Australian Regulatory Compliance Review

APRA releases research on superannuation fund governance

The Australian Prudential Regulation Authority (APRA) has released the results of its recent research on the governance practices of APRA-regulated superannuation funds (pdf).

The research, based on a detailed survey of superannuation trustees, found that there was little difference between the Corporate, Public Sector, Industry and Retail sectors in many areas of trustee policies and practices.  In some areas, however, there were statistically significant differences between the sectors, with Retail trustee practice more often different from that of the other sectors.

Some of the findings of the research include:

 

• Trustee directors of the large funds in the survey were typically well qualified, experienced and reasonably well trained in their trustee duties.
• Most boards (76 per cent) have both independent audit and regular self-assessment to review compliance with the Superannuation Industry (Supervision) Act 1993 and other regulations.
• Service providers are widely used in the superannuation industry, with the average fund using more than 13 service providers. Over 60 per cent of Retail directors have one or more associations with service providers, a figure that is double that for directors of Corporate funds and almost three times that for Public Sector or Industry funds.
• Relative to the other trustees, Retail trustees have fewer directors, shorter (but just as frequent) board meetings, and rely more on fund executives to take the initiative on most key decisions. By contrast, trustees in the other three sectors mostly make the decisions with the main input coming either from themselves or from their consultants.
• More than half of all Retail trustee directors are employed by related parties or by the fund itself, and very few are nominated by fund members. By contrast, many Industry, Corporate and Public Sector trustee directors are member-nominated.
• More than half of Corporate, Public Sector and Industry trustee directors are themselves members of their funds.  About one in five Retail trustee directors are members of their funds.

April 2008 podcast

In this month's podcast (click here to listen) I discuss 2 topics:

1. Directors' duties in times of economic uncertainty (see also section 180(2) Corporations Act)
2. Nikolich's case and the effect of HR policies

The podcast goes for 9 mins, 23 seconds and is 8.62mb.

Corporate Governance In Today's Volatile Market Condition

The Minister for Superannuation and Corporate Law's speech on Corporate Governance In Today's Volatile Market Condition summarises the government's caution about further regulation as a response to the sub-prime crisis:

"on the whole, our robust financial system has coped extremely well with the recent global pressures. And our market regulators have been doing a solid job in difficult circumstances.

... But I can assure you that I am well aware of the need for caution before we introduce any new regulation in this area.

We must look beyond immediate events and preoccupations. We must consider the medium-term risks, opportunities, and vulnerabilities that confront corporate law.

I am committed to pursuing reform of the regulatory and corporate governance framework. Reform that is comprehensive, effective, and — above all — sustainable.

The speech discusses:

• disclosure requirements for  equity derivatives
• short selling and securities lending
• directors’ conduct and obligations to their companies
• reforms to corporate offences, sanctions and personal liability for directors
• financial services consumer protection
• reform of regulation of credit-related financial  services
• financial reporting
• self managed superannuation funds

Board communication in times of uncertainty

I gave a presentation to a board of directors last night on issues arising from the sub-prime crisis and the credit crunch.

I made the observation that in times of uncertainty it was important for directors to pay close attention to market conditions and think about how they affect your business (eg your customers, your cash flow and funding).

In reality this is just an extension of directors fulfilling their duty to keep themselves fully informed about the business and obtaining whatever advice they need to make reasonable business forecasts.

But it is equally important for directors to communicate with each other and management and shareholders about these issues. And, of course, your industry regulator.

Board communications are critical if a crisis occurs.

What boards should be doing in the credit crisis

I attended a timely presentation by Mark Phelps of Ernst and Young Brisbane last week on the risks that boards should be focussing on in the current period of uncertainty in the financial markets. There was anecdotal discussion about credit rationing and cancelling of credit facilities by lenders.

We don't know whether the current circumstances are a "perfect storm" but boards have to be able to show they made reasonable decisions in their business forecasts.

Here are my take-away points:

• Reassess your risks: look at the certainty of your funding arrangements, your cost of funding, your asset valuations, do you need to/can you change your funding sources?
• Business risk: manage the allocation of your resources and protect your capital, monitor your debt levels, look for opportunities, are there new products or services you can provide?
• Risk management: re-identify your risks especially complex transactions, review your compliance reporting procedures, review the quality of your data on your customers and suppliers, ensure your compliance processes are being followed
• Financial risk: review your provisions, liquidity management, capital
• Legislative and regulatory risk: do you have adequate compliance programs and procedures, have you considered the reputational risk of non-compliance?
• Priorities for boards: review and test your strategies, make contingent funding forecasts, do stress-based modelling, manage your capital and liquidity, identify and monitor operational risks, review your asset valuations, assess your legal and regulatory exposures, check the effectiveness of board communications, review the quality of information you get and whether it is the right kind of information.

Review of directors' liability and financial reporting

Is our corporate regime causing directors to be overly cautious when making decisions, particularly in fast-moving and complex business situations?

In a speech  to ASIC's Summer School by Minister for Superannuation and Corporate Law Nick Sherry (delivered by Treasury Secretary Ken Henry) it was announced that Treasury is examining these issues to improve and clarify the corporate governance regime and will consult widely with industry and the regulators:

The Minister believes that it is important that this project looks beyond the Corporations Act to examine issues such as the emerging trend for other legislation to impose personal liability on company officers for corporate fault.

