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CONTENTS

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australia sparke Helmore lawyers

8 Getting the Deal Through – Corporate Governance 2013

AustraliaNick Humphrey, Hal Lloyd and Michelle Segaert

Sparke Helmore Lawyers

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practiceWhat are the primary sources of law, regulation and practice relating

to corporate governance?

Corporate governance in Australia is regulated federally under the Corporations Act 2001 (Cth) (Corporations Act) and under the com-mon law in both state and federal court systems. Listed entities are also regulated under applicable stock exchange listing rules.

Federal statute – The Corporations ActThe Corporations Act is the principal legislation regulating corpora-tions in Australia. It regulates all aspects of companies, including formation, the responsibilities and duties of the board of directors, financial reporting and audit requirements, capital management and capital raising, takeovers and shareholder rights and remedies. In Australia there are two basic forms of company: public companies (that may be listed or unlisted) and proprietary companies, which generally do not undertake broad-based capital raising transactions. Corporate governance rules differ in some respects depending on whether the company is public or proprietary and whether or not it is listed on the Australian Securities Exchange Limited (ASX).

The Australian Securities and Investments Commission (ASIC) is Australia’s corporate regulator with responsibility for enforcement of the Corporations Act.

Common lawAustralia is a common law jurisdiction. Historically, many of the fundamental principles of law relating to companies, including the principles of corporate governance, were derived from English com-mon law applying English statutory provisions. Australian jurispru-dence relating to corporate governance has since developed over time through both state and federal courts applying the Corporations Act and it continues to diverge from English law in its detail.

The listing regimeThe ASX is Australia’s primary securities exchange. Other smaller stock exchanges exist in Australia, such as the National Stock Exchange and the recently established Chi-X, however the ASX is the dominant exchange for listed companies in Australia.

The ASX Listing Rules expound corporate governance principles to which listed companies must either comply with or explain pub-licly why they do not. The ASX corporate governance principles are the de facto standard for good corporate governance in Australia.

2 Responsible entitiesWhat are the primary government agencies or other entities

responsible for making such rules and enforcing them? Are there any

well-known shareholder activist groups or proxy advisory firms whose

views are often considered?

Australian Securities & Investments Commission (ASIC)The Australian parliament is responsible for passing laws relating to companies, including the Corporations Act. ASIC is Australia’s cor-porate regulator. It is an independent Commonwealth government body with statutory authority and power to enforce compliance with the Corporations Act. ASIC also promulgates regulatory guidance notes on a number of topics that assist the market to understand how ASIC proposes to exercise its regulatory powers. It may also issue a class order, the effect of which is to modify the manner in which the Corporations Act operates in certain specified circumstances where to do so is not inconsistent with the policy objectives of the Corpora-tions Act. In some circumstances, in response to an application, ASIC will grant relief to a company in respect of a specific course of action where, on a case by case basis ASIC believes to do so is consistent with the policy objectives of the Corporations Act.

ASIC also regulates financial services providers (for example, investment funds and financial advisers) that are required to be licensed in Australia and consumer credit laws.

ASX Compliance and the ASX Corporate Governance CouncilThe ASX oversees compliance by listed entities with the ASX Listing Rules. The ASX Corporate Governance Council’s ‘Corporate Governance Principles and Recommendations’ (ASX Corporate Governance Principles) present principles for corporate governance for listed entities and are referred to in the ASX Listing Rules. The ASX Listing Rules require a listed public company to either comply with those rules or explain, in its annual report each year, the reasons that it does not wholly comply with the principles. The requirement to explain ‘if not, why not?’ provides some flexibility to a listed com-pany to adopt alternative corporate governance practices, if its board considers those to be more suitable to its particular circumstances, subject to the requirement for the board to explain its reasons for adopting those alternative practices.

Australian Prudential Regulation Authority (APRA)APRA is the prudential regulator of the Australian financial services industry. APRA oversees banks, building societies, credit unions, gen-eral insurance and reinsurance companies, life insurance, friendly societies and most members of the superannuation industry. APRA supervises compliance by these financial institutions with corporate governance standards prescribed in applicable legislation.

Shareholder activismHistorically, shareholder activism has been less prominent in Aus-tralia than in some other jurisdictions such as the United States, although more recently that has been changing.

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Sparke Helmore Lawyers auStraLia

The key shareholder activist body is the Australian Shareholders’ Association (ASA), which is an independent non-profit organisation that frequently attends shareholders meetings and makes public state-ments generally in favour of greater disclosure and greater account-ability of listed company boards. The ASA tends to represent the views of retail, rather than institutional shareholders.

Individual institutional shareholders can, at times, be vocal about certain specific corporate governance issues, but there is limited col-lective activism by institutional shareholders.

Proxy advisor firmsThe two major proxy advisors operating in Australia are Glass Lewis and Institutional Share Owner Services (ISS). A large number of Australian institutions subscribe to the services of one or both of these providers to obtain their views on how they should vote on resolutions to be put by listed companies to their shareholders.

The rights and equitable treatment of shareholders

3 Shareholder powersWhat powers do shareholders have to appoint or remove directors or

require the board to pursue a particular course of action?

Shareholders of public companies always have the ability to remove directors and vote for replacement directors, but have no legal power to direct the board to pursue any particular course of action. The power and responsibility to determine strategy and operate the com-pany rests with the board and not with the shareholders.

Shareholders may remove directorsShareholders can generally appoint and remove directors by passing an ordinary resolution at a shareholders meeting.

