House of Representatives

Explanatory Memorandum

Circulated by the Authority of the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP

Chapter 5 - No vacancy rule

Context of amendments

5.1 The 'no vacancy' rule allows a board to declare that it has no vacant positions even though the maximum number of directors allowed by the constitution has not been reached. 'No vacancy' resolutions make the election of new directors difficult because if a no vacancy resolution is passed, non-board endorsed candidates need to gain more votes than a board endorsed candidate as well as receiving more than fifty per cent of the vote to be elected. A 'no vacancy' resolution can therefore make it extremely difficult for a non board endorsed candidate to join a board.

5.2 The PC inquiry concluded that the 'no vacancy' rule provides boards with considerable power over the composition of the board. The declaration of the rule can make it more difficult for outside nominees to be voted onto a board. These people need to run against an incumbent director or a board-endorsed nominee, both categories which generally receive high favourable votes and are difficult for an outside nominee to defeat in a direct contest.

5.3 As such, the 'no vacancy' rule makes it difficult for shareholders to address concerns that a board is functioning in a 'closed shop' fashion, does not have sufficient independence from management, or fails to nominate and recruit new members with the right characteristics to ensure board decisions are made in the best interests of the company. For this reason, the 'no vacancy' rule has been identified as inhibiting appropriate shareholder oversight of company boards.

Summary of new law

5.4 A company will be required to obtain the approval of its shareholders for a declaration that there are no vacant board positions in the case where the number of board positions filled is less than the maximum number specified in the company's constitution. If agreed, the declaration lasts until the following AGM. This requirement will apply to public companies.

5.5 Any appointment of a director made while the declaration is in place must be confirmed by a resolution of members at the following AGM, or the appointment lapses at the conclusion of that AGM.

Comparison of key features of new law and current law

Detailed explanation of new law

5.6 Companies will be required to obtain the approval of their shareholders in order to declare at a general meeting (either an AGM or an extraordinary general meeting) that there are no vacant board positions, in the case where the number of positions filled on the board is less than the maximum allowable under the company's constitution. The need for shareholder approval applies regardless of whether the board limit is the subject of a new resolution or the decreasing of a lower maximum. If agreed, the declaration will be in force until the following AGM. [Schedule 1, item 30, section 201P]

5.7 Notice of intention to obtain shareholder approval to declare that there are no vacant board positions must be lodged with ASIC and notified to shareholders as part of the notice convening the meeting, along with an explanatory statement. The notice must specify the board limit that is being agreed upon. The explanatory statement must set out the view of the board on the proposed resolution and information to assist shareholders to determine whether the proposed resolution is in the company's interest. [Schedule 1, item 30, section 201S, paragraph 201P(1)(c), section 201Q]

5.8 If a 'no vacancy' resolution is not passed, a non-board endorsed candidate will have the ability to stand for election for a vacant board position. If shareholders agree to a 'no vacancy' resolution, a non-board endorsed candidate will still be able to stand for election if there is an election for directors, whether this be where an incumbent director is up for re-election or retires, or where the shareholders remove a director.

5.9 Following passage of a 'no vacancy' resolution, boards may fill board positions through the year, but such appointments must be confirmed by shareholders at the following AGM, or the appointment lapses at the conclusion of that AGM. [Schedule 1, item 30, subsections 201P(3) and (4)]

5.10 Where a company does not comply with the requirement that shareholder approval be sought for a 'no vacancy' declaration, but the company declares no vacancies at a general meeting, that declaration will be made void until the requisite shareholder approval is obtained, and any appointments of director made at the general meeting will be invalid. [Schedule 1, item 30, section 201U]

5.11 Where a company prevents a person from putting themselves forward as a director at a general meeting on the basis that the board has instituted a 'no vacancy' rule, but that rule has not been agreed by shareholders of the company, the person may institute Court proceedings against the company for loss or damage suffered as a consequence of not being able to be considered by the general meeting for appointment to the board. [Schedule 1, item 30, section 201U]

5.12 Where a company appoints a director in breach of the new provisions the appointment will be invalid. In addition, a company or a person who suffers loss or damage because of the setting of a board limit in contravention of the provisions may institute a proceeding in the court. [Schedule 1, item 30, subsections 201U(5) and (6)]

Application and transitional provisions

5.13 The provisions will apply in relation to the setting of board limits on or after 1 July 2011.