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Commonwealth Bank Sale Bill 1995



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House: Representatives

Portfolio: Treasury

Commencement: Generally, the Act commences on the day on which it receives the Royal Assent. Certain sections commence on a date to be fixed by Proclamation, or when a necessary event occurs. These events relate to such matters as the transfer of the ownership of the Commonwealth's shares in the Commonwealth Bank. These detailed variations are set out in Clause 2 (see also, the summary at pages 8- 9 of the Explanatory Memorandum to the Bill).

+=5"> Purpose

This Bill facilitates the sale of the Commonwealth's shares in the Commonwealth Bank.

+=5"> Background

A Brief History of the Commonwealth Bank

Federation of the Australian colonies was achieved in 1901. The Commonwealth Constitution contains the following head of power in relation to banking:

51(xiii) Banking, other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money.

The Commonwealth bank was established in 1912 by the Fisher Labor Government via the Commonwealth Bank Act 1911. In his Second Reading speech, Andrew Fisher (who was then Prime Minister and Treasurer), said:

This will be a bank belonging to the people, and directly managed by the people's own agents.

...[I]t will ultimately become the bank of banks rather than a mere money- lending institution.

...Our chief aim is not to make profits, but to insure safety and security to depositors.

1

The establishment of the Commonwealth Bank followed 20 years of community debate in Australia. This debate had been largely triggered by the serious financial crisis which seared the banks and their customers during the 1890s. In this period, 54 institutions which called themselves "banks" were either forced to close or to refuse payments for periods of time.

The colourful Labor parliamentarian King O'Malley claimed that he was the driving force in the establishment of the "People's bank". O'Malley's version of events is not necessarily accepted by all within the Labor Party. 2

The First World War (1914- 1918) saw the development of a key role for the Commonwealth Bank. Apart from providing a stabilising role in a time of financial uncertainty, it was also central in the creation of the national commodity pools (such as grain and wool) which provided an orderly response to the disruption of the marketing of agricultural products caused by the war.

The Great Depression of the 1930s left a legacy of bitterness and suspicion of the financial sector which was mainly directed at the banks. A Royal Commission was established and it reported in 1937. The Royal Commission was chaired by Justice Napier and included Ben Chifley who was later to become a Labor Prime Minister and Treasurer. The Royal Commission's recommendations included a recommendation that private banks continue but that they be licensed. Chifley, in dissent, argued for government control of banking.

After the Second World War (1939- 45), Chifley's vision for the Commonwealth Bank was for it to have an expanded role to better serve the community within a nationalised system of banking. The attempted nationalisation of the private sector banks failed when the Banking Act 1947 was struck down as unconstitutional by the High Court and the Privy Council in the Bank Nationalisation case. 3

From the 1950s onwards, the Commonwealth Bank was subject to restructuring resulting in several bodies corporate, including the Reserve Bank and the Commonwealth Development Bank (which provides finance for primary production and industrial undertakings).

In 1990, the legacy of corporate collapses of the 1980s created a crisis for the State Bank of Victoria which had sustained heavy losses through its merchant bank subsidiary, Tricontinental Holdings. Faced with the spectre of a repeat of the uncertainty and turmoil which had been presented many years ago, when the Government Savings Bank of New South Wales encountered serious financial problems in 1931, the Commonwealth Government moved quickly to acquire the State bank of Victoria, using the Commonwealth Bank. To facilitate this acquisition, the Commonwealth Bank was again restructured, this time to a public company with a combination of majority government shareholding and non- government shareholding (see Commonwealth Banks Restructuring Act 1990). The Commonwealth Development bank was made a subsidiary of the Commonwealth Bank.

The restructuring of the Commonwealth Bank in 1990, released 30% of the Commonwealth's shares in the Commonwealth bank for sale. The Prospectus for the first release of shares in the Commonwealth Bank was issued in July 1991. In 1993, the Commonwealth Banks Amendment Act 1993 amended section 27L of the Principal Act to further reduce the statutory requirement for Commonwealth shareholding from 70% to 50.1%. A second sale of shares in the Commonwealth Bank followed.