A public company is not entitled to entrench its directors. Share-holders may remove a director at a general meeting, regardless of any agreements in place between the company and the director or between the shareholders and the director, and regardless of the constitution of the company. In a public company it is only the shareholders that may remove a director (directors have no power to remove a fellow director). In a proprietary company the directors may remove another director and it is possible to provide for the entrenchment of a director in a shareholders agreement or in the company’s constitution.

Specific listing rule rotation requirementsThe ASX Listing Rules require directors to retire and stand for re-election every three years on a rolling basis.

4 Shareholder decisionsWhat decisions must be reserved to the shareholders? What matters

are required to be subject to a non-binding shareholder vote?

The Corporations Act provides that the business of a company is to be managed by the directors, but certain actions are prohibited without shareholder approval by the Corporations Act and the ASX Listing Rules (if the company is listed). The following actions are examples of this.

Constitution or name changesA resolution passed by shareholders holding at least 75 per cent of the shares in the company by voting either in person or by proxy (Special Resolution) is required to amend or replace a company’s constitution or to change the name of a company. Unless the company constitu-tion provides otherwise, a Special Resolution is required to vary or cancel share rights, to issue or convert preference shares, and to vary dividend rights to shares of the same class.

Related party transactionsChapter 2E of the Corporations Act requires a public company to obtain shareholder approval in order to give a financial benefit to a related party. ASX Listing Rule 10.1 requires a listed company to obtain shareholder approval for the sale or purchase of a substantial asset to or from a related party (where substantial asset means an asset with a value that is equal to or greater than 5 per cent of the equity interests of the company). ASX Listing Rule 10.11 prohibits a listed company issuing securities to a director or related party with-out shareholder approval.

Capital issues and alterationsASX Listing Rule 7.1 limits the number of securities that a listed company can issue or agree to issue within a 12-month period with-out shareholder approval (subject to a number of exceptions, such as a pro-rata rights issue). Certain alterations to share capital, includ-ing selective capital reductions and share buy-backs, and mergers by scheme of arrangement, require the approval of shareholders under the Corporations Act.

Major change to activities or disposal of main undertakingASX Listing Rules 11.1 and 11.2 require a listed company to obtain the approval of shareholders if it proposes to dispose of its main undertaking or make a significant change to the nature or scale of its activities.

Directors’ remunerationAustralia has followed the UK in introducing a non-binding share-holder vote on executive remuneration for listed companies, which is outlined in more detail in question 28.

5 Disproportionate voting rightsTo what extent are disproportionate voting rights or limits on the

exercise of voting rights allowed?

A listed company must have one vote for each ordinary share on issue and non-voting ordinary shares and super-voting ordinary shares are generally not permitted. A listed company may issue preference shares, which are only entitled to vote in certain circumstances, which are prescribed under ASX Listing Rule 6.3.

An unlisted company may have different classes of shares with different voting rights attached and could provide for restricted vot-ing rights in specified circumstances under its constitution or under a shareholders agreement. The rights attaching to preference shares must be set out in the company’s constitution or otherwise approved by a Special Resolution of shareholders.

6 Shareholders’ meetings and votingAre there any special requirements for shareholders to participate in

general meetings of shareholders or to vote?

All ordinary shareholders of a company have a right to receive notice of and attend and vote at its general meeting. To participate at a gen-eral meeting, shareholders must be registered as a holder of the com-pany’s shares on the company’s share register by the ‘record date’, being a date and time, determined by the company, no more than 48 hours before the meeting.

7 Shareholders and the boardAre shareholders able to require meetings of shareholders to be

convened, resolutions to be put to shareholders against the wishes

of the board or the board to circulate statements by dissident

shareholders?

Shareholders with at least 5 per cent of the votes that may be cast at the general meeting, or at least 100 shareholders who are entitled to vote at the general meeting, may request that the directors of a



company call and arrange to hold a general meeting. The company must prepare the notice of meeting including the resolutions and a statement regarding those resolutions as drafted by the shareholders requisitioning the meeting. The directors may also include a state-ment regarding each resolution and provide their accompanying rec-ommendations. The company is not required to include a statement prepared by a shareholder if it is more than 1,000 words long or is defamatory in its content. The expenses of calling and holding the meeting must be met by the company.

Alternatively, shareholders with at least 5 per cent of the votes that may be cast at a general meeting of the company may call, and arrange to hold, a general meeting themselves. In that case the notice will be prepared by the applicable shareholders and the directors may not have the opportunity to provide input and commentary in the notice. In this case, the shareholders calling the meeting must pay the expenses of calling and holding the meeting.

8 Controlling shareholders’ dutiesDo controlling shareholders owe duties to the company or to

noncontrolling shareholders? If so, can an enforcement action against

controlling shareholders for breach of these duties be brought?

Shareholders do not owe duties to the company or to the other share-holders. But the right to vote is not entirely unfettered. Shareholders that hold a majority interest in a company are not entitled to exercise their rights as a shareholder if to do so is oppressive to or unfairly prejudicial to or unfairly discriminatory against the interests of the minority shareholders. Minority shareholders have a right under the Corporations Act and under common law to seek relief from the courts for oppressive acts by a majority. A court has broad discre-tionary power to make remedial orders where oppression has been found, including orders that the company be wound up, that the company’s existing constitution be modified, that the company take or refrain from taking a particular action, that the majority purchase of shares of the minority and whatever else it determines will right the oppressive action.

9 Shareholder responsibilityCan shareholders ever be held responsible for the acts or omissions

of the company?

