“On Board” is an occasional publication for non-executive directors of Australian public companies and other large organisations.
In this issue, we focus on the implications for Boards and company executives of the High Court’s decisions against the James Hardie non-executive directors and the general counsel. We also analyse the experience to date under the new “two strikes” regime for approval of remuneration reports.
In addition, we summarise the implications for non-executive directors of some other major cases and developments in 2012 including:
- The decision of the High Court in the Fortescue / Forrest continuous disclosure case
- Proposed revisions to ASX Guidance Note 8 on continuous disclosure
- CAMAC consultation on “The AGM and Shareholder Engagement”; and
- Progress on the implementation of COAG reforms concerning the liability of directors for corporate fault.
James Hardie … the Shafron High Court decision – Company executives
In May 2012 the High Court dismissed the appeal brought by Peter Shafron, the former general counsel and company secretary of James Hardie Industries Limited (“JHIL”).
The Court confirmed that Mr Shafron had breached his duty of care and diligence as an “officer” of the company, contrary to s 180 of the Corporations Act, because he failed to advise the board of JHIL that certain information in respect of asbestos-related liabilities should have been disclosed to ASX, and he also failed to advise the board that an actuarial report, commissioned by JHIL for the purpose of estimating the amount of future asbestos claims, used a cash flow model that did not take superimposed inflation into account. As a consequence, JHIL published a misleading ASX release which claimed that a foundation established by JHIL to meet asbestos claims was “fully funded”.
This decision has important consequences for company executives. The High Court’s interpretation of the definition of “officer” in s 9 of the Corporations Act will mean that more company executives are “officers”. They therefore become subject to the duties of care and diligence and good faith under sections 180 and 181 of the Act, and liable to civil penalties, compensation orders and disqualification for a breach of those duties.
The following two “limbs” of the definition of “officer” are relevant here:
“(b) a person:
(i) who makes or participates in making decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation’s financial standing; …”
Mr Shafron argued that he was not an officer in any capacity other than in his role as company secretary of JHIL, and that the conduct alleged by ASIC (the failure to advise the board and CEO) was done in his capacity as general counsel and not in his capacity as company secretary. The High Court rejected this argument.
Mr Shafron also argued that the fact that he was general counsel did not make him an officer under paragraph (b)(i) of the definition as he was not a person who participated in making decisions that affected the whole or a substantial part, of the business of JHIL. He submitted that “in order to ‘participate in making a decision’ a person had to have a role in actually making the decision”. That is, it was the board and not he that made the relevant decisions.
The High Court also rejected this argument, and observed that whilst the definition distinguished between making decisions of a particular character and participating in making decisions, the concept of “participating in making decisions” did not exclusively deal with the case where there were joint decision-makers, which would have been more accurately described as “making decisions (either alone or with others)”.
In concluding that Mr Shafron participated in making the relevant decisions, the High Court considered what he did as well as the relationship between his actions and the board’s decision to adopt the proposal. Mr Shafron was one of three executives of JHIL who “shaped and developed” several variants of the separation/ restructure proposal, including the proposal that was finally adopted by the board. The High Court found that he was “part of the promotion of the separation proposal to the board” and that the board was “‘reactive’ rather than ‘proactive’ in the formulation of the proposals”.
Applying the definition:
When is an executive an “officer”?
Paragraph (b)(i) of the definition (first limb)
When applying the first limb, the fundamental question is whether a person’s participation in a decision that affects the whole or a substantial part of the business of the corporation is of a sufficient degree to attract the definition.
The High Court found that the idea of “participation” in making such decisions
“directs attention to the role that a person has in the ultimate act of making a decision, even if that final act is undertaken by some other person or persons. The notion of participation in making decisions presents a question of fact and degree in which the significance to be given to the role played by the person in question must be assessed.”
It is clear that directors and the CEO of the corporation are people who make such decisions. In our view, the members of an executive committee that makes decisions about matters delegated to the CEO or to the executive committee by the board, will also be persons who “make” such decisions.
