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Company Law Review Bill 1997
Bills Digest
No. 133 1997-98
ISSN 1328-8091
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I N F O R M A T I O N A N D R E S E A R C H S E R V I C E S
Bills Digest
No. 133 1997-98
Company Law Review Bill 1997
Lee Jones Law and Bills Digest Group 23 February 1998
Contents
Purpose ....................................................................................................................................... 1
Background ................................................................................................................................ 1
Scheme History ................................................................................................................... 1
Recent Reviews ................................................................................................................... 2
Electronic Communications ................................................................................................ 3
The Directors’ Report ......................................................................................................... 3
Company Meetings ............................................................................................................. 5
Main Provisions ......................................................................................................................... 8
Replacement Part 1.5 - Small Business Guide ................................................................... 8
New Chapter 2A - Registering a company ........................................................................ 9
New Chapter 2B - Basic features of a company ................................................................ 9
New Chapter 2F - Members’ rights and remedies ........................................................... 10
New Chapter 2G - Meetings ............................................................................................ 11
New Chapter 2H - Shares ................................................................................................. 13
New Chapter 2J - Transactions affecting share capital .................................................... 14
New Chapter 2M - Financial reports and audit ................................................................ 15
New Chapter 2N - Annual returns and lodgments with the ASC .................................... 17
New Chapter 5A - Deregistration of Companies ............................................................. 17
Concluding Comments............................................................................................................. 18
Endnotes ................................................................................................................................... 19
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Company Law Review Bill 1997
Date Introduced: 3 December 1997
House: House of Representatives
Portfolio: Treasury
Commencement: The substantive amendments (except those relating to the abolition of par values for shares) must commence within 6 months of Royal Assent. The amendments in respect of the abolition of par values for shares commence immediately after the Taxation Laws Amendment (Company Law Review) Act 1998 commences.
Purpose
To rewrite and simplify the provisions of the Corporations Law which deal with the creation of companies, the conduct of meetings, share capital, financial reports and audits, the deregistration of companies, and company names.
Background
Scheme History
In July 1989 the Commonwealth attempted to establish a national scheme of companies and securities regulation based upon the Commonwealth legislative power to replace the existing cooperative scheme which was based on State legislative power. Under the Commonwealth Constitution, the Commonwealth’s power in respect of corporations is:
To make laws for the peace, order and good government of the Commonwealth with respect to … foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth…
2 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
The High Court decided in New South Wales v. Commonwealth of Australia1 that it was constitutionally invalid for the Commonwealth to legislate in respect of the incorporation of companies. This significantly weakened the foundations of the scheme sought to be introduced.
Following the High Court decision, the Commonwealth began negotiations with the States and Northern Territory to salvage the scheme. In June 1990, an agreement was reached under which the Commonwealth’s legislation was to be amended to apply as a law of the Australian Capital Territory (ACT) and the states would enact application legislation adopting the law of the ACT as amended from time to time as a law of that State.
The Corporations Law commenced as the national scheme for the regulation of companies and securities law on 1 January 1991.
Recent Reviews
In October 1993, the Commonwealth Attorney-General established a Corporations Law Simplification Program, the aim of which was to rewrite the Corporations Law to make it easier to understand, and to remove unnecessary business regulation. The first stage of the program was completed in December 1995 with the commencement of the First Corporate Law Simplification Act 1995.
An exposure draft of the Second Corporate Law Simplification Bill was released for public comment by the former government in June 1995. In response to comments and submissions received in respect of that exposure draft, a second exposure draft was released by the Corporations Law Simplification Task Force (Task Force) in July 1996.
That second exposure draft (draft Bill) was referred to the Parliamentary Joint Committee on Corporations and Securities (PJC) by the then Parliamentary Secretary to the Treasurer, Senator the Hon Brian Gibson AM, on 26 June 1996.
That Committee tabled its report in the Senate on 18 November 1996 and made 11 specific recommendations. The government responded to that report in November 1997.
In the meantime, in March 1997, the government instituted the Corporate Law Economic Reform Program (CLERP) to, in effect, continue the work of the Task Force and, according to the government, to comprehensively improve Australia’s corporate law as part of its drive to promote business and economic development.2 That program has released discussion papers on six issues:
⢠Accounting standards
⢠Fundraising
⢠Directors’ duties and corporate governance
Company Law Review Bill 1997 3
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
⢠Takeovers
⢠Electronic commerce
⢠Futures and securities markets.
Legislation dealing with elements of CLERP is to be introduced later in 1998.