It is important that corporate law reflect modern thinking about the use of criminal, civil and administrative sanctions for misconduct, while also permitting flexibility in decision-making. The Minister has indicated to Treasury that this is a high priority project.

The speech also highlighted two key areas which the Government has identified as areas requiring review — executive remuneration and corporate sustainability reporting.

Corporate governance in Commonwealth companies

The Commonwealth Authorities and Companies Amendment Bill 2008 (Bill) has been introduced into Parliament. The Bill proposes substantive amendments to the Commonwealth Authorities and Companies Act 1997 (CAC Act) to align it with the Corporations Act in terms of corporate governance.

Subsection 34(1) of the CAC Act currently defines a Commonwealth company as “a Corporations Act company in which the Commonwealth has a controlling interest”. The definition expressly excludes companies in which the Commonwealth has a controlling interest through one or more interposed authorities or Commonwealth companies. The expression “controlling interest” has been interpreted at common law to mean the ability of the Commonwealth to control a majority of votes at a meeting of members (in particular, at an annual general meeting).

The proposed amendment would broaden coverage for determining control of companies under the CAC Act. This would allow for greater accountability to the Australian Government and the Parliament. It will also improve the alignment between the CAC Act test for control and the tests in the Corporations Act.

Other amendments proposed by the Bill include:

• aligning the penalty for a breach of director's duties involving dishonesty or recklessness to those imposed by  the Corporations Act (ie 2,000 penalty units, imprisonment for 5 years, or both).
• imposing a penalty for a failure to disclose material personal interests.
• creating an offence if directors are present or vote on matters in which they have a material personal interest.

Good practices in board-shareholder relations

In recent years shareholder groups (such as the Australian Shareholders Association) have been increasingly vocal in expressing their views on issues traditionally (and legally) reserved for board and management. Is it time for a re-balancing of the board-shareholder relationship?

Ira M. Millstein, Holly J. Gregory and Rebecca C. Grapsas of US law firm Weil, Gotshal & Manges LLP have issued a memorandum (pdf) discussing shareholder activism and encouraging increased efforts by boards of directors to engage shareholders in less contentious, more cooperative interaction and communication.

They identify board quality as a key factor in the relationship and detail 5 issues where shareholders have legitimate interests which boards need to consider:

• board composition and independent leadership,
• corporate performance disclosures,
• executive performance, compensation and succession,
• strategic direction, and
• societal concerns, including climate change.

They conclude:
Reaching out to shareholders in a concerted fashion will not appeal to every board. However, it is likely to be a prudent approach for companies seeking to avoid confrontation. Setting a positive and constructive tone in shareholder relations not only has the potential to elicit for the board useful insights about shareholder perspectives but also may encourage shareholders to focus on long-term performance and act as owners making rational investment decisions.

Is legal professional privilege waived by disclosure in company reports?

In GMCG, LLC v Agenix Ltd [2007] QSC 309 the Supreme Court of Queensland refused to order disclosure of documents over which legal professional privilege had been claimed even though the documents had been referred to in the company's annual report lodged with the ASX.

The companies were involved in a dispute over fees. The defendant disclosed the dispute as a contingent liability and stated "The company has received legal advice that it has no liability whatsoever." The company subsequently changed that statement to read “The company has received legal advice. Based on that advice, the company believes that it has no liability whatsoever.” The plaintiff claimed privilege over the legal advice had been waived and sought disclosure not only of the advice but also of the documents “that reveal the process of reasoning and the factual assumptions and instructions lying behind that legal advice”.

The judge accepted the defendant's finance officer's evidence that "he referred to the legal advice to make it clear that the classification of the claim as a contingent liability was based on the company’s belief, following legal advice, that it had no liability. I also accept that the advice was mentioned in order to explain the reason why the defendant believed that its possible further exposure in these proceedings was properly classified as a contingent liability."

Justice Douglas concluded:

In this case...it was important that the defendant be able to disclose why it had adopted a particular accounting treatment of its potential exposure to the plaintiff. It promoted the integrity of the accounts and market transparency by the provision of appropriate information to shareholders, potential shareholders and creditors in circumstances where the disclosure has given it no advantage in the litigation. I do not conclude from those references to the advice the defendant received that it thereby waived the privilege in the advice for the purpose of these proceedings.

Good Governance and Ethical Practice Guide for Charities

The Panel on the Nonprofit Sector (USA) has released Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations.

The Guide (pdf) outlines 33 practices designed to support board members and staff leaders of charitable organisations.

Mid-Cap Corporate Governance report

The 2007 BDO Kendalls Mid-Cap Corporate Governance report highlights a deterioration in governance levels across the mid-caps sector (ie 150 “mid–sized” Australian listed companies, the 251st–400th largest based on market capitalisation at 31 December 2006).

Key highlights of the report include:

• Less than 50% of mid-cap companies (69) have an independent chairman, and only 25% have a majority of independent directors.
• A high 90% of surveyed companies had an audit committee, with more than 80% having an independent chair.
• Almost 71% of mid-caps had a separate remuneration committee, however less than 40% had a separately constituted nomination committee and more than half (56.9%) did not have a majority of independent members.
• 14.7% of companies did not have a code of conduct; 14% did not have a risk management policy, and 38.7% did not have a share trading policy.

APRA releases revised standards on governance for ADI's and insurers

The Australian Prudential Regulation Authority (APRA) has released revised prudential standards on governance for authorised deposit-taking institutions (ADIs) (APS 510)and life insurers (including friendly societies)(LPS 510).

