First published in Butterworths Corporation Law Bulletin on Friday, 19 September 2008
Over the past 12 months, the Simpler Regulatory System package (Package)1, Corporations Amendment (Takeovers) Act 2007 (Cth) and the Corporations (NZ Closer Economic Relations) and Other Legislation Amendment Act 2007 (Cth) have introduced important changes to the corporations law in the following areas:
- fundraisings (including rights issues, small scale offerings, secondary sales and employee share schemes)
- related party benefits
- company reporting requirements (including executive remuneration disclosure, changes to the definition of "large proprietary company" and the provision of annual reports to members)
- trans-Tasman offers.
The Simpler Regulatory System package
The Package implemented proposals made in the Corporate and Financial Services Review Paper November 2006 (Corporate and Financial Services Review Paper) and the recommendations of the Rethinking Regulation report, which was produced by the Banks Regulation Taskforce in January 2006.
The amendments to the corporations law are designed to:
- facilitate a simpler regulatory system
- reduce compliance costs for businesses
- provide companies with a greater ability to attract capital.
All of the amendments that were introduced by the Package, as of 1 July 2008, are now in force.
The Package amended provisions in the Corporations Act 2001 (Cth) (Corporations Act) relating to fundraisings by corporate entities. These amendments are designed to facilitate fundraisings by providing relief from certain disclosure requirements, removing unnecessary inconsistencies between different parts of the Corporations Act and relaxing certain restrictions relating to the time periods and amounts that can be raised under particular provisions in the Corporations Act.
Prior to the amendments introduced by the Package, the Corporations Act required rights issues to be accompanied by a prospectus or product disclosure statement (PDS). This requirement has now been abolished for certain rights issues of quoted securities and interests in managed investment schemes.
The exemption is limited to quoted securities and interests in managed investment schemes on the grounds that the combination of an original prospectus or PDS on listing and the continuous disclosure requirements ensure the provision of an appropriate flow of information to members to facilitate informed decision-making in relation to a rights issue.
Section 708AA of the Corporations Act sets out the requirements for the disclosure exemption including that the issuer provide a "cleansing notice" to the market within the 24 hour period before the offer is made. The notice must include information relating to the potential effect of the rights issue on the control of the relevant entity.
Small scale offerings
The market has not made wide use of offer information statements (OIS) under Chapter 6D of the Corporations Act. Among other things, OIS impose a lower level of disclosure than a full prospectus. To encourage wider use, the amount specified in section 709(4) that may be raised under an OIS (when combined with funds previously raised) has been increased from $5 million to $10 million.
Amendments have also been made to align the definition of sophisticated investor in section 708 of Chapter 6D of the Corporations Act with that in Chapter 7 by allowing the inclusion of the net assets and gross income of a company or trust controlled by the investor in the total net assets and gross income of the investor. As in Chapter 7 of the Corporations Act, the concept of what constitutes an offer to a sophisticated investor has been expanded to include offers of securities to a company or trust controlled by a person who satisfies the conditions for being classified as a sophisticated investor.
The definition of a professional investor in section 708(11) of Chapter 6D has also been aligned with the definition in Chapter 7 so that a person who has or controls gross assets of at least $10 million is a professional investor.
These amendments have expanded the number of investors that are able to take advantage of the disclosure relief provided to these types of investors under section 708 of the Corporations Act.
Provided that the requirements in section 708A of the Corporations Act are satisfied, certain secondary sale offers may be effected without a disclosure document. Previously, the disclosure relief in section 708A did not extend to the secondary sale of securities by a controller. Accordingly, controllers had to obtain relief from ASIC on a case by case basis.
Section 708A has now been amended to allow controllers to benefit from the disclosure relief in section 708A subject to the existing requirements in the section and the additional requirement that both the controller and the entity that issued the securities provide a cleansing notice to the Australian Securities Exchange.
The period of time that the relevant securities must be quoted to obtain the relief in section 708A has also been reduced from 12 months to 3 months by an amendment to section 708A(5)(a) of the Corporations Act.
Employee share schemes
Amendments introduced by the Package have provided relief from certain licensing and hawking restrictions in the Corporations Act for employee share schemes (ESS) for unlisted companies, provided that they are accompanied by a disclosure document such as an OIS or a prospectus.
The relief is subject to a number of requirements in the Corporations Act which are also applied in ASIC Class Order 03/184, which relates to ESS for listed companies.
Companies with eligible offers under the Corporations Act and Class Order 03/184 are given:
- relief from the requirement to hold an Australian Financial Services Licence to provide general advice about the ESS
- relief from the hawking provisions to allow the company to contact employees and make an offer to them under an ESS
- an exemption from the managed investment and licensing provisions in the Corporations Act for contribution plans (i.e. plans where funds are deducted from employees' salaries and used to pay for shares under an ESS).
To facilitate the use of OIS for ESS, amounts raised under an ESS are no longer required to be counted towards the $10 million cap on the total amount of funds that can be raised under an OIS under section 709(4) of the Corporations Act.
The Corporations Amendment (Takeovers) Act 2007 (Takeovers Amendment Act) implemented amendments to the provisions in the Corporations Act that relate to the Takeovers Panel (the Panel). These amendments were introduced to dispel any uncertainty regarding the Panel's powers and jurisdiction after the decisions of the Federal Court in Glencore International AG v Takeovers Panel  FCA 1290 and Glencore International AG v Takeovers Panel  FCA 274 (the Glencore Decisions).