The issues which this Bill raises were identified by the PJC. Readers are referred to the Executive Summary of the PJC report for a synopsis of those issues.
Electronic Communications
The PJC heard evidence that the draft Bill did not fully embrace modern electronic forms of communication.
The option of giving notice via an electronic address (for example, by email) was not included in the draft Bill. The PJC suggested that there was a recognition by the Task Force that a notice of meeting, delivered electronically, might also specify an electronic return address to which proxies could be sent.3 The PJC commented that:
While the Bill should impose no obligation to use these forms of communications, it should nevertheless facilitate their use.4
The draft Bill was amended so that the Bill now provides that notices of meetings may be sent electronically to an address nominated by the member and that a proxy will be taken to be validly received if sent to an electronic address specified for that purpose in the notice of meeting.5
The PJC did not accept the submission that the draft Bill should have gone even further to provide for electronic voting prior to an Annual General Meeting (AGM). It was thought that such voting procedures could ultimately change the character of the AGM and the PJC was not convinced that the character of the AGM should change.6
The Directors’ Report
The draft Bill prescribed certain matters with which the annual directors’ report was required to deal. The provision stated:
The directors’ report must discuss and analyse the matters members need to be informed about if they are to understand the overall financial position of the company… including:
(a) results of operations (both overall and in key industry and geographical segments); and
4 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
(b) key strategic initiatives adopted; and
(c) major commitments entered into and sources of funding for those commitments; and
(d) unusual or infrequent events or transactions; and
(e) likely future developments in the business; and
(f) trends or events (both internal and external) that have had a significant effect, or are likely to have a significant effect, on the business. 7
This requirement received support from some groups and criticism from others.8 The PJC took the view that the requirements were in line with international trends but that they should be reviewed three years after implementation.
The government response to the report stated:
The Government believes that accurate and informative reporting to company members about a company’s activities and performance is essential to maintaining investor confidence…
The Committee has endorsed changes proposed to be made to the Law in the Bill in the area of directors’ reports to members by the introduction of a requirement to include a management discussion and analysis of the matters members need to be informed about if they are to understand the overall financial position and performance of the company.9 (emphasis added)
It is interesting that whilst the concept of understanding the overall financial position of the company was contained in the draft Bill and reaffirmed in the government response to the PJC report, it no longer appears in the Bill.
Further, the matters with which the directors’ report was required to deal under the draft Bill (listed above) have been substantially amended. The most obvious omission from the Bill is the requirement for the report to discuss and analyse key strategic initiatives adopted by the company.
The PJC also recommended that certain additional matters should be disclosed, namely:
(a) the policies of the Board for determining the remuneration of the Board and senior executives;
(b) the quantum and components of the remuneration of each director of the company and each of its 5 highest paid executives;
(c) the age and all other listed company directorship of each director;
(d) whether, during the reporting period, any proceedings were instituted against the company for any material breach by the company of the Corporations Law or trade practices law and (if so) a summary of the alleged breach and the company’s position in relation to it;
Company Law Review Bill 1997 5
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
(e) whether, during the reporting period, any such proceedings were concluded or settled and (if so) the terms on which they had been.10
The government’s response to this recommendation was that certain of these matters, for namely (c) and (d), are already information which is available to members. However, the issue of the disclosure of director and senior executive remuneration has caused concern. Whilst details of options over unissued shares will be required to be disclosed, details of other aspects of a director’s remuneration package will remain secret. It has been reported that a major US fund manager has written to the Australian Treasury officials, concerned that, among other things, there should be fuller disclosure of executive salaries and remuneration.11
Company Meetings
Notice of Meetings
The Corporations Law currently provides for a general period of 14 days’ notice for all members’ meetings (with 21 days notice where the meeting is to consider a special resolution).
The draft Bill proposed, as a general rule, and in the absence of contrary provision in the company’s constitution, that at least 21 days notice should now be given for all members’ meetings. Institutional and overseas investors regarded the 14 days notice period to be insufficient. In their submissions to the PJC, institutional and overseas investors considered that the proposed 21 days period was itself still insufficient to enable a fully informed vote to be cast. The Australian Investment Managers Association argued for a minimum period of 28 days for meetings of companies listed on the Australian Stock Exchange.12
The PJC took the view that a 28 day notice period would involve little additional inconvenience for the management of listed companies while providing investors with a more realistic period of time to arrange for the casting of their votes and recommended that the minimum notice period for a member’s meeting should be 28 days.
