On 19 March 2015, the Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2014 (Act) became law, having been passed through the Commonwealth Parliament earlier this month. The introduction and passage of the Act followed a period of consultation by Treasury early last year.
Amongst a number of changes geared towards removing unnecessary regulation, the Act has removed the ability of 100 or more shareholders in a company to require a company to call a general meeting of the company's shareholders.
The requirement for unlisted companies to prepare remuneration reports, as well as the requirement for companies limited by guarantee which are not required to have their annual financial statements audited to maintain the appointment of an auditor, has also been eliminated.
Unfortunately, the Act does not implement an earlier proposal to simplify the test which companies must apply when considering whether the company can pay a dividend.
This e-Bulletin provides a short summary of the key changes implemented by the Act.
What the changes mean for you
As a result of the changes implemented by the Act:
- shareholders are no longer able to compel a company to convene a general meeting to consider resolutions proposed by those shareholders, unless those shareholders cumulatively hold 5% or more of the votes that may be exercised at a general meeting of the company;
- companies that are "disclosing entities" for the purposes of the Corporations Act, but whose securities are not listed on a securities exchange are no longer required to prepare a remuneration report; and
- small companies limited by guarantee and most other companies limited by guarantee with annual revenue of less than $1 million are no longer required to maintain the appointment of an auditor.
Member requested meetings
Section 249D of the Corporations Act previously required a company to call a general meeting of its shareholders on the request of:
- members with at least 5% of the votes which may be cast at a general meeting of the company's shareholders; or
- at least 100 members who are entitled to vote at a general meeting of the company's shareholders.
As a result of the Act, paragraph (b) of section 249D no longer applies. The result is that companies are only required to convene a general meeting in response to a request from members where the requesting members hold, in aggregate, at least 5% of the votes which may be cast at such a meeting. The amendment recognises that, particularly in relation to listed entities, the wishes of 100 shareholders (regardless of the size of their holdings) do not necessarily justify the cost and expense for the company of convening a general meeting.
That said, groups of 100 or more members of a company will retain the right, arising under section 249N of the Corporations Act, to propose resolutions at a general meeting called at the initiative of the company. The distinction is important, as it is one thing to require a company to add what may turn out to be an unpopular resolution to the agenda for a general meeting that would be convened regardless, and quite another to require the company to convene a general meeting for the sole purpose of considering that resolution.
Remuneration reporting confined to listed companies
Section 300A(2) of the Corporations Act previously required a company that is a "disclosing entity" to provide prescribed information about the remuneration of its key management personnel as part of the company's annual directors' report. This was despite the heading to section 300A suggesting that the legislature may only have intended the provision to apply to listed companies.
This anomaly in the legislation has now been corrected by clarifying that the remuneration reporting requirements under section 300A of the Corporations Act apply only to disclosing entities which are listed. This change means that companies which are disclosing entities by virtue of having a wide base of shareholders, but which are not listed, will no longer be required by the Corporations Act to report on the remuneration of their key management personnel. This change will apply in relation to the current financial year.
Exemption from auditor appointment requirement for small and certain other companies limited by guarantee
Section 327A(1) of the Corporations Act previously required a public company to appoint an auditor within one month of its incorporation. This requirement extends to companies limited by guarantee, despite section 292(3) of the Corporations Act exempting small companies limited by guarantee from the requirement to prepare an annual financial report and section 301(3) of the Corporations Act allowing most companies limited by guarantee with annual revenue of less than $1 million (whether on an individual or consolidated basis) to review, rather than audit, their annual financial statements.
In recognition that the requirement to appoint an auditor is superfluous for many companies limited by guarantee, section 327A has now been amended to exempt companies limited by guarantee from the requirement to appoint an auditor where the company is a small company limited by guarantee or where the directors reasonably believe that the company will fall within the scope of section 301(3) and, accordingly, the company will no longer be required to have its annual financial statements audited.
Dividend test to remain as is
The exposure draft of the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 (Bill) which was released early in 2014 had proposed to amend section 254T of the Corporations Act by reforming the dividend payment test. Currently a company must ensure that any dividend payment it makes will not result in the company's total liabilities exceeding its total assets. The exposure draft of the Bill had proposed that this test be replaced with a solvency test, which would have removed the need for a company to prepare a balance sheet in accordance with the accounting standards whenever it sought to declare a dividend. The exposure draft had also proposed to clarify that a dividend declared in accordance with section 254T of the Corporations Act would not require shareholder approval as a capital reduction under section 256B of the Corporations Act.
These changes were not ultimately included in the Act. Therefore, for the time being at least, company directors must continue to employ a "balance sheet test" when proposing to declare dividends and, where a dividend is proposed to be paid otherwise than out of profits, consider whether the dividend constitutes a reduction of share capital requiring shareholder approval under section 256B.