The amendments to the prudential standards result from recent changes to the Australian Securities Exchange (ASX) Corporate Governance Council’s Corporate Governance Principles and Recommendations.

The key amendments to the governance standards are that:

• in addition to the principle of independence of directors set out in the standards, APRA has incorporated the ‘relationships affecting independent status’ in the ASX Corporate Governance Council’s Principles as circumstances that would preclude a director from being treated as independent on the Board of an ADI or life insurer. The circumstances are identical to the five “relationships affecting independent status” in the 2nd edition of the ASX Corporate Governance Council Principles. They represent a non-exhaustive list of specific circumstances that would preclude a director from being regarded as independent for the purposes of serving on the Board of an APRA-regulated institution. A director in any of these circumstances would still be able to serve on such a Board, but not as an independent; and
• a Board should give consideration to the length of service of directors as part of its Board renewal policy.

The revised standards will take effect from 1 January 2008.

The revised prudential standard on governance for general insurers (GPS 510) are a result of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007.

Corporate integrity and culture

Ben Heineman, Jr, former General Counsel of GE, has written about the role that general counsels play in corporate affairs based on his experiences, emphasizing how they can help ensure that a business is managed to achieve both high performance and high integrity.

In Avoiding Integrity Land Mines (pdf) Heineman argues that " It is now time to shift this debate about corporate integrity from board oversight of the CEO to how the CEO and top company leaders can most effectively fuse high performance with high integrity at all levels in a challenging, fast-changing, and at times hostile world. This is a grinding, complex, day-in, day-out task that is difficult in the best of circumstances to do well."

He gives the example of when a senior leader was removed not for failing to follow key rules but for failing to create the right culture. "During my time, there were two seminal examples. Both involved acts hidden for a number of years that were clearly understood by many in the respective business units to be suspicious or wrong but had been tolerated to keep difficult customers satisfied. The first involved fraud in a Middle East procurement contract financed by U.S. government funds in the late 1980s and early 1990s. The second, early in this decade, had to do with acquiescing to an Asian customer’s request that GE falsify supplier documents included in regulatory submissions."

(via Harvard Law School Corporate Governance Blog)

What new court discovery rules will mean for management of electronically stored information

The Federal Court of Australia is considering adopting e-discovery rules for commercial litigation based on the US's Federal Rules of Civil Procedure which already specifically allow electronic discovery. (Lawyers Weekly)

What will this mean for companies?

In Linking E-Discovery & Enterprise Security Programs:A Successful Governance Action (pdf) by Jody R. Westby, CEO of Global Cyber Risk LLC, the author argues that "Technological considerations are now front and center in litigation strategy, and discovery issues must be woven into enterprise security programs."

Some of the US FRCP requirements which could be adopted here are:

• a party must provide “a copy of, or a description by category and location of, all documents, electronically stored information, and tangible things that are in the possession, custody, and control of the party.”
• a party can request that they be able to “inspect, copy, test, or sample any designated documents or electronically stored information (including writings, drawings, graphs, charts, photographs, sound recordings, images, and other data or data compilations stored in any medium…)” or to inspect “tangible things that constitute or contain matters within the scope of” discovery.
• a court may not impose sanctions for failing to produce electronically stored information (ESI) that was lost as a result of the “routine, good-faith operation of an electronic information system.” However, the “good-faith operation” of systems requires parties to modify or suspend routine features of a system that may result in the destruction of data that is subject to preservation. A party is under a duty to preserve data that is applicable to pending or reasonably anticipated litigation.

The new Rules will also include "litigation hold" procedures to stop destruction of emails and other electronic messages. Companies will need to have technology in place to ensure that such orders can be complied with.

In summary, Westby says that from the moment litigation is filed or a person has reason to believe litigation may arise, counsel must know:
• What ESI the organization has
• What ESI is relevant
• What ESI should be preserved
• What ESI is subject to privilege or other protections (including intellectual property protections, contractual obligations, non-disclosure agreements, etc.)
• What format is the ESI ordinarily maintained in
• Where the ESI is located and how many copies exist
• What personnel have access to the ESI (within the company and third parties, such as vendors, contractors, business partners, etc.)
• What ESI is not reasonably accessible
• What ESI is expensive and burdensome to produce.

In the US the new rules have had "a significant impact on managerial policies and procedures and operational considerations. Organizationally, they require a much closer working relationship between in-house counsel, the CISO (Chief Information Security Officer), and records management personnel. Operationally, they require a linkage between records management systems and enterprise security programs."

Legal professional privilege of in-house emails

I recently noted the decision of Telstra v Minister for Communications disallowing Telstra's claim of privilege for certain communications by its in-house lawyers because it could not be shown the lawyers were acting independent of management.

What would be the situation regarding e-mails and attachments between in-house lawyers and non-legal personnel addressed to both lawyers and non-lawyers for review, comment and approval?