It is important to note that it is possible to be classified as an officer even if one is counselling against the making of the decision (which would go to absolving the person from a breach of duty of care).
However, a one-off contribution to the decisionmaking process is unlikely to provide the requisite degree of participation. The cases also indicate that a person will not be classified as an “officer” under the first limb of the definition if the person has duties that are clerical or administrative, or involve carrying out directions as an employee, or involve undertaking functions in accordance with pre-determined policies.
The High Court concluded that Mr Shafron “participated” in making decisions of the requisite kind because he was one of the three most senior executives in the company, responsible for formulating and presenting the relevant proposals to the board with his recommendation for approval. His role was not confined to proffering advice or information.
Applying the decisions and observations of the courts in relation to paragraph (b) of the definition, the following employees are likely to be officers under the first limb:
- the chief executive officer, whether or not a director;
- members of the executive committee;
- senior executives who customarily prepare and present proposals for decision by the board, the chief executive officer or the executive committee; and
- employees who customarily make recommendations, alone or jointly with others, to the board, the chief executive officer or the executive committee, in relation to matters for decision by those bodies.
However, employees who merely provide advice and information to the decision-makers at their request are unlikely to be officers under the first limb.
Paragraph (b)(ii) of the definition (second limb)
The courts have overlaid some “filters” to help determine whether a person is an “officer” because they have the capacity to affect significantly a corporation’s financial standing (under the second limb of the definition).
A “management” role
Recent decisions (eg Citigroup and Buzzle) make it clear that only persons who have a role within the corporation that is akin to management, and who can affect significantly a corporation’s financial standing, will be captured by this definition. An employee with limited responsibilities and whose duties are subject to direction would not be classified as an officer even if the employee was in a position to make decisions that had a material effect on the financial position of the company.
This interpretation appears somewhat arbitrary. It suggests that people undertaking roles in a corporation such as sales, marketing, business development, customer relations, investor relations, or trading will not, by virtue only of those roles and absent a “management” responsibility, be officers under the second limb, even though people in each of those roles could make decisions that have a material financial consequence for the corporation.
In our view, the requirement that a person must have a “management” role is based on historical considerations that are no longer relevant, and therefore may not be entirely reliable. However, as the courts have consistently imported a “management overlay”, it is a useful if not bulletproof approach to the application of the second limb.
Holding company directors
A person who is a director of a holding company will be an officer of each subsidiary of the holding company under the second limb if the person’s role within the holding company is one in which the person can significantly affect the financial standing of each subsidiary.
No third parties
A person involved in a company’s affairs as a third party and with no management responsibilities (for example, the holder of a charge over the assets of the company), will not be an officer under the second limb.
Being an officer – Implications for executives
Duties of care and diligence, and good faith
Employees who are classified as officers have a duty of care and diligence under s 180(1), and a duty to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose, under s 181(1). Intentional or reckless breach of this duty is a criminal offence, under s 184(1). Employees who are not officers do not have these duties.
Pecuniary penalties, compensation orders and disqualification
The duties in ss 180(1) and 181(1) are civil penalty provisions. A court can order an officer who has breached a civil penalty provision to pay a pecuniary penalty of up to $200,000. The Court can also make compensation orders that would require an officer to compensate a corporation for damage suffered by the corporation because the officer contravened a civil penalty provision, and disqualify the officer from managing a corporation.
Indemnities and insurance
The ability of a corporation to indemnify and insure a person who is an officer is materially more limited than for other employees. A company cannot indemnify an officer against liability to the company, against liability for a pecuniary penalty under the Corporations Act, or for liability arising from conduct not in good faith, but it can indemnify other employees in those circumstances provided that their conduct is not criminal.
Therefore, the consequences for an employee who becomes an officer are potentially significant. The employee may need to be included in D&O cover for liabilities to the company, and may also need to pay personally for insurance cover against liabilities that the company cannot pay to insure.