Indicative Market Value of the Shares

According to the Explanatory Memorandum to the Bill, the Commonwealth Government's current shareholding is 50.39% which has a market value in the order of $4.5 billion.

Share trading prices, in terms of highs and lows, for shares in the Commonwealth Bank are:

The Secondary Share Prospectus of 1993

On Budget night of 9 May 1995, the Government announced that it would sell the remaining majority Commonwealth shareholding in the Commonwealth bank (in two stages). 4

In subsequent debates 5, the Government was reminded of certain statements which indicated a commitment to remain as a major shareholder in the Commonwealth Bank, including statements which appeared in the Prospectus documentation issued in October 1993 by the Government for the secondary sale of shares in the Commonwealth Bank. The 1993 Prospectus documentation included the following statement:

The Government has no intentions whatsoever of further reducing its shareholding. 6

An examination of that statement is contained in the Parliamentary Research paper Commonwealth Bank Sale: Fisher's Ghost ? (June 1995) 7. The paper concludes:

the Government's statement in the 1993 secondary share Prospectus about having no intentions whatever of further reducing its shareholding in the Commonwealth bank does not breach the prospectus provisions of the Corporations Law (in terms of a subsequent reversal of policy some 18 months later); and

the Trade Practices Act 1974 does apply to the Commonwealth in terms of the "business" of selling assets to the public (in this case, full voting shares in a publicly listed company - the Commonwealth Bank), but there has been no misstatement in the 1993 prospectus because the relevant legal test is applied to the statement at the time that it is made and not with the wisdom of hindsight.

Foreign Investment Considerations

The existing Division 3 of Part IV of the Commonwealth Banks Act 1959 contains specific limitation on foreign investment in the first issue (in 1991) of Commonwealth Bank shares. This Bill repeals that Division (see Item 21 in the Schedule to the Bill). In doing so, the repeal also removes a key section, section 27L, which contains the statutory requirement for the Commonwealth and the bank (via its Memorandum and Articles) to maintain majority Commonwealth shareholding in the Commonwealth Bank. In essence, while section 27L is operative, foreign control of the Commonwealth bank is not possible. This proposed legislation will, however, remove section 27L.

This Bill is at its First Reading stage, and the Second Reading is yet to be made by the Minister. At this stage, there is limited public information on what mechanisms the Government will utilise to monitor the level of foreign investment in the Commonwealth Bank. Paragraph 57 in the Explanatory Memorandum to the Bill states that the Bill does not impose any legislative restrictions on the ability of foreign interests to acquire shares in the Commonwealth Bank. There are, however, separate statutes such as the Banks (Shareholdings) Act 1972 and the Foreign Acquisitions and Takeovers Act 1975 which will impact on investment in the Commonwealth Bank. The Explanatory Memorandum notes these statutes and further advises that there will be an "allocation policy" expected to apply in the sale process which will assist in maintaining predominant Australian ownership of the bank.

In contrast, the Qantas Sale Act 1992 (amended in 1995) contains codified restrictions on the percentage of foreign ownership of the national carrier. Apart from percentage thresholds for foreign share ownership, the Qantas Sale legislation also requires that the Board of Qantas be two- thirds Australian.

As noted above (and in the Explanatory Memorandum to the Bill), banking per se is subject to a variety of statutes. For example, there is a limit of 10% on individual shareholding in a bank (which may be increased to 15% with a Treasurer's exemption) under the Banks (Shareholdings) Act 1972. Further, the preferred interpretation of the Foreign Acquisitions and Takeovers Act 1975 imposes a threshold of 40% as an "aggregate substantial interest" for 2 or more foreign investors in an Australian company. At that level, notification under the Foreign Acquisitions and Takeovers Act 1975 is required. Further foreign ownership could be denied if the Treasurer was satisfied that such a development was contrary to the national interest.

