Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Corporate Law Reform Bill 1993



Download PDFDownload PDF

House: Senate

Portfolio: Attorney- General

Purpose

To provide for ongoing disclosure of certain financial information to the Australian Securities Commission (ASC) by certain entities.

Background

The central feature of this Bill is an enhanced corporate disclosure scheme which provides for ongoing disclosure by certain entities of certain financial information to the ASC. The scheme proposed by this Bill and the rationale for its introduction are broadly along the lines of those proposed by the Companies and Securities Advisory Committee in its September 1991 Report On An Enhanced Statutory Disclosure System.

The Advisory Committee's proposals had three main elements:

* that there be `an affirmative obligation on directors of "disclosing entities" to make a timely disclosure of any "material matter" to the ASC and, where applicable, to the ASX [Australian Stock Exchange].';

* that there be `a requirement for disclosing entities to lodge detailed half- yearly financial reports'; and

* that there be `more comprehensive annual disclosure requirements for disclosing entities and exempt proprietary companies'. 1

The Advisory Committee's rationale for its proposals included to:

* overcome the inability of general market forces to guarantee adequate and timely disclosure by disclosing entities;

* minimise the opportunities for insider trading; and

* promote a more informed assessment of the likely future financial performance of disclosing entities. 2

As noted in the Second Reading Speech and the Explanatory Memorandum to this Bill, considerable criticism was levelled at the Advisory Committee's proposals, including that they were an over- reaction to the corporate sectors excesses of the 1980's; that there was a danger of the regulators over- compensating and creating a costly regulatory environment; that it will be almost impossible to consistently comply with the proposed requirements; and that implementation of the proposals will result in Australia having the most onerous continuous disclosure regime in the world. Such criticism led to a number of modifications to the Advisory Committee's proposals which are reflected in the provisions of this Bill. As noted by the Minister in the Second Reading Speech to this Bill, these modifications include a narrowing of the range of entities to be subject to the scheme and a `reformulation of the ongoing disclosure obligations to ensure a less onerous and more cost effective system'.

Despite the provisions of this Bill differing in a number of important respects from those proposed by the Advisory Committee, this Bill continues to attract considerable criticism from certain corporate sector lobby groups. Criticism of the provisions of this Bill are essentially the same as those used against the Advisory Committee's proposals.

On 28 January 1993, the Attorney- General announced reforms, in addition to those contained within this Bill, to the prospectus requirements of the Corporations Law. The Government proposes to include the prospectus reforms in this Bill. The proposed reforms include:

* a requirement that directors, experts or others involved in the preparation of a prospectus notify the issue of the prospectus of any material omissions or material statements that are false or misleading as soon as practicable after becoming aware of them;

* a requirement that supplementary or replacement prospectuses be lodged as soon as practicable after the person who issued the original becomes aware of the need to correct material omissions or material statements that are false or misleading; and

* allow a licensed dealer to offer securities to certain existing clients, irrespective of how the offer is communicated.

It is reported in The Financial Review of 24 March 1993 that a compromise proposal on continuous disclosure is being considered by certain corporate sector lobby groups. The proposals include that the ASX have responsibility for maintaining an informed market and that non- listed entities involved in fund- raising have to meet the same disclosure criteria as required by the ASX.

Note: This Bill is identical to the Corporate Law Reform Bill (No. 2) Bill 1992. The Corporate Law Reform Bill (No. 2) 1992 was restored to the Senate Notice Paper on 4 May 1993 and is recorded in the House of Representatives Bills and Papers Office `Daily Bills List' as the Corporate Law Reform Bill (No. 2) 1992 [1993]. On introduction to the House of Representatives, the title of this Bill will become the Corporate Law Reform Bill 1993.)

Recommended Reading

* B Bailey, Continuous Disclosure: Enhanced Corporate Reporting, Parliamentary Research Service, Department of the Parliamentary Library, 1993.

* Companies and Securities Advisory Committee, Report On An Enhanced Statutory Disclosure System, September 1991

* Q Digby, Continuous Disclosure Reforms: Streamlined Prospectuses Confidentiality Exception, Butterworths Corporation Law Bulletin, No. 27, 1992, p. 477.

* W J Koeck I Ramsay, Indemnification and Insurance of Directors and Officers, Butterworths Corporation Law Bulletin, No. 26, 1992, p.457.

* W J Koeck I Ramsay, The Continuing Saga of Continuous Disclosure - The Corporate Law Reform Bill (No. 2) 1992, Butterworths Corporation Law Bulletin, No. 27, 1992, p. 478.

* R Mangioni, Further Prospectus Reforms, Butterworths Corporation Law Bulletin, No. 4, 1993, p. 73.

* I McEwin, Australia's Continuous Disclosure Regime: Some Comments, Australian Journal of Corporate Law, No. 2, 1992, p. 77.