Practical implications for directors and officers
It is clear from the Shafron decision and other recent cases concerning the application of these provisions, that boards should ensure that employees who now fall within the definition of “officer, and who are responsible for preparing and presenting information, or making a recommendation on the basis of information provided by the person, to the board, should:
- check the information personally to ensure that the information is accurate and complete in all material respects, is not misleading, contains no omissions that would make it misleading, and that there is a reasonable basis for all forward-looking statements;
- disclose to the board any assumptions, risks, limitations or qualifications that have been made in preparing the information; and
- address all matters and risks relevant to the person’s particular expert function in connection with the matter for decision. (For example, a general counsel should address legal compliance and risks, and a treasurer should address credit rating, interest rate, exchange rate and solvency risks.)
Suggestions for reform
The decisions in Shafron and other recent cases highlight the difficulty of applying the definition of “officer” with any certainty, which in turn highlights the onerous consequences for officers who breach their statutory duties, including civil penalties for breach of a duty of care. No other group of people in Australia is liable to penalties for mere negligence simply because of the occupation of the group members.
Amend the definition of officer
To provide greater certainty, we suggest that the reference to people who “participate” in decisionmaking could be deleted from the first limb, and replaced with a reference to people who make recommendations to decision-makers about decisions that affect the whole, or a substantial part, of the business of the corporation.
This change would limit the application of the definition to those who actually make decisions, and those who have some influence over the relevant decisions – ie those who formulate proposals and recommend them to the decision makers, rather than those who may participate in a manner in which they have no influence.
This seemed to be the point of differentiation for the High Court applying the definition to the facts in Shafron, and this amendment would make it clear.
Extend ss 187 and 189 to officers
We also advocate amending ss 187 and 189 of the Corporations Act so that they are available to all officers and not just directors.
Section 187 provides that a director of a wholly-owned subsidiary will be taken to act in good faith and in the best interests of the subsidiary if the director acts in good faith and in the best interests of the holding company, so long as the subsidiary’s constitution expressly allows for this. This provision does not presently extend to other officers of a corporation who owe the same duties of good faith.
Section 189 of the Corporations Act permits directors to rely on certain information or advice provided by persons specified in the section in certain circumstances in the discharge of their duties. Again, this section does not presently extend to other officers who owe the same duties.
James Hardie – the High Court decision against Non-Executive Directors
The High Court overturned the decision of the NSW Court of Appeal, and found that the non-executive directors of James Hardie Industries limited (JHIL) had breached their duty of care and diligence by approving a misleading draft ASX release in February 2001. The ASX release concerned the establishment and funding of the Medical Research and Compensation Foundation, established to fund asbestos claims against the James Hardie Group.
(The NSW Court of Appeal subsequently reduced the fines and banning orders originally imposed on the directors.)
The resolution of the appeals by the nonexecutive directors turned on the factual question of whether the draft ASX announcement was tabled at the board meeting of 15 February 2001 and whether it was approved by the board. The High Court rejected the finding of the Court of Appeal that ASIC had not established to the satisfaction of the Court that the directors approved the draft announcement.
The High Court also rejected the finding of the NSW Court of Appeal that ASIC was under an obligation of fairness that required ASIC to call Mr David Robb as a witness. Mr Robb was a partner of Allen Allen & Hemsley, JHIL’s legal advisers, with significant involvement in the relevant events.
As a consequence of the High Court’s decision, it remains the case that directors will be responsible for a company’s most important announcements and public documents. Such announcements and documents should go to the board or a sub-committee of the board for approval. Directors should ensure that they have sufficient time for careful consideration before approval, particularly because they may not be entitled to rely on a defence of reasonable reliance on management or others in those circumstances. Finally, if directors believe an announcement or document which has already been published is misleading or contains a material error or omission, they should take steps immediately to correct it.
(King & Wood Mallesons acted for James Hardie Industries NV in these proceedings.)
