Legal Briefing No. 55

Number 55

(10 March 2000)

Amendments to the Corporations Law and
CAC Act

Introduction

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

Significant changes have been made to the rules governing
the offering of company securities (eg. shares and debentures)
for issue or sale. In particular:

  • 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 christine.cheney@ags.gov.au or
any of the following lawyers:

Canberra

John Scala

(02) 6253 7223

Anne Kelly

(02) 6253 7004

Sydney

David Durack

(02) 9581 7474

Melbourne

Martin
Bruckard

(03) 9242 1386

Brisbane

Glenn
Owbridge

(07) 3360 5700

Adelaide

Sarah Court

(08) 8205 4231

Perth

Graeme
Windsor

(08) 9268 1102

Hobart

Peter Bowen

(03) 6220 5474

Darwin

Rick Andruszko

(08) 8943 1400


ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

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.

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