Australian corporate law

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Australian corporations law has historically borrowed heavily from UK company law. Its legal structure now consists of a single, national statute, the Corporations Act 2001. The statute is administered by a single national regulatory authority, the Australian Securities and Investments Commission.

The two federal statutes are the Corporations Act 2001 and Australian Securities and Investments Commission Act 2001.[1] The corporations legislation is administered by the Australian Securities and Investments Commission ("ASIC"), which reports to the Treasurer. Since provisions in the Act can frequently be traced back to some pioneer legislation in the United Kingdom, reference is frequently made to judgments of courts there.

History[edit]

On the settlement of Australia by British colonists in 1788 the power in relation to corporations was controlled by the United Kingdom. As colonies gained more independence, and their own parliaments, the power to control corporations passed to these parliaments. Each of the colonies passed laws in relation to the regulation of corporations. On federation in 1901, the Commonwealth of Australia gained limited powers, through the constitution, in relation to corporations, most notably:

"51(i) trade and commerce with other countries, and among the States;"[2]

and

"51(xx) foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth;"[2]

These powers did not extend to the formation of corporations, so the formation of corporations continued to be regulated by the states and territories, while the running of the companies was regulated by the Commonwealth. Laws between states and territories were inconsistent. A later attempt at complex cross-vesting arrangements by the states, territories and commonwealth was ruled invalid by the High Court. It was after this, in 2001, that the current arrangement, where the states refer their power to the Commonwealth in respect of corporations was created.

Company formation[edit]

A "corporation" is defined as a separate legal entity created by charter, prescription or legislation.[3] Australian law, like English law, recognises a kind of corporation called the corporation sole. However, there are few cases of such corporations, the corporation sole is excluded from the Australian statutory definition of corporation.[4]

A proprietary company, under CA 2001 s 45A is one which has the suffix "Pty Ltd", and is not allowed to raise capital on the public equity markets. This form of business entity has similar characteristics to the Limited Liability Company, or LLC, that is a commonly used term in multiple jurisdictions around the world. Some of the characteristics of an Australian Pty Ltd Company include: i) Full foreign ownership is permitted, ii) requires minimum of 1 shareholder and 1 director, iii) requires one director to be resident in Australia and office address to be in Australia, iv) profits can be repatriated, v) an annual audit is required and vi) shareholders have limited liability.

Corporate governance[edit]

Corporate Governance standards are not just a matter of comply and explain, and have been taken into account by the Australian courts when determining the scope of directors’ duties. (They would probably be similarly relevant to the UK duty of care, under CA 2006 s 174.) In Australian Securities and Investments Commission v Rich,[5] Mr Greaves was a non executive director of One.Tel Ltd, and also the chairman, chair of the board and chair of the finance and audit committee. He was a qualified accountant. Austin J held that it was a board responsibility to have functioning financial and audit committees with independent directors, as well as internal review and accounting standards.

The ASX Corporate Governance Council’s Best Practice Recommendation 2.3 states the CEO and chair should be separated. The ASX CGCBPR 2.1 states there should be a majority of independent directors, and the chair should be independent. Under ASX CGCBPR 8.1, the companies should have a remuneration committee, which should be chaired by an independent director, have at least three members and a majority independent. Under ASX CGCBPR 4.2 an audit committee should have at least three members, with a majority independent, and be chaired by an independent director, not including the chairman.

Company constitution[edit]

Australia has strong rules, similar to those found across the Commonwealth,[6] in allowing for removal of directors by a simply majority vote in an ordinary resolution. For public companies, under CA 2001 section 203D[7] there must be a meeting with two months’ notice where the director has a right to be heard. For private companies (known as ‘proprietary companies’ the ones with the suffix “Pty Ltd”) which do not offer shares to the public, and have under 50 shareholders, this rule can be replaced with a different rule allowing for a simpler procedure. In Lee v Chou Wen Hsien [1984] 1 WLR 1202, the Privy Council advised that a private company was permitted to have a provision for directors to remove other directors. Removal from office does not affect a director’s claim for breach of contract.[8]

Under CA 2001 s 201H[9] the directors of a public company (like the UK) can make the appointments of other directors. However, unlike the UK, if that happens, those new directors must be confirmed at the next general meeting, CA 2001 s 201H(3). This rule can be replaced, so it would be possible for a company to require that shareholders make all appointments.

