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Corporate Law Reform Bill 1993



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House: House of Representatives

Portfolio: Attorney-General

Commencement: The substantive provisions (Schedules 1,2,3,4, and 6) of the Bill are to come into effect on a date fixed by Proclamation, or if they do not commence within six months of the proposed Act receiving Royal Assent, they will commence on the first day after that period. The transitional provisions (Schedule 5) commence on the day on which the Act receives the Royal Assent.

Purpose

The primary purpose of this Bill is to introduce a statutory-based system of continuous disclosure of information by those who issue invitations to the public to invest in securities. This Bill enhances the level of disclosure of information available to the market by using the provisions of the national Corporations Law. The Bill adds to the existing continuous disclosure requirements already in place for companies listed on the Australian Stock Exchange (ASX), and applies those principles to unlisted entities in which the public invest. The Bill also introduces new periodic reporting requirements and reforms the prospectus provisions in the Corporations Law.

Background

Continuous disclosure involves the provision of full, accurate and timely information by a business entity which has sought loans from creditors, and investment from the public. That entity usually takes the form of a company whose shares are listed on the ASX, but public investment can also be made in other securities such as an unlisted unit trust.

Creditors and investors have different information needs and these needs include:

. a creditor needs to know whether its debtor will be able to make payment or repayment ie. the creditor needs to know about the solvency of its debtor; and

. an investor needs to know how well the investment is performing eg. the investor needs to know the net asset value of his or her investment. 1

Under the Rules of the ASX, a listed company is required to 'immediately' notify the ASX of any information likely to materially affect the price of the securities of the listed company (Listing Rule 3A). The ASX Listing Rules also require a listed company to lodge half yearly reports as well as the printed annual report (a trust or a mining exploration company have different periodic reporting requirements).

Although these Listing Rules have applied for some time, there were serious inadequacies in the level of disclosure by some listed companies during the 1980s. The poor performance and practices which surfaced during this period were, of course, not confined to some of the listed companies. Other serious blows to investor confidence also came about from difficulties encountered by some building societies, life offices and unit trusts.

Growing concern over the inadequate level of disclosure during this period saw the development of a strong push for what is known as an 'enhanced statutory disclosure system'. In other words, a compulsory obligation imposed by statute on those who seek investment in their business enterprises to provide creditors and investors with adequate and timely information. Failure to observe those obligations would make the offender liable to civil and criminal sanctions. Enhanced statutory disclosure was proposed not only for listed companies but also to apply to other forms of investment in respect of which a disclosure of information is required. In its initial proposal, enhanced statutory disclosure was to be additional to the existing Listing Rules of the ASX.

On 26 November 1992, the Government introduced into the Senate the Corporate Law Reform Bill (No. 2) 1992. Following the General Election in March 1993, this Bill was restored to the Notice Paper in the Senate as the Corporate Law Reform Bill (No. 2) 1992 [1993]. This Bill originated when the Hon Michael Duffy MP was the Attorney-General and, for convenience, it will be referred to as the 'Duffy Bill'. The central theme of the Bill was to introduce an enhanced statutory disclosure system which was to be administered by the national corporate watchdog, the Australian Securities Commission (ASC).

Earlier, in November 1991, the House of Representatives Standing Committee on Legal and Constitutional Affairs issued its report Corporate Practices and the Rights of Shareholders. For convenience, this Committee will be referred to as the 'Lavarch Committee'. The Lavarch Committee looked at continuous disclosure and recommended that a regime of continuous disclosure for listed companies be enforced by the ASX through revised Listing Rules and that the ASX be given stronger statutory support under the Corporations Law. 2

This new Bill, the Corporate Law Reform Bill 1993, introduced by the now Attorney-General Hon Michael Lavarch MP, adopts the Lavarch Committee approach and places the primary monitoring of continuous disclosure by listing companies with the ASX which has its role bolstered by additional amendments to the Corporations Law. This Bill will be referred to as the 'Lavarch Bill'. It is assumed that the Duffy Bill, now in the Senate, will be discharged from the Notice Paper now that the Lavarch Bill has been introduced into the House of Representatives.

The Duffy Bill and the Lavarch Bill represent a fundamental difference in approach to corporate regulation. Under the Duffy Bill, statutory responsibility for enhanced disclosure was placed with the statutory regulator, the ASC. Under the Lavarch Bill, recognition is given to what can be described as industry 'self-regulation' through the ASX ie. building on an existing framework. Both approaches have supporters and detractors. The Duffy Bill was criticised largely because of the duplication it would have created for listed companies (ie. continuous disclosure obligations under both the existing Listing Rules and the proposed new statutory obligations to the ASC). The Lavarch Committee approach does not win support from those who hold the view that self-regulation in the corporate sector may be inadequate.

