Mr COSTELLO (Treasurer) (5:51 PM) —I move:

That the bill be now read a second time.

Today, I introduce the Corporate Law Economic Reform Bill 1998 which will modernise the regulation of business and our financial markets. When introducing the package of legislation reforming the Australian financial sector earlier this year, I stated that those reforms to the financial system, together with the wide-ranging reform of Australia's corpo rate laws proposed under the corporate law economic reform program, would provide a launching pad for this government's drive to make Australia a leading business centre in the Asia-Pacific region. This bill builds the framework for Australia's business regulation to foster economic development and employment. It provides key reforms to our laws in the areas of fundraising, directors' duties, accounting standards and takeovers.

In March 1997, the government announced it was taking a new approach to corporate regulation under its corporate law economic reform program. The objective of this program is to give prominence to promoting efficiency in the Australian economy while facilitating market integrity and providing investors with protection from fraud, negligence or abusive market conduct. In developing this new regulatory regime, the government, in consultation with the business community and interest groups, is seeking to adopt a more flexible and efficient regulatory framework that can respond to market developments. It will permit market participants to adapt to challenges presented by technological developments, innovation and integration of the world's financial markets.

To assist the government in the consultation process, the business regulation advisory group, BRAG, chaired by Mrs Catherine Walter with representatives from key business groups, was established. The government has greatly appreciated the contribution of all groups that have participated so actively in the reform program.

Corporate Fundraising

This bill will improve the operation of the fundraising provisions of the Corporations Law to facilitate more efficient capital raising by Australian business. A range of measures will be implemented to facilitate raising investment capital and reduce the high costs of fundraising faced by Australian companies. Prospectuses are often too long and complicated and can obscure information of interest to investors. Issuers frequently complain that they are forced to burden prospectuses with unnecessary information and that prospectus costs are too high. The operation of the fundraising rules will be improved and costs to business will be reduced by:

introducing short form prospectuses for retail investors with technical information contained in separate documents that will be available on request;

permitting investors in certain industries to be provided with a short profile statement containing key information rather than the full prospectus; and

allowing companies to issue prospectuses in electronic form and distribute them through the Internet or other media.

It is also clear that uncertainty over liability for the content of prospectuses has added to the complexity and expense of fundraising and has detracted from the prime function of a prospectus to disclose relevant information to investors. The government will clarify the potential liability of parties for prospectus content by providing that their liability will be governed solely under the Corporations Law. Due diligence defences will be made available in all cases of fundraising where there is a positive duty to disclose information.

Facilitating Fundraising by Small and Medium Sized Enterprises

The cost of preparing and lodging a prospectus can be excessive in light of the amount of capital which small and medium sized enterprises, SMEs, seek to raise. This acts as a significant impediment to SMEs seeking public funding. A new fundraising mechanism will allow an SME to raise a total of up to $5 million through the use of offer information statements, OIS. The OIS introduces simpler disclosure obligations. Bodies wishing to use an OIS will be required to state the purpose for which the funds are required, the nature of the risks involved and include a copy of its audited accounts. Investors will be warned of the risks of investing without a prospectus and the desirability of obtaining professional advice.

In addition, a prospectus will not be required if a person makes personal offers that result in securities being issued to 20 or fewer persons in a one year period with no more than $2 million being raised. This will reduce the costs faced by SMEs when making small scale offerings without exposing investors to unnecessary risks. To facilitate SME fundraising, a corporation will be able to raise funds from sophisticated investors without preparing a prospectus in a wider range of circumstances.

Clarifying Directors' Duties

Effective corporate decision making is hampered by legal uncertainties arising from the potential liabilities of directors for their actions. A business judgment rule will be introduced to provide directors with a safe harbour from personal liability in relation to honest, informed and rational business judgments. The rule will apply where an officer makes an informed decision in good faith, without a material personal interest in the subject matter of the decision and rationally believes that the decision is in the best interests of the company.

The objective of the rule is to protect the authority of directors in the exercise of their duties of management. It is not designed to, and will not, insulate them from liability for negligent, ill informed or fraudulent decisions. The rule will not lead to any reduction in the level of accountability of directors, but will ensure that they are not liable for decisions made in good faith and with due care. Directors will benefit from the certainty that the rule provides in terms of their liability as they will be encouraged to take advantage of business opportunities and not behave in an unnecessarily risk averse manner.

To reflect modern business practice, directors will, where appropriate, be able to delegate functions to, and rely on advice and information provided by, other persons. The availability of an indemnity for legal actions and directors' liabilities in corporate groups will also be clarified.