The US decision in  In re Vioxx Prods. Liab. Litig. is the subject of a Litigation Alert (pdf) by Hogan & Hartson (via Stephen Warne). Here's some key points:

• After the pain drug Vioxx was pulled from the market in 2004 due to concerns that it caused an increased risk of heart attacks and strokes, the drug’s manufacturer, Merck, was flooded with lawsuits.
• Merck’s claimed privilege over approximately 500,000 pages of documents, primarily e-mails and attachments between Merck in-house attorneys and non-legal personnel.
• The Court decided that e-mails “addressed to both lawyers and non-lawyers for review, comment, and approval,” and any attachments are not privileged since the primary purpose of the request is “not to obtain legal assistance since the same [advice] was being sought from all.”
• Such a communication could be considered a request for legal advice with a notification to the non-lawyer recipients of the advice sought, but the burden of establishing this is on the proponent of the privilege.
• Documents sent to an attorney for legal advice do not remain privileged if later circulated to other company personnel for non-legal purposes unless the purpose was to apprise them of the legal advice sought and received.
• Parties cannot claim an entire e-mail thread is privileged. They must prove that each thread is privileged unless the entirety of the e-mail chain is integrated into a communication made only to an attorney for legal advice.

As ediscovery becomes a routine litigation procedure in Australia, this issue will arise for consideration here.

Removal of company directors: disputed notice of meeting

Disputes over the convening of company meetings and removal of directors are frequently litigated.

In Scottish & Colonial Ltd v Australian Power & Gas Co Ltd & Ors [2007]  NSWSC 1266 the New South Wales Supreme Court decided that a general meeting of shareholders of Australian Power and Gas Company Limited (APG) called by a director could not, by resolution, remove any director from office because section 203D of The Corporations Act had not been complied with.

APG is a public company listed on the Australian Stock Exchange. On 15 October 2007 Mr Bellman, a director, requisitioned a general meeting of APG to be held on 15 November 2007.  Mr Bellman was authorised to call the meeting by s 249CA of the Corporations Act 2001. He gave notice complying with s 249HA. He acted under that power without seeking a decision of the board to call a meeting. His notice of meeting set out five resolutions, the effect of which was that, if passed, all four other directors would be removed from office immediately, and that another person, who was not a current director, would be appointed a director

Scottish & Colonial Limited, a shareholder of APG, claimed an injunction restraining the challenged directors and APG from continuing to issue communications relating to the meeting of 15 November 2007 which in any way sought to influence the outcome of that meeting; an injunction restraining the challenged directors and APG from operating the information hotline referred to in a letter which they circulated on 18 October 2007 at APG's expense; an injunction restraining the challenged directors from using funds or resources of APG to influence shareholders to vote against the resolutions at the meeting proposed, and orders that the challenged directors indemnify or compensate APG for funds and resources already utilised to seek to influence shareholders to vote against the resolutions.

The principal ground alleged against the directors was contravention of their duty to exercise their powers in good faith in the best interests of APG and for a proper purpose, as set out in s 181(1) of the Act.

The section 203D issue was heard as a separate preliminary point.

Mr Bellman did not follow the procedure for removal of the directors indicated by s 203D of the Act, which includes a requirement in subs (2) that "Notice of intention to move the resolution must be given to the company at least 2 months before the meeting is to be held". He did not give two months' notice.

Justice Bryson rejected argument that a general meeting could resolve to remove directors notwithstanding non-compliance with section 203D:

"In my opinion s 203D means that if a director is to be removed the procedures required by the section must be taken. The step in s 203D(2) of giving notice must be taken, subject to the means of overcoming the time provided for by subs (2) but otherwise as prescribed. So too for the steps required by subs (3) and for according the director the entitlement conferred by subs (4). If there are conditions in a company's articles for exercise of the power, whether procedural provisions or other conditions, it is nonetheless necessary that s 203D be complied with. The power in subs 203D (1) exists despite anything in any other of the documents indicated; that is, it always exists, in any removal of a director the members always exercise it. When it is exercised the other provisions of s 203D apply and must be complied with. Whether any conditions imposed by a company’s constitution must also be complied with need not now be determined: in this case the requirements of cl 12.5 would be complied with."

The effect of the rejection of a remuneration report

The Australian reports that Telstra shareholders rejected the Board's remuneration report at its AGM but that the Board intends to proceed with the proposed remuneration packages for its executives.

See Telstra Chairman's statement

Under section 300A of the Corporations Act, a listed public company's annual directors' report must contain a discussion on remuneration of directors, secretary and senior managers in a separate remuneration report.

The remuneration report must include a discussion of the relationship between the remuneration policy and the company’s performance.

If an element of the remuneration package for a director, Company Secretary or senior manager is dependent on them satisfying a performance condition, the company must disclose:

• a detailed summary of the condition
• an explanation of why the condition was chosen
• the methods used in determining whether the performance condition has been satisfied.

Companies also have to explain why the company’s securities form part of the remuneration if the securities are given without satisfaction of a performance condition.

Sections 249L(2) and 250R(2) require that at a listed company’s AGM, the members vote on an advisory (non-binding) resolution that the remuneration report be adopted.

Even though a vote to reject a remuneration report is not binding, a company should explain to its shareholders what action, if any, it intends to take in response.

The Corporations Act is silent on the consequences if a Board proceeds with its remuneration proposals despite a negative shareholder vote.

Of course the shareholders may review their position when electing directors in the future.

For listed companies, Listing Rule 10.17 provides that members must determine directors’ fees and that any increase requires members’ approval. LR 10.17.2 provides that fees paid to non-executive directors must be by fixed sum. Similarly, LR 10.17 provides that remuneration to executive directors (salary or fee) must not include a commission on, or percentage of, operating revenue.

Telstra's AGM passed a resolution to increase the aggregate fees payable to non-executive directors.

