Corporations Law Guidebook [2 ed.] 0195594010, 9780195594010

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Second Edition

OXFORD UNIVERSITY PRESS AUST RALIA & NEW ZEALAND

ISBN 978-0-19-559401-0

111111111111111111111111

9 780195 594010

visit us at: oup.com.au or contact ustomer service: [email protected] /

David Wishart

v

OXFORD

CONTENTS

UNIVERSITY PRESS

Preface to the First Edition Preface to the Second Edition Acknowledgments How to ... Learn from this Book How to ... Write Essays How to ... Answer Problems

Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries. Published in Australia by Oxford University Press 253 Normanby Road, South Melbourne, Victoria 3205, Australia © David Wishart 2016

The moral rights of the author have been asserted. First edition published 2009 Second edition published 2016 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence, or under terms agreed with the appropriate reprographics rights organisation. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. National Library of Australia Cataloguing-in-Publication data Creator: Wishart, David (David Anthony), author. Title: Corporations law guidebook/ David Wishart. Edition: 2nd edition ISBN: 9780195594010 (paperback) Notes: Includes index. Subjects: Corporation law-Australia. Commercial law-Australia. Dewey Number: 346.94066

Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Liinited (CAL) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Liinited Level 11, 66 Goulburn Street Sydney NSW 2000 Telephone: (02) 9394 7600 Facsiinile: (02) 9394 7601 Email: [email protected] Edited by Joy Window Typeset by diacriTech Proofread by Tim Fullerton Indexed by Karen Gillen Printed by Sheck Wah Tong Printing Press Ltd Links to third party websites are provided by Oxford in good faith and for information only Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

PART ONE CORPORATIONS LAW IN CONTEXT Chapter 1 : The Law Parliament and corporations law What the Act does not include Case law

ix xi xii xiii xvi xvii

••

1 3 4 7 9

Chapter 2: How Did It Come to Be? Introduction A timeline

13 14 15

Chapter 3: Constitutionality Introduction ,,. Should corporations law be a Commonwealth or state matter? The Constitution and corporations Empowering the current national sc~eme

40 40

Chapter 4: Administration Introduction Functions The administrative bodies Australian Securities and Investments ~mmission (ASIC) The Takeovers Panel Other bodies Challenging administrative decisions Power and process Merits

50 50

63

PART TWO EXTERNAL MATTERS

67

Chapter 5: The Entity Introduction Incorporation or registration Forms of corporation Forms of company The process of registration Why register a company? Company name and number

69 70 71

41

42 45

51 51

52 59 61

62 62

72 72 75 75 81

vi

CONTENTS

Constitutive documents Certificate of registration Dissolution Effect of registration Membership Limits Ignoring registration Chapter 6: Capacities and Powers Introduction Owning property Suing and being sued Contracting Exceeding authority Preregistration contracts Committing wrongs Chapter 7: As Debtor Introduction Choosing to borrow Types of borrowing Security Mortgages Floating charges Registration Chapter 8: Companies in Trouble Introduction Workouts Schemes of arrangement Receivership Voluntary administration Liquidation

CONTENTS

83 85 86 87 89 95 96 103

103 104 105 107 107 113 114 122

122 124 126 129 130 130 132 136

136 138 138 139 142 144

Chapter 9: Liquidation Introduction Initiating winding up Effect of winding up The liquidator Deregistration

146 148 152 153 153

Chapter 1 0: Paying in Order Introduction Unenforceable security interests Priority

156 157 158

146

156

Voidable transactions Priority payments Deferred claims

158 162 162

~

Chapter 11 : Protecting Stakeholders and Society Generally Introduction Size matters Creditor protection Investor protection Employee protection Tort victims

167

••

167 168 169 177 177 178

PART THREE INTERNAL MATTERS

183

Chapter 12: The Decision-making Sifucture Introduction The decision-making structure in overview The board of directors Who may be a director Meetings of members The members Unanimous consenf' The ru les under which the company is run The division of power

185

185 187 188 190 192 194 195 195 196

Chapter 13: Information Introduction History Purposes Creative accounting Inspection ASIC investigation Mandated disclosure Audit

200 201 202 202 203 206 206 210

•

Chapter 14: Control of Decisions Introduction The policies behind the law Policies in operation: the controls Policies in operation: enforcement Doctrines

200

•

216

218 219 220 227 231

vii

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CONTENTS

ix

PART FOUR THE SECURITIES MARKET

275

Chapter 15: Regulation of the Industry Introduction Financial services Regulation of financial markets Regulation within securities markets Administration

277 280 283 291 293

Table of Cases Table of Statutes Index

295 298 303

277

PREFACE TO THE FIRST EDITION Flattered as I was when Karen Hildebrandt from Oxford University Press came to my office and suggested I write a student-centred guidebook to corporations law, my first impulse was to reject the invitation. There are few rewards flowing from a supplementary text-a little money, if one is lucky, and teaching accolades if it is superb. However, it would not be considered research. Not only is my self-image, rightly or wrongly, one of a researcher, but textbooks are also not counted as research in research quality exercises. The latter is, of course, a science-centric approach, yet is an unfortunate fact of life in academia today. •"" Some reflection induced me to recant. It occurred to me that to write a guidebook for students would serve nicely in a project I had had in mind for some time. This was to investigate how law can be presented for law students in a way that accepts a legal studies or sociological "'Jil.Y of t~king without denying professional knowledge or its societal importance. William of Ockham advised against superfluous concepts. Is 'law' one of these? Postmodernists might well say that it is. Law is, according to them, an abstraction of a series of governmental actions and mentalities-an element of a discourse. This ties with the common observation that textbooks create 'law' as much as do parliament and judge:, A textbook writer's project is to make law comprehensible, presenting it as a coherent and consistent set of rules when that may not be the case at all. It certainly is not the case in cor~orations law. Putting this another way, is there a middle way between a textbook and Karl Llewellyn's bramble bush (The Bramble Bush, Oceana, New York, 1951)? Llewellyn argued that students should steep themselves in case law by reading as many cases as they could find without attempt at rationalisation. A student would then develop an 'a-perceptive mass' of individual instances on which approaches to problems could be founded. Apart from the unbelievable tedium of this process, the modern student would, and does, reject the process as quasi-religious, just as the libertarian academic rejects the authoritarian nature of the consequent Socratic lecture technique. Law schools (and even law lecturers) swing between versions of doctrinalism and realism in the law they teach. Any textbook sits uneasily in this process, most attempting to deal with both. Inevitably, however, doctrine as a real thing is conceded, with 'context' as an add-on . There are exceptions, of course; in corporations law Company Law and Governance (S Berns and P Baron , Oxford University Press, Melbourne, 1998) is an excellent example of a thoroughly legal studies approach. The question that intrigues me is whether it is possible to provide a text which does not concede doctrinalism, which adheres to realism or even the postmodern vision, yet is still useful in a doctrinal law school. This book is my attempt. It seeks to satisfy the needs of students studying corporations law, whatever the leanings of their various law schools, without asserting that there is such a thing as 'the law' . Its sole object is to provide the necessary information and techniques to perform the tasks students are set.

x

PREFACE TO THE FIRST EDITION

xi

Notwithstanding the above, the very first word of Chapter 1 is 'Law'. Why so? 'Law' here has a definite meaning. It is of thinking adopted by persons whose and complicity. The task of students in of such patterns of thinking by judges.

a series of particular interconnected patterns actions fit within wider patterns of compliance problem solving is to predict outcomes In order to predict those outcomes, the

patterns of thinking are normally described more narrowly as 'law' and applied to the circumstances at hand. If the wider perspective is taken, problem solving becomes a matter of applying the patterns, including the sequence by which questions are asked of the circumstances. Application of law becomes a matter of following problem-solving plans. Hence I use 'law' as a shorthand to refer to the patterns of thinking deployed by judges in their decision making. The full impact of taking

PREFACE TO THE SECOND EDITION ~

'

A preface to a later edition is a place to report on the success or otherwise of previous editions and to say what has changed. Sales-wise all I can say is that the first edition did sufficiently well for Oxford to ask me to do a second edition. Thank you, Linda, for your sterling efforts in this regard. Disappointingly and despite my protestations above, it was not counted as research even though it provoked invitations to give academic papers on various comments made and questions raised. Its pinkness was reduced in a reprint, much to my chagrin. Teaching practice caught up with the idea that there is a gap between description ancfp~blem solving; this gap is now filled in the 'flipped classroom'. And at least one respected

the perspective I do is that problem solving is quite unashamedly viewed as the application of algorithms, 'problem solving schemas', derived from those patterns. Deriving these is the function of mentioning 'law', but the focus of the book is on how

academic colleague berated me for spoon-feeding students and thus undermining the purposes of the law degree. My response to this was that it is a matter of democratisation: why give tho~e who~ background has fitted them out with the

problems set for students are to be solved.

skills an advantage? The skills are not profound; however, they need to be taught if legal education is to be available to all on the basis of equal opportunity.

Much more could be said about these, the theoretical underpinnings of this book. If it is not research, a real intellectual endeavour, I do not know what is. Yet this is not the place to say more, for, if the endeavour is to be valid, it must fit within the doctrinal vision which denies the necessity of such underpinnings: in this understanding law is a self-referential category needing no justification for its substance and techniques. To say more in this vein would be to move outside the purposes of learning corporations law. This book focuses on providing a service to students - one that is equally useful in narrowly doctrinal schools of law and in those of a more sociological bent. The book stands or falls on its utility in this sense, both from my publisher's perspective and from my academic one. To move to the pleasurable task of saying my thanks: the aforesaid Karen is first on the list for asking me in the first place, and for her forbearance and patience as time flowed by and I was happily delving into the question of the Code of Hammurabi and whether it said anything about corporations. My thanks to Trischa Baker, the editor-the book seemed magically so much better after her cut (but why is it wrong to call companies 'beasties '?) To the whole production team at Oxford my thanks for making the book so beautiful and for allowing it to be hot pink. To Linda Telai, also from Oxford University Press, thanks also for promising to sell it. To my family, Jane, Alexia, Anthony and Imogen (plus the dogs, cat, rabbit, budgies and fish) as ever, I owe a debt of gratitude for suffering my distraction, abstraction, detachment and simple bad temper with equanimity and encouragement. Lastly, I thank my students who have suffered the experimentation the results of which inform this book. This book was written during 2007 and 2008 . The law (there is that ever-so-useful word again!) is stated as it was then. David Wishart Bundoora May 2008

What is new (beyond correction of the multiple authorial errors about which I will not tell you)? The most important changes relate to the Personal Property Securities Act 2009 (Cth). This replaced the law as to charges with a law as to security interests. Oddly, it was'touted as representing a conceptual shift in the way security was dealt with in the law. It has taken me some years to work out that my initial confusions were the result of trying to fi~d and understand those deep conceptual shifts. There had to be more than the rather obvious approach of the legislation; I must have been missing it. However, if one pas misapprehended the old propertybased law as a matter of contract, the new one is actually simply tidying up the old . There was no great conceptual shift to be found! There were a number of other detailed legislation changes in about 50 Acts and a couple of important decisions, although n~ne of these altered the principles of the law. I am not a sufferer of latest-caseism, a disease like cititis, in the throes of which sufferers feel impelled to prove the currency of their work by citing the latest case in which some principle or rule has been applied. Mind you, my publisher might prefer otherwise. My thanks to all mentioned in the Preface to the first edition (especially my family-Jane, Imogen, Anthony and Alexia; although a new generation of dogs and cats has taken over, the fish did not survive and I let the budgies out accidentally-I did so feel sorry for them). My thanks also to Kazim Haksever and Mat Munro, both of whom provided invaluable research assistance; Tiffany Bridger at Oxford, who managed me (no mean task); and Joy Window, who edited it expertly, although thankfully (at least to me) leaving in some silliness . This edition was updated to mid 2015. David Wishart Bundoora August 2015

xiii

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ACKNOWLEDGMENTS

HOW TO ... LEARN FROM THIS BOOK

The author and the publisher wish to thank the following copyright holders for

Audience (this means you!)

reproduction of their material.

Commonwealth of Australia for excerpts from Commonwealth Acts sourced from www.comlaw.gov.au. This legislative material is reproduced by permission, but is not the official or authorised version. It is subject to Commonwealth Australia copyright. Incorporated Council of Law Reporting (ICLR) for case extracts from AC and QB reports; Thomson Reuters Australia for case extracts from Australian Law Journal Reports (ALJR) and Commonwealth Law Reports (CLR). Reproduced with permission of Thomson Reuters (Professional) Australia Limited, www.thomsonreuters.com.au . Every effort has been made to trace the original source of copyright material contained in this book. The publisher will be pleased to hear from copyright holders to rectify any errors or omissions.

WHO This book is written for students of corporations (sometimes 'company') law. You are probably attempting corporations law as a subject in a law degree. However, some of you may be attempting corporations law as a subject in a business, economics or accounting degree. For those of you in the latter group, while I think you can find a deal of value in what follows , there is a health warning below.

••

ASSUMED KNOWLEDGE Corporations law usually is attempted fairly late in a law degree. This puts me in the fortunate position of being able to asstlf'Tle a reasonably comprehensive knowledge of the basic ideas·of law, of le~al method and legal institutions. I assume you have completed contracts and torts and have a fair knowledge of property law. A little administrative law is useful in parts, too.

IF YOU DON'T KNOW ... I do not expect readerjto know all of these things. But where you do not, I expect you to have sufficient foundation in law to be able to look it up pretty quickly and easily. A good Australian law dictionary~ s a really good start, perhaps then a law encyclopedia and perhaps perusal of the Australian Halsbury entry. There is no harm in Wikipedia, so long as one recognises its limitations; check especially the jurisdiction about which the entry is

written ~

THE HEALTH WARNING For those of you who are not law students .Pbsence of the knowledge I assume you to have may make parts of this book difficult to follow. However, most of you will have completed a subject in business law before attempting corporations law. Almost all the knowledge I assume can be found in the textbook you used for that subject. It just might take a little work to dig it out. Those dictionaries and encyclopedias may help too.

The text PURPOSE This text is not supposed to be a textbook. It is a 'supplementary text'. This means you turn to it to help you get through your corporations law unit. As the series title suggests, it exists to guide you through the subject. The sense of the word 'subject' here is not that of a field of law, but of a course of study, with material to be studied , and assessment of your knowledge of that material and your skills in dealing with the material. So it focuses on what you need to know to perform the assessable tasks

xiv

HOW TO ... LEARN FROM THIS BOOK

that you might be set. I trust that you can find in here help and guidance for whatever may be thrown at you. CHAPTERS AND TOPICS Each chapter of this book covers one topic . I have endeavoured to keep each chapter self-contained. To some extent this is impossible as corporations law is a network of principles and rules rather than a sequence that can be logically arranged.

HOW TO ... LEARN FROM THIS BOOK

Assessment ""'""(

To an understandable extent, students are focused on assessment. After all, that is the visible evidence of their work. Indeed, learning theory would suggest that the objectives of a subject be rigorously tied to assessment. By aiming to do well in assessments, students are supposed to attain the learning objectives of a subject. My concern in this is that students too often think very little about how to do their

ORGANISATION

assessments, being far more concerned with the substance of the law applied in their assessments. Yet the old truth still obtains: what you do with it is just as important as

I have eschewed the 'life story' approach to the organisation of the text (registration as birth, the business as life, liquidation as death) in favour of context, followed by

what you have (or know). ·~ Accordingly, this book provides help in thinking about how assessments should

the corporation as a person (the external aspect), then the internal organisation , and finally securities as property. That is the way I think of it. It is no less and no more justifiable than any other approach. That organisation is arbitrary is in itself important to learn. TOPICS Note that the topics may not have the same names as those in your institution's corporations law subject, nor be internally arranged in the same way. This is the inevitable consequence of the independence of mind of law teachers (including me). To make it easier to cope with variance in versions of corporations law, I have highlighted all the usual names of topics in the index.

be completed. This help is in the following form: In law schools, assessment of substantive law subjects like corporations law generally take~ the form

~

o~essays

and problems. For each of these (especially the

latter) there is a 'How to ... ' section. • At the end of each chapter is a segment entitled 'Assessment'. This does three things : 1

Provides a sense of how knowledge of the topic is usually assessed.

2

Indicates the t~ical essays set for the topic.

3

Provides a step-by-step guide to solving problems within the topic. In the singular case of Chapter 14 Coftitrol of Decisions, this step-by-step guide is provided at the end of the description of each relevant doctrine.

DEPTH AND DETAIL In each chapter the important features of the law are described pithily, to the depth necessary for an undergraduate law course. No sophistication is sacrificed, merely detail that is easily accessible elsewhere. Ways to find that detail are provided, as are means to deeper learning. Diagrams are deployed where useful. There are a lot of boxes in this book.

Learning Law students are notoriously passive learners. They (you !) would learn far more, and far more easily, by taking a more active role in their learning . To this end, various learning tools are provided here. These are: •

Active learning exercises . These are designed to provide more interesting tasks through which matters may be comprehended and explored . By pursuing them, detail which this text does not have room for will be also discovered. Do them!

•

'Think about it' exercises. These are designed to provide avenues to deeper

learning . They frequently deal with policy issues. They also point to readings of cases, generally providing a hypothesis with which to approach the judgments. In my experience, cases are much more interesting if one has a question to answer.

•

xv

xvi

xvii

HOW TO ... WRITE ESSAYS

HOW TO ... ANSWER PROBLEMS

I have no doubt at all that you have been learning to write essays since primary

In contrast to essays, the law school problem is a form of assessment a student does not meet until they enter law school. Admittedly, the law school problem is merely a refinement in the techniques children acquire the instant a parent tries to impose the slightest discipline. Most students receive (further) training in how to do problems in an introductory subject, yet in my experience very few have thought much about doing them since then. And when they did that introductory subject, few had the material onto which to hitch the knowledge and skills on offer. Consequently much is forgotten and neglected. .. ...

school. In secondary school, these skills were refined. By your final year of schooling, you should have acquired a firm grasp of the differing forms of text, the various forms of essay, the importance of audience definition, the stages in the process of writing and so forth . Even if you completed mainly technical or science-based subjects, your English subject will have covered these matters. Essays demanded of you at university are merely more sophisticated forms of your school essays. In any event, many of you have already completed other undergraduate degrees, or are well on your way to completion. There is, then, no

Problems in corporations law tend to expose any flaws in the skill of answering

need for me to set out general instruction at length. Essays in corporations law are the same as essays set in any subject.

problems in general. This is because there are many topics and choosing the right ones to write about ('picking the issue') is critically important. Knowing which law deals with the fact situation raised ,,. by~ problem is as much one of the skills being tested as the ability to explain and apply any particular area of law. Yet very little time is devoted to developing this skill. In fact, given that law subjects generally deal

What, then, are the main forms of essay set in corporations law? Most often it is heavily descriptive. Frequently the question will ask for an opinion as to some controversy, but only as an adjunct to your description. Rarely is a classically argumentative essay called for. If called for, argument arises from reasoned discussion. Assume a modicum of intelligence of the audience, but not expert knowledge. The main point of this whole page is simply this: Answer the question! This involves a number of steps: 1 2

3

Read the question. Read it three times. Underline key words. Work out what it means. Look up any unfamiliar words . Explore any unfamiliar concepts to which it might refer. Work out what you think it requires you to do. Frequently guidance is given. Think about purpose (descriptive, analytical, argumentative, even polemical) and audience. Write a statement of what you think the question requires you to do for yourself (a 'statement of intention').

4

Research, brainstorm and plan your response, each as a separate activity.

5

Once you have planned your essay, reread the question and check that it does indeed require you to do what you plan to do.

6

Engage in a process which will produce a draft essay. This should be a number of steps which converts the plan into an essay.

7

Ensure your introduction explains how the essay addresses the question.

8

Ensure your conclusion explains your substantive response to the question.

9

Review your essay for expression, grammar and correct citation of cases. Be particularly careful to avoid any possibility of accusations of plagiarism, even to the extent of diminishing the appearance of originality of argument. The gains to be made from originality are far outweighed by the detriments resulting from even the suspicion of plagiarism.

If the question is answered and is still thought by the examiner to miss the issue, the student is entitled to, and should , protest.

with material in a segmented, sequential fashion, choosing just which segment or segments is relevant is usually ignored. Even books and other materials on 'how to study law' or 'problem -polving techniques' generally avoid the problem of how to know what law is rele~nt. All this is compounded by the tendency in corporations law subjects to pose problems about known chapters. The skill of choosing the right topic is not explored. • Second, there is such a depth of material in corporations law, beyond the capacity of a student in a single law school subject \o fully digest, that questions of required depth and detail can lead to severe miscalculation . Students run out of time or neglect relevant issues in favour of lesser topics. I have always found it extremely painful (as does the student) when a student underperforms due to a failure in generic skills rather than lack of intelligence and knowledge. It behoves me, then, to set out at some length how to answer problems.

•

Preparation STEP 1: CONSIDER FACT SITUATIONS Fact situations are the generalised questions for which law provides solutions for clients. For example, two people may have entered into mutual undertakings, some of which have not been fulfilled. This could be a contract or family law situation. More specifically, a non-family relationship in which one party merely neglects to perform a promise might be at issue. This would indicate that the relevant rules are those relating to the existence of a contract and to breach of contract. The fact situations are often lumped together into 'subjects' -usually those taught in law schools. 'Subjects' may provide an easy guide to which fact situations are relevant, but are not infallible. Some company law involves contract law, for instance,

xviii

HOW TO .. ANSWER PROBLEMS

so it would be foolish to exclude contract because the problem is thought to be about company law. Within the subject known as corporations law, as in most subjects, there are not many different fact situations. A preliminary task of students is to work out what they are. You should divide the subject on the basis of relatively abstract descriptions of sets of facts where a remedy might be desired, starting with the desires of a client. The categorisation you adopt is a matter of personal preference. One possible taxonomy (of many) for corporations law is: 1

The company management think a director or officer has behaved wrongly and wish to seek redress.

2

One or more shareholders wish to challenge a decision made on behalf of the company by:

HOW TO ... ANSWER PROBLEMS

3 4

section 232 unfairness;

5

enforcement of the Corporations Act under s 1324;

6

particular statutory avenues; and

7

threats to initiate inspections or investigations or apply under s 461.

Or for fact situation 4 in which the company does not wish to be liable in contract, the issues might be:

(c) the promoters. 3

A director wishes to challenge a decision of the company.

4

The company does not wish to be liable in contract. crime or tort.

5

Someone (a creditor of the company or a victim of corporate activity) wishes to get at the assets of the shareholders or directors or other officers of the company.

incorrect execution and/or lack of authority; pre-registration contract;

1 2 3

breach of duty; and

4

ultra vires (this is really old law now, but still may be worth raising if only to dismiss it).

•

(a) the general meeting; (b) the board of directors; or

breach of constitution;

A particular issue might b~ placed under more than one fact situation; breach of duty, for example, is something the company management might think a director has done wrong, and therefore under fact situation 1. a control on company decisions exercisable by a shareholder through a derivative action and thus under fact situation 2, and a means a company can use to get out of a contract under fact situation 4. (It is also a means by w!jch a creditor can get at the assets of the directors under 5 in the taxonomy above and something ASIC might be interested in enforcing.)

6

Identification of the assets of the company with those of the shareholders benefits the company or shareholders.

7

A party to a contract for the purchase of shares wishes to enforce/repudiate or in some other way deal with the contract or its surrounding circumstances.

In breaking down a subject into iss ~es under their headings you again need a thorough knowledge of the subject from an overall perspective. You should concentrate on seeing the relationship of the rules to each other and to the types of problems that arise. The remedy availal51e should be constantly in mind because

8

ASIC (or even the Department of Public Prosecutions) seeks to enforce the Corporations Act 2001 (Cth) in some way.

remedies are the whole point of the categorisation. In this exercise tutorials and group work are invaluable aids.

You need a good understanding of the subject to divide it up in this way. When you do so, ensure all rules are incorporated somehow, and that your taxonomy suits the sorts of problems you are about to face. You might think of the problems dealt with in tutorials and subject materials and work out how they fit into your taxonomy. Have a look at some old examinations too. STEP 2: CONSIDER ISSUES OF LAW Each fact situation involves a number of issues of law. Each issue solves a problem the plaintiff in the fact situation has, given that the criteria for a remedy are satisfied. In other words, an 'issue' is a means by which the client's desires are met. For example, in fact situation 2 in which a shareholder wishes to change a decision made on behalf of the company by, say, a general meeting, the 'issues' might be: 1

fraud on the minority;

2

derivative action for breach of duty;

STEP 3: CONSIDER THE RULES

•

Each issue of law can be broken down to a set of rules. Very simply, a rule has criteria for application and a result of application. The matter should match the remedy sought. For example, in relation to a claim by a company wishing to renege on a contract that the contract was made on its behalf without authority (fact situation 4, category 1 above), the rule as to agency is: •

result: an enforceable contract;

•

criteria: -

either an agent makes a contract with authority; or the agent not having express authority, the third party can take advantage of an assumption under s 129 (and you may go on to state in full the possible means of doing so).

xix

xx

HOW TO ... ANSWER PROBLEMS

Of course, the issues may be broken into smaller and smaller segments, almost endlessly. Some rules are of less certainty than others. The less certain a rule is, the more contentious its application. There are two types of uncertainty: doubtful validity and vagueness. The first is a doubt as to whether the expression of the rule in a particular form correctly represents the law. An example is whether those executing a contract under s 127 as the company also need authority as agents. The second occurs when the way in which the rule applies to facts is not clear. Thus we don't know how to determine whether a third party 'knew or suspected' under s 128(4)-the rule is clear, but how do you know what anyone knows or suspects? The first is a question of law, and the latter a question of fact, although the two are so intimately related that it is hardly worth making the distinction in most circumstances.

HOW TO ... ANSWER PROBLEMS

and therefore have to be memorised (the examination is closed-book), they should be condensed as far as possible.

"""\

Answering The answer itself should be prepared in the following steps. 1 Read the question. Make sense of the story. Find the actual question about the story. Who is the question concerned about? Does the question narrow the focus of what you have to provide?

2

Pick the issues . While the above concentrates on preparation fo' ~e particular strategy, there are a number of other strategies for which the above prepares you, and some additional ones which you might contemplate. They are: -

When advising a client about an uncertain rule, a lawyer does not decide what the rule is. The lawyer does advise on the chances of success in the circumstances facing the client. This involves considering the ways in which such matters have been decided previously with the ultimate aim of predicting what a court will do. Thus ideas, concepts, principles, precedents and so forth are referred to as reflecting on the decision of the court or even a particular judge. The principles and concepts

Recall what the examiner said as to what is on the examination, although you must be careful to put the indi~ted material in the right place in your answer. ~

While many examiners enjoy the blandishments of students attempting to gain an advantage over their fellows , most also feel to give clues is not worth the problems of complaints of inequity among students and possible claims of unsatisfactory performance of their duties. Nevertheless, clue-seekers are generally

revealed by judges in the past are the best guide to what judges will do in the future. -

Distinguish here between ideas and theories of law, and ideas and theories of how

thou~t

to perform better in examinations.