Main Provisions

CONTINUOUS DISCLOSURE: The key continuous disclosure provisions proposed by this Bill are contained in clause 52 which will insert a new Part 7.12A (proposed sections 1084A- 1084M) into the Corporations Law. Central to an understanding of the disclosure obligations proposed by this Bill are a number of definitions including `disclosing entity', `ED securities' and `notifiable event'. Basically, an entity will be `disclosing entity' if its securities are `ED securities'. Proposed Division 3A (proposed section 22A- 22H), that will be inserted into Part 1.2 of the Corporations Law by clause 5, sets out the securities that will be `ED securities'. `ED securities' will include:

* securities listed, quoted or traded on a stock market or stock exchange, approved stock market, or exempt stock market (proposed section 22B);

* prospectus securities where a primary prospectus has been or is required to be, lodged in relation to the securities or a document relating to those securities taken to be a primary prospectus (proposed section 22C); and

* securities, other than debentures, that have been offered as consideration for the acquisition of securities under a takeover scheme or compromise or arrangement (proposed section 22D).

`Notifiable event' is defined by proposed section 1084A to be an event or change of circumstances about which investors and their professional advisers would reasonably require information in order to make an informed assessment of certain matters, including:

* the assets and liabilities, financial position, profits and losses, and the prospects, of the disclosing entity; and

* the rights attaching to ED securities in relation to the disclosing entity.

Obligation to disclose information about notifiable events: Where a notifiable event occurs in relation to disclosing entity, the disclosing entity is to disclose that information by lodging a disclosure notice (proposed subsection 1084C(1)). A disclosure notice will be required to be lodged within three business days after the happening of a notifiable event (proposed subsection 1084C(3)). Disclosure will not be required where a supplementary prospectus has been, or is required to be, lodged that contains the information, or the disclosing entity can show that disclosure would be likely to result in unreasonable prejudice to it (proposed subsections 1084C(2) and 1084C(3)).

Criminal liability for breach of continuous disclosure requirements: It will be a criminal offence, punishable by a maximum fine of $20 000 or imprisonment for five years, or both, for a disclosing entity to knowingly or recklessly not comply with proposed section 1084C disclosure obligations (proposed sections 1084E and clause 54.

Civil liability and defences for breach of continuous disclosure requirements: Proposed section 1084F allows a person who, in connection with a dealing in securities, suffers loss or damage because of a breach of proposed section 1084E by a disclosing entity, to bring an action to recover the amount of the loss or damage from the disclosing entity or any person involved in the breach. Such an action will have to be brought within six years of the day on which the cause of action arose. It is a defence to an action under proposed section 1084F if it is proved that the information does not have to be disclosed because: the disclosing entity can show that disclosure would be likely to result in unreasonable prejudice to it; or if a supplementary prospectus has been or is required to be lodged containing the requisite information; or it is proved that: the disclosing entity was not aware of the information; and no disclosure system that the disclosing entity could reasonably be expected to have had in place could reasonably be expected to have resulted in the information being disclosed (proposed section 1084G).

INDEMNIFICATION AND INSURANCE OF OFFICERS AND AUDITORS: New subsections 241(1)- 241(3), that deal with the indemnification of company officers and auditors, will be substituted into the Corporations Law by clause 57. Proposed subsection 241(1) will prohibit a company, or a related company, from indemnifying or exempting from liability a person who is, or has been an officer or auditor of the company against liability incurred by the person in their capacity as an officer or auditor. Proposed subsections 241(2) and 241(3) provide from exceptions to the prohibition and include: indemnification to another person, provided the liability does not arise out of conduct involving a lack of good faith; in defending civil or criminal proceedings in which judgment is given in favour of the officer or auditor, or in which the officer or auditor is acquitted; or in connection with an application in relation to proceedings in which the court grants relief to the person. `Indemnify' is defined by clause 57 to include indemnifying through one or more interposed entities. As noted in the Explanatory Memorandum to this Bill, the intention of this definition is to ensure that the prohibition cannot be circumvented by a company arranging payment of an indemnity through a third party.

A new section 241A, that deals with payment of insurance premiums in respect of certain liabilities of company officers or auditors, will be inserted into the Corporations Law by clause 58. The principal effect of proposed subsection 241A will be to prohibit a company, or related company, from paying, or agreeing to pay, a premium in respect of a contract that insures a company officer or auditor against a liability arising out of conduct involving a wilful breach of duty to the company or a breach of subsections 232(5) or 232(6) of the Corporations Law (these subsection relate to the improper use of information and position).

References

1. Companies and Securities Advisory Committee, Report On An Enhanced Statutory Disclosure System, September 1991, p. 6.

Bills Digest Service 26 March 1993

Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1993.

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1993.