In turn, "foreign control" has implications under the Banking Act 1959 in that banks are subject to licences which carry conditions. As noted in paragraph 45 of the Explanatory Memorandum to the Bill, the Commonwealth Bank and the Commonwealth Development Bank will receive separate banking licences, post sale. The Banking Act 1959 also has provisions which allow Regulations to be made in regard to a range of foreign investment matters including foreign currency, securities (shares) and property.

While there may be no specific monitoring provisions for foreign investment in the Bill, foreign investors are expected to know the requirements of the relevant Australian laws, just like anyone else. There are a range of legal provisions which can impact on any corporate investment in Australia. For example:

there is a requirement on all substantial shareholders in publicly listed companies to notify details to the Australian Stock Exchange under the Listing Rules;

there is a requirement under the Corporations Law (Part 6.7) for all substantial shareholders (usually 5% shareholding or more) to notify the company with a variety of details including name and address; and

there is a standard restriction in the Corporations Law which has the effect of, essentially, requiring public disclosure where an acquisition of more than 19% of the shares of a company is proposed (the takeover provisions).

There is, of course, a continuous obligation upon listed companies to inform the market of events which may have a material effect on the price of the company's shares.

In terms of an "allocation policy" (mentioned above), it may be that the Government will negotiate an agreement with the Commonwealth Bank to ensure that its share register monitors the level of foreign investment. Under the new CHESS system operated by the Australian Stock Exchange the initial share transaction is processed on an electronic share transfer system which does not recognise a refusal to register a proper share transaction. ("CHESS" means Clearing House Electronic Subregister System). It is an excellent system and its aim is to expedite the processing of share transactions. The electronic transfer is "secure", even though a formal share certificate is yet to be issued in the name of the purchaser. It is possible, after the CHESS registration, for the company to notify the new shareholder that divestiture of the shares is required to comply with national laws (e.g. foreign investment limits). A subsequent entry is then processed by CHESS to record the "reversal" or part- reversal of the share transaction. This is an initial problem which can, however, be rectified. The down- side is that it requires monitoring outside the CHESS system.

Another option may be the creation of different classes of shares. This approach was utilised in New Zealand for Air New Zealand which has "A" shares for domestic shareholders and "B" shares for foreign investors. 8 The "B" shares trade at a premium.

Technically, the remaining majority shares in the Commonwealth Bank can be listed without a Prospectus because the shares are now already listed on the Australian Stock Exchange. In the absence of specific provisions in the Bill the likely content of the "allocation policy" can be speculation only, at this stage.

Proposed Share Buyback by the Commonwealth Bank

This matter is only mentioned in passing. Technically, a proposal for a buyback of company shares is a matter for the company and its shareholders. The sale of the Commonwealth's 50.34% is a sale by the Commonwealth and not the bank. Once the Commonwealth's majority shareholding is released on to the market shareholders may consider whether a selective buyback of shares is advantageous to the company as a whole. This is entirely a commercial issue for shareholders to consider and it is unnecessary for the matter to be dealt with in the Bill. A selective buyback of a significant amount of shares requires a special resolution of the company passed by a 75% majority of shareholders in a general meeting. No comment is made either way in this Bills Digest as to the merits of a buyback in this particular case.

The matter is mentioned simply because it is sometimes inadvertently referred to as requiring legislative intervention in the context of the sale of the Commonwealth's shareholding in the Commonwealth Bank. The repeal of section 27L (mentioned above) in the Commonwealth Banks Act 1959 makes redundant a provision in the Memorandum and Articles of the Commonwealth Bank relating to the maintenance of majority Commonwealth shareholding. Whether the bank and its shareholders decide (after the commencement of this sale legislation) to utilise the capital reserves of the Commonwealth Bank to buyback shares depends upon the existence of necessary provisions (which are already present - Article 2.4) in the Memorandum and Articles of the Commonwealth Bank.

