On 2 March 2015, the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 (Cth) (Bill) was passed by the Senate, following its approval by the House of Representatives on 27 November 2014. The Bill is now awaiting Royal Assent.
The Bill introduces a number of significant changes to the Corporations Act 2001 (Cth) (Act) of which directors, shareholders and practitioners need to be aware.
Abolition of the ‘100 member rule’
Previously, directors of a company were required under s249D(1)(b) of the Act to call and hold a general meeting, at the company’s expense, upon the request of 100 or more members entitled to vote at a meeting.
The 100 member rule has long been criticised by key stakeholders, such as the Australian Institute of Company Directors (AICD), the Business Council of Australia, the Governance Institute of Australia and the Law Council of Australia, on the basis that it imposes unreasonable compliance costs on companies by enabling members with potentially a very small proportion of the voting shares of a company to require a general meeting to be held even where the resolutions to be considered at the meeting have very little prospect of being passed. Indeed, the AICD has noted that the cost of convening a general meeting can range from $500,000 to in excess of $1,000,000, not including intangible costs such as ‘the distraction to board and management and the time taken away from engaging with shareholders that have an economic stake in the company and that have legitimate corporate governance concerns’. 1
Concerns have been expressed that the 100 member rule has enabled ‘activist’ groups to advance various political causes, for example in 2012 when 210 members, with the assistance of the GetUp! campaign movement, compelled Woolworths to call and hold a general meeting to consider a resolution calling for a limit on poker machine betting (supported by only 2.5% of voting members) and in 2003 when the Wilderness Society compelled Gunns to call and hold a general meeting to consider a resolution to ban old-growth logging (supported by just 0.45% of voting members).
Although they are no longer able to require a general meeting to be called and held, members with at least 100 voting shares will still be able to:
- propose resolutions for inclusion on the agenda of general meetings that have been properly called, pursuant to s249N(1)(b) of the Act, and
- require the distribution of statements, at the company’s expense, in relation to a proposed resolution or a matter that may be properly considered at a general meeting, pursuant to s249P(2)(b) of the Act.
The ability for members holding at least 5% of the votes that may be cast at a company’s general meeting to require directors to call and hold a general meeting under s249D(1)(a) of the Act also remains.
While the Bill strikes a more appropriate balance between minority shareholder rights and participation and maximising business efficiency in the absence of excessive compliance costs, consideration ought to be given to imposing a minimum economic threshold on the remaining rights of 100 members of a company under the Act identified above. This would require the 100 members to hold a minimum value of the company’s total share capital and would reduce the potential for small groups of members to abuse their rights under the Act by transferring limited numbers of shares to multiple persons to meet the 100 member requirement.
Noting the adoption of a minimum economic threshold in several European jurisdictions, for example the United Kingdom (where, under s338(3)(b) of the Companies Act 2006 (UK), 100 members must hold shares on which there has been paid up an average sum per member of at least £100), the former Companies and Securities Advisory Committee was in favour of requiring each of the 100 members to hold shares of a ‘meaningful economic value’, potentially $1,000.2
Other options, for example allowing directors to override members’ rights where they are being exercised for an improper or extraneous purpose (as occurs in Canada and New Zealand) and/or requiring members to have held their shares for a minimum period of time (as occurs in the United States, where a 12 month minimum is imposed) could also be revisited.
Additionally, the 100 member rule has not been removed for managed investment schemes under s252B(1) of the Act, resulting in higher transaction costs for schemes in comparison to companies without any reasonable justification. This discrepancy should be remedied by the Government.
Executive remuneration reporting requirements
The Bill alters reporting requirements for executive remuneration.
Unlisted disclosing entities no longer need to prepare a remuneration report. This is on the basis that those entities are not required to hold an annual general meeting and to place a remuneration report before the company’s members, therefore rendering the preparation of a remuneration report unnecessary.
