Australian Regulatory Compliance Review

ASIC announces results of its strategic review

The Australian Securities and Investments Commission (ASIC) has announced it has completed a strategic review.

The key changes ASIC is making in order to be closer to the market and to take emerging trends into account more quickly are:

• additional investment in market research and analysis;
• the appointment of an experienced External Advisory Panel drawn from a variety of sectors of the economy in order to advise ASIC’s Commission on market developments and potential systemic issues;
• abolition of the four current ‘silo’ directorates of ASIC and replacing them with 17 outwardly-focused stakeholder teams covering the financial economy (e.g. teams for retail investors and consumers, investment managers, investment banks, superannuation funds and financial advisors);
• additional resources directed to the supervision of brokers and intermediaries and to operators of exchange-traded products and to surveillance of exchange-traded markets; and
• a better balance between national and regional initiatives (e.g. more resources into Perth and Western Australia.). 

ASIC will retain its strong approach to enforcement. ASIC will now have six main enforcement or deterrence teams (instead of one large directorate). Each team will be tasked with specific responsibilities such as insider trading, major fraud, and international fraud and teams for other significant misconduct.

ASIC will retain current staff levels of 1600. ASIC will carry out the restructure within its current budget and has not asked the Government for additional resources for the 2008/09 financial year.

The new arrangements take effect from now and will be fully implemented during the next four months.

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

Takeovers Panel Guidance Note on collateral benefits

The Takeovers Panel has issued Guidance Note 21 which sets out the Panel's approach to collateral benefits. The Panel starts from the idea that unacceptable circumstances will be likely to exist whenever a bidder provides a security holder something of value which it does not offer to other security holders.

Under s602(c) Corporations Act, if there is a proposal for the acquisition of a substantial interest, then, as far as practicable, the holders of the relevant class of voting shares must all have a reasonable and equal opportunity to participate in any benefits.

MBF demutualisation scheme

The Federal Court has authorised MBF Australia Limited to convene a meeting of its members to consider a scheme of arrangement which involves the company's demutualisation ( MBF Australia Limited, in the matter of MBF Australia Limited [2008] FCA 428)

The reasons for the decision are of interest because they consider, in addition to the Court’s consideration of whether to approve the Scheme under s 411(4)(b) of the Corporations Act, the conditions imposed by the Private Health Insurance Administration Council (PHIAC) namely:

(a) that the conversion scheme would not result in a financial benefit to any person who is not a policy holder of, or another person insured through, a health benefits fund conducted by the insurer; and

(b) that the conversion scheme would not result in financial benefits from the Scheme being distributed inequitably between such policy holders and insured persons.

The Scheme Information Memorandum has been published on MBF's website here.

ASIC issues report on relief applications - September to November 2007

The Australian Securities and Investments Commission (ASIC) has released a report outlining its recent decisions on applications for relief from the corporate finance, financial services and managed investment provisions of the Corporations Act (the Act) between 1 September and 30 November 2007. 

The report, Overview of decisions on relief applications (September to November 2007) )pdf) provides an overview of situations where ASIC has exercised, or refused to exercise, its exemption and modification powers from the financial reporting, managed investment, takeovers, fundraising and financial services provisions of the Act.

The report also highlights instances where ASIC decided to adopt a no-action position regarding specified non-compliance with the provisions.

ASIC announces financial reporting relief

The Australian Securities and Investments Commission (ASIC) has announced a number of changes to Class Order 98/1418 Wholly-owned entities, which provides certain wholly-owned subsidiaries with relief from the requirement to prepare financial reports. The changes will enable more companies to rely on the relief and reduce the administrative work for group companies.

ASIC has also announced new relief under Class Order 08/15 Disclosing entities – half-year financial reporting relief. CO 08/15 relieves a disclosing entity from the requirement to prepare and lodge a half-year financial report and directors’ report during the first financial year of the entity, where that first financial year lasts for eight months or less.

Winding up statutory demand dates are critical

In times of uncertainty, more company winding-up notices (statutory demands) are issued. Failure to comply results in a presumption of insolvency.

So the High Court's decision in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Limited [2008] HCA 9 is timely.

