House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

2. Regulation Impact Statement

Objective of the Bill

2.1 The objective of the Company Law Review Bill 1997 is to improve the efficiency of corporate regulation, and reduce regulatory burdens on business and other users of the Corporations Law. The Bill will achieve this by removing unnecessary regulation and reducing the complexity of existing Corporations Law rules. The Bill has received strong support from the business community.

2.2 The Bill will not have any impact on Government expenditure.

The reforms to be made by the Bill

Overview

2.3 The Bill rewrites and makes significant improvements to the core areas of registering companies, meetings, share capital, financial reports and audit, annual returns, deregistration of defunct companies, and company names, with a view to facilitating business and investment.

2.4 While there will be transitional costs because the core company law provisions are being replaced, the provisions that are replacing them are more streamlined, and easier to comply with. In addition, the draft legislation was exposed for public comment in June 1995. Most users of the Corporations Law are therefore already familiar with the overall direction and content of the Bill.

Why the reforms are necessary - alternatives

2.5 The provisions covered by the Bill in the existing Law are complex, use complicated legal concepts unfamiliar to most business people, and impose excessive regulation. For example, the Law currently requires companies to incur the expense of obtaining shareholder approval for a range of transactions that involve the company giving financial assistance for the acquisition of its shares, even though many of these are ordinary commercial transactions that do not involve any material prejudice to the interests of the company, or its shareholders and creditors.

2.6 For several years the business and professional communities have been calling for a reduction in the complexity of the Law, to enable them to reduce costs incurred in complying with the Law. These costs are incurred in 2 ways:

(a)

users of the Law must find out and understand their rights and obligations under the Law - this is made difficult because the Law is expressed in unnecessarily complex language, so average business users may need professional advice (eg from accountants or lawyers) before undertaking routine company activities; and

(b)

compliance with the Laws obligations may involve costs, including administrative costs and costs associated with obtaining professional advice, yet some of these obligations are redundant or unduly onerous.

2.7 The alternative to introducing the reforms in the Bill would be to leave the provisions in the Law in their current state. However, this approach would fail to address the legitimate concerns of business about the cost of complying with existing Corporations Law obligations.

Benefits of the Bills reforms

2.8 The benefits of the Bill flow from 2 sources:

(a)

reduction of regulatory burdens; and

(b)

simplified expression and organisation of the Law.

2.9 Each of these is described below.

Reduction of regulatory burdens

2.10 The Bill will remove obligations that are redundant, and streamline those that are currently unduly onerous. The major areas of potential benefit to business are:

(a)

Simplified procedure for setting up and running a company: The procedure for setting up a company will be streamlined: the only formality will be lodgment of a completed application form. It will therefore be possible to register a company suitable for operating a typical small business by lodging a single form with the Australian Securities Commission (ASC), instead of the several that are currently required. The concept of memorandum of association will be abolished (the memorandum of existing companies will be treated as part of their constitution). Also, the adoption of a constitution will be optional. The basic rules that are available to the internal management of companies (Table A of the Law) will be updated and moved into the main body of the Law as replaceable rules. Companies will be able to adopt a constitution displacing some or all of these rules. These reforms will reduce the cost of registering a company for the approximately 80 000 new companies that are registered each year. Doing business with a company will also become easier, especially for those who provide finance to companies, because of the reduced need for third parties to make inquiries about the companys internal affairs.

(b)

Electronic communications: The provisions in the Bill on meetings recognise the use of electronic communication in providing notice of meetings, appointing proxies for meetings and conducting meetings, consistent with the recommendation of the Financial System Inquiry that the Law should facilitate electronic commerce. For example, companies will be able to serve notice of meetings to an electronic address or fax number nominated by the member. This will reduce the administrative costs associated with company meetings. The Bill also facilitates the electronic lodgment of annual returns and other documents with the Australian Securities Commission.

(c)

Reducing the need to hold formal company meetings: Proprietary companies will be able to pass resolutions (except for removal of an auditor) by arranging for every member to sign a statement setting out the terms of the resolution (this procedure is not currently available for special resolutions). These companies will therefore be able to conduct their day-to-day business without having to regularly incur the cost of holding meetings.

(d)

No court approval for capital reductions: Companies will be able to return capital to their shareholders without the expense and inconvenience of having the transactions confirmed by the court and their shareholders.

(e)

No par value for shares: This will remove a range of redundant rules affecting the financial affairs and financial reporting obligations of companies. It will also mean that companies whose shares are valued at a price less than their par value will be able to raise fresh capital without incurring the cost of convening a members meeting, and without the delay and expense involved in seeking court approval for this.

