House of Representatives

Explanatory Memorandum

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

4 Summary of key amendments proposed by the Bill

4.1 The key features of the new regulatory arrangements proposed by the Bill are in four main areas of the Law.

Directors duties and corporate governance

4.2 The key features of the new regulatory arrangements proposed by the Bill are:

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Introducing a business judgment rule , which would offer directors a safe harbour from personal liability for breaches of the duty of care and diligence in relation to honest, informed and rational business judgments.

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Introducing a statutory derivative action , to enable shareholders or directors of a company to bring an action on behalf of the company, for a wrong done to the company where the company is unwilling or unable to do so.

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Rewriting the existing duty to exercise care and diligence in subsection 232(4) to clarify that the standard of care required by the duty must be assessed by reference to the particular circumstances of the officer concerned. A breach of the duty of care and diligence will give rise to civil consequences only, and will no longer provide a basis for an offence under the Law. Criminal liability will continue to apply to breaches of the duty to act honestly.

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Delegation - express legislative authority will be given to the board of directors to delegate their powers, subject to any restrictions in the constitution of the company.

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Reliance - directors will be expressly allowed to rely on the advice or information provided by experts when making decisions, as long as the director believes on reasonable grounds that the person relied upon is reliable and competent in relation to the matters concerned.

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Reformulating the existing duty to act honestly in subsection 232(2) to capture the fiduciary principles that a director or other officer of a corporation must exercise their powers and discharge their duties in good faith in what they believe to be in the best interests of the corporation and for a proper purpose. Breach of this will continue to attract both criminal and civil consequences.

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Clarifying the duty of directors in situations of conflict of interest to permit directors who serve on wholly owned subsidiaries to take into account the interest raised by the nominating company in certain circumstances. It is to be noted that the provisions are not intended to codify the common law. The common law obligation to disclose conflicts of interest remains.

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Recasting section 241 dealing with indemnification for legal expenses to confine the matters for which a company or related body corporate may not give an indemnity for legal expenses to legal expenses incurred:

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in defending or resisting a proceeding in which the person is found to have a liability for which the company may not indemnify the person; or

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in defending or resisting criminal proceedings in which the person is found guilty; or

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in defending or resisting proceedings brought by ASIC or a liquidator for a Court order if the grounds for making the order are found by the Court to have been established; or

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in connection with proceedings for relief to the person under this Law in which the Court denies the relief.

4.3 The Bill will also rewrite without substantial change the remaining provisions in Parts 3.2 (Officers), 3.2A (Related Party Transactions), 3.4 (Oppression) and 9.4B (Civil Penalty Provisions) of the Law.

Takeovers

4.4 The key features of the new regulatory arrangements proposed by the Bill are to:

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Promote a more competitive market for corporate control by:

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allowing a bidder to exceed the statutory threshold of 20 per cent of total voting rights to gain control of a target provided that the announcement of a full takeover bid the mandatory bid immediately follows the acquisition that takes the bidder through the threshold. The bid price must be the same as, or higher than, the best price paid by the bidder for shares in the target in the previous 4 months.

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modifying the compulsory acquisition rules to:

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allow all types of securities (not just shares) to be compulsorily acquired;

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allow compulsory acquisitions to take place at any time (not just following a takeover bid);

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facilitate the acquisition of the outstanding securities in a class by any person who already holds 90 per cent of the class; and

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make it easier for majority shareholders to obtain the benefits of 100 per cent ownership by providing for the acquisition of all the securities, in all classes, of a target, where overwhelming ownership of the target by the majority shareholder can be demonstrated.

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Improve resolution of takeover disputes by reforming the Corporations and Securities Panel (Panel) so that it, rather than the courts or the Administrative Appeals Tribunal (AAT), is the primary forum for resolving takeover matters. This will be achieved by:

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opening up access to the Panel to any interested party (rather than being limited to ASIC as at present);

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except on the application of ASIC or another public authority of the Commonwealth or a State, ensuring that the courts will not grant injunctions during the bid period; and

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having the Panel, rather than the AAT, deal with appeals against ASIC exemption and modification decisions relating to takeovers.

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Extend the takeover provisions to listed managed investment schemes , so that members of these schemes will have the same rights to share in a control premium as shareholders, while responsible entities of these schemes will face the same competitive pressure to perform as company directors.

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Streamline the rules for off-market and market bids , including bringing together disclosure requirements into a bidders statement (replacing the current Part A and Part C statements) and a targets statement (replacing the current Part B and Part D statements). These statements will facilitate better disclosure by replacing the checklist of content rules with a general disclosure requirement for all information material to a shareholders decision whether or not to accept an offer.

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Rationalise liability provisions by ensuring that the liability regime for the contents of takeover disclosure documents is generally consistent with that applying to the proposed new fundraising rules.