Shareholders of a company are not generally responsible for the com-pany’s debts and liabilities. In rare circumstances Australian courts have held that the ‘corporate veil’ of a company could be pierced in order to hold a shareholder responsible for the debts and liabilities of the company. The courts have made it clear that this would only be done in limited circumstances where the corporate form has been used deliberately to perpetrate a fraud or to avoid an obligation.

The Corporations Act also provides that a holding company (being the company that controls a subsidiary) may be responsible for the debts of its subsidiary where the subsidiary is insolvent, the holding company is aware or should be aware that the subsidiary is insolvent and the subsidiary incurs the debt while it is insolvent (or the subsidiary becomes insolvent by incurring the debt) and the subsidiary is subsequently wound up.

Corporate control

10 Anti-takeover devicesAre anti-takeover devices permitted?

Anti-takeover devices are generally not permitted in Australia. This is consistent with the English law principle that the decision on whether or not a takeover proposal is acceptable rests with the shareholders and not with the board.

Frustrating actionA board may not engage in any action that has the effect of frus-trating a takeover (such as disposing of a material asset or making a placement of shares to a third party or taking some other action that triggers a defeating condition in the bid) and might deny the shareholders an opportunity to participate in a proposal for control of the company.

That means that many of the takeover defence strategies that have developed in other jurisdictions are not permitted, such as shareholder rights plans, staggered boards or golden parachutes. The ASX Listing Rules contain an express prohibition on the payment of termination benefits to officers that are linked to a change in control of the listed company.

The Australian Takeovers Panel is a statutory body that oversees and adjudicates on disputes in takeovers and other corporate con-trol transactions in Australia. The Takeovers Panel will determine whether a target board has engaged in frustrating action. It will take into account all the circumstances surrounding the bid in determin-ing whether there is frustrating action or whether a lock up device is acceptable or not.

Use of lock-up devicesLock-up devices in the context of a change of control transaction are permissible and are common in Australia, but are also more limited than in some other jurisdictions. Lock up devices, such as break fees and no-shop or no-talk provisions are only permitted to the extent they encourage a bidder to engage with the target (because, for exam-ple, its costs are covered) but do not represent an unacceptable deter-rence to an alternative takeover proposal.

The Takeovers Panel has issued guidance on lock-up devices and market practice is becoming reasonably settled. For example, it is now well established that break fees should not exceed 1 per cent of equity value of the target company because, at that level, the break fee does not deter in any material way an alternative offer. There are also now well-established formulations for no-shop and no-talk pro-visions and the extent to which the board of the target must remain entitled to talk to alternative bidders, where to do so is necessary for the board to avoid a breach of duty to the company (namely, the scope of the fiduciary carve out).

11 Issuance of new sharesMay the board be permitted to issue new shares without shareholder

approval? Do shareholders have pre-emptive rights to acquire newly

issued shares?

Generally, the power to issue shares rests with the board.A company’s constitution may prescribe whether the company

requires shareholder approval and whether shareholders have pre-emptive rights to acquire newly issued shares. If a proprietary com-pany does not have a constitution, the Corporations Act sets out rights of pre-emption for existing shareholders in respect of new share issues, however the shareholders can vote to waive this on a case-by-case basis.

If issuing a new class of shares has the effect of varying the rights of an existing class of shares then the approval of the holders of that class of shares will be required under the Corporations Act.

Listed companiesShareholders of a listed company do not have pre-emptive rights. But a listed company requires shareholder approval if it wishes to issue shares representing more than 15 per cent of its issued capital over a rolling 12-month period (ASX Listing Rule 7.1). For small listed companies, the threshold may be increased to 25 per cent by shareholders passing a special resolution at an annual general meet-ing (ASX Listing Rule 7.1A).



Shareholder approval is not required for pro rata rights issues, issues upon the conversion of eligible convertible securities, certain issues under Corporations Act compliant off-market bids (eg, to fund the cash consideration under a takeover or scheme) or an issue made with the approval of shareholders for certain purposes (eg, a merger by scheme of arrangement).

Shareholder approval is not usually required when shares are issued pursuant to an approved employee share option plan (except where shares are issued to a director or related party).

12 Restrictions on the transfer of fully paid sharesAre restrictions on the transfer of fully paid shares permitted, and if

so, what restrictions are commonly adopted?

The transfer of fully paid shares may be restricted in an unlisted company by the company’s constitution or by agreement between shareholders or with an individual shareholder. It is common in closely held companies for shareholders to agree to restrict transfers of shares to third parties unless the shares are first offered to the other shareholders. It is also common to prohibit the transfer of shares to competitors of the company, although the mechanisms and process for achieving that can differ from situation to situation.

For listed companies, fully paid shares must generally be freely traded on the ASX. However, in some circumstances there may be restrictions imposed on certain shareholders that prevent the free transfer of their shares. For example, a person who has been issued with securities under certain circumstances before the IPO of the entity will be restricted from dealing in their securities for a specified escrow period following the IPO. Shareholders may also agree to enter into a voluntary escrow agreement in certain circumstances, which results in a holding lock being applied so that the security is unable to be traded. Escrows are usually applied in these circum-stances to give the market comfort that key pre-IPO shareholders will not sell immediately after the IPO.

A bidder may also agree to enter into a standstill agreement with regard to listed securities of the target in the context of negotiating a takeover or control transaction.

13 Compulsory repurchase rulesAre compulsory share repurchases allowed? Can they be made

mandatory in certain circumstances?

An Australian-listed company cannot require its own shareholders to sell their shares back to the company although it is possible to com-pulsorily redeem shares in a reduction of capital with the approval of shareholders by special resolution. If the reduction of capital is selective (that is, from only some shareholders), then it must also be approved by special resolution).