Look for key words in the questions. Some words indicate areas of law. If a company contracts in a proble~, then there well may be an issue as to the

law operates in a particular circumstance. The former are a means of understanding the rules, but are not authoritative sources for evidence of how a court will reason. The latter do help indicate how a court will reason in a particular situation and should be used for this purpose. For example, that a company is a legal person is an important theoretical posture in law. It is referred to in many situations of social debate, such as whether a company should be liable for crimes and torts, or for a subsidiary company's actions. But it is not particularly important for solving problems, except in its converse form of a set of laws about when the established set of liabilities for corporate actions is to be disregarded.

contract. A mention of directors usually presages a question about directors' duties. -

Look for patterns of facts for which 'answers have been given in tutorials or elsewhere and for which you have prepared. Be careful of little variations in facts which might change a whole question.

-

Look for patterns of facts which hff~e appeared in cases. Little variations are possible here too. Resist the temptation to simply apply the case without considered reasoning. Once you have run the above strategies over the problem, you should read

STEP 4: PLAN

the facts and decide which fact situations as described above are involved in

Planning for answering problems should consist of a restructuring of the received

the problem. If you have practised by answering lots of problems, you should

descriptions of the law into the categorisation of the lawyer as described above (fact situations, legal issues and rules). The last will be in that level of detail commensurate with available time.

have altered your taxonomy of fact situations to reflect those usually arising in the problems set for your institution. Then , bearing in mind the remedies sought by the clients, delete from the listings of legal issues in each fact

This preparation involves a complete reconsideration of all that has been heard and read . The further afield the student reads, the more appropriate and workable the structure set up. If the materials prepared by the student are to be available at the time of problem answering (in, say, an open-book examination) they should be in a form suitable for easy physical and mental access during its course. If they will not be available then,

situation those inappropriate for the facts provided. The remaining ones are 3

the 'issues ' which you have 'picked'. Examine the issues you have chosen and note the contentious ones, either in themselves, or because the facts are only marginally applicable.

xxi

xx ii

HOW TO ... ANSWER PROBLEMS

HOW TO ... ANSWER PROBLEMS

4

Plan your answer, stating and organising the material under issues, with particular reference to contentious rules.

5

Reread the problem. Are there any orphan facts for which there seems to be no reason? Can you think of an issue for which they may be relevant? Is there anything else which might apply?

6

Write the answer according to your plan, being careful to deal with these issues:

How does this Book Help? IN ISSUE PICKING There are three ways this book can help you to pick the right issues . First, it explains in simple terms how each topic fits into corporations law as a whole. If you can make sense of the law in this way, the process of dividing the subject into fact situations and issues is made simpler.

-

Who can sue whom?

-

What are the criteria for the remedy and have they been fulfilled?

-

Are there any applicable defences and have their criteria been fulfilled?

Second, it explains what each topic does as a set of rules. This is the same as the first, except it comes at the task from the other side, as it were. We can see how the law works to resolve disputes and maintain order and hence can• .Jork out what it

-

What is the remedy and will it be effective?

does in various sorts of disputes and situations.

-

What is the result if the criteria are not satisfied or the defences made out? Remember, the more contentious the rule is in itself or in its application to the given circumstance, the more you should write (there is more to write about). If there is no doubt as to whether the remedy is available or not, there is not a Jot to write about. You will have noticed that the fact situations, or even a statement of the issues, will not appear in your answer. The answer will deal mainly with rules, with reference to each particular issue for structural purposes. This does not mean it is unnecessary to study the fact situations and the way issues interrelate. Doing so is the means of finding which rules are relevant. There is

Third , in the 'Assessment' section in relation to each topic, it indicates how the topic can be recognised.

IN WRITING THE ANSWER When undertaking instruction 6 above, the steps that should be taken in each topic should be thought out early in the planning stage. If there is to be an examination, it should be done for every topic prior to the examination. I have set out the ~~ps for instruction 6 as I see them for every topic. You can find them either at the end of the chapter or (for Chapter 14, Control of Decisions only) at the end of the discussion of the varioul discrete topics.

no point at all in long answers on rules that do not help the client. Finally, as in all writing, audience definition is critical. In writing the answer to a legal problem, the examinee should not treat the teacher as the audience. The accepted simple definition of the audience is the client. A more sophisticated student might look at it differently, deeming the audience to be a person more senior in an imaginary legal firm than the examinee, the answer being the examinee's explanation of the advice given to the client. Of course, the ultimate audience is the teacher; it is merely that the game-like rules of problem answering dictate a different audience.

Where has IRAC Gone? IRAC (Issue, Relevant law, Argument, Conclusion), or its equivalents, are often heavily inculcated in the earlier years of law school. Law students rapidly discover that it is a learning device rather than a blow-by-blow description of how to prepare an answer. Yet each of the four elements still has to be apparent in the answer. Does the above depart from IRAC? The answer is 'no'. It is still there. Much of the above is about the Issue. The Relevant law, Argument and Conclusion are all tucked into instruction 6. That is the stuff you have been practising for a number of years now.

Conclusion The above description is my suggested wcfy of doing problems. Not all people agree with it. Think about the way in which you are going to prepare answers. Adopt the principle of mark maximisation (most marks for least effort), trusting the teachers to place bounds on and examine the subject tin the best interests of the students.

xxiii

,,..

ONE CORPORATIONS LAW IN CONTEXT •

3

CHAPTER 1

THE LAW COVERED IN THIS CHAPTER The extent and sources of law for and about corporations The main statute, Corporations Act 2001 (Cth} The relationship between the case law and the legislation

STATUTES AND SECTIONS TO REMEMBER Corporations Act 2001 (Cth}

Law envisages a corporation as a separate pool of assets governed by a decision-making structure. The decision-making structure involves both a group of members and a system of strong central control in the board of directors. Membership of the gr~p is a form of property that may be alienable, in which case it is called a 'share'. Corporations must be created by law, and law has to be made specifically to cope with corporations because law mostly assumes human beings are its subject. Corporations enable power, in the form of control over wealth, to be accumulated

'

and deployed-and power can be used for evil as well as good. So the way corporations work, and what they do, must be controlled . In addition, membership is so abstract, in this form of property known as shares, that the process of buying and selling enables frauds, scams and all sorts of dishonesty to occur. Social policy aims to protect the gullible from their ignorance. All this takes a lot of law just for corporations. That is what this book is about. FIGURE 1.1 The corporation Operates in a legal environment designed for human beings

Is a separate pool of wealth with a decision-making structure With membership in the form of shares which can be bought and sold

4

PART 1: CORPORATIONS LAW IN CONTEXT

CHAPTER 1: THE LAW

what a member is and members' rights and remedies;

THIN K ABOUT IT

what shares are, what forms they can take, re~tion of shares and how shares

One of the leading thinkers in law, H L A Hart, stated that we should not consider 'What is ... ?'questions in law (H LA Hart, 'Definition and Theory in Jurisprudence' (1954) 70 Law Quarterly Review 37, 49-57). Why might I, the author, start off this book in quite deliberate disobedience of this injunction? What are the limits and contingencies of the description set out here? Think about the uses to which it might be put. Your task of learning corporations law is clearly one such use.

may be transferred from one person to another; share capital and transactions affecting it; borrowing by companies, security for those borrowings, and what happens when

Note: The description given above derives from that set out in S J Stoljar, Groups and Entities: An Inquiry into Corporate Theory, ANU Press, Canberra, 1973.

audited; various ways of changing the structure of corporations, whether capital structure,

PARLIAMENT AND CORPORATIONS LAW

meetings of members and directors;

there is not enough money to pay back the borrowings; what records a company has to keep, what reporting it has to make and how it is

I.

.....

borrowing arrangements or ownership structure; the ways in which companies may get out of financial trouble with the help of outsiders, including ways of placi~ problems 'on hold' while solutions are found ;

The most obvious place to look for corporations law is the Corporations Act 2001

how corporations go bankrupt through winding up in insolvency;

(Cth). This is a very long Act of the Commonwealth Parliament.

how members can decide to wind up the company; how corporations are wound up and eventually deregistered; and

LEARNING EXERCISE

who takes priority in getting their money if a company is being wound up.

Find out just how many sections there are in the Corporations Act 2001 (Cth). Note: The Act is numbered to s 1471 , but includes many more interpolated sections, such as the 216 sections inserted between s 601 and an existing s 602. Moreover, substantial numbers of sections are simply not there-like all those between ss 1101 J and 1200A. Then there are the sections incorporated by reference, such as the transitional provisions incorporated bys 1408, and a 'Small Business Guide' of some 12 sections which forms part of s 111 J of the Act.

Many other provisidhs in the Corporations Act deal with the markets that have grown up around the possibility of buying and selling memberships in corporations-memberships usually re~resent a 'share' in the company and are therefore of value.

THINK ABOUT IT It is not just that the Corporations Act 2001 (Cth) is long; it also covers many topics, including provisions about the existence of a company, how it is governed and carries on activities, and what is to happen when it ceases to exist. These might be called the 'substantive' provisions.

If we can divide up the functions of law as making things possible (engineering) and resolving disputes, which of these provisions do the former and which the latter? For example, registering a company is engineering whereas using s 1324 to stop a reduction of capital is resolving a dispute as to whether the reduction should go ahead.

THE SUBSTANTIVE PROVISIONS Substantive provisions cover: registration of companies, their names, addresses and the various types they can be; how corporations contract;

PROVISIONS ABOUT SHARES AS SALEABLE PROPERTY These provisions regulate:

their internal rules;

conduct in buying and selling shares; the process and consequences of sufficient numbers being purchased that control

the duties, powers, appointment, disqualification and remuneration of directors and other officers;

of the company changes; and the markets themselves, those that are involved with them and the services that they provide.

5

6

PART 1: CORPORATIONS LAW IN CONTEXT

Finally there are the provisions which make the whole apparatus work. Some are in other Acts of various parliaments, such as the Australian Securities and Investments Commission Act 2001 (Cth).

CHAPTER 1: THE LAW

but regulates a broader range of legal entities, termed 'corporations'. And sometimes, for some purposes, even this is exten'd!:t:l.

LEARNING EXERCISES

THE TECHNICAL PROVISIONS

1

What is the difference between a 'corporation' and a 'company'?

Technical provisions provide detail about: definitions of words;

2

What is a 'managed investment scheme'?

3

Can you think of a 'body that is not a company' but which is also not a human being?

the way regulation is to be enforced (for example, through penalties); the relationship between the various parliaments;

Clue: Look ups 9 of the Corporations Act 2001 (Cth).

the institutions set up for various purposes, such as general administration and regulation (the Australian Securities and Investments Commission (ASIC)), advice on law reform (the Corporations and Markets Advisory Committee (CAMAC) and the Joint Parliamentary Committee), administration and regulation of the auditing profession's involvement with corporations, and deciding disputes in certain areas such as takeovers; which courts are to be involved, and in what way; and matters to do with the transition from one set of statutes to another-all too frequent in corporations Jaw.

WHAT THE ACT DOES NQT INCLUDE Close examination of the statutory law reveals an oddity: there are some surprising fundamental omissions. The Corporations Act does not say some things one could reasonably expect it to say, given that it is supposed to establish and terminate all companies and regulate the wider field of all corporations.

CORE OMISSIOfltj 1 Many sections provide for 'the duties, powers, appointment, disqualification and remuneration of directors and other

off~ers'.

But there is nothing in the Act to say

precisely what a director is. Section 9 says this: LEARNING EXERCISE Which chapters, parts or sections of the Corporations Act 2001 (Cth) perform each of the above tasks?

director of a company or other body mea1is: (a)

a person who: (i) (ii)

is appointed to the position of 3'li alternate director and is acting in that capacity;

Yet this is not the end of corporations law. Parliament {by indirect means) and

regardless of the name that is given to their position; and

bodies set up by parliament (more directly) provide much that can be considered 'law'. In fact law is not a category with definable boundaries. Regulation and

is appointed to the position of a director; or

(b)

unless the contrary intention appears, a person who is not validly appointed as a

regulatory and administrative practice are as important as the provisions of an Act.

director if:

These can be found particularly in the Corporations Regulations 2001 and in the

(i)

they act in the position of a director; or

regulatory guides, class orders and information sheets issued by ASIC, all dealing in

(ii)

the directors of the company or body are accustomed to act in accordance

more detail with aspects of statutory law or the exercise of discretions under it. Nor does 'corporations law' have a definable boundary. The Corporations Act has

with the person's instructions or wishes. Subparagraph (b)(ii) does not apply merely because the directors act on advice

substantial portions (Chapter 5C) subjecting 'managed investment schemes' to

given by the person in the proper performance of functions attaching to the person's

regulation, and extends some of its provisions to 'bodies that are not companies'.

professional capacity, or the person's business relationship with the directors or the

Indeed, the very title of the statute, the Corporations Act, reflects the fuzzy

company or body.

boundaries of 'corporations law', which provides for the registration of 'companies',

If you read this carefully, you will see that this assumes the idea of 'director'. There is nothing in the Act to further elucidate it.

7

8

CHAPTER 1: THE LAW

PART 1: CORPORATIONS LAW IN CONTEXT

CORE OMISSION 2 'Member' is in a similar position . All the Act says is this :

Yet all this does is to equate a company to a 'body corporate' and proceed to set out the powers that are included in the suite of powe(s thereby conferred. The gaps in the Corporations Act extend beyond the core ideas. A company's

231. Membership of a company

A person is a member of a company if they:

relations with the outside world might also be thought relevant for a comprehensive statute. Yet although the way a company contracts is well provided for in ss 126-30,

(a)

are a member of the company on its registration; or

and extended in ss 131-3 to dealing with the situation of contracts purportedly

(b)

agree to become a member of the company after its registration and their name is entered on the register of members; or

whether, or how, a company may commit a tort or crime.

(c)

become a member of the company under s 167 (membership arising from conversion of a company from one limited by guarantee to one limited by shares).

CORE OMISSION 3

made on behalf of the company before it came into existence, there is nothing about Although it is not invariably the case, many statutes in Australia st~t~their purpose. Some chapters of the Corporations Act do state a specific purpose, but no general purpose is given. The Australian user is left in the dark about the whole point of the statute.

'Company' is somewhat better served bys 119: 119. Company comes into existence on registration

A NEW ZEALAND COMPARISON: COMPANIES ACT 1993 (NZ)

A company comes into existence as a body corporate at the beginning of the day on

The preamble to the New Zealand Companies Act 1993 says:

which it is registered. The company's name is the name specified in the certificate of registration. Ands 124:

An Act to reform the law relating to companies, and, in particular, (a)

124. Legal capacity and powers of a company (1)

A company has the legal capacity and powers of an individual both in and outside

(b)

this jurisdiction. A company also has all the powers of a body corporate, including the power to:

(c)

(a)

issue and cancel shares in the company;

(b)

issue debentures (despite any rule of law or equity to the contrary, this power

(d)

includes a power to issue debentures that are irredeemable, redeemable only if a contingency, however remote , occurs, or redeemable only at the end of a period , however long); (c)

grant options over unissued shares in the company;

(d)

distribute any of the company's property among the members, in kind or otherwise;

(e)

to reaffirn'tthe value of the company as a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the sq;eading of economic risk, and the taking of business risks; and to provide basic and adaptable requirements for the incorporation, organisation, and operation of cl:>mpanies; and to define the relationships between companies and their directors, shareholders, and creditors; and to encourage efficient and responsible management of companies by allowing directors a wide discretiE:>n in matters of business judgment while at the same time providing protection for shareholders and creditors against the abuse of management power; and to provide straightforward and fair procedures for realising and distributing the assets of insolvent companies.

(e)

give security by charging uncalled capital;

(f)

grant a circulating security interest over the company's property;

CASE LAW

(g)

arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction;

There are lots of cases about corporations and corporations law. They are the

(h)

do anything that it is authorised to do by any other law (including a law of a foreign country).

there is case law. The corollary follows: where understanding is complete and

product of disputes involving corporations. Wherever there has been a legal dispute, universally accepted, there is no case law. We can thus identify the various roles

A company limited by guarantee does not have the power to issue shares.

cases take in corporations law.

9

10

PART 1: CORPORATIONS LAW IN CONTEXT

THE ROLES OF CASE LAW Case law: establishes many of the important ideas, such as 'director' and directors' duties, 'body corporate ', 'member' -indeed, the very framework upon which the statute hangs; fi lls in gaps in the legislative framework (for example, tortious and criminal liability); and interprets the statute. These are conventional for any area of law. Yet the absences discussed above point to a profound and unique feature of corporations law. This is the complexity of the relationship between statute and case law. Even the preamble to the New Zealand Companies Act 1993 illustrates this in subtle ways when it describes itself as 'An Act to reform the law', and to 'reaffirm' , 'provide basic and adaptable requirements ' and so forth. The assumption is that there is substantial pre-existing

CHAPTER 1: THE LAW

Indeed, case law and the statutory law are best thought of as twin pillars, each supporting the whole field of corporations law. In ffm> function they are sometimes in tension, although this is not surprising given their very different histories, modalities, epistemologies, locations in the field of societal governance, and techniques of governing.

THINK ABOUT IT What are the differences in the 'histories, modalities, epistemologies, lof~tions in the field of societal governance, and techniques of governing' of case law and legislation , and how might these influence the idea that the field of corporations law might be a consistent and coherent whole? Note: Draw upon your knowledge fromdllher law subjects to answer this. Especially consider legal mettiods and process subjects (under whatever name) and jurisprudence. If you have undertaken studies in politics, philosophy or sociology, you might like to consider it from their perspectives. The question might well be approached from a postmodern or governmental perspective.

law, that the Act, whether the Australian or New Zealand one, is not to be taken to completely set matters out, and that many, if not most, of the relevant ideas and concepts are not established by statute. This goes beyond an assertion of the usual interpretive function of courts. It is recognition that the statute does not stand alone, that it is grounded in a case-based jurisprudence.

EXAMPLE 1: DIRECTORS' DUTIES Here is one example of the complex relations between the statute and case law. When courts consider directors ' duties, even though the statute provides statements of the contents of the duties in no uncertain terms, courts inevitably commence their examination with analysis of the common law. The exercise is not simply an

•

interpretive one, but rather an acknowledgment that the way duties operate-even statutory ones-cannot be understood without consideration of their origin and development in the courts.

EXAMPLE 2: INTERNAL RULES Section 140 provides a more extreme example of the complex relations between the statute and case law. That section deals with the enforceability of the internal rules of the company. It states that the rules 'have effect as a contract'. If this is read on its face, the internal ru les have effect as a most peculiar contract. One of the essential features of a contract is that all its terms are enforceable, yet that is not the case with the internal rules of a company. Only those that directly and personally affect a member in their capacity as member are enforceable by a member. The statute certainly does not mean what it apparently says.

3 0009 03505083 5

11

12

13

PART 1: CORPORATIONS LAW IN CONTEXT

ASSESSMENT PREPARATION This chapter contains background material. You need to know what it says to fully comprehend what comes later, but it is not assessable in itself. At most, some of the 'Think about it' boxes might contain an essay topic.

Example essay question Would the preamble to the Companies Act 1993 (NZ) (set out above) be appropriate for the Australian Corporations Act 2001 (Cth)? Consider the coverage of the New Zealand Act compared with the Australian Act. Consider also the value statements in the preamble and whether they wou ld be appropriate for Australia.

CHAPTER 2

HOW DID IT COME TO BE? COVERED IN THIS CHAPTER The history of law for and about corporations The social context of that history The history of thinking about corporations law

CASES TO REMEMBER Automatic Self-Cleaning Filter Syndicate v Cunninghame (1906] 2 Ch 34 Case of Suttons Hospital (1612) 10 ~ Reo 23a Erlanger v New Spmbrero Ph0sphate Co (1878) 3 App Cas 1218 Foss v Harbottle (1843) 2 Hare 461, 67 ER 189; Gambotto v WCP Ltd (1995) 182 CLR 432 Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330 Mills v Mills (1938) 60,.CLR 150 Mozely v Alston (184 7) 1 Ph 790 Ngurli v Mccann (1953) 90 CLR 425 • NSW v Commonwealth (1990) 169 CLR 482 NSW v Commonwealth (2006) 229 CLR 1 (the WorkChoices Case) Peters' American Delicacy Co Ltd v Heath'(1939) 61 CLR 457 Re Wakim; Ex parte McNally (1999) 198 CLR 511 Salomon v Salomon & Co Ltd (1897] AC 22 Sons of Gwalia Ltd v Margaretic [2007] HeA 1; 232 ALR 232; 81 ALJR 525 Trevor v Whitworth (1887) 12 App Cas 409

STATUTES AND SECTIONS TO REMEMBER Bubble Act 1719 (UK) Close Corporations Act 1989 (Cth) Companies Act 1862 (UK) Companies Act 1948 (UK) Company Law Review Act 1998 (Cth) Corporate Law Economic Reform Program Act 1999 (Cth) Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth)

14

CHAPTE R 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

Corporate Law Reform Act 1992 (Cth) Corporations Act 1989 (Cth)

This chapter presents a timeline of events with small contextualising essays for specific periods. Sources for further exploration oHtre subject are at the end.

Corporations Act 2001 (Cth) Corporations Amendment (Short Selling) Act 2008 (Cth) Corporations Amendment (Sons of Gwalia) Act 201 O (Cth) Corpus Juris Civilis, or lnstitutiones Justiniani 529-34 CE Criminal Code Act 1995 (Cth)

A TIMELINE ORIGINS Accounts of the history of corporations law mostly start with the towns and guilds

Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Act 2009 (Cth)

of England . This is seriously misleading in a number of respects. First, it does not

Joint Stock Companies Act 1844 (UK)

and commercial organisation. Second, it confines the developments to England

Joint Stock Companies Act 7856 (UK)

when similar things were happening across Europe, at least. When the account

recognise the experience of thousands of years of global commerc~ ~change

Limited Liability Act 1855 (UK)

is extended territorially and temporally, it becomes obvious that the themes in

Securities Commission Act 1989 (Cth)

corporations law today are mere conMuations of local responses to issues that have

Securities Industry Acts 1970 (Australian states)

plagued commerce for as long as money has existed . How to avoid being cheated

Statute of Monopolies 1623

yet organise to accommodate both capital provision and labour contribution, how

Trade Practices Act 1974 (Cth), later Competition and Consumer Act 2010 (Cth)

to spread risk , raise funds , share in ownership and trade in ownerships, and how

Uniform Companies Acts 1961 (Australian states)

to transact when there are multiple owners are all problems experienced more than

OTHER PUBLICATIONS TO REMEMBER A A Berle and G C Means, The Modern Corporation and Private Property, Macmillan, New York, 1932 R Coase, 'The Nature of the Firm' (1937) 4 Economica 386 M C Jensen and W Meckling, 'Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure', (1976) 3 Journal of Financial Economics 305 Senate Select Committee on Securities and Exchange (Senator P E Rae, Chairman),

Australian Securities Markets and their Regulation, AGPS, Canberra, 1974 Adam Smith, An Inquiry into The Nature and Causes of the Wealth of Nations, Strahan and Cadell, London, 1776 (and many later editions)

INTRODUCTION Students rarely have to write essays about the history of corporations law. Indeed, there are few scholars who write on the subject, and even fewer who are concerned with the history of Australian corporations law (Rob McQueen and Phil Lipton are two). Nevertheless, the events of the past in sequence and in context can be vital to any student's understanding of the subject. Essays on current topics are frequently required and they are much enhanced by knowledge of how things came to be as they are. The context of old cases and past legislation also illuminates their meanings.

1000 years ago. Similarly we can trace interventions through law in the patterns of commerce since the d'ode of Hammurabi of almost 4000 years ago . Roman era

From 529 to 534 CE 1he Corpus Juris Civilis, or lnstitutiones Justiniani, is compiled by Emperor Justinian. It is a collection of Roman legal materials in ( Odes. Two forms of commercial association are recognised in those codes: societas and universitas. The former, partnership, is a simple contract between two people but does not create a relationship upon which other people dealing with any of the partners can rely. •

Universitas is a sophisticated legal representation of an organisation , but one mainly confined to public bodies: tax gatherers; gold , silver and salt mines; various guilds, and ship owners. Moreover, the creation of an association is not a matter of right but only as permitted by the Senate (or, later, the emperor). An association has a name, common property and treasury, and transactions done on behalf of the association are deemed to bind and be done by all in the association. No liability for debts of the association is owed by a member of the association but, equally, claims by the association cannot be pursued by a member. There is also a third form of organisation : publicani or tax-farming organisations. These are tax-gathering agents.

(Continued)

15

16

CHAPTER 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

Byzantine and Islamic empires

Various forms of partnership and commenda develop as matters of institutionalised commercial practice. The former jointly contribute capital, and share work, profit and loss. In a commenda, one (and perhaps more) of the participants contributes the capital while the other (or others) contribute the work. They share profit and loss according to agreed terms.

About 1070: northern Italy

Corpus Juris Civi/is is recovered after disappearing from the legal landscape for 500 years. Extensively studied in Bologna, it provides a foundation of civil law to serve the needs of merchant classes.

1138: France

First stock exchange, trading in debts, state and municipal bonds, commodities and occasionally ship and (later) mining shares.

Italian Renaissance

Development in Venice and, later, Genoa of the commenda and the manoa as business organisations. Manoe are organisations for the gathering of taxes, funded by the contribution of /ocae. Manoe start conquering the territories from which they were contracted to gather tax. Locae are transferable property, although conceived of as debt to the owner.

Fourteenth and fifteenth centuries: Europe

Beginning in Sweden, mining starts being financed through a share system whereby the shareowners own the mine and are liable on calls to contribute more capital on their shares. The system spreads south through Eastern Europe, Germany and Italy and is the origin of the unincorporated joint stock company. Here is a picture of a document from Genoa dated 16 June 1288, evidencing title to a one-eighth share in a Swedish copper mine.

Construction and operation of ships are funded by dividing ownership into shares. The cargo is contributed by other persons (often in commenda). Double-entry accounting is developed. Medieval period: England

Feudal conceptions of the position of the Crown and the nature of law within a theocratic society obtain. Land is held by a lord and divided into fiefs or shares. Often the lord is a religious institution . Bourgeoisie have little place in the theory of feudal society, although trade is in fact developing. Various legal systems operate. Ecclesiastical organisations and offices operate autonomously, as to a lesser extent do towns and guilds. This autonomy is subject to the military dominance of the Crown. The autonomous bodies, especially towns and guilds, recognise this by rendering taxes on behalf of their populations, in return for recognition of their self-government and protection from dues payable to local feudal lords. Self-government involves the power to pass by-laws, impose taxes on their members, elect officials and have local courts, and to act as a collectivity through the possession of a common seal and sue and be sued in the name of the body. Common law increasingly recognises such autonomy by calling the institutions 'corporations' .

