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Sources of corporate governance rules and practices

Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The primary sources of law and regulation regarding corporate governance in Australia are the Corporations Act 2001 (Cth) (Corporations Act) and its subsidiary regulations. As a common law jurisdiction, corporate governance is also subject to common law principles within the Australian court system.

The Corporations Act governs every aspect of a company’s existence and operation extending from formation to deregistration. The Corporations Act also regulates director and officer duties, takeovers and fundraising, shareholder rights and remedies and financial reporting requirements. The Australian Securities Exchange’s (ASX) Listing Rules (Listing Rules) apply to listed entities admitted to official quotation on ASX. The Listing Rules govern the admission and removal of entities to the official list, quotation and suspension of securities for trade, disclosure and some conduct requirements (among other things). The Listing Rules are enforceable under the Corporations Act and entities agree to be bound by them upon admission.

Beyond regulatory requirements, corporate governance standards are also driven by the ASX Corporate Governance Council (Governance Council). Listed entities are required to benchmark their own governance practices against the Governance Council’s Recommendations (the Recommendations) and to disclose the comparison to the public within their annual report. The Recommendations operate on a ‘comply or explain’ basis, designed to encourage, but not force, entities to improve their governance standards. While the Recommendations do not apply to unlisted companies or other corporate entities, they remain the accepted aspirational standard for the governance functions of any entity (whether listed or otherwise).

Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The key regulatory bodies engaged in making and enforcing governance standards in Australia are the Australian Securities and Investments Commission (ASIC) and the ASX.

With regard to listed companies, Australia operates a dual regulatory system established by the Corporations Act. ASIC is an independent Commonwealth government body and acts as Australia’s corporate regulator. ASIC is responsible for administration and enforcement of the Corporations Act generally. ASIC also publishes regulatory guidance and information statements on a vast variety of topics, including corporate governance.

The ASX is a publicly listed company tasked to function as a market operator, oversee compliance of the Listing Rules and promote governance standards. ASIC and the ASX share a collaborative and open relationship to effectively discharge their respective roles and responsibilities.

Both the Takeovers Panel (providing a forum for the resolution of disputes arising in respect of control transactions) and the Australian Prudential Regulatory Authority (APRA) (the regulation of the Australian financial service industry) have discrete functions. However, in exercising their functions, both bodies set standards in relation to corporate governance standards in Australia.

Some of the key shareholder groups or proxy advisory firms that operate in Australia include the following:

  • Australian Shareholders Association, being the peak representative body for retail shareholders in Australia;
  • the Australian Council of Superannuation Investors (ACSI), a membership body consisting of asset owners and institutional investors with a remit to respond to environmental, social and governance issues in the interest of limiting materially negative impacts on investment; and
  • proxy advisory firms including Institutional Shareholder Services, CGI Glass Lewis and Ownership Matters.

These groups regularly conduct research and make submissions to ASIC or the Australian government in relation to governance matters. Perhaps more importantly, they engage with listed companies and various stakeholders and often drive governance initiatives (for example, gender diversity on boards of ASX-listed companies) through this engagement process.


Rights and equitable treatment of shareholders

Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Shareholders in public companies have a statutory right to remove directors under section 203D of the Corporations Act by an ordinary resolution requiring 50 per cent of the company’s shareholders (in attendance and voting at the relevant meeting) to approve the resolution to remove a director. There are onerous notice requirements that must be complied with in order for this statutory right to be validly exercised.

This right to remove directors is frequently used in conjunction with the right of members controlling 5 per cent of the voting shares (section 249D of the Corporations Act) to call (or require the company to call) a general meeting.

This statutory right is not an exclusive method of director removal. While the section operates despite any other method prescribed, it does not limit the creation of alternative methods for director removal within a shareholders’ agreement or a company’s constitution.

For private companies the process is much simpler. Section 203C of the Corporations Act is a replaceable rule that allows companies, by ordinary resolution, to remove a director from office. The notice requirements contained within section 203D do not apply. However, if a private company’s constitution provides otherwise, the replaceable rules will not apply. Accordingly, private companies may establish alternative methods or limits on director removal within the company’s constitution.

The power to manage the affairs of Australian companies vests in the board. Shareholders do not have a general right to require that a board pursue (or not pursue) a particular course of action.

Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The directors of a company have the power to manage the business of the company generally and may exercise all the powers of the company except for certain actions that require shareholder approval, or any actions limited by the company’s constitution. Decisions that are reserved for shareholder approval include:

  • constitutional amendments: a company may only amend its constitution by a special resolution of members passed with at least 75 per cent approval. The process is the same for changing a company’s name;
  • election of directors: where a company is required to elect directors, either in accordance with its constitution or pursuant to Listing Rule 14.4, the director must be elected by ordinary resolution;
  • related party transactions: chapter 2E of the Corporations Act prohibits a public company from giving a financial benefit to a related party without first obtaining shareholder approval. For listed companies, the Listing Rules also require that shareholders approve transactions with specified persons of interest (which includes directors, substantial holders and any of their associates);
  • capital alterations: the Corporations Act requires various share capital alterations including capital reductions, selective buy backs and share buy backs to be approved by shareholders. In some circumstances, such as selective buy backs, shareholder approval must be sought by special resolution; and
  • major changes to company activities or the disposal of main undertaking: the ASX may require listed companies to seek shareholder approval to make a significant change to the nature and scale of its activities under Listing Rule 11.1. If the significant change involves the company disposing of its ‘main undertaking’, which is a term generally understood to be its main business activity, shareholder approval is mandatory.

Shareholder approval is required under the Corporations Act in a variety of further instances including appointing auditors, financial assistance, issuing incentive options or performance rights to directors, or applying for a company to be wound up.

As addressed further in question 28, shareholders have a non-­binding vote on the company’s remuneration report.

Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Listed companies are required by Listing Rule 6.9 to allocate one vote for each fully paid ordinary share in the capital of the company. The ASX does not usually trade alternative voting right shares such as non-voting shares, ‘golden’ shares or super voting shares. However, preference shares and partly paid shares are quoted by the ASX. Preference shareholders have voting rights restricted to particular circumstances prescribed by Listing Rule 6.3 and holders of partly paid shares are entitled to vote in proportion to the amount paid on the share (except for a vote by show of hands).

Unlisted companies have more flexibility in their share class structure and may provide for shares with disproportionate or limited voting rights in shareholder agreements or the company’s constitution.

Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

The procedures for general meetings of a company are prescribed by Part 2G.2 of the Corporations Act. Company shareholders must receive written notice of a general meeting of the company and may attend and vote, or vote by proxy. Listed companies must give shareholders notice of a general meeting with at least 28 ‘clear’ days’ notice prior to the meeting. This notice period is reduced to 21 ‘clear’ days for non-listed companies.

Owing to advancements in the functionality and reliability of technology, some major corporations around the world have held virtual general meetings online. While there have been some examples of general meetings held virtually within Australia, such as the 2017 AGM of the a2 Milk Company Limited, uptake of virtual AGMs is not widespread. Section 249S of the Corporations Act allows companies to hold a meeting of its members at two or more venues using technology, such as video conference, that allows members a reasonable opportunity to participate. At this point in time, ‘hybrid’ AGMs occurring in person at a particular place and via video conference or web conference externally are more common than truly ‘virtual’ AGMs occurring entirely online via technology.

Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The Corporations Act contains a variety of avenues for shareholder-driven company actions: shareholders may move resolutions against the wishes of the board, including the removal of directors (as outlined further in question 3 above) and issue dissident statements to be considered by other shareholders.

Shareholders with at least 5 per cent of the votes in the company may initiate a general meeting of the company by either: requisitioning the directors to call and hold a meeting under section 249D; or calling and arranging to hold a general meeting themselves under section 249F.

The procedure established by section 249D is generally preferred by companies, as directors retain elements of control that are absent under meetings held solely by members. While shareholders requisitioning the board must provide any resolutions proposed to be considered at the meeting in their notice to the company, the directors may include explanatory statements and recommendations prior to providing the notice to all members. In contrast, under the procedure established by section 249F, the members have complete autonomy in calling and holding the meeting, but are burdened with the corresponding expense. Alternatively, shareholders consisting of at least 5 per cent of the votes in the company, or at least 100 members entitled to vote, may give a company notice of a resolution to be considered at the next general meeting. The company must give notice to all shareholders in its next notice of meeting.

In addition to calling meetings and proposing resolutions, shareholders may request the company to circulate member statements addressing a proposed resolution or any other matter that may properly be considered at a general meeting, provided the request is made by members with at least 5 per cent of the vote in the company, or 100 members entitled to vote.

Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Shareholders, even major shareholders, are not fiduciaries owing duties to the company. However, in certain circumstances the actions of a company, which can extend to the actions of major shareholders, may be found to be oppressive, unfairly prejudicial or unfairly discriminatory to members, or contrary to the interests of the members as a whole. In these circumstances, Part 2F.1 of the Corporations Act allows the court to make remedial orders.

