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Corporations and Securities - Joint Statutory Committee - Report - Differential voting shares and the Australian Stock Exchange, November 1993


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The Parliament of the Commonwealth of Australia

DIFFERENTIAL VOTING SHARES

AND THE AUSTRALIAN STOCK EXCHANGE

PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND SECURITIES

NOVEMBER 1993

This document was produced from camera ready copy and printed by the Senate Printing Unit, Parliament House, Canberra.

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DUTIES OF THE COMMITTEE

Section 243 of the Australian Securities Act 1989 reads as follows:

The Parliamentary Committee's duties are:

(a) to inquire into, and report to both Houses on:

(i) activities of the Commission or the Panel, or matters connected with such activities, to which, in the Parliamentary Committee's opinion, the Parliament's attention should be directed; or

(ii) the operation of any national scheme law, or of any other law of the Commonwealth, of a State or Territory or of a foreign country that appears to the

Parliamentary Committee to affect significantly the operation of a national scheme law;

(b) to examine each annual report that is prepared by a body established by this Act and of which a copy has been laid before a House, and to report to both Houses on matters that appear in, or arise out of, that annual report and to which, in the Parliamentary Committee's opinion, the Parliament's attention should be directed; and

(c) to inquire into any question in connection with its duties that is referred to it by a House, and to report to that House on that question.

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CONTENTS

Membership of the Committee

Duties of the Committee

Differential Voting Shares and the ASX

5 The discussion paper states in its introduction that, in raising the matter, it is cognisant that -* there has to date been little public debate on the topic in Australia; and

* while there has been a great deal of debate overseas on the topic, there is still no

consensus among scholars or other

commentators regarding the desirability of ordinary shares that carry differential voting rights1

6 The Committee agrees with these views and notes that they are at variance with the position taken by the Chairman of the ASX who is reported to have said that "The market is already well aware o f the issues involved" 2

7 The Committee believes the time allowed for comment on issues of such complexity is unreasonably short. Furthermore, it believes that such apparently consciously truncated consideration of such complex questions damages the credibility and impartiality of the ASX by creating the impression that it is simply going through the motions of a perfunctory consultative process to arrive at a pre-determined outcome.

8 While not suggesting that this is the objective of the ASX, the Committee is encouraged in this view by the unsolicited verbal and written comments it has received from business people and other interested parties.

9 The Committee believes that the discussion paper addresses issues of long-term importance both to the system of shareholder protection and to the perception of strong corporate oversight which has developed in Australia in recent years.

'Differential Voting Rights', ASX Discussion Paper, November 1993, para 5.

Australian Financial Review, 15 November, 1993, p. 22

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10 Among serious questions raised by the Paper and of central importance to the efficiency and accountability of companies to their shareholders are the following :

the possibility of entrenchment of control by current major shareholders;

* the possibility of one group of shareholders in a

company being able to increase its proportion of voting control without formal takeover or acquisition of equity;

* the possibility that such acquisition of control may be in breach of the takeover code (Ch 6 o f the Corporations Law);

the possibility that ordinary shareholders will lose rights and that the value of their shareholdings might diminish.

11 The Committee believes that any proposed departure from the time-honoured principle of one share one value must be subject to the most thorough analysis, scrutiny and debate, involving consideration of the experiences of overseas

exchanges and the full range of implications for Australian shareholders.

12 While the discussion paper provides examples of how overseas exchanges (including New York, London and Toronto) have approached the differential share issue, the analysis is neither complete nor comprehensive. There is,

however, despite these shortcomings, ample evidence even in the Paper to support the conclusion that the question has been a vexed and divisive one wherever it has been discussed and that it has proved universally difficult to arrive at a

satisfactory set of rules.

13 By contrast with the long and sometimes bitter debate in the US, Canada and elsewhere the debate in Australia is in its infancy. The discussion paper is a valuable starting point for what the Committee believes should be a much longer and more informed debate involving not only members of the ASX but also the many other interested parties including

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large and small shareholders, academics, corporate lawyers, representative organisations such as the Australian Investment Managers Group, the Securities Institute of Australia, the Attorney General and interested parliamentary committees from both state and federal jurisdictions.

14 For this reason the Committee strongly opposes the reported suggestion that a decision might be made by the ASX in December 1993.

Recommendation (i)

The Committee recommends that the ASX allow until the end of February 1994 for submission of views and comment on the complex issues raised in its discussion paper 'Differential Voting Rights'.

15 As the Committee has noted, the issue of the discussion paper is against a background of a submission to the ASX by News Corporation Limited that the ASX waive its current listing rule 3K to allow News to put to its shareholders a proposal for the creation of super-voting shares. The Committee requested a copy of the original News proposal from the ASX, but was informed that the proposal was confidential. The Committee is therefore unable to comment upon the proposal which, in any event, appears to have undergone a number of changes, following the initial negative reaction from significant parts of the securities industry. (The

Committee notes that News' latest proposal has been provided to it by the ASX.)

16 While under section 774 of the Corporations Law,

amendments to the ASX listing rules may be disallowed by the Attorney General, it is an irony and of some concern to the Committee that a waiver of these rules is not subject to such disallowance.