The Lavarch Bill now represents the Government's proposal to reform corporate law by the imposition of enhanced statutory disclosure to restore confidence in the integrity of the market place.

Recommended Reading

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

. Australian Securities Commission, Enhanced Statutory Disclosure System: A Response to the Companies and Securities Advisory Committee Report, February 1992.

. Hon. Michael Lavarch MP, Attorney-General, Corporations Law Reform in the 1990s, Corrs Chambers Westgarth Guest Lecture, Melbourne, 4 August 1993.

. Australia, Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs, Corporate Practices and the Rights of Shareholders, Australian Government Publishing Service, Canberra, November, 1991.

Main Provisions

The Bill uses 6 Schedules to effect amendments to the:

. Corporations Law (as set out in section 82 of the Corporations Act 1989); and

. Australian Securities Commission Act 1989 ( the Act establishing the ASC).

(a) Concept of a Disclosing Entity

The Bill introduces a new concept of a disclosing entity. Item 26 in Schedule 1 of the Bill inserts a new Part 1.2A comprising proposed new sections 111AA-111AX. A disclosing entity includes:

. listed entities and listed prescribed interest schemes;

. entities and prescribed interest schemes which raise funds pursuant to a prospectus (including borrowing corporations);

. entities and prescribed interest schemes which offer securities other than debentures as consideration for an acquisition of shares in a target company under a takeover scheme; and

. entities whose securities are issued under a compromise or scheme of arrangement. 3

To be a disclosing entity there must be a minimum of 100 shareholders or prescribed interest holders. This means that small business will be largely unaffected by the continuous disclosure obligations. Investments offered by the States and Territories, and investments guaranteed by the Commonwealth will also exempt from enhanced continuous disclosure obligations.

(b) Half-yearly reports

The Bill defines an accounting period to be both the financial year of a company and, where the company (or a body which is not a company or a prescribed interest) is a disclosing entity, the accounting period is also a half-year (see Item 11 of Schedule 1). This proposed amendment changes the emphasis from the traditional concept of the presentation of accounts being a financial year to one of periodic reporting for disclosing entities (ie. at least every 6 months). Effectively, this amendment will require all disclosing entities to lodge half-yearly accounting reports in addition to annual reports (see proposed section 50A).

(c) The concept of Enhanced Disclosure Securities

The Bill, at proposed new sections 111AD-111AI at Item 26 of Schedule 1, introduces the concept of enhanced disclosure securities (ED securities). These ED securities include:

. securities quoted on a stock exchange;

. securities to which a prospectus relates;

. securities issued under a take-over, compromise or arrangement; and

. moneys held by a trustee pursuant to section 1052 of the Corporations Law being subscriptions for debentures to be issued by a corporation which has sought borrowings by invitation to the public.

(d) The System of Continuous Disclosure

Two key continuous disclosure provisions in the Bill are found at Item 92 in Schedule 1. These provisions are:

Continuous disclosure for entities listed on the ASX

A proposed new section 1001A imposes a statutory obligation for continuous disclosure upon listed disclosing entities by making it an offence to intentionally, recklessly or negligently fail to notify the ASX. The information that is required to be disclosed is information:

. that is not generally available; and

. that a reasonable person would expect (that information) to have a material effect on the price or value of the securities of the listed entity.

Two important issues that are silent in the Lavarch Bill are the period of time for notification and exemption (or carve-out) for information that is confidential.

The answer to the first issue is that the notification period is already established by the ASX Listing Rules. Listing Rule 3A states that the listed company shall 'immediately notify' the ASX. This Rule is interpreted in the commercial sense and allows common sense to apply in terms of actually collating the information and notifying the ASX in an appropriate form. The now superseded Duffy Bill had a provision which stipulated that the notifying period was '...as soon as practicable, and in any event within 3 business days...'. The time limit in the Duffy Bill had generated some criticism as being too short a period. Time is needed for management to receive the information, assess its importance (perhaps seek legal advice) and then issue the information in a useable form.

The approach on time limits utilised by the United States Securities and Exchange Commission is to set various time limits for specific material events. For example, a resignation of a director or a change of auditor attracts a time limit of 5 business days. A change in control of a company attracts a time limit of 15 calendar days. In some other matters no time limit is set. In Canada, the Ontario Securities Act sets a limit of within 10 days. The Australian Lavarch Bill approach is to leave the issue of a time limit to the ASX Listing Rules. It is suggested that the Lavarch Bill approach is, nevertheless, acceptable.

In the Duffy Bill there was a provision (proposed new section 1084C(4) which allowed the carve-out of information which, if disclosed, would be '...likely to result in unreasonable prejudice to the disclosing entity...'. This is known as a 'carve-out'. The Lavarch Bill leaves this issue to the Listing Rules. In his second Reading speech to the Bill, the Attorney-General also noted this modification and said that '...[s]hould it be necessary, such a provision could be made by Regulation'.

