House of Representatives

Explanatory Memorandum

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

3. Principal changes to the Corporations Law

Summary of changes

Forming companies

3.1 The process of setting up a company will be streamlined. A person will be able to set up a company by lodging a completed application form with the ASC. Directors, secretaries and members listed with their consent in the application form will be automatically appointed upon the companys registration.

3.2 The memorandum of association will be abolished. Companies will not need to have articles of association. To enable companies to function without articles of association, the basic rules of internal management which are now normally in a companys articles will be placed in the Law as replaceable rules. The rules will be replaceable in that a company will be able to adopt a constitution which displaces some or all of them. These rules are based on Table A, which currently provides model articles of association and will operate in substantially the same way. Table A will be abolished. The new rules will operate in substantially the same way as Table A. Existing companies will continue to have their memorandum and articles as their constitution unless they repeal them.

3.3 Companies limited by guarantee will be able to convert into companies limited by shares. This will be of particular importance for mutual companies (often companies limited by guarantee) converting into companies limited by shares. The other types of conversion will be retained. Conversion will only be permitted where the rights of creditors would not be materially prejudiced. The existing mechanism for challenging conversions by 10% (by value) of shareholders or debenture holders will be repealed. Instead, members will be able to use the oppression remedy and creditors will be able to seek review of the ASCs decision to register the change of a companys status. If a decision of the ASC to change the status of a company is not challenged within 1 month, the ASCs registration of the change of type will be conclusive, although this will not restrict the availability of other remedies (for example, damages).

3.4 In light of the capacity for companies limited by guarantee to convert to companies limited by shares, future registrations of companies limited by both guarantee and by shares will not be permitted, although existing companies of this type will continue.

3.5 Proprietary companies will no longer be required to keep their registered offices open to the public. In addition, companies will no longer need to have a common seal.

Meetings

3.6 The use of electronic technology to hold meetings will be facilitated. For directors meetings, it will be possible to use any form of technology agreed to by the directors. For members meetings, it will be possible to use any form of technology that gives members a reasonable opportunity to participate in the meeting.

3.7 Members of a proprietary company will be able to pass all forms of resolution (except for the removal of an auditor) by signing a circulating resolution: they will not need to hold a meeting if all members sign.

3.8 All general meetings will require at least 21 days notice to be given individually to members, although members will be able to agree to shorter notice (except for voting on removal of an auditor and, for public companies, voting on the removal or replacement of a director and to appoint or reappoint a director who is more than 72 years old). A general meeting will have to be held at a reasonable time and place.

3.9 Members holding 5% of the votes, or 100 members entitled to vote at a general meeting, will be able to require:

(a)

the directors to call and arrange for the holding of a general meeting,

(b)

a proposed resolution to be put on the agenda of a general meeting, or

(c)

a statement about a proposed resolution to be distributed to members.

3.10 The Law will recognise members rights to ask questions about or comment on company management at annual general meetings (which are held only by public companies) by requiring the chairman to provide a reasonable opportunity for members as a whole to do so. Similarly, members will also be able to question auditors about their audit report at annual general meetings.

3.11 The process for appointing a proxy will be streamlined to ensure that appointments are valid if they are signed and contain certain minimum information. Appointments will not need to be dated or witnessed. To minimise the number of appointments required, members will be able to appoint any person who holds a particular office and make standing appointments.

3.12 Members of both public companies and proprietary companies will be able to appoint a proxy (however, proprietary companies will be able to replace this right due to the closely-held nature of some of these companies). They will also be able to specify the proportion or number of votes that the proxy may exercise. Members who are entitled to cast two or more votes will be able to appoint 2 proxies. If this is not specified and 2 proxies are appointed, each proxy will be able to exercise half of the votes (under the current law, such an appointment would be invalid). Fractions of votes will be disregarded.

3.13 To be effective, all proxy documents must be given or transmitted to the company at least 48 hours before the meeting, or in a shorter period set out in the companys constitution or the notice of meeting. Proxy documents will be able to be transmitted to the company if the company specifies a fax number or electronic address in the notice of meeting.

3.14 A proxy will be able to vote on a show of hands, unless the companys constitution provides otherwise. The proxys authority to speak and vote for a member at a meeting will be suspended while the member is present at the meeting. If another proxy is appointed and both appointments could not be validly exercised at the meeting, the later appointment will revoke the earlier one.

3.15 If an appointment specifies the way the proxy is to vote on a particular resolution:

(a)

the proxy will not be required to vote on a show of hands, but if they do, they must vote that way

(b)

if the proxy has 2 or more appointments that specify different ways to vote on the resolution - the proxy must not vote on a show of hands

(c)

if the proxy is the chairman - the proxy must vote on a poll and must vote that way

(d)

if the proxy is not the chairman - the proxy need not vote on a poll, but if they do, they must vote that way.

