House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)

Chapter 4 Corporate Governance

Outline of chapter

4.1 The Bill contains amendments to the related party transaction provisions in the Corporations Act and to the administration of approvals for certain company names and constitutions.

Context of amendments

4.2 The changes outlined in this chapter contribute to the broader themes of the Bill to facilitate a simpler corporate regulatory system that delivers continued consumer protection, reduced compliance costs and greater ability for companies to attract capital.

4.3 Within the corporate governance context, the related party transaction provisions are an important check on the powers of the board to manage the affairs of a company. However, obtaining member approval for every related party transaction may unnecessarily put a company to a disproportionate compliance expense where the value of the transaction is small. The amendments in the Bill are aimed at addressing the potential for disproportionate compliance costs to cause corporate resources to be allocated inefficiently.

4.4 This amendment has its origins in the Corporate and Financial Services Review Proposals Paper of November 2006.

4.5 In addition, currently ministerial approval is required for the use of certain company names and changes to the constitutions of certain companies. Names and constitutions are basic features of companies, and the Bill provides for more streamlined administrative processes where approvals or notifications are required.

Summary of new law

4.6 The Bill will make amendments to the Corporations Act to:

•

allow public companies to give small financial benefits to related parties without seeking member approval in certain circumstances;

•

allow delegation to ASIC of the function of consenting to grant a particular company name notwithstanding it is identical to another name or otherwise unacceptable; and

•

remove the requirement for companies exempted from using 'limited' in their name to seek ministerial approval for changes to their constitutions, and replace it with a requirement to notify ASIC of any changes.

Comparison of key features of new law and current law

Detailed explanation of new law

Related party approval threshold

4.1 The related party transactions provisions in Part 2E.1 of the Corporations Act require that public companies obtain member approval before they can give any financial benefit to a related party (such as a director, a director's spouse, a controlling entity, or entities controlled by mutual entities), unless the benefit fits within certain exceptions.

4.2 The policy rationale for the related party transactions provisions is to protect shareholders' investments from being eroded by the board approving transactions with related parties that are non-commercial or non-arms'-length in nature. These transactions may not be in the best interests of the company and may result in the company missing out on commercial advantages or profits that would otherwise be gained where the transactions are with non-related parties.

4.3 The cost for business of obtaining member approval for related party transactions not otherwise allowed by the law can be substantial. If the related party benefit is small, then the compliance cost may well outweigh any governance benefits from requiring member approval.

4.4 The Bill will insert a provision into the Corporations Act to provide that member approval is not required for giving a financial benefit to a related party which is at or below a prescribed amount aggregated over a financial year. [Schedule 1, Part 2, item 190]

4.5 It is expected that the amount initially prescribed will be $5,000.

4.6 The new provision will repeal and replace the current section 213 and absorb its effect. The current provision allows payments at or below $2,000 to related parties who are directors or directors' spouses to be made without member approval. Under the new provision, member approval will not be required for giving a financial benefit to these related parties (ie directors or directors' spouses), which is at or below the prescribed level aggregated over a financial year.

4.7 By referring to 'amounts or values', the provision contemplates both monetary and non-monetary financial benefits. It is intended that non-monetary financial benefits will be valued by reference to ordinary valuation concepts.

4.8 In determining the total amounts of values to which the provision applies, the provision uses a similar aggregation method to the current section 213. That is, the amount is worked out by adding all the amounts or values of financial benefits given to the related party in the financial year from the public company or entity and the companies and entities it controls when the financial benefit is given, and disregarding any amounts repaid or falling under another related party transaction exception.

4.9 The new section 213 will not interfere with the requirements on directors or officers to exercise their powers and discharge their duties in accordance with other provisions of the Corporations Act, including the duties in Part 2D.1 and rules under the general law.

Approval of identical and otherwise unacceptable company names

4.10 Currently, section 147 of the Corporations Act provides that a name is available for use by a company unless the name is identical to another or unacceptable with reference to the rules in the Corporations Regulations. Section 601DC provides for a similar legislative scheme that applies to registrable Australian bodies and foreign companies. Regulation 2B.6.01 of the Corporations Regulations provides rules for determining whether a name is identical or unacceptable. As there may be particular reasons for a company wishing to use an identical or otherwise unacceptable name, the Corporations Act allows companies use of these names if the application receives ministerial consent.

4.11 The Minister may delegate the function of considering such an application to an officer of the Department under subsection 1345A(1) of the Corporations Act.

4.12 In the first instance, companies lodge these applications with ASIC, which then refers the applications to the Treasury. Given ASIC's role as the corporate regulator and manager of the company register, a more efficient administrative arrangement would be for ASIC to determine these name applications.

4.13 The Bill inserts a new subsection 1345A(1A) for the Minister, by signed instrument, to delegate the function of determining whether a particular company name should be granted, notwithstanding the name is identical or otherwise unacceptable, to a member of ASIC (ie a commissioner) or a staff member of ASIC. [Schedule 1, Part 2, item 197]

Pre-existing licences allowing companies to omit the word 'limited' from their names

4.14 A number of Australian companies hold a licence to omit the word 'limited' from their names. Such licences were generally issued by State and Territory Attorneys-General during the period when corporate law was a responsibility of the State and Territory Governments.

4.15 These licences generally require approval of the Minister responsible for corporate law, or another Minister of the Commonwealth, a State or a Territory, or an officer, instrumentality or agency of the Commonwealth, a State or a Territory for any changes to the constitutions of these companies.

4.16 A more efficient administrative arrangement would be for these companies to notify ASIC of changes to their constitutions, given ASIC's role as the corporate regulator and manager of the company register.

4.17 The Bill inserts new subsection 151(2AA) which replaces the requirement to seek approval for any changes to the constitutions of companies with pre-existing licences with a requirement to notify ASIC of any changes to their constitutions. [Schedule 1, Part 2, item 188]

4.18 ASIC will have the power to revoke a company's licence if the company fails to notify ASIC of a change to its constitution, in addition to its current powers to revoke a licence in subsection 151(3). [Schedule 1, Part 2, item 189]

Application and transitional provisions

Related party approval threshold

4.19 The amendment to remove the requirement for member approval of a related party transaction at or below a prescribed level aggregated over a financial year applies to a company's financial year that begins on or after the 1 July 2007, which is the day the amendment commences. [Schedule 1, Part 6, item 240]

Company names and pre-existing licences

4.20 The amendments to delegate approval of an identical or otherwise unacceptable name and the amendments to require a company with pre-existing licence to notify ASIC of changes to its constitution commence on 1 July 2007.