Fortescue Metals Group Limited and Andrew Forrest v ASIC – High Court decisions
In October 2012, the High Court allowed appeals by Fortescue Metals Group Limited and its then Chairman and Chief Executive Andrew Forrest, reversing decisions by the Federal Court that they had made misleading and deceptive public statements to ASX and elsewhere.
The statements, made mainly in the second half of 2004, claimed that Fortescue had entered into “binding agreements” with certain Chinese State-owned companies to build, finance and transfer a mine, a railway and a port in the Pilbara region in Western Australia. When Fortescue disclosed these agreements in March 2005, there was a material fall in the Fortescue share price. The agreements (one each for the mine, the railway and the port) were described as “Framework Agreements”, were (respectively) 3, 4 and 5 pages long, and left almost all material terms, including general contract conditions, scope of works, scheduling of works and the price of works, to be determined at a later date. Nor did the Framework Agreements contain any mechanism for determining those matters. In the event, shortly after the agreements were disclosed, the Chinese companies pulled out.
The Full Federal Court had found unanimously that the relevant statements were misleading and deceptive, because (amongst other things) the agreements were incomplete and unenforceable in an Australian court.
The High Court, however, held that the parties had in fact made the agreements, the agreements concerned the claimed subject matter, and the parties intended that the agreements be binding. The High Court found that the statements did not convey anything further, and were therefore not misleading or likely to mislead. In particular, the High Court found that there was no evidence that the statements conveyed that the agreements were enforceable in an Australian court.
In our view, it would be unwise to view the High Court’s decision in this case as a useful precedent or indicator of acceptable practice for disclosure in Australian equity markets. It is a decision on its facts, a decision about which the most experienced judges in the country have disagreed.
Suffice it to say that it is highly unlikely that in future any major ASX-listed company, properly advised, will announce that it has entered into a binding agreement for the construction, financing and transfer of a mine, a railway or a port, that is in fact only 4 or 5 pages long, and does not address the fundamental terms for such a project, or the mechanisms for determining those terms.
(King & Wood Mallesons acted for ASIC in these proceedings.)
Two strikes and you’re out – reflections on the 2012 AGM season
As the curtain closes on the 2012 AGM season we provide some insights into the reasons why companies received “strikes” against their remuneration report and why others managed to avoid them.
The two strikes rule was one of the most topical issues of the 2012 AGM season. It forces companies to propose a “spill resolution” where 25% or more of the votes cast at two successive AGMs are against the adoption of the company’s remuneration report. If the spill resolution is carried by a simple majority, the entire board is “spilled” and director elections must be held at a spill meeting.
The strike rate in 2012
Of the AGMs held in 2012, 125 companies received either a first or second strike against their remuneration report.
Given the two strikes rule came into effect on 1 July 2011, 2012 presented the first occasion for companies to receive a second strike. 24 companies received a second strike in 2012, the vast majority of which were outside of the S&P/ASX 300. However only 6 of those companies that received a second strike will be required to hold a subsequent “spill meeting” – when time came to pull the trigger, shareholders seem to have become gun shy.
Penrice Soda was the first company required to hold a spill meeting under the two strikes rule. Following the announcement of a proposed restorative of Penrice Soda’s businesses, the Board were able to avoid being voted out at that spill meeting.
Strike one – reasons for first strikes in 2012
In some cases, the vote was used by shareholders to vent their frustration at executive remuneration arrangements. Common grievances were the value of bonuses, granting of “in the money” options or increases in fixed pay, particularly where the share price or profits of a company had declined. Short term incentives have also been criticised.
However, it appears the vote was used by some shareholders to protest against non-remuneration related issues. There were at least 9 reported examples in the press of protest votes reflecting disappointment with company or board performance. Some have even suggested in a few other cases that the rule was used to destabilise the board as part of personal campaigns to secure board seats, or in pursuit of motives unrelated to executive remuneration – a concern we raised when the legislation was first mooted.
