Commercial

What corporate governance rules do investors need to be aware of and what applies to them?

The Australian Government welcomes productive foreign direct investment.  A good understanding of the Australian corporate governance rules is the key to success in investing in Australia.

Main legislation and regulatory sources

The Corporations Act 2001 (Cth) (the “Act”) is the principal legislation regulating companies in Australia.

The Australian Securities and Investment Commission (“ASIC”) is the principal corporate regulatory agency which registers companies and enforces compliance with the Act.

The Takeovers Panel (“Panel”) is a peer review body and forum for resolving disputes about a takeover bid and other control transactions.

Australian Securities Exchange (“ASX”) is a co-regulator with ASIC which prescribes standards for publicly listed companies and reserves power to police those standards – the ASX Listing Rules.

ASX Corporate Governance Council (“Council”) has issued a guide entitled “Corporate Governance Principles and Recommendations” (“Principles”).  ASX Listing Rules require that publicly listed companies disclose in their annual report the extent to which they have followed these Principles (the ‘if not, why not’ approach).  Proprietary companies may follow the Principles voluntarily.

The Australian Foreign Investment Review Board (“FIRB”) reviews certain foreign acquisitions of Australian shares and assets to ensure they support Australia’s interests.

The Australian Competition and Consumer Commission (“ACCC”) reviews certain foreign acquisitions under competition and consumer law where the acquisition could have the effect of substantially lessening competition in the Australian market.

Corporate governance standards

Investors should pay particular attention to the following rules:

Shareholders

• Shareholders do not per se have any responsibilities in regards to the corporate governance of the companies in which they invest.
• If companies are limited by shares, the liability of shareholders is limited to the amount paid for their shares.
• Shareholders’ meetings (AGMs and EGMs) are governed by the Act as well as by the individual company’s constitution and any applicable rules (e.g. ASX Listing Rules).
• The Act requires certain types of decisions to be passed by a special resolution (at least 75% of votes), as compared to an ordinary resolution (simple majority vote).
• Shareholders have no fiduciary duty to the company but they are subject to the statutory oppression prohibitions in the Act.

Directors

• The board of directors (“Board”) managers a company and is responsible for the overall governance and strategic direction of the company.
• Shareholders appoint directors at incorporation. Also, subsequent appointments may occur at Board level with shareholder approval.  The Board may not remove a director of a public company.
• Only natural persons (not companies) of 18 years or over, who have not been disqualified from holding office, may serve as directors.
• Both executive and non-executive directors comprise the board.
• A proprietary company must have at least one director that lives in Australia. If the company has crowd-sourced funded shareholders, it must have at least two directors and a majority of these directors must live in Australia.  A proprietary company is not required to have a secretary but if it does, they must live in Australia.
• A public company must have at least three directors and one secretary. At least two of the directors and at least one secretary must live in Australia.
• The Principles recommend that a majority of the Board should be independent and the Board should establish committees such as nomination, remuneration and audit committees.
• Directors also require re-electing at least every three years according to the ASX Listing Rules.
• The Board is responsible for appointing senior executives to management positions.
• Directors owe fiduciary duties to the company and its members.
• Directors may be personally liable for breach of their duties, e.g. allowing the company to trade whilst insolvent.

Financial reports

• The Act requires the following entities to prepare financial reports:
  • All disclosing entities
  • Public companies
  • Companies limited by guarantee (except small companies limited by guarantee)
  • All large proprietary companies that are not disclosing entities
  • All registered managed investment schemes
  • Foreign-controlled small proprietary companies
  • Small proprietary companies that have one or more crowd-sourced funding shareholders at any time during the year
• Financial reports prepared must comply with Australian Accounting Standards which are in line with the International Financial Reporting Standards (IFRS).

ASIC annual reviews

• ASIC runs annual reviews of all companies. For most companies and schemes, their annual review date is the anniversary of their date of registration or incorporation.

Others

• Substantial shareholdings (5% or more, including holdings of associates) in publicly listed companies must be disclosed. Each change of 1% thereafter must also be disclosed.  When the shareholding falls below 5%, that change must also be disclosed.
• The takeovers provisions of the Act prohibit acquisitions of relevant interests in voting shares in publicly listed companies where the acquisition would cause a person’s voting power to increase above 20%, or, where the acquisition would cause a person’s voting power to increase from a position above 20%.
• Furthermore, there are government initiatives and certain tax deductions for small business in Australia. Different regulators in Australia have their own definition of ‘small business’.
• Also, the Fair Work Act 2009 and the Fair Work Regulations 2009 regulate employment in Australia. The National Employment Standards (NES) provide minimum employment entitlements to all employees. The industry and occupation awards outline minimum pay rates and conditions of employment in specific industry or occupation.

Recent and new developments

Safe harbour provisions were introduced in September 2017 to provide a ‘safe harbour’ for directors of companies that are nearing insolvency.  As such, directors will be afforded protection from civil liability where they develop a course of action that is reasonably likely to lead to a better outcome for a company than administration or liquidation.

New laws are proposed (and likely to come into effect in 2019 if the legislation is passed) to:

• significantly increasing civil and criminal penalties for breaches of the Act
• introducing a new objective test for ‘dishonesty’
• introducing a new director Identification Number (DIN) regime to give every director a unique identifier
• making directors personally liable for the unpaid GST debts of their companies by expanding the directors’ Penalty Notice regime
• prohibiting dispositions of company property
• improving the accountability of resigning directors
• modernising the Australian Business Register and the ASIC business registers onto a single platform that will be administered by the Australian Business Register within the Australian Taxation Office

Koffels Solicitors and Barristers specialise in corporate law offering professional advice on all facets from company incorporation to corporate governance and compliance, including directors’ duties, mergers and acquisitions. Please do not hesitate to contact us should you have any queries.