Shareholder rights[edit]

The Corporations Act 2001 contains a default rule in section 250E that shareholders have one vote per share (or have one vote per person if a poll happens with a show of hands at a meeting). Corporations listed on the Australian Stock Exchange cannot deviate from one share, one vote, ASX LR 6.8. Under CA 2001 section 249D directors must convene a meeting if members with over 5% of voting rights, or at least 100 members, request it by writing, stating the resolution they wish to be put. The CA 2001 section 136(2) gives the general meeting the power to alter or amend the company constitution by a 75% vote (a special resolution).

Directors’ remuneration is to be determined by ‘the company’ (CA 2001 s 202A). This rule is a default, or ‘replaceable’, and it usually is replaced. As usual, the standard is that directors pay themselves. Australia has had a non-binding say on pay since the Corporate Law Economic Reform Program Act 2004 for its shareholders. Then, under the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011, new sections were introduced (see CA 2001 ss 250R(2), 250U-V) so that if at two consecutive meetings over 25% of shareholders vote against the directors’ remuneration package, the directors have to stand for election again in 90 days. (It might be noted that it is unclear why shareholders cannot simply propose remuneration themselves, and fix it, and leave directors to go somewhere else if they do not like it.)

Australia has few rules on political donations. Only if it can be found to be a breach of a director’s duty (e.g. the director of the company is a Liberal party member), or would involve oppression of the minority (inherently unlikely) can anything be done as a company law matter. There is no requirement, as in the UK, for ex ante approval of donations with political objects. There is under the Commonwealth Electoral Act 1918 a requirement for disclosure of donations, since the Howard government raised it in 2006, over $10,000.

Australia has a system of "codetermination" or member nominated trustees in its pension, or ‘superannuation’ funds. Since the Occupational Superannuation Standards Act 1987, the Occupational Superannuation Standards Regulations (SR 1987 No 322) regulations 13 and 15 required that equal member nominated trustees was required, or at least one member nominee in schemes with under 200 people. The current legislation is the Superannuation Industry (Supervision) Act 1993, sections 86 to 89.

Directors' duties[edit]

Australian directors are subject to similar duties found in other jurisdictions, particularly the duty of loyalty and the duty of care. Directors have a duty to act in the best interests of the company. This is primarily identified as being for the benefit of shareholders, and surveys suggest that Australian directors, more than in other countries view their primary obligation as being to create shareholder value.

Directors have the duty to strictly avoid conflicts of interest. When directors have any interest in a transaction (i.e. they stand on both sides of a deal a company makes) they must give full disclosure under CA 2001 ss 191-193. A significant extension to the UK law, there is in addition, criminal penalties under Schedule 3 of the 2001 Act. In The Duke Group Ltd v Pilmer[10] a director of Duke Holdings Ltd, and a Duke Group employee, became a director of Kia Ora, a mining business, in a reverse takeover. He failed to tell the Kia Ora board the true financial position of Duke Group, which was worse than expected. Owen J held this failure to disclose meant a breach of duty. So directors involved in two companies with conflicting interests must not only declare they have an interest but also give full disclosure on the potential harm to the company. When a director wishes to take an opportunity in which the corporation may possibly have an interest, the director must gain the fully informed consent of the board, or the opportunity will belong to the company under CA 2001 sections 182-183.[11] There are further specific duties where members need to approve large transactions found in CA 2001 sections 207-230.