Fourteenth and fifteenth centuries: England

Groups of merchants soon see the advantages of self-government free from feudal incidents . They too start making bargains with the Crown to pay taxes directly in return for various freedoms and privileges, just as the towns and guilds do. In particular, groups of local merchants and tradespeople seek charters which will grant them monopolies in certain products or in trade in certain areas, and the self-government to a~minister the monopoly. They also seek the right to sue and be sued in the group name (especially to defend the monopoly), to use a common seal, to hold common property, to have perpetual succession , to regulate themselves with by-laws, to adjudicate in disputes and so forth. Thus 'The Company of Merchant Staplers at Calais' is an association of English and foreign merchants engaged in selling to foreign merchants raw materials ('staple' goods, especially raw wool) produced in England; it is granted a royal charter in 1363. It consists of a mayor and constables elected by all the members of the association or 'guild', with powers of arrest for breaches of the peace, debt or breach of contract; 'staple' courts apply appropriate law developed in those courts to disputes between members; powers to create by-laws and so on. In return the Crown is paid its customs duties without the costs of enforcement and collection. (Continued)

17

18

CHAPTER 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

Sixteenth century: England

Joint stock companies are recognised and obtain charters, starting in 1553. Sir Francis Drake's voyage around the world is financed in this way. Mining companies are established in this way too. Royal charters giving exclusive trading rights are issued in respect of trade with various parts of the world.

1602: Holland

Stock exchange is founded in Amsterdam, trading in the stock of the Dutch East India Company.

Seventeenth century: Great Britain. This is the era of the Stuart kings , the civil war and the Commonwealth, and the Restoration

Case of Suttons Hospital (1612) 10 Co Reo 23a

Lord Coke distinguishes corporations from human beings in the operation of law. Corporations are nominated as 'artificial': the corporation itself is only in abstracto, and rests only in the intendment and consideration of the law' (32b). The context of this case is that Lord Coke is formulating a new constitutional structure for England, with the common law at its core-this is often called 'Whig ' politics. Such a constitutional structure requires the formulation of how and whom common law governs. The answer to the latter question is the human being, leaving the corporation as something to be explained.

The East India Company receives its first charter in 1599 and this is renewed during the seventeenth century. In 1654 it receives a charter which gives it perpetual succession, following European precedent. Transferable shares follow soon thereafter. Long-distance trading companies are encouraged and there is much rivalry amongst the European monarchies. This is in contrast to the general discouragement or trading corporations.

Statute of Monopolies 1623

Parliament attempts to control the abuse of the Crown prerogative of issuing charters under James I and Charles I. Under this Act the Crown is not to issue any further charters or create monopolies unless they are for inventions and continue for less than 20 years, and for pre-existing 'Corporations, Companies or Fellowships of any Art, Trade, Occupation or Mystery, or to any Companies or Societies of Merchants within this Realm, erected for the Maintenance, Enlargement, or Ordering of any Trade or Merchandise'.

Eighteenth century: Great Britain

The South Sea Bubble. A similar set of events occurred in France around the Mississippi Company in 1718

By 1720, chartered corporations and joint stock companies have t ansferable shares (usually called 'stock'). Markets in which money lenders, money changers and commodity traders operate have existed for some time. Traders in these markets readily adapt to trading in transferable stock and stock markets are soon set up. The London Stock Exchange is not established in a fixed place until 1773, but in 1720 there is an informal market in the coffee houses where merchant br~f!:e's meet. In 1719 and the first half of 1720 there is a strong and widespread belief that investment in joint stock c~panies, whether unincorporated or chartered, is the key to wealth. This leads to widespread market manipulation as dealers in the market discover how easy it is to fool hopeful investors. The scheme of the directors or promoters of the South Sea Company is to secure the government's permission by statute to exchange shares in the South Sea Company for the debt of the government to the members of the public. This• scheme is perfectly legitimate. Indeed , the Bank of England, another chartered company, is compet~g for the same concession at the same time. The Bank of England eventually does receive the concession, purchases the national debt and takes the central position in the English economy that it W!tl hold from now on. Unfortunately for many, a substantial and unsubstantiated rise in prices in the South Sea Company is generated by its directors and promoters through various and devious means of market manipulation . These activities result in a rise in share prices in most companies, rather than in just that of the South Sea Company. Since there is a limited supply of wealth to buy stock in companies generally, the directors decide to limit the number of companies in which stock can be purchased. To this end they procure the passing, in June 1720, of the Bubble Act 1720. They are able to do this because many members of Parliament

(Continued)

19

20

CHAPTER 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

In the shipping and mining industries special court systems operate: dmiralty and stannary courts respectively. These operate under customary law (/ex mercantoria) in which business practice drives the law's solutions to disputes. In these courts the requirements of organised business are recognised in the form of a body of law as to quasi corporations.

are involved in the scheme: even the Chancellor of the Exchequer (whom we call the Treasurer) was a director of the South Sea Company. The aim of the Bubble Act 1720 is to outlaw the unincorporated joint stock company. Section 20 prohibits 'acting or presuming to act as a corporate body' and 'the raising or pretending to raise transferable stocks', but there are exemptions in ss 22 and 23 for all undertakings established before 24 June 1718, for two corporations established in the Act itself (the South Sea Company and the East India Company) and for trading partnerships and companies. The Bubble Act 1720 has little effect on the competition for funds in June 1720. The price of stock keeps climbing, but the South Sea Company's competitors remain in the market because they are, in the main, exempted. Soon, however, there are signs of market instability and a general crash ensues. The South Sea Company is itself caught in the general fall in stock prices. As the South Sea Company scheme to capture the public debt has been founded on a rising market, the crash of 1720 causes its failure. The activities of its directors and the corruption among officials are exposed, triggering numerous prosecutions, including that of the Chancellor of the Exchequer. After the Bubble

The upshot of the South Sea Bubble is that public confidence in investment in joint stock companies, whether incorporated or not, is destroyed for more than 80 years. Further, officials take heed of the apparent policy of the Bubble Act 1720 and place restrictive conditions on the grant of incorporation, whether by charter or by the later means of private statute. Capital is limited and large numbers of transferable shares are not permitted. Sound businesses survive and take advantage of joint stock, especially in the banking , insurance, canal and waterworks industries. By the turn of the century, faith in investment returns, and it grows with the need to finance industry spawned by the Napoleonic wars and the growth in railways .

In those areas of the economy not.co'fred by customary law, partnerships develop to accommodate the needs of business. Great ingenuity is demonstrated in negotiating the ban on~nincorporated joint stock companies under the Bubble Act 1720. At first this requires severe restrictions on the transferability on shares, but as the century progresses this becomes less of a feature of the associations. Many of the desired features of these associations-capacity to sue and be sued, variable constitutions, transferable shares-are readily achieved in practice if not law by the turn of the century. A trust in the form of a deed of Sfttlement is added to the contractual partnership form. Limited liability is sought, but only achieved through the impracticality of suing large numbers of stockhoJ.ders and the inchoate nature of the law. 1776

Adam Smith publishes The Wealth of Nations, thereby starting the downfall of the mercantilist state. The utility of the market as a form of governance is thereaftai; recognised, and this appreciation later extends to capital markets, despite the lingering distrust triggered by the South Sea Bubble. Paradoxically, Adam Smith is of the view that joint stock companies would not be able to compete with private traders due to the inherent tendency of the managers to purloin the capital for themselves.

THE NINETEENTH CENTURY During this century the corporate form becomes fixed and its principal features settled. It is a time of rapid change in all fields of human endeavour. Technological change allows for large factories and infrastructure in the form of canals, railways and utilities. Economically, these enterprises need large accumulations of capital and various states compete to provide environments convenient to host such developments and reap the rewards of investment. Intellectual understandings of the

21

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CHAPTER 2: HOW DID IT COME TO BE?

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economy and the social proliferate and the population as a subject of governmental

Provision for limited liability is not a feature of the Act and the ~stitution of a company is still in the form of a deed of settlement. A later Act, the Companies Clauses Consolidation Act 1845, applies many of these provisions to all future statutory corporations.

intervention is invented. Utilitarianism becomes a key philosophy. Understanding of the market as a device upon which a degree of reliance could be placed grows. The ideology of liberalism develops, freedom of the individual from government restraint becomes a fundamental principle in politics. United States of America

The United States splits away from Great Britain in 1760; its law splits away at the same time. Some legislatures freely grant charters to corporations in all parts of the economy. Limited liability is freely granted by 1820, and general incorporation by registration statutes follows soon after. These are in the form of the grant of charters, rather than the recognition of organisations.

Great Britain

1825: Repeal of the Bubble Act

The legal threat to unincorporated associations represented by the Bubble Act 1720 is recognised as creating great uncertainty and contributing to fluctuations in economic conditions. A boom and bust cycle starts to become apparent. The Bubble Act is repealed despite the confusion by some of incorporation with the dangers of monopoly. The upshot of the repeal is, however, greater legal uncertainty. Authorities become even more reluctant to grant incorporations, whether by way of charter or special Act of Parliament. Both methods are very expensive.

Trading Companies Act 1834, Chartered Companies Act 1837

Both of these statutes provide for the grant of letters patent of incorporation on certain terms. They are unsuccessful because the same officials influenced by the old policies still govern the exercise of the discretion to incorporate. The later Act provides for a measure of limited liability.

Joint Stock Companies Act 1844

This Act is the foundation of corporations law as we know it in Australia today. It is the product of the Gladstone-chaired Parliamentary Committee on Joint Stock Companies. It introduces the principles of: distinguishing between partnerships and companies; incorporation by registration; publicity as the best safeguard against fraud; administration by a body dedicated to that task-the Registrar of Companies.

After the 1844 Act has been passed four forms of commercial association are recognised in law: (1) partnerships of up to 25 mem~~with unlimited liability; (2) unincorporated associations continuing from prior to 1844, with unlimited liability in theory, aut maybe not in practice; (3) chartered and statutory corporations, with no or limited liability; and (4) companies registered under the 1844 Act, with unlimited liability. Foss v Harb9ffle (1843) 2 Hare 461, 67 ER 189; Mozely v Alston (1847) 1 Ph 790 Limited Liability Act 1855

These two cases taken together set out the fundamental principles of the decision-making structure of companies: the proper plaintiff rule and the internal management rule, and their limits. The fall-~t of oppression of minorities of shareholders is recognised and, in a series of cases in the 1870s, P[Ocedural issues are thrashed out to make derivative actions possible. There has been considerable call for and debate over limi~d liability for a number of years. There is nothing new about it, since chartered and statutory corporations have had various forms for centuries. Even some forms of commenda provided for the limited liability of the capital-providing partner. The Limited Liability Bill for companies is introduced in tandem with a Partnership Amendment Bill to provide for profit-sharing loans without partnership-another way of describing limited liability for capital-providing partners. The latter is not passed but the government is suddenly seized with a sense of urgency and rushes to pass the Bill that provides for limited liability for shareholders in companies. (Continued)

23

24

CHAPTER 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

Joint Stock Companies Act 1856

a large debenture is deployed to give the former owner preference in a winding up. This device is challenged in Salomon's Case. The House of Lords upholds, as a matter of construction of the statute, the principle of limited liability and a strict notion of the separate personality of the company. It rejects the notion that there is an inherent agency agreement involved, or any trust relationship-both of which had been deployed in lower courts to defeat rrte ~laim of the plaintiff.

This Act brings together the Limited Liability Act 1855 and the Joint Stock Companies Act 1844 and removes much of what is by now thought to be surplusage (although in the past it had been thought to be essential safeguards for investors and creditors). Publicity as the best protection against fraud is entrenched, including the introduction of the word 'Limited' in all company names as signifying limited liability. Despite this approach, requirements as to accounts and audit are thought to be a matter of agreement between the incorporators, and hence are placed in the model Articles of Association. This is not to change until the last decade of the century, and then only in the form of mandatory auditing if accounts are published. Accounts become mandatory in the 1930s. Each of these changes is triggered by a notorious collapse due to fraud. Immediately after enactment in 1856 there is a rapid increase in company promotions, although they are mostly for large enterprises.

Companies Act 1862

A series of minor amendments are made to the Joint Stock Companies Act 1856 and these are consolidated in the Companies Act 1862. This Act is the first to look something like a modern Companies Act.

Trevor v Whitworth (1887) 12 App Cas 409

The potential for fraud due to transactions with share capital is recognised and the principle of maintenance of share capital is enunciated.

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

The need for protection for investors from company promoters is recognised in the form of a

Salomon v Salomon & Co Ltd (1897] AC22

While promotions soon after the Joint Stock Companies Act 1856 were mainly of large businesses, by the 1890s smaller companies, essentially incorporated partnerships, begin to proliferate. In many the device of selling an overvalued business to the company in return for

fiduciary duty.

Australia

As a settled colony and , later, colonies of Great Britain, English law applies in Australia. T~ companies that operate in Australia are LJ.Sually forme~ or incorporated in the United Kingdom. Governor Macquarie and subsequent governors issue charters, although there tend to be disputes over their effectiveness. Moreover, the doctrine of extraterritoriality implies that colonial incorporations are not effective beyond the colony in which they are in»brporated. After the enactment of the Companies Act 1862, most of the Australian colonies follciwv suit. Administration is provided for in ways similar to the British Act, although in fact little by way of bureaucracy is provided for. What there is varies from colony to colony in effectiveness. t In 1871 , Victoria introduces the Companies (Mining) Act 1871, which creates a new category of company: the 'no liability company'. This allows for the issue of partl!paid shares, liability for the calls upon which could be ignored by investors on pain only of forfeiture of their shares. Land and mining booms and busts are (and will remain) a feature of the Australian colonies. A widespread collapse is often highly productive of corporate law reform . Following the crash of the early 1890s, all the Australian colonies revise their Companies Acts. In Victoria, where the effect of the crash is greatest, the reforms are the most far-reaching: Keeping of proper accounting records from which an annual balance sheet was to be prepared is made mandatory. So is audit of that statement. The stringency of these requirements is ameliorated by provision for the 'proprietary' company, with lessened reporting and audit requirements. Statutory duties for directors and auditors are introduced.

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CHAPTER 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

The impact of neo-liberalism is felt towards the end of the century. This

THE TWENTIETH CENTURY

emphasises the entrepreneurial individual and

By the start of the twentieth century most of the fundamental ideas and principles of corporations law are settled. There is legal personality, limited liability, joint stock and transferable shares. Stock markets are well established. The allocation of risk between shareholders and creditors is settled. The processes of incorporation and winding up have been refined . The principles of corporate governance have mostly been decided. Comprehensive liberality or laissez-faire is the expression of liberalism. Mandatory disclosure is accepted as the principal defence against fraud and thus of increasing public confidence in the stock markets. Disclosure is not seen to infringe laissez-faire. The twentieth century sees at first the extraordinary swing to state welfarism, with a concomitant proliferation of regulation. This affects corporate law in many ways, including increasingly complex disclosure laws for annual reports and

governments to govern human relations. In corporations law it is reflected in a ideas of the corporation. There is acceptance of the cost of regu lation, especially in respect of disclosure and of prohibitions on various forms of business structures. The market for corporate control is strongly articulated as a societal good . A sense of the necessity of states to compete with one another for business, brought on by perceptions of impending globalisation, leads to legislative thrusts

Midnight, 1 January 1901

Federation ·of Australian"' colonies

Tl'ftConstitution provides for corporations in s 51 (xx) . At this time each separate colony, now state, has its own Companies Act and administering bureaucracy. This causes much confusion and opportunity for fraud . There is a strong movement for national corporations legislation, as well as much political opposition to it.

1906

Automatic Self-Cleaning Filter Syndicate v Cunninghame [1906] 2 Ch 34

At the turn of the twentieth century there is still ~oubt as to the status of a company's memorandum and Articles (its constitution). The source of company law in deed of settlement companies and the vagaries of the constitutions of joint stock companies contrasts with the constitutional understandings developed for chartered and statutory corporations. The . conflict of models is settled by Automatic SelfCleaning Filter Syndicate v Cunninghame in favour of a constitutional understanding which could accommodate a constitution setting out a delegation model of governance.

(which are extended to officers and even employees), the introduction of insolvent (voluntary administration) of dealing with companies in distress. Companies as such in the Trade Practices Act 1974 (Cth) (later the Competition and Consumer Act 2010

a competition perspective,

acquisitions and mergers . Securities law arises out of nowhere. After a brief flirtation with self-regulation, complex arrangements for takeovers, managed investment schemes, on-market behaviour, and eventually the licensing of dealers and service

.

providers, including stock exchanges (later 'securities' exchanges), are enacted . A subtle influence is provision for workers. Deep within the debates over the introduction of floating charges in the late nineteenth century is a regard for the interests of employees, informed perhaps by European Marxism and US legal realism's appreciation of the influence of legal rules upon stakeholders. While stakeholders other than workers are mostly ignored, employees received recognition group. This can be seen in the list of priorities in winding up and later in the Corporations Act 2001 (Cth), Part 5.8A. Previously it was apparent in the statutory

modifications to the doctrine of ultra vires. Meanwhile the three-sided tussle between the global, national and local play

l(l_duction of

'red tape' and the 'costs of doing business'. Nevertheless, corporations legislation

trading laws and the tightening of duties of care and diligence, and new forms

from legislatures careful not to prejudice the interests of such an influential pressure

f~

grows fatter by the year.

including maintenance of capital laws, the statutory enactment of directors' duties

(Cth)), s 50 of which provides a scheme to regulate, from

on markets rather than

renewed focus on shareholder primacy models at the expense of communitarian

prospectuses, the specification of much that had been a matter for the courts,

are heavily regulated, as is business generally. Competition law develops, culminating

reli~e

1909

Huddart, Parker& Co Pty Ltd v Moorehead (1909) 8 CLR 330

The interpretation of s 51 (xx) of the Constitution is settled by the decision of the High Court of Australia in favour of the states retaining the power to incorporate.

out, not only in terms of the Constitution, but also in terms of the British Imperial hegemony in the first half of the century and the influence of US theories of the firm and understandings of the foundations of democratic market economies in the latter half.

(Continued)

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CHAPTER 2: HOW DID IT COME TO BE?

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1930s

1932

1937

Mid-century

Royal Mail Steam Packet Company scandal

This scandal, occurring in England, leads to Empire-wide reforms to Companies Acts. The reforms are to accounting and audit provisions, which are altered to mandate keeping of proper books of account, presentation of a balance sheet with prescribed information and filing of the balance sheet with the Registrars of Companies if the company is one which receives investments from the public. This, a continuance of the traditional disclosure as the best defence against fraud doctrine though it might be, marks the start of a proliferation of legislated (or prescribed) information disclosure provisions in the case of yearly reports and prospectuses.

Publication of A A Berle and G C Means, The Modern Corporation and Private Property, Macmillan, New York, 1932

This book, coming squarely within the New Deal period of US history, has an immense impact on understanding of the operation of corporate law within American society. It introduces notions such as the separation of ownership and control and managerial elites as 'self-appointed oligarchies'.

Publication of Ronald Coase, 'The Nature of the Firm'(1937) 4 Economica 386

Until the publication of this article, the firm had been treated as a profit maximising 'black box' by economists. This article views it as a product of a choice between hierarchy and transaction , determined by the costs of doing business in each form. For many years it is ignored. While concerned with firms, rather than corporations as legal persons, the article later triggers institutionalist ideas of the firm and, much later, the agency cost or contract theory of the firm. The latter then produces the economic theory of the corporation, which seizes the North American legal imagination and dominates it from the 1970s onwards.

From the 1930s to perhaps the 1970s the High Court of Australia, in a series of decisions, develops the duties of directors (particularly the duty to act for a proper purpose) into a highly sophisticated structure for balancing the needs of business for entrepreneurial freedom with

protection of the interests of shareholders. These decisions include Mills v Mills (1938) 60 CLR 150, a-;'J Ngurli v McCann (1953) 90 CLR 425. These considerations carry over into reformulations of the century-old fraud on the minority doctrines in Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457. 1948: Great Britain

Companies Act 1948

Although it is mostly a mere consolidating Act, this Act becomes the model for companies Acts around the British Commonwealth of Nations. It therefore acts as a de facto uniform Act for.~vustralian states. One notable new feature of the 1948 Act is the oppression remedy, conferring on courts the power in '11t1ing the law. 1989

Established by New South Wales, Victoria and Queensland, and later Western Australia, this is an attempt at cooperative federalism whereby each of the states amends its companies and securities legislation to provide for uniformity in substance and administration. This is the seminal article for agency theory of the firm . From this point on , the shareholder primacy version of the normative structure of corporations law has a theoretical basis.

Corporation~

Act 1989 (Cth); Securities Commission Act 1989 (Cth) 1990

NSWv

Co~monwealth

(1990) 169 CLR 482

1991

Without impinging on state sensibilities, under this scheme for national uniformity in companies and securities law each state by Act adopts as amended from time to time the companies and securities legislation passed by the Commonwealth for the Australian Capital Territory. This included an Act (the Companies (Acquisition of Shares) Act 1980) regulating takeovers, legislation regulating

Corporations Act 1989 (Cth); Close

The National Scheme: the Corporations Law

The Labor Commonwealth government decides to provide national companies and securities le~slation , as well as a separate form of corporation designed for small business. The Acts provide complete coverage of all that has been part of the cooperative scheme. The government replaces the NCSC with the Securities Commission, established in the Securities Commission Act 1989 (Cth). The High Court of Australia holds that the Commonwealth Parliament has no power to make laws as to the incorporation of companies. Acoordingly the Corporations Act 1989 (Cth) and the Close Corporations Act 1989 (Cth) are constitutionally invalid. After an agreement reached in Alice Springs in 1990, the Commonwealth and states agree to a revised version of the Corporations Act 1989. Adoptirfg essentially the same concept as the cooperative scheme of 1980, the substance of the corporations legislation, the Corporations Law, is s 82 of the Act. The rest of the Act is a set of machinery provisions incorporating , in particular, complex arrangements for the cross-vesting of jurisdictions between Commonwealth and state courts. The states apply the Corporations Law and the interpretation provisions to their own jurisdiction with a Corporations (Name of State] Act 1990. The Securities Commission Act 1989 remains in place. The Close Corporations Act 1989 remains constitutionally invalid but remains on the Commonwealth statute books until 1995.

(Continued)

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CHAPTER 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

1992

Corporate Law Reform Act 1992

The Act introduces a civil penalty regime and, coming into force a little later, insolvent trading as a breach of duty by directors from which personal liability flows . At the same time, and ameliorating the impact of the latter, a new system based on US (via UK) corporate bankruptcy law for companies in difficulty, under which external administrators are appointed, is introduced.

1994

Corporate Law Simplification Program (CLS)

This program operates until a change in government in 1996. It aims at simplifying corporations law without changing policy, although substantial policy changes are in fact made. The First Corporate Law Simplification Act 1995 (Cth) deals with company registers , proprietary companies and buy-backs.

Gambotto v WCPLtd (1995) 182 CLR 432

The High Court of Australia substantially revises the limits on majority action in companies . Supreme Courts later wind this back.

Criminal Code Act 1995 (Cth)

This legislation set out a new way of attributing the mental element required for some crimes and torts to corporations. Much state legislation enacts similar concepts. It leaves open questions of ancillary and primary liability of company directors, other officers and employees.

1996

Corporate Law Economic Reform Program (CLERP)

With the 1996 change of government come sweeping changes to at least the name of the corporate law reform program. It becomes CLERP, located in Treasury, rather than Attorney-General's Department. Policy changes are no longer anathema.

1997

Wallis report

The Financial Sector Inquiry is set up to consider regulation of the investments industry. It reports in March 1997 and its recommendations are enacted over the next few years. The main impact of the changes is to change regulation from an institutional to a functional basis.

1998

Company Law Review Act1998

The original name of this Act was the Second Corporate Law Simplification Act, but for political reasons (the incoming Government wanted to claim

1995

the credit) a new name is chosen. Nevertheless, the content is a~e CLS Program recommended. It brings significant changes to the law as to incorporation, registration , meetings, corporate constitutions (establishing the replaceable rules system), and particularly share capital (abolishing par value and its associated concept of maintenance of share capital in favour of procedural, solvency and fairness requirements).

Managed Investments Act 1998

This Act substantially changes the regulation of managed investments and other collective investment schemes. Oddly enough, despite being abaµt trusts and other vehicles, the regulation is placed in the Corporations Law.

Waterfront dispute

Reform of the procedures for loading and unloading ships, especially container vessels, is desired by the government and by Patricks Ltd, the owner of a container facility. In a series of transactions Patricks separates employment or workers and asset ownership at the facility, setting up a service provision contract between the two. A term of thatltontract provides for its termination if there is an interruption of service to the asset-owning compant (which contracts with the ship owners to load and unload their ships). The employing (service provision) company is emptied of assets. A strike occurs. The employing company goes into adrliinistration. The employees are threatened with termination without payment of their accrued termination payments (superannuation, long service and other leave payments, and so forth). A standoff occurs; the employees blockade Patricks facilities. The matter is eventually settled . The threat to termination payments leads to much criticism and the introduction of the General Employee Entitlements and Redundancy Scheme (GEERS) and Part 5.8A of the Corporations Act 2001 (Cth). Piercing the veil is discussed as a possible argument in the litigation (which at the time of settlement concentrated on conspiracy issues).

,,.

(Continued)

33

34

PART 1: CORPORATIONS LAW IN CONTEXT

1 July 1998

1999

Australian Securities and Investments Commission Re Wakim; Ex parte McNa/ly

(1999) 198 CLR 511

Corporate Law Economic Reform Program Act1999

With the advent of new responsibilities, the Australian Securities Commission (ASC) becomes the Australian Securities and Investments Commission (ASIC). The cross-vesting arrangements in the 1991 National Scheme are held to be invalid by the High Court of Australia. Re Wakim is followed by a number of other cases holding various aspects of the scheme invalid or possibly so, including R v Hughes (2000) 202 CLR 535 , in which the Commonwealth Director of Public Prosecution's powers were found to be limited against state law. Among various changes with respect to fundraising, accounting standards and takeovers, this Act introduces much stricter statutory duties as to care and diligence and a counterbalancing derivative action allowing shareholder suit on behalf of a company, although only at the discretion of the court.

CHAPTER 2: HOW DID IT COME TO BE?

