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 The Corporate Law Economic Reform Program Act 1999 (Cth) -- an overview |
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Author: Christopher John Bevan
of
5th Floor Wentworth Chambers
This is an extract from Lawbook Company's Nutshell: Corporations Law by Christopher Bevan (Sydney: LBC, 1999, 4th ed). LBC Nutshells are the essential revision tool: they provide a concise outline of the principles for each of the major subject areas within undergraduate law. Written in clear, straightforward language, the authors clearly explain the principles, and highlight key cases and legislative provisions for each subject.
The Corporate Law Economic Reform Program Act 1999 ("the CLERP Act ") was enacted by the Commonwealth Parliament in October 1999.
The Minister for Financial Services and Regulation (who is now responsible for the administration of the Corporations Law instead of the Attorney-General) announced that the CLERP Act would commence to operate on 13 March 2000.
The CLERP Act implements the following policy objectives of the Corporate Law Economic Reform Program which commenced in 1997:
- to promote the operation of informed share and derivative trading markets by removing unnecessary obstacles to fundraising by companies in an effort to encourage investmentby the public in companies;
- to promote higher standards of corporate governance whilst at the same time encouraging company directors to be more entrepreneurial and innovative;
- to facilitate the development of accounting standards which ensure the maintenance of an informed and efficient capital market for companies; and
- to improve corporate control within the capital market in order to provide incentives for greater corporate efficiency.
The CLERP Act implemented these policy objectives by making various amendments to the Corporations Law with effect from 13 March 2000.
The CLERP Act amendments to the Corporations Law
The CLERP Act made amendments to the following parts of theCorporations Law:
Fundraising
A new Chapter 6D, entitled "Fundraising", containing ss 700-741, has been enacted, and the former fundraising provisions in Part 7.12 and the previous fundraising liability provisions in s 996 and Part 7.11 have been repealed. These amendments rewrote and streamlined the debenture provisions (which are discussed in Chapter 15 of this Nutshell).
The CLERP Act amended the prospectus provisions of the Corporations Law by enacting the new Chapter 6D. The purpose
of these amendments was:
(1) to provide for a lower level of financial disclosure where a company is seeking to raise $5m or less: in these cases an offer information statement under s 709 can be issued instead of a prospectus under ss 710, 711, 713 and 717;
(2) to provide for no disclosure where an offer to raise capital is made to less than 20 investors and less than $2m is raised in any 12 month period and where less than $0.5m is raised from each investor, or the investor is a "sophisticated investor", ie, one who has net assets of $2.5m or more and a gross income for each of the two last financial years of $0.25m or more.
Chapter 2L contains a new regime for issuing debentures. Part 2L.1 contains new requirements for a trust deed and trustees' qualifications and replacement. Part 2L.2 sets out new duties of the borrowing company under a debenture. Part 2L.3 sets out the duties of a guarantor of a company borrowing under a debenture. Part 2L.4 sets out the duties of a debenture trustee. Part 2L.5 creates a new regime for holding meetings of debenture holders.
Part 2L.6 sets out the civil liability penalties for breaches of Chapter 2L. Part 2L.7 sets out the Australian Securities and Investments Commission's powers of enforcement of, and powers to exempt from or modify, Chapter 2L. Part 2L.8 sets out a court's powers in respect of the debenture provisions including determining questions, making declarations and otherwise regulating steps taken pursuant to Chapter 2L.
The commentary in Chapter 15 of this Nutshell should be read subject to these amendments.
Directors' duties
A new Chapter 2D, entitled "Officers and Employees", which now comprises ss 179-206H, replaces the former Chapter 2H, which comprised ss 221-243. The new Chapter 2H enacted six fundamental changes arguably the most important changes made by the CLERP Act to the nature and scope of company directors' duties:
(1) a new business judgment rule s 180(2) provides company directors with a safe harbour from personal liability, including liability for duties owed at common law and in equity, in respect of judgments made in the course of performing their duties as directors, if made in good faith for a proper purpose, if they have no material personal interest in the subject matter of the judgment, if they inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate and if they rationally believe the judgment to be in the best interests of the corporation (ie, a mixture of objective and subjective
criteria);
(2) the former duty to act honestly s 232(4) a duty owed both as a civil and criminal obligation, is now two separate obligations: s 181 (civil obligation) and s 184 (criminal obligation). Whereas s 232(4) imposed a reasonable company director test of due care and diligence, s 181 now imposes an objective test of good faith in the best interests of the corporation and/for a proper purpose test;
(3) ss 189 and 190 are new provisions permitting company directors to rely on information, professional or expert advice given by employees, professional advisers or experts, another director or officer or a committee of directors if made in good faith after making an independent assessment of the information or advice; and they also permit a director to
delegate duties and rely on the delegate if the delegate was believed, in good faith, on reasonable grounds and after due enquiry, to be reliable and competent;
(4) s 187 is a new provision which permits a director of a wholly-owned
subsidiary to act in the best interests of the holding company without breaching his or her duty to act in the best interests of the subsidiary if the subsidiary's constitution permits the director to act in the best interests of the holding company and if the subsidiary was not insolvent when the director acted and did not become insolvent as a result of
the act;
(5) Division 2 of Part 2D.1, comprising new ss 191-196, require directors of both public and private companies to disclose material personal interests to other directors (the primary amendment is the extension of this duty to public company directors); and
(6) the civil penalty provisions of the Corporations Law formerly Part 9.4B ss 1317DA-1317JC and now Part 9.4B ss 1317E-1317S have been completely rewritten to separate civil and criminal liability. The purpose for the separation and streamlining is to encourage greater use of each category of provisions but in a way which does not necessarily expose company directors and officers to both categories of penalties.