CAMAC issues discussion paper on shareholder claims against insolvent companies (Sons of Gwalia)

The Corporations and Markets Advisory Committee (CAMAC) has released a discussion paper  Shareholder claims against insolvent companies: Implications of the Sons of Gwalia decision (pdf).

The paper responds to a request from the Parliamentary Secretary to the Treasurer, the Hon. Chris Pearce, MP, for CAMAC to consider the implications of the decision of the High Court of Australia in Sons of Gwalia Ltd v Margaretic  [2007] HCA1.

In that case, the High Court held that a shareholder who is misled by a company into acquiring its shares can claim as a creditor in the external administration of the company. Such a claim is not postponed behind other unsecured creditors as are claims brought in a shareholder’s ‘capacity as a member of the company’. While clarifying the interpretation of relevant statutory provisions, the decision opens up underlying policy considerations, as was recognised by members of the Court.

CAMAC has been asked to consider whether the current position should be retained or changed to postpone claims by shareholders as aggrieved investors, and whether other changes should be made to ameliorate the consequences of either outcome.

The paper reviews various arguments for or against change to the current legal position and notes the divergence between the US and UK positions. It canvasses possible changes to the conduct of creditors’ meetings and to the procedure for determining shareholder claims if the current position is retained. It raises the possibility of introducing a ‘fraud on the market’ principle to assist shareholder claims should the law be changed. Finally, the paper considers whether shareholders whose claims are postponed in a liquidation should still be treated as creditors, with voting and other rights in an external administration.

Submissions close on Friday 21 December 2007.

APRA releases proposed amendments to governance standards

The Australian Prudential Regulation Authority (APRA) has released a discussion paper on proposed amendments to prudential standards on governance for authorised deposit-taking institutions (ADIs), general insurers and life insurers and a revised Prudential Standard APS 510 Governance for ADIs. The change is expected to take effect from 1 January 2008.

  These amendments follow the release of the ASX Corporate Governance Council’s Principles and Recommendations (2nd ed) which contained changes to the provisions on the independence of board directors.

As the ASX document no longer provides a definition of independence but identifies a number of “relationships affecting independent status” that Boards should consider in determining a director’s independence, APRA proposes to redraft its standard.

APRA will remove reference to the definition of independence in the 1st edition of the ASX Corporate Governance Council Principles. Instead, the paragraph will refer to circumstances that will not satisfy the principle of independence.

The circumstances are identical to the five “relationships affecting independent status” in the 2nd edition of the ASX Corporate Governance Council Principles. They represent a non-exhaustive list of specific circumstances that would preclude a director from being regarded as independent for the purposes of serving on the Board of an APRA-regulated institution. A director in any of these circumstances would still be able to serve on such a Board, but not as an independent.

APRA is also proposing that an ADI's Board Renewal policy must give consideration to whether directors have served on the Board for a period which could, or could reasonably be perceived to, materially interfere with their ability to act in the best interests of the regulated institution. 

Written submissions on these proposals should be submitted by 28 September 2007.

Prudential standards on governance for general insurers and life insurers (GPS 510 and LPS 510) will also be revised in the same way, but will be finalised subject to a number of other changes required as a result of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007. APRA will consult separately on those other changes.

UPDATE 28 November 2007: Final standards issued

Further Simpler Regulatory System changes come into force

The Governor-General has proclaimed 1 September 2007 as the day on which items 198 to 215, 221 and 222 of Part 3 of Schedule 1 of Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 commence.

Corporations Amendment (Insolvency) Bill 2007

The Corporations Amendment (Insolvency) Bill 2007 has been passed by Parliament and is waiting Assent.

UPDATE: Corporations Amendment (Insolvency) Act 2007 as passed

Chris Pearce, the Parliamentary Secretary to the Treasurer spoke about the Bill in his speech “The changing role of creditors in insolvency” to The Banking and Financial Services Law Association.

He spoke about:

• the treatment of employee entitlements,
• practitioner independence,
• practitioner fees,
• measures to deter misconduct, and
• the new pooling regime.

ASX releases revised Corporate Governance Principles and Recommendations

The ASX Corporate Governance Council has issued The revised Corporate Governance Principles and Recommendations (pdf). The revised Principles will start on a company's first financial year commencing on or after 1 January 2008.

The ASX has provided a document setting out the differences between the 2003 and 2007 editions of the Principles and Recommendations

In summary, the key changes are:
• ‘Best practice’ has been removed from the title and the text of the document – to be known as the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations - to eliminate any perception that the Principles are prescriptive and so not to discourage companies from adopting alternative practices and ‘if not, why not’ reporting where appropriate.
• There are now eight Principles instead of ten with Principle 8 amalgamated into Principles 1 and 2, and Principle 10 amalgamated into Principles 3 and 7. These changes make the document more user-friendly by structuring the guidance more logically.
• Guidance to Principle 2: Structure the Board to Add Value sets out a list of “relationships affecting independent status” that a company should take into account when determining the independence of a director rather than providing a definition of independence. Companies are required to disclose their reasons for considering a director ‘independent’ notwithstanding the existence of one of these relationships.
• Council recommends that companies’ trading policies should prohibit hedging unvested options and that any hedging of vested options should be disclosed to the company under Principle 3: Promote Ethical and Responsible Decision-Making. Council’s position complements the Government proposal to amend the Corporations Act to require companies to disclose their policy on hedging of options.
• Principle 7: Recognise and Manage Risk now makes it clear that material business risks involve both financial and non-financial risks. Companies are encouraged to adopt appropriate risk oversight, management policies and internal control systems rather than disclosing specific material business risks.