In Ontario in Canada, the continuous disclosure system allows the filing of the carve-out in a confidential form which is retained in that form by notification of the status within every 10 day period. In other words, it is not made public until the listed company advises that the confidentiality no longer applies. The ASX has advised that it proposes to consider express confidentiality provisions for its Listing Rules. 4 What form the confidentiality provisions will take is not yet known.

Continuous disclosure (to the ASC) - unlisted disclosing entities

The Bill contains a proposed new section 1001B which applies to unlisted disclosing entities. The lodgement of information is made to the ASC. The information which must be disclosed is information:

. that is not generally available; and

. a reasonable person would expect (that information) would have a material effect on the price or value of the securities.

Basically, these securities are those issued by unlisted entities and those not otherwise covered by the prospectus provisions in the Corporations Law. The Bill is silent on what arrangements exist for a carve-out of confidential information. On its face, the Bill requires full disclosure of all relevant information to the ASC. It is understood that the issue of a carve-out provision was put to the industry but the industry was of the opinion that the small number of unlisted entities (and those not covered by the prospectus provisions) covered by this proposed new section 1001B did not warrant a carve-out provision in terms of an express confidentiality provision. If necessary, a Regulation could be made to cover this issue once the system is operational.

(e) What is Meant by a Material Effect on the Price or Value of Securities

A proposed new section 1001D defines what constitutes a material effect on price or value. The Bill provides:

A reasonable person would be taken to expect information to have a material effect on the price or value of securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell, the first-mentioned securities.

The above definition applies to both listed and unlisted disclosing entities.

(f) Prospectus Reforms

Schedule 2 of the Bill contains significant reforms of the prospectus provisions in the Corporations Law. Some references to a prospectus will now include a supplementary prospectus and a replacement prospectus is a prospectus in its own right (see Item 1 of Schedule 2). Now that a regime of continuous disclosure will apply together with the requirement for half-yearly reporting, the life time of a prospectus (unless limited by the prospectus itself) will be increased to 12 months (item 57 of Schedule 2).

Section 994 of the Corporations Law has been modified to clarify an ambiguity surrounding documents which are attached to a prospectus. The existing provision can be interpreted to mean that a stockbroker's flyer accompanying the official prospectus forms part of the prospectus and the prospectus issuer is liable for any false or misleading statement. The section has been amended to make it clear that liability for a report or memorandum that is issued with the prospectus is restricted to documents issued with '...the consent or knowledge of a person who authorised or caused the issue of the prospectus' (Item 11 of Schedule 2).

The Bill replaces and expands existing section 1024 of the Corporations Law. The replacement sections are 1023A, 1023B, new 1024, 1024A, 1024B, 1024C, 1024D, 1024E, 1024F and 1024G (Item 41 of Schedule 2). This is a comprehensive revision of the existing supplementary prospectus provisions. The revision commenced with the obligation on a person (eg. a person associated with the preparation or promotion of the prospectus) to notify whoever formally lodged the prospectus of any false or misleading statements in a prospectus. The scope of the obligation also includes notification of any material omission or where there has been a significant change or a significant matter has arisen during the application period for the securities. A similar obligation is also placed upon the issuer of a prospectus to correct a false or misleading statement.

The term 'significant' is not defined but will be given its ordinary meaning (see suggested meaning in the Explanatory Memorandum to the Bill at page 75). A breach of these new provisions will incur a maximum penalty ranging from $5000 or imprisonment for 1 year, or both, to $20,000 or imprisonment for 5 years or both, depending upon the nature of the breach. The fine for a corporation ranges from $25,000 to $100,000.

The Bill confines the existing requirement for the issue of a secondary prospectus for secondary offers of securities to the offer of a 30% or more bloc of unquoted shares (proposed new section 1043C - Item 60 of Schedule 2). Below the 30% threshold, the issue of a notice (or information memorandum) will apply (proposed section 1043D - Item 60 of Schedule 2).

As a general overview, the reforms of the prospectus provisions are important and are necessary both as a form of streamlining and as consequential amendments upon the introduction of the new system of continuous disclosure. For example, prospectus issuers will be able to incorporate a document lodged with the ASC (by virtue of the operation of continuous disclosure) into a prospectus by reference to that prospectus (proposed new section 1024F).

(f) Indemnifying or Insuring an Officer or Auditor of the Company

Schedule 3 to the Bill contains amendments to the Corporations Law to clarify the circumstances when an officer or auditor of a company may be indemnified or insured to defend civil or criminal proceedings. These circumstances are confined to when the person obtains judgment or is acquitted, or there is no lack of good faith involving dealings with a person not associated with the company. Apart from this exception, the primary prohibition on a company offering an general indemnity against proceedings remains. Any instrument or arrangement and any provision in the memorandum or articles of the company offering a general indemnity is void (see Item 2 of Schedule 3).