It is possible for a company to issue securities that have rights and obligations attached to them that permit compulsory redemption, such as redeemable preference shares. Redeemable preference shares are redeemable on their terms and once redeemed are cancelled.

Compulsory acquisition proceduresThe Corporations Act provides for the compulsory acquisition of shares in the context of a takeover offer, if the bidder and its associ-ates acquire relevant interests in at least 90 per cent (by number) of the securities in a bid class and have acquired at least 75 per cent (by number) of securities the bidder offered to acquire in the bid class. In the context of a takeover, bidders who are entitled to compulsorily acquire the remaining holders of a bid class, but elect not to, may still be required under the Corporations Act to compulsorily buy out the remaining holders of a bid class.

Compulsory acquisition is also permitted at any time if a person (either alone or with a related body corporate) holds full beneficial interests in at least 90 per cent of the securities (by number) in a class of securities in a company. In that case the acquirer must obtain

an independent valuation of the shares as the basis the compulsory acquisition price and if more than 10 per cent of the minority disa-gree, the courts must adjudicate on the fair value of the shares (and all costs of the minority shareholders incurred in those proceedings must be paid by the acquirer).

Unlike in a takeover, in a scheme of arrangement, if at least 50 per cent of shareholders in the relevant class (by number) who are present and vote representing at least 75 per cent of the total votes cast, approve the acquisition of the securities by way of a scheme of arrangement, then all shareholders are compulsorily obliged to sell their securities in accordance with the scheme of arrangement.

14 Dissenters’ rightsDo shareholders have appraisal rights?

There are no general appraisal rights remedies under the Corporations Act. But there are some circumstances in which a shareholder may be entitled to have the company or a bidder acquire the shareholder’s shares for fair value.

Remedy available for oppression or compulsory acquisitionAs noted previously, a court has very broad discretion to make orders to provide a remedy to an act or omission by majority shareholders that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a minority shareholder. Those remedies may include requir-ing the majority shareholders or the company to purchase the shares of the minority at fair value, as determined by the court.

Compulsory buy-outWhere a bidder under a takeover bid acquires more than 90 per cent of the shares in a target company, but chooses not to proceed to compulsory acquisition, the shareholder may require the bidder to acquire its shares, but the price paid will be the price paid under the takeover bid and there is no separate assessment of fair value.

The responsibilities of the board (supervisory)

15 Board structureIs the predominant board structure for listed companies best categorised as one-tier or two-tier?

In Australia companies have a single board of directors (one-tiered structure). Management report to the board, but there is no separate management board structure.

16 Board’s legal responsibilitiesWhat are the board’s primary legal responsibilities?

Directors’ dutiesAustralia has an extensive body of common law regarding directors’ duties that exists alongside, and overlaps with, the statutory duties in the Corporations Act. Directors are fiduciaries under Australian law and as such owe stringent duties to the company. The duties may be categorised into two broad categories:• dutiesofcareanddiligence,whichregulatehowdirectorsgo

about their responsibilities; and • dutiesofgoodfaith(whichisabundleofdutiesderivedfrom

the duty to act in the best interests of the company as a whole and for a proper purpose, such as the duty not to improperly use their position or company information for personal gain and the like).

DefencesDefences are available to directors in some circumstances, including:• business judgmentrule–whereadirectorhasmadea judg-

ment in good faith and for a proper purpose, and have properly informed themselves about the subject matter;



• relianceonthird-partyadvice–wherethereliancewasmadeingood faith after making an independent assessment of the infor-mation or advice; and

• delegation–wherethedirectorhasdelegatedaresponsibilityto another person, provided that the matter is one that should properly have been delegated (see question 21).

Other duties and liabilityDirectors also have responsibilities regarding financial and other reporting and disclosure (see question 35) and can be liable under various laws including for breaches of fundraising laws, anti-money laundering laws, environmental laws, competition and consumer laws, privacy laws, and occupational health and safety laws.

Breaches of directors’ duties or obligations can result in a range of fines or terms of imprisonment (or both) and disqualification from managing a company for a period of time.

Indemnities and insuranceIn some circumstances, directors can be granted indemnities from companies (see question 31). Many companies take out directors and officers (D&O) insurance to cover many of the directors’ liabilities (see question 30).

17 Board obligeesWhom does the board represent and to whom does it owe legal duties?

In Australia, the board represents the company, and directors owe duties to the company ‘as a whole’. This ordinarily means that direc-tors owe duties to the general body of shareholders. Unlike UK law, Australian law does not specifically provide that the directors may take the interests of other stakeholders into account, however, they may do so, as long as they are acting in the best interests of the company as a whole.

When the company is insolvent or nearing insolvency, the com-pany ‘as a whole’ includes an obligation on the directors to also take into account the interests of creditors. If a company has incurred debts while insolvent, in some circumstances creditors can pursue the directors personally for repayment of those debts.

18 Enforcement action against directorsCan an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Directors’ duties of care and diligence and duties of good faith under the common law and their equivalents under the Corporations Act are owed to the company. The proper plaintiff in an action for breach of those duties is the company and not the shareholders.

The Corporations Act provides for a statutory derivative action, that permits shareholders to commence proceedings for breach of duty in the company’s name and on its behalf. However, an applicant must satisfy a number of strict criteria to bring an action, the cost of bringing an action can be quite prohibitive (unlike the United States, Australia does not permit statutory derivative actions to be funded on a contingency basis), and bringing a statutory derivative action may not personally benefit the applicant. For these reasons, statutory derivative actions are not common, with shareholders often prefer-ring to pursue the directors or the company under the oppression remedy instead, alleging breach of duty as the basis for the oppressive acts said to be suffered (see question 8).