• Recommendation 7.2 now deals with “material business risks” in broad terms. Where a company has risks relating to sustainability or corporate social responsibility (CR) that are material to its business they should be considered in the context of the revised Recommendation 7.2.

• Recommendation 7.3 contains a revised version of the existing “assurance” or “sign-off” on financial reporting risks. The Recommendation requires the board to disclose that it has received assurance from the CEO/CFO that the declaration under section 295A of the Corporations Act is founded on a sound system of risk management and internal control which is operating effectively in all material respects in relation to financial reporting risks.

• Recommendation 9.4 has been deleted and instead commentary has been added to Recommendation 8.2 suggesting companies may wish to consult shareholders about equity-based incentive plans involving the issue of new shares to executives, other than directors, prior to implementing them.

Access to member register of building societies, credit unions and friendly societies clarified

Corporations Amendment Regulations 2007 (No. 9) modifies section 173 of the Corporations Act 2001  dealing with the right of access to a member register of building societies, credit unions and friendly societies by inserting new subsections (1AA), (1AB), (3A) and (3B) and insertlng a new Part 3 of Chapter 2C Corporations Act dealing with use of information on a register of members.

Under section 173, companies are required to provide a copy of their register of members within seven days to a person requesting access to the register and paying the required fee. But section 173 was modified in the case of building societies and credit unions.

When corporate regulation of building societies, credit unions and friendly societies was transferred to ASIC in 2001, the Corporations Act had to be modified to deal with, for example, the concept of member shares, demutualisation and the right of access to the member register.

Part of the concern of mutuals was that, unlike other public companies, as customers needed to be members, disclosure of the member register also provided personal information about members in their capacity as customers. Security concerns were also raised for companies whose membership is concentrated in the defence or police sectors.

Subsection 173(3B) was inserted by reg 12.8.06 of the Corporations Regulations 2001 (Cth).The modification was recently considered in Capricornia Credit Union Ltd v Australian Securities and Investment Commission [2007] FCAFC 79 .

The Government has addressed the concerns by requiring that where an applicant wishes to contact members and where a copy of the register has not been provided within 28 days of a person’s request for a copy, the company may (unless it reasonably believes the contact or material to be sent is not lawful) satisfy its obligations by providing the member register details to a secure third party provider such as a mailing house rather than the applicant directly.

The Regulation does not change the need for the applicant to have a lawful purpose for access but does provide a clearer process and member privacy safeguards. The Regulation also inserts a new ground on which a company can refuse access, namely the body is not satisfied that allowing the person to inspect or copy the register is in the interests of the members as a whole.

DISCLOSURE: I advised Capricornia Credit Union in its action.

Public companies' top 20 shareholders

From 1 July 2007 public companies no longer need to notify ASIC of their top 20 shareholders or interest holders as part of their annual review.

This change is implemented by Corporations Amendment Regulations 2007 (No. 5).

CAMAC issues discussion paper on company liabilities for future personal injury claims

The Corporations and Markets Advisory Committee (CAMAC) has released a discussion paper Long–tail liabilities: The treatment of unascertained future personal injury claims

The paper responds to a request from the Parliamentary Secretary to the Treasurer, the Hon. Chris Pearce, MP, following the Special Commission of Inquiry into Medical research and Compensation Foundation (the James Hardie Inquiry) for the Committee to consider the adequacy of arrangements under the law for the protection of individuals who in the future may have personal injury claims against companies that have been involved in the manufacture and distribution of products that give rise to health problems or diseases after the lapse of a significant period of time (such as asbestos).

ASIC financial reporting relief for small foreign owned companies

ASIC has announced additional relief from the requirement to prepare and lodge financial reports for certain small proprietary companies controlled by foreign companies and registered foreign companies.

ASIC Class Order [CO 07/505] Variation and revocation of financial reporting instruments amends existing ASIC relief to reflect recent changes in the ‘large/small test’ made by the Corporations Legislation Amendment (Simpler Regulatory System) Act .

ASIC v Vines penalty reduced on appeal

In Geoffrey William Vines v Australian Securities & Investments Commission [2007] NSWCA 75, the New South Wales Court of Appeal partially allowed Vines' appeal against findings that he had breached his duty to act with reasonable care and diligence on certain occasions during the course of AMP's 1998–99 takeover bid for GIO Australia.

ASIC has announced that the New South Wales Court of Appeal has ordered that Geoffrey William Vines, a former Chief Financial Officer of GIO Australia Holdings Ltd (GIO), pay a pecuniary penalty of $50,000 for his conduct during the takeover bid. This penalty replaces the order made in 2006 by Justice Austin of the Supreme Court of New South Wales that Mr Vines be disqualified from managing a corporation for three years and pay a $100,000 pecuniary penalty.

The Court of Appeal also held that Mr Vines was a fit and proper person to manage a corporation and therefore, under the law that applied at the time, it declined to disqualify him and set aside Justice Austin’s disqualification order.

Section 1317EA of the Corporations Law, which dealt with the disqualification of directors at the time of Mr Vines’ conduct, was repealed with effect from 13 March 2000 and replaced by section 206C of the Corporations Act. The difference between the two provisions is that under the old law the court could not disqualify a person they considered fit and proper to manage a corporation. Under the new law the test is broader and the court can disqualify a person if they are satisfied that the disqualification is justified.