Where a company indemnifies an officer, the company must disclose information in a report including the identity of the officer, the nature indemnity and how much was paid by the company (Item 9 of Schedule 3).

These reforms are a result of criticisms of the present law. The amendments to the existing law recognise that there are circumstances where an officer may be involved in proceedings arising out of conduct which did not involve dishonesty or a breach of good faith. These reforms do not override the common law prohibition on a company indemnifying its officers against criminal liability.

(g) Documents of the ASC to be Prima Facie Proof in Court Proceedings

Schedule 4 to the Bill gives formal status to a document from the ASC's database so that the document is prima facie evidence of the matters stated without a requirement for certification. The document is proof of the matter in the absence of evidence to the contrary (proposed new section 1274B). This amendment will assist in streamlining the preparation of documentation required in court proceedings.

(h) Transitional Provisions

Schedule 5 to the Bill provides the transitional and consequential amendments that will follow once the Bill becomes the Corporate Law Reform Act 1993.

(i) Exchange of Confidential Information: ASC to ASX : Companies and Securities Advisory Committee (CASAC) To Report On Continuous Disclosure

Schedule 6 to the Bill provides amendments to the Australian Securities Commission Act 1989 to permit the ASC to disclose confidential information to the ASX. Under the present law, the ASC is specifically precluded from disclosing confidential information on securities to the ASX (as well as to the Sydney Futures Exchange - 'SFE'). This amendment is necessary to assist in co-operation between what are the two major regulators of securities in Australia.

Item 4 of Schedule 6 requires the Attorney-General to request a review of the new statutory-based continuous disclosure system by the Companies and Securities Advisory Committee (CASAC) within 18 months of its commencement. The amendments do not oblige the Minister to publicly respond to the report nor to table such a response. An alternative approach may have been to adopt the procedure referred to in section 92 of the major amendments made in 1992 to the Canadian Bankruptcy Act. Under that Act, the new provisions and their operations stand referred to the a '...committee of the House of Commons, of the Senate or of both Houses of Parliament...'. The committee is to commence its 'comprehensive review' after 3 years of operation and is to report within one year of commencing its review.

(j) The Role of the ASX: More Statutory Support for the ASX

A key element of the new statutory-based continuous disclosure system is the role of the ASX in relation to listed entities. The ASX is a company incorporated in the Australian Capital Territory under the Commonwealth's Australian Stock Exchange and National Guarantee Fund Act 1987. The ASX is an amalgamation of the six separate stock exchanges which operate in each capital city. Those exchanges still operate (referred to as 'home exchanges') but they are now under the umbrella of the ASX. The ASX has a board of 15 directors. Ten of the directors are elected from individual Members (as distinct from member organisations) of the ASX. One member is the salaried managing director and four members are appointed from the business community. At least one board member represents each home exchange.

It is suggested that there may be scope to consider further broadening the representation of membership of the broad of the ASX to include a government nominee or a representative from a shareholders association. This suggestion is made on the basis that the whole aim of statutory-based continuous disclosure is to maintain investor and community confidence in the securities industry. Broadening the membership of the ASX can assist in that aim.

Significant amendments are made to the Corporations Law to bolster the role of the ASX. Key provisions commence at Item 87 in Schedule 1 and they include:

. tightening the requirements for the flow of information between the ASX and the ASC (Item 87);

. clarifying the existing section 777 of the Corporations Law to ensure that the Rules of the ASX can be enforced by a Court against directors of a body corporate as well as the body corporate itself; clarifying that section 777 will also apply to a unit trust (Items 88 and 89); and

. specifically identifying that the ASX enjoys the protection of qualified privilege from defamation in relation to statements made about matters relating to securities (but where no malice is involved) (Item 91).

Note: The term ASX is used throughout this Bills Digest. As noted above, the ASX is the amalgamation of six formerly separate stock exchanges in the Australian capital cities. These exchanges still operate under the umbrella of the ASX. The amendments in this Bill apply to those exchanges as well as other exchanges such as the Sydney Futures Exchange. For convenience, the single term ASX has been used.

Endnotes

1. Australian Securities Commission, Enhanced Statutory Disclosure System: A Response to the Companies and Securities Advisory Committee Report, February 1992: 9.

2. Australia, Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs, Corporate Practices and the Rights of Shareholders, Australian Government Publishing Service, Canberra, November 1991: 106-108 (Recommendations 12, 13 and 14).

3. Explanatory Memorandum to the Corporate Law Reform Bill 1993: 5.

4. Second Reading Speech to the Corporate Law Reform Bill 1993, House of Representatives Hansard, 15 December 1993: 4086.

B. Bailey (06 2772434)

Bills Digest Service 31 January 1994

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 1994.

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Published by the Department of the Parliamentary Library, 1994.