The Government has taken the view that a significantly longer notice period would make it more difficult for listed companies to capitalise on windows of opportunity to enter into a range of significant transactions requiring shareholder approval. The Government believes that the 21 days notice period strikes an appropriate balance.13
This is another issue which has attracted overseas comment. A US financial adviser has reportedly written to the Parliamentary Secretary to the Treasurer, Senator the Hon Ian Campbell, stating that:
If passed in its present form, the measure would set Australia on a course that would place it behind the emerging international best practice of 28 to 30 days.
6 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
…
Look, for example, at the top five markets. The average notice in the US is 30 days, and by law it is 32 days in Germany, and 30 days in France. 14
Calling Meetings
At present, the directors of a company must convene a general meeting on receiving a requisition by:
(a) where the company has share capital, at least 100 members holding shares in the company on which there has been paid up an average of $200 per member;
(b) where the company does not have share capital, at least 200 members; or
(c) in either case, members who are entitled to at least 5% of the total voting rights.
Under the Bill, the power of members to requisition directors to convene a meeting will be simplified and slightly expanded. Directors will be obliged to convene a meeting on requisition by:
(a) members with at least 5% of the number of votes that may be cast at the meeting; or
(b) at least 100 members who are entitled to vote at the meeting.
The power to requisition directors to call a meeting is to be distinguished from the power of members (at least 5%) to convene a general meeting themselves. The costs of such a requisitioned meeting must be borne by the members who convene the meeting. Under the Bill, the power of members to convene a meeting themselves cannot be excluded by a contrary provision in the company's articles of association, as it can at present. Concern was expressed to the PJC that this could ‘create havoc’ for a large number of companies.
15 It was thought that this power has the potential for abuse by members for improper purposes.
The PJC agreed that the right of members to convene a meeting themselves should be retained but recommended that the legislation should make it clear that the power to requisition or convene a meeting should not be exercised frivolously and should only be exercised for a valid purpose. The Government responded to this recommendation by stating that this concern would be addressed by including a provision in the Bill which would restate the common law position that general meetings must be called for a proper purpose. The Bill contains such a provision (proposed new section 249Q).
Company Law Review Bill 1997 7
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Questions and Comments at an AGM
The Bill would require the person chairing an AGM to allow a reasonable opportunity for the members as a whole at the meeting to ask questions about or make comments on the management of the company.16
It also proposes that, if the company’s auditor is present, the person chairing the meeting must allow a reasonable opportunity for the members as a whole to ask the auditor questions relevant to the conduct of the audit and preparation and content of the auditor’s report.17
There is no obligation on the directors or auditor to answer questions, nor is there an obligation on the auditor to attend the meeting.
Whilst some difficulties have been envisaged in respect of members asking questions of directors and making comments at AGMs, it has been suggested that in practice most companies already provide members with an opportunity to ask questions at the AGM.18 The PJC made no recommendations in respect of this proposal.
The issue of questioning of auditors received a mixed response from within the accounting profession. KPMG took the view that it would be ‘unworkable in practice’. However, Ernst & Young said that their partners already answer questions at AGMs.
Section 1289 of the Corporations Law provides auditors with qualified privilege in respect of statements made in the course of their duties as an auditor. It is not completely clear whether this protection extends to answers to questions asked during an AGM.
The PJC recommended that auditors be required to attend the AGMs of listed companies to be available to take questions. It also recommended that the Bill or Explanatory Memorandum specifically refer to the applicability of qualified privilege to answers to questions put to auditors by members at an AGM.
The Government responded by deferring the issue of compelling auditors to attend AGMs until it considers the report of the Ministerial Council for Corporations Working Party on the requirements for registration of auditors, which will deal with the issue.19 In respect of the applicability of qualified privilege, the Government is of the view that privilege applies in the context of answering questions at an AGM and has stated this in the Explanatory Memorandum in accordance with the PJC’s recommendation.20
As to what constitutes giving members a ‘reasonable opportunity’ to speak or ask questions, the Explanatory Memorandum states:
These provisions will not affect the chairperson’s power under the common law to run an orderly meeting. In particular, the chairman will not necessarily be required to allow each member who wishes to do so an opportunity to ask questions. 21
8 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Voting at Meetings
At present, it is essentially up to individual companies to determine whether resolutions put to a meeting will be decided on a show of hands or a poll. However, a company’s articles are void to the extent that they attempt to exclude the right to demand a poll or require a demand for a poll to be made by more than 5 members or the members with at least 10% of the total voting rights.22
The Bill proposes that a resolution must be decided by a show of hands unless a poll is demanded. However, this is subject to the company’s articles providing otherwise.