ASIC was ordered to pay Mr Vines’ costs of the appeal.

High Court grants special leave to appeal in APL v Alinta

In A-G of the Commonwealth v Alinta Limited & Ors the High Court has granted special leave to appeal the Federal Court Full Court decision in APL v Alinta which limited the Takeover Panel's jurisdiction.

Simpler Regulatory System: Corporate Governance changes

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 when passed will make amendments to the Corporations Act to:

·      allow public companies to give small financial benefits to related parties without seeking member approval in certain circumstances;

·      allow delegation to ASIC of the function of consenting to grant a particular company name notwithstanding it is identical to another name or otherwise unacceptable; and

·      remove the requirement for companies exempted from using ‘limited’ in their name to seek ministerial approval for changes to their constitutions, and replace it with a requirement to notify ASIC of any changes.

Related party approval thresholds
The related party transactions provisions in Part 2E.1 of the Corporations Act require that public companies obtain member approval before they can give any financial benefit to a related party (such as a director, a director’s spouse, a controlling entity, or entities controlled by mutual entities), unless the benefit fits within certain exceptions.

The Bill will insert a provision into the Corporations Act to provide that member approval is not required for giving a financial benefit to a related party which is at or below a prescribed amount aggregated over a financial year.  [Schedule 1, Part 2, item 190]. This would avoid the need for member approval of what could be considered minor transactions.

It is expected that the amount initially prescribed will be $5,000.

The new provision will repeal and replace the current section 213 and absorb its effect.  The current provision allows payments at or below $2,000 to related parties who are directors or directors’ spouses to be made without member approval.  Under the new provision, member approval will not be required for giving a financial benefit to these related parties (ie directors or directors’ spouses), which is at or below the prescribed level aggregated over a financial year.

By referring to ‘amounts or values’, the provision contemplates both monetary and non-monetary financial benefits.  It is intended that non-monetary financial benefits will be valued by reference to ordinary valuation concepts.

The new section 213 will not interfere with the requirements on directors or officers to exercise their powers and discharge their duties in accordance with other provisions of the Corporations Act, including the duties in Part 2D.1 and rules under the general law.

The amendments regarding related party transactions apply to financial years commencing on or after 1 July 2007. 

Company names
The Bill will allow delegation to ASIC of certain administrative functions regarding identical or unacceptable company names, and approval of changes to certain corporate constitutions.

The amendments allowing delegation of administrative functions to ASIC will commence on 1 July 2007.

Simpler Regulatory System: Company reporting changes

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 when passed will simplify company reporting obligations.

Executive remuneration
Amendments will remove duplication in the executive remuneration disclosure requirements between the Corporations Act and accounting standards so that the remuneration disclosure requirements for individual directors and executives of listed companies will be exclusively contained in the Corporations Act.  Following on from the amendments to the Corporations Act in this Bill, the remaining remuneration disclosure requirements in the accounting standards will be incorporated into the Corporations Regulations.

The Act will adopt the standards' definition of ‘key management personnel’.

Disclosures will be made in a company’s directors’ report instead of the financial report. 

The amendments regarding executive remuneration will apply to financial years that begin on or after commencement.

Companies that are disclosing entities must disclose their policy in relation to directors and executives hedging their incentive remuneration and how the company enforces this policy.

Thresholds for financial reporting of large proprietary companies
The revenue and asset thresholds for financial reporting of large proprietary companies will be increased. The revenue and assets thresholds that determine a large proprietary company will be increased by 150 per cent from $10 million in revenue to $25 million in revenue and from $5 million in assets to $12.5 million in assets. The threshold regarding the number of employees will remain at 50 employees.

The changes to thresholds for reporting for large proprietary companies will take effect in the financial year that ends on or after commencement.

Change in office holders
The requirement for a company to notify ASIC of a change in officeholder, where the officeholder has already notified ASIC, will be removed. The changes to requirements for companies to inform ASIC when officeholders change will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent

Company addresses
A single process for notification of an update of all company addresses will be implemented. This will allow companies to nominate an address, separate from the registered office address, at which they prefer to receive documents from ASIC. But if they do so a company must lodge a change to its contact address in the prescribed form. This will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent

Voluntary deregistration
Amendments will allow deregistration of a company to proceed where an annual review fee becomes payable or is incurred after the application for deregistration is approved. This will commence on Royal Assent.

Upfront payment of annual fees for companies
Amendments will allow companies to pay a single sum to cover review fees for an extended period.

For example, instead of $212 per year for 10 years ($2,120), proprietary companies would only be required to pay a one-off fee of $1,600.

The change will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent

Electronic distribution of annual reports
The default option for receiving annual reports will be changed to be via the Internet if a company does not wish to send every shareholder a hard copy. But if a company chooses to distribute reports in this way it must comply with new section 314(1AA). Members will continue to be able to choose to receive a hard copy or an electronic copy of annual reports free of charge if they so elect.

Under section 314(1AA)(c) a company must directly notify those members who did not receive a hard copy that the reports are accessible on the web site, and specify the direct address of the web site (ie the URL of the reports). This notification can be made in hard copy, or by electronic means (for example, e-mail or fax).

The amendments regarding distribution of annual reports apply to a financial year that ends on or after commencement.

I discuss this change in detail in my June podcast.

The Simpler Regulatory System Package update

The Simpler Regulatory System Package was passed by the House of Representatives and introduced into the Senate on 14 June 2007.