In certain circumstances, a major shareholder may be entitled to nominate a director to sit on the company’s board. As a director, the nominee will owe fiduciary duties to the company to act in the company’s best interest. A nominee director is not permitted to disregard the interests of the company; however, there may be instances where a nominee director is able to act in the best interest of the company and additionally in the interest of the nominating shareholder.

Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders are generally not liable for the acts or omissions of the company. However, in exceptional circumstances courts may pierce the corporate veil to find shareholders, or related companies responsible for the actions of a company. While there are examples of the corporate veil being lifted in Australia (such as the infamous James Hardie case), there remains no discernible principle of company law to dictate in what circumstances the court will infringe upon the separate legal entity doctrine.

Part 5.7B - Division 5 of the Corporations Act establishes particular circumstances where a holding company is liable for the debts of a subsidiary in insolvency. In order for a creditor to be able to look through the corporate veil, the holding company must have been aware, or should reasonably have been aware, that the subsidiary was insolvent.

Corporate control

Anti-takeover devices

Are anti-takeover devices permitted?

The Takeovers Panel (the Panel) has the power to review conduct relating to control transactions in Australia and may make declarations of ‘unacceptable circumstances’ where it considers such conduct to be in breach of the Corporations Act, or the core principles underpinning Australian takeover law. The Panel has released guidance as to when lock-up devices will be considered acceptable (and would not be sufficient to support a declaration of unacceptable circumstances). The key consideration in this regard is whether the relevant device significantly limits competition among current or potential bidders or is otherwise likely to coerce shareholders to accept a bid

In this context, certain lock-up devices, such as break fees, no-talk and no-shop agreements, are common in Australia, with the Panel issuing guidance on when they may be appropriate. For example, break fees consisting of less than 1 per cent of the equity value of the target and no-talk agreements where a ‘fiduciary’ carve out exists, allowing directors to entertain alternative bids to the extent necessary to avoid a breach of duty, are generally accepted by the Panel.

Frustrating actions, being actions taken or proposed to be taken by a target company to force a bid to be withdrawn, lapse or fail to proceed, may be considered unacceptable by the Panel in certain circumstances. Frustrating action that denies shareholders the opportunity to consider or participate in a proposed bid is likely to be considered inconsistent with the duty to act in the best interest of shareholders. ‘Poison pills’, such as arrangements whereby a third party holds a right exercisable on a change of control, are generally considered to be a frustrating action which the Panel may make orders to prohibit.

Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The power to issue shares is a power exercisable by the directors in accordance with the Corporations Act. However, this power is subject to the terms of the company’s constitution, exceptions in the Corporations Act and, for listed companies, the ASX Listing Rules. For example, such limitations include:

  • any pre-emptive rights provided for in a shareholders’ agreement or company constitution;
  • restrictions in the Corporations Act and Listing Rules regarding the issue of securities to related parties or persons in positions of influence; and
  • for listed entities, restrictions in the Listing Rules preventing the issue of securities in excess of a defined capacity (15 per cent of issued capital in any 12-month period) without prior shareholder approval.

Directors must always be cognisant of their directors’ duties when issuing shares and avoid acting for an improper purpose when doing so.

Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The Corporations Act does not prohibit restrictions on the transfer of fully paid ordinary shares. Private companies may establish trading restrictions within the company’s constitution or a shareholders’ agreement.

The ASX Listing Rules contain mandatory restrictions for certain securities and establish rules regarding voluntary trading restrictions. Chapter 9 of the ASX Listing Rules establishes restrictions on trading securities in particular contexts. Commonly restricted securities include shares issued to seed capitalists and early investors prior to a company’s initial public offering or to vendors who have sold assets or provided services to the company in exchange for securities prior to admission. The ASX may also impose restrictions on any securities at their discretion. Securities that the ASX determines should be restricted will be placed into escrow for a period of 12 to 24 months. Generally, the ASX will only enforce mandatory escrow periods to companies that are substantially speculative or unproven. The ASX will not apply restrictions to companies that have:

  • met the financial admission requirements of Listing Rule 1.2;
  • a proven track record of profitability; or
  • a substantial portion of tangible assets or assets with a readily ascertainable value.

The ASX will require voluntary escrow periods for securities of a listed company in certain circumstances.