3.16 The quorum for a general meeting will be 2 for both proprietary and public companies. A body corporate will be able to make a standing appointment of an individual to represent it at company meetings. Each individual will be counted only once towards the quorum. The quorum will be required to be present at all times during the meeting. (Under the Bill, the minimum number of members for public companies will be reduced to 1, making it consistent with that for proprietary companies. However, 1 member companies cannot hold meetings and any decisions required to be made by a general meeting can be made by the member recording the decision and signing the record.)

3.17 Companies will no longer be required to hold a statutory meeting or send their members a statutory report following the issue of shares under their first prospectus.

3.18 The rules for meetings of members of collective investment schemes will be based on those for companies.

Share capital

3.19 Shares will no longer have a par value. This will cover all shares, whether issued before or after commencement of the new provisions. Transitional provisions will preserve the effect of existing contractual arrangements that refer to par value.

3.20 Streamlined provisions will be introduced to deal with:

(a)

the issue of shares (including bonus shares)

(b)

conversion of shares

(c)

the redemption of redeemable preference shares

(d)

partly-paid shares

(e)

dividends.

3.21 Capital reductions will no longer require court confirmation. Instead, a capital reduction must:

(a)

be fair and reasonable to all shareholders

(b)

not materially prejudice the companys ability to pay its creditors

(c)

be approved by the companys shareholders (if the reduction involves the cancellation of shares, it must also be approved by a special resolution of those shareholders whose shares will be cancelled).

3.22 The rules against a company acquiring its own shares will focus on the companys actual control over those shares. The meaning of control will be clarified along the lines of the use of this concept in the accounting standards. A company will be unable to take security over its own shares except for the purpose of an employee share ownership scheme or, if the company is a financial institution, in the ordinary course of providing financial accommodation.

3.23 Shareholder approval of financial assistance given by a company for the acquisition of its own shares will only be required if the financial assistance would materially prejudice the companys or shareholders interests, or the companys ability to pay its creditors.

3.24 In light of these changes to the share capital rules, the buy-back provisions will be amended to enable the buy-back of redeemable preference shares and to require that a buy-back not materially prejudice the companys ability to pay its creditors.

Financial statements and audit

3.25 The Bill will provide a general framework for comprehensive financial disclosure, by retaining the requirement to prepare a profit and loss statement and balance sheet, and introducing into the Law a requirement to prepare a cash flow statement. The detail of how these statements are to be prepared will be set out in accounting standards made by the Australian Accounting Standards Board (AASB). The new rules will be largely uniform for different types of investments, in particular, companies and collective investments. The special accounting rules for banks, life insurance companies, investment companies and collective investment schemes now in the Law will be repealed and left to be determined by the AASB.

3.26 A company or collective investment scheme will be able to send its members a concise version of its annual report. However, the full report will be lodged with the ASC and members will be entitled to request a copy of this report from the company or scheme without charge.

Annual returns

3.27 Over half of the items currently required to be included in annual returns will be removed. Annual returns for collective investment schemes will be required on a similar basis as for companies.

3.28 The Law will facilitate electronic lodgment of returns with the ASC.

Defunct companies

3.29 The process of deregistering defunct companies will be streamlined, with newspaper advertisement of a proposed deregistration no longer required. New procedures for ASC deregistration will assist the ASC in finalising the affairs of defunct companies.

3.30 A person will be able to sue a deregistered companys insurer directly, without having to first apply to a court for reinstatement of the companys registration.

Names

3.31 The rules for obtaining and using company names, and Australian Company Numbers, will be rewritten.

3.32 The companies permitted to omit Limited from their names will be restricted to charitable companies and the conditions applicable to this right will be set out in the Law (rather than in ASC licences). Existing licences will be preserved.

Setting up and running a company

3.33 This section describes how the Law will operate after the Company Law Review Bill commences.

3.34 To set up a new company, a person must apply to the ASC for registration of the company.

3.35 A proprietary company must have a share capital and must not engage in any activity which would require lodgment of a prospectus unless shares are offered only to existing shareholders or employees. A public company may have a share capital or be limited by guarantee.

3.36 A company must have at least 1 member and, if it is a proprietary company, can have no more than 50 shareholders (not counting employee shareholders). A proprietary company may have a single director who may also be the company secretary. A public company must have at least 3 directors and a company secretary.

3.37 A company can choose any name unless it is identical to a name reserved or registered under the Law for another body, or a name that is included on the National Business Names Register, or is unacceptable (for example, the name includes the word ANZAC). These rules will be in the Corporations Regulations.

3.38 A company must have a registered office. A public company must display its name and the words registered office prominently at that office. A public companys registered office must be open for at least 3 hours each business day. A proprietary company does not need to keep its registered office open, but must, on request, provide access to relevant documents and registers.

3.39 A company must keep (generally at its registered office) registers of members, options, debenture holders and charges. Members of the public may inspect and obtain copies of these registers. A person must not use or disclose information obtained from a register to contact or send material to the holder of securities unless the use or disclosure is approved by the company or is relevant to the holding of the securities.

