The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth) (Act) has implemented a number of legislative reforms aimed at improving the transparency, disclosure and accountability of executives and directors in respect of remuneration and other matters. The purpose of the reforms is arguably to increase corporate governance with a view to increase shareholder and investment confidence.
One aspect of the Act that deserves attention for many listed and unlisted public companies is the ‘no vacancy’ rule.
What is the application date?
The Act received royal assent on 27 June 2011 and will generally apply from 1 July 2011, with some provisions to commence on 1 August 2011.
What is the ‘no vacancy’ rule?
Under the Act, a public company will be required to obtain a shareholder resolution at a general meeting of the company in the event that the directors of the company limit the number of directors to an amount less than the maximum amount specified in the constitution of the company (board limit). This rule is commonly referred to as the ‘no-vacancy’ rule.
Additionally, the directors must not set a board limit unless:
- a resolution approving the proposed limit has been passed at a general meeting of the company;
- the notice of the meeting contained information in respect of the intention of the company to propose the resolution and stated the resolution; and
- the notice was accompanied by a statement explaining the resolution and meeting requirements contained in the Act
In the event that the directors set a board limit in breach of the requirements contained in the Act, the board limit will be ineffective for the purposes of the company’s constitution or the Act.
Can a director be appointed between company meetings?
A director may be appointed by other directors between general meetings, however the appointment will need to be confirmed at the next AGM of the company.
What type of companies does the rule apply to?
The Act provides that the no-vacancy rule applies to public companies (whose constitution allows for the number of directors to be less than the maximum amount stated in the constitution).
Section 112 of the Corporations Act 2001 (Cth) provides that a public company includes a public company:
- limited by shares;
- limited by guarantee;
- unlimited with share capital; and
- no liability company.
What are the potential concerns?
Given the recent implementation of the Act, it still remains to be seen the practical operation of the novacancy rule. Although given that it is intended that the rule apply to public companies, it is arguable that the no-vacancy rule will potentially apply to entities limited by guarantee within the not-for-profit sector as well. The Productivity Commission has argued that this requirement will ‘enhance current arrangements to enable greater contestability by reducing unwarranted barriers to entry for non-board endorsed nominees, improve shareholders’ oversight and influence over board composition, and provide encouragement for boards to improve board accountability and transparency’.
However, it is arguable that the no-vacancy rule has the potential to cause problems for boards (both within the not-for-profit and profit sectors). In some circumstances a board may choose to keep positions vacant to ensure that the ‘right person’ is appointed to the vacant board position. Although, the ability for boards to continue operate in such a manner will be limited, given that the board will need to obtain approval from shareholders in the event that they wish to enforce a no-vacancy rule.
Additionally, it is also arguable that increasing the regulation in the setting of board limits will have the opposite result of what it is trying to achieve (eg, investor confidence). Restricting the ability and flexibility of a company to appoint directors to the board in the absence of shareholder approval increases the difficulty of public companies to find and appoint good directors as and when such people become available. Accordingly, it is possible that this will lead to a decrease in investor confidence.
However, given that such amendments have only recently been implemented, the practical implications of the no-vacancy rule on boards (both within the notfor- profit and profit sectors) are yet to be seen.
What should clients be aware of?
The main issue that clients should be aware of is that if they are trying to change the constitution of a public company to increase or decrease the number of directors they will need to obtain shareholder approval for such a change and comply with all notification requirements contained in the Act.