While listed disclosing entities are still required to prepare a remuneration report, there have been changes to the reporting of lapsed options. Listed disclosing entities were previously required to disclose the value of options held by key management personnel as part of their remuneration that lapsed during the financial year and the percentage of the value of the remuneration of key management personnel consisting of lapsed options. Now, listed disclosing entities are only required to disclose the number of options granted to key management personnel that lapsed during the financial year and the financial year in which the lapsed options were granted.3
These amendments will reduce compliance costs and red tape for companies while still requiring the disclosure of information that is relevant and material to a company’s members and investors. While strongly supportive of the amendments, stakeholders have also called for the Government to consider other mechanisms to encourage greater simplicity in executive remuneration reporting in the future.
Determining a company’s financial year
Under s323D of the Act, the directors of a company may, in a given year, increase or decrease the usual 12 month financial year period for the company provided that any modification:
- does not exceed 7 days (s323D(2)), or
- is necessary to synchronise the reporting period of controlled entities to provide consolidated financial reports (ss323D(3) and 323D(4)).
Under s323D(2A) of the Act, directors can also reduce the 12 month financial year period if the reduction is made in good faith in the best interests of the company, provided that the company’s financial year has not been shortened on that basis alone in any of the previous 5 financial years.
The Bill inserts a note at the end of s323D(2A) of the Act which clarifies that, in determining whether a company’s financial year has been shortened in any of the previous 5 financial years, reductions that have occurred under ss323D(2), 323D(3) or 323D(4) of the Act are not taken into account. This amendment was made purely for the sake of clarity and does not alter the existing express wording of the Act.
Companies limited by guarantee: appointing and maintaining an auditor
Under s292(3) of the Act, small companies limited by guarantee are not required to prepare an annual financial report or a directors’ report unless required to do so by ASIC or members with at least 5% of the votes that may be cast at a general meeting of the company. Further, under s301(3) of the Act, companies limited by guarantee with annual revenue of $1 million or less (and which are not Commonwealth companies or subsidiaries of a Commonwealth company or authority) can elect to have financial reports that it prepares reviewed rather than audited.
Prior to the passage of the Bill, the intention of these provisions to reduce the regulatory burden on companies limited by guarantee was undermined by provisions of the Act which required all public companies to appoint (and subsequently to maintain) an auditor within one month of being registered. The Bill has now inserted ss327A(1A) and 327B(1A) into the Act, as well as a note to s327C(1), to clarify that small companies limited by guarantee and companies limited by guarantee that elect to have their accounts reviewed rather than audited are not required to appoint or maintain an auditor.
The Bill also enables:
- the Remuneration Tribunal to determine the remuneration of the Chair and members of the Financial Reporting Council, the Australian Accounting Standards Board and the Auditing and Assurance Standards Board, and
- Takeovers Panel members to perform their functions while overseas (thereby improving the administrative efficiency of the Takeovers Panel).
The original exposure draft of the Bill (Exposure Draft), released on 10 April 2014, contained a provision designed to replace the three-limb test for when a company is entitled to pay a dividend contained in s254T of the Act, whereby the company must have positive net assets immediately before the dividend is declared, the payment must be fair and reasonable to the company’s shareholders as a whole and the payment must not materially prejudice the company’s ability to pay its creditors.
The replacement provision would have introduced a pure solvency test, enabling a company to:
- declare a dividend if, immediately before the dividend was declared, the directors reasonably believed the company would, after the declaration, be solvent, and
- pay a dividend if, immediately before the dividend was paid, the directors reasonably believed the company would, after the payment, be solvent.
The intention of this provision was to provide greater flexibility to companies and to reduce compliance costs on smaller companies in preparing financial statements to satisfy the positive net assets requirement, with reference to current accounting standards, in circumstances where they would not otherwise be required to prepare the financial statements.
Additionally, the Exposure Draft sought to clarify that a company could make a capital reduction by way of a dividend payment, without the need for shareholder approval under Part 2J of the Act, so long as there was an equal reduction to all shareholders. This amendment could potentially have allowed greater flexibility to companies in implementing corporate restructures through the in specie distribution of shares as a dividend payment.
The dividend amendments were omitted from the Bill as passed. However, during the course of a Senate Inquiry into the Bill, the Government emphasised that this was done to enable further consideration of ‘alternative approaches which will balance the need for certainty and simplicity for business, protections for investors and the implications for the tax treatment of dividends’. New proposals and ongoing discussion in relation to the declaration and payment of dividends can therefore be expected in the future.