The High Court decided that a court could not extend the time for compliance with a statutory demand under the Corporations Act if the time fixed by the Act had already expired.

A statutory demand is a demand served on a company under section 459E of the Corporations Act to pay a debt or debts within 21 days. Section 459F(2) provides that if the company applies pursuant to section 459G for an order to set aside the demand, a court may extend the period for compliance, and if no extension is ordered the period ends seven days after the application under section 459G is finally determined.

Aussie Vic applied to the Victorian Supreme Court for an order setting the demand from Esanda aside. On 20 June 2006, Master John Efthim dismissed the application to set aside the demand but ordered that the time for compliance be extended to 4 July 2006. Aussie Vic was entitled to appeal to a single judge of the trial division of the Supreme Court. After the extension fixed by Master Efthim had expired but before the appeal to a single judge had come on for hearing, Aussie Vic applied for another extension of time for compliance.

The issue went all the way to the High Court: no extensions could be given.

ASIC grants relief for share and interest sale facilities

ASIC has announced class order relief from provisions of the Corporations Act to facilitate the operation of certain share and interest sale facilities. This relief is provided in ASIC Class Order CO 08/10 Share and interest sale facilities and explained here .

ASIC has also released Regulatory Guide 161 Share and interest sale facilities (RG 161), which explains the relief given in CO 08/10, and ASIC’s approach for sale facilities not covered by the class order.

Share and interest sale facilities are facilities that some companies and issuers of interests in managed investment schemes offer to their members from time to time. These sale facilities can provide an easy and cheap way for their members, especially those with small holdings, to dispose of their holdings at or near their current market value.

CO 08/10 provides relief from a range of provisions of the Act. This will allow companies and product issuers to offer certain sale facilities and related facilities for the purchase of shares or interests, and reduce costs for those companies and product issuers by removing the need for them to apply to ASIC for individual relief before offering such facilities to their members.

The relief only applies to facilities where the shares or interests are sold in the ordinary course of trading on a licensed market or approved foreign market. The relief is also subject to other limitations and conditions. The details are set out in RG 161 and the class order.

If an issuer proposes to operate a sale facility that is not covered by the class order relief, it can apply for individual relief.

APRA and ASIC release new online breach reporting system for dual-regulated institutions

The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have released a new online breach reporting system for dual-regulated institutions.

The online system simplifies the process for regulated institutions to report breaches, and prospective breaches, of a legal provision of an APRA-administered or ASIC-administered Act, standard or rule, as well as other matters that are required to be reported. It also reduces duplication faced by institutions regulated by both APRA and ASIC. The superannuation industry is already using an online system to report breaches to APRA.

The new system:

•   enables all APRA-regulated institutions — authorised deposit-taking institutions, general insurers, life insurance companies, friendly societies and superannuation licensees — to report breaches to APRA online; and
  
• enables those institutions regulated by both APRA and ASIC to report breach notifications required to be lodged with both regulators through a single electronic breach report to APRA, thereby eliminating the requirement for dual‑regulated institutions to provide separate breach reports for the same incident to both regulators. 

This initiative follows the passage through Parliament, in late 2007, of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. The Act introduces a consistent definition of reportable breaches across all institutions in APRA-regulated industries and all ASIC-regulated Australian Financial Services licensees.

Are draft statements 'books' of a company?

In  Areva Nc (Australia) Pty Ltd -V- Summit Resources (Australia) Pty Ltd [No 2]  [2008] WASC 10, the Supreme Court of Western Australia dealt with the issue whether a draft incomplete statement taken from a witness by a former solicitor for a company but which was never signed or provided to the company is part of the "books" of the company.

Whilst it was clear that the draft or drafts of the statements of the evidence to be given are 'books', in this case, the critical question was whether they are the books of the company.

Section 247A of the Corporations Act empowers the court to make an order authorising the inspection of 'books of' a company. The word 'books' is given an expansive definition by s 9  of that Act, and includes:

(a) a register; and

(b) any other record of information; and

(c) financial reports or financial records, however compiled, recorded or stored; and

(d) a document.

The Court concluded that the draft or drafts of the statements of the evidence prepared by the company's solicitor at a time when he was acting for and on behalf of the company in relation to the relevant litigation are the property of and belong to the company, and are therefore 'books of' the company for the purposes of s 247A of the Corporations Act.