ASX listed companies are also required to maintain securities trading policies that may restrict the ability of shareholders involved in the management of the company (eg, directors) from trading in certain circumstances.

Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

In general, unless otherwise provided in a company’s constitution or a shareholder agreement, companies are unable to compulsorily repurchase shares other than in circumstances of a capital reduction referred to in question 4 above.

The Corporations Act provides for the compulsory purchase of shares by a bidding company under a takeover bid or scheme of arrangement where:

  • a takeover bid receives 90 per cent shareholder acceptance, at which point the bidding entity can compulsorily acquire the remaining securities; and
  • a scheme of arrangement receives the approval of 50 per cent (by number) of shareholders casting at least 75 per cent of the votes available in favour of a scheme, which will, subject to the terms of the scheme, allow the bidding entity to acquire 100 per cent of the shares in the target company.

Dissenters’ rights

Do shareholders have appraisal rights?

While common in other jurisdictions, Australian shareholders do not have appraisal rights. However, a remedy available to the court in the event of minority shareholder oppression (discussed further in question 8 above) includes an order for the purchase of shares held by a shareholder at fair value.

Responsibilities of the board (supervisory)

Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Australian companies generally operate a single-tier board structuring consisting of a board of directors. However, the board may delegate elements of its operation to committees or individuals. Certain companies may also create an advisory board, which is a purely advisory body from which the board will consider the advisory board’s views and advice before making its own decisions.

Board’s legal responsibilities

What are the board’s primary legal responsibilities?

As fiduciaries, the directors of a company owe duties to the company established by statute and a substantial depth of common law principles. Duties imposed on directors include the duty to:

  • exercise powers with reasonable care and diligence;
  • act in good faith in the best interests of the company and for a proper purpose;
  • not improperly use their position;
  • not improperly use information;
  • not permit the company to trade while insolvent; and
  • keep adequate financial records.

The Corporations Act provides defences to a breach of directors’ duties in certain situations, including when reliant on third-party advice (as further discussed in question 21 below) and where a director has made a ‘business judgement’ decision. The ‘business judgement’ defence is available where the director has:

  • made a business decision in good faith for a proper purpose;
  • duly informed themselves of the context of the decision;
  • not had a material personal interest in the subject of the decision; and
  • where they rationally believe the decision is in the best interests of the company.

Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board of directors owes a fiduciary duty to the company as a whole and must act in the company’s best interest. However, this duty is not entirely inflexible, as the board may consider the interests of particular members, third parties or stakeholders provided the course of action remains in the best interest of the company.

Section 588G imposes a statutory duty on the directors of a company to prevent insolvent trading. This duty necessarily requires a director to consider the interests of creditors when a company is approaching or is trading insolvent. In certain circumstances, creditors may pursue individual directors for losses incurred owing to the company’s actions. Directors are protected from personal liability by the Corporations Act’s ‘safe harbour’ provisions, which protect directors who can show that their decision or course of action was reasonably likely to achieve a better outcome for the company than could be achieved by putting the company in administration or liquidation.

Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

An important point to note is that directors’ duties are owed to the company, that is, the company’s shareholders. Directors do not owe duties to individual or specific shareholders, but rather the company as a whole. These general principles inform how directors’ duties are enforced. In particular, as directors’ duties are owed to the company, the general rule is that the company is the ‘proper plaintiff’ with respect to breaches of such duties, and should be responsible for enforcing the duties. This approach is justified, inter alia, on the basis that courts should not interfere with the internal affairs and management of companies, including in circumstances where a company has decided, through its proper process, not to institute proceedings against another person (including a director).

However, where the directors who have been alleged to have breached their duties constitute a majority of the board of the relevant company, it is most unlikely that those directors will cause the company to institute proceedings to enforce statutory duties. Accordingly, directors’ duties tend to be enforced by the following entities:

  • ASIC under its powers under the Corporations Act or the Australian Securities and Investment Commissions Act 2001 (Cth);
  • the company pursuant to a statutory derivative action (an action that permits individual shareholders to apply for leave of the court to bring an action on the company’s behalf); or
  • the company following the appointment of a liquidator.

Care and prudence

Do the board’s duties include a care or prudence element?

Directors have a statutory duty under section 180(1) of the Corporations Act to exercise their powers and discharge their duties with a degree of care and diligence. The general test that has been applied is what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances if acting on his or her own behalf. This test has both objective and subjective elements, meaning that the applicable standard of care will consider the company’s size, board composition and business, as well as the relevant skill set of the particular director. Notwithstanding this, directors are held to the degree of care and diligence that would be expected of a reasonable person if they were a director in the company’s unique context and if they held the same responsibilities within the company as the director.