This is not an issue for this Bill.

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+=5"> Main Provisions

Clause 3 includes the definition of transfer time which means the time when the Commonwealth ceases to have its status of majority shareholder.

Clause 4 implements the Schedule to the Bill which amends a variety of Commonwealth Acts (see Schedule, below).

Clauses 5- 13 provide transitional and saving provisions to protect pre- sale employee benefits such as "worker's compensation" for employees of the Commonwealth Bank.

Likewise, Clauses 14- 16 protect the deferred retirement and death benefits for former Defence Force personnel who are now employed by the Commonwealth Bank.

Clause 17 is a saving provision to ensure that the property of the Commonwealth Bank Officers Superannuation Corporation (which was vested in the Commonwealth Bank) remains vested in the Commonwealth Bank notwithstanding the repeal of the original vesting provision in the Principal Act by Item 33 in the Schedule to the Bill.

Clause 18 is a protective provision to alleviate the impact of a section of the Income Tax Assessment Act 1936 which might otherwise have adversely affected the capacity of the Commonwealth Bank to claim a deduction for debts written off (i.e. because of the change of majority shareholding resulting from the Commonwealth's sale of its shares).

Clause 19 allows Regulations to be made regarding transitional and savings provisions relating to the sale of the Commonwealth Bank shares. As a special measure, such Regulations may, where necessary, be retrospective in effect and thus "commence" before formal notification in the Gazette. These Regulations are therefore exempted from subsection 48(2) of the Acts Interpretation Act 1901.

Comment: This exemption does not mean that the Regulations may not, if necessary, be disallowed by Parliament in accordance with the procedures in the Acts Interpretation Act 1901.

Clause 20 provides an exemption from State and Territory taxes and fees for the Commonwealth's disposal of its shares in the Commonwealth Bank. Fees payable under the Corporations Law or certain other fees or taxes (to be specified by notice in the Gazette) will apply. The Explanatory Memorandum to the Bill indicates (at paragraph 40) an in- principle support for an ex gratia payment to relevant States and Territories for any stamp duty foregone.

Schedule to the Bill

Most of the amendments in the Schedule are consequential on the change in status of the Commonwealth Bank from a majority- owned Commonwealth body to a non- government entity.

Item 11 in the Schedule amends the Banks (Shareholdings) Act 1972 to exempt the Commonwealth (or an associate of the Commonwealth) from the 10% limitation on shareholding in a bank.

Item 20 repeals an existing section 27H in the Commonwealth Banks Act 1959 to clarify the status of the Commonwealth Bank from the date of the transfer time of the Commonwealth's shareholding. Essentially, the provision makes it clear that, as from the transfer time, the Commonwealth Bank is no longer covered by laws which might otherwise have brought the Commonwealth Bank (in its pre- transfer status) under laws which apply to a body established for a public purpose by the Commonwealth.

Item 21 is a key provision in the Bill in that it repeals Division 3 of Part IV of the Commonwealth Banks Act 1959. This Division contains the specific restrictions on foreign ownership as they applied to the first release of shares in the Commonwealth Bank, and the statutory obligation on maintaining majority shareholding by the Commonwealth.

Items 27- 28 convert the Commonwealth Development Bank from a statutory authority into a limited public company under the Corporations Law. The shareholders in the Commonwealth Development Bank will continue to be 91.9% (Commonwealth Bank) and 8.1% (the Commonwealth). After registration, the limited company will be known by the name of the Commonwealth Development Bank of Australia Limited. According to the Explanatory Memorandum (paragraph 70), a shareholders agreement will be struck to maintain the existing Charter of the Development Bank, and a Commonwealth subsidy.

Item 29 repeals sections in the Commonwealth Banks Act 1959 which apply to the existing Commonwealth Development Bank and the Commonwealth Bank Officers Superannuation Corporations. As from the transfer time of Commonwealth shareholding, these sections are no longer relevant to what will be a "non- government" company.