ASIC and ASX on share lending and short selling

The Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) have issued three statements to clarify and reinforce existing obligations in relation to share lending and short selling.

These statements follow the joint statement issued by the organisations last week on finance arrangements and margin loans involving listed companies.

The three further statements are:

• ASIC reminds market participants about stock lending disclosure obligations
• ASX on short selling (pdf)
  
• ASIC on false and misleading rumours   

Disclosure guidance for listed entities

ASX and ASIC have co-operated on the release of two Companies Updates to assist companies meet their disclosure obligations in ensuring the market is fully informed in a timely manner..

Companies Update 02/08 provides guidance on the disclosure of material information relating to the financing arrangements of listed entities and the margin loans held by company directors.

Companies Update 01/08 provides guidance on the disclosure obligations of listed entities when they seek a trading halt or suspension of their securities.

Trans-Tasman disqualification of disqualified directors

The Minister for Superannuation and Corporate Law has announced that the Government will introduce legislation to ensure that persons who are disqualified from managing companies in New Zealand will also be disqualified in Australia.

The amendments to the Corporations Act 2001 will be modelled on the existing New Zealand provisions to ensure cross-border consistency.

Additionally, disqualification in another country will constitute a ground for the Australian Securities and Investment Commission to apply to an Australian court for an order that that person be disqualified in Australia.

Draft legislation will be developed over the  coming months.

High Court Alinta takeover reasons published

The High Court has published its reasons for its decision in Attorney-General (Cth) v Alinta Limited [2008] HCA 2 (originally announced on 13 December 2007) that section 657A(2)(b) of the Corporations Act was not invalid for purporting to confer the power on the Takeovers Panel to declare circumstances relating to the takeover of a company to be unacceptable.

The High Court unanimously allowed the appeal by the Commonwealth against the invalidity of the section and held that the Takeovers Panel does not exercise the judicial power of the Commonwealth when discharging its functions under section 657A(2)(b). The High Court decided that the Panel’s making of a declaration of unacceptable circumstances under that section does not involve resolution of a controversy about a legal obligation. Instead, it characterised the Panel's role as the nonjudicial function of considering policy considerations relevant to the public interest: it makes orders about the process to be undertaken with respect to a takeover and what the rights of the parties should be.

The High Court confirmed that an order of a court is necessary for enforcement of compliance with the Panel’s orders.

Member register access: AXA v Direct Share Purchasing Corporation Pty Ltd

Last year I wrote about member register access in the context of activity by David Tweed and his associated companies including Direct Share Purchasing Corporation and National Exchange Pty Ltd.

In AXA Pacific Holdings Ltd and Anor v Direct Share Purchasing Corporation Pty Ltd, AXA sought to prevent Tweed's company from using Axa's register for an improper purpose.

The proceedings have been resolved by Direct Share Purchasing Corporation agreeing that it will not use or disclose the information contained in the register of members of AXA APH provided to it in response to its request to AXA APH , unless the use or disclosure of the information is relevant to the holding of the interests recorded in the register or the exercise of the rights attaching to them.

Insolvency law reform: corporate insolvency information for directors, employees, creditors and shareholders

Insolvency law changed on 31 December 2007 as a result of the Corporations Amendment (Insolvency) Act 2007. The ATO and ASIC have issued information sheets relevant to the changes. The IPA has issued a new Code of Professional Practice for Insolvency Professionals.

Recovering super entitlements from failed companies: Information from the ATO about changes applying from 31 December 2007.

ASIC has issued 11 information sheets for directors, employees, creditors or shareholders affected by the three most common company insolvency procedures:

• voluntary administration
• liquidation, and
• receivership.