ASIC may also enforce the statutory directors’ duties arising under the Corporations Act. A breach of the statutory duties may result in:• apecuniarypenaltyorder;• thedirectorbeingdisqualifiedfrommanagingcompanies;• anorderforthedirectortopaydamagestothecompany;• aninjunctionrestrainingafuturebreach;or• areceiverbeingappointedoverthepropertyofthecompany.

19 Care and prudenceDo the board’s duties include a care or prudence element?

Section 180(1) of the Corporations Act provides that a director or other officer of a corporation must exercise their powers and dis-charge their duties with care and diligence. A similar duty exists under the common law.

The standard of care and diligence that must be exercised is that which a reasonable person would exercise if they were a director or officer of a company in the company’s circumstances and occupied the office held by, and had the same responsibilities within the com-pany as, a director or officer.

Australia’s statutory duty of care and diligence is similar to the equivalent duty under English law. Recently, the duty of care and diligence has been the subject of a number of high profile cases, including ASIC v MacDonald [2009] and ASIC v Hellicar [2012] (the James Hardie case), ASIC v Fortescue Metals Group Ltd [2011] (the Fortescue case) and ASIC v Healey & Ors [2011] (the Centro case). These cases are referred to in more detail below.

20 Board member dutiesTo what extent do the duties of individual members of the board

differ?

All directors are subject to the same duties and responsibilities. How-ever, the specific requirements to fulfil those duties will depend on the factual circumstances of the case, which facts include the director’s role and responsibilities within the company. For example, a direc-tor who has certain qualifications, skills and knowledge would be expected to use those special skills in the fulfilment of the director’s responsibilities (which may mean that the director’s responsibilities may extend further than a director who does not possess those spe-cial skills). In the James Hardie case (see question 19) it was found that the responsibilities of the company secretary (who was also a qualified lawyer) extended to providing advice to the board about meeting disclosure obligations and identifying defects in reports being considered by the board, because he possessed special skills as a lawyer.

A non-executive director, being less involved with the day-to-day management of the company, may not be expected to have, in the exercise of skill and care, the same knowledge of the operations of the company as the executive management who may also sit on the board.

Nevertheless, it is expected that all directors have a certain mini-mum level of skill and expertise that enable the directors to perform their role as directors of a company. For example, the decision in the Centro case (see question 19) found that, especially in the case of public listed companies, all directors must have an objective standard of skill in respect of financial matters that enable them to read and understand financial statements, consider whether those statements are consistent with their knowledge about the company’s affairs, and understand basic accounting conventions and basic accounting con-cepts to carry out their responsibilities adequately.

21 Delegation of board responsibilitiesTo what extent can the board delegate responsibilities to

management, a board committee or board members, or other

persons?

Directors have wide powers of delegation. However, they remain responsible for the delegate’s actions unless they can prove that they believed on reasonable grounds that the delegate would exercise the power in conformity with the duties imposed by the Corporations Act and the company’s constitution, and believed on reasonable grounds and in good faith (after making proper inquiries), that the delegate was reliable and competent in relation to the power delegated.



The James Hardie and Centro cases (see question 19) also high-lighted that directors may not delegate to others the ‘core, irreduc-ible’ responsibilities of directors, including, for example, the making of the declaration of compliance for financial statements and the approval of significant market announcements.

While generally, directors are entitled to rely on other experts or management, that reliance must be in good faith after the direc-tors have made an ‘independent assessment’ having regard to their knowledge of the company and the complexity of its structure and operations.

22 Non-executive and independent directorsIs there a minimum number of ‘non-executive’ or ‘independent’

directors required by law, regulation or listing requirement? If so, what

is the definition of ‘non-executive’ and ‘independent’ directors and

how do their responsibilities differ from executive directors?

There is no statutory requirement to have a certain number of non-executive or independent directors on the board.

It is common for the boards of large listed companies to have more non-executive independent directors than executive non-inde-pendent directors. Most large listed companies will have an inde-pendent chairperson. Around 98 per cent of S&P/ASX 200 boards have a majority of non-executive directors, and 85 per cent have a majority of independent directors.

However, the smaller the company, the less likely its board will have independent directors.

The ASX Corporate Governance Principles make various recom-mendations in relation to the independence of boards, including:• amajorityoftheboardshouldbeindependentdirectors;and• thechairshouldbeanindependentdirector.

Where the chair is not an independent director, the ASX Corporate Governance Principles suggest the appointment of a lead independ-ent director.

The ASX Corporate Governance Principles describe an inde-pendent director as a non-executive director who is not a member of management and who is free of any business or other relation-ship that could materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgment.

23 Board compositionAre there criteria that individual directors or the board as a whole

must fulfil? Are there any disclosure requirements relating to board

composition?

In Australia, directors must be at least 18 years old, and must not act as a director without court consent if they:• areanundischargedbankrupt,oraresubjecttopersonalinsol-

vency agreements or arrangements; or• havebeenconvictedoffraudoroffencesundercompanylaw,such

as a breach of duties as a director or trading while insolvent.

Additionally, public companies must have two directors who ordinarily reside in Australia, and private companies must have one director who ordinary resides in Australia.

The ASX Listing Rules require companies seeking admission to the official list of the ASX to supply evidence that each proposed director is of ‘good fame and character’.

While there are no composition requirements for boards, there is a strong focus on encouraging diversity (particularly gender diver-sity) in Australia.

