Overview (August 1999)

Legislative Reforms to Australian Corporations and Investment Laws

The last year or so has seen some fairly extensive changes to the legislative regime governing the companies and securities industry in Australia, as part of the federal government's promise to 'simplify' and reform corporate law and make it more accountable to economic criteria. In fact, this reform juggernaut commenced in the mid 1990s, with further reforms in the offing. A brief summary of the changes made over the past year or so, and those still to come, are set out below.

Changes Over the Past Year

The last tranche of legislative amendments to the Australian Corporations Law (which came into force on July 1 1998) involved three main changes.

'ASIC' - A New Look Corporate and Securities Regulator
The first was to expand the role, and concomitantly change the name, of Australia's corporate and securities regulator to the 'Australian Securities and Investments Commission' or 'ASIC'. Its role in consumer protection and enforcement originally mainly covered the corporations and securities sectors. It now also extends across the whole of the investment (including that involving superannuation or insurance) sector as well, and encompasses the former role the Australian Competition and Consumer Commission had in all three sectors (appropriately amended provisions of the Trade Practices Act having been moved wholesale into the ASIC Act). The ASIC now effectively shares the function of regulating the insurance and superannuation industry with a new super-regulator, the Australian Prudential Regulation Authority. Information about the ASIC may be found at its website address: www.asic.gov.au.

Long Overdue Company Law Reforms
The second change was to simplify or drop certain long standing rules of company law, although these are not likely to have any earth shattering impact; for example, procedures for setting up and running companies have been simplified, the concepts of 'par value' for shares and a company having an 'authorized capital' have been abolished, and the way capital reductions are conducted has been streamlined (including dropping the requirement for court approval). Other changes were made to rewrite and improve the law on meetings, share capital and 'buy backs', financial reporting and annual returns.

Overhaul for Regime Regulating Funds Management
More significant, however, was the introduction of a new regulatory regime for the funds management industry. The result of a lengthy reform process involving two major government reports and extensive lobbying by industry groups, the most contentious innovation of this regime was to give funds the option of dispensing with the requirement for a separate manager and 'approved' trustee.

Instead, a single 'responsible entity' may be licensed by ASIC to discharge both functions under a (supposedly) streamlined set of regulatory requirements. Funds themselves are now known as 'managed investment schemes' and a deed establishing such a fund is now referred to as a 'constitution'. As for existing industry participants, they received a grandfathering period of two years within which to comply with the requirements of the new law. Guidance on the new regime can be obtained from new policy statements that ASIC has published, available from its website.

Further Reforms Planned

Further legislative reforms are also proposed to three principal areas under the Corporate Law Economic Reform Bill 1998. These were to have come into force on July 1 1999 but have not yet made it through the Australian parliament, as they are still the subject of some political debate.

Directors Duties and Corporate Governance
A US-style business judgement rule is to be introduced to provide directors with a 'safe harbour' from personal liability where the director has been involved in a business judgement which was made by the director in good faith and for a proper purpose, without a material interest in the subject matter of the judgement, after informing himself or herself about the subject matter of the judgement, and in a rational belief that the judgement is in the best interests of the corporation. Other reforms in this area include the following:

• the standard of care and diligence required of a director will be clarified and the particular circumstances of the corporation and the director's office and responsibilities will be taken into account;
  
  
• the duty of a director to act 'honestly' will be reformulated in terms of a duty to act in good faith and for proper purposes;
  
  
• a further 'safe harbour' from personal liability will be introduced for directors who rely on information or advice provided by others and there will be a statutory recognition of an ability on the part of directors to delegate;
  
  
• the circumstances in which directors may be indemnified for legal expenses will be clarified;
  
  
• there will be a limited reformulation of the provisions governing related party transactions and oppression proceedings; and
  
  
• in a sense in exchange for the foregoing, individual shareholders will be granted a statutory derivative right of action to sue on behalf of a corporation for breach of a director's or an officer's duties or against a third party, if the corporation is unwilling to sue, although such proceedings will require the leave of the court and the court will have wide powers to control their conduct.