Board member duties

To what extent do the duties of individual members of the board differ?

Each director owes fiduciary duties to the company as outlined in question 16 above. However, common law principles have established that the standard of care and diligence is considered in the context of an individual’s experience, expertise and role. While directors’ duties may vary depending on a director’s skill in a relevant area, their role as an executive or non-executive director or their length of tenure on the board, it is important to note that all directors owe basic standards of care and diligence, which may never be excused (eg, a basic understanding of accounting principles and financial statements).

Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Boards have discretion to delegate elements of their functions to individuals or committees under section 198D of the Corporations Act, unless the company’s constiution provides otherwise. It is considered good governance to outline the exercise of a delegated function by drafting clear committee remits, developing terms of reference and requiring committee reports.

Directors maintain ultimate responsibility for the actions of delegates. Directors are liable for the misconduct of delegated committees unless it can be established that they reasonably and in good faith believed the delegate would exercise their power in accordance with the rules imposed on the delegate and that the delegate was reliable and competent enough to exercise their delegated function.

However, there are limitations on director delegation. The common law has established that directors are unable to delegate their ‘core’ functions, including for example, approval of the company’s annual financial reports. In addition, the Corporations Act limits directors from relying solely on the advice of delegates or other parties, requiring directors to independently assess informaiton or advice provided to them before they can rely on the advice, even if the reliance is made in good faith.

Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Australian law does not dictate requirements or ratios of executive and non-executive directors. Provided companies meet their minimum officer holder requirements (discussed in question 23 below), companies may determine the make-up of their board in accordance with their own governance standards.

The Guidance Council Recommendations recommend that:

  • a majority of the board of a listed entity should be comprised of independent directors;
  • listed entities should disclose the names of directors the board considers to be independent; and
  • the chairman of the board of a listed entity should be an independent director.

In determining whether a director is ‘independent’ companies should consider whether the director:

(i) is or has been employed in an executive capacity by the company or a related company;

(ii) is or has recently been a partner, director or senior employee of a business providing professional services to the company;

(iii) is or has recently been in a material business relationship with the company or a related company;

(iv) is a substantial security holder in the company;

(v) has a material contractual relationship with the company or a related company;

(vi) has close family ties with a person who would meet the criteria in (i) to (v) above; or

(vii) has been a director of the entity for such a period that their independence may have been compromised.

Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The minimum number of directors and officers a company must have is set by section 201A of the Corporations Act, which provides that private companies must have one director and public companies must have at least three directors. Australia does not limit board sizes.

As outlined in question 4 above, directors are generally elected by shareholders at a general meeting, however the Corporations Act allows a company’s directors to appoint other directors (although the term of such appointment is limited to the company’s next annual general meeting, where such directors may seek to be elected to the board). The company’s constitution may also provide for alternative methods of director appointment in certain circumstances.

In order to be a director, a person must be at least 18 years old and must not be disqualified from managing a company under the Corporations Act. Individuals will be disqualified from managing a company where they are an undischarged bankrupt, are insolvent, have been convicted of fraud or insolvency offences or have been charged with an offence punishable by a period of imprisonment of more than 12 months. Australia requires companies to have a specific number of directors who are ordinarily resident in Australia, being one for private companies and two for public companies.

While the composition of boards is not regulated in Australia, the Governance Council Recommendations promote board diversity by recommending the establishment of diversity policies and disclosure.

Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There are no laws or rules that dictate the amalgamation or separation of the chairman and CEO position in Australia. In smaller companies, it is common for the chairman or managing director to perform the duties of a CEO; however, larger businesses tend to separate the positions.

The Governance Council Recommendations recommend that listed companies separate the role of CEO and chairman on the basis that good governance principles demand there is a distinction between those in charge of managing the company and those responsible for overseeing the managers.

Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

As discussed in question 21, the directors of a company have the ability to delegate functions to committees; however, it is not mandatory to do so for most companies. The ASX Listing Rules require that larger listed companies included in the S&P/300 index must have an audit and remuneration committee. Other than this mandatory requirement, the Governance Council Recommendations recommend that all listed companies should have:

  • a nominations committee;
  • an audit committee;
  • a risk committee; and
  • a remuneration committee.

Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The Corporations Act does not prescribe a minimum number of board meetings to be held per year. Accordingly, companies are free to hold as many board meetings as required. In larger companies, these are usually monthly.

Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Listed entities are required by Listing Rule 4.10.3 to publish an annual corporate governance statement, which discloses the extent to which the entity has followed the Governance Council Recommendations. As stated in question 1, entities must do so on a ‘comply or explain’ basis, disclosing their reasons for not following recommendations.

Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Directors are remunerated in a variety of ways, regulated by the Corporations Act and, for listed companies, the Listing Rules.

Directors of a company may be entitled to a fee for directorial services. Section 202A of the Corporations Act provides that directors may be paid a fee as determined by member resolution. Shareholders will generally set a maximum remuneration pool by resolution and allow the board of directors to allocate fees paid to individual directors based on their contribution, experience or input. The upper remuneration limit applies indefinitely unless decreased or increased by shareholder resolution.

In addition, directors may also be reimbursed for travelling and other expenses properly incurred in attending company, director or committee meetings and in connection with the company’s business in general.

Beyond the above, directors who perform executive positions within the company will usually receive compensation in the form of salaries or bonuses as an employee and generally would not receive a separate board fee.

ASX listed companies are required to prepare an annual report outlining the allocation of director’s fees as well as any further remuneration paid to directors and senior management (Remuneration Report). The Remuneration Report must be published in the company’s annual report and presented to shareholders at an annual general meeting (AGM). Shareholders are given the opportunity to adopt the Remuneration Report at an AGM by an advisory resolution. The resolution does not bind the company, which retains the autonomy to respond to a negative resolution result at their discretion. Directors and executive management are prohibited, including via the exercise of discretionary proxies, from voting on a resolution to adopt the Remuneration Report (except the chairman who may exercise proxies if expressly authorised to do so at their discretion).

However, the Corporations Act includes a ‘two strikes’ rule in relation to successive failures of shareholders to approve a Remuneration Report. The rule provides that, if a Remuneration Report receives 25 per cent or more of the total vote against the adoption of the report at two consecutive AGMs, shareholders must consider a resolution to ‘spill’ the board. The spill resolution is determined via ordinary resolution at the same AGM as the ‘second strike’. If shareholders approve, a spill meeting must be held within 90 days, at which point all directors, other than the managing director, will need to stand for re-election.

The Corporations Act and Listing Rules limit payments that may be made to directors and key management personnel upon termination.

Section 200B of the Corporations Act prohibits ‘golden handshake’ payments in excess of the average compensation over the last three years without shareholder approval to any person who has been a director or key management personnel (if the entity is a listed company or certain other disclosing entities).

Listing Rule 10.18 expressly prohibits officers of listed companies from being entitled to termination benefits if a change occurs in the shareholding or control of the company generally. In addition, Listing Rule 10.19 echoes the anti-termination provisions contained within the Corporations Act, requiring a company to receive shareholder approval to offer a termination benefit to a company officer if the benefit would exceed 5 per cent of the equity interests of the company.

Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Individuals in senior management positions are considered ‘key management personnel’, as that term is defined by the Australian Accounting Board Standards, and are subject to the same rules pertaining to executive remuneration outlined in question 28.

D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Company directors and officers face a broad range of personal liabilities in relation to their duties and obligations to the company. Accordingly, D&O liability insurance is a common method of protecting directors and officers from risks that the company is unable to indemnify a director for (see question 31 for further information).

The company is entitled to pay insurance premiums in relation to liabilities that are not specifically prohibited under the Corporations Act. Section 199B of the Corporations Act prohibits a company from paying insurance premiums that cover a director, officer or auditor of the company (other than for legal costs) for situations arising out of a wilful breach of duty or the improper use of information or position by a director.

Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Companies will often indemnify directors and officers from liability exposure in the performance of their duties in favour of the company to the extent permitted by law. Companies are prohibited by section 199A of the Corporations Act from indemnifying a director, auditor or other officer of the company from:

(i) liabilities incurred to the company in the performance of their role;

(ii) any liability (other than legal costs) owed to the company or a related body corporate, incurred as a pecuniary penalty order under section 1317G or a compensation order under section 1317H of the Corporations Act, or owed to a third party, which did not arise out of conduct in good faith.


A company is also prohibited from indemnifying a director, auditor or officer for legal costs incurred:

  • in defending legal proceedings where the individual was found to owe a liability referred to in (ii) above;
  • in defending or resisting criminal proceedings in which the individual is found guilty;
  • in defending or resisting proceedings brought by ASIC, or a liquidator for a court order, if the grounds for making the order at established by a court; or
  • in connection with proceedings for relief under the Corporations Act that are denied.