The ASX Corporate Governance Principles make various recom-mendations in relation to diversity including that:

• companiesshouldestablishapolicyconcerningdiversity(includ-ing measurable objectives for achieving gender diversity) and dis-close the policy or a summary of that policy;

• companiesshoulddiscloseineachannualreportthemeasurableobjectives for achieving gender diversity and progress towards achieving them; and

• companiesshoulddiscloseineachannualreporttheproportionof women employees in the whole organisation, women in senior executive positions and women on the board.

24 Board leadershipDo law, regulation, listing rules or practice require separation of the

functions of board chairman and CEO? If flexibility on board leadership

is allowed, what is generally recognised as best practice and what is

the common practice?

In Australia there is no requirement to separate or combine the func-tion of chairman and CEO. However, in Australia, the majority of large listed companies separate the role of CEO and chairman. In 2011, around 80 per cent of companies in a S&P/ASX 200 sample had an independent, non-executive chairman.

In smaller companies, or more entrepreneurial companies, it is more likely that the CEO and chairman role would be combined.

The ASX Corporate Governance Principles recommend that the roles of chairman and CEO should not be exercised by the same individual.

APRA’s governance standards require that APRA-regulated insti-tutions’ boards comprise a majority of independent directors and have an independent chairman who has not been the CEO of the regulated institution at any time in the previous three years.

25 Board committeesWhat board committees are mandatory? What board committees

are allowed? Are there mandatory requirements for committee

composition?

If a company is included in the S&P All Ordinaries Index, the ASX Listing Rules provide that it must have an audit committee. If an entity is included in the S&P/ASX 300 Index, the ASX Listing Rules provide that it must have a remuneration committee comprised solely of non-executive directors.

The ASX Corporate Governance Principles provide that boards of ASX listed companies should establish a nomination committee, an audit committee and a remuneration committee, each of which should:• consistofamajority(orsolely)ofindependentdirectors;• bechairedbyanindependentdirector;and• haveatleastthreemembers.

Board committees are not mandatory for unlisted companies. How-ever, generally, directors may delegate any of their powers, including to a committee of directors.

26 Board meetingsIs a minimum or set number of board meetings per year required by

law, regulation or listing requirement?

There is no minimum or pre-determined number of board meet-ings per year required under the Corporations Act or ASX Listing Rule requirements. A board of a listed company would typically meet once a month, but may meet much more frequently if there are circumstances requiring it, such as a takeover or capital-raising transaction.



27 Board practicesIs disclosure of board practices required by law, regulation or listing

requirement?

In addition to disclosure about independence (see question 22), com-position and diversity (see question 23), separation of the chairman and CEO (see question 24) and board committees (see question 25), the ASX Corporate Governance Principles provide that boards of ASX listed companies should also disclose the process for evaluat-ing the performance of the board, its committees and individual directors.

Listed companies must disclose the number of board meetings held during the financial year and which directors attended the meetings.

28 Remuneration of directorsHow is remuneration of directors determined? Is there any

law, regulation, listing requirement or practice that affects the

remuneration of directors, the length of directors’ service contracts,

loans to directors or other transactions between the company and any

director?

Generally, directors determine their own remuneration, but the aggre-gate amount available to pay directors must be approved by share-holders at a general meeting. The Corporations Act and the ASX Listing Rules govern remuneration of directors in several ways.

Director remunerationRecently the ‘two strikes rule’ came into effect in relation to the remuneration of key management personnel of a listed company. The rule requires that directors of listed companies put the remunera-tion report (which reports on the remuneration of key management personnel and executive directors) (Remuneration Report) to a share-holder vote at the annual general meeting (AGM) of the company.

If 25 per cent or more of the votes cast on a resolution in rela-tion to the Remuneration Report vote against the Remuneration Report, this is the ‘first strike’. If at the next AGM of the company, 25 per cent or more of the votes cast on a resolution in relation to the Remuneration Report again vote against the Remuneration Report, this is the ‘second strike’. When a second strike occurs, the shareholders will vote at the same AGM to determine whether all of the directors need to stand for re-election. The spill resolution will be passed if 50 per cent or more of eligible votes cast are in favour. If the spill resolution is passed, a meeting must be held within 90 days of the spill resolution at which all directors (other than the manag-ing director) who were directors at the time that it was resolved to put the Remuneration Report to the AGM are required to stand for re-election at the spill meeting.

A number of companies received a second strike against their remuneration report in 2012. In approximately 85 per cent of cases, the spill resolution failed and no spill meeting was required.

Termination benefitsUnder the Corporations Act, a company must not give a person who holds a managerial or executive office (or who held such a role in the three years before their retirement), a benefit in connection with their retirement, unless the giving of the benefit has been approved at a general meeting of the company. Further, under the ASX Listing Rules, a company must ensure that no officer of the company will be entitled to termination benefits upon a change of control of the company.

29 Remuneration of senior managementHow is the remuneration of the most senior management determined?

Is there any law, regulation, listing requirement or practice that affects

the remuneration of senior managers, loans to senior managers or

other transactions between the company and senior managers?

The rules pertaining to director and officer remuneration discussed above (see question 28) apply equally to senior management.

30 D&O liability insuranceIs directors’ and officers’ liability insurance permitted or common

practice? Can the company pay the premiums?

D&O liability insurance is permitted and is common practice in Australia.

The company may generally pay the premiums, provided that it must not pay or agree to pay a premium for a contract insuring a person who is or has been an officer or auditor of the company against a liability (other than one for legal costs) arising out of con-duct involving a wilful breach of duty in relation to the company, or a contravention of the statutory duties of good faith under the Corporations Act.