The Government intends to pass the Bills this week so that certain provisions can commence on 1 July 2007.

As the Bills cover a range of topics (Financial Services Regulation, Company Reporting Obligations,  Auditor Independence,  Corporate Governance,  Fundraising,  Takeovers, and  Compliance) which I summarised here, I will do separate notes dealing with the final changes in each area.

UPDATE: Detailed notes now added on

Company reporting changes

Corporate governance

Fundraising

Takeover rules

ASX releases review of corporate governance reporting

The ASX has released its review of the corporate governance reporting in the annual reports and relevant website sections of 1,294 listed companies and 77 listed trusts - 1,371 listed entities in total - that reported with a 30 June 2006 balance date. This number represents approximately 71% of all listed entities at that date.

The latest review by the Australian Securities Exchange (ASX) of reporting against the ASX Corporate Governance Council’s Principles and Recommendations shows that listed entities have continued to improve their corporate governance reporting.

The overall reporting level for listed companies – the aggregate of adoption of recommended practices and of ‘if not, why not’ reporting – was higher in 2006 (90%) than in either of the two previous years ASX has conducted the review (2005 – 88% and 2004 – 84%).

Financial reporting requirements of unlisted public companies

The Parliamentary Secretary to the Treasurer has released a Treasury discussion paper on financial reporting by unlisted public companies.

The discussion paper analyses the current financial  reporting requirements of unlisted public companies under the Corporations Act 2001 (both companies limited by guarantee and unlisted public companies limited by shares).

Currently, these companies are subject to similar annual reporting requirements as listed public companies. The paper examines the issue of whether some type of differential reporting framework should be introduced for these companies based on the existing differential requirements for proprietary companies. The paper highlights the unique nature of many unlisted public companies due to their not‑for‑profit focus.

Interested parties are invited to provide written comments on the discussion paper by 3 August 2007.

Takeovers Panel Guidance Note on insider participation in takeovers (including private equity bids)

The Takeovers Panel has today released Guidance Note 19 in relation to when the Panel may consider unacceptable circumstances exist where there is insider participation in control transactions.

The Guidance Note provides takeover market participants with guidance on situations where there is involvement or potential involvement by the management, directors or external advisers of a target company with the bidder or participating insiders to in a takeover bid or potential bid for the target company.

The issues which are discussed in this Guidance Note overlap with directors’ and employees’ duties, employment law and the duties and terms of engagement of advisers. The guidance applies to these issues where they affect the principles set out in section 602 of the Act, including the maintenance of an efficient, competitive and informed market for a company’s securities where the company is subject to a takeover bid.

Key guidelines include:

14. The Panel considers that insiders should promptly inform the relevant sub-committee or the board of the target company of any approaches that might lead to a change of control proposal being tabled and obtain the relevant sub-committee or the board’s consent before they provide any non-public information. 
15. The Panel considers that it would be prudent for companies to make such requirements clear to their management and boards, and that bidders seeking to gain the support of insiders should also make any proposed discussions subject to such requirements.
16. As soon as the board of a company becomes aware or informed of a bid or potential bid for the company, in which there is, or is likely to be, participation by insiders, it should establish appropriate protocols. Normally this will involve appointing an independent board committee (IBC) consisting of those directors who are not participating insiders to oversee the application of these protocols and the process in the interests of target shareholders. Any directors who are participating insiders should not be present at, or participate in or vote on, any consideration by the board of the bid or any competing bid.

The issues discussed in this Guidance Note are applicable to all takeover bids (irrespective of the source of funding). However, some of the issues have recently been brought to prominence by the increase in the number of private equity bids or other buy-outs which frequently have features which make the Guidance Note particularly relevant for such bids.

The Panel has also released a Public Consultation Response Statement which sets out the main comments that the Panel has received and the reasons why the Panel has taken up, or not taken up, the comments or suggestions received (Consultation  Response).

Takeovers Panel releases reasons for Qantas decision

The Takeovers Panel has published the reasons for its decision in  relation to an application dated 6 May 2007 from Airline Partners Australia Limited (APA) for review of the decision made by the sitting Panel in  the Qantas Airways Limited proceedings that it not take any action in response to APA's submissions that as a result of clause 7.3(f)(i) of the terms of the APA Offer, APA may have met the 50% threshold prior to the scheduled close of the APA Offer and thus the APA Offer may have been extended by the operation of s624(2) of the Corporations Act.

ASIC's power to disqualify is constitutionally valid

In Visnic v Australian Securities and Investments Commission [2007] HCA 24 the High Court decided that section 206F of the Corporations Act 2001, which gives the power to ASIC to disqualify persons from managing corporations is constitutionally valid and was not a function that must be exercised by courts.

Corporate insolvency reforms introduced

The Parliamentary Secretary to the Treasurer, Chris Pearce MP, has introduced the Corporations Amendment (Insolvency) Bill 2007 into Parliament.

The Insolvency Bill will:

• strengthen the protection of employee entitlements, improving insolvency practitioner disclosures to creditors (including on independence and remuneration), and streamline procedures
• extend ASIC’s investigative powers in monitoring liquidators and improving court processes in relation to misconduct by company officers.
• introduce more regular reporting requirements for insolvency practiotioners, requiring adequate insurance to be held and providing greater flexibility to the Companies Auditors and Liquidators Disciplinary Board.
• Fine tune the voluntary administration process.

More

UPDATE 9 August 2007: Bill passed by Senate.