A company is also excluded by the Australian Consumer Law (ACL) from indemnifying directors and officers against a liability to pay a pecuniary penalty arising out of a breach of the consumer protection provisions of the ACL contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth) and legal costs arising in defence or resistance of proceedings in which the director or officer is ultimately found liable.

Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

As addressed in questions 3o and 31, companies may indemnify and insure directors against liability to the extent permitted by law. In addition, companies may seek shareholder approval to ratify the actions of directors in certain circumstances. The court may consider the effect of shareholder ratification in oppressive conduct proceedings (outlined further in question 8 above). Under the common law, shareholders may ratify the actions of directors provided their actions were not:

  • a breach of statutory duties;
  • fraud on the minority;
  • the defeat of a member’s personal right;
  • an insolvent transition to prejudice creditors; or
  • an illegal act.

Shareholder ratifications require full and frank disclosure to shareholders to be effective and therefore are rare.


What role do employees play in corporate governance?

Senior company employees in executive positions or sitting on board committees may contribute to corporate governance standards; however, there are no legal or statutory corporate governance obligations imposed on employees generally.

Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The Governance Council Recommendations recommend that listed entities undertake a process of periodically evaluating the performance of the board, committees and individual directors and disclose the results of that process to the public. As referred to in question 27 above, listed entities are required to publish a governance statement addressing the Recommendations, which would require them to undertake and disclose an evaluation process or explain why they did not.

Unlisted companies are not required to undertake and disclose similar processes but may choose to do so in the interests of good governance.

Disclosure and transparency

Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The availability of company constitutions varies by company type. Listed companies are required to disclose their constitution to the public on the ASX, while unlisted public companies must lodge their constitution with ASIC upon registration and then notify ASIC of any subsequent amendments. Private companies are not required to lodge their constitution anywhere, but must ensure a copy is available to members at their request.

Company information

What information must companies publicly disclose? How often must disclosure be made?

Disclosure of information is a foundational principle of Australian company law. Companies are required to lodge documents with ASIC and the ASX where they are then available to the public.

Listed entities are required to continually disclose any information that would have a material effect on the price or value of the company’s securities to the ASX immediately, unless disclosure of the information would be a breach of the law or the information concerns an incomplete proposal, is insufficiently definite, is for internal management purposes or is a trade secret. Listed entities must also disclose a broad range of corporate activities, including capital issues, notices of meeting, a change in a director’s share interests and the issue of a dividend. The Corporations Act imposes similar continuous disclosure obligations on particular public unlisted companies under section 675 of the Corporations Act referred to as ‘disclosing entities’; however, these entities are not common.

Listed entities are also subject to periodic disclosure requirements. The Listing Rules require entities to issue half yearly and annual financial reports and publish an annual report. Some entities, such as investment companies and mining and oil and gas exploration companies are required to lodge quarterly cash flow and quarterly activity reports.

Public unlisted companies are subject to less stringent disclosure requirements, primarily involving the preparation and lodgement of annual financial reports with ASIC. Large private companies must prepare and lodge financial reports, while smaller private companies are subject to limited reporting requirements.

Hot topics


Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Listed companies are required to publish a remuneration report annually. The report is contained within the directors’ report section of the company’s annual report and is provided to shareholders and is available to the public on the ASX website.

As outlined further in question 28 above, shareholders have an advisory, non-binding vote at the company’s AGM to approve the remuneration report. If a company receives ‘two strikes’ on its executive remuneration, shareholders are given the option to ‘spill’ the board.

Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Companies may enter into agreements that give major shareholders, parent companies or other stakeholders the opportunity to nominate a director to be appointed to the board. Nominee directors are appointed to represent the interest of their appointee but must ensure they avoid conflicts of interest and abide by their directors’ duties to the company. Private companies may provide the terms and conditions of nominee directors in the company’s constitution or a shareholder agreement at their discretion. In contrast, listed entities have less freedom as nominee directors are subject to election and re-election requirements.

Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

The extent to which companies engage with shareholders varies greatly from company to company. Shareholders have the ability to question directors and management of companies at AGMs, but it is common for companies to engage with shareholders (particularly key institutional shareholders) on a regular basis.

Key shareholder representatives such as ACSI engage with listed companies on a regular basis regarding matters that they consider may affect the interest of their members.

Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

There are a number of disclosure obligations placed on Australian companies with respect to the disclosure of corporate social responsibility matters (including environmental risks facing companies). These include the following:

  • ASX’s Guidance Note 9 (concerning the disclosure of corporate governance practices) recommends that a ‘listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage these risks’. If the company does not disclose these details in its annual corporate governance statement, it must explain why not;
  • when undertaking a fundraising under a prospectus, companies are required to disclose ‘all the information that investors and their professional advisers would reasonably require to make an informed assessment’ of, among other things, the financial position of the company, which may include social responsibility matters where these pose financial risks to the company; and
  • in the ‘financial report and directors report’ required to be lodged with ASIC each financial year under section 292 of the Corporations Act, the company is required to report on the company’s performance in respect of any particular and significant environmental regulations to which the company is subject.

Such disclosure obligations are likely to increase in the future. This is because:

  • global task forces have been established (and have reported in relation to) the standard of corporate disclosure of social responsibility matters (particularly climate risks) and how this standard can be improved;
  • institutional investor representatives, such as ACSI, have established a dialogue with listed companies in relation to social responsibility disclosures and have issued various reports in relation to these matters; and
  • increasingly, significant listed companies are providing additional disclosure over and above the specific obligations regarding these matters as they recognise that this is an area that shareholders are becoming increasingly interested in.


CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Unlike the United States and other international jurisdictions, Australia does not require companies to disclose the ratio of CEO to general workforce remuneration. While there are some calls for similar legislation to be imposed in Australia, there is limited regulatory or corporate appetite for reform in this area. The Governance Council Recommendations suggest that executive remuneration should be issued fairly, responsibly and not excessively; however, they stop short of requiring CEO-employee comparisons.

Remuneration reports (see question 28) and remuneration committees (see question 25) establish checks on executive pay under the current Australian governance standards.

Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

While Australia underwent a consultation process in relation to the implementation of mandatory gender pay gap reporting obligations in 2016, legislation was never implemented. Australian companies are not required to disclosure ‘gender pay gap’ information; however, the Governance Council Recommendations suggest listed entities undertake gender pay equity audits as part of their governance procedures.

Update and trends

Update and trends

Please identify any new developments in corporate governance over the past year (including any significant proposals for new legislation or regulation, even if not yet adopted). Please identify any significant trends in the issues that have been the focus of shareholder interest or activism over the past year (without reference to specific initiatives aimed at specific companies).

Over the previous year, Australian corporate governance standards have been updated to address modern trends, including cybersecurity and crowd-sourced funding.

The Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth) established a mandatory data breach notification scheme in Australia under Part IIIC of the Privacy Act 1988 (Cth), which came into operation on 22 February 2018. The scheme places significant obligations on board and management to address and respond to cybersecurity and data breach issues. The scheme introduces mandatory disclosure requirements by companies to affected individuals and will necessarily extend to added disclosure to ASIC and the ASX in circumstances of a data breach. Companies face substantial financial penalties of up to A$2.1 million for seriously breaching the scheme. Because the consequences of breaching the scheme pose such substantial financial risks to Australian companies, it is unlikely that directors will be able to satisy their duty of care and diligence without properly understanding the scheme and its application to the company and implementing an appropriate set of controls. Accordingly, the scheme is expected to drive governance changes at board level as companies may begin targeting individuals with cybersecurity experience in order to defend against and respond to cybersecurity threats.

Australia’s legal system has relatively low thresholds for shareholder activism provided by the meeting requisition threshold of 5 per cent and the ‘two strikes’ remuneration principle. However, despite these avenues, shareholder activism remains relatively subdued.

While fixed pay for ASX 100 companies has not increased beyond an average of approximately A$1.9 million in the previous 10 years, the ‘two strikes’ rule’s effectiveness may be called into question by reported figures indicating a mere six remuneration reports received a ‘strike’ in the 2017 AGMs of listed companies. However, market commentators have suggested the mere existence of the rule is driving executive remuneration figures down across the board.

In addition, shareholder activism via requisition resolutions was relatively uncommon in 2017. Shareholders exercised requisitioned resolutions in relation to environmental, social and governance issues in eight of the ASX 200 companies.

Despite the limited uptake in 2017, market forecasts suggest shareholder activism may increase in the coming years as the domestic market continues to expand, foreign activist intervention occurs, the influence of superannuation fund groups (such as ACSI) increases and global hedge funds and asset managers continue to grow in prominence. Increased shareholder activism in the near future is expected to drive governance standards and increase accountability.