The Bill also provides that a poll may be demanded on any resolution (except the election of the chairman and the adjournment of the meeting if the articles so provide). The poll may be demanded by at least 5 members entitled to vote, members with at least 5% of the votes that may be cast or the chairman. The company’s constitution may provide that fewer members or members with a lesser percentage of votes may demand a poll.
The Australian Investment Managers Association submitted that voting at shareholder meetings should be by poll only and that the process of voting by a show of hands should no longer be used. On the other hand, the Australian Shareholders’ Association declared itself against poll only voting. The PJC was not convinced that the arrangements in the draft Bill would work any conspicuous injustice.23
Main Provisions
The Bill is comprised of 5 Schedules. The substantive amendments are contained in Schedule 1 and this Digest will deal only with the contents of Schedule 1. Because the Bill is largely a rewrite and simplification of the current law, only the provisions which involve substantive changes in law or policy will be considered.
Schedules 2, 3 and 4 contain consequential amendments and amendments to relocate provisions and make structural changes to the Corporations Law. The provisions of Schedule 5, which relate to the abolition of par values, will be discussed where they arise in the context of Schedule 1.
Replacement Part 1.5 - Small Business Guide
The small business guide is a summary of the main provisions of the Corporations Law that are likely to be significant to small business. This Bill repeals the existing guide and replaces it with a new guide which will reflect the new substantive provisions.
Company Law Review Bill 1997 9
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
New Chapter 2A - Registering a company
Proposed new section 117 provides the new one step procedure for registering a company. Upon lodgement of the application the ASC is empowered to register the company and issue a certificate of incorporation (proposed section 118).
Companies will no longer be required to have common seals (proposed section 123).
New Chapter 2B - Basic features of a company
Acting outside power or contrary to objects
At present, it is a contravention of the Corporations Law for an officer of a company to be involved in the exercise by a company of a power:
(1) contrary to an express restriction in the company’s constitution; or
(2) which is for a purpose outside the stated objects of the company. 24
Under the Bill, it will no longer constitute a contravention for an officer to be involved in the exercise by the company of a power in this way (proposed new part 2B.1). However, acts contrary to these restrictions will still be able to be asserted in other actions under the Corporations Law, such as dishonesty under section 232 or oppression under section 260.
The general rule is that where a director breaches his or her duty to the company, the proper plaintiff in an action in respect of that wrongdoing is the company.25 One of the recognised exceptions to this rule is where the directors have caused the company to act outside its powers. In that circumstance, individual members have an action against the relevant directors under section 162(7)(g) of the Corporations Law and those directors will be liable to the company for any loss resulting from the breach.
Section 162(7)(g) will be repealed and acts by directors which are contrary to restrictions on a company’s exercise of its powers will be treated in the same way as any other breach of the company’s constitution.
Assumptions when dealing with companies
People who deal with companies are entitled to make certain assumptions about the company, for example, that the company’s constitution has been complied with and that a person who is held out as an officer of the company has been duly appointed.26 Clearly this is to prevent a company, for example, entering a transaction and later denying the transaction on the basis that the company did not have the power to enter it or that the
10 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
person held out as representing the company was not duly appointed or did not have the authority to agree to the transaction.
However, under the law at present a person is not entitled to make an assumption where the person had actual knowledge that the assumption was not correct or if the person’s connection or relationship was such that he or she ought to have known that the assumption was not correct.27 This has been interpreted as asking the question whether in the full circumstances of the person’s connection with the company the person acting reasonably should have known the position about the matter assumed.28
The Bill proposes a stricter test than the one which has arisen out of the current provision. A person will be able to rely on an assumption unless at the time of the dealings they knew or suspected that the assumption was incorrect (proposed new section 128).
Replaceable rules
At present a company must have a constitution, i.e. rules governing the operation of the company. These take the form of memorandum and articles of association. Companies which are limited by shares can choose to adopt the regulations for management of a company set out in Table A of Schedule 1 to the Corporations Law (commonly referred to as the ‘Table A articles of association’) as their articles of association.
Under the Bill, a company will no longer be required to have a constitution. The Corporations Law will contain numerous ‘replaceable rules’ which will govern the internal management of the company (proposed new section 134). A company will be able to either utilise those replaceable rules for internal management, or replace some or all of the rules with those which it determines. However, certain replaceable rules are mandatory for public companies.
A table of replaceable rules is set out in proposed new section 141.
New Chapter 2F - Members’ rights and remedies
The power to vary or abrogate any of the rights attached to a class of shares may be conferred by the issuing company’s constitution, by the terms of the issue of the shares or by the Corporations Law. The Table A Articles provide that if the company’s share capital is divided into classes, the rights attached to any class may be varied with the written consent of the holders of three-quarters of the issued shares of that class or with the sanction of a special resolution (i.e. 75% in favour) passed at a separate meeting of the holders of the shares of that class.