(f)

Reduced need for shareholder approval in relation to financial assistance transactions: The rules restricting a company from financially assisting a person to acquire its shares without shareholder approval will be relaxed so that they will no longer have to incur the expense of holding a members meeting to seek approval for a range of ordinary commercial transactions. (Shareholder approval will only be required for financial assistance given by a company for the acquisition of its own shares if the financial assistance would materially prejudice the companys or shareholders interests, or the companys ability to pay its creditors.)

(g)

Reduced costs in relation to annual reports: Companies and managed investment schemes will have the option of sending concise annual reports to members, saving printing and distribution costs. To avoid the need for members to incur additional search costs if they require more information than is contained in the concise report, members will be able to choose to receive a full annual report.

(h)

Smaller Annual returns: Over half of the items currently required to be included in annual returns will be removed. This will result in annual returns being shorter and less expensive to prepare.

(i)

Dealings in relation to defunct companies: It will be cheaper and easier to deregister a company that has no liabilities: in particular, it will no longer be necessary to incur the expense of a newspaper advertisement of a proposed deregistration. Further, a person will be able to sue a deregistered companys insurer directly, without having to first incur the time and expense of a court application for reinstatement of the companys registration.

Simplified expression and organisation of the Law

2.11 The Bill replaces long, complicated provisions with succinct provisions that are expressed in plain English. This is illustrated by the fact that the Bill will replace around 95000 words of text with about 54000 words: a saving of 43% (41000 words).

2.12 Also, provisions have been organised in a more logical order, to avoid as far as possible the need to refer to several parts of the Law to understand a single topic.

2.13 The result will be reduced costs for all users of the Law because it will be quicker and easier for users of the Law to find provisions relevant to them. Further, the simpler expression of provisions will make it easier for business users to understand their rights and obligations without recourse to professional advisers. This effect will be enhanced by the amended Small Business Guide, which is included in the Law to help small business operators understand their rights and obligations in running a company.

New obligations

2.14 The Bill will introduce some new obligations, set out below.

21 days notice for company general meetings

2.15 All general meetings will require 21 days notice to be given to members. This introduces a uniform period for all meetings which at present require 14 days notice for meetings to consider ordinary resolutions and 21 days for meetings to consider special resolutions. However, this change is unlikely to affect the cost of holding meetings. It will facilitate shareholder participation in meetings, as members will have more time to prepare for and consider the matters to be dealt with and, where appropriate, appoint a proxy. Furthermore, members will be free to agree to a shorter notice for most meetings. It will be open to companies to establish longer notice periods in their constitution or to offer a longer notice period in practice.

Asking questions at annual general meetings of public companies

2.16 The Bill will expressly recognise that the annual general meeting is an opportunity for shareholders to seek information about particular matters. To achieve this, the Bill will require the chairman of the annual general meeting for a public company to allow members as a whole a reasonable opportunity to ask questions about, or comment on, the companys management and to ask auditors questions about the audit report. This is a new obligation in the Law. However, in practice most companies already provide members with an opportunity to ask questions at the annual general meeting.

Managed investment schemes

2.17 As far as possible, the Bill will apply the rules on company meetings to meetings of managed investment schemes. This will involve certain rules being prescribed for managed investment schemes in situations where the content of these rule is currently left up to the individual scheme. Further, as the use of consistent rules will promote greater certainty, the time and expense involved for members of managed investment schemes to discover their rights in relation to meetings of a particular scheme will arguably be reduced.

Consultation

2.18 The amendments to be introduced by the Bill have been the subject of extensive consultation with the business community and other users of the Law. Between May and December 1994, 7 proposals were released for public comment on the topics covered by the Bill, explaining the major changes proposed for the Bill and raising specific issues for consideration. Over 250 written submissions were received on the proposals. In June 1995 an exposure draft of the Bill was released, together with a commentary explaining the proposed changes. During the 3-month consultation period on the Bill, public seminars to discuss the proposals were held in 6 capital cities. Throughout this process testing sessions were conducted with users of the Law to ensure that the Bill was comprehensible to its ordinary users. Other seminars and numerous meetings with interested organisations and individuals were held. Over 70 written submissions were received on the Bill. These comments have been taken into account in finalising the Bill. Overall, the comments were strongly supportive of the Bill.

2.19 In June 1996 the Government referred the draft Bill to the Parliamentary Joint Committee on Corporations and Securities. This provided an additional opportunity for input by users of the Law. The Committee received 26 written submissions on the draft Bill and held hearings on 13 September and 2 October 1996 in Canberra and Sydney respectively.

2.20 The Committees report was tabled in the Senate on 18 November 1996. In its report the Committee expressed its approval of the general content of the draft Bill, as well as the extensive process of consultation undertaken in its preparation. The Committee also made 11 specific recommendations which the Government has addressed in a separate response to the Committees report.