3.40 When a company is registered, the ASC allocates to it a unique Australian Company Number (ACN). A companys name and ACN must appear on its public documents. A company may elect to have a common seal. If it does, the seal must contain the companys name and ACN.

3.41 A company does not need to have a constitution. Instead, it can use the replaceable rules contained in the Law to govern the management of its internal affairs.

3.42 If a company wishes to replace or discard any replaceable rule contained in the Law, it may do so by adopting a constitution by special resolution passed at a general meeting of the company. The replaceable rules and a companys constitution have effect as a contract.

3.43 The replaceable rules will not apply to proprietary companies with a single member who is also the sole director. Special rules will facilitate the operation of these companies.

3.44 All shares are no par value shares. Shares are issued at a price determined by the directors. A company may pay dividends but only out of profits.

3.45 A company must not acquire shares in itself unless it follows the procedures set out in the Law. If a company acquires control of an entity that holds shares in the company, then within the following 12 months either the company must cease to control that entity or the entity must cease to hold shares in the company.

3.46 A company may financially assist a person to acquire shares in the company or a holding company if the assistance does not materially prejudice the interests of the company, its shareholders or its creditors, or if it is given in the ordinary course of certain commercial dealings, or as part of an employee share scheme.

3.47 Before a company can return capital to its shareholders or undertake a share buy-back, it must be solvent and the transaction must not materially prejudice the companys ability to pay its creditors. A company may redeem redeemable preference shares out of profits or the proceeds of a fresh share issue.

3.48 Capital returns which treat all shareholders equally require shareholder approval by ordinary resolution passed at a general meeting of the company. A share buy-back which treats all shareholders equally requires shareholder approval if it exceeds the 10/12 limit, ie 10% of the smallest number, at any time during the last 12 months, of votes attaching to voting shares in the company. Selective capital reductions and selective buy-backs must be approved by shareholders by special resolution or by a resolution agreed to by all ordinary shareholders. The company is required to disclose relevant information of which it is aware to members to enable them to make informed decisions.

3.49 Shareholder approval is not required for other capital reductions unless they involve a diminution of liability in respect of unpaid share capital or the cancellation of paid up share capital.

3.50 A shareholder or a creditor may apply to the court for an injunction if the capital reduction or share buy-back would materially prejudice the companys ability to pay its creditors. A shareholder may also apply to the court for an order opposing a capital reduction on the grounds that it is not fair and reasonable to all the companys shareholders.

3.51 A companys directors may be personally liable if the company would be insolvent immediately after payment of a dividend, a reduction of capital, a redemption of preference shares, the giving of financial assistance or a share buy-back. A shareholder or creditor may apply to the court for an injunction if the company would be insolvent immediately after the happening of any of those events.

3.52 The company has the burden of proof in any court application made to challenge a capital reduction or buy-back.

3.53 A directors meeting may be held using any technology agreed to by all of the directors. A resolution may be passed by the directors without a directors meeting if they all sign a document containing a statement that they are in favour of the resolution.

3.54 A proprietary company with more than 1 member may pass a resolution, other than one to remove an auditor, without a general meeting if all shareholders entitled to vote on the resolution sign a document stating that they are in favour of the resolution.

3.55 A director may call a general meeting. The directors must hold a general meeting on the request of members who hold at least 5% of the votes that may be cast at the meeting or 100 members who are entitled to vote at the meeting. Members holding at least 5% of the votes which may be cast at the general meeting may call and hold a general meeting.

3.56 A company may hold a meeting of its members at 2 or more venues using any technology that gives members a reasonable opportunity to participate. At least 21 days notice must be given for all meetings.

3.57 A single director of a proprietary company may pass a resolution by recording it and signing the record. A single member company similarly does not hold meetings. The member may pass a resolution by recording it and signing the record.

3.58 A company must keep sufficient accounting records to enable annual financial statements to be prepared and audited. Public companies and large proprietary companies must prepare annual financial statements in accordance with applicable accounting standards, have those statements audited and send them to members. Except for those large proprietary companies which have had annual accounts audited under the previous Law and elect to continue operating under those rules, the statements must be lodged with the ASC. A small proprietary company need only prepare annual financial statements if required to do so by the ASC or shareholders with 5% of the companys voting shares.

3.59 Directors of companies which are required to prepare financial statements must state whether, in their opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due.

3.60 A company can elect to send shareholders a concise financial report, rather than the full annual financial statements, although a member can choose to receive the full statement and directors report. Shareholders may also elect to receive nothing at all.

3.61 The directors of a company which has not lodged accounts with the ASC in the previous 12 months must pass a resolution stating whether, in their opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due.

3.62 A public company must hold an annual general meeting to enable members to consider its financial statements, directors report and auditors report. Proprietary companies do not hold annual general meetings. The chairman of an annual general meeting must allow a reasonable opportunity for the members as a whole at the meeting to ask questions about or make comments on the management of the company and to ask the companys auditor questions relevant to the auditors report.

3.63 A company must lodge an annual return for each calendar year with the ASC to update key information available on the public record.