Company Law Review Bill 1997 11
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
If a company has a procedure in its constitution for varying rights attaching to classes of shares, that procedure must be adhered to when varying or abrogating any relevant rights.29
If a company’s constitution makes no provision for variation or abrogation of class rights but does not declare those rights to be unalterable, the Corporations Law provides that the rights may be varied or abrogated upon the consent in writing of three-quarters of the relevant shareholders or members, or with the sanction of a special resolution passed at a meeting of the shareholders or members.30
The Bill substantially reenacts these rules.
At present, where rights are varied or abrogated, the variation or abrogation may only be challenged by the holders of the aggregate of at least 10% of the issued shares in that class. Any such application to challenge must be made within 28 days of the variation. If such an application is made the variation or abrogation has no effect until it is confirmed by the Court.
The Bill changes this slightly, in that any variation or abrogation which does not obtain unanimous approval has no effect until the expiration of 1 month from the variation without an application being lodged to set the variation aside (proposed new section 246D).
A further addition is the requirement to give members of the class written notice of the variation within 7 days of the variation being made, to allow them to take advantage of their right to challenge the variation [proposed new section 246B(3)].
New Chapter 2G - Meetings
Meetings of Directors
The issue of the use of technology in the conduct of directors’ meetings has been considered by the courts in the context of telephone meetings. It appears that the prudent approach is for there to be an express provision in the company’s articles authorising meetings by telephone or video link-up.31
Proposed new section 248D clarifies that issue and allows directors’ meetings to be called or held using any technology consented to by all the directors. A director may only withdraw their consent within a reasonable period before the meeting.
12 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Meetings of Members
Section 255 of the Corporations Law allows proprietary companies to pass resolutions as if in general meeting by circulating a document to all members for their signature.32 The limitation is that only ordinary resolutions can be passed in this way. Proposed new section 249A will extend the ability of proprietary companies to pass resolutions in this way to all resolutions (including special resolutions) except a resolution to remove an auditor.
The ability of members to requisition to directors to convene a meeting and to convene a meeting themselves is discussed in the Background above under the subheading ‘Calling Meetings’. Proposed new section 249E continues the right of members with more than 50% of the votes who requisitioned the directors to convene a meeting, to convene a meeting themselves if the directors do not do so within 21 days after the request. The liability of the company to pay the reasonable expenses of the members incurred because of the failure by directors to call and hold the meeting is continued, as is the ability of the company to recover that amount from the directors in default.
Members of a company currently have a right to put a resolution at the annual general meeting and to have a statement in respect of the resolution, of no more than 1000 words circulated to all members.33 Unless the company otherwise resolves, the cost of circulating the resolution and statement must be borne by the requisitioning members. Under the Bill, this right will be extended to all general meetings not just the annual general meeting and the company will be responsible for the cost of giving members notice of the resolution and a copy of the statement provided those documents are given to the company in time to send them out with notice of the meeting (proposed new sections 249N, 249O and 249P).
Proposed new section 249S will allow companies to hold members meetings at two or more venues using any technology that gives the members as a whole a reasonable opportunity to participate. In accordance with the recommendation of the PJC, the draft Bill was amended to require the notice of the meeting to make known to participants the technology which is to be used to facilitate the meeting if the meeting is to be held in two or more places (proposed new section 249L).
The Bill simplifies the provisions of the Corporations Law relating to proxies. Two noteworthy policy changes are:
⢠at present a company’s constitution must specifically provide that a proxy can vote on a show of hands before the proxy can do so. The Bill reverses this and gives proxies the right to vote on a show of hands unless the company’s constitution provides otherwise [proposed new section 249Y(2)].
⢠currently, a failure by a proxy to follow voting directions is a contractual issue between the proxy and his or her principal. The Bill provides that where the company
Company Law Review Bill 1997 13
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
has held a person out as being prepared to act as a proxy and that person fails to vote as directed, the person is guilty of an offence.
Proposed new section 250K restates the right that a poll may be demanded on any resolution, but that a company’s constitution may provide that a poll may not be demanded in respect of the election of the chairman or the adjournment of the meeting.
Meetings of members of registered managed investment schemes
The provisions of proposed new Part 2G.4 will place the investors in managed investment schemes in a similar position to members of public companies, in terms of calling meetings, proxies and voting at meetings. However, a number of distinctions should be noted:
⢠managed investment schemes will not be required to hold annual general meetings. The Explanatory Memorandum states that this is consistent with ‘the usual character of collective investment schemes as passive investment vehicles’.