2007 sees the commencement of the Global Financial Crisis. Some argue that the world narrowly escaped economic depression,

this, too, rapidly evaporates. Much effort is put into regulatory reform to ensure that such a crisis never ever happens again. Meanwhile the fall-out from the HIH collapse and the James Hardie scandal continues as director's duties are tightened to control remunerations and demand grows for greater social responsibility of businesses. Nothing much is done with respect to the latter. Ironically, corporate democracy is reduced with.4;J(lfeased restrictions on the ability of members to call meetings. The law relating to borrowing on security is substantially changed. 2001

Corporations 'Act 2001 (Cth)

As 'It result of continuing constitutional issues surrounding the National Scheme, the states refer their powers over incorporation to the Commonwealth. The referral is restricted to a number of years, and restricted in scope. The referrals are renewed despite controversy over the use of the corporations power by the Commonwealth to regulate industrial relations (a use of the corporations power specifically excl~ded from the referral).

Collapse of Enron, HIH and One.Tel

A number of high profile companies collapse in 2001, causing much soul-searching in the business community. Eventually blame, apart from simple wrongdoing, for the Enron collapse at least, is settled on auditors. Problems should have been • picked up and the accounts qualified. Why were they not? The answer is taken to be that auditors had conflicts of interest in their dealings with the company. The upshot is the Sarbanes-Oxley Act of US Congress strongly regulating auditors' conflicts of interest. In relation to wrongdoing, there are prosecutions in the United States over Enron, and contravention orders are sought and obtained in Australia over the Australian collapses.

James Hardie controversy

Over a period of some years, the directors of the James Hardie group of companies manage to hive off, to an underfunded trust, tort liability for diseases caused by asbestos mined and used by companies in the group. This effort of loss mitigation is

THE NEW MILLENNIUM At the turn of the millennium (whether at the end of 1999 or of 2000) corporations law is a matter of much complexity and detail. Its reach extends beyond dealing with just companies and their conception, birth, life and death to substantial regulation of associated investment vehicles and of the markets dealing with securities generally. Reform is continuous and considered as much a matter of economic policy as of legal structure. There is much talk of deregulation and minimising the cost of compliance. Belief in the efficacy and efficiency of markets is high, despite the technological boom and consequent bust. Executive pay is increasing exponentially with increased belief in leadership and leaders. There is strong criticism from many quarters, but governments appear to be able to do little beyond legislating for a little increased disclosure. Australia's economy is also booming; it escapes relatively unscathed from the technology markets bust (the 'tech-wreck'), relying on meeting the demands for resources resulting from astounding growth in China's economy to keep the good times rolling on. Meanwhile, the neo-liberal construct of the relations between government and market, the place of entrepreneurship, and the ru le of law and its efficacy come under challenge after a number of scandals and a feeling of doom due to impending ecological disaster. After the end of the great Australian drought of the first decade of the millennium, the feeling of doom evaporates.

hough some countries did not.

The crisis precipitates much hand-wringing over belief in market processes, although

2001--07

(Continued)

35

36

CHAPTER 2: HOW DID IT COME TO BE?

PART 1: CORPORATIONS LAW IN CONTEXT

complex and achieves a level of legal success not seen in any other jurisdiction for asbestos liability. It is the subject of an inquiry, the conclusion of which is that there were only a few contraventions of corporations law, mainly in respect of disclosure to capital markets of estimates of liability. Social pressure nevertheless forces a reluctant and muchdelayed accommodation . Arising out of intense debate over the conduct of the James Hardie group's directorate is a strong focus on corporate social responsibility and this is the subject of at least two inquiries in Australia.

2002

2003

2004

Financial Services Reform (Consequential Amendments) Act2002

CLERP 7 reforms:

In a delicious footnote to the operation of corporations law in Australia, one of the principal objects of this Act is to reinsert a definition of solvency into the Corporations Act. It had been accidentally abolished, despite its obvious importance, by the Financial Services Reform Act 2001!

Australian Wheat Board scandal

2006

Inquiries into corporate social respo~sibility

>

procedures by which documents are lodged with and matters notified to ASIC. Annual returns are now a matter of receiving a record from ASIC and only returning it if there is anything to change.

CLERP 9 Reforms: Corporate Law Economic Reform Program (Audit

The collapse of Enron focuses law reformers'

Two inquiries are held into corporate social responsibility, both motivated by the James Hardie scandal. The first is by the Corporations and Markets Advisory Committee and the second by the Parliamentary Joint Committee on Corporations and Financial Services. While neither recommends far-rElaching changes, both recognise the limitations of the shareholder primacy model of corporate law in both descriptive and normative formulations.

NSWv Commonwealth

(2006) 229

minds on growing auditors ' conflicts of interests. In particular, simultaneous management consultancy and audit functions, longer-term relationships and absence of independence are the subject of the Sarbanes-Oxley Act in the United States. Similar

CLR 1 (the WorkChoices Case)

but watered-down reforms are adopted for Australia under CLERP 9, together with some sops to those affected. These include requirements for audit committees, auditor rotation , restrictions on certain employment and financial relationships, disclosure of provision of non-audit service, requirements to attend AGMs, and enhanced powers for the ASIC as to auditors' registration, all ameliorated by reduced auditor liability ('measures to better allocate and manage risk'). Also included are provisions for enforcement of continuous disclosure and enhanced powers for the Financial Reporting Council.

Adding to the pervasive sense of the irresponsibility and amorality of Wsiness is the Australian Wheat Board scandal. From 1995 the United Nations has had in place the Oil for Food Program under which sanctions against Iraq are ameliorated by the possibility of swaps of oil for food. Essential to that program is the diversion of funds away from Saddam Hussein's government in Iraq. Nevertheless many organisations do give bribes to the Hussein regime. Chief amontf'tltlse is the Australian Wheat Board, which has channelled millions of dollars to the Iraqi government. An inquiry, the Cole inquiry, is held to verify the facts anc9tecommend any action that should be taken over the scandal.

These reforms simplify and streamline the

Corporations Legislation Amendment Act2003

Reform and Corporate Disclosure) Act2004

2005-07

The CorJmonwealth government passes the Workplace Relations Amendment (Work Choices) Act 2005 in order to effect its industrial relations policy of.individual workplace contracts. The states challenge the constitutional validity of the Act, but fail. The High Court holds that the power to make laws as to corporations includes the power to make laws as to the relations they have with employees. This is widely considered to imply that the Commonwealth now has unlimited law-making power: anything that corporations do could now be subject to Commonwealth control. And what don 't corporations do?

2007

Sons of Gwalia Ltd v Margaretic

This case appears to involve a minor point of law: whether a shareholder with a claim, under statute, for damages for misleading and deceptive

(Continued)

37

38

PART 1: CORPORATIONS LAW IN CONTEXT

(2007] HCA 1 ; 232 ALR 232; 81 ALJR 525

2007-10

Global Financial Crisis

statements or omissions by the company ranks with other creditors in a winding up. The court holds that such a shareholder might. The importance of the decision is that the High Court attacks Houldsworth v City of Glasgow Bank (1880) 5 App Gas 317, one of the seminal cases establishing the doctrine of maintenance of share capital. More generally, the case indicates that what is involved in being a member of a company is not entirely clear. The pragmatic ideas deployed in Sons of Gwalia may well conflict with the more romantic ones espoused in Gambotto v WCP Ltd (1 g95) 182 CLR 432. The decision was reversed by legislation on entirely pragmatic grounds: Corporations Amendment (Sons of Gwalia) Act 2010. This just adds to the theoretical confusion. In 2004 a US housing price bubble bursts. By 2007 this precipitates a financial crisis due to the unravelling of financial products (bundled subprime mortgages, credit default swaps, over-the-counter derivatives and so forth}. Blame is placed on failure in financial regulation, in the culture of financial institutions, housing policies, conflicts of interest, and negligent practices of ratings agencies and investors. Banks collapse and emergency support mechanisms are put in place. Australia escapes the worst effects of the crisis through Keynsian spending, a bank deposit guarantee and a fortuitous resources boom due to China's rapid economic expansion. Regulatory responses in the United States included the Dodds-Frank Act and in Europe BASEL Ill bank regulations increasing liquidity requirements and implementing internal reporting measures. At the time of writing, the world's economy has not recovered. Some European economies are still in crisis. Australian regulatory responses include a suite of legislation, including tightening of short-selling bans in the Corporations Amendment (Short Selling) Act 2008 and new conflicts regulations for financial advisors in the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Act 2009. Given the compulsory nature of

CHAPTER 2: HOW DID IT COME TO BE?

superannuation in Australia, any lack of confidence in the market am~g retail investors seems unlikely to do much damage to the markets. 2009

Personal Property Securities Act 2009 (Cth)

Until 2010, the law as to charges was very confusing. The Personal Property Securities Act 2009 (Cth) substantially changes it to a Canadian and New Zealand model based in contract law rather than a strange amalgam of contract and property.

••

Further Reading ~

CA Cooke, Corpora.tion, Trust aoo Company, Manchester University Press, Manchester, 1950 S Corcoran 'Corporate Law and the Australian Corporation: A History of section 51 (xx) of the Australian Constitution' (1994) 15 Journal of Legal History 131 WR Cornish and G Clark, Law and Society in England 1750-1950, Sweet and Maxwell, London, 1989

,.

R Formoy, The Historical Foundations of Modern Company Law, Sweet and Maxwell, London, 1923 LC B Gower, The Principles of Modern Co°?npany Law (4th edn), Stevens, London, 1979, chs 2 and 3 BC Hunt, The Development of the Business CQrporation in England 1800-1867, Harvard University Press, Cambridge, Mass., 1936 J W Hurst, The Legitimacy of the Business Corporation in the Law of the United States 1780-1970, University Press of Virginia, Charlottesville, 1970

•

P Ireland, 'The Rise of the Limited Liability Company' (1984) 12 International Journal of Sociology of Law 239 P Lipton, 'A History of Company Law in Colonial Australia: Economic Development and Legal Evolution' Melbourne University Law Review (2007) 31 Melbourne University Law Review 805 R McOueen, 'An Examination of Australian Corporate Law and Regulation 1901-1961 ' (1992) 15 University of New South Wales Law Journal 1 R McQueen, 'Life Without Salomon' (1999) 27 Federal Law Review 181 R McQueen, 'Limited Liability Company Legislation: The Australian Experience' (1991) 1 Australian Journal of Corporate Law 22 W R Scott, The Constitution and Finance of English, Scottish and Irish Joint Stock Companies to 1720, Peter Smith, New York, 1951, vol 1 SP Ville, 'Judging Salomon : Corporate Personality and the Growth of British Capitalism in a Comparative Perspective' (1999) 27 Federal Law Review 203 D Wishart, 'A Reconfiguration of Company and/or Corporate Law Theory' (2010) 10 The Journal of Corporate Law Studies 151

39

CHAPTER 3: CONSTITUTIONALITY

40

CHAPTER 3

•

particular restrictions on law making specifically provided or implied in the

Constitution and the various state constitutions;

CONSTITUTIONALITY

•

allocation to the Commonwealth of law-making powers over particular matters, with unallocated powers remaining with the states.

COVERED IN TH IS CHAPTER

The last of these has proved to be most contentious in corporations law, although all the others have some part to play.

Attempts since 1961 to provide a national scheme for corporations and securities law The division of power over corporations between the states and the

SHOULD CORPORATIONS LAW BE A COMMONWEALTH OR STATE MATTER?

Commonwealth in the Australian Constitution

The prevailing feeling is that the Commonwealth, rather than the states, should make

The reasons for the failure of national schemes

and administer the laws to do w ith corporations. But the question is complex.

Whether a national scheme is a Good Thing

The present scheme and its limits

CASES TO REMEM BER Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330

Some arguments for empowering tile Commonwealth to make and administer corporations laws are: •

Uniformity in law is very desirable in a small market economy like Australia's.

•

There should be no red tape for a company doing business in more than one

NSW v Commonwealth (2006) 229 CLR 1

state, hence there should be only one incorporation regime. Different regimes, or

NSW v Commonwealth (1990) 169 CLR 482 R v Hughes (2000) 202 CLR 535 Re Wakim; Ex parte McNally (1999) 198 CLR 511

·-

even a mutual recogn_ition scheme, add unwanted complexity. •

Centralisation mean~less duplication in administration and might mean less cost.

• . The Commonwealth's resources are far greater and regulatory matters can more easily be funded in a centralised syst8m. This is particularly important when

STATUTES AND SECTIONS TO REMEMBER

corporations are immensely wealthy, and litigation and enforcement is multi-

Australian Constitution s 51 (i), (xiii), (xx), (xxxix); 77, 109

jurisdictional, complex and very expensivt. •

States competing for fees from corporations create a 'race to the bottom' in appeasing big business. This results in inappropriate laws . Some arguments for states retaining power to make and administer corporations

INTRODUCTION

law are:

Powers to govern in Australia are divided between its state and federal

•

•

The local environment is a very important consideration in good administration

(Commonwealth) governments by the notoriously difficult-to-alter Constitution . The

and law making . That is the whole point of having states. This is sometimes called

Constitution also divides power among the components-the legislature, executive

the 'Principle of Subsidiarity'.

and judiciary-of the Commonwealth government and limits the exercise of its powers . In terms of corporations law, and in particular its history in Australia, the

•

States provide the 'laboratory of democracy'; this means that law will only progress if states can experiment with new and different forms and processes .

important divisions of and limits on governing power are: •

the division of government into the legislative, judicial and executive arms-this is rigorous in the Constitution for the Commonwealth government but less so in state constitutions; limitations on states in the extent of geographical effectiveness of their laws, including the jurisdiction of their courts;

THINK ABOUT IT Is it appropriate for Australia to have a national corporations and securities law? Note: Surprisingly, there is not a great deal of published critical analysis on this issue, apart from some politics literature on the importance of the local and the economics of law literature on whether competition between states for the revenue from hosting corporations produces better law. A starting point for the latter could be I M Ramsay, 'Company Law and the Economics of Federalism' (1990) 19 Federal Law Review 169.

41

42

PART 1: CORPORATIONS LAW IN CONTEXT

C HAPTER 3: CONSTITUTIONALITY

THE CONSTITUTION AND CORPORATIONS

•

'laws ... with respect to ... ': what degree of connection must there be between the law under challenge, and the corporations ta'.Nhich the law relates and

The main law-making power as to corporations in the Constitution is s 51, which

their character as constitutional corporations? Need the law merely refer to or

gives the following power to the Commonwealth Parliament:

operate on corporations or must there be a greater degree of relevance and in 51 . Legislative powers of the Parliament

what ways? While this also has been considered a number of times with varying

The Parliament shall, subject to this Constitution, have power to make laws for the

results, most recently in New South Wales v Commonwealth (2006) 229 CLR 1

peace, order, and good government of the Commonwealth with respect to:

industrial relations laws founded on the corporations power were held to be valid

(xx)

as regulating the employment of persons by constitutional corporations.

foreign corporations, and trading or financial corporations formed within the

••

limits of the Commonwealth;

A CASE TO REMEMBER

Section 51 (xiii) gives the Commonwealth the power to make laws as to the incorporation of banks. And s 51 (xxxix) provides the incidentals power: (xxxix) matters incidental to the execution of any power vested by this Constitution in the Parliament or in either House thereof, or in the Government of the Commonwealth, or in the Federal Judicature, or in any department or officer of the Commonwealth. Finally, the Commonwealth government is conferred power to make laws as to 'external (that is, international] affairs', and 'trade and commerce with other countries, and among the States' ins 51 (xxix) and (i) respectively. These are sometimes deployed to empower Commonwealth legislation in the field of corporations law. An example, considered in R v Hughes (2002) 202 CLR 535, was the conferral on

NSW v Commonwealth (2006) 229 CLR 1 All six state (Labor) governments challe~ed the Commonwealth (Coalition) government's newly passed Workplace Relations Amendment (Work Choices) Act 2005. This Act severely cut back on rights to claim unfair dismissal, changed the institutional structure of the setting of minimum wages to one much more under the control of the government, cut back on the number of minimum conditions of work and virtually removed unions from the physical workplace. The challenge was on the basis that the Act was not supported by any Commonwealth constitutjonal power. The chief power relied upon by the Commonwealth government was the cof'porations power. If a constitutional corporation was an employer, said the Commonwealth, the corporations power gave power to regulate employment contracts made by that employer. The HigJ1 Court agreed, affirming that employment was a sufficient degree of connection.

the federal Attorney-General and other Commonwealth agencies of the power to prosecute state offences by the then Corporations Act 1989 s 47 and Corporations (Commonwealth Authorities and Officers) Regulations 1990 reg 3( 1)( d) . The limits of these powers as to corporations have been interpreted in several

THINK ABOUT IT

respects. They are:

Something ho rrible

•

Consider Higgins J's list of 'horribles' . More than 100 years ago, in Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330 at 409, Higgins J contemplated with horror the subjects for which an unrestrained corporations power might permit the Commonwealth to legislate: libel;

'trading and financial corporations': which corporations are in this category (often called 'constitutional corporations' in legislation, for example in the Workplace Relations Act 1996 (Cth))? There are two contenders for the test to determine which corporations fall in the category: what the corporations do and what they were set up to do-the 'activities' and 'purposes' tests. And the activities or

licensing;

purposes which fall within the category may be more or less important within the

industrial relations;

overall purposes or activities of the corporation . There are a number of cases on the issue, but for the present the issue remains unsettled .

•

interest on deposits; •

religion and morals;

•

Statute of Limitations; and

means by which corporations contract;

THINK ABOUT IT Does the constitutional power extend to incorporated legal aid bureaux funded by competitive tender? See Lawrence v Aboriginal Legal Service of Western Australia Inc [2007] WAIR Comm 435.

education. To what extent do you think Higgins J's fears have come to pass? (The term 'horribles' was coined by P H Lane, The Australian Federal System (2nd edn), Law Book Co, Sydney, 1979, 160.)

43

44

CHAPTER 3: CONSTITUTIONALITY

PART 1: CORPORATIONS LAW IN CONTEXT

•

'formed ... ': must the corporation be already formed for the Commonwealth government to have the power to make laws as to it, or can the Commonwealth make laws as to the incorporation of corporations? This question was decided in NSW v Commonwealth (1990) 169 CLR 482. 'Formed' was interpreted to be the past tense, hence a corporation had already to be in existence for the Commonwealth to have power over it. This was also held to be true of 'foreign' corporations, although the incorporation of banks is subject to a specific grant of power ins 51 (xiii) of the Constitution.

A CASE TO REMEMBER NSW v Commonwealth (1990) 169 C LR 482

In 1989, fortified by numerous advices from senior counsel, the then Commonwealth (Labor) government passed a major legislative package centralising and reforming corporations law and its administration. The package comprised statutes providing for a national corporations law, a national 'close' corporations law, national securities law and a national regu lator. Those states with Liberal or Coalition governments successfully challenged the parts of the laws that provided for the incorporation of companies. The court (Deane J dissenting) decided that the phrase 'formed within the limits of the Commonwealth' was not meant merely to distinguish trading and financial corporations from foreign corporations, but was meant to add something like 'having been already created' to the limitation represented by 'trading and financial'. This was supported by consideration of the intent of the drafters of the Constitution as apparent in the Convention Debates and authority. The result meant the Commonwealth government could not by itself legislate to create a national companies and securities scheme. As soon as possible after the decision was handed down the state and federal governments met and in Alice Springs in 1990 agreement was reached: the states would by statute adopt as their own a corporations law passed by the Commonwealth for its territories.

THINK ABOUT IT Imagine a scheme where the states adopt as their law a Commonwealth law as amended from time to time. It is to work as a single law throughout Australia. This was, indeed, what the Alice Springs agreement set up and what was eventually enacted in the Corporations Act 1989 along with the various state Corporations (Applications of Laws) Acts. What are the issues relating to political control, administrative centralisation, and the jurisdiction of courts? How would you deal with them? What are the constitutional difficulties in so doing?

EMPOWERING THE CURRENT NATIONAL SCHEME Numerous attempts were made bet\Mlen 1961 and 2001 to establish a national corporations and -securities law scheme. The limitations on the Commonwealth's powers meant it could not do it itself. The limitations on cross-vesting meant that cooperation inevitably failed. The solution was for the states to refer their powers to the Commonwealth under s 51 (xxxvii) of the Constitution. This the states did in 2001.

,,. THE REFERRING ACTS Corporations (Commonwealth Powers) Act 2001 (NSW); Corporations (Commonwealth Powers) Act 2001 (Vic); Corporations (dommonwealth Powers) Act 2001 (SA); Corporations (Commonwealth Powers) Act 2001 f:NA); Corporations (Commonwealth Powers) Act 2001 (Qld}; Corporations (Commonwealth Powers) Act 2001 (Tas).

' !THE REFERRALS

•

The powers referred by the states in 2001 were limited. They empower the Commonwealth only: Various other issues of constitutional law have borne upon corporations law in Australia. Of importance recently have been limitations on 'cross-vesting' the jurisdiction of various courts, and the powers and functions of various officials. Section 77(iii) of the Constitution empowered the Commonwealth Parliament to

to enact the Corporations Bill 2001 and the Australian Securities and Investments Commission Bill 2001 ; and to amend those Bills in respect of the formation of corporations, corporate regulation and the regulation of financial products and services.

invest any court of a state with federal jurisdiction, but it is silent as to the reverse: the investing of federal courts with state jurisdiction . In Re Wakim; Ex parte McNally

The referrals were temporally limited to five years, with provision for early

(1999) 198 CLR 511 the High Court held that this indicated there was no power to

termination and, with the exception of South Australia, for extension (which has

do so. In R v Hughes (2000) 202 CLR 535 it held that the exercise of state powers

been given).

by Commonwealth officials had to be empowered by state legislation, to which the Commonwealth might consent. But the Commonwealth could not impose further

The referrals specifically excluded laws as to industrial relations-a somewhat futile gesture in view of New South Wales v Commonwealth (2006) 229 CLR 1 , in

duties or obligations on those officials unless empowered to do so under the powers

which the High Court found that laws as to industrial relations were empowered by s

conferred on it by the Constitution.

51 (xx) to the extent that the relations were entered into by constitutional corporations .

45

46

CHAPTER 3: CONSTITUTIONALITY

PART 1: CORPORATIONS LAW IN CONTEXT

The referral of powers does not solve all the constitutional issues faced in forging a national corporations and securities law scheme. There are some continuing problems: •

DATES OF

WHAT WENT WRONG

There are concerns about separation of powers issues not faced by the states. Regulatory authorities, including ASIC, are increasingly being given powers which

1981-91

Cooperative scheme: the Commonwealth passed an act incorporating a companies code for its territories and this was adopted as amended from time to time by states legislation. The Commonwealth established a national regulatory body, the National Comp~es and . Securities ~mmission, to work in cooperation with the state registrars of companies. Ultimate political responsibility still remained with the states, but ~hannelled through a mint;terial council comprising the responsible ministers of all the states and t~e Commonwealth.

Change difficult as the ministerial council did not work very well, yet change necessary to deal with new lows in business behaviour and the market crash of 1987. National Companies and Securities Com~~on remained underfunded in the face of growing responsibilities and increasing enforcement costs. The division of responsibilities between the National Companies and Securities Commission and the Registrars of Companies led to duplication and waste, not to say administrative game-playing. Business increasingly operating at a national level, hence jurisdictional issues becoming more acute.

1991-2001

Corporations Law schemr the Commonwealth amended the Corporations Act 1989 to accommodate the High Court's ruling in • NSW v Commonwealth (see above). Section 82 of the Corporations Act 1989 contained the Corporations Law and this was adopted by the states as amended from time to time. A new single national regulatory body, the Australian Securities Commission (later the Australian Securities and Investments Commission) was set up to take over the

Vesting federal courts with state jurisdiction was declared unconstitutional. Doubt was cast on the ability of the Commonwealth to confer duties on Commonwealth officers when those duties arose within a state's jurisdiction.

appear to be judicial and thus infringe the strict separation of powers in the

Constitution . Examples are powers to disqualify directors under s 206F and to issue infringement notices under Part 9.4AA. Similarly, courts have been given powers which appear to be administrative or legislative. There are a number of examples in court supervision of external administration and in discretions to alleviate irregularities . Attempts have been made to fix these issues. •

TH E SCHEME

OPERATION

Compulsory acquisitions under the Corporations Act 2001 (Cth) must not infringe the constitutional right not to have property acquired otherwise than 'on just terms' : the Constitutions 51(xxxi). Remaining state responsibil ities must be carved out of the ambit of the

Corporations Act if they are not to be void under s 109 of the Constitution. This is attempted in Part 1 . 1A of the Corporations Act.

LEARNING EXERCISE Find the sections of the Corporations Act that have been amended to deal with some of the constitutional concerns. Can you find any others which might be invalid under the Constitution? TABLE 3.1 Schemes DATES OF

THE SCHEME

WHAT WENT WRONG

OPERATION

Until 1961

Each colony, then state, had its own legislation, usually modelled on the prevailing United Kingdom statute. Each state had its own administrative body, generally called the 'Registrar of Companies'.

Uniformity only approximate. Operation in each other's jurisdiction had to be through mutual recognition of companies. Jurisdictional issues in litigation were expensive and case law did not develop uniformly.

1961-81

Uniform Companies Acts passed in all states. Political and administrative responsibility remained local.

Only weak mechanisms for maintaining uniformity. Registrars of Companies faced growing regulatory responsibilities and more powerful corporations with inadequate funding . Jurisdictional issues remained .

(Continued)

47

48

CHAPTER 3: CONSTITUTIONALITY

PART 1: CORPORATIONS LAW IN CONTEXT

ASSESSMENT PREPARATION

TABLE 3.1 Schemes (Continued) DATES OF

THE SCHEME

OPERATION

role of the state registrars of companies and the National Companies and Securities Commission and corresponding conferrals of state powers on Commonwealth officials. Political responsibility was placed much more firmly with the Commonwealth minister (at first the Attorney-General and later the Treasurer). Jurisdictional issues were dealt with by complex crossvesting, but the federal courts took an increasing role. 2001-present

WHAT WENT WRONG

It is difficult to devise a problem question for this topic, although the Lawrence Case mentioned above might provide an example. Most examination questions are likely to require an essay-either argumentative or descriptive. Simple questions would involve descriptions of the one or more schemes together with their difficulties and why they failed, or might demand a listing of the virtues and vices of national corporations legislation. More difficult questions might involve a consideration of the econonii' s of federal ism or an in-depth analysis of the existing scheme's potential failings. Alternatively, a purely descriptive essay about the specific referral arrangements might be required.

THINK ABOUT IT The failure of the cross-vesting scheme was as a result of a case (Re Wakim; Ex parte McNally (1999) 198 CLR 51 1) in which it was argued that someone should not be liable to be examined by the court under the Corporations Act 2001 (Cth) because the Court wh ich would have examined them did not have the jurisdiction to do so. Were the case one of liability for insolvem trading, is lack of technical jurisdiction a good reason for someone to not pay thefr creditors?

Referral of powers: the states gave to the Commonwealth the powers necessary for the Commonwealth to pass a national Corporations Act including a scheme of securities regu lation.

•

49

50

CHAPTER 4: ADMINISTRATION

CHAPTER4

responsibility within which they work, and the dispute resolution system (although this last is strictly speaking not 'administrative').