4.1 In addition, provisions in the Bill will have the effect of removing the overlapping application of section 52 of the Trade Practices Act to takeover activity, and removing governmental immunity of Federal government business enterprises from the takeover provisions.

Fundraising

4.2 The key features of the new regulatory arrangements proposed by the Bill are:

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Small business fundraising will be facilitated by:

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allowing issuers to raise up to $2 million each year from up to 20 persons without issuing a prospectus or other disclosure document;

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allowing issuers to raise up to $5 million under an offer information statement rather than a full prospectus. The statement will be required to disclose material information known to the issuer but it will not be necessary for the issuer to undertake the due diligence investigations required for prospectuses; and

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extending the class of sophisticated investors from whom an issuer can raise capital without issuing a prospectus or other disclosure document.

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Facilitating shorter prospectuses by reducing the volume of material provided to retail investors and providing retail investors with the information which will assist them, without unnecessary detail. Information which may be of interest primarily to professional analysts and advisers can be mentioned in the prospectus and made available on request. In addition, ASIC will be empowered to allow the use of short profile statements in suitable industries. The full prospectus will be available on request.

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Rationalising liability provisions by removing the overlapping application of the Australian Securities and Investments Commission Act and corresponding provisions in the Fair Trading Acts of the States and Territories. In addition, changes proposed to the fundraising liability regime and associated defences will provide both issuers and investors with greater certainty about their rights and obligations under the Law. A uniform defence will be available to all persons acting with reasonable care. Professional advisers and experts will only be liable to investors for statements attributed to them with their consent. The rule reversing the onus of proof for forward-looking statements will be removed.

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Reforming advertising restrictions to enable information to be provided to the market about a proposed offer. Advertising of securities which are already traded on the Australian Stock Exchange (ASX) will be liberalised. Advertising of securities which are not already traded on the ASX will be restricted to basic information until a disclosure document has been issued.

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Electronic commerce will be facilitated by enabling fundraisers to issue disclosure documents in electronic form and distribute them via any medium, including the Internet.

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Prospectus registration will be replaced with a 7 day free look period during which ASIC, market participants, financial journalists and others will be able to examine a prospectus before fundraising is permitted.

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Removing governmental immunity from the fundraising provisions of Federal government business enterprises and encouraging the States and Territories to follow suit.

4.3 The Bill will also complete the reform of fundraising provisions by rewriting the debenture provisions in Division 4 of Part 7.12 of the Law.

Accounting standards

4.4 The key features of the new regulatory arrangements proposed by the Bill are:

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Establishing the Financial Reporting Council as an advisory body with responsibility for the broad oversight of the Australian accounting standard setting process and for giving the Minister reports and advice on that process.

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Members of the FRC would be appointed by the Minister on the basis of nominations made by peak professional, business and government organisations having an interest in the standard setting process.

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Specific functions of the FRC would include:

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appointing the members of the standard setter (the Chairman of the standard setter would be appointed by the Minister);

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approving and monitoring the standard setters priorities, business plan, budget and staffing arrangements;

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monitoring the development of international accounting standards and furthering the harmonisation of Australian standards with international standards; and

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promoting a greater role for international accounting standards in the Australian accounting standard setting process.

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Reconstituting the standard setter, the Australian Accounting Standards Board (AASB) as a body corporate, thus enabling it to employ staff and acquire property in its own right.

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Functions of the AASB would include making accounting standards for the purposes of national scheme laws, formulating accounting standards for entities not established under national scheme laws and participating in the formulation of international accounting standards.

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The AASBs powers include engaging the staff and consultants needed to undertake its technical research and providing administrative support.

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Facilitating interpretation of accounting standards by setting out the objectives of the accounting standard setting provisions in the legislation and providing that accounting standards are to be interpreted in accordance with those objectives. In addition, each accounting standard would have to be interpreted in accordance with any statement of purpose provision in the standard, so long as that statement was not inconsistent with the objectives of the standard setting provisions.

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A body, based on the existing Urgent Issues Group (UIG), would be established by either the FRC or the AASB to provide guidance on urgent financial reporting issues.

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Requiring a cost/benefit analysis of the impact of a proposed accounting standard to be prepared by the AASB before:

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making or formulating an Australian accounting standard;

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providing comments on an exposure draft of an international accounting standard; or

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proposing a standard for adoption as an international accounting standard.

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Funding - it is anticipated that funding of the new standard setting arrangements, which will be overseen by the FRC, will be provided by the Government, the Australian Society of Certified Practising Accountants and The Institute of Chartered Accountants in Australia (jointly) and preparers/users in the public and private sectors in broadly equal proportions.

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International harmonisation - the Minister would have the power to give the AASB a direction about the role of international accounting standards in the Australian accounting standard setting system but, before giving such a direction, would be required to consider a report from the FRC about the desirability of giving the direction.