Fundraising and Prospectuses
The rules on fundraising will be rewritten, with a number of substantive changes to be made in an attempt to reduce the costs of fundraising, particularly for a small to medium sized enterprise or 'SME'. In summary, the major reforms are as follows:

• No prospectus will be required in respect of less than 20 issues of securities in any 12 month period raising no more than A$2 million.
  
  
• A reduced disclosure standard will apply to one-off offerings of up to A$5 million through the use of an 'offer information statement' or 'OIS'.
  
  
• No formal prospectus will be required if the relevant offer is made to sophisticated investors (basically persons who meet a wealth test of net assets of more than A$2.5 million or income exceeding A$250,000 per annum, or who a licensed security dealer considers to be sophisticated based on previous investment experience).
  
  
• Prospectuses will no longer need to be registered by the ASIC, although there will be a 14 day waiting period before offers can be made pursuant to the prospectus.
  
  
• Most of the restrictions on advertising of securities offers will be eliminated.
  
  
• The retail market may be approached using an abbreviated form of prospectus, as long as full technical and other information is contained in a separate document available on request.
  
  
• Prospectuses will be permitted to be issued in electronic form and through the Internet and other media.

Takeovers
A number of changes are to be made to the rules on takeovers in an effort to make the requirements simpler and clearer and compliance cheaper. First, they are to be rewritten, with anomalies identified by a 1998 Companies and Securities Advisory Committee (CASAC) report rectified.

Secondly, a UK-style mandatory or 'follow-on' bid rule will be introduced. Under this rule a bidder will be able to acquire a stake in excess of the takeover threshold (ie more than 20% of the total voting rights in a target company) as long as the bidder announces immediately an unconditional cash bid (whether with or without alternative consideration) for all the remaining voting shares in the target at the highest price paid by the acquirer for such shares over the previous four months.

Thirdly, the existing Corporations and Securities Panel (commonly called the 'Takeovers Panel') will become the primary forum for resolving takeover matters over the courts and the Administrative Appeals Tribunal.

Fourthly, extended compulsory acquisition powers will be available to a person who holds or acquires at least 90% by number of a class of shares in a target to acquire the remainder of that class, and to a person who holds or acquires at least 90% by value of the securities in a target to acquire the remainder of all such securities.

Finally, listed managed investment schemes or trusts will become subject to the takeovers rules which to date have only applied to companies.

Accounting Standards
The law will be amended in relation to Australian accounting standards. Increased emphasis will be placed on harmonizing Australian accounting standards with standards set by the International Accounting Standards Committee. Further, there will be a 'Financial Reporting Council' with members drawn from professional and business organizations which will oversee the setting of accounting standards and report to the responsible federal minister as the effectiveness of those standards. Finally, standards will be required to be set with a view to ensuring that they lead to the production of relevant, reliable and comparable financial information for users of financial statements, and after a cost benefit analysis has been conducted in respect of each standard.

Timing of Further Law Reform

The Corporate Law Economic Reform Bill 1998 is presently being tinkered with to incorporate changes recommended by the Parliamentary Joint Committee on Corporations and Securities issued on May 12 1998. After then, the amended bill will have to be re-introduced to parliament for consideration. Government officials say that it is difficult to predict if and when this process will be completed, but an optimistic prognosis is that the bill could be introduced into law by January 1 2000.

ASIC Policy For New Fundraising Regime

In the meantime, ASIC has been busy. On July 22 1999, it released three 'policy proposal papers' for public comment. Effectively, these are draft policy statements indicating how ASIC intends to interpret and give relief from the fundraising regime proposed to be introduced by the Corporate Law Economic Reform Program Bill, if and when it is enacted. It also indicates how ASIC will deal with transitional issues. Copies of the papers can be obtained from ASIC's website which, as noted above, is located at www.asic.gov.au.

For further information on these topics please contact Danny Simmons or Mark Pistilli at Atanaskovic Hartnell by telephone (+61 2 9777 7000) or by fax (+61 2 9777 8777) or by email ([email protected] and [email protected]).

The materials contained on this web site are for general information purposes only and are subject to the disclaimer.