ADMINISTRATION

FUNCTIONS COVERED IN THIS CHAPTER

The administrative functions required for corporations law are:

The role of the Australian Securities and Investments Commission (ASIC} and its

•

registration of companies;

main functions of information gathering and dissemination, and enforcement

•

registration of security interests;

ASIC's extraordinary powers, particularly powers of enquiry and relief from

•

registration or certification of auditors, liquidators, financial service providers, securities exchanges and so forth; . ...

compliance Other bodies (the Takeovers Panel and the Financial Reporting Panel) set up

•

demanding, receiving and holding information, including entries on registers but

to keep courts out of business affairs so that game playing does not inhibit the

also including masses of other financial and other business information , and disclosing it to people who have thEQCight to see it;

functioning of markets Review of administrative decisions

CASES TO REMEMBER Australian Pipeline Ltd v Alinta Ltd [2007] FCAFC 55 Glencore International AG v Takeovers Panel (2005) 54 ACSR 708 Precision Data Holdings Ltd v Wills (1991) 173 CLR 167

STATUTES AND SECTIONS TO REMEMBER Australian Securities and Investments Commission Act 2001 (Cth) Parts 2 and 8,

ss 1, 8, 9, 12, 172(2) and 261 Corporations Act 2001 (Cth) ss 659A-C

•

checking for compliance witl'l regulation (the 'surveillance' function);

•

enforcing proscriptions, whether as criminal prosecutions or civil enforcement, or even through on-the-spot fines;

•

conducting investigations;

•

exempting from compliance when compliance would be pointless or too costly;

•

setting rules for the way the procedures and policies involved in these functions are to work;

•

setting standards, such as accountin~ standards;

•

giving advice as to reforms in the law or accounting standards;

•

educating the public and subsets thereof as to the law, its operation and its ' administration. Most of these functions are performed entirely or in part by ASIC .

INTRODUCTION

LEARNING EXERCISES

Look up the ASIC website (www.asic.gov.au) and see how many of these functions are carried out by ASIC. Then find the websites for the other bodies listed below and see what they do.

Laws need administering- things have to be done and proscriptions have to be enforced, elements of the community need to be educated about the law, and advice on reform is necessary if the law is to be kept up to date. Bodies and institutions are therefore set up within law, and corporations law in particular, with appropriate

•

2

Find out which sections of the Corporations Act 2001 (Cth) or the Australian Securities and Investments Commission Act 2001 provide for the above functions.

powers and responsibilities, or extra powers and responsibilities are given to existing bodies. These powers and responsibilities are often loosely referred to as 'functions'. An administrative system needs to be responsible and accountable for what it

THE ADMINISTRATIVE BODIES

does. This is especially true for a complex set of laws like corporations law. Moreover,

Before working through the institutions or bodies involved in corporations law, it is

disputes arise between corporations, within corporations and between corporations

worth thinking about just what is necessary for a body to be involved in administering

and the administering authorities, and these need to be resolved. The administrative context for corporations law thus comprises the nature and functions of various institutions and bodies, the systems of accountability and

a set of laws. The following is a list not of necessities, but of qualities, which any particular institution has to some extent, each in its own particular way:

51

52

CHAPTER 4: ADMINISTRATION

PART 1: CORPORATIONS LAW IN CONTEXT

•

Status as a legal entity: perpetual succession, capacity to acquire, hold and

of ASIC. It is, however, also constituted as a statutory corporation, having been given eans it can act within the legal

dispose of property, to sue and be sued. This may include capacities to employ

the status and capacities of a body corporate. This

people and otherwise do things.

system-be represented in court to prosecute, hold funds, and so forth. Finally, it is a

A governance structure, usually in the form of a committee (or 'commission') with

large government organisation concerned with regulating corporations.

membership, means of appointment of members, and a chair. It may include a detailed organisational structure. •

WHERE IT IS

Objectives, powers and functions defining the body's business and how it is to

For obvious reasons to do with state sensibilities, Part 4 mandates the formation

go about it. This may include being directed to do things or to do them in certain

of a regional office in every state and territory of Australia, and no head office is

ways by various persons or bodies-often the responsible minister or other

provided for.

...

political appointment or body. •

Responsibility and accountability, including reporting requirements.

HOW IT WORKS

•

A source of funding.

ASIC as a commission can have between three and eight members, of whom at least

Bodies are mostly, but not necessarily, provided with these qualities by legislation.

three must be full-time and each of w~m is appointed by the Governor-General on

Some just exist, although their functions are limited by the necessity for federal

the nomination of the responsible minister. The Governor-General has to appoint

matters to be constitutionally founded and for governmental action generally (apart

one full-time member and chairperson of the meeting, and may appoint another as

from that under the Crown prerogative) to be founded in powers conferred by

deputy chairperson. All this is set out in ss 8 and 9 of the Australian Securities and

parliament. Nevertheless, it is possible to argue that, say, the Corporations Law

Investments Commission Act 2001. Conflicts of interest and misuse of information

Simplification Program or the Corporate Law Economic Reform Program are bodies,

on the part of members.have their own Part 7 of the Act. Part 4 contains a lot of

yet neither was established by statute; rather they were founded by ministerial fiat to

provisions dealing witr:ihe meetings of the Commission (quorum, who is to preside)

give advice as to law reform.

and its membership. Meetings are to be convened by the chairperson at a time and

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (ASIC)

of ASIC's functions' or when requested to do so by two or more of the members.

ESTABLISHMENT

services, or authorising someone to carry out a specified function. Each of these is

For technical reasons to do with the changing constitutional arrangements for

dealt with in the Act. It is worth noting that, ~nder s 120, its staff must be engaged

place determined by them, when they

t~ink it 'necessary for the efficient performance

Apart from the Commission itself as a CQfTlmittee, ASIC as a government organisation does things through delegation, employing people, contracting for

corporations law, the provisions establishing ASIC are messy. ASIC is actually

under the Public Service Act 1999 (Cth); this is illustrative of its essential nature as a

established by s 7 of the Australian Securities Commission Act 1989 (Cth)-the predecessor to the current Act-although s 8 of the current Act, the Australian

government regulatory body. At the time of writing ASIC governs itself by having four committees advise

Securities and Investments Commission Act 2001 (Cth), states that ASIC is a body

the commission itself (it tends to vary with governmental fashions). They are the Audit

corporate, has a common seal, may deal with property, and may sue and be sued.

Committee, the Risk Committee, the Regulatory Policy Group and the Enforcement

The phrasing of this s 8 suggests that ASIC already exists; s 261 confirms this by

Committee. These include senior officials of the commission. Its functions are carried

stating that ASIC established under the old law 'continues in existence as if it had

out by three areas (they used to be called 'directorates'): Markets, which has two

been established under [the 2001] Act'.

commissioners, and Investors and Financial Consumers, and Registry which have three commissioners between them.

WHAT IT IS As its name suggests, ASIC was established in 1989 as a 'commission' -a committee with a task. Between 1989 and 1 July 1998 it was the Australian Securities Commission (ASC). The Australian Securities and Investments Commission Act 2001 (Cth) has a number of provisions about membership and chairpersonship

LEARNING EXERCISE Find out more about AS/C 's organisation and procedures by going to its website, www.asic.gov.au . In particular, look for an information sheet and its organisation chart. To find them, go to 'About ASIC' and then 'What we do'.

53

54

CHAPTER 4: ADMINISTRATION

PART 1: CORPORATIONS LAW IN CONTEXT

ASIC's functions are expanded in a couple of ways. First, Part 2 of the Australian

FINANCE Details of ASIC's finances can be found in its annual report on the ASIC website. An organisation needs money. ASIC mostly gets it from the Commonwealth Parliament by appropriation. (Jn 2013-14, funded through the Commonwealth budget, ASIC's operating expenditure was $405 million. ASIC raised $763 million in fees and charges for the Commonwealth.) It also gets money from the sale of services and interest from money invested. It can be paid by state governments to do specific things. A number of accountability measures apply to ASIC's finances. All this

Securities and Investments Commission Act 2001 Ph) provides a role for ASIC in the related field of consumer protection in relation to financial services. Second, ASIC does not administer just the Corporations Act 2001 (Cth) and the

Australian Securities and Investments Commission Act 2001. It also has functions under:

• Insurance Contracts Act 1984 (Cth); •

can be found in Part 8 of the Australian Securities and Investments Commission Act

2001 (Cth) . Money raised through fines, fees and charges is not kept by ASIC but paid into consolidated revenue. On the other hand, if costs are awarded to ASIC in litigation, ASIC receives them - but in that case it is only recouping its expenses.

THINK ABOUT IT Some regulators are funded on a user-pays system. Under this those subject to its administration pay a levy. Those entities more likely to be costly to regulate because their activities are in an industry more subject to misconduct or because they themselves have not conducted themselves well in the past might have to pay a larger levy. Do you think this would be a good way to fund ASIC? Would it solve ASIC's chronic shortage of funds? Some argue that it would make ASIC fat and lazy and perhaps more susceptible to capture. A consultation paper discussing the issue was released by Treasury on 28 August 2015. What do you think about it?

••

Business Names Registration Act 2011 (Cth); •

Business Names Registration (Transitional and Consequential Provisions) Act

2011 (Cth); •

Superannuation Industry (Sl.JPervisi't!n) Act 1993 (Cth);

•

Retirement Savings Accounts Act 1997 (Cth);

•

Life Insurance Act 1995 (Cth); and

•

Medical Indemnity (Prudential Supervision and Product Standards} Act 2003 (Cth) . Moreover, other regulators also administer some parts of these nine Acts.

,.

For example, parts of the last four Acts dealing with prudential regulation are administered by the Australian Prudential Regulation Authority (APRA) . Section 1 (2) of the Australian Securities and Investments Commission Act 2001 sets out ASIC's objectives in doing

thes~ things . ASIC must,

in the Act's words,

'strive' to: ~uickly;

•

uphold the law uniformly, effectively and

•

promote confident and informed participation by investors and consumers in the financial system;

WHAT IT DOES ASIC performs most of the administrative functions listed at the start of this chapter

Superannuation (Resolution of Complaints) Act 1993 (Cth); National Consumer Credit Protection Act 2009 (Cth);

make information about companies and i;ither bodies available to the public; and •

improve the performance of the financial system and the entities within it.

as necessary for a functioning corporations law. Some of those functions are covered in later chapters. Three (registering, information gathering, and relieving from liability) are considered below.

KEY CONCEPT Regist ratio n Strictly speaking 'registration' is the act of entering something on a 'register'. The Oxford English Dictionary says registration means '[t]o set down (facts, names, etc .) formally in writing; to enter or record in a precise manner'. Hence a 'register' is: '[a] book or volume in which regular entry is made of particulars or details of any kind which are considered of sufficient importance to be exactly and formally recorded; a written record or collection of entries thus formed'. Thus for the purposes of corporations law, 'registration' means to record something, usually in a form which people can inspect so as to find out information.

THINK ABOUT IT What function does parliament's injunction to ASIC to 'strive' to do certain things serve? Possibilities include: a direction to courts about interpretation; •

a mission statement of little consequence; and a constraint founding ultra vires claims.

KEY CONCEPT 'The Minister' 'The Minister' is defined in ss 26 and 19-19C of the Acts Interpretation Act 1901 (Cth). In short, 'The Minister' is the member of Cabinet to whom the responsibility for administering

55

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CHAPTER 4: ADMINISTRATION

PART 1: CORPORATIONS LAW IN CONTEXT

Giving relief

the Act is given for the time being. To which minister it is given is a political question, decided in accordance with the procedures of the governing political party, but nominally by the Governor-General on behalf of the Queen in accordance with the procedures of a Westminster-style constitutional system. Currently it is the Treasurer.

Much of the Corporations Act regulates companies a d individuals, requiring them to do some things and not to do others. Some of these requirements are onerous and in many cases it is not necessary for those individuals, corporations or classes to comply in order to achieve the objects of the regulation . Thus compliance places

In addition to the Act formu lating priorities and objectives, the Minister is empowered under s 12 to give directions about ASIC's policies and priorities, although that degree of political control is mediated by s 12(3) which says that the

undue cost on those bodies. Hence the Corporations Act frequently confers on ASIC the power to relieve individuals, corporations and classes of either from such compliance. The powers to relieve are quite specific to the regulations concerned.

Minister must not give such directions in a specific case.

EXAMPLE In April 2014 the Treasurer issued a Statement of Expectation to the chair of ASIC. It outlined the Government's expectations about the role and responsibilities of ASIC, its relationship with the Government, issues of transparency and accountability and operational matters. A previous one had been issued in February 2007. The Treasurer requested a Statement of Intent in response and this was issued by the Chair of ASIC in July 2014 . The statements can be found at http://asic .gov.au/about-asic/what-we-do/ our-role/statements-of-expectations-and-intent/.

TH INK ABOUT IT The power to relieve is an extraordinary power. After all, the Corporations Act 2001 (Cth) is an Act of Parliament, yet an administrativ~ody is given the power to waive the application of it as law. What safeguards do y.ii>u think are necessary for the exercise of the power? What should ASIC d~ to ensure the discretions at least appear to be exercised fairly and impartially? Note: Look at the regulatory guides on the ASIC website: www.asic.gov.au . They are a little hard to find, being available under 'Regulatory resources'. In particular, Regulatory Guide 51 deals with applications for relief. Perhaps compare that to the Leniency Policy set out by the Australian ~ompetition and Consumer Commission.

SOME SPECIFIC ACTIVITIES Information gathering

Enforcing

In order to carry out its functions, ASIC gathers information. It can do this in a

As the main corporate, markets and financial services regulator, one of ASIC's main

number of ways:

roles is to ensure compliance with corporations and securities law. Much of its activity is

l

•

simply talking to people informally;

directed to this end. This is not to say that it simply prosecutes: there is much regulatory

•

reviewing the information on its registers;

theory which emphasises a more compliance-oriented approach using the regulatory

• •

sharing information w ith other agencies of Australian governments and the

triangle developed in 8 Fisse and J 8raithwait~. Corporations, Crime and Accountability,

Australian Stock Exchange Ltd, and with overseas agencies;

Cambridge University Press, Melbourne, 1993, chs 4 and 5 (see over the page) .

calling for the production of books under ss 28-398 of the Australian Securities

Reflecting, in part, this approach, the Corporations Act provides a variety of

and Investments Commission Act 2001;

means for enforcement, graduated in terms of seriousness:

investigating under the power to investigate contraventions of the corporations

•

legislation or other Australian law where the contravention concerning bodies corporate, managed investment schemes of financial products: Australian

•

civil actions where a company has been wronged and no one else has the

•

civil penalty proceedings seeking a declaration of contravention under Part 9.48,

Securities and Investments Commission Act 2001 ss 13-27 (this includes the power to summon persons to hearings) ; •

infringement notices under Part 9.4AA for breaches of disclosure provisionsthese are like on-the-spot traffic fines; capacity to bring an action;

requiring the disclosure of information about acquisitions and disposals of financial

where the standard of proof is on the balance of probabilities, but the penalties are

products: Australian Securities and Investments Commission Act 2001 ss 40-48;

minor (although this is a relative term: they can be up to $200000 for an individual

holding a hearing under ss 51-62 of the Australian Securities and Investments

Commission Act 2001 (although this method cannot be used as part of an

and $1 million for a body corporate); and •

criminal prosecution , although in this situation in all but minor regulatory offences

investigation of a suspected contravention or as to whether unacceptable conduct

evidence gathered by ASIC is referred to the Commonwealth Director of Public

has taken place in a takeover).

Prosecutions who may, or may not, prosecute.

57

CHAPTER 4: ADMINISTRATION

PART 1: CORPORATIONS LAW IN CONTEXT

FIGURE 4.1 The regulatory triangle

More specific accountability measures are set out in the Commonwealth

Authorities and Companies Commission Act 1997-(tith), which deals with reporting, accountability, banking and investment, and the conduct of officers. In particular, an annual report is required. ASIC is also subject to the usual political processes of questioning in parliament, Enforcement

and appearance before parliamentary committees. In particular, the Parliamentary Joint Committee on Corporations and Financial Services regularly reviews ASIC's activities, as does the Senate Estimates Committee.

Create incentives for people to tell us when they have breached their obligations

•• THE TAKEOVERS PANEL ESTABLISHMENT The Takeovers Panel, like ASIC , was

Monitor compliance

~ablished

in an earlier Act, the Australian

Securities Commission Act 19S9 (by s 171, as the Corporations and Securities Panel). It is continued in existence by s 261 of the Australian Securities and

Help entities understand their compliance obligations

Investments Commission Act 2001 (Cth), having been renamed by the Financial Services Reform Act 2001 (Cth).

WHAT IT IS

,.

THINK ABOUT IT

The Takeovers Panel is what its name suggests: simply a set of people who meet

To what extent do ASIC's compliance policies reflect Braithwaite's regulatory theories? In what way could they be changed to more truly reflect those theories?

are disputes which occur during takeovers of companies-mainly whether

Note: There is a voluminous literature on regulatory theory, Braithwaite's being one of the better-known ones. Indeed it was formulated to deal with the issue of what was then called 'white-collar crime'.

to make decisions. It is not a body cor~rate, nor a court. The things it decides circumstances in a takeover are 'unacceptqble' within the terms of Chapter 6 of the

Corporations Act. The people on the panel are selected to represent a 'peer group' for those involved in the disputes: as the panel expre~ses it (at www.takeovers.gov.au), 'The

RESPONSIBILITY Political responsibility lies with the responsible minister, currently the Treasurer, although prior to 1996 it was the Attorney-General.

Panel is a peer review body that regulates corporate control transactions in widely held Australian entities, primarily by the efficient, effective and speedy resolution of takeover disputes'.

WHERE IT IS THINK ABOUT IT

The Takeovers Panel conducts its activities wherever convenient, although its

What difference does it make to the way corporations law is administered that responsibility was transferred from the Attorney-General to Treasury? Do Treasury and the Attorney-General's Department have different cultures, and does this influence what is done and how it is done? Do the departments have different objectives, and does this affect corporations law and its administration? A useful starting point might be a comparison between the two recent law reform efforts: the Corporate Law Simplification Program and the Corporations Law Economic Reform Program. Also compare the policies of the Coalition parties and the Labor party.

executive is in Melbourne.

HOW IT WORKS Although the minimum membership is five, currently there are 38 members, appointed by the Governor-General on the advice of the Minister. One is the president. When a matter is referred to the panel, the president may appoint a threemember 'sitting panel' to consider it. Proceedings are primarily determined on written submissions. However, the sitting panel may convene a conference. The panel has

59

60

PART

1:

CORPORATIONS LAW IN CONTEXT

significant powers at a conference, including powers to take evidence on oath,

CHAPTER 4: ADMINISTRATION

OTHER BODIES

subpoena witnesses, examine witnesses or subpoena documents. The panel then comes to a decision. If it finds unacceptable circumstances, it must publish its

Two watchdog and advisory bodies were set up or continued in existence by

decision under s 657 A(5) of the Corporations Act 2001. It also publishes its other decisions and policies on its website (www.takeovers.gov.au).

the Corporations and Markets Advisory Committee and the Parliamentary Joint

Funding comes by appropriation from the Commonwealth government.

WHAT IT DOES The Takeovers Panel is, according to s 659AA of the Corporations Act, the primary

the Australian Securities and Investments Commission Act 2001 (Cth). They are Committee on Corporations and Financial Services, dealt with in Parts 9 and 14 respectively. Their main functions are to deal with questions of law reform and the effectiveness of the administration of corporations law as referred to them and on

..,

their own initiative.

dispute resolution forum for takeover bids during the lifetime of those bids. Under

The government announced in its 2014-15 Budget that the Corporations and

s 659B of the Act, private parties to a takeover do not have the right to commence

Markets Advisory Committee was to be abolished. While the Australian Securities

civil litigation, or seek injunctive relief from the courts in relation to a takeover,

and Investments Commission Amendment (Corporations and Markets Advisory

while the takeover is current. All they can do is seek a declaration of unacceptable circumstances under s 657 A.

Committee Abolition) Bill 2014 was

In addition to its power to determine unacceptable circumstances in a takeover,

in~ed

introduced on 4 December 2014, it is

currently (October 2015) befortl the Senate. In the meantime CAMAC has ceased operations.

the panel has the power to review decisions of ASIC to grant exemptions from aspects of the takeovers legislation on Chapter 6 of the Corporations Act. These decisions themselves are subject to review, but by the panel itself under s 657EA.

RESPONSIBILITY At first blush, decisions of the Takeovers Panel might seem to be judicial, but that is

THINK ABOUT IT Does the abolition of C~AC leave a gap in the provision of advice and recommendations to the Minister about matters relating to corporations and financial services law, administration and practice? •

not supposed to be the case. They are provided for so as to be administrative, being merely decisions as to how the law might apply in certain circumstances.

•

There are strenuous efforts made in the Corporations Act to limit courts' powers

A complex of bodies deals with accounting and auditing matters set up by or

of review in relation to panel decisions. These are in ss 659A-C. The main reason is

continuing in existence under the Australian Securities and Investments Commission

so that the panel is the main forum for resolving disputes about a takeover bid during

Act 2001. These bodies are:

its currency. What is left to the courts are mainly questions of law to which the panel refers and enforcement measures. Whether or not these provisions are constitutionally valid remains an issue.

•

Financial Reporting Council Accounting '!>tandards Board;

•

Auditing and Assurance Standards Board; and Companies Auditors and Liquidators Disciplinary Board .

THINK ABOUT IT Can you distinguish between a panel decision and a judicial decision? Why is the distinction important? See Precision Data Holdings Ltd v Wills (1991) 173 CLR 167 Glencore International AG v Takeovers Panel (2005) 54 ACSR 708 and Australian P;peline Ltd v Alinta Ltd [2007] FCAFC 55.

As for ASIC, political responsibility lies with the responsible minister. More specific measures for accountability are specified in the Public Governance, Performance and Accountability Act 2013, which deals with reporting, accountability, banking and investment, and annual reports are again required.

LEARNING EXERCISE

Draw up a table dealing with each of these bodies in terms of the analysis above: • establishment; • what it is;

• • • •

where it is located; how it works; what it does; and responsibility.

61

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PART 1: CORPORATIONS LAW IN CONTEXT

CHAPTER 4: ADMINISTRATION

CHALLENGING ADMINISTRATIVE DECISIONS

THE OMBUDSMAN

If someone thinks it worthwhile, they may challenge the actions, usually called

If someone has a complaint about an administrative ody's processes and

'decisions', of an administrative body. Most challenges are to the decisions or failings

procedures, it may be taken to the Commonwealth Ombudsman. The Ombudsman

of ASIC, although the Takeovers Panel and the Companies and Auditors Disciplinary Board appear to do the kinds of things that are subject to claims.

then investigates the complaint with the objective of resolving it, although they have

As any student of administrative law should know, challenges to the decisions

no power to decide issues. Reports must be made to the relevant body and can also be made to the Prime Minister and Parliament.

of administrative bodies may be in respect of the existence of power to make the decision, the process by which it was made, or the merits of the decision. These

OTHER SPECIFIC WAYS TO COMPLAIN

categories overlap, so it is better to categorise claims in terms of the fora in which they might be made.

enforceable through particular legislation: the Freedom of Information Act 1982 (Cth)

Rights to access to information and its converse, rights to privacy, are"oth and Privacy Act 1988 (Cth) respectively.

POWER AND PROCESS THE HIGH COURT

MERITS

This is the place to claim unconstitutionality or that members of ASIC or the

ADMINISTRATIVE APPEALS TRIBUNAL

Takeovers Panel (but not the members of the Companies and Auditors Disciplinary

Most decisions by ASIC, the Minister or the Companies Auditors and Liquidators

Board) are acting beyond their powers or not acting as they should. The first is by

Disciplinary Board can be reviewed on the merits by the Administrative Appeals

virtue of s 30 of the Judiciary Act 1903 (Cth) and the latter by virtue of s 75 of the

Tribunal. This tribunal~ empowered by the Administrative Appeals Tribunal Act 1975

Constitution. Claims relying on s 75 must be for one of the traditional prerogative

to stand in the shoes of the original decision maker in considering the facts of the

writs of prohibition, mandamus or certiorari and be in respect of someone who is

situation and substitute its decision for that of the original decision maker.

an 'officer of the Commonwealth' . The members of ASIC and the Takeovers Panel

The Tribunal only has this power when the legislation conferring the original

fall within this category because they are appointed by the Governor-Genera/ on the

discretion confers it: s 25 of the Administrative Appeals Tribunal Act 1975. The

nomination of the Minister (Australian Securities and Investments Commission Act 2001 ss 9(2) and 172(2)).

Corporations Act does so by first saying (ins 1317B) that all decisions by ASIC, the

THE FEDERAL COURT, THE FEDERAL MAGISTRATES COURT OR STATE SUPREME COURTS

minister or the Companies Auditors and Liquidators Disciplinary Board are subject to review by the Administrative Appeals Tribunal, but then providing a list of exceptions (in s 1317C). The exceptions are: •

The Federal Court and (in particular) the Federal Magistrates Court are much cheaper fora in which to pursue a claim. Supreme Court actions are quite expensive-but not as expensive as High Court actions. The Administrative Decisions (Judicial Review) Act 19 77 (Cth) in ss 5 and 6

•

decisions expressed to be final or conclusive, or for which appeal or review is already provided;

•

refusal by ASIC to consent to the referral of financial reports to the Financial Reporting Panel under s 323EH;

•

certain discretions exercised in the deregistration procedures;

provides for review of decisions in these courts on the ground of the decision being

•

decisions about examinations by the court under ss 596-7B;

'bad'. There are also, ins 7, grounds for claim for failure to make a decision within a certain period or for unreasonable delay in making a decision.

•

decisions to grant exemptions and modifications to the takeover provisions-the power to review these decisions has been given to the Takeovers Panel;

While this Act provides only for these claims to be made in the Federal Court

certain decisions by the minister and ASIC with regard to financial services and

or the Federal Magistrates Court, a rather complicated set of provisions in the

markets;

Corporations Act gives state Supreme Courts jurisdiction (s 1337B), but requires that

•

a decision not to give notice of the exercise of a discretion under s 1317D; and

all such claims in state Supreme Courts must be transferred to the federal system,

•

decisions about infringement notices under Part 9.4AA.

unless they arise out of or relate to another non-administrative /aw proceeding (s 1337H).

63

64

PART 1: CORPORATIONS LAW IN CONTEXT

THINK ABOUT IT Why are each of these decisions protected from review?

Section 244 of the Australian Securities and Investments Commission Act 2001 (Cth) sets out the decisions empowered by it that are subject to merits review by the Administrative Appeals Tribunal. They are all in respect of hearings ASIC may conduct in relation to the exercise of any of its functions. ASIC's powers in this regard are draconian.

