(10 March 2000)
Amendments to the Corporations Law and CAC Act
This briefing deals with amendments to the Corporations Law and the Commonwealth Authorities and Companies Act 1997 ('the CAC Act') made by the Corporate Law Economic Reform Program Act 1999 ('the CLERP Act') which take effect on 13 March 2000. The amendments to the Corporations Law and the CAC Act have implications for:
- Commonwealth companies, their directors and employees
- Commonwealth authorities, their boards, employees and subsidiaries
- Commonwealth departments who have dealings with companies and Commonwealth authorities, and
- those involved in the sale or partial sale of Government business enterprises.
Corporations Law Changes
The main areas amended by the CLERP Act are:
- the directors' duties provisions
- fundraising by companies
- the conduct of takeovers, and
- the framework for setting accounting standards.
CLERP also rewrites in plain English, with some amendments, the balance of the current parts 3.2 (Officers), 3.2A (Related Party Transactions), 3.4 (Oppression) and 9.4B (Civil Penalty Provisions) of the Corporations Law.
Changes to Directors' Duties
These provisions are of particular relevance to the directors of Commonwealth companies and to the directors of subsidiaries of Commonwealth authorities. Key features introduced by the CLERP Act are discussed below.
Standard of Care and Diligence
The standard of care and diligence required of directors and other company officers (as defined in the Corporations Law) has been amended to make it clear that an officer's actions must be assessed by reference to the particular circumstances of the officer concerned.
The relevant provision now states that officers must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation's circumstances, and occupied the office held by, and had the same responsibilities within the corporation, as the officer (section 180(1)).
New Business Judgment Rule
The CLERP Act contains a new business judgment rule. Under section 180(2), a director or other officer of a corporation will be taken to have met the requirements of the duty of care and diligence in respect of making a business judgment (defined as any decision to take or not take action in respect of a matter relevant to the business operations of the corporation) if:
- the judgment was made in good faith for a proper purpose, and
- the director or other officer did not have a material personal interest in the subject matter of the judgment, and
- the director or other officer informed themselves about the subject matter of the judgment to the extent they reasonably believed to be appropriate, and
- the director or other officer rationally believed that the judgment was in the best interests of the corporation.
It will be presumed that a director's or officer's belief that a business judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
Provided directors or other officers fulfil the above requirements, they will be shielded from liability for any breach of their duty of care and diligence.
Good Faith Provisions
The current statutory duty on directors and other company officers to act 'honestly' is replaced by a duty to exercise their powers and discharge their duties in good faith in the best interests of the company, and for a proper purpose (section 181).
There are civil penalties for a breach of this duty (section 181(2)), and criminal penalties if they breach it and have been reckless or intentionally dishonest (section 184).
Reliance on Expert Advice
The CLERP Act inserts a new provision to clarify the duty to act in good faith and in the interests of the company in relation to directors of wholly owned subsidiaries. Previously, such directors could not take into account the interests of the holding or parent company. Now they will be taken to have acted in good faith in the best interests of the subsidiary if:
- the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company, and
- the director acts in good faith in the best interests of the holding company, and
- the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act (section 187).
Clients that are holding companies or subsidiaries will need to consider if the constitutions of the subsidiaries need to be amended to take account of these provisions.
There are also civil penalties for directors, other officers and employees of companies (current and former) who improperly use their position (or information obtained because of that position) to gain an advantage for themselves or someone else, or to cause detriment to the company (sections 182 and 183), and criminal penalties for those who do so with dishonest intent or recklessly (section 184).
The CLERP Act inserts a rebuttable presumption that a director's reliance on information or professional or expert advice was reasonable if it was given or prepared by certain persons, and the reliance on it was made in good faith after making an independent assessment of the information or advice having regard to the director's knowledge of the company and the complexity of the structure and operations of the company (section 189).
Delegation of Powers of Directors
Express legislative authority is given to directors to delegate any of their powers not only to a committee of directors, but to a single director, an employee of the company or another person, subject to any restrictions in the constitution of the company (section 198D).
However, a director will continue to be responsible for the exercise of the power by the delegate unless:
- the director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors by the Corporations Law and the company's constitution, and
- the director believed on reasonable grounds and in good faith and after making proper inquiry if the circumstances indicated the need for inquiry, that the delegate was reliable and competent in relation to the power delegated (section 190).
Changes to the Fundraising Rules
- The immunity of the Commonwealth and its agencies from the fundraising provisions is removed. This means that in future the Commonwealth is bound by the disclosure provisions of the Corporations Law when floating government business enterprises. However, debt instruments offered by the Commonwealth and its agencies that are guaranteed by the Commonwealth will continue to be exempt.
- The fundraising rules are extended to apply to listed managed investment schemes.
- Small-scale offerings will be facilitated by:
- allowing personal offerings of securities to raise up to $2 million each year from up to 20 persons without the need for a prospectus or other disclosure document
- allowing issuers to raise up to $5 million under an offer information statement rather than a full prospectus, and
- extending the class of 'sophisticated investors' from whom an issuer can raise capital without issuing a prospectus or other disclosure document.
- Amendments have been made to facilitate shorter prospectuses.
- Prospectus registration is replaced by a 7-day period during which a disclosure document will be able to be examined by ASIC and the market before applications for the issue or transfer of non-quoted shares can be accepted.
- The disclosure requirements for prospectuses have been clarified, and the liability provisions have been rationalised.
- Advertising restrictions have been reformed and electronic commerce will be facilitated by enabling fundraisers to issue disclosure documents in electronic form and to distribute them via the Internet.
- The current provisions relating to debentures are replaced by a new part 2L of the Corporations Law.