Chapter 12 of this Nutshell,dealing with directors' control and directors' duties, should now be read subject to these amendments.
Statutory derivative action
A new Part 2F.1A of the Corporations Law , comprising ss 236-242, enacts a new statutory derivative action. Section 236 permits a shareholder (ie, member), former shareholder, officer or former officer, but only where the person is acting with the leave of a court given under s 237 (as to which see below), to bring proceedings on behalf of a company or to intervene in any proceedings to which the company is a party for the purpose of taking responsi-bility for the proceedings on behalf of the company, including compromising or settling the proceedings. Section 236 also abolishes the right of a shareholder to bring, or intervene in,
proceedings on behalf of a company at general law ? known as the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 ? with effect from 13 March 2000.
The new statutory derivative action is only available if a court grants leave to bring the action, or to intervene in the proceedings, pursuant to s 237. The section makes it mandatory for the court to grant the leave unless the court is satisfied that it is probable that the company will not bring the proceedings or take responsibility for them, the applicant seeking the leave is acting in good faith, it is in the best interests of the company that the applicant be granted leave, there is a serious question to be tried in proceedings to be commenced in the company's name, and 14 days notice of the application has been given to the company where practical to do so. Ratification of the conduct of the company complained of by the applicant will not deprive the applicant of leave to intervene or
bring the proceedings if otherwise qualified to do so.
Chapter 13 of this Nutshell, dealing with members' rights, duties and remedies, should now be read subject to these amendments.
Accounting standards
Accounting standards were formerly made pursuant to Part 12 of
the Australian Securities and Investments Commission Act 1989 (Cth) by the Australian Accounting Standards Board. The CLERP Act repealed Part 12 and enacted a new regime for the setting of Australian Accounting Standards. Not only are the institutional arrangements for determining new standards completely new but the procedures to be adopted by those charged with responsibility for setting standards for the formulation of new standards have also been radically amended by the CLERP Act . A new Financial Reporting Council has been established to become an advisory body with responsibility for oversight over the process of setting new accounting standards.
Chapter 16 of this Nutshell, dealing with reporting and audit requirements, should now be read subject to these amendments.
Takeovers
The CLERP Act extensively amended the takeover provisions of the Corporations Law by the enactment of a new takeover regime in Chapter 6. Four main areas of amendment are:
(1) reconstruction of the Takeovers and Securities Panel to have exclusive jurisdiction to deal with takeover disputes, ie. exclusive of the courts and the Administrative Appeals Tribunal;
(2) making it easier for a bidder to achieve 100% ownership of the target and introducing new compulsory acquisition rules which will be available even though a takeover bid has not been made;
(3) extending takeover laws to listed management investment schemes such as unit trusts; and
(4) removal of the prohibition on giving free bid benefits in the
four months preceding a takeover.
Chapter 17 of this Nutshell, dealing with the powers of the Australian Securities and Investments Commission (ASIC), should now be read subject to these amendments.
CLERP 7
The next stage of the Company Law Economic Reform Program is Stage 7, or CLERP 7, as it has come to be known. At the time of publication of this addendum CLERP 7 is at the discussion paper stage and no draft amending legislation has yet been issued. Its overall purpose is to streamline paperwork required to be lodged with ASIC under the Corporations Law . The important amendments to the Corporations Law proposed by CLERP 7 are:
(1) the abolition of company annual returns;
(2) streamlining document lodgement procedures with ASIC;
(3) the creation of a Business Advisory Board;
(4) the overhaul of Corporations Law fees.
In relation to the abolition of annual returns, companies will still have to notify ASIC of changes in company particulars and pay an annual fee.
In relation to streamlining document lodgements, a multi-purpose form will replace a number of different ASIC forms, and the electronic lodgement of documents will be enhanced.
In relation to the Business Advisory Board, this Board will advise ASIC of changes needed to the Corporations Law in respect of ASIC's role.
In relation to fees payable, an annual fee will be introduced to replace the annual return fee, and a differential scale for prospectus lodgements will apply based on the type of disclosure document. A flat rate fee for lodging takeover documents will remain but will be set at $4,000.
Chapter 16 of this Nutshell, dealing with reporting and audit requirements, should now be read subject to these amendments.
Christopher Bevan
BEc LLM (Hons)(Syd)
Barrister
Wentworth Chambers
June 2000
March, 2001
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