31 Indemnification of directors and officersAre there any constraints on the company indemnifying directors and

officers in respect of liabilities incurred in their professional capacity?

If not, are such indemnities common?

Subject to the following exceptions, a company may indemnify its officers against liabilities incurred in their capacity as directors.

A company or a related body corporate must not indemnify a person against any of the following liabilities incurred as an officer or auditor of the company: • aliabilityowedtothecompanyorarelatedbodycorporate;• aliabilityforapecuniarypenaltyorderoracompensationorder

under the Corporations Act; or• aliabilitythatisowedtosomeoneotherthanthecompanyora

related body corporate and did not arise out of conduct in good faith.

A company or related body corporate must not indemnify a per-son against legal costs incurred in defending an action for a liability incurred as an officer or auditor of the company if the costs are incurred: • indefendingproceedingsinwhichthepersonisfoundtohavea

liability for which they could not be indemnified by the company (see above);

• indefendingcriminalproceedingsinwhichthepersonisfoundguilty;

• indefendingproceedingsbroughtbyASICoraliquidatorforacourt order if the grounds for making the order are found by the court to have been established; or

• inconnectionwithproceedingsforrelieftothepersonundertheCorporations Act in which the court denies the relief.

A company must not indemnify its officers against either of the fol-lowing liabilities incurred by the officer:• aliabilitytopayapecuniarypenaltyundertheconsumerpro-

tection provisions of the Competition and Consumer Act 2010 (Cth); or

• legalcostsincurredindefendingproceedingsinwhichthepersonis found to have such a liability.



32 Exculpation of directors and officersTo what extent may companies or shareholders preclude or limit the liability of directors and officers?

The constitution of a company may provide for the company to pay insurance premiums or indemnify directors and officers to the extent so permitted at law.

It is common for companies to enter into deeds of access, indem-nity and insurance with directors that set out the director’s entitle-ment to insist on insurance, provides for the applicable indemnity and gives the director greater access to information after the director ceases to hold office that might be relevant in proceedings against the director.

The company in general meeting may ratify an action taken or to be taken by a director. Generally speaking, an act may not be ratified if it involves a breach of the directors’ statutory duties, it is illegal, it amounts to a fraud on the minority, or it involves a breach of the directors’ duties to the company’s creditors.

33 EmployeesWhat role do employees play in corporate governance?

There is no formal role for employees in the governance process, except when they are also shareholders, directors or officers of the corporation. In practice, senior employees may be involved in the formulation of board practices and policies.

Employees also have certain statutory obligations that are similar to the good faith obligations of directors and officers. For example, employees must not improperly use their position or information gained from their position to gain an advantage for themselves or someone else or to cause detriment to the company.

Disclosure and transparency

34 Corporate charter and by-lawsAre the corporate charter and by-laws of companies publicly available? If so, where?

Listed companies must disclose their constitution to the ASX and it is publicly available. If a listed company wishes to amend its constitu-tion, it must submit the proposed amendments to ASX for its review before seeking the approval of shareholders to the amendment.

A public unlisted company must lodge its constitution with ASIC and make it available on the company’s website. If a public unlisted com-pany changes its constitution it must lodge the resolution effecting the change (and the amendment) with ASIC within 14 days of the change.

Proprietary companies are not required to make their consti-tution publicly available. Pursuant to the Corporations Act, the constitution must be kept with the company’s records and be made available to members, if requested.

35 Company informationWhat information must companies publicly disclose? How often must disclosure be made?

Disclosure of information regarding a company and its finances is a key platform in the regulation of companies in Australia. Disclosure of company information is made both by lodgement of documents with ASIC, which is stored in a publicly available database, and by filing with the ASX, which is publicly available on the ASX website. Listed companies, of course, have the most stringent obligations to disclose information to the market.

Continuous disclosure obligationsListed companies on the ASX have continuous disclosure obliga-tions under the ASX Listing Rules. A listed company is required to immediately disclose information that could have a material effect on the price or value of the company’s securities as soon as the com-pany becomes aware of that information, unless the information is

confidential, a person would not expect it to be released and the information meets one of several other criteria (the most common of which is that the information concerns an incomplete proposal).

Immediate release requires prompt action and release without undue delay. If there could be a delay in the release of the informa-tion, for example, because the release requires board approval, the company should request a trading halt so that the market cannot trade until the information is released.

ASIC has the power to issue infringement notices for breach of the continuous disclosure obligations under the Corporations Act. In 2008 ASIC imposed an infringement notice on the Commonwealth Bank of Australia for what amounted to less than an hour’s delay in releasing information relating to the quantum of loan impairment charges for the bank that was material to its business. There have been a number of examples of ASIC using this infringement notice regime as a regulatory tool to deter non-compliance with the continu-ous disclosure regime.

As a result of the requirement for listed companies to act promptly, the board of a listed company should have internal proce-dures for reporting and assessing price-sensitive information and for making disclosure decisions in a timely and efficient manner, includ-ing by use of a disclosure committee.

Other disclosure obligationsThere are also numerous other disclosure obligations under the ASX Listing Rules, including disclosure of a range of corporate activities, such as buy-backs or capital reconstructions, issues of shares or the payment of dividends and the entry into or change in terms of an executive service agreement with the CEO or a director.

Periodic reporting obligationsIn addition to continuous disclosure obligations, listed entities must comply with periodic financial reporting requirements. Listed entities must file an annual preliminary final report with the financial state-ments for the financial year, an annual report and a half-yearly report with the half-year financial statements. Mining exploration compa-nies and listed entities known as ‘cash boxes’ must also prepare and lodge with the ASX a quarterly cash flow report.