Changes to the Rules for Takeovers
Significant changes concerning the rules for takeovers of companies come into effect including:
- The takeover rules have been streamlined, including bringing together disclosure requirements into a bidder's statement (replacing current Part A and Part C statements) and a takeover target's statement (replacing the current Part B and Part D statements). These statements will facilitate better disclosure by replacing the checklist of content rules with a general disclosure requirement for all information material to a shareholder's decision whether or not to accept an offer.
- The takeover rules have been extended to apply to listed managed investment schemes.
- Compulsory acquisition rules have been modified and extended.
- The Corporations and Securities Panel (the Panel) will take the place of the courts as the principal forum for resolving takeover disputes under the Corporations Law.
- Liability provisions have been rationalised.
Introduction of a Statutory
Previously, proceedings on behalf of a company could only be commenced at common law in limited circumstances under a common law exception to the rule in Foss v Harbottle that the company is the proper plaintiff for wrongs done to it.
The CLERP Act contains new provisions which will enable proceedings to be commenced on behalf of a company, in respect of wrongs done to the company, where the company is unwilling or unable to take the action itself. The leave of the court will be required, but it will have to be granted where certain criteria have been satisfied.
The new provisions will make it possible for present and former shareholders or directors of a company to commence proceedings on behalf of a company against a director of the company in respect of wrongs done to the company.
New 'Control' Test
There is a new definition of 'control' for the purposes of determining who are subsidiaries and hence who are 'related' bodies corporate under the Corporations Law.
This is relevant to a number of clients who take into account the financial situation of 'related' companies when determining eligibility for grants.
Section 50AA provides that an entity controls another entity if it has the capacity to determine the outcome of decisions about the other entity's financial and operating policies. In determining whether an entity has this capacity, the practical influence it can exert is to be considered, and any practice or pattern of behaviour affecting the other's financial or operating policies is to be taken into account.
Changes to Accounting Standards
The CLERP Act amends the Australian Securities and Investments Commission Act 1989 by replacing the existing Part 12 (Australian Accounting Standards Board) with a new Part 12 (Accounting Standards).
These provisions establish new institutional arrangements for the Australian accounting standard setting process (for example, by establishing a Financial Reporting Board). They also provide for the adoption of new procedures that must be followed by the standard setter when it is making or formulating accounting standards.
The aim is to facilitate the development of accounting standards which:
- require the provision of financial information that allows users to make and evaluate decisions about allocating scarce resources
- assist directors to discharge their obligations in relation to financial reporting
- are relevant to assessing performance, financial position, financing and investment
- are relevant and reliable
- facilitate comparability, and
- are readily understandable.
Changes to the CAC Act
By way of amendment to the CAC Act, the reforms to directors' duties introduced by the CLERP Act apply, where appropriate, to Commonwealth authorities as defined in the CAC Act. In particular:
- The standard of care and diligence required of officers of Commonwealth authorities (as defined in the CAC Act) has been rewritten to reflect the new Corporations Law standard (section 22(1)).
- Officers of Commonwealth authorities will be able to rely on a statutory business judgment rule (section 22(2)).
- The duty of honesty is replaced by a provision that officers of a Commonwealth authority must exercise their powers and discharge their duties in good faith in the best interests of the Commonwealth authority, and for a proper purpose. Breach may give rise to a civil penalty (section 23).
- Officers will commit a criminal offence if they are reckless or intentionally dishonest and fail to exercise their powers or discharge their duties in good faith in what they believe to be the best interests of the Commonwealth authority or for a proper purpose (section 26).
- Civil and criminal offences will also be committed by officers and employees of Commonwealth authorities (current and former) in relation to the misuse of their positions or information gained because of their positions (along the lines of the Corporations Law provisions) (sections 24, 25 and 26).
- However, there will be no offences (civil or criminal) in relation to breaches of sections 23, 24, 25 or 26 in an officer doing an act that another provision of the CAC Act requires the officer to do or, where the officer is also a public servant, in doing the act in the course of performing their duties as a public servant (section 27A).
- Directors of Commonwealth authorities will be able to rely on the advice of experts in certain circumstances (section 27D).
- Directors of a Commonwealth authority who are permitted under its enabling legislation to delegate a power, are responsible for the exercise of that power by the delegate in certain circumstances (section 27E).
- The obligation of directors to disclose material personal interests in a matter, and restrictions on such a director being present and voting at meetings where such matter is being considered, have been amended (sections 27F- J).
- Where a board is unable to form a quorum because of material personal interests and a matter needs to be dealt with urgently, or there is some other compelling reason for the matter to be dealt with at the directors' meeting, the responsible Minister will be able to resolve the matter by authorising directors who have a material personal interest in a matter to be present while the matter is being considered, to vote on that matter, or both be present and vote, despite that interest (section 27K).
- The responsible Minister will be able to make a class order in respect of a specified class of Commonwealth authorities, directors, resolutions or interests to enable directors who have a material personal interest in a matter to be present while the matter is being considered at a directors' meeting, to vote on that matter, or both be present and vote. Notice of the making or revocation of such class orders must be published in the Gazette (section 27K(3)).
- Directors and former directors of Commonwealth authorities are given certain rights of access to the authority's books (section 27L).
This Briefing was written by Christine Cheney, Principal Solicitor, Commercial Group. For further information please contact Christine on tel (02) 6253 7086 or e-mail firstname.lastname@example.org or any of the following lawyers:
(02) 6253 7223
(02) 6253 7004
(02) 9581 7474
(03) 9242 1386
(07) 3360 5700
(08) 8205 4231
(08) 9268 1102
(03) 6220 5474
(08) 8943 1400
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The material in this briefing is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this briefing.