17 The Committee does not, in common with a number of others, consider that a case-by-case approach to the question of company alterations to their shareholding structures is appropriate. Any proposal for such a change should entail

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consideration by the ASC and the Attorney General as provided for in Section 774.

18 The Committee approached the ASX concerning this matter. In a letter to the Chairman dated, dated 19 November, 1993, the Director of Operations of the ASX advised the

Committee that " the A S X is not, and has not been

contemplating using its waiver power for the purpose o f any relief to ... Newscorp from listing rule 3K(2) ..." a copy of the letter is appended.

19 While the Committee welcomes this response from the ASX it notes that the waiver option has not been ruled out but the ASX has advised the Committee "... that, in the event if found it necessary to use its waiver power, it would advise the

Australian Securities Commission, your Parliamentary Committee and the Attorney-General in advance o f exercising that waiver power, so that those parties could consider their position"; a clear indication that waiver remains an option.

20 Further, the Committee considers the whole question of differential shares, whether implemented by waiver or amendment of current listing rules should be the subject of careful consideration by the ASC and the Attorney General,

as well as by the commercial community and other interested parties including this Committee.

Recommendation (ii)

The Committee recommends that any change in ASX requirements which would permit alteration to the current one-share-one vote rule should be implemented by means of amendment to the ASX listing rules. The Committee strongly

opposes the introduction of such changes by waiver on a case-by-case basis.

21 Section 774 of the Corporations Law requires the ASX to lodge notice of any amendment to the listing rules with the ASC within 21 days of such amendment (subsection 774 (3)). The Attorney General can, within 28 days of receipt of the

notice by the ASC, disallow the whole or part of any amendment. The possibility consequently exists that a

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proposal made in December to alter the listing rules would need to be considered and responded to by the ASC and the Attorney General by early in 1994.

22 The Committee considers that any proposed change to the listing rules involving such an important matter as differential voting rights is a matter which requires a period of exposure to allow proper comment. To do otherwise would run the risk

of allowing a fundamental change to the current structure of shareholding to be made in an unacceptably short time frame and without full and proper consideration.

23 The Committee notes that the letter from the Director of Operations of the ASX, in referring to the Attorney General's 28 day period for disallowance indicates that "it would be open to the Attorney General to take longer than the 28 days

to decide the issue, if he so determined, by either disallowing the change as an interim measure or by asking the A S X to withdraw the change until such time as he has had the opportunity to consider the matter further".

24 Notwithstanding this, the Committee believes that, in the longer term, consideration should be given to involving both the Attorney General and government in matters involving such fundamental and far-reaching change.

25 The Committee takes this view because it believes the ASX might be placed under considerable pressure and possible conflict of interest in resolving such issues. This may influence its capacity to be detached and objective.

26 In the current situation, the fear of the loss of brokers

commissions from trading in Newscorp shares (said to be in the order of $60m) resulting from a possible decision by Newscorp to move overseas, faces the ASX with a difficult conflict of interest.

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27 The Committee therefore recommends

Recommendation (iii)

That both the ASC and the Attorney-General prepare a response to the ASX discussion paper 'Differential Voting Rights' and publish those responses.

Recommendation (iv)

That the Attorney-General examine the longer term implications of decisions on such fundamental issues as differential noting rights for shares being made by bodies which may be subject to undue pressure and/or face possible

conflicts of interest.

28 The underlying concern of the Committee is that the ASX retain its reputation as an institution which has established and maintains the highest international standards; that it provide a market which is fair, open and applies uniformly high standards.

29 The Committee is concerned that the proposed changes, if supported by the ASX, together with the haste in making such a decision would significantly undermine its integrity and have a profound long term effect on the standing of

Australia's capital market.

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30 SUMMARY OF RECOMMENDATIONS

(i) The Committee recommends that the ASX allow until the end of February 1994 for submission of views and comment on the complex issues raised in its discussion paper 'Differential Voting Rights'.

(ii) The Committee recommends that any change in ASX requirements which would permit alteration to the current one-share-one vote rule should be implemented by means of amendment to the ASX listing rules. The

Committee strongly opposes the introduction of such changes by waiver on a case-by-case basis.

(iii) That both the ASC and the Attorney-General

prepare a response to the ASX discussion paper 'Differential Voting Rights' and publish those responses.

(iv) That the Attorney-General examine the longer term implications of decisions on such

fundamental issues as differential noting rights for shares being made by bodies which may be subject to undue pressure and/or face possible conflicts of interest.

MICHAEL BEAR AN CHAIRMAN

November, 1993

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1 'r* l i - r o

I confirm that the ASX Board is being notified of this undertaking, which I have given after consultation and support from the Chairman of National Listing Committee, Mr Maurice Newman.

Yours sincerely

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RJ SCHOER DIRECTOR OPERATIONS

Dictated by Mr Schoer and signed in his absence

2195lVcj

THE WHUAMENT OF THE COMMONWEALTH OF AUSTRALIA

3 ARLI AMENTARY PAPER No. 445 flf 1903

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