An objective standard of care was developed by the Australian courts, beginning in Daniels v Anderson[12] where a bank let a forex trader lose money. The bank sued the auditors (Deloitte Haskins and Sells) who failed to notice, and the auditors counterclaimed that the company was negligent. The NSW Court of Appeal held by a majority that both the auditors and the company directors, whether executives or not, were liable for failing to exercise proper oversight. However, the Liberal government introduced the Corporate Law Economic Reform Program Act 1999, with a new section 180(2) containing a US style ‘business judgment rule’. Directors cannot be liable if they have at least taken steps to ‘inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate’. I am not sure whether there is a recent parallel case, but this would mean that a director could receive a report on separating the back and front offices and ignore it (as in Barings), receive a compensation report warning of grave mistakes and ignore it (as in the US Walt Disney case), or simply delegate duties down the chain of management, and ignore what happens below (as in Daniels).

At the point of insolvency CA 2001 s 588G creates the same kind of liability as is found in the UK for wrongful trading (Insolvency Act 1986 s 214). If a director is or should reasonably be aware that a company would become insolvent, and does nothing about it, the director is liable to pay compensation.

Shareholder litigation[edit]

The Australians were ahead of the UK in reforming the common law procedure for bringing a derivative claim. It also has an equivalent for unfair prejudice in CA 2001 s 232, which need not be discussed again. Following Canada’s lead, in the Corporate Law Economic Reform Program Act 1999, a new statutory derivative procedure was put into CA 2001 ss 236-242. A member or a former officer of the company (so unlike Canada, this is limited, and other stakeholders cannot claim) can bring an action for a breach of duty owed to the company, and if granting leave would be ‘in the best interests of the company’ the courts will give leave. This is essentially similar to the one found in the UK.

Takeovers[edit]

See also: Takeovers

Takeovers are regulated directly by detailed and very technical rules in Chapter 6 of the Corporations Act 2001. Corporate control transactions and restructings may also be subject to anti-monopoly, foreign investment, employment protection and special industry protection legislation.[13]

Corporate finance[edit]

See also[edit]

References[edit]

  1. ^ Together termed as "corporations legislation" under Corporations Act 2001 s 9; Australian Securities and Investments Commission Act 2001 s 5(1).
  2. ^ a b http://www.comlaw.gov.au/comlaw/comlaw.nsf/0/19541afd497bc2e4ca256f990081e2cf/$FILE/Constitution.pdf Australian Constitution
  3. ^ Butterworths Encyclopaedic Australian Legal Dictionary (definition of "corporation").
  4. ^ Corporations Act 2001 s 57A.
  5. ^ (2003)44 ACSR 241; [2009] NSWSC 1229AustLII
  6. ^ See the UK Companies Act 2006 s 168
  7. ^ Corporations Act 2001 s 203D. AustLII
  8. ^ See Carrier Australasia Ltd v Hunt (1939) 61 CLR 534, which mirrored and preceded the leading UK case, Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701.
  9. ^ Corporations Act 2001 s 203D. AustLII
  10. ^ (1999) 17 ACLC 1329, http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCATrans/1999/351.html?stem=0&synonyms=0&query=title(Pilmer%20and%20Duke%20)
  11. ^ See Queensland Mines Ltd v Hudson (1978) 18 ALR 1 or Adler v ASIC (2003) 46 ACSR 504
  12. ^ (1995) 13 ACLC 614
  13. ^ See Renard I A and Santamaria J G, Takeovers and Reconstructions in Australia, Butterworths looseleaf, Ch 1

Bibliography[edit]

  • Renard, I. A; Santamaria, J. G. "Chapter 1". Takeovers and Reconstructions in Australia. Butterworths. 
  • Farrar, J. H (2008). Corporate governance : theories, principles and practice (SJ100 FAR). 
  • Farrar, J. H (2001). Corporate governance in Australia and New Zealand (KU956 F24). 
  • Ford, H. A. J (1999). Ford and Austin's principles of corporation law (KD956 F69) (9th ed.). 
  • Tomasic, R (2002). Corporations law in Australia (SJ100 TOM). 

External links[edit]