In the clear – why companies avoided second strikes in 2012
Approximately 90% of the S&P/ASX 300 companies that received a first strike in 2011 avoided a second strike in 2012. In general, those companies restructured their executive remuneration arrangements, including removing all short term bonuses, reducing NED fees, changing hurdles and freezing fixed pay.
Increasing engagement with major shareholders and proxy advisors was a key ingredient too.
Proponents of the two strikes rule look to this as an example of it working as intended.
In early 2013, the first “spill meetings” will be held since the enactment of the two strikes rule. The outcome of those meetings should shed further light on whether the rule is serving its intended purpose, or whether shareholders have been able to effectively use it for ulterior motives.
Proposed changes to ASX Listing Rules and Guidance Note 8 – Continuous Disclosure
Set out below is a short summary of the key changes proposed by ASX to its Listing Rules and to Guidance Note 8, in relation to continuous disclosure. Submissions in response to the proposals were requested by 30 November 2012, and final amendments are expected to be released shortly.
The requirement that market sensitive information be disclosed immediately will be retained. ASX confirms that immediately does not mean “instantaneously” but rather “promptly and without delay”. ASX will recognise the speed at which disclosure can be made will depend on various factors including the source of the information, the forewarning (if any) an entity had of the information, the complexity of the situation, the need for verification, and in some cases internal governance requirements.
There will be greater recognition of the role trading halts can perform in managing continuous disclosure issues, including resolving the tension between immediate disclosure and accurate disclosure. ASX confirms that it will usually agree to a trading halt if an entity advises it needs time to prepare and issue a continuous disclosure announcement. ASX also acknowledges that the use of trading halts may be an appropriate mechanism to allow time for board review of significant announcements.
The current guidance that a 10-15% variation in earnings guidance, consensus forecasts or prior year results triggers an earnings revision will be withdrawn.
At a more general level ASX will apply accounting standards criteria for assessing quantitative materiality issues (less than 5% is presumed immaterial, more than 10% is presumed material, 5-10% requires a judgment to be made). This will be applied to the assessment of implications of share price movements. This will also be applied to situations where earnings guidance has been released.
ASX confirms that the “reasonable person” test does not generally require disclosure of confidential approaches concerning a possible control transaction.
Employment, service or consultancy contracts with the CEO and directors
ASX proposes to amend the listing rules to require immediate disclosure of the material terms of any employment, service or consultancy agreement with the CEO or a director, and any variations.
More worked examples
ASX has provided many more worked examples of how it considers disclosure issues should be handled, including in the areas of control transactions, material acquisitions, issue of securities, mineral discoveries, litigation, earnings guidance and variance of earnings estimates from consensus estimates.
In dealing with facts similar to those considered by the High Court in the Fortescue case ASX acknowledges that an entity that signs a market sensitive agreement can satisfy its continuous disclosure obligations by either announcing the key terms of the agreement or by lodging a copy of the agreement on the market announcements platform. However, an announcement of key terms must contain a fair and balanced summary of material features of the agreement and other information that could impact on an investor’s assessment of the information.
CAMAC consultation on “The AGM and shareholder engagement”
In September 2012, the Corporations and markets Advisory Committee (CAMAC) released a discussion paper “The AGM and Shareholder Engagement”.
The paper identifies a range of issues around the vexed question of the role of the traditional Annual General Meeting in a world of global equities markets, continuous disclosure and electronic trading.
CAMAC has identified three main themes for consideration:
- the role of the AGM within a broader context of shareholder engagement by company boards and management;
- the content of the annual report; and
- processes, formats and functions of the AGM.
The area of greatest focus for legal reform is the process, format and function of the AGM. Questions raised by CAMAC in relation to these matters include:
Whether there should be any change to the timeframe for holding an AGM (to reduce congestion in the “AGM season”, amongst other things).
Comment: There seems to be no practical or legal reason why the AGM “season” could not be extended from 2 months to at least 3 months.
How technology might be used to make the notice of meeting more useful and its distribution more efficient.
Comment: It would clearly be more efficient to encourage greater use of electronic distribution and access to meeting materials.