CHAPTER 4: ADMINISTRATION

ASSESSMENT PREPARATION Most of the difficult issues in this topic are matters of administrative law and are therefore unlikely to be examined in a corporations law course. Two aspects of this material do warrant preparation: Essays considering the functions and powers of ASIC or the Takeovers Panel. It is worth considering in particular the enforcement policy, the power to relieve, and investigation powers of ASIC, and the role and policies of the Takeovers Panel (perhaps comparing those of the Financial Reporting Panel with those of the Takeovers Panel). The abolition of CAMAC might also provoke an essay topic . •• 2 As additional information when dealing with remedies and procedure in problems. It is always impressive when students are able to indicate the fora in which disputes are resolved (or not) , the officials involved in enforcement or supporting civil litigation, the means by which matters come to those fora, and the procedures and remedies for ,. maladministration.

"°

•

65

TWO EXTERNAL MATTERS

•

69

CHAPTER 5

THE ENTITY COVERED IN THIS CHAPTER How corporations in general come into existence How companies in particular come into existence

...

Forms of corporation Types of company Choosing a legal form of business Names and numbers of companies The certificate of incorporation

~

Dissolution and the 'long tail' problem The effect of incorporation and its limits Membership, including: -

classes of shares

-

acquisition

-

transfer

,,.

CASES TO REMEMBER

?.

Ascot Investments Pty Ltd v Harper (1981] 148 CLR 337 Borland's Trustee v Steel Bros & Co Ltd (1901] 1 Ch 279 Bowman v Secular Society (1917] AC 406

•

Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549; 7 ACLC 841 Burland v Earle (1902] AC 83 Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd (1916]

2 AC 307 Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 Gilford Motor Company v Horne (1933] Ch 935 Industrial Equity v Blackburn (1977) 137 CLR 567 Lee v Lee's Air Farming Ltd (1961] AC 12 Macaura v Northern Assurance Co Ltd (1925] AC 619 Patrick Stevedores Operations No 2 Pty Ltd v MUA (1998) 195 CLR 1; 153

ALR 643; 88 IR 34 Prest v Petrodel (2013] UKSC 34 Quintex Australia Finance Ltd v Schroeders Australia Ltd (1991) 9 ACLC 109;

3 ACSR 267

70

CHAPTER 5: THE ENTITY

PART 2: EXTERNAL MATIERS

Re Darby (1911] 1 KB 95

INCORPORATION OR REGISTRATION

Re Plashett Pastoral Co Pty Ltd (1960) 90 WN (Pt 1) (NSW) 295 Salomon v Salomon & Co Ltd (1897] AC 22

COMPANIES

Smith, Stone and Knight Ltd v Birmingham Corporation (1939] 4 All ER 116 Webb v Earle (1875) LR 20 Eq 556 Will v United Lankat Plantations Co Ltd (1914] AC 11

A company comes into being through a process called 'incorporation by registration'. An Act of Parliament, the Corporations Act 2001 (Cth) (in Part 2A.2), sets out a procedure ('registration') which, if followed, results in a statement that a new company now exists.

STATUTES AND SECTIONS TO REMEMBER Associations Incorporation Reform Act 2012 (Vic) or equivalent CorporationsAct2001(Cth)ss45A,113-5, 119, 124, 134-41, 147-50, 153-5, 157, 162, 162(3), 168, 169, 231, 2468-D, 254A, 2540, 514-29, 601AA-AH, 1070A 1071 E-F, 1073A-5A, 1274(7 A), 1306

Partnership Act 1958 (Vic) or equivalent

...

KEY CONCEPTS Corporation and company

Corporations are things which are recognised as persons in law ('legal person') but not because they are human beings. They usually can sue and be sued, hold property and enter into contracts. Companies are a su~et of corporations. Companies are corporations registered under the Corporation~ Act 2001 (Cth) or its predecessors.

CORPORATIONS OTHER THAN COMPANIES

INTRODUCTION

Forms of corporation other than companies come into being-or 'are incorporated' -

Corporations are made, not born. Yet, like human beings, after they have come into being, they are said to be 'legal entities'.

in a variety of ways, thesj:l days many by similar processes of registration under

Corporations are made according to a process (like human beings, but one is biological and the other bureaucratic). A number of issues arise from this:

other statutes (for exan1Ple, incorporated associations or trade unions) and some by special Acts of Parliament, whether state or Commonwealth (for example, universities).

•

In days gone by, corporations were often created under the Crown prerogative

•

What is the process?

•

Why is it undertaken?

by charter. Sometimes the courts simply acG,epted that they had already come

•

How do you know it has been carried out?

into existence. In Pramatha Nath Mullick v Pradyumna Kumar Mullick (1925)

•

How have abuses of the process been dealt with?

LR 52 Ind App 245 a Hindu idol was recognised as a legal person. Beetles in

•

What does it mean to be a 'legal entity'?

St Julien-de-Maurienne were tried and

•

Are there any limits to the idea of legal entity?

considered to have been thought of as legal persons.

•

Who is involved?

•

exec~ted

in 1545 and hence must be

Managed investment schemes are generally set up as trusts with corporations

How does an entity cease to be?

as their trustee. Although a whole chapter of the Corporations Act is devoted to

These are the subject of this chapter.

managed investment schemes, trusts are beyond the province of this book.

A number of theoretical approaches can be taken to these questions. Moreover,

If a body corporate originates in a non-Australian jurisdiction, a process for

a number of current issues arise from them. Space does not permit their coverage

registration as a company in Australia is provided in Chapter 58 of the Corporations

here; however, they are dealt with in D Wishart, 'A Reconfiguration of Company

Act. If it is already a company, another procedure of registration in Australia is

and/or Corporate Law Theory' (2010) 10 The Journal of Corporate Law Studies 151.

provided a little later in the Act. And if a non-company Australian body corporate (so long as it is not an exempt public authority or corporation sole) wants to register as a company it may do so under the same Part, as may unincorporated bodies that can sue or be sued or hold property in the name of an officer. Which simply goes to show that quite a lot of entities can, and some must, register as companies.

71

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CHAPTER 5: THE ENTITY

PART 2: EXTERNAL MATTERS

FORMS OF CORPORATION

KEY CONCEPT

There are many forms of corporation. They are mainly categorised by method of

Limited liability

incorporation: chartered, statutory, registration and common law. Those incorporated by registration may be companies or something else-whatever the legislation says they are to be called (for example, trade union or incorporated association). Nevertheless, the method of incorporation is not the only way to categorise corporations. Corporations, howsoever created, may be 'corporations sole' or 'corporations aggregate'.

l cORPORATIONS SOLE

In very simple terms, a member's liability to contribute to the debts of the company is limited to any unpaid amount on their shares. See ss 514-29 of the Corporations Act 2001 (Cth). Table 5.1 is a classification based on the liability of members.

TABLE 5. 1 Classification of companies according to members' liability

TYPE

SIGNIFIER

CHARACTERISTIC

Limited liability companies

'Ltd ' or 'Limited' at the end of its nam~with or without 'Pl'bprietary' or 'Pty'.

A member's liability to contribute to the debts of the company is limited to any unpaid amount on their shares. This is the normal type of company.

No liability companies

'NL' at the end of its name.

Members are not even liable for unpaid amounts on their shares. Only mining companies can be no liability companies .

Unlimited liability companies

Nothing required at the end of its name.

Members are liable for all the company's debts.

Companies limited by guarantee

'Ltd ' or 'Limited ' at the end of its name, alth~ugh most are charitable companies which can dispense with the 'Ltd' or 'Limited'.

Instead of having shares, its members sign a guarantee to pay a certain amount (often $10) if the company becomes insolvent.

Companies limited by shares and guarantee

'Ltd' or 'Limited ' at the end of its name.

A hybrid form of company, no longer able to be registered, although some remain from when they were able to be formed.

These are offices, like the Crown, or the state or Public Trustee, which are held by a single person at any one time, but are considered to survive across the incumbencies of many persons. 'The King is dead; long live the King! ' encapsulates this idea.

CORPORATIONS AGGREGATE These are corporations made up of many members, like companies. (Whether one-person companies under the Corporations Act 2001 (Cth) fall into this category is unclear.)

Corporations may be categorised on many other bases: by activity-educational, trading, charitable, government; by structure-multinational, conglomerate (although

••

this would not be strictly accurate as it implies many corporations); and so forth. For present purposes, what matters is whether the categorisation is deployed within law to achieve any governmental aim . Few are, although that can change at the whim of parliament or the courts.

FORMS OF COMPANY The three main bases for classification of types of company in the Corporations

Act are (1) liability of members, (2) ability to solicit capital and have shares of capital traded, and (3) size. There are many other ways of classifying or describing companies and corporations, but they are not relevant to corporations law.

rEXAM HINT It is always important to determine what type of company is involved in any situation. Answers can vary depending on the type of company involved.

0. t.11

O-" b- \ 0.'.

TYPES There are three types of meeting:

1

Annual general meetings: public companies are required to hold annual general meetings under s 250N, once a year within five months of the end of the company's financial year. They are held to consider financial statements and directors' reports, appointment and remuneration of directors and auditors and deal with any other business that may arise.

2

Extraordinary general meetings: these are held as necessary.

3

Class meetings: these are held to consider issues that affect the rights of particular classes of members. Notice

•

LEARNING EXERCISE Draw up the agenda for the annual general meeting for a large public listed company. Look through the Corporations Act 2001 (Cth) for everything that must be dealt with. Also look through the ASX Listing Rules, to be found on the ASX website. 2

Draw up the agenda for an annual general meeting for a medium sized proprietary company.

Processes and procedures of meetings are heavily regulated. Table 12.2 indicates the more important provisions.

•

Quorum

Public comp.'.!nies must hold annual general meetings once a year within five months of the end of the company's financial year: s 250N. Annual general meetings are not required for proprietary companies under the Act but may be by the constitution of the company. Extraordinary general meetings must be for a proper purpose: s 2490. Extraordinary general meeting may be called by: the board; a director (proprietary company and unlisted public companlaccording to the company's constitution ors 249C (replaceable rule); listed companies: s 249CA (mandatory); board on written 'request' of member(s) with 5% of votes: s 249D (N ote: There is controversy over whether there should be a numerical requirement; one was abolished in 2015); the member(s) at their expense if 5%+ of votes: s 249F; the court: s 2~G. Class meetings are held as necessary to comply with the Act. Minimum of 21 days, unless a longer period is stated in the constitution or a shorter period is agreed to by 95% of members: s 249H . If it is a listed public company the period is 28 days: s 249HA. Must include matters specified in s 249L, but note s 250R inclusions. Must be given to all members entitled to vote, to all directors and the auditor: s 249J-K.

The quorum is a matter for the company constitution . The replaceable rule specifies two members present at all times: s 249T. If the company is a single-member company, the quorum is one: s 2498. (Continued)

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CHAPTER 12: THE DECISION-MAKING STRUCTURE

PART 3: INTERNAL MATIERS

TABLE 12.2 Regulation (Continued) Voting

•

•

Resolutions are either ordinary, requiring 50% of the votes plus one, or special, requiring at least 75% of the votes: s 9. Special resolutions also require notice under s 249L. The procedure for voting should be specified in the company constitution. If not, individual members vote on a show of hands. Of course, a member may own more than one share, hence five members or member(s) holding 5% or more of the votes can demand that a poll be taken in which votes are counted according to the voting rights attached to each share. A properly authorised person, called a 'proxy', may vote instead of a member. Sections 249X-50D deal with them. It is worth noting that it is the proxy system which largely constitutes boards of directors as 'self-perpetuating oligarchies' to use Berle and Means' famous phrase: see A A Berle and G C Means, The Modern Corporation and Private Property (revised edition) , Harcourt Brace World, New York, 1968.

UNANIMOUS CONSENT It is increasingly argued that there is a doctrine of unanimous consent. This doctrine states that the company is bound by the unanimous consent of all the members : Re Ouomatic Ltd [1969] 2 Ch 365. It is more than simply that a resolution of all the members is as effective as if it were made by a general meeting. The doctrine is that it is a resolution of the company and arguably supervenes even what the directors decide, despite Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 24. The principle is saved (thereby implicitly recognising it) in

s 249(7).

The consent must be: •

actually expressed;

•

fully informed; by all members (those who are ~titled to receive a notice of a general

•

meeting); and something the members can do in general meeting (this is the arguable point).

THINK ABOUT IT

THE MEMBERS In Chapter 5, The Entity, the notion of membership as an external characteristic is discussed. Details of the acquisition and disposal of memberships or shares can be found there.

The rationale for the !Jl:>ctrine of unanimous consent is quite problematic. Ross Grantham (1 993) 'The Unanimous Consent Rule in Company Law' CLJ 245 gives three: that the failure to comply with all the formalities is a mere irregularity, that it is a matter of equitable estoppel, or that unanimous consent is somehow the real decision of the company. One could add that it is an example of the principle in Moze/y v Alston (184 7) 1 Ph 790; 41 ER 833 that everything that the general meeting can do will be presumed to have been done. The doctrine has intuitive appeal. What, then, are the reasons for limiting it?

TH INK ABOUT IT In Chapter 5 membership-or, if the company is limited by shares, shareholding- is viewed as something separate from the company. After all, it is a piece of property that can be bought and sold. Yet membership is also an internal characteristic: the general meeting of members, class meetings and unanimous consent are organs in the decision-making processes of a company and hence are a matter of the expression of particular rights conferred by ownership of the external thing. The dual nature of membership-its Janus-like qualities-is severely problematic in law. Arguably, this is revealed when a critical eye is passed over the judgments in Gambotto v WCP Ltd (1995) 182 CLR 432 and the attitude to membership is compared with that evinced in Sons of Gwalia v Magaretic [2007] HCA 1; 232 ALR 232; 81 ALJR 525. In the former the internal yet proprietary nature of the right to hold shares is emphasised (despite repeated assertions over the years, especially when reductions of capital are considered, that no person has a right to hold shares) and the decision ultimately turns on the proposition that the principles of membership were thought to outweigh those of market regulation. In the latter, precisely the reverse is central to the decision. Do you agree?

THE RULES UNDER WHICtl THE COMPANY IS RUN In Chapter 5, The Entity, the idea of the constitution of a company was introduced and the significance of the replaceable rules adverted to. To summarise: •

The set of rules under which a company is run has two possible sources: a constitution which applies to that particular company and the Corporations Act. The Act has mandatory rules and proffered rules. Proffered rules are called the 'replaceable ru les' in the Act. The reason is that the company is run accord ing to the replaceable rules unless it replaces them with its own rules in the form of a constitution. The system is set out in ss 136-41 of the Act.

•

There is an older form for the constitutional structure of a company which many companies still have. This is the memorandum and articles. The table in s 141 sets out a list of the replaceable rules. These cover:

•

appointment, removal and resignation of directors;

•

powers of directors;

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• •

meetings of directors;

That the constitution of the company can simply divide up the power to do things

termination of appointment of managing directors;

was decided in Automatic Self-Cleansing Filter Synciicate Co Ltd v Cunninghame

terms and conditions of appointment of company secretaries;

[1906] 2 Ch 24.

transfer of shares; •

dividends;

•

right of pre-emption of shares;

•

meetings of members; and

•

inspection of books by members.

Note:

•

Some replaceable rules are replaceable for proprietary companies but not for public companies. One-person companies have a separate set of rules appropriate for their unified

A CASE TO REMEMBER Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 24 The general meeting by resolution directed the board of directors to sell the company's undertaking. The board refused. The constitution of the company gave the board the power to sell any property of the company on such terms as it thoughl'fit. It also gave the general meeting the power to subject the board to such regulations as it thought fit , but only by extraordinary resolution. The English Court of Appeal decided that the general meeting could not force the sale of the property other than by extraordinary resolution .

...

decision-making structure.

The constitution can provide a more sophisticated division of power. It can provide

LEARNING EXERCISE

that the general meeting delegates power to the board and therefore retains the

Do the replaceable rules form a viable constitution for a company? What kind of company? The CLERP Task Force intended them to do so.

power to override the board. Indeed, the old version of s 198A subjects the power

Clue: Find the constitution of a company and compare it to the constitution formed by the replaceable rules. There are many examples available over the internet or in various textbooks. Even the old Table A articles would be a suitable comparison .

to manage to 'such regulations ... as may be prescribed by the company in general meeting'. This governs the division of power in many, even very large, companies. It never received authC:itative interpretation. This is extraordinary given that versions of it were extant for over 100 years in many jurisdictions.

LEARNING EXERCISES

THE DIVISION OF POWER

What do you think the division of power as expressed in the old Table A meant?

THE CONSTITUTIONAL POSITION

2

The division of power within a company is governed by the company's constitution.

•

The most common division of power is captured by s 198A(1 ), a replaceab le ru le: 198A Powers of directors (replaceable rule-sees 135) (1)

The business of a company is to be managed by or under the direction of the directors.

one-person companies;

•

small family companies;

•

large proprietary companies;

•

very large multinational companies.

public listed companies; and

Note: There is already special provision for one-person companies in s 198E.

Note: See s 198E for special rules about the powers of directors who are the single 3

director/shareholder of proprietary companies. (2)

Consider what you think are appropriate divisions of power between the various organs are for:

The directors may exercise all the powers of the company except any powers that this Act or the company's constitution (if any) requires the company to exercise in general meeting.

In very large companies, what is the function of the board? Can it sufficiently oversee the operations of the company? If, indeed, there only one company and, if it is a group of companies, how is central direction achieved?

Note: For example, the directors may issue shares, borrow money and issue

QUALIFICATIONS ON THE POWER OF THE BOARD

debentures.

The Corporations Act gives many powers to the general meeting. This is envisaged in

Notable in this is the absence of any sense of delegation by the members.

s 198A. Examples are: •

power to alter the constitution of the company;

•

changes of company name and type;

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•

variations of class rights;

•

some transactions affecting share capital;

•

perhaps rights to remove and appoint directors, and decide remuneration;

•

power to appoint and remove auditors;

•

rights of veto over certain transaction, especially related-party transactions, takeovers and reconstructions;

•

power to wind up the company. A requirement that is rather meaningless (because failure to pass them does not

invalidate the relevant transaction) is that resolutions are required by Chapter 2E in relation to related-party transactions. The ASX Listing Rules require some matters be referred to the general meeting: •

some new issues of shares;

•

certain transactions with important persons in the company;

•

changes to the nature or scale of the business; and disposals of major assets. In general law there are certain situations where the general meeting can act,

despite general management powers being given to the board. They are: •

where the board is unable to act, either through the impossibility of achieving a

•

where it is decided that the company should condone a breach of duty by a

quorum or deadlock-a statutory example of this is provided in s 195; and director. This ratification by the general meeting can effectively bind the company, whereas the board cannot bind the company not to sue one of its own members. Legal proceedings in relation to directors' breaches of duty have been a problematic area since before the first Companies Acts. The difficulty is obvious: if directors manage the company, they should have control over legal action by the company. This includes legal action against directors who breach their duty. Hence the directors have power to decide whether a director should be sued. There are no prizes for guessing what their inclination will be. Indeed, most actions for breach of directors' duty are at the instigation of liquidators. For this reason, there is special provision in Part 2F.1 A for one or more members to take legal proceedings on behalf of the company, provided stringent conditions are met. This is considered in Chapter 14.

LEARNING EXERCISE Keep your eye on the business pages of any newspaper. See if you can find stories in which matters are referred to the general meeting of a company or decisions of a general meeting are reported. Find out why those matters were considered by the general meeting. Determine which sections of the Act are involved.

CHAPTER 12: THE DECISION-MAKING STRUCTURE

ASSESSMENT PREPARATION Most of this chapter is descriptive. However, much of it will become critical to problems originating from fact situations where particular decisions are disputed. It is referred to then. There are a number of essay topics arising from this chapter. Here are some specific topics to watch out for, in addition to those mentioned in passing in the text: • theoretical discussions as to how best to encapsulate for law making how decision making is carried out; • descriptions of the various structures, particularly differentiating between various types and sizes of company-this can be tied into consideration of the appropriateness of regulation for each; • whether and to what extent independent directors should be mandatory in boards of public listed companies; • the extraordinary amounts paid to ~rectors, CEOs and high managerial agents and how best to control such payments; • whether and to what extent institutional investors and the proxy system defeat the structure of control of decision making; whether the managements of companies constitute a self-appointed oligarchy; • explorations of the precise limits of the reserve powers of the general meeting. This can involve you in some.extraordinarily complex law; it is probably best to concede that the decisions of judgetcannot always be reconciled.

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The above passage, first written in 1913 for Harper's Weekly, is much quoted.

INFORMATION

The idea is that bad things will not happen if wrongdoers know that people could get

It pithily expresses the policy behind disclosure reqairements in corporations law. to know and perhaps seek redress about what they intend to do. Hence legislatures

COVERED IN TH IS CHAPTER

force companies and corporations to disclose information and also provide mechanisms by which information may be revealed.

Why information must be disclosed Inspection

In current Australian law, there are now three ways in which companies are or may be forced to reveal information:

ASIC investigation

the exercise of rights held by various persons and bodies to insP.ect company

Mandated disclosure: -

records;

keeping records

2

procedures by which companies are forced to divulge information in hearings; and

-

preparation and presentation of reports

3

mandatory disclosure of certain (and some not-so-certain) information.

-

annual review

Audit

CASES TO REM EMBER AWA Ltd v Daniels (1992) 10 ACLC 933; 7 ACSR 759

Moreover, legislation provides for

~dit,

which is designed to ensure that whatever

is disclosed is true, fair, and complies with standards.

HISTORY

Daniels v Anderson (1995) 37 NSWLR 438

The idea that disclosure protects against fraud had been around for many years

Esanda Finance Corp. Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241

before Justice BrandaiS' comments, being the guiding principle behind much law

In Re Kingston Cotton Mill Co (No 2) [1 896] 2 Ch 279

reform in the nineteenth century. It was even bandied around in the English debates

Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29

prior to the Limited Liability Act 1855.

STATUTES AND SECTIONS TO REMEMBER

mandatory disclosure until the twentieth century. People were assumed to be

While the idea of disclosure was around for many years, this did not result in Australian Securities and Investments Commission Act 2001(Cth) ss 13, 28-38, 51, 53-93AA

prudent enough not to invest when ignorant. The first legislative requ irements placed on companies were just that: if they did publish statements, they had to be

Corporations Act 2001 (Cth), Chapters 2C, 2M, ss 9, 45A, 111 AA-AX, 139, 140,

audited. A number of spectacular frauds and crashes in the twentieth century led

142, 146, 173, 1518, 198~242,247A,250RA,250~251B,254X-Y,285,

to legislatures working out that their assumptions about the prudence of investors

286, 289, 290, 292, 293, 295-7,299-300A,301,307,308, 310-12, 314-22,

were ill-advised. Mandatory disclosure requirements soon followed and a pattern of

324, 324CA-DD, 327-9, 344, 345A-49D, 588E, 588G, 601 EB, 729, 10411,

crisis remed iation and subsequent consolidation emerged, leading to considerable

1274-1274A, 1278-80, 1317E

legislative complexity. This trend has continued into the new millennium, its current form being the response to the collapse of Enron Inc through the set of reforms known in Australia as CLERP 9. These reforms concentrate on remedying conflicts of

INTRODUCTION Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. (Justice Louis Brandeis, Other People's Money, and How the Bankers Use It, National Home Library Foundation, Washington, 1933)

interest among auditors. Since the 1990s attention has been paid to the cost of required disclosure, leading to changing forms for requirements to disclose. Less specificity is often required, the reference point being standards in terms of what 'reasonable investors' or the like require for decision making. On the other hand, complexity has been reintroduced with the increasing importance of accounting standards and the need to reconcile them with the nicely opaque legal standard of 'truth and fairness', the increasing relevance of groups of companies, and the proliferation of investment vehicles needing separate accounting treatment.

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PURPOSES

6

capitalisation policies;

More precisely, the purposes of requiring the disclosure of information have been said to be:

7 8

inter-company transactions.

use of hybrid financial instruments; and

"'\

1

to force accounting for stewardship by management of other people's money;

2

to enable effective assessment of investments, past. present and future, by

LEARNING EXERCISE

investors who do not have the power to force disclosure as required;

The infamous Enron Inc US corporate collapse was caused by creative accounting practices. What were they? The collapse of One.Tel is a similar Australian story. What were the practices involved in that collapse? You might also explore the causes of the Global Financial Crisis, although at root these related to ass~sscients of creditworthiness and the design of financial products.

3

to promote the public interest in managerial competence;

4

to aid government supervision of corporate activity;

5

as a basis of taxation;

6

to help management carry out its functions (although surely management has the

Clue: Wikipedia is quite good for this research.

power to demand the information it needs); and 7

to assist the operation of creditor and investor protection provisions. Each requirement partakes of some of these to more or less extent.

INSPECTION BY A MEMBER OF THE PUBLIC

THINK ABOUT IT

Registers

In the twenty-first century we seem to sum these up in the word 'transparency'. This word refocuses the matter away from the things to be seen and onto the process of ensuring they can be seen. What if those things are necessarily indeterminate as recognised in the accounting phrase, 'true and fair'? Information, then, is manipulable: sociologists have for some time recognised that the relation between knowledge and power works both ways. How does 'transparency' reflect this?

Anyone can inspect and get copies of t he registers required to be kept by the company under Chapter 2C. After all, the reason the reg isters are there is to record and make available"Certain information. The registers are: register of members; 2

register of option holders; and

3

reg ister of debentures. A fee is payable (s 173).

CREATIVE ACCOUNTING THINK ABOUT IT It is obvious that management has control over the processes of information production within a corporation. Audit is a long-established process meant to control manipulation and misleading and deceptive conduct, although it necessarily takes place within its own discourse. Investigations and hearings are other processes by which the control of management over information and its release is challenged. What then are the most obvious forms of manipulation? They are outright lying, including changing the information to suit. and 'creative accounting' . 'Creative accounting' is a term used to describe accounting practices which produce desired income or asset resu lts. These practices may or may not be in accordance with professional standards . They most often occur in relation to: 1 valuation of stock; 2

valuation of assets;

3

valuation of intangibles;

4

calculation of depreciation (amortisation);

5

debt or equity financing;

There is at least one person (if we can call "'1em that) who makes a living by making personal offers to all the shareholders of listed public companies to buy their .shares at amounts less than the market price. These offers are couched 1n terms of being a very good offer, a once in a lifetime opportunity and the like. Most recipients consign the offer to the rubbish bin, as it deserves. But some are fooled-usually the elderly and more vulnerable. They accept, by signing an acceptance. The contract that thereupon comes into existence is rigorously enforced, no matter the pleas of those fooled . The shares can then be sold at a profit. What do you think of such a person? What are the various ways by which such a process can be challenged? Note: The means by which the names and addresses of the shareholders are discovered is through s 173 public disclosure requirements. Is there any way to prevent. unscrupulous people from accessing the names and addresses? Not really. But the scam 1nv.olved using machines to address the letters in a cost-effective way using data from the reg1stern. Regulations made under s 173(3) require the company to give the data as a .del1.m1ted text file produced by a commercially available spreadsheet or database application and copied onto a CD-ROM or USS flash drive. At one point providing the data in .PDF format prevented electronic manipulation of the data and this has been used to stymie the scam.

