House of Representatives

Explanatory Memorandum

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

9. Chapter 2F: Members rights and remedies

9.1 New Chapter 2F will replace Part 3.4, section 256 and Division 3 of Part 2.4. It will also deal with the rights of members to inspect certain documents. The oppression remedy in current section 260 will be moved to this Chapter and renumbered as section 246AA (Bill Schedule 3 Item 85). The Bill will set out who the members of a company are (Bill s 246A).

Class rights

9.2 The Bill substantially redrafts current sections 197 to 199 which deal with variations of class rights and removes technical deficiencies which have been identified in those sections. In particular, the new provisions will make it clear that, unless the companys constitution provides otherwise, any variation has to be approved by special resolution of the company and special resolution (or written consent of 75%) of the class (Bill s 246B).

9.3 The provisions contain several policy changes. First, unless the variation receives unanimous consent of the affected class members (Bill s 246E), it will have no effect until:

(a)

the expiration of 1 month from the variation without an application being lodged with a court to set the variation aside, or

(b)

if an application is made, it is withdrawn or finally determined (Bill s 246D).

9.4 Secondly, a notice will have to be given to any affected class member within 7 days of the variation (Bill s 246B(3)). This new requirement will ensure that members who are affected by a variation will be informed of the variation and thus able to exercise their right to challenge it in court.

9.5 Thirdly, where the rights of only some members of a class are proposed to be varied, those members will be treated as a separate class for the purposes of the new provisions (Bill s 246C). As a result, members representing at least 75% of a class will no longer be able to vary rights of the remaining members.

9.6 Issues of shares with rights not set out in the companys constitution or a document lodged under the Law (or the previous legislation) will continue to be regarded as variations of the rights attached to the existing shares (Bill s 246C(5)). Similarly, issues of additional preference shares which rank equally with the existing preference shares will continue to be regarded as variations, unless authorised by the terms of the original issue or by the companys constitution (Bill s 246C(6)). An issue of new preference shares that rank ahead of existing preference shares would be treated as varying the rights attached to the existing shares.

9.7 As at present, members entitled to at least 10% of the votes in the class will be able to challenge in the court any variation of the rights in that class (Bill s 246D).

9.8 The capacity of members of companies to access documents concerning their rights will be enhanced under the Bill (Bill ss 246F and 246G).

9.9 A redraft of current section 196 requires companies to notify the ASC of any division or conversion of shares. All documents and resolutions dealing with rights attached to shares in a public company will be required to be lodged. The time period for these lodgments will be 14 days (Bill s 246F).

9.10 The right of members to obtain from the company copies of documents dealing with rights attached to shares will be extended to members of all companies (Bills 246G). This will assist members of public companies by entitling them to obtain a copy of the document from the company, as well as from the ASC.

Inspection of books

9.11 As recommended in the November 1991 report of the House of Representatives Standing Committee on Legal and Constitutional Affairs( Corporate Practices and the Rights of Shareholders ) the provisions dealing with the rights of members to inspect books will be altered to allow a Court to authorise any person (and not only a registered company auditor or legal practitioner) to inspect the books on behalf of a member. These access arrangements will also apply to members of registered managed investment schemes seeking access to the books of the scheme (Bill s 247A).

9.12 As at present, the Court will have wide discretionary powers in relation to its orders, including the power to restrict the use the person may make of the information obtained during the inspection (Bill s 247B). Similarly, the current prohibition on disclosing the information to persons other than the ASC or the member on whose behalf the inspection is carried out will continue to apply (Bill s 247C).

9.13 In addition to the statutory rights, a replaceable rule will enable the directors or the company in general meeting to authorise a member to inspect the books of the company (Bill s 247D). This rule is based on regulation 85 of Table A.