Issues concerning the participation and receipt of information by beneficial owners of shares.
Comment: If shareholders choose to hold shares through a nominee, they can also make arrangements with the nominee to vote and receive information.
Whether there should be any change to the threshold and timing requirements for shareholders to call a meeting or place a matter on the meeting agenda.
Comment: These issues have long been the subject of proposals for reform by shareholder activists. The current thresholds and timing requirements seem to strike a good balance.
Whether procedures should be introduced for companies to ask shareholders before the AGM about issues they would like discussed, or questions they would like answered, at the AGM.
Comment: Many listed companies adopt pre-meeting procedures to elicit this information, and prepare responses for the AGM. It is an effective form of engagement with shareholders and should be encouraged.
Whether there should be any change to the matters currently required to be considered at the AGM.
Comment: Following the recent introduction of non-binding voting on the remuneration report, and the “two strikes” rule, there are no current proposals to add further matters to the business of the AGM. However, the practice of adopting the financial statements at the AGM, even though there is no legislative requirement to do so, appears to be anachronistic given that shareholders have an opportunity to ask questions and make comments at the AGM about the management of the company.
The appointment and role of proxies to vote at the AGM, including the regulation of “vote renting” and the obligations of proxies to vote.
Comment: There have been various issues relating to the form of appointment for proxies in recent years. Many of those issues would be resolved by requiring that proxy forms cannot be “pre-completed” by the company or a person distributing the form, and that forms must be dated by the shareholder completing them in order to be valid. The related but separate concern about “vote renting” appears to be misconceived: there does not appear to be any reason why a person should not seek to solicit votes for consideration or otherwise, provided that there is compliance with existing laws concerning substantial shareholder disclosure and limits on relevant interests.
Whether direct voting before the AGM (which removes the requirement to appoint a proxy in order to vote) be formally permitted by regulation?
Comment: Many listed companies have amended their constitutions to permit “direct voting” by shareholders before the AGM. This form of voting avoids the complexities of proxy voting, and enables shareholders to express their views without having to “attend” the AGM in person or by proxy.
Whether any change should be made to rules concerning the disclosure to the meeting of votes cast before the meeting.
Comment: The current replaceable rule requiring disclosure of proxies before the vote is taken at the meeting, should be mandated and clarified to include direct votes and to cover both a show of hands and a poll.
Whether online attendance and voting should be permitted during the AGM, and if so, how should it be regulated.
Comment: Provided that companies have access to appropriate technology, and participation and voting can be monitored and verified, there does not appear to be any reason to prohibit online attendance and voting. However, legislative change would be required to remove current uncertainty as to the validity of online attendance and voting.
Whether voting on a show of hands should be prohibited.
Comment: Voting on a show of hands necessarily excludes proxy votes and direct votes cast before the AGM, and gives all shareholders present an equal vote irrespective of the number of shares held. It is therefore unrepresentative of the views of shareholders and should no longer be permitted.
Processes for disclosure of and access to voting results after the AGM.
Comment: All voting results should be required to be disclosed to shareholders.
Whether there should be any changes to the frequency and voting procedures for the election of directors
Comment: Some listed companies have adopted a procedure whereby all directors retire and stand for election every year. This is likely to avoid shareholders voting for a spill. It could also be inimical to longer tenure and continuity on boards, but it has been rare in Australia for shareholders to vote to remove incumbent directors.
Whether the decision-making function of the AGM should be separated from reporting and discussion, to permit shareholders to vote within a specified period after the meeting has been held.
Comment: This is a constructive suggestion, which allows shareholders to consider discussion at the meeting. There need not be any procedural obstacle to voting after the meeting.
Whether AGMs should be abolished altogether.
Comment: AGMs can continue to serve a useful purpose for annual company business and should be retained in a modified form.
Submissions were due by 21 December 2012, although extensions have been granted.