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PART 3: INTERNAL MATIERS

Information lodged with ASIC

BY A DIRECTOR

Members of the public have the right to search non-confidential material lodged with

The financial records of the company

ASIC: s 1274-1274A.

A director has a right of access to the financial records of the company of which they

BY A MEMBER

want someone else to look and even make copies, they must get a court order under

The company constitution

s 290(2).

are a director at all reasonable times: s 290(1). This is personal to the director; if they

A member has the right to obtain a copy of the company's constitution: s 139. A fee can be charged.

The books of the company in relation to legal proceedings

The minutes of general meetings

If a director is or might be party to legal proceedings, they may insriee\ the books of the company for the purposes of the legal proceeding: s 198F. This right (unlike the

A member has the right to inspect the minutes of general meetings: s 251 B. A fee

others) lasts for seven years after the director ceases to hold office . It gives a right to

may be charged for a copy.

..

make copies. The legal proceedings will generally be actions for breach of duty by the director.

The minutes of directors' meetings In general, there is no member's right to inspect the minutes of directors' meetings. Members should allow the directors to get on with their job without interference.

The books and records of the company for the purpose of carrying out their duties

There is, however, some authority, cited in R P Austin and I M Ramsay, Ford's

This is a case-law right. It is a corollary of a director's fiduciary duty and hence is

Principles of Corporations Law (15th edn), Butterworths, Sydney, 2013, [110.380]. to

limited to the discharlle of those duties; in other words, it must be exercised for the

the effect that if a member has some special interest the court will allow inspections sufficient only for the purposes of that interest.

purposes of the company.

The books of the company

Obviously auditors need access to the books of the company in order to check whether the financial records comply with the requirement to be true and fair and

A member cannot simply turn up and ask to inspect the books of the company,

BY AN AUDITOR

beyond their rights as a member of the public (although to inspect a company

in accordance with Accounting Standards. This is provided ins 310. Indeed, it

register they do not have to pay the fee) . That would undermine how the corporate

is extended by enabling an auditor to require any officer of the company to give

system works. Members have to ask the court to make an order under s 24 7A. The

information, explanations or other assistar,y:::e.

order can specify that someone else may inspect on the shareholder's behalf-a useful thing to ask if the shareholder doesn't know much about company finances . The member must be acting in good faith and for a proper purpose. Checking

BY ASIC Among ASIC's powers are the powers to inspect the books of a company

whether a director is indeed breaching a duty is proper, but finding things out for a competitor is not.

and to call for the production of books relating to a company's affairs (even

This right to inspect is especially useful for oppression actions, to be discussed in Chapter 14. Indeed, that situation is especially provided for in s 24 7A(3).

Securities and Investments Commission Act 2001, ss 28-38. The powers are,

Any matters specified in the company's constitution

to contraventions . These powers also support the hearings and investigations

A company's constitution may provide for members' inspections of the books of the

powers discussed in the following section.

when kept out of the jurisdiction: s 289(3)). These are set out in the Australian naturally enough, limited to the purposes of the performance of ASIC's functions, including ensuring compliance with the corporations legislation or in relation

company, or of the accounting records (which is a slightly narrower category) . This, then, is enforceable through s 140, although such enforcement is subject to the qualifications outlined in Chapter 14.

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CHAPTER 13: INFORMATION

PART 3: INTERNAL MATTERS

ASIC INVESTIGATION

is at core an obligation of controlled entities to provide information for, and for the controlling entity to produce, consolidated accoun'l\; and reports .

The Australian Securities and Investments Commission Act 2001 provides for a two procedures through which ASIC can gather information. Each has a different

Non-corporate entities

purpose. They are:

Obligations under the disclosure provisions are broadened to include a variety of

•

Hearings: s 51. These are situations where the corporations legislation requires or

non-corporate bodies. These include managed investment vehicles, like trusts and

gives ASIC the power to hold hearings. Examples of these are:

unincorporated associations. Indeed a combination of s 111 AC and s 9 allows for the

-

law reform matters;

inclusion of bodies defined as : 'body corporate or unincorporated body and includes,

-

exemptions from the operation of various provisions of the Corporations Act

for example, a society or association '. The extensions to the regulato~ ambit are

2001 (Cth);

limited to those bodies quoted on a stock exchange.

-

licensing of securities dealers;

-

making stop orders.

Procedural matters are dealt with in ss 53-93AA. Worth noting is that ASIC is not bound by the rules of evidence but is bound by the requirements of natural justice. •

There are differential reporting requir6!llents for various categories of reporting

Investigations: s 13. In any of three situations ASIC may launch an investigation.

entities. They are: public companies, whether listed or not: s 9;

They are:

•

-

if ASIC thinks it expedient in order to administer the corporation legislation, including pursuing contravention and other laws relating to fraud or dishonesty;

-

when directed by the minister (ASIC must then investigate); and

-

followi ng a report by a receiver or liquidator.

Once an investigation is launched, ASIC has a variety of powers, including that of examination: requiring a person to give reasonable assistance or answer questions on oath. Naturally, the power to inspect and call for books also follows .

MANDATED DISCLOSURE THE SCHEMA The corporations legislation provides a scheme under which information must be disclosed to members . It has the following elements (see s 285): Accounting and financial records must be kept. •

Categories of reporting entities

Financial and other reports complying with certain standards must be prepared from these records.

• These reports must be published by presentation. All these actions have to be audited (about which see the next section).

proprietary companies, small and large: s 45A(2); disclosing entities: ss 111AA-AX;

•

reg istered scheme;: ss 9, 601 EB; listed registered stheme: s 9.

Note: • Some small proprietary companies are disclosing entities under s 111 AC. •

Some foreign-controlled small proprietary companies are treated as large proprietary companies: s 292(2). Small proprietary companies can increase their reporting requirements: s 293.

REQUIREMENT 1: KEEP RECORDS All companies must keep financial records: s 286 . They must be kept for seven years . Section 9: 'Financial records' includes (a)

invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and

(b) (c)

documents of prime entry; and working papers and other documents needed to explain: (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements.

In addition, an annual review of information held by ASIC must be conducted . Non-compliance is a civil penalty offence: ss 344 and 131 ?E. Failure to comply

COMPLICATING FACTORS

may also lead to the company 's deemed insolvency: s 588E. This can lead to

Corporate groups

personal liability for directors.

While the disclosure provisions operate on an entity-based system, there is a series of provisions designed to deal with the situation of corporate groups, including those with overseas operations: Divisions 6, 7 and 8 of Chapter 2M. For groups this

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PART 3: INTERNAL MATTERS

The director's report reviews the company's principal activities, changes in LEARNING EXERCISE

activities, extraordinary events or activities and ret'ESvant environmental regulation

John Elliot, a high profile businessman of the 1980s and 1990s, was caught under these provisions. Find out the circumstances of his case.

(if any). Also required is specific information about: •

the directors;

Clue: The company concerned was Water Wheel Holdings Ltd.

• •

dividends paid; options issued (especially to directors); and

•

indemnities and insurance premiums.

• •

Public companies have to also set out: directors' qualifications, experience and responsibilities; and number of board meetings held during the year and number attended.

REQUIREMENT 2: PREPARE STATEMENTS AND REPORTS Requirement The second requirement as to disclosure is that various statements be prepared for the past financial year: ss 292 and 295 for consolidated accounts.

Listed public companies have to set out:

Small proprietary companies are exempted from this requirement, although a shareholder with 5% or more of the votes in a general meeting can direct the preparation of financial statements, with or without a directors' report and whether or

board policy on directors' remuneration; relationship between remunerati~ and the company 's performance; the amount and elements making up the remuneration paid to the directors and

• •

not they are to be audited. ASIC can direct preparation too.

five senior executives; and directors' interests in shares, options, debentures and contracts with the

Contents

company.

Financial statements are complex documents and their contents are a topic probably

,

beyond the province of lawyers to deal with in any detail. In schematic they are:

LEARNING EXERCISE Triple bottom line accounting is a process by which the social and environmental effects of company activities are measured and reported. What is it? Is it provided for in the legislation? How would you mandate it?

• profit and loss statement: a statement of earnings and expenses, even if not reflected in actual income and receipts, for the accounting period;

• balance sheet: a statement of assets and liabilities, which must balance with capital (the amounts contributed plus or minus accumulated profits or losses) , as at a particular date;

• cash flow statement: a statement of money in and out over the accounting period; and

• directors' report: see more information about this later in the chapter. The statements must comply with: •

REQUIREMENT 3: PRESENT THE REPORTS The reports have to be presented: ss 314-22. This means they have to be: • •

sent to shareholders; presented at a general meeting; and

•

lodged with ASIC. Notice also lodgment requirements as to: changes to registered office or company officers (ss 142, 146, 242);

the Corporations Regulations (in particular, Schedule 5) (s 296); accounting standards (s 29); and

•

truth and fairness (s 297).

•

share issues or cancellations (ss 254X-Y); and

judge-developed standard, whereas accounting standards are developed by the

•

continuous disclosure obligation for disclosing entities.

accounting profession. It is logically possible for one to be met while the other is not.

AN ADDITIONAL REQUIREMENT: THE ANNUAL REVIEW

The relationship between the last two is fraught. 'Truth and fairness ' is a

The legislation sets out the relationship: the reports must be couched in terms of the accounting standards, but any departure from truth and fairness must be explained in the notes to the statements.

The directors' report Another financial statement is called the directors' report. It is a review of the company 's operations and is dealt with in ss 299-300A.

Every year ASIC sends to every company an 'extract of particulars' within two weeks of its 'review date'. The company must: •

correct any wrong particulars;

•

answer any questions;

209

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PART 3: INTERNA L M ATTERS

•

pay the review fee Corporations Review (Fees) Act 2003 (Cth);

•

pass a solvency declaration within two months. This procedure is of recent origin and is set out in ss 345A-49D.

CHAPTER 13: INFORMATION

REQUIREMENTS '

All companies except small proprietary companies must appoint an auditor: s 301. The qualifications auditors are required to hold are set out in s 324 and

AUDIT PURPOSE Financial reports are prepared by management. They disclose what management has been doing and members calculate management's performance from the information there provided. Clearly, management has an incentive to tell lies-at very least to manipulate the information to produce the 'truth' that it wants the rest of the world to see. This is so obvious an issue that in the nineteenth century, even before disclosure was requ ired, the legislation mandated that audit of those financial statements that were produced was required. Audit, then , is the process of: • •

checking that the financial statements are prepared in accordance with the requirements of the legislation; and telling those concerned whether they are or are not so prepared . The most common communication by auditors, other than to simply approve the

financial reports, is to 'qualify' the reports. This is a statement that the auditors think

ss 1278-80. They are based on the principles of expertise, independence and accountability. Removal and resignation is regulated in ss 327-9 . These regulations are the key protection for auditors.

THE AUDIT CONTRACT The relationship between the auditor and the company is contractual. Its basic terms are set out in Table 13.1. TABLE 13.1 Undertakings made in the ~uditing contract UNDERTAKINGS BY THE COMPANY

• •

UNDERTAKINGS OF THE AUDITOR

To pay the fee. To permit the audit and the disclosure of the auditors' report in accordance with the corporafions legislation and the company's constitution.

that in some way the financial reports do not meet the requirements of the legislation. It is made in the auditors ' report to the general meeting .

•

The corporations legislation: •

regulates who may be appointed as auditor and the means of their appointment and dismissal;

•

provides rights of access to records;

•

provides for shareholder access to auditors;

•

To audit the financial statements for the accounting period next after the meeting. To provide a report which complies with the corporations legislation and the company's constitution. To exercise reasonable care and skill in the conduct of the audit and in the making of the report. Anything else the auditors expressly agrees to do.

Note: The contract does not extend to giving advial, unless, of course, that is agreed: AWA Ltd

mandates what must be reported; and •

deals with conflict of interests.

v Daniels

(1992) 10 ACLC 933; 7 ACSR 759 .

AUDITORS' DUTIES UNDER TORT LAW Undertaking an audit and providing an auditors' report may give rise to a duty in tort.

THINK ABOUT IT The point of an audit is to check management. This makes the appointment of auditors fraught. It is difficult for a meeting of possibly many members to make so precise a decision as who should be appointed and on what terms. Doing so must thus be left to management, yet it is management that is being audited. Even so, notionally the appointment is made by the company, in the sense of the accumulated members.The following paragraphs map the way the law attempts to resolve the position of auditors. Is the law successful in resolving the issue?

Someone, say an investor in the stock market, may rely on the auditor's report in assessing the company's shares as an investment. The question courts have had to face is whether, if the auditor has not lived up to their duties, the person who relied should receive compensation. It is a difficult question for, as Cardozo CJ of the US Supreme Court said in U/tramares Corporation v Touche (1931) 17 4 NE 441 , 444, there is a danger in 'liability in an indeterminate amount for an indeterminate time to an indeterminate class'. The current Australian formulation of the line drawn between those to whom a duty is owed and those to whom it is not is set out in Esanda Finance Corp.

Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241. The most commonly cited

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formulation is that of Brennan CJ (at 252). Under that formulation the plaintiff has to demonstrate that the auditor must have known or ought reasonably to have known: the information or advice would be communicated to the plaintiff, whether individually or as a member of an identifiable class; •

the information or advice would be communicated for a purpose which would be very likely to lead the plaintiff to enter a transaction of the kind they did in fact enter into; and

•

it would be very likely that the plaintiff would enter into such a transaction relying

THINK ABOUT IT The audit function has long been considered to be a private one. It is a relationship between the company and the auditor whereby the auditor serves the needs of the accumulated members. Their position is delicate and their main power is that of persuasion backed by the threat of disclosure through qualification of the reports. Section 311 of the Corporations Act changes this by requiring auditors to report any significant contraventions of the Corporations Act and any attempts to interfere with the audit to ASIC. Does this damage that relationship?

on the information or advice provided and thereby risk economic loss if the statement was untrue or the advice unfounded.

BREACH OF AUDITORS' DUTIES LEARNING EXERCISE

Checking that the financial reports ~fl eet a true and fair view and that accounting

Draw up a scale of proximity for the application of this test. At one end put the company as such, being the party that signed the contract to have the audit performed. At the other end place anyone who has suffered a loss due to mismanagement of the company. Between them and in order might lie: the members as a body in respect of their function of controlling management; • shareholders individually in that function;

standards have been complied with is an exceedingly complex task. The fundamental

• •

• •

Ch 279: It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and caution whicti a reasonably competent, careful and cautious auditor would use.

shareholders as investors;

What is reasoncdile care skill and caution must depend on the particular circumstances

people who intend to invest in the company, who have read the report;

of each case. (at 288)

people who are thinking of investing in companies which invest in the audited company and who have read the report; and people in either category who have read a newspaper or stock exchange reference to the report.

Where did the plaintiff in the Esanda Finance Case lie on this axis? Where is the line drawn by the High Court?

AUDITORS ' STATUTORY RIG HTS AND DUTIES The legislation provides the following rights: access to records: s 31 0; and not to be obstructed without lawful excuse: s 312. The following are the statutory duties of auditors: •

statement is that of Lopes LJ in In Re Kingston Cotton Mill Co (No 2) [1 896] 2

to form an opinion : s 307;

•

to report to members: s 308;

•

to attend the AGM and to answer questions: ss 250RA and 250T;

•

to report to the trustee for debenture holders where the company is a borrowing corporation : s 313;

It should be added that the standard also varies over time. There are a number of aspects of skill and care t hat have been identified over the years. They are: • The auditor should know the legislation and the company's constitution. •

The auditor should employ competent staff.

•

Books and documents should be examined.

•

It is permissible to rely on internal control systems, but they must be checked.

•

It is permissible to rely on management, but they should be aware of the possibility of fraud, but not be suspicious-watchdogs, not bloodhounds is the simile most frequently deployed. The auditor should warn sufficiently senior management and should qualify the reports if there is no remedy.

A CASE TO REMEMBER

Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29

•

to be a watchdog for ASIC as to compliance with the Corporations Act: s 3 11; and

The auditors failed to discover that mortgages which were supposed to secure loans given by the company did not exist. The auditors argued that they relied on the company's external solicitor to check security was given . The case provides an extensive analysis of

•

to comply with the new conflict of interest regulation in ss 324CA-DD.

exactly what auditors should do.

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A CASE TO REMEMBER

ASSESSMENT PREPARATI ON

AWA Ltd v Daniels (1992) 10 ACLC 933; 7 ACSR 759 Daniels v Anderson (1 995) 37 NSWLR 438 Note: Sometimes 'Daniels' is substituted for 'Deloitte Haskins and Sells' because Mr Daniels was the relevant partner in the audit firm. Moreover, many people conflate the cases into one big one, which is quite understandable. AWA employed Mr Koval as a foreign exchange manager. In a process which has happened before and will happen again, controls on Mr Koval's trading activities became lax as he made very good profits for the company. He then lost a lot of money, the controls failed to work and he lost lots more. The total loss to AWA was $49.8 million, but that is a mere pittance compared to the many recent losses in similar circumstances. In any event, AWA sued its auditors for failing to pick up the problems over two audits. The auditors had in fact warned management that controls on foreign exchange trading were insufficient, but failed to warn senior management and had not qualified the accounts. The auditors cross-claimed on the basis that the directors of AWA had been negligent in allowing the controls to be lax (AWA did not sue its own directors). The series of cases provide extensive analysis of the duties of auditors and of directors, particularly the relation between them and of the duties of executive and non-executive directors.

OTHER LIABILITY Auditors may also be liable if they are involved in preparing a prospectus (see Chapter 15). While tort liability is unlikely under the Esanda Finance test above, s 729 might well apply.

Essays Beyond the usual run of descriptive questions, the following are likely topics: • failures of the auditing system revealed by the collapse of Enron; • the reforms wrought by CLERP 9; • the way creative accounting rots the disclosure system ; • ASIC powers. Other topics are flagged in the text.

Problems Apart from the material on auditors, there is very little in the chapter which could give rise to substantial questions. Students should watch out for the potential personal liability of directors under s 588G due to the deeming provision in s 588~hen financial records are not kept. The main topic for problem questions is auditors' liability. Note the connection with directors ' duties along the lines of the AWA Cases. The main issues will be: • Have the auditors failed? • Do they have to compensate these claimants? Proceed along the familiar lines of tort cases: Is there a duty? It oin be contractual or tortious. If the plaintiff is not the company, use the Esanda Finance test. 2 State the standard, using Kingston C~tton Mill. . . 3 Determine which aspect of the duty may have been breached. Discuss the way 1n which it has been breached. Refer to Pacific Acceptance and AWA. 4 Check to see if there is a corresponding breach of directors' duty to act with care and diligence. s Determine whether there is and, if necessary, discuss any other liability.

Auditors may also be liable under s 1041 1for making a false and misleading statement as a result of which a person subscribing for securities suffers a loss.

•

21 5

CHAPTER 14: CONTROL OF DECISIONS

216

CHAPTER 14

CONTROL OF DECISIONS

Elder v Elder and Watson (1952) SC 49 Eley v Positive Government Security Life Assurance l:o Ltd (1875) 1 Ex D 20 Erlanger v New Sombrero Phosphate Co (1878) 3 App Gas 1218 Furs Ltd v Tomkies (1936) 54 CLR 583

COVERED IN THIS CHAPTER

Gambotto v WCP Ltd (1995) 182 CLA 43

Why control decisions?

G/avanics v Brunninghausen (1996) 19 ACSA 204; 14 ACLC 345; on appeal (1999) 46 NSWLR 538

Controls on:

Har/awe 's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968)

-

the board of directors

-

the general meeting

Hickman v Kent and Romney Marsh Sheep-Breeders ' Association [1915] 1 Ch 881

-

other decision makers

Hogg v Cramphorn Ltd [1967] Ch 254

Enforcement of controls Who can control whom as to what decision Doctrines deployed to control decisions in a list

121 CLR 483

Houldsworth v City of Glasgow Bank (1880) 5 App Gas 317 Howard Smith v Ampol Petroleum Ltd1"1974] AC 821 Hurley v BGH Nominees Pty Ltd (1982) 1 ACLC 387 Hurley v BGH Nominees Pty Ltd (No 2) (1984) 2 ACLC 497

CASES TO REMEMBER Aberdeen RaJ/way Co v B/aikie Bros (1854) 1 Macq 461; 1 All ER Rep 249

Kathleen Investments (Aust.) Ltd v Australian Atomic Energy Commission [1977]

HCA 55; (1977) 139 CLR

Airpeak Pty Ltd v Jetstream Ltd (1997) 15 ACLC 715

Kaye v Croydon Tramways Co [1898] 1 Ch 358

Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656

Kinsela v Russell KinstJa Pty Ltd (1986) 4 NSWLR 722

Andy Kala Pty Ltd v E J Doherty Pty Ltd (1995) 13 ACLC 1630

Kraus v J G Lloyd Pty Ltd [1965] VA 232

AC~83

ASIC v Citigroup Global Markets Australia Pty Limited [2007] FCA 963

Loch v John Blackwood Ltd [1924]

ASIC v Hellicar [2012] HCA 17 ASIC v Rich (2003) 21 ACLC 450; 44 ACSR 341 and (2004) 50 ACSR 500;

MacDougall v Gardiner [1875] 1 Ch D 13

22 ACLC 1232 AWA Ltd v Daniels (1992) 7 ACSR 759, 10 ACLC 933; on appeal Daniels v

Menier v Hooper's Telegraph Works (187 4)·LR 9 Ch App 350 Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483; 14 ACLC 519 Mills v Mills (1938) 60 CLA 150

Anderson (1995) 37 NSWLR 438

Mozely v Alton (1847) 1 Ph 790; 41 ER

Beatty v E & F Beatty [1938] Ch D 708

Ngurli Ltd v Mccann (1953) 90 CLR 425

Bia/a Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785

Pender v Lushington (1877) 6 Ch D 70

Boardman v Phipps [1967] 2 AC 46

Percival v Wright [1902] 2 Ch 421

Bou/ting v ACTAC [1963] 2 QB 606

Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1

Canadian Aero Service v O 'Malley (1973) 40 DLR (3d)

Permanent Building Society v Wheeler (1994) ACSR 109

Carrier Australasia Ltd v Hunt (1939) 61 CLR 534 Evans & Sons Ltd v Spritebrand Ltd [1985] 2 All ER 415 ; [1985] 1 WLR 317

Peters ' American Delicacy Co Ltd v Heath (1939) 61 CLR 457

c

83~

Queensland Mines Ltd v Hudson (1978) 18 ALA

Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62

Quin &Axtens Ltd v Salmon [1909] 1 Ch 714

Colortone Holdings Ltd v Calsil [1965] VR 129

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n; [1942] 1 All ER 378 Re Harmer

Cook v Deeks [1916] 1 AC 554 Darvall v North Sydney Brick and Tile Co Ltd (1987) 16 NSWLR 212

Re Smith & Fawcett [1942] Ch 402

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

[1959] 1 WLR 62

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PART 3: INTERNAL MATTERS

CHAPTER 14: CONTROL OF DECISIONS

Re Yenidge Tobacco Co Ltd [1916] 2 Ch 426

This chapter deals with the controls on decisions to be found in corporations law. The structure of the chapter is as follows:

Shafran v ASIC [2012] HCA 18

1

It sets out the general ideas, or 'policies ', involved in controlling decisions in a company.

2

It describes how the policies operate in the various components of the decisionmaking structure of a company in the form of doctrines or rules.

3

The logical corollary of doctrines and rules as controls follows: an explanation of how those doctrines and rules are enforced.

Thomas v HW Thomas Ltd (1984) 1 NZLR 686

4

Table 14.2 shows who can sue for what in terms of those docl,jin ~ and rules.

Tomanovic v Global Martgage Equity Corporation Pty Ltd [2011] NSWCA 104

5

Re Tivoli Freeholds Ltd [1 972] VR 445

Shears v Phosphate Co-op of Australia (1988) 14 ACLR 747 Scottish Co-operative Wholesale Society v Meyer [1959] AC 324 South Australia v Marcus Clark (1996) ACSR 606 Southern Foundries (1926) Ltd v Shir/aw [1940] AC 701 Spies v R (2000) 201 CLR 603

Following Table 14.2 the details of the particular doctrines and rules are set out, with numbered headings to match Table 14.2. At the end of each numbered

Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 Walker v Wimborne (1976) 137 CLR 1

doctrine an 'Approach to problems' section sets out how that particular legal

Wayde v NSW Rugby League Ltd (1985) 3 ACLC 158

doctrine might be deployed to c:Mal with a problem.

White v Bristol Aeroplane [1953] Ch 65 Whitehouse v Carlton Hotel Pty Ltd (1 987) 162 CLR 285

6

Finally, the chapter sets out the way essays and problems dealing with the control of decisions might be dealt with, the latter in a more general way, the specifics having been covered under the glossary entries.

STATUTES AND SECTIONS TO REMEMBER Australian Consumer Law s 18 (previously Trade Practices Act 19 74 (Cth) s 52)

All of that makes it a very long chapter. It is necessarily so because all these matters are interwovein.

Corporations Act 2001 (Cth) Parts 2F.1, 2F.1A, 5.8A, 6A.2, 9.48, Chapters 2E, 14,

A note on theory:'this chapter sets out, as best one can, a description of the

ss9,50AA, 124-5, 131-3, 140, 175, 180-4, 189, 190-5, 199A-B,208,210-15,

way doctrine currently operates in Australia. It is a positive formulation of the Jaw.

217-29,232-5,236-242,2468-D,247A,461,462,563A,588G,588J-Q,

Normative considerations are set out elsewhere.

588R-U,598,607A, 728, 729, 1041H, 1042A-430, 1311-17, 1317E, 1317H, 1317HA, 13178, 1318, 1322, 1324

THE POLICIES BEHIND THE LAW

Federal Court of Australia Act 1976 (Cth) Part /VA Supreme Court Act 1986 (Vic), or equivalent, Part 4A

The policies which appear to have most influenced the law are: •

Strong central control: that if an institution like the corporation is to work well, it needs to be able to respond with swi1T' and certain decisions; law should facilitate this.

INTRODUCTION

•

Good faith and competence: if law makes the accumulation of power possible, as it does through corporations law, it should provide for controls on the exercise

Decision makers are not free to make just any decision. After all , they would

of that power; the two main sources of control are the fiduciary principles of good

otherwise do what they are not allowed to do, benefit themselves, act unfairly and

faith and the requirement of levels of care, diligence and perhaps skill.

so on. This is as true for majorities in meetings as it is for individuals . Decisions and

•

courses of conduct in the conduct of a company's affairs are therefore controlled.

