Corporate Update – December 2006

• Proposed legislation simplifies company administration

• Proposed changes to fundraising laws

• Proposed company administration and reporting changes

On 14 August 2006 Parliamentary Secretary to the Treasurer Chris Pearce announced that changes to the Corporations Act 2001 (Cth) aimed at simplifying the day-to-day administration of companies are expected to proceed in the coming months.

28 out of over 50 reform proposals first touted in April this year will be further detailed in a proposal paper expected to be released to the public for feedback next month.

The following is a summary of the reform proposals that are expected to surface:

Later on in the pipeline, amendments may also be introduced to extend the definition of the "business judgment rule" to protect directors from potential breaches of directors’ duties, if they act in a bona fide manner for the corporation’s benefit, having considered the scope of the corporation’s business.

Another potential amendment will be to enable shareholders in single-director companies to resolve to disapply some of the directors’ duties provisions.

Gadens Lawyers will keep you updated on developments regarding these proposed amendments and how it will impact the way your company is administered.
By Albert Yung

In a win for the forests, hard copies of annual reports may soon be sent only to members who specifically request them. Companies, registered schemes and disclosing entities will need to make annual reports available for download on their websites.

Companies will be required to notify a member, in writing, of their right to elect to receive a hard copy of the annual report. Each year, the company must also directly notify each member when the annual report is available on their website, where it can be located and ensure that it is reasonably accessible on their website.

Large proprietary companies must prepare and lodge annual financial reports and directors' reports. This is a considerable expense. It is proposed that a proprietary company will be 'large' for a financial year if either:

the consolidated gross operating revenue for the financial year of the company and the entities it controls is $25m or more (up from $10m); or

the consolidated gross assets at the end of the financial year of the company and the entities it controls is $12.5m or more (up from $5m).

There will no longer be a '50 employees' threshold for small proprietary companies.

Many wholly-owned subsidiaries, that are also reporting entities, currently seek relief under ASIC Class Order 98/1418 from the requirement to prepare and lodge annual financial reports separate to their parent companies. While the process of obtaining relief is simple, the text of the Class Order is convoluted at best (even for lawyers).

In our experience, many companies require legal assistance to seek relief and to satisfy the ongoing obligations to retain such relief.

The relief given by the ASIC Class Order is proposed to be incorporated into the Act. However, we expect the Act to clearly and simply state the relief allowing companies to better understand their obligations in obtaining and retaining relief.

A public company is required to seek shareholder approval before it can provide any financial benefit to a related party of the company, such as payments to the company's directors, unless that benefit fits within certain exceptions (such as financial benefits provided on arms length terms). There is no monetary limit on the amount of the benefit, meaning that the provision of minor, but often necessary, benefits require disproportionate time and expense in either obtaining shareholder approval or ensuring an exemption applies.

To address this issue, a financial benefit threshold of $5,000 (which can be increased by regulations) has been proposed, below which payments to the company's related parties would not require the company's members' approval.
By Albert Yung

Under the current law, all companies wishing to offer a rights issue to its current shareholders require the preparation and lodgement of a prospectus, which often consumes a considerable amount of a company's time and resources.

The proposed amendments will allow listed companies, that is, companies that comply with the continuous disclosure rules under the Act and any listing rules, the ability to offer a rights issue to its members without the issue of a prospectus. Instead, it is proposed that the company may issue:

• an information memorandum relating to the rights issue; and

• a 'cleansing' notice, modelled on the requirements of s708A of the Act.

The terms of this cleansing notice is still unknown but is expected to include a board's declaration of compliance with the financial reporting and continuous disclosure provisions of the Act. We also expect that companies will need to be listed for more than 12 months to take advantage of this exemption.

Since its introduction in 1999, companies have been slow to take advantage of the use of Offer Information Statements (OIS) as a way for companies to raise funds of less than $5m. There are reduced disclosure requirements for an OIS in comparison to those required for a prospectus, which makes it an attractive method for a company to seek equity capital.

To encourage the wider use of OISs, the maximum amount of money that a company can raise under an OIS is proposed to increase to $10m (up from $5m).

We note that for the purposes of IPO listings, the ASX admission criteria generally require that companies issue a prospectus (or a product disclosure statement) and therefore an OIS will not suffice for these purposes.

Employee share schemes have long been difficult to implement in Australia. This is due to companies having to overcome the following regulatory hurdles:

• providing adequate disclosure to employees

• financial licensing issues in relation to the operation of the scheme

• advertising and hawking prohibitions.

An ASIC Class Order issued in 2003 has given listed companies relief from these regulatory issues associated with implementing and running an employee share scheme.

The new proposals will extend such relief (other than disclosure relief) to unlisted companies so that all companies will be able to incentivise their employees through employee share schemes. Unlisted companies will still have to provide a disclosure document to employees. However, amendments will allow those companies to be able to issue an OIS to employees with no cap on the amount which can be raised from such schemes.

Gadens Lawyers will keep you updated on further developments on these proposals in the future.
By Albert Yung

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.