House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 7 Corporate Governance Concessions

Outline of chapter

7.1 This Chapter sets out the temporary concessions from certain public company corporate governance and reporting requirements available to a new public company that is eligible to crowd fund and has completed or intends to complete a CSF offer within the required time.

7.2 Unless otherwise stated, all references in this Chapter relate to the Corporations Act 2001.

Context of amendments

7.3 As the CSF regime is only available to public companies, it will exclude start-ups and other small-scale enterprises that do not adopt a public company structure. Restricting the CSF regime in this way could potentially reduce the number of companies using the CSF regime and consequently substantially reduce the effectiveness of the regime.

7.4 To address this, the Bill creates temporary concessions from certain public company corporate governance and reporting requirements for new public companies limited by shares and proprietary companies that convert to a public company that satisfy the CSF eligibility criteria at the time of registration as a new public company and at the end of the relevant financial year, and that complete a CSF offer within the required timeframe. The purpose of the concessions is to reduce the barriers to adopting a public company structure.

7.5 The corporate governance concessions are only available to companies that register as, or convert to, a public company after the commencement of the CSF regime. This is to ensure that public companies currently subject to the public company requirements do not reduce their reporting or governance standards.

Summary of new law

7.6 A company that is registered as, or that converts to, a public company limited by shares after the commencement of the CSF regime will be eligible for the corporate governance and reporting concessions.

7.7 The concessions are only available to companies that are eligible and intend to crowd fund at the time they are registered and that successfully complete a CSF offer within 12 months of registration or conversion, and have not undertaken any fundraising offers requiring disclosure.

7.8 The corporate governance and reporting concessions apply for a maximum of five years from the date of registration as, or conversion to, a public company limited by shares. The concessions are:

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an exemption from needing to hold an Annual General Meeting (AGM) under the usual rules;

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the option to only provide financial reports to shareholders online; and

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the company not being required to appoint an auditor or have audited financial reports until more than $1 million has been raised from CSF offers.

Comparison of key features of new law and current law

Detailed explanation of new law

7.9 The concessions are only available to a company that registers as a public company, or converts to a public company, after the commencement of the CSF regime. In order to be eligible to claim the concessions, the company must satisfy certain eligibility criteria on registration as or conversion to a public company limited by shares and at the end of the financial year in which it is claiming the concession.

Must be eligible on registration or conversion

7.10 In order to be eligible for the concessions, a newly registered company limited by shares must indicate, on its application for registration, that it will satisfy the requirements to be an eligible CSF company (Chapter 2 of the Explanatory Memorandum) on registration and that it intends to make a CSF offer after registration within the next twelve months [Schedule 2, item 1, paragraph 117(2)(mc)].

7.11 Similarly, a proprietary company that converts to become a public company limited by shares is only eligible for the concessions if they make a statement that they satisfy the requirements to be an eligible CSF company on conversion and they intend to make a CSF offer within 12 months of conversion. [Schedule 2, item 2, paragraph 163(2)(d)].

7.12 A company that gives misleading information about its intention to make a CSF offer will commit an offence under section 1308 of the Act.

7.13 A company that does not indicate the above in its application for registration or conversion will be ineligible for the concessions.

Must be eligible at end of financial year

7.14 The company must determine its eligibility to claim the concessions at each financial year end.

7.15 A company is eligible for the concessions for a particular year where it satisfies the following criteria:

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it is an eligible CSF company at the end of the financial year;

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it has, in its application for registration or conversion, indicated that it will be an eligible CSF company on registration or conversion and that it intends to make a CSF offer;

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the current financial year ends within five years of the date of the company's registration;

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where the current financial year ends more than 12 months since registration or conversion, the company has successfully completed a CSF offer;

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either it is the company's first financial year, or where it is not the company's first financial year, the company has been eligible for the concessions in relation to every earlier financial year; and

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the company has not made any offers of securities for issue or sale that need disclosure under Chapter 6D.2 since they started accessing these corporate governance concessions. [Schedule 1, Part 1, item 14, section 738ZI]

Must complete a CSF offer within 12 months of registration

7.16 The requirement that the company complete a CSF offer within 12 months of registration as, or conversion to, a public company limited by shares is intended to ensure the concessions are targeted to companies that use the CSF regime.