INFO 41	Insolvency: a glossary of terms
INFO 42	Insolvency: a guide for directors
INFO 43	Insolvency: a guide for shareholders
INFO 45	Liquidation: a guide for creditors
INFO 46	Liquidation: a guide for employees
INFO 54	Receivership: a guide for creditors
INFO 55	Receivership: a guide for employees
INFO 74	Voluntary administration: a guide for creditors
INFO 75	Voluntary administration: a guide for employees
INFO 84	Independence of external administrators: a guide for creditors
INFO 85	Approving fees: a guide for creditors

The Insolvency Practitioners Association (IPA) has issued a Code of Professional Practice for Insolvency Professionals (pdf)

Corporations Act for the company secretary

Part of my motivation for establishing my consultancy was to allow clients to work closer with me than was possible in a traditional legal practice (while still remaining my independence). In the second semester of 2007 I decided to look at life from the company secretary's point of view: I enrolled in "Company Secretarial Practice and Meetings" as part of Chartered Secretaries Australia's Graduate Diploma in Applied Corporate Governance.

I met some very interesting people and passed the subject (assessment was a 3000 word assignment and a 3 hour exam). The course gave me a different framework for approaching practical problems, which my clients will benefit from.

I've decided to add some of my notes to my collaborative compliance wiki. You're welcome to look at them or expand or comment on them.

ASIC relief for foreign-controlled small proprietary companies

ASIC has made Class Order [CO 07/822] varying Class Order [CO 98/98] which provides relief to foreign-controlled small proprietary companies which are not part of a “large group” (as defined in the principal class order) from the requirement under paragraph 292(2)(b) of the Act to prepare and lodge audited financial reports and directors’ reports with ASIC.

The amending class order reduces the administrative burden on companies relying on the relief to lodge forms with ASIC every year. (Explanatory statement)

Debenture advertising: ASIC Regulatory Guide 156

ASIC has released  Regulatory Guide 156: Debenture advertising (pdf).

ASIC will expect advertising by debenture issuers to comply with the guide from late January 2008 onwards.

The Guide sets out the following principles-based standards in relation to the advertising of debentures for issuers of debentures:

1. All advertisements for debentures offered to retail investors should include a prominent statement to the effect that investors risk losing some or all of their principal investment.

2. Advertisements for debentures should only quote an interest rate if it is accompanied by prominent disclosure of either the current credit rating for the debenture and what that means or where to find this information or, where the debenture does not have a rating, what this means.

3. Advertisements should state that the debenture is not a bank deposit. They should also avoid the use of terms such as ‘secure’, ‘secured’ and ‘guaranteed’ and avoid the term ‘no fees’, as these statements may convey a misleading impression as to the risk profile of the debenture.

4. Advertisements for debentures should not state or imply that the investment is suitable for a particular class of investor.

5. Statements in advertisements for debentures should be consistent with the corresponding disclosures in the prospectus.

6. Statements made in response to inquiries are subject to the same regulation regarding misleading and deceptive conduct as the advertisements.

The guide also makes it clear that ASIC expects publishers to have systems and controls to detect and refuse advertisements for debentures that do not comply with these advertising standards.

ASIC sues 6 former AWB directors and officers

ASIC has commenced civil penalty proceedings in the Supreme Court of Victoria against six former directors and officers of AWB Limited (AWB).

ASIC alleges that the defendants contravened section 180 of the Corporations Act, which requires company officers to act with care and diligence, and section 181, which requires company officers to discharge their duties in good faith and for a proper purpose.

ASIC is asking the Court for declarations that each defendant has breached the law, the imposition of pecuniary penalties (for each breach a maximum of $200,000), and disqualification of each defendant from managing a corporation.

These actions arise out of investigations following the Cole Inquiry.

The contracts covered by ASIC’s proceedings were entered into between 20 December 2001 and 11 December 2002 and involved the payment of AUD$126.3 million in breach of UN sanctions.

The defendants in the ASIC actions are:

• Andrew Lindberg, the former Managing Director of AWB;
• Trevor Flugge, the former Chairman of AWB;
• Peter Geary, the former Group General Manager Trading of AWB;
• Paul Ingleby, the former Chief Financial Officer of AWB;
• Michael Long, the former General Manager of International Sales and Marketing for AWB (2000-2001); and
• Charles Stott, the former General Manager of International Sales and Marketing for AWB (2001-2006).

ASIC alleges that these officers breached their duties under the Corporations Act in connection with AWB’s contracts with the IGB under the United Nations (UN) Oil-for-Food Program, which contained payments for purported inland transportation fees (ITF). The ITF payments were made to Alia, a Jordanian company partly owned by the Iraqi Ministry of Transport.

