Corporate Law Economic Reform Program – Draft Legislation Released for Public Comment

The Treasurer today released draft legislation in the areas of Fundraising, Accounting Standards, Director’s Duties and Takeovers to implement proposals for reform contained in the Government’s Corporate Law Economic Reform Program (CLERP) Policy Papers released in 1997. The legislation will also give effect to a number of recommendations of the Financial Systems Inquiry.

The Treasurer said that CLERP is designed to modernise Australia’s Corporations Law and give it an economic focus.

“Our aim is to introduce world best practice in business regulation as part of the Government’s broader goal of making Australia a leading financial centre in the region,” Mr Costello said.

“The draft legislation released today will give effect to this goal by implementing important and long overdue reforms to the Corporations Law. As a result of this legislation, business practices will be streamlined and red tape reduced, thereby delivering on the commitments made by the Government to the business sector. These reforms are aimed at helping Australian businesses to grow and create jobs,” he said.

The key features of the legislation include:

• Removing impediments to the efficient raising of capital by reducing transaction costs and increasing levels of investment, not only in large listed corporations, but also in small and medium businesses which are vital to the well being of the economy;
• Providing a greater commercial and international focus to the accounting standard setting process and ensuring that accounting standards are responsive to the needs of both business and investors;
• Clarifying directors’ duties through the introduction of a business judgement rule and expanding shareholder’s rights to take action on behalf of companies; and
• Improving takeovers regulation to promote a more competitive market for corporate control including the introduction of a follow-on rule and enhancing the role of the Takeovers Panel.

The draft legislation was developed after extensive consultations by the Treasurer and the Parliamentary Secretary to the Treasurer, Senator the Hon. Ian Campbell, who have consulted widely with business, industry bodies and consumer groups. In addition, the Government was assisted by the Business Regulation Advisory Group, consisting of representatives of peak business groups.

The Government proposes a further round of consultation with business and key interest groups throughout Australia upon release of the draft legislation.

Comments on the draft legislation are requested by 21 May 1998.

Copies of the draft legislative provisions are available from the AGPS and on the Treasury web site (http://www.treasury.gov.au).

CANBERRA

9 April 1998

ATTACHMENT A: Summary of Draft Legislation

ATTACHMENT B: Business Regulation Advisory Group Membership

The draft legislation includes the following initiatives:

1. Fundraising

• Enabling capital raising of up to $2 million each year from up to 20 persons without issuing a prospectus or other disclosure document provided the offer is not made to the public at large;
• Enabling capital raising of up to $5 million based on an “Offer Information Statement” (OIS) rather than a full prospectus;
• Enabling capital raising without a prospectus or other disclosure document if the offer is made to a ‘sophisticated investor’. A sophisticated investor will include persons whose gross income in the previous two years was at least $250,000 per annum or who have net assets of $2.5 million or persons who a licensed securities dealer considers to be sophisticated because of their previous experience in investing in securities;
• Rationalising liability rules by introducing a clearer due diligence defence and removing the overlapping of the liability provisions of the Trade Practices Act and the Fair Trading Acts;
• Facilitating the use of shorter prospectuses and profile statements, to provide information tailored more specifically to the needs of retail investors; and
• Enhancing competitive neutrality by applying the fundraising provisions to sales of Federal government business enterprises.

• Establishing the Financial Reporting Council (FRC), with responsibility for the broad oversight of the Australian accounting standard setting process and for giving the Minister reports and advice on that process.
• Specific functions of the FRC include:
• appointing the members of the standard setter (the Chairman of the standard setter would be appointed by the Minister);
• approving and monitoring the standard setter’s priorities, business plan, budget and staffing arrangements;
• monitoring the development of international accounting standards and furthering the harmonisation of Australian standards with international standards; and
• promoting a greater role for international accounting standards in the Australian accounting standard setting process;
• Reconstituting the standard setter, the Australian Accounting Standards Board (“AASB”), as a body corporate, thus enabling it to employ staff and acquire property in its own right;
• Functions of the AASB would include making accounting standards for the purposes of national scheme laws, to formulate accounting standards for entities not established under national scheme laws and to participate in the formulation of international accounting standards; and
• The AASB’s powers include engaging the staff and consultants needed to undertake its technical research and provide its administrative support.

• Introducing a safe harbour with respect to business decisions by directors so that directors and other company officers who make informed business decisions in good faith for a proper purpose, rationally believing the decisions to be in the best interests of the corporation, will be taken to have met the requirements of the duty of care and diligence in the draft legislation and the general law duty of care and diligence in respect of those decisions (Business Judgement Rule);
• Allowing shareholders or directors to take action on behalf of companies that are unwilling or unable to do so (Statutory Derivative Action);
• Clarifying:
• That the standard of care required in relation to the existing duty to exercise care and diligence is to be assessed by reference to the particular circumstances of the officer concerned;
• That a breach of the duty of care and diligence will only give rise to civil sanctions;
• The circumstances in which it is appropriate for directors to delegate their functions and rely on the advice of experts when making decisions; and
• That the existing duty to act honestly reflects the fiduciary nature of directors’ duties to companies to act in good faith in the interests of the company and for a proper purpose. A breach of the duty will continue to have civil and criminal consequences;
• Confining the matters for which a company or a related body corporate may not give an indemnity for legal expenses, to legal expenses incurred in:
• defending or resisting a proceeding in which the person is found to have a liability for which the company may not otherwise indemnify the person;
• defending or resisting criminal proceedings in which the person is found guilty;
• defending or resisting proceedings brought by the Australian Securities and Investments Commission or a liquidator for a Court order if the grounds for making the order are found by the Court to have been established; or
• connection with proceedings for relief to the person under the Corporations Law, in which the Court denies the relief; and
• Clarifying that the duty of directors in situations of conflict of interest permits directors who serve on wholly or partly owned subsidiaries to take into account the interest raised by the nominating company in certain circumstances.

• Allowing a bidder to exceed the takeover threshold (more than 20 per cent of the total voting rights in a company) before being obliged to make a general takeover offer. To take advantage of this rule, certain conditions that reflect the equal opportunity principle underlying the takeover provisions must be met. These conditions include:
• The bidder must start from below the 20 per cent threshold with only one acquisition being allowed before the mandatory bid requirement is triggered;
• The bidder must disclose to the selling shareholder that the mandatory bid requirement will be triggered by an agreement to sell;
• A bid for all the outstanding shares in the target must be announced immediately following the pre-bid agreement;
• The bid must be for an amount at least equivalent to the highest price paid by the bidder in the last four months;
• Target shareholders must be provided with an independent expert’s report; and
• In addition, a bidder must not exercise control of the target until the mandatory bid is made; the bid must be for cash only and be unconditional; and no shares may be issued for a certain period after the announcement of a takeover without shareholder approval;
• Modifying the compulsory acquisition rules for shareholders holding an overwhelming interest in a company to allow a more efficient use of investment capital;
• Improving the resolution of takeover disputes by reforming the Corporations and Securities Panel so that it, rather than the courts or the Administrative Appeals Tribunal, is the primary forum for resolving matters relating to takeovers; and
• Applying the takeovers code to listed managed investment schemes and Federal Government Business Enterprises.