Unlisted entitiesPublic unlisted companies are required to prepare and lodge their financial reports (and director’s and audit reports) with ASIC and unlisted companies and managed investment schemes that are ‘dis-closing entities’ (as defined in section 111AC of the Corporations Act) must meet the continuous disclosure obligations in section 675 of the Corporations Act. Proprietary companies have more limited financial reporting obligations.

Recent trend to litigationThe continuous disclosure obligations and periodic disclosure obli-gations have recently been the subject of increased securities class action lawsuits in Australia. Plaintiff law firms have increasingly made claims that companies that have delayed in making announce-ments (or published periodic reports incorrectly stating accounts) that have subsequently shown to have a material effect on the price of the company’s securities, are responsible to those shareholders that traded in the shares of the company in the absence of the information that should have been released. Centro recently settled a class action lawsuit for approximately A$200 million. Other class actions based on a failure to make timely disclosure (all of which have been settled) are Aristocrat Leisure (A$144 million), Multiplex (A$110 million) and OZ Minerals (A$36 million).

Also, the James Hardie case and the Centro case (see question19), have resulted in a renewed focus for listed entities on the practical aspects of meeting their continuous and periodic disclosure obliga-tions. In both those cases the directors were held to have failed to adequately discharge their duties to disclose in a timely or accurate manner.



Hot topics

36 Say-on-payDo shareholders have an advisory or other vote regarding executive

remuneration? How frequently may they vote?

In Australia, shareholders have a non-binding vote regarding execu-tive remuneration referred to as the ‘two strikes rule’, which is dis-cussed in question 28.

37 Proxy solicitationDo shareholders have the ability to nominate directors without

incurring the expense of proxy solicitation?

The rights of shareholders to require a company to call and hold a meeting and their right to call and hold a meeting themselves, is set out in question 7. Although sometimes activist shareholders may engage in a proxy contest to seek to replace a director, it is not com-mon in Australia. Because directors of public companies can always be removed by shareholders, where a shareholder with the numbers wishes to replace the board, the directors usually resign before the meeting to remove them is held. This is more common among the smaller listed companies, with less institutional shareholders on the register.

Nick Humphrey [email protected] Hal Lloyd [email protected] Michelle Segaert [email protected]

Level 16, 321 Kent Street Tel: +61 2 9373 3555

Sydney NSW 2000 Fax: +61 2 9373 3599

Australia www.sparke.com.au

The Personal Liability Corporate Fault Reform Act 2012 (Cth) was introduced to ease the burden of criminal liability for directors. However, at the same time new occupational health and safety laws that impose greater responsibility and liability for directors and executives, and new tax laws that impose directors’ personal liability for unpaid PAYG tax payments and superannuation payments in an insolvency context, have been introduced.

The ASX recently issued updated guidance on the application of Australia’s continuous disclosure laws under the ASX Listing Rules. The new guidance note should provide boards with greater clarity on how to ensure compliance with those rules. Boards should ensure that processes are in place to permit compliance with the revised guidance. That will likely require companies to request trading halts on very short notice as soon as it becomes apparent that a disclosure may not be able to be made without undue delay.

The convergence of increased securities class actions, increased shareholder activism and increased regulator oversight (for example, leading to the James Hardie case), means that boards will need to be more careful in giving due weight and attention to the board process as much as to the substance of the board decision-making process. In the James Hardie case, the court was critical of the board for failing to give due weight to reviewing and approving the minutes of the relevant board meeting. The focus on board processes should lead to a convergence in board practice with the United States, where securities class actions and aggressive shareholder activism have been part of the landscape for a long time. In the United States, the board processes in the lead-up to a significant event, such as a control transaction, would be directed not only at satisfying the duties of the board by considering substantively all the issues that need to be considered in a deliberate manner before approving the transaction, but also building a record of that deliberative process in comprehensive minutes that can be used as evidence that the substantive deliberation took place. In Australia, boards may consider

moving towards building a more comprehensive record of the deliberation of the matter before the board so that the evidence of the board process is more apparent and is more readily produced in response to any allegation that proper process has not been followed.

The financial crisis increased the attention of the business community on the duty of directors to prevent insolvent trading. Under the Corporations Act, if a company incurred a debt while it was insolvent and at the time there were reasonable grounds for suspecting that the company was insolvent, then the directors may be held personally responsible for those debts (if the company is wound up). The business judgment rule, that applies as a defence to an action for breach of duty of care and diligence is not a defence to liability for insolvent trading. In 2010 the federal government released a consultation paper that proposed a potential safe harbour for reorganisation attempts for a business that was not in a formal insolvency regime. That reform proposal was not pursued at that time, but remains on the agenda of many stakeholder groups that believe that the insolvent trading regime in Australia discourages directors from persisting with restructuring attempts that would preserve value in the business and encourages the appointment of administrators to protect the directors’ personal assets. It is not a high priority of the current government, but in the continuing difficult economic environment, it is likely to drive some additional regulatory change in this area in the future.

Shareholder activism has focused in the last 12 months on the remuneration of executives. The ‘two strikes’ rule is now in its second year of operation so this reporting season is the first opportunity for companies to be subject to two strikes and have a spill resolution put to its shareholders. It is unlikely that boards would be spilled in many cases (because if shareholders controlled 50 per cent of the vote, those shareholders could remove the directors in any event), but it has significant symbolic effect to have two strikes against your remuneration policies.

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