The Glencore Decisions raised concerns that it may have been open to read the Panel's powers and jurisdiction in a way that was too narrowly formulated to enable the Panel to perform effectively as the primary forum for resolving takeover disputes during the bid period. The Takeovers Amendment Act amended the Corporations Act in response to these concerns.
Prior to the Takeovers Amendment Act, section 657A(2)(a) of the Corporations Act provided that the Panel could declare circumstances to be unacceptable if it appeared to the Panel that they were unacceptable having regard to their effect on:
- the control, or potential control, of the company or another company; or
- the acquisition, or proposed acquisition, by a person of a substantial interest in the company or another company.
Section 657A(2)(a) of the Corporations Act has now been amended to allow the Panel to make a declaration having regard to what the Panel is satisfied is the past, present, future or likely effect of the circumstances. This amendment is designed to make it clear that it is for the Panel to satisfy itself as to what the effect or likely effect of the relevant circumstances is, and that the Panel can make a declaration before any effect has actually occurred. The new amendment gives far greater jurisdictional certainty to the Panel's determinations.
Section 657A(2)(b) has also been inserted in the Corporations Act to give the Panel jurisdiction to declare circumstances unacceptable having regard to the purposes of Chapter 6 of the Corporations Act as set out in section 602. This amendment is designed to ensure that the Panel can address circumstances which impair the purposes of Chapter 6 without having to also establish either a contravention of the Corporations Act, or an effect on the control or potential control of a company, or on the acquisition or proposed acquisition of a substantial interest in a company.
Telephone monitoring and 85 per cent notices
Under the Package, amendments have been made to repeal the provisions in the Corporations Act which required a bidder and target in a takeover situation to record all telephone calls made to security holders to discuss a bid during the bid period.
The requirement to provide section 665D and 665E notices (i.e. 85 per cent notices) has also been abolished.
3. Related party transactions
The related party transaction provisions in Part 2E.1 of the Corporations Act require public companies to obtain member approval before giving any financial benefit to a related party, unless the benefit fits within certain exemptions.
The cost of obtaining member approval for a related party transaction not otherwise allowed by law can be substantial. If the benefit is small, the compliance costs of obtaining approval may outweigh any corporate governance benefit that is gained from requiring approval. Accordingly, section 213 of the Corporations Act, which allowed payments of up to $2,000 to be made to a director or a director's spouse without member approval has been repealed and replaced.
Section 213 now provides that member approval is not required to give financial benefits to a related party (including a director or a director's spouse) which are below a prescribed limit which must be aggregated over a financial year. The amount currently prescribed by regulation 2E.1.01 of the Corporations Regulations 2001 (Cth) (Corporations Regulations) is $5,000.
4. Company reporting requirements
The Package introduced amendments to simplify company reporting obligations in the Corporations Act with the aim to reduce compliance costs and the regulatory burden on businesses.
The remuneration disclosure requirements for directors and executives of listed companies are now exclusively contained in the Corporations Act and the Corporations Regulations. Listed companies are therefore no longer required to refer to both the Accounting Standards and the Corporations Act to determine their executive remuneration disclosure requirements.
A consequence of moving the requirements out of the Accounting Standards and into the Corporations Act is that a company's executive remuneration disclosures will now be made in its directors' report rather than its financial report. To ensure that a company's remuneration disclosures continue to be subject to assurance by an external auditor, the Package introduced the requirement for an auditor to express an opinion on the remuneration information that has been moved from the financial report into the directors' report.
Companies that are disclosing entities are now also required to disclose their policy in relation to their directors and executives hedging their incentive remuneration and how the company enforces this policy.
Thresholds for reporting for large proprietary companies
A large proprietary company, as defined by section 45A(3) of the Corporations Act, is required to prepare a financial report and a directors' report for each financial year.
The thresholds for determining whether a proprietary company is 'large' have not been reviewed since they were introduced in 1995. Accordingly, the monetary thresholds in section 45A(3) have been increased so that a proprietary company is a large proprietary company for a financial year and must prepare a financial and directors' report if it satisfies any two of the following paragraphs:
- the consolidated revenue for the financial year of the company and the entities it controls is $25 million or more (previously $10 million)
- the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls is $12.5 million or more (previously $5 million); or
- the company and the entities it controls have 50 or more employees at the end of the financial year (this threshold remains unchanged).
Companies are no longer required to lodge a notice of cessation of a company office holder with ASIC if the office holder has notified ASIC. Previously, section 205B of the Corporations Act required a company to notify ASIC even if the office holder had already lodged notification of their cessation with ASIC.
Distribution of annual reports
Companies can now make their annual report available on a website and only send hard copies to members that request one in accordance with section 314 of the Corporations Act. Alternatively, a company can continue to distribute hard copies, by default, to members.
5. Trans-Tasman offers
The Corporations (NZ Closer Economic Relations) and Other Legislation Amendment Act 2007 amended the Corporations Act by introducing a scheme to allow for the mutual recognition of the regulation and administration of securities offerings between Australia and foreign jurisdictions and was introduced as part of a series of initiatives to support closer economic relations between Australia and New Zealand.
Entities from Australia can now offer securities into New Zealand on the basis of compliance with Australian fundraising requirements with minimal additional requirements imposed by New Zealand law. Similarly, New Zealand entities can offer securities into Australia under the same terms.
1 The Package comprised of the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth), Corporations (Fees) Amendment Act 2007 (Cth), Corporations (Review Fees) Amendment Act 2007 (Cth), Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (Cth) and corresponding regulations.