ASIC alleges that Messrs Long, Geary and Stott were officers of AWB who:

• knew of and implemented various AWB contracts that included the purported inland transportation fees;
• were aware or ought to have been aware that the fees were not genuine; and
• knew or ought to have known that the fees were, or were likely to be, contraventions of the UN sanctions upon trade with Iraq.

ASIC alleges that Messrs Lindberg, Flugge and Ingleby:

• knew, or ought to have known, about the AWB contracts that included the purported inland transportation fees;
• had obligations to make reasonable inquiries to ensure that AWB complied with obligations under UN sanctions upon trade with Iraq;
• were aware, or ought to have been aware, that the fees were not genuine; and
• knew, or ought to have known, that the fees were, or were likely to be, contraventions of the UN sanctions.

The regulator further alleges that all defendants caused harm to AWB through their conduct.

Takeovers Panel jurisdiction restored

The decision of the High Court of Australia in Attorney-General (Commonwealth) vs. Alinta  Ltd (pdf) upheld the validity of s 657A(2)(b) of the Corporations Act 2001 and the powers of the Takeovers Panel.The reasons for the decision will be delivered later. (see previous post)

Keeping up to date: the ASIC Gazette

It is important for businesses to keep up to date with information about their customers and suppliers. A useful free source of company information is the ASIC Gazette.

ASIC issues compensation and insurance requirements for AFS licensees

ASIC has released a new regulatory guide, Regulatory Guide 126: Compensation and insurance arrangements for AFS licensees (RG 126).

RG 126 outlines ASIC’s policy for administering the new compensation and professional indemnity (PI) insurance requirements for Australian financial services (AFS) licensees who provide financial services to retail clients. These requirements are set out in regulation 7.6.02AAA of the Corporations Regulations 2001 and s912B of the Corporations Act 2001. 

The compensation and PI insurance requirements aim to reduce the risk a licensee might not have sufficient financial resources to compensate retail clients for losses they suffer as a result of a licensee breaching the law.

ASIC has adopted a two-stage approach to administering the new rules: 

1. ASIC will initially require licensees to have PI insurance based on what is commercially available in the market now, but has also set minimum standards to deliver some practical results for consumers. It will be enough for licensees to meet these minimum standards for two years after the requirements commence.

2. At the end of the two-year implementation period (1 January 2010), ASIC expects licensees to have a higher standard of PI insurance. It will work with industry to encourage the development of products or solutions that achieve this higher standard during the implementation period.

Licensees with an AFS licence that commenced before 1 January 2008 must have stage 1 insurance in place by 1 July 2008. Those with a new AFS licence commencing on or after 1 January 2008 need to meet the stage 1 compensation requirements from the date their licence commences. 

ASIC to research the balance between corporate liability and directors (individual) liability.

AICD has expressed concern on the balance between corporate liability (i.e. relying on the corporate veil) and directors (individual) liability. In response the ASIC Chair in a speech to AICD on 26 November said ASIC will research the issue:

"The concern is that able and experienced women and men are shying away from the listed environment because of higher liability risks. It is argued that even if claims are not successful, the potential of reputation damage is too much risk to accept board positions...

We recognise, however, that it may be time for a stocktake in this area of personal liability – to assess this balance between ensuring our boards take risks (so that our economy keeps growing) with protection of shareholders and creditors and consumers where individual liability may be appropriate.

Our Capital Markets taskforce will, for the Summer School in February 2008, commission a study on the current state of the law on this important issue. It will present its report at the Summer School. This will be our initial contribution on this important debate. How the debate will unfold from this will depend on the outcome of research and the debate which we hope will follow."

ASIC issues report on relief applications - June to August 2007

ASIC has released a report outlining its recent decisions on applications for relief during the period 1 June to 31 August 2007. It summarises situations where ASIC has exercised, or refused to exercise, its exemption and modification powers from the financial reporting, managed investment, takeovers, fundraising or financial services provisions of the Corporations Act 2001.

Security of company books: not just a privacy issue

Security of company records is usually discussed in connection with privacy.

But security is actually an obligation of directors and officers under section 180 of the Corporations Act, the duty of care and diligence.