7.17 Recognising that it will take some time for a newly formed company to complete a CSF offer, the company has a period of 12 months from registration as, or conversion to, a public company limited by shares within which to successfully complete a CSF offer.

7.18 The offer must be complete within the 12-month period. A company that makes a CSF offer that is open at the end of the 12 month period will not be eligible for the CSF corporate governance concessions even if the offer subsequently successfully completes.

7.19 Likewise, if the company makes a CSF offer that closes but does not 'complete' (for example, because the minimum subscription condition is not met), the company will be ineligible to claim the concessions.

7.20 While the companies described in paragraphs 7.13, 7.18 and 7.19 will not be eligible for the public company corporate governance and reporting concessions outlined in paragraphs 7.21 to 7.40, they may still be eligible to make a CSF offer, subject to satisfying the relevant eligibility criteria (refer to Chapter 2 of the Explanatory Memorandum).

Concession 1: Relief from holding an AGM

7.21 If the financial year end for the company is within 18 months of the date of registration, or conversion, the company does not need to hold an AGM if it satisfies the requirements to claim the public company concessions at the end of the financial year. [Schedule 2, item 3,subsection 250N(5)]

7.22 For all subsequent financial years, the company does not need to hold an AGM if it satisfies the requirements to claim the public company concessions at the end of that financial year. [Schedule 2, item 3, subsection 250N(6)]

7.23 The policy rationale for providing relief from having to hold an AGM is that, while AGMs serve a purpose in the general engagement process between companies and their shareholders and are a mechanism for accountability of those in control of the company, holding an AGM poses practical difficulties and costs for start-ups and other small-scale enterprises. The concession, therefore, is intended to reduce the burdens associated with holding an AGM for a limited period. Notwithstanding the company will not be required to hold an AGM under section 250N, the directors may still be required to call a general meeting under other circumstances (for example, pursuant to subsection 249D(1), on the request of members with at least 5 per cent of the votes that may be cast at the general meeting).

Concession 2: Relief from preparing audited annual financial reports

7.24 Public companies must have their financial reports audited (sections 295 to 297). However, recognising the compliance burden that can arise for a newly formed public company (particularly where it has converted from a proprietary company where audited financial reports are not required), a company can elect not to have audited financial reports where:

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they satisfy the general eligibility criteria to claim the concessions (paragraph 7.15); and

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as at the end of the current financial year, the company has raised less than $1 million from all CSF offers. [Schedule 2, item 6, subsection 301(5)]

7.25 Recognising that the obligation to have audited financial reports provides an important safeguard for investors, the exemption from having audited financial reports ceases at the earlier of: five years from the date of registration as, or conversion to, a public company; or when the company raised more than $1 million from CSF offers. The cap is based on offers made at any time - the $1 million cap does not reset every year.

Relief from appointing an auditor

7.26 As the Bill provides an exemption from the requirement to prepare audited financial reports, the Bill exempts the directors of a company from needing to appoint an auditor within one month of registration where the following requirements are satisfied:

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on registration, or conversion, the company satisfied the general eligibility criteria to claim the concessions (paragraph 7.15). [Schedule 2, item 17,at the end of subsection 327A(1A))]

7.27 As public companies that meet these eligibility requirements are not required to hold an AGM, the obligation under section 327B to appoint an auditor at an AGM will not be triggered. Similarly, as these public companies do not have an obligation to have audited statements, the obligation to appoint an auditor to fill a casual vacancy under section 327C is also not triggered.

