On 24 May 2007, the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 was presented to Parliament for its Second Reading speech. The Bill is intended to simplify aspects of the current regulatory system but it is of note that the Bill itself exceeds 70 pages and the Explanatory Memorandum exceeds 180 pages.
The reforms follow the recommendations in the ‘Rethinking Regulation’ report of the Banks Taskforce on Reducing the Regulatory Burden on Business and the release of the Corporate and Financial Services Regulation Review Proposals Paper (Proposals Paper) in November 2006.
This update addresses the reforms specific to certain corporate governance and company reporting provisions of the Corporations Act 2001 (Cth). The reforms to Chapter 5 Fundraising Activities, Chapter 7 Financial Services and the takeover provisions are discussed in separate client updates.
The reforms featured in this update will be of particular interest to company secretaries.
Related party transactions
The proposed amendments introduce a threshold test for seeking approval from members for payments made to related parties. Any payments made under the threshold will not require approval from a company’s members.
For example, where a company enters into a related party transaction for a ‘small financial benefit’, the company will not be required to obtain member approval for the transaction. It is initially expected that transactions will be considered to be for a small financial benefit where its value is no greater than $5,000.
This amendment is intended to enhance the efficiency of a company’s operations for related party transactions considered to be minor in nature. It will apply to a company for its financial year that begins on or after 1 July 2007.
Changes to company names and constitutions
ASIC is to be given the power to consent to the grant of a company name in circumstances where the company name is not:
- Identical to another company name that has already been registered.
- Is not otherwise unacceptable.
The reforms allow Australian companies which hold a pre-existing license allowing them to omit the term ‘limited’ from their name, to notify ASIC of changes to their constitutions rather than seeking approval from the Minister. This change will commence on 1 July 2007.
Changes to company reporting obligations
There are seven refinements to existing company reporting obligations which are designed to provide companies with a simpler regulatory framework for complying with reporting obligations.
The current disclosure requirements in relation to the remuneration of executives and directors require listed companies to comply with two sets of requirements namely the accounting standards and the Corporations Act. The reforms will reduce the duplication and minor inconsistencies by amending Section 300A(1). The reference to ‘directors, secretaries and senior managers’ will be replaced by the term ‘the key management personnel’ which will be defined by reference to the accounting standards.
Moving the remuneration disclosure requirements into the Corporations Act will mean that the disclosures will now be made in the company director’s report instead of the financial report. The company auditor will be required to express an opinion on whether the remuneration report complies with Section 300A.
The remuneration disclosure requirements will apply to all disclosing entities that are companies and will not be limited to listed companies.
Companies will also be required to disclose board policy on the hedging of incentive remuneration and the mechanism that the company uses to enforce this policy.
These reforms will apply to financial years that begin on or after the commencement of the legislation.
Financial reporting thresholds
Large proprietary companies are required to prepare a financial report and a directors’ report for each financial year. The definition of a ‘large proprietary company’ will reflect amendments to two of the current threshold tests. The current threshold regarding the number of employees will remain the same at 50 employees.
The remaining threshold tests will change to $25 million in consolidated operating revenue and $12.5 million in gross consolidated assets. Companies (and the entities that are controlled by them) that do not exceed two of the three thresholds will not be classed as large proprietary companies and will not have to lodge an audited financial report with ASIC.
To ensure that the definition of a large proprietary company continues to reflect the genuine economic significance of a company, the reforms allow for regular review of these thresholds.
To reflect changes in the accounting standards the term ‘consolidated gross operating revenue’ in Section 45A will be changed to ‘consolidated operating revenue’.
The reforms aim to benefit smaller business by recognising that reporting obligations for such companies should be appropriate to the size of their operations. It is estimated that the amendments to the definition of large proprietary company proposed by the Bill will result in cost savings of 33% by excluding many companies that are currently required to lodge audited financial reports with ASIC.
The above amendments will take effect in the financial year that ends on the day after the Act receives the Royal Assent.
Changes to officeholders
The reforms remove the requirement for a company to notify ASIC when there is an appointment or resignation of an officeholder in circumstances where the appointed or retiring officeholder has already provided this notification. In other words, if a director resigns from their position and notifies ASIC of their resignation, the company is no longer required to lodge a Form 484 to notify ASIC. This reform will commence on a date to be proclaimed, or if no date is proclaimed, six months after the Act receives Royal Assent.
Companies will be permitted to nominate an address, that is separate from their registered office address, at which they prefer to receive documents from ASIC.
The reforms amend the voluntary deregistration process, by removing the annual review fee where the annual review date falls either two months prior to, or two months after, the company’s intent to be deregistered is published in the Gazette.
Payment of annual fees
The reforms permit the payment of an upfront annual review fee for a period of 10 years. If a company chooses to make an upfront payment, it will receive a discount of the total fees of approximately 15%. For example, if a company pays its annual review fee upfront for the next 10 years, it will only be required to pay $1,600 rather than $2,120 (calculated as the annual review fee of $212 for 10 years).
Electronic distribution of Annual Reports
Existing Section 314(1) will be repealed and replaced by a provision that requires companies, registered schemes and disclosing entities, which are required to report to members, with the default option of providing an Annual Report to shareholders via the internet (rather than the current default of hard copy). A company that does not wish to provide its Annual Report to its shareholders via its website may elect to send hard copies of the Annual Report to shareholders.
However, a company must provide notification to shareholders, informing them that they are able to elect to receive the Annual Report in hard copy free of charge. Such notification is only required to be provided to a shareholder once, and if a shareholder has made an election to receive the Annual Report in hard copy, this election will remain in place until the company is notified otherwise by that shareholder. In other words, a company will only be required to provide a shareholder with a hard copy of its Annual Report if that shareholder has so elected.
This amendment will apply for a financial year that ends on or after the day on which the Act receives the Royal Assent.
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