⢠In contrast to members of companies, members of registered managed investment schemes are only entitled to put special and extraordinary resolutions to meetings (proposed new section 252L).
⢠On a vote by show of hands, each member has one vote. On a poll, each member has 1 vote for each dollar of the value of the total interests they have in the scheme (proposed new section 253C).
⢠Votes which are taken on special and extraordinary resolutions must be decided on a poll (proposed new section 253J).
New Chapter 2H - Shares
The major change in respect of shares is the abolition of par values (Schedule 5, item 10, section 254C).
The Table A articles currently provide that a company’s existing members be offered unissued shares before they are issued to non-members. This gives existing shareholders the right to take up shares before they are offered to others. Proposed new section 254D establishes a replaceable rule to this effect for proprietary companies.
In circumstances where a company is limited by shares, the total amount of the company’s share capital is referred to as its ‘authorised share capital’. The Corporations Law presently includes a mechanism for increasing or decreasing authorised share capital (by a resolution at a general meeting where provided for by the company’s articles).34 The
14 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
concept of authorised share capital will be removed from the Corporations Law because it no longer serves any particular purpose.
The rules in respect of redeemable preference shares, which are presently contained in the Table A articles, will be moved into the body of the Corporations Law. The primary rule is that a company may only redeem redeemable preference shares on the terms on which there are issued (proposed new section 254J). Redeemable preference shares issued after the commencement of the Bill will only be able to be redeemed using profits or the proceeds of a share issue made for the purpose of redemption (proposed new section 254K). Because shares will no longer have a par value and consequently there will be no share premium account, companies will no longer be able to fund a redemption using the share premium account.35
At present, directors may be subject to civil penalties and criminal consequences if they allow the company to incur a debt whilst there are reasonable grounds to suspect that the company is insolvent.36 Item 222 of Schedule 2 expands the meaning of incurring a debt to include the redemption of redeemable preference shares, i.e. where a company proposes to redeem shares which are redeemable at its option, the directors must ensure that the company will be solvent after the redemption before proceeding with it.
New Chapter 2J - Transactions affecting share capital
Share capital reductions and share buy-backs
Reductions in share capital is currently dealt with in section 195 of the Corporations Law. Essentially that provides that a company may reduce its share capital provided it is authorised to do so by its articles, the members resolve to do so by a special resolution and the reduction is approved by the Court. Proposed new sections 256A to 256F largely rewrite section 195. However, upon the commencement of the Taxation Laws Amendment (Company Law Review) Act 1998, Schedule 5 of this Bill will commence operation and repeal these rewritten provisions.
The new provisions will remove the requirement for court confirmation of the reduction. The basis of a capital reduction will be the satisfaction of 3 conditions:
(1) it must be fair and reasonable to the company’s shareholders as a whole;
(2) it must not materially prejudice the company’s ability to pay its creditors; and
(3) it must be approved by shareholders by the appropriate resolution. An ordinary resolution is required where the reduction relates only to ordinary shares, the reduction applies in proportion to the number of shares held and the terms of the reduction are the same for each holder of shares. In any
Company Law Review Bill 1997 15
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
other circumstance a special resolution or unanimous shareholder agreement is required.
The rules in respect of share buy-backs were inserted into the Corporations Law by the First Corporate Law Simplification Act 1995. This Bill will reenact those provisions with only a couple of changes of any significance:
⢠redeemable preference shares can be cancelled under a share buy-back or reduction of capital (proposed new section 254J).
⢠it will be a requirement that a buy-back not materially prejudice the company’s ability to pay its creditors (proposed new section 257A).
Financial Assistance
The giving of financial assistance by a company for the purpose of acquisition of its own shares is prohibited by section 205(1)(a) of the Corporations Law. The aim of the financial assistance prohibition is to ensure that those who acquire shares in a company do so from their own resources and at their own risk and not with the help of the company itself.37 The prohibition also helps to prevent:
⢠creditors or minority members of a company being prejudiced by financial transactions which may be entirely unrelated to the company’s normal business activities; and
⢠a company’s officer using the company’s funds to manipulate the market in the company’s shares for profit or control-related reasons.
The present law allows for the provision of financial assistance upon compliance with a relatively complex process of notification and shareholder approval. This process can impede ordinary commercial transactions.
The Bill will continue the prohibition but in addition to allowing the provision of financial assistance following shareholder approval, financial assistance will be able to be provided where the giving of assistance does not materially prejudice the interests of the company, its shareholders or creditors (proposed new section 260A).