7.28 However, the directors of public companies that lose access to the corporate governance concessions (for example by not successfully undertaking a CSF offer within 12 months or at the end of the five year concession period) will be required to appoint an auditor within 1 month of the company losing its access to the corporate governance concessions unless an auditor has been appointed at a general meeting. [Schedule 2, item 18, section 328C(1)]

7.29 An auditor appointed in this way will hold office until the company's first annual general meeting. The normal rules relating to the appointment of auditors in sections 327B to 327E will apply after this. [Schedule 2, item 18, section 328C(2)]

7.30 Once a public company loses access to the concessions, its directors must take reasonable steps to ensure an auditor is appropriately appointed. A failure by the directors to do this is an offence which carries a maximum penalty of 25 penalty units, 6 months' imprisonment or both. The penalty mirrors the existing penalty for a public company where the directors fail to appoint an auditor within one month of being required to. [Schedule 2, item 18, section 328C(3) and Schedule 2, item 19, item 116MC in Schedule 3]

7.31 A similar requirement to appoint an auditor is in place for a public company that raises more than $1 million from CSF offers. This company will lose its access to the exemption from having audited financial statements (paragraph 7.24) and its directors will therefore be required to appoint an auditor within 1 month of this occurring. A failure by the directors to do this is an offence which carries a maximum penalty of 25 penalty units, 6 months' imprisonment or both. The penalty mirrors the existing penalty for a public company where the directors fail to appoint an auditor within one month of being required to. [Schedule 2, item 18, section 328D and Schedule 2, item 19, item 116MD in Schedule 3]

7.32 A company that loses its concession from having audited financial statements because it has raised more than $1 million from CSF offers will still have access to the other corporate governance concessions until it is no longer eligible for them.

7.33 As these companies will not be required to hold an AGM, the normal rules relating to the appointment of an auditor at a public company's AGM under section 327B does not automatically apply. To address this, a replacement provision has been introduced that replicates section 327B.

7.34 Under this new provision, an auditor appointed to a public company that loses its concession from having audited financial statements because it has raised more than $1 million from CSF offers will hold office until the auditor dies, is removed from office or conflict of interest situations arise. These rules mirror the existing provisions that apply in relation to auditors of public companies under section 327B. [Schedule 2, item 18, section 328E]

7.35 Changes to and obligations in relation to appointing replacement auditors can occur in accordance with the existing provisions relating to auditors in sections 327C - 327F. Where there is a need to appoint a new auditor this will be done by the directors of the company until the next AGM (which may be a few years away if the other corporate governance concessions still apply to the company).

Concession 3: Annual financial reports only to be provided online

7.36 Public companies must provide a financial report, directors' report and auditor's report to shareholders each year. The company must, on at least one occasion, directly notify each shareholder in writing that they may elect to receive the reports in either hard or electronic copy free of charge and, if they do not so elect, they may access the reports on a specified website.

7.37 The requirement to notify shareholders of the options to receive the annual reports and to provide the reports in the format elected by the shareholder may impose significant costs on a start-up or small-scale enterprise.

7.38 The Bill provides that a company that satisfies the general eligibility criteria to claim the concessions (paragraph 7.14) at the end of the financial year only needs to provide its annual reports via a website and does not need to notify shareholders of alternative ways of receiving the reports. [Schedule 2, items 7 and 8, subsections 314(1) and 314(1AF)]

7.39 A similar amendment has also been made to enable a company that qualifies for the concessions to provide its concise financial report to shareholders by making the report available on a website. [Schedule 2, item 9, subsection 314(2A)]

7.40 Consequential amendments have been made to the content requirements of the annual directors' report. The amendments provide that a company that claims the audit concessions is not required to include a copy of the auditor's declaration in its directors' report. [Schedule 2, items 4 and 5, subsections 298(1AA) and 298(1AC)]

Consequential amendments

7.41 Consequential amendments have been made to the notes under subsection 324CA(1A), subsection 324CB(1A), subsection 324CC(1A), subsection 324CE(1A), subsection 324CF(1A), subsection 324CG(1A) and subsection 324CG(5A) to indicate that the appointment of an auditor for a public company with crowd-sourced funding will be terminated in circumstances where the auditor notifies ASIC of conflict of interest situations unless a second notice under section 328E is provided in 21 days. This consequential amendment is necessary to ensure section 328E mirrors section 237B. [Schedule 2, items 10-16, notes under subsection 324CA(1A), subsection 324CB(1A), subsection 324CC(1A), subsection 324CE(1A), subsection 324CF(1A), subsection 342CG(1A) and subsection 324CG(5A)]