Section 1306(3) Corporations Act states that "A corporation must take all reasonable precautions ... for guarding against damage to, destruction of or falsification of or in, and for discovery of falsification of or in, any book or part of a book required by this Act to be kept or prepared by the corporation."

This makes it a duty of the directors to consider fire protection, anti-theft and other security measures of all their records, whether physical or electronic.

Whatever they decide, they need to be able to justify the decision under the business judgment rule in section 180(2).

Does your company have a records security policy?

Takeovers Panel updates guidance on lock-up devices

The Takeovers Panel has published a revised  version of its Guidance Note 7 on Lock-up devices.

The term "lock-up device" refers to different types of restrictive arrangements entered into between bidders and targets (or other parties) to encourage or facilitate a takeover bid.

Guidance Note 7 sets out the Panel's approach to such arrangements entered into by a target entity, including devices such as break fees, asset lock-ups, no-talk agreements and no-shop agreements. It explains the two guiding criteria, concerning competition and coercion that the Panel applies when considering whether such arrangements give rise to unacceptable circumstances.

The changes which the Panel has made include:

• adjusting the focus of the guidance note from singular devices to lock-up arrangements generally.
• guidance on agreements affecting dealings with rival bidders, including 'no due diligence' agreements and agreements to pass on information. In summary, the Panel considers that, similar to no talk provisions, such agreements require appropriate safeguards and fiduciary exceptions.
• adding references to the recent panel decisions in Magna Pacific Holdings Limited 02 [2007] ATP 03 and Queensland Cotton Holdings Limited 02 [2007] ATP 05. Accordingly, the policy reflects that the Panel would be likely to find a no-talk agreement to be anti-competitive if the form of any fiduciary exception meant that it was likely to be unavailable to target directors in practical terms.
• clarification of policy application. The revised policy clearly states that the principles will be applied to any arrangement which has the effect of fettering the actions of a target, a bidder or a substantial shareholder.

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."

ASIC to run Westpoint actions for investors

ASIC has announced it will issue a number of proceedings for the benefit of investors in the Westpoint Group seeking compensation for their failed investments.

This follows ASIC'€™s announcement that the Commission had resolved to take over the running of liquidators'€™ proceedings commenced by the liquidator of Ann Street Mezzanine Pty Ltd and York Street Mezzanine Pty Ltd and to bring claims on behalf of other mezzanine companies.

The first phase of ASIC's legal action will seek to recover damages from various directors and officers of certain companies in the Westpoint Group and entities associated with one of the directors and from a number of licensees of financial planning firms that sold Westpoint investments.

It will be alleged that directors and officers are responsible for the misapplication of funds raised by the mezzanine companies, and that commission payments received by entities associated with one director should be returned. At this stage ASIC has identified potential claims of up to $245 million.

ASIC will also allege that, in selling products with the risk and financial characteristics of Westpoint, the licensees did not comply with their obligations under the conditions of their Australian financial services licences and under the law.

ASIC will be seeking a total of approximately $63.2 million in damages from these licensees, based on the amounts which their clients invested in Westpoint products and subsequently lost when Westpoint collapsed.

UPDATE 23 December 2007: ASIC announces phase 2 actions

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.

ASIC's policy on independent expert reports

ASIC has released two regulatory guides updating its policy on independent expert reports.

These are Regulatory Guide 111 [RG 111] and Regulatory Guide 112 [RG 112].

RG 111 focuses on reports prepared for transactions under Chs 5, 6 and 6A of the Corporations Act, whether the reports are required by the Corporations Act or are commissioned voluntarily. The Guide addresses the issues reports are required to consider to satisfy the Corporations Act.

RG111 also observes that : An expert report should only contain information that relates directly to the decision to be made by security holders. Including extraneous information in an expert report undermines the effectiveness of that report.

We encourage an expert to consider preparing a concise or short form expert report. The commissioning party would make a longer expert report containing additional, more technical or detailed information available on request free of charge or ensure it is accessible online.

RG 112 discusses how previous and existing relationships with commissioning and other interested parties may affect the independence of an expert  and how an expert should deal with the commissioning party and other interested parties to maintain its independence.