Progress on COAG reforms concerning the liability of directors for corporate fault
In November 2008, the Council of Australian Governments (COAG) agreed in to reform the numerous statutory provisions imposing personal liability on directors for corporate fault (over 700 separate State and Federal provisions) to achieve a consistent approach.
In November 2009, COAG agreed the principles upon which this would be achieved. (These principles are applicable only in circumstances where the company itself has committed an offence, and not where the director has committed an offence directly or as an accessory under existing principles.)
The principles adopted were, broadly, that:
- the corporation should be held liable in the first instance;
- personal liability for corporate fault should not be imposed as a matter of course;
- the imposition of personal criminal liability should be confined to situations where there was a compelling public policy reason to do so, it was necessary to promote compliance, and it was reasonable in all the circumstances;
- regard should be had to certain factors, including that the obligation on the director was clear, the director had the capacity to influence corporate compliance, and a reasonable director could have taken steps to ensure compliance;
- directors should only be liable where they have encouraged or assisted in the commission of the offence, or been reckless or negligent in relation to the offence; and
- directors should bear the burden of proving that they have taken reasonable steps to prevent the offence.
In July 2012, COAG approved guidelines to ensure that all jurisdictions interpreted and applied the principles consistently. The guidelines identified three levels of liability for directors and executives:
- first, where directors and executives will have no liability unless the prosecution can prove that they failed to take reasonable steps or exercise due diligence to prevent the offence;
- second, where directors and executives who establish to the satisfaction of the court, on the balance of probabilities, that there is a reasonable basis to conclude that they took reasonable steps or exercised due diligence to prevent the offence, in which case the prosecution must then prove that they did not, beyond reasonable doubt; and
- third, where directors and executives will have a defence to personal liability if they prove that they took reasonable steps or exercised due diligence to prevent the offence (ie a reversal of the onus of proof).
The Commonwealth released three separate exposure draft Bills for consultation in 2012. In September 2012, the Personal Liability for Corporate Fault Reform Bill, amalgamating all 3 exposure drafts, was introduced into the Commonwealth Parliament and referred to various Parliamentary Committees for review. The review process was completed and the Bill was passed by the Parliament and assented to on 10 December 2012.
The Act achieves very little substantive reform. There is only one section of the Corporations Act (s188, concerning company secretarial administrative obligations) where the actual imposition of personal responsibility has been amended, but personal liability remains under that section in an amended form. A similar outcome applies for all other legislation amended by the Act. In fact, while this process has been in train, the Federal Government has passed additional laws under which directors can be personally liable for corporate fault, mainly in taxation matters.
Therefore, there has been no actual attempt to reduce the number of Commonwealth laws for which directors can be liable for a breach by the corporation. The Commonwealth appears to have done the absolute minimum to meet its commitment under the COAG agreements on this matter.
New South Wales, on the other hand, has passed legislation to implement the COAG agreement (the only state to do so to date) that actually reduces the number of offences under which directors could be personally liable for corporate fault, from over 1000 to about 150. The NSW Act also ensures that there is no reversal of the onus of proof for all but the most serious offences under NSW environmental laws. Therefore, in almost all remaining NSW statutory provisions under which a director may be personally liable for a breach by the corporation, the prosecution will be obliged to prove all elements of liability against the director, including that the director failed to take reasonable steps to prevent the offence. This is a very good outcome for directors.
The ACT, South Australia, Tasmania and Victoria have introduced Bills to similar effect, removing personal liability for directors from hundreds if not thousands of legislative provisions in each of those States, and amending others to require the prosecution to prove all elements of liability against directors.
Queensland has also introduced a Bill that removes director personal liability from many provisions, and also amends others to require the prosecution to prove all elements of liability against directors. However, the Queensland Bill also introduces new provisions to reverse the onus of proof against directors in over 20 Acts where no reversal of proof applied previously. This is a particularly frustrating outcome.
It should also be noted that occupational health and safety and environmental legislation was excluded from the COAG audit process, and only New South wales has amended legislation concerning those matters in relation to directors personal liability.