Greater Accountability to Shareholders

A new `representative' action will be introduced to enhance shareholders' rights to pursue an action on behalf of shareholders where the company is unable or unwilling to do so. This new right of action will provide an incentive for management to exercise powers appropriately and for the benefit of shareholders. Safeguards will be introduced to ensure that company management is not undermined by unjustified or vexatious litigation. The court will need to be satisfied that proceedings brought on behalf of a company are appropriate in that there must be a serious case to be tried, the applicant must be acting in good faith and the action must be in the best interests of the company.

Making Accounting Standards More Useful for Business

Financial reporting requirements play an important role in Australian companies' ability to compete effectively and efficiently. Accounting standards that are responsive to the needs of both the Australian business community and investors need to be developed, thus ensuring that Australia maintains an informed and efficient capital market. To bring an investor and business focus to the standard setting process, an advisory body, the financial reporting council, FRC, will be established with membership drawn from peak professional, business and government organisations. The FRC will have broad oversight of the Australian accounting standard setting process. It will report to the minister and provide advice on the effectiveness of accounting standards. As a result, the accounting standard setting process will become more responsive to the needs of preparers and users of financial statements.

A key role of the FRC will be to ensure that the Australian Accounting Standards Board, AASB, is committed to, and works towards, adopting international standards having regard to what is taking place in major capital raising economies. The FRC will report to the government on the acceptance of international accounting standards in overseas capital markets, on the progress made by the International Accounting Standards Committee, IASC, on developing a core set of international standards and on the International Organisation of Securities Commission's acceptance of those standards.

Streamlining Takeover Rules

The current takeover rules are complex and impose excessive costs on bidders and target firms. The bill reforms the current takeover legislation to make requirements simpler and clearer. To facilitate a more competitive market for corporate control, a bidder will be able to exceed the takeover threshold—more than 20 per cent of the total voting rights in a company—through a new mandatory bid procedure before being obliged to make a general takeover offer.

The mandatory bid rule will provide two significant advantages. First, by giving potential bidders the choice of which takeover method to employ, they are more likely to proceed with their bids, resulting in an increased likelihood of assets being used in their most productive manner. Secondly, the mandatory bid rule will ensure that all target company shareholders will have the opportunity to sell their interest at a fair price and to benefit from the premium a bidder for control places on the securities.

To take advantage of this rule, conditions that reflect the equal opportunity principle underlying the takeover provisions must be met. The mandatory bid conditions include:

the bidder must start from below the 20 per cent threshold with only one acquisition being allowed before the mandatory bid requirement is triggered, which must be immediately followed by the announcement of the mandatory bid;

the bidder must disclose to the selling shareholder that the mandatory bid requirement will be triggered by an agreement to sell;

the bid must include an offer of a cash sum for the securities, thereby giving target shareholders the option of exiting from the company completely. Alternative consideration, such as securities or a combination of cash and securities, may also be offered;

the bid must be for an amount at least equivalent to the highest price paid by the bidder in cash or non-cash transactions in the last four months;

the bid must be unconditional;

target shareholders must be provided with an independent expert's report by the target;

the bidder must not exercise control of the target until the offer period starts for the mandatory bid; that is, until the first offer under the bid is made. Until then, the bidder will only be able to influence the affairs of the target through voting shares already held in the target before the pre-bid acquisition that triggered the mandatory bid procedure; and

no securities may be issued in the target company, nor dividends declared, from the time of the pre-bid acquisition until the end of the bid period without shareholder approval by a general meeting. However, this prohibition does not apply in certain circumstances, including where the issuing of securities or dividends are announced before the mandatory bid is announced.

Takeovers Panel

To address concerns with the current dispute resolution mechanisms for takeovers, the existing Corporations and Securities Panel will be reconstituted to become the primary forum for resolving takeover matters. The panel will retain its existing jurisdiction to enforce compliance with the spirit of the Law. It will also be given jurisdiction to review ASIC decisions on exemptions from the takeover rules given to corporations. All interested parties will be able to bring matters before the panel, not just the Australian Securities and Investments Commission, ASIC. Court proceedings in relation to a takeover bid or proposed takeover bid will not be able to be commenced until after the end of the bid period except on the application of ASIC or another public authority of the Commonwealth or a state.

Listed Managed Investments

Investors will also have the benefit of the takeover rules applying to listed managed investment schemes.

This program of reforms will ensure that Australia's corporate laws meet the challenges of the present and future marketplace in a forward thinking, responsible and innovative way. The reforms are designed to encourage free enterprise for the benefit of all Australians.

I wish to place on record my thanks to my parliamentary secretary, Senator Ian Campbell, for the work that he has done in bringing this program together; to Mrs Catherine Walter and the members of the BRAG group; to Julie Abramson, those of my own staff and any of my own department who have worked on this exciting and very forward thinking project. I commend the bill to the House and present the Explanatory Memorandum.

Debate (on motion by Mr Martin Ferguson) adjourned.