New Chapter 2M - Financial reports and audit
Financial Records
Proposed new section 286 restates the requirement that a company must keep written financial records (currently referred to as ‘accounting records’) that:
16 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
⢠correctly record and explain its transactions and financial position and performance; and
⢠enable true and fair financial statements to be prepared and audited.
Financial Reporting
All disclosing entities (‘disclosing entity’ is a complex term but significantly includes companies listed on a stock exchange), public companies, large proprietary companies and registered collective investment schemes must prepare a financial report and a directors report each financial year (proposed new section 292).38
Shareholders with at least 5% of the votes in a small proprietary company or the ASC may give the company a direction to prepare a financial report and a directors’ report for a financial year (proposed new sections 293 and 294).
Proposed new section 295 specifies the contents of the annual financial report. The financial report for a financial year comprises the financial statements, the notes to those statements and the directors’ declaration about the statements and the notes. The major change in respect of the financial statements is the requirement of the inclusion of a statement of cash flows.
The requirement that the financial reports of a company comply with accounting standards (section 298) is restated in proposed new section 296.
The content of the annual directors’ report is split into ‘general’ and ‘specific’ information under proposed new section 299 and 300. The content of the directors’ report has been discussed in the Background above.
Existing section 332(10) provides that if an auditor is satisfied that there has been a contravention of the Corporations Law, the auditor must report the contravention to the ASC. The Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs, entitled Corporate Practices and the Rights of Shareholders states:
The accountancy bodies convinced the Committee that the use of the term ‘satisfied’ presents problems because it requires an unduly high degree of proof before the auditor can make a report. 39
The Committee recommended that the provision be amended so that there need only be ‘reasonable grounds to suspect’ that malpractice has occurred. Proposed new section 311 adopts that form of words.
Existing section 315 of the Corporations Law obliges all public companies to provide a copy of their annual report to members at least 14 days before the annual general meeting. Proposed new section 314 will give companies which are required to report to members
Company Law Review Bill 1997 17
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
the option of sending a concise financial report instead of the full annual financial report. Members who wish to obtain a copy of the full report will be able to request one and the company must provide one at no charge to the member.
New Chapter 2N - Annual returns and lodgments with the ASC
Companies must lodge a return, referred to as an ‘annual return’, in the prescribed form with the ASC each year. Under the Bill, the number of items which must be contained in the return has been significantly reduced. The annual return for a company will now need to contain only 10 items:
⢠ACN
⢠name
⢠address of registered office
⢠address of principal place of business
⢠details of each director and company secretary
⢠details of issued shares
⢠details of options granted
⢠the top 20 members in each class of shares
⢠a statement as to the company’s solvency
⢠the ultimate holding company.
New Chapter 5A - Deregistration of Companies
Upon deregistration, a company ceases to exist. The chapter introduces a greatly simplified procedure for the deregistration of a company. The Corporations Law currently contains a procedure by which the members of the company may wind up the company.40 That procedure involves a number of steps including the appointment of a liquidator, a special resolution to wind up, the directors declaring that the company is solvent and the preparation of a statement of affairs.
The new procedure for deregistration is in addition to the voluntary winding up procedure. It allows an application for deregistration to be made by the company, a director, a member or liquidator of the company. The application may only be made where:
18 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
⢠all members of the company agree to the deregistration;
⢠the company is not carrying on business;
⢠the company’s assets are worth less than $1,000;
⢠the company has paid all fees and penalties payable under the Corporations Law;
⢠the company has no outstanding liabilities; and
⢠the company is not a party to any legal proceedings.
Upon making the application and satisfaction of these preconditions, the ASC must give notice of the proposed deregistration on the ASC database and in the Gazette. When 2 months have passed since the Gazette notice, the ASC may deregister the company (proposed new section 601AA).
The Bill restates the ability of the ASC to initiate deregistration of a company in certain circumstances (proposed new sections 601AB and 601AC).
On deregistration the company’s property vests in the ASC (proposed new section 601AD).
Concluding Comments
In its most recent Economic Survey on Australia, the OECD concluded its assessment of corporate governance in Australia by stating:
By and large, the balance in Australian corporate regulation appears to have shifted too far towards a prescriptive and intrusive approach. The core goals of ensuring honesty and efficiency in business could be achieved while streamlining some important aspects of the current regulations. Continued progress in the reform and simplification of corporate law should therefore remain a priority for the government.41
To the extent that the aim of this Bill is to simplify a relatively substantial and commonly referred to part of the Corporations Law, it may be viewed as successful. The one step procedure for company registration, the paring back in the detail required in annual returns and the simplification of the deregistration process will make it easier for small businesses to use and comply with the Corporations Law.
