While margin lending continues to create headlines in the
media, the ramifications of the recent share market turmoil
will be far-reaching with company directors increasingly in the
spotlight. ASIC and the ASX are going on the offensive, and
company directors need to ensure their corporate governance is
up to scratch.
How good is your governance?
A recent report1 commissioned by some significant
institutional investors has highlighted the generally appalling
share trading practices by directors and executives. The
investigation covered share trades by S&P/ASX200 company
directors and underscores the importance for company directors
to be vigilant about their responsibilities.
Corporate governance is a key responsibility of company
directors and now is the perfect time to ensure that your
internal policies are up to date and they are being
ASX-listed companies are required by Listing Rule 3.1 to
immediately disclose any information concerning itself that a
reasonable person would expect to have a material effect on the
price or value of its securities. Expectations of the
reasonable person evolve over time and the current environment
is such that the following two areas may require attention and
Financing arrangements of directors'
Margin lending is the process of borrowing money using
shares as collateral. There are some highly publicised cases of
margin loans being used to finance the purchase of more shares
in the same company as the collateral.
Where a director who is also a significant shareholder has a
margin loan over some or all of their shares then, depending on
the circumstances, disclosure may be required in compliance
with ASX Listing Rule 3.1.
Directors' Share Policies should include provisions
that require directors to disclose the key terms of their
financing arrangements, including the number of securities
involved, the trigger points, the right of the lender to sell
unilaterally and any other details that could be considered
material. ASX have specifically stated that, "whether a
margin loan arrangement is material under listing rule 3.1 is a
matter which the company must decide, having regard to the
nature of its operations and the particular circumstances of
Where the success of a company is regarded as directly tied
to one of its owners it may be necessary to disclose any
borrowings that finance that ownership. Family-run companies
that have recently listed should consider their
Financing arrangements of entities
Many financing arrangements include terms that may be
activated upon the occurrence of certain events that may or may
not be in the control of the company. Where such circumstances
could have a significant effect on the company then it is
likely that such terms should be disclosed. For example, the
market capitalisation of a listed company falling below a
certain threshold may be considered an event of default by a
Where such circumstances exist, audit committee policies
should require disclosure of the nature and terms of the
arrangements, the trigger event and any other material
information such as any impact that triggering of the term may
have on the entity's relationship with its bankers, or
financial position or financial performance.
ASX listed company directors have plenty to think about.
Reviews should be regularly conducted by directors to ensure
that policies are being followed. If you need help in ensuring
compliance with disclosure obligations then contact
1 Regnan Pty Limited, "Regnan Position Paper
Director and Executive Security Trading", 10 March
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