Items 30- 34 convert the Commonwealth Bank Officers Superannuation Corporation into a limited public company under the Corporations Law. The superannuation fund and its Trust Deed, which was established for Commonwealth Bank officers, will vest in a company with the same name as it had previously. The rights and liabilities of members and beneficiaries will continue. It is a change of corporate form.

Item 37 is a key provision in the Bill in that it continues, on a transitional basis, the Commonwealth's guarantee of the liabilities of the Commonwealth Bank and the Commonwealth Bank Officers Superannuation Corporation.

The effect of the guarantee varies according to the liability. The commencement of the guarantee is from the transfer time or 9 May 1996, whichever is the later. That date is known as the "effective date". The period for a demand deposit is three years after the effective date. For term deposits and liabilities which mature at other times, the date varies.

There is no apparent "limitation" on the Commonwealth's guarantee for the due payment by the Development Bank of any amount that is payable to a person other than the Commonwealth (see proposed new section 117(2) in Item 37).

Item 38 repeals various sections in the Commonwealth Banks Act 1959 which are applicable to a government- owned Commonwealth Bank (e.g. judicial notice of its corporate seal and certain exemptions).

Items 39- 48 deal with the use of the names Commonwealth Bank and the Commonwealth Development Bank. The Commonwealth Development bank will be accorded a "protected name". Paragraph 96 in the Explanatory Memorandum to the Bill indicates that the transitional period for the protected name will be for 10 years.

Items 50 to 59 are minor consequential amendments to various Acts. These proposed amendments result from the change in status of the Commonwealth Bank.

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+=5"> Endnotes

1. Australia, House of Representatives, Hansard, Canberra, 15 November 1911: 2644- 2662.

2. Beazley, Kim. E. 'The Labor Party and the Origin of the Commonwealth Bank', the Australian Journal of Politics and History, University of Queensland Press, May 1963: 27- 28.

3. Bank of New South Wales v. The Commonwealth (1948) 76 CLR 1. The Privy Council appeal was Commonwealth v. Bank of New South Wales (1949) 79 CLR 497.

4. Australia, House of Representatives, Hansard, Canberra, Hon R Willis, Treasurer, Second Reading speech, Appropriation Bill (No. 1) 1995- 96, Canberra, 9 May 1995: 68.

5. Australia, House of Representatives, Hansard, Canberra, 10 May 1995 (Hon John Howard at p. 199), (Mr P Costello at p. 210), 30 May 1995 (Mr P Costello at p. 569) and 31 May 1995 (Mr M Cobb at p. 669).

6. Commonwealth Bank Secondary Share Offer by the Australian Government, Prospectus, September 1993, Letter dated 24 September 1993 from Hon Ralph Willis, Minister for Finance, to investors (the letter was included in the front of the Prospectus).

7. Bailey B. Commonwealth Bank Sale: Fisher's Ghost ?, Current Issues Brief No. 49 1994/95, Parliamentary Research Service, Canberra, 28 June 1995. The Current Issues Brief also contains an outline of the history of the Commonwealth Bank. That outline and its various references to other authors were drawn upon for the brief history mentioned in this Bills Digest.

A useful summary of the history of banking in Australia can also be found in Chapter 2 of the Martin Committee report on banking - House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change: Banking and Deregulation (November 1991), Australian Government Publishing Service, Canberra, 1991.

8. See Ivor Ries 'Chanticleer' column in Australian Financial Review, 2 August 1995.

Brendan Bailey (06 2772434)

Bills Digest Service

Parliamentary Research Service

24 October 1995

This Digest does not have any legal status. Other sources should be consulted to

determine whether this Bill has been enacted and, if so, whether the subsequent Act reflects further amendments.

Commonwealth of Australia 1995

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 and Senators of the Australian Parliament in the course of their official duties.