From the perspective of shareholders and prospective investors, the watering down of the components of the directors’ report and the failure of Bill to require full disclosure of directors’ and senior executives’ remuneration are disappointing.
Company Law Review Bill 1997 19
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Endnotes
1 (1990)1 ACSR 137
2 Australia, House of Representatives, Treasurer, Second Reading speech in respect of the Company Law Review Bill 1997, Debates, 3 December 1997, p. 11930.
3 Australia, Parliament, Parliamentary Joint Committee on Corporations and Securities, Report on the Draft Second Corporate Law Simplification Bill 1996, (Senator G. Chapman, Chairman), Canberra, 1996, p. 11.
4 ibid.
5 Company Law Review Bill, proposed new s. 249J.
6 Parliamentary Joint Committee on Corporations and Securities, op. cit., p. 12.
7 Second Corporate Law Simplification Bill: exposure draft, proposed new s. 298.
8 Parliamentary Joint Committee on Corporations and Securities, op. cit., pp. 32-34.
9 Australia, Parliament, Government Response to the report of the Parliamentary Joint Committee on Corporations and Securities on the Draft Second Corporate Law Simplification Bill, November 1997, p. 13.
10 Parliamentary Joint Committee on Corporations and Securities, op. cit., p. 36.
11 Main, A., ‘Some black letters over company law’, Australian Financial Review, 8 January 1998.
12 Parliamentary Joint Committee on Corporations and Securities, op. cit., p. 19.
13 Government Response to the report of the Parliamentary Joint Committee on Corporations and Securities on the Draft Second Corporate Law Simplification Bill, op. cit., p. 8.
14 Main, A., op. cit., p. 10.
15 Parliamentary Joint Committee on Corporations and Securities, op. cit., p. 16.
16 Company Law Review Bill, proposed new s. 250S.
17 Company Law Review Bill, proposed new s. 250T.
18 Parliamentary Joint Committee on Corporations and Securities, op. cit., p. 21; Australia, Parliament, Company Law Review Bill Explanatory Memorandum, 1997, p. 6.
19 Government Response to the report of the Parliamentary Joint Committee on Corporations and Securities on the Draft Second Corporate Law Simplification Bill, op. cit., p. 17.
20 Company Law Review Bill Explanatory Memorandum, op. cit., p. 46.
21 ibid.
22 Corporations Law, s. 248.
23 Parliamentary Joint Committee on Corporations and Securities, op. cit., p. 27.
24 Corporations Law, s. 162(3).
20 Company Law Review Bill 1997
Warning:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
25 Foss v. Harbottle (1843)2 Hare 461; 67 ER 189.
26 Corporations Law, s. 164.
27 Corporations Law, s. 164(4).
28 Bank of New Zealand v. Fiberi Pty Ltd (1994)14 ACSR 736.
29 Corporations Law, ss. 197(3), 198(3), 199(3).
30 Corporations Law, ss. 197(2), 198(2), 199(2).
31 Intercapital Holdings Ltd v. MEH Ltd (1988)13 ACLR 595; Residues Treatment & Trading Co Ltd v. Southern Resources Ltd (1989)15 ACLR 770.
32 A proprietary company is a company which is:
a. either limited by shares or an unlimited company that has a share capital; and
b. has no more than 50 members
A proprietary company is limited in the manner in which it can raise funds and it cannot do anything which would result in the Corporations Law requiring the issue of prospectus.
33 Corporations Law, s. 252.
34 Corporations Law, s. 193.
35 At present, when a company issues a share of a certain par value at a price higher than that value, the difference is referred to as the premium. Upon the issue of shares at a premium, a share premium account is created in the financial accounts and any amount standing to the credit of the share premium account can later be used for the purpose of redeeming shares.
36 Corporations Law, s. 588G.
37 See for example Darval v. North Sydney Brick and Tile Co Ltd (No.2)(1989)16 NSWLR 260.
38 A large proprietary company is one which satisfies 2 of the following:
⢠Operating revenue is greater than $10 million
⢠Value of consolidated gross assets is $5 million or more
⢠50 or more employees at the end of the financial year.
39 Australia, House of Representatives, Standing Committee on Legal and Constitutional Affairs, Corporate Practices and the Rights of Shareholders, 1991, p. 135.
40 Corporations Law, s. 491.
41 OECD, Economic Surveys - Australia 1997-98, Paris, 1997.