Business judgment: that a decision turned out to be the wrong one does not mean it was bad at the time-courts should not second-guess decisions. To do otherwise is to seriously impede risk taking within the business community and therefore limit the entrepreneurial function.

LEARNING EXERCISE

Make a list of all the actions you think directors and majorities of members in meeting should not do. Compare your list with the lists of your friends. Look at the cases and (1) add to your list, and (2) marvel at human ingenuity. When you have completed this chapter, go back to your list and work out how each action is proscribed, if, indeed, it is proscribed.

•

Voting as a property right: that the company is an expression of the collective interests of the members; the only way this can be made to work without imposing some external , therefore possibly mistaken and certainly inefficient, idea of the collective interests of members is that each member should be entitled to consider their own interests as of right and to vote how they want.

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CHAPTER 14: CONTROL OF DECISIONS

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,

Majority rule: this should be adopted because it is a necessarily imperfect but

If performance requirements are placed on directors, the response may be to

reasonable approximation to the collective interests of a meeting; sometimes its

'satisfice', to produce what is necessary but to'l.avoid risks.

imperfections are acknowledged to be such that a 'special' majority of 75% is

•

Avoiding conflicting interests within the company as a matter of good faith yet fully harnessing self-interest in the interests of society at large, as opposed to acting in

required.

the interests of the company; possibilities left unfulfilled, because to act on them

• Abuse of power: the imperfections in majority rule and in the vote as a property right are such that there are occasions when the majority abuse their power; the

as opportunities would be in conflict of interest, leads to a loss to society.

law should be aware of these and provide remedies to individual members and

Setting overly many requirements may result in too much time spent 'ticking the boxes', to avoid claims of carelessness.

minorities.

• Market processes as protection: that the operation of markets can provide

•

Companies differ, hence standards set for one type of compan¥ qiay be unnecessary or overly lax for another. Should the requirements for the board

incentives to perform appropriately that are greater than those encouraging the

of a multinational mining company be the same as that for the local plumbing

abuse of power, hence making costly and inefficient regulation unnecessary.

company? Does the board do the same thing in each?

POLICIES IN OPERATION: THE CONTROLS

•

Board decisions are collective al'ltl hence the control should be exercised collectively. However, law works on legal persons, hence duties are individually

The policies behind the law, set out immediately above, can be found operating in the

owed. This dichotomy leads to some difficult law.

controls that apply, as rules, to each decision-making body. The policies conflict in many situations and courts and the legislature have had to decide between them or

Controls

come to compromises in formulating the rules that apply. The rules tend to be drawn

Collectively the boar~ must stay within the powers laid out in the company

from a fairly limited typology, although their formulation can differ markedly.

constitution and witf'ti n the Act.

THE BOARD OF DIRECTORS

Individually, the directors owe duties to retain the reality and appearance of pure motive, and to avoid carelessness, including avoiding insolvent trading and in

Relevant policies

delegation and reliance. General law and statute both contribute to a substantial

The function of the board of directors is to manage according to the interests of the

network of such duties owed by directors.

company as defined by the shareholders collectively. Its task is to efficiently deploy collective capital for those purposes. For now, be aware that the precise role of

THE GENERAL MEETING

directors is problematic and can be considered to be any of:

Relevant policies

•

managers of other people's money;

The shareholders in general meeting define the interests of the company and is that

•

policy setters;

body to which the board is responsible. It is viewed as representing all members.

•

entrepreneurs; and

•

risk managers.

•

In any event, the policies considered most relevant are:

•

The relevant policies are: voting as a property right; majority rule;

•

strong central control;

abuse of power; and

•

good faith and competence; and

market processes as protection .

•

business judgment.

•

Reconciling these policies represents a difficult balancing issue in allowing the

Difficult balancing issues lie in:

expression of self-interest in the ascertaining of collective interests at the same time

Reconciling competence and business judgment: preventing incompetence yet

as preventing the expression of self- interest in unfair or abusive ways.

avoiding courts being required to second-guess decisions. Decisions which prove to be bad often seemed good at the time or were made under a degree of pressure such that full information and consideration could not be given .

Controls General law draws a line between abuse and acceptable expression of self-interest under various headings: 'fraud on the minority' or 'equitable considerations'.

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The main idea is that mostly decisions are acceptable but that in certain situations,

Officers

for which the courts must always be on the alert, there is a greater possibility of harm

The board of directors is the body responsible for ~cision making. Officers carry

to minorities or individual shareholder interests. In these circumstances there are

out the decisions. Mostly, then, their activities are controlled by their contract of

criteria for what is 'abuse'. Such situations include when there is an expropriation

employment and duties which flow from it.

of company property, expropriation of shares or members' rights, and when the constitution of the company is changed. The Corporations Act 2001 (Cth) tends not to differentiate between organs of the

There are two exceptions to this approach. The first is when the officer is in sufficiently high a position as to be considered a fiduciary and hence subject to the full panoply of general law directors' duties. Indeed, the duties only apply to directors

company in setting criteria for decision making in terms of abuse or fraud. These then

because they are fiduciaries. CEOs would no doubt be considered fiduciaries,

apply to the general meeting as much as to the board of directors.

whether or not they are directors, if their powers are sufficiently widaly~ efined in the

Again the general meeting must stay within its powers as set out in the company constitution and the Act.

company constitution. The second exception is that the Corporations Act frequently applies duties to officers as well as directors. Sometimes the duties extend to employees. While

OTHER DECISION MAKERS

'employee' receives no definition in ttfe legislation, 'officer' does in s 9.

Promoters Companies do not come into existence by themselves. They are registered and

KEY SECTION: S 9

their businesses are set up by others. These people are called 'promoters'. Many

The 'officer' of a corporation means:

promoters make decisions which have an impact on the company, for better or for

(a) a director or secrE!tary of the corporation; or

worse. Accordingly, their decisions are subject to controls.

(b) a person: ' (i) who makes, or participates in making, decisions that affect the whole, or a

However, it would be to overstate the importance of promoters to apply the full panoply of controls upon them. After all, it is still up to the directors to take on board

substantial part, of the business of the corporation; or (ii) who has the capacity to affect significantly the corporation's financial

what the promoters have done which involves decision subject to controls. And contracts made before the company is registered are strictly controlled, needing

standing; or (iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional

to be ratified (ss 131-3-see Chapter 6, Capacities and Powers). Nevertheless, promoters are required to avoid conflicts of interest as a matter of good faith. Promoters are defined as those who stand to benefit from the formation of the company and the raising of its capital: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215.

capacity or their business relations'!'lip with the directors or the corporation); or (c) a receiver, or receiver and manager, of the property of the corporation; or (d) an administrator of the corporation; or (e) an administrator of a deed of company arrangement executed by the

A CASE TO REMEMBER Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 A company (RSC Trading Co Pty Ltd) sold at a handsome profit property to a company formed for the purpose. The company was to develop the land. Shares in the original company were also sold to the new company (actually called Newco) and to various other people, all who sought to profit from the sale. All were held by the High Court to be promoters under a duty to disclose their profits, which they had not done. They were promoters whether or not they had taken an active part in the formation of the company and the setting up of its business. All that was needed was knowledge of the plan and agreement that they would share in the profits. This does not include those acting in a professional capacity.

corporation; or (f) a liquidator of the corporation; or (g) a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

L All of the duties in the sections set out in Table 14.1 cover directors. Other officers and employees are covered by some sections but not others.

223

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PART 3: INTERNAL MATIERS

CHAPTER 14: CONTROL OF DECISIONS

TABLE 14.1 Duties of directors, officers and employees by section SECTION

DIRECTORS

180: Care and diligence

OFFICERS

OTHER SITUATIONS EMPLOYEES

There are some matters which strictly fall outside ~ ideas of corporations law but are nevertheless so intimately involved as to be best considered at the same time. These are:

,/

181: Good faith

,/

,/

182: Use of position

,/

,/

,/

183: Use of information

,/

,/

,/

Extrinsic contracts These are contracts which cover the same ground as the constitution of the

,/

190: Responsibility for actions of a delegate

,/

,/

• •

are incorporated in the constitution; or are part of the constitution. A separate binding force is necessary. This means that the mere fact that they

relate to the constitution of the compaeny does not mean they bind their parties, they have to have separate contractual status. The main issue with extrinsic contracts is change: what happens when the

191: Disclosure of material personal interests 588G: Insolvent trading

company and: incorporate some provisions of the constitution;

184: Good faith, use of position and use of information-criminal offences

constitution is changed? Do the contractual terms change or not? For example, if a managing director is appointed for five years as required by the constitution of the company, but they are sacked after only two after a change in the relevant ,#

,/

constitutional provision, have they a claim for breach of contract or has the contract changed?

UNDIFFERENTIATED DECISION MAKING Statutory control frequently does not nominate a decision maker. Sometimes it specifically nominates all decision makers. It concentrates on the nature of the decisions or their effect on persons it allows to apply for a remedy-usually a member but sometimes more widely defined. •

The policies involved in controlling decisions whomsoever they are made by are: business judgment;

•

majority rule;

•

abuse of power;

•

markets as sufficient control; and

•

votes as property right. The particular controls on undifferentiated decision making are as to oppressive

and unfair behaviour, failure of purpose, not allowing wrongs to go unremedied, and misleading and deceptive behaviour.

•

Duties directly owed Directors and other officers may owe extra fiduciary duties as a result of their activities while director or officer but not solely because they are director or officer. These duties are between the director or officer and another person, such as a member. They are therefore 'directly

owed ~

This contrasts with most directors' duties

which are owed because they are director and are owed to the company. An example of the sort of situation in which duties are directly owed is where there is a family company. The directors are specifically trusted by members of the company, usually elderly members of the family. If, say, an outsider wishes to purchase the shares from the members, the director may be given the task to negotiate a good price. Normally this is not the province of a director, who manages the accumulated funds regardless of who the members are. But the special circumstances of trust and empowerment conspire to place a duty outside the normal operations of corporations law on the director. See G/avanics v Brunninghausen (1996) 19 ACSR 204; 14 ACLC 345; on appeal (1999) 46

NSWLR 538. This has been pushed to construct a duty directly between a director and the beneficiaries of trusts of which the company is trustee. See Hurley v BGH Nominees

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CHAPTER 14: CONTROL OF DECISIONS

Pty Ltd (1982) 1 ACLC 387, Hurley v BGH Nominees Pty Ltd (No 2) (1984)

shares they did not have in order to buy them when the price fell-this is called 'short

2 ACLC 497.

selling '. The process of trading with special kno'WTBdge is called 'insider trading'.

THINK ABOUT IT

banned almost worldwide. In Australia, this is done in a separate division of the

In the 1960s and 1970s this came to be thought of as pernicious and it has been Corporations Act (ss 1042A-430). Arguably it also falls within the duty in ss 183 and Do you think directors should owe a duty directly between a director and the beneficiaries of trusts of which the company is trustee? That is, should D1 in Figure 14.1 owe a duty to 81? See Hurley v BGH Nominees Pty Ltd (1982) 1 ACLC 387, Hurley v BGH Nominees Pty Ltd (No 2) (1984) 2 ACLC 497. Strictly speaking , legal doctrine says no-but then if D1 causes the trust to benefit themself, 82 loses without a remedy. On the other hand these very artificial arrangements have only one purpose: to avoid taxation. Perhaps the participants take the risk that the arrangements do not work to their benefit.

184(3) not to misuse information.

THINK ABOUT IT What is so very bad about insider trading? Who is the victim? Surely the 'victims' have consented to the sale or purchase of securities? Does insider trading force information out more quickly than would happen otherwise?

..

FIGURE 14.1 Trustee company

52

51

POLICIES IN OPERATION: ENFORCEMENT DIRECTORS' DUTIES 01

Trustee company

02

Percival v Wright [1'802] 2 Ch 421 Directors of a company were considering a proposal to sell the main undertaking of the company at a very good price. A shareholder, not knowing of the negotiations, approached the directors seeking to sell their shares to the directors in accordance with the constitution of the company at a price which did not reflect the value of the undertaking as established by the negotiations. The directors accepted the shareholder's offer. The shareholder, on learning of the negotiations (which ultimately proved abortive), sought to have the sale set aside for non-disclosure; in other words, for breach of fiduciary duty. It was held that the directors owed no fiduciary duty to individual shareholders.

Trust

Bl

A CASE TO REMEMBER

82

If the company owes a duty, say vicariously for what an employee does, the directors may be liable if they direct or procure the wrong: C Evans & Sons Ltd v Spritebrand Ltd [1985] 2 All ER 4 15; [1985] 1 WLR 31 7.

Insider trading Directors, officers and employees know things about a company which, if publicly available, would cause investors to value the company's shares more or less than

Percival v Wright means that directors' duties are owed to the company. Breach of a directors' duty is a wrong to the company. By 1902 there was already a long standing rule called 'The rule in Foss v Harbottle ' or 'The Proper Plaintiff Rule'. This is to the effect that for wrongs done to the company, only the company can sue. Putting the two together, only the company can sue for breaches of directors'

their current market value. It was long thought perfectly acceptable that those people

duties. This conclusion, which seems simple and sensible, has a very difficult problem

trade in the shares for a pro~t: if they knew something which would cause the price

attached to it. What if the wrongdoer(s) control the company? They are not then

of shares to go up, they could buy shares-in order, perhaps, to resell them at a

going to allow the company to sue themselves. Wrongs will then go unremedied.

profit. If they knew something negative, they could sell whatever shares they had, perhaps to buy them back later when the news was out; indeed, they could sell

Solution to this problem eluded the courts for 150 years. There are all sorts of complications and competing policies. principles and doctrines. The matter could

227

228

PART 3: INTERNAL MATTERS

not even be left to the general meeting as a residual power, because the directors

CHAPTER 14: CONTROL OF DECISIONS

COMPLIANCE WITH THE CONSTITUTION OF THE COMPANY

often controlled sufficient votes to exculpate themselves. The courts could not decide whether this should be treated as a matter of directors' duties or as a matter of abuse of the power of the general meeting. Ultimately parliament saved the situation by enacting the derivative action in ss 236-42, giving the court discretion to allow individual members or officers to bring proceedings on behalf of the company.

Once a company is considered to have a

constitutio~ or some set of rules under

which it is run , the issue of whether and the extent to which these should be enforced arises. The history of how this came to be the case is shrouded in mystery, but general law and legislation both agree that the constitution of the company should be enforced as if it were a contract. But do not be misled. That does not mean that every provision is enforceable, nor that only parties to it can

Abuses of power by the general meeting

enforce it. All it means is that the procedure of enforcement is in accordance with

Reflecting the confusions surrounding the enforcement of directors' duties by anyone

contract Jaw.

other than the company, enforcement related to abuses of power by the general meeting faced confusions due to the irresolvable conflict of policies . These persist to this day, mediated somewhat by statutory intervention. Perhaps the core confusing issue is the status of a rule called the 'Internal

COMPLIANCE WITH THE LEGISLATION Provisions in the Corporations Act have a variety of enforcement mechanisms . It is

....

critical that the appropriate mechanism be identified for each matter. Worth recalling from Chapter 4, Administration , in relation to AS/C 's role as

Management Rule'. This rule reflects the view that anything a majority can do will be presumed to be done: why should the court interfere in what the members can do or

enforcer is that it operates in terms of the enforcement pyramid, whereby court action

not do themselves? It means that an individual member should not sue for abuse of

is simply the ultimate stage in ASIC fulfilling its role of ensuring compliance. There are three main mechanisms of enforcement of the legislation:

power because that decision is itself something the meeting should decide. To put it

Private enforcemerJ of rights: here a more or less specified class of persons is

another way, abuse of power is a wrong to the company, not the individual.

given the capacity to insist on compliance with the legislation. Thus members can

Currently, the court tends to simply allow members to sue in relation to the

apply for an order under s 233 for o~pression, or to bring proceedings on behalf

particular matters considered to be justiciable. However, a casuistic High Court might well revert to a more rigorous approach.

of the company. 'Any interested person ' can seek an injunction to enforce any provision in the Corporations Act under s 1324. If there is a contravention of a civil penalty provision , the company can seek compensation under s 131 ?H. There are

THINK ABOUT IT Compare the approach taken in the first edition of Ford: H A J Ford, Principles of Company Law, Butterworths, Melbourne, 1974, ch 17, with that taken in the latest edition: currently R P Austin and I M Ramsay, Ford's Principles of Corporations Law (15th edn), Butterworths, Sydney, 2013, ch 10. What are the differences? One thing to note is that the early edition considers a fraud on the minority to be a wrong to the company and therefore subject to the rule in Foss v Harbottle. The requirements for individual member action, fraud and control by the wrongdoers, have to ex1s.t before the matter is justiciable. Is this the approach in the later edition? If not, on what basis do the authors think individual shareholder action is available? This 'Think about it' question might cause you to extend your thinking into the nature of textbooks. Can they be wrong? (Is this textbook wrong in some ways?) If they are wrong, how do you know when to trust them? Even deeper questions arise about the relation between a textbook as organising and articulating the law. In so doing, does it create the law? What then does that say about the authority of law? Does 'law' exist?

many others. Particularly worth noting in respect of any such right to enforce is provision for costs, especially in view of the benefit to be obtained. 2

Civil penalty: many of the requirements in the Corporations Act are nominated

as 'civil penalty provisions'. This means they are to be enforced through Part 9.48 of the Act. This Part provides a procedure through which ASIC can seek 'pecuniary penalty orders' on the basis of civil standards of proof. ASIC first seeks a declaration of contravention and then consequential orders, such as that a 'civil penalty be paid to the Commonwealth' or compensation be payable, or even that a management banning order be made. The point of this procedure is to avoid the criminal burden of proof, and evidentiary and mens rea requirements in enforcement of the Act. A list of civil penalty provisions is set out in s 131 ?E. The maximum civil penalty at the moment is $200000 for individuals and $1 million for bodies corporate (although the latter only applies in a small range of civil penalty provisions to do with financial services).

229

230

CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATIERS

3

Crime: traditionally regulation is enforced through the criminal law. While the civil

of lawyers to initiate legal action by finding sufficient members of a class who may

penalty regime cuts this back a little in the corporations legislation, prosecuting

have a right of action. Usually class actions are fun~d by the firm of lawyers bearing

for breach of the Act as an offence is still the core means of ensuring compliance. This is set out in ss 1311-17. Note that breaches of some provisions are stated

the risk of loss, being the costs that may be awarded against the plaintiffs, and taking a proportion of any winnings.

not to be offences and some have stated penalties, and all others are covered by

Litigation funding: litigation can be costly and risky due to the system of costs

the generic regime. Prosecution for offences is referred to the Director of Public

allocation adopted in common law. There are a variety of schemes to allow regulatory

Prosecutions, although there is, in s 1313, a system of penalty notices rather like

effect and access to justice within the system. Class actions above are one way. This

the on-the-spot fines with which readers may be all too familiar.

can be allied to the growth of the litigation funding industry where companies are set up specifically to fund and pursue litigation both individual and via clas~ action. The Sons of Gwalia litigation (a 'case to remember' discussed in Chapter 10) was funded

THINK ABOUT IT

in this way.

Does the civil penalty regime comply with the principles of the common law? Does the compliance approach of ASIC infringe the rule of law?

DOCTRINES The doctrines discussed on pages 239-72 are set out in alphabetical order and

PROCEDURE Detailed consideration of procedure is to a large extent beyond the province of this

numbered 1-15 to match the right-hand column in Table 14.2. TABLE 14.2 Who can sue for what?

book. There are, however, a number of terms which are important, as is the process of funding litigation.

WHO

SUING FOR .. .

PRIME

EXPLANATION

DOCTRINE*

Section 140 and Hickman v Kent and Romney Marsh SheepBreeders' • Association [1915] 1 Ch 881

The constitution is enforceable as a contract by members among themselves and as against the company. Not all provisions are enforceable.

6

Southern Foundries (1926) Ltd v Shir/aw [1940] AC 701

If there is a binding force other than simply because it is a provision in the company's constitution, a provision can be enforced as an extrinsic contract.

7

SOURCE

Words and phrases Personal actions: this is really just a way of saying that action is not 'derivative'. It

means that the right is that of the person suing . Derivative actions: members are permitted to take, or intervene in, legal action on

behalf of a company in a very limited set of circumstances. These are set out in s 237. More detail is set out below. Simultaneous actions: adoption of a particular route to a remedy does not preclude

using other ways of reaching the same end. Thus a set of events can be the subject

Members

Breach of a provision in the company constitution

of a derivative action for breach of directors' duties as well as an oppression action under s 233 and a winding-up petition under s 461. All these 'actions' can be 'simultaneous'. Representative actions: most sets of Rules of Court provide for a single applicant

to represent a class of persons with the same interests. These are representative actions. However, the requirements for them are restrictively interpreted by the court. Class actions: these are a form of representative action and are specifically provided

for in the statutes establishing many courts (for example, Supreme Court Act 1986 (Vic) Part 4A, Federal Court ofAustralia Act 1976 Part IVA). Class actions allow a firm

(Continued)

231

CHAPTER 14: CONTROL OF DECISIONS

232

PART 3: INTERNAL MATIERS

WHO

TABLE 14.2 Who can sue for what? (Continued) WHO

SUING FOR ...

PRIME

EXPLANATION

DOCTRINE*

SOURCE

Breach of other personal members' rights (for example, the right to receive adequate information in a

Kaye v Croydon Tramways Co (1898] 1 Ch 358; Colortone Holdings Ltd v Ca/sit (1965] VR 129

Members have some rights simply because they are members of a corporation. They are enforceable by the member. The existence of such a right has to be established.

5

Gambotto v WCPLtd (1995) 182 CLR 432

Alterations must be for a proper purpose and not be oppressive if the alteration expropriates shares. Probably also if it merely takes away rights. Probably not otherwise.

8

To the extent Gambotto does not apply, alterations must not be in fraud of the minority. This means they must be bona fide for the benefit of the company as a whole.

8

notice of general meeting)

Alteration to constitution

Peters' American Delicacy Co Ltd v Heath (1939) 61CLR457

SUING FOR ...

PRIME

EXPLANATION

SOURCE

'

DOCTRINE*

Resolutions of the general meeting

Peters' American Delicacy Co Ltd v Heath (1939) 61CLR457 (to an extent replaced by Gambotto test)

Only if expropriation of company property, expropriation of members' property, release of directors' duties (note also derivative action), and some other specific situations. If the resolution does fal l within these categories, it must be bona fide for the benefit of the company as a whole.

8, 14

Wrongs to the company (most

Section 236

A member can apply for leave to bring, or to intervene in, legal proceedings on behalf of a company. This is called a 'derivative action'. The court has a discretion whether or not to allow it.

3, 4

This is not something a member can do anything about, unless it is a breach of the constitution, a breach of directors' duty, oppression or unfairness, or failure of substratum (all of which consider).

old ultra vires doctrine

commonly, breaches of directors' duties)

Company acting outside its purposes

•

Sections 125(2), 124(2)

(Continued)

233

234

PART 3: INTERNAL MATTERS

CHAPTER 14: CONTROL OF DECISIONS

TABLE 14.2 Who can sue for what? (Continued)

WHO

SUING FOR ...

PRIME

WHO EXPLANATION

SOURCE Oppression or unfairness

SUING FOR ...

Sections 232-4

Unfair or oppressive acts or courses of conduct may be the subject of remedial order by the court on the application of a member.

12

Section 461 (n.(g) or (k)

Unfair or oppressive acts or courses of conduct may be the subject of a winding-up order by the court on the application of a member.

12

A court may wind up the company on the application of a member on the grounds that it is just and equitable to do so.

15

PRIME

, p PLANATION

Failure to live up to the special underlying obligations on which the company may have been founded

Section 461 (1) (k) and Ebrahimi v Westbourne Galleries Ltd (1973] AC 360

Other 'just and equitable' reasons

Section 461(1) (k)

Sue a director for breach of duty

Glavanics v Brunninghausen (1996) 19 ACSR 204; 14 ACLC 345

Section 461 (1) (k) and Re Tivoli Freeholds Ltd (1972] VR 445

Loss of faith in the probity with which the company is being managed

Section 461 (1 )(k) and Loch vJohn Blackwood Ltd (1924] AC 783

Deadlock

Section 461{1)(k) and Re Yenidge Tobacco Co Ltd[1916]2 Ch 426

•

Enforce a provision of the Corporations Act, including as to transactions with share capital

A court may wind up the company on the application of a member on the grounds that it is just and equitable to do so.

15

In some situations a duty is owed directly to members, for which members can sue. There is no right to sue for directors ' duties to the company; Percival v Wright . A derivative action must be used .

3, 4

A member can apply for an injunction to prevent a contravention of the Act. Damages are payable for breach.

5

...

I'

Failure of substratum

DOCTRINE*

SOURCE

DOCTRINE*

Section 1324

•

(Continued)

235

236

CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATTERS

TABLE 14.2 Who can sue for what? (Continued) WHO

SUING FOR .. .

PRIME

WHO EXPLANATION

Declare that a proceeding in decision making is not invalid Inspect books and registers

Section 246D

The company

Section 1322

Section 24 7A

If the rights of a class of members are changed, 10% of the votes in that class can apply to the court to have the change set aside. What constitutes a 'change' is expanded by s 246C. Prevent the invalidity of proceedings on procedural grounds.

PRIME

Have the register corrected

Section 175 (see also s 1322(4)(b)

Court can order the entry on register be amended.

2

Misleading or deceptive information or conduct

Section 607A

Takeover documents.

11

Section 728

Fundraising document.

11

Section 1041 H

Financial product or service.

11

Trade Practices Act 1974 (Cth), s 52

All other misleading or deceptive statements .

11

The company can enforce the company constitution as a contract against members, directors and secretaries. N ~ all the provisions are so enforceable.

6

Section 140

Enforce the Corporations Act

Section 1324

The company can apply for an injunction to prevent a contravention of the Act if it affects the company. Damages are payable for breach.

5

Declare that a proceeding is not invalid

Section 1322

Prevent the invalidity of proceedings on procedural grounds.

2, 10

Sue directors and fiduciaries for breach of equitable and common law duties

Many cases: Chapter 14

Directors' duties are owed to the company. The duties control the motive and standard of conduct of directors and their fiduciaries.

4

Seek compensation for breach of statutory duties that are civil penalty provisions

Section 1317H

Whether there has been a declaration of contravention or not, a company is entitled to seek compensation for contraventions of the civil penalty provisions.

4

..

,. 2

DOCTRINE*

Enforce the constitution

10

Allows for courtordered inspection of the books of a company.

EXPLANATION

SOURCE

DOCTRINE*

SOURCE

Change in rights of members

SUING FOR .. .

-

(Continued)

237

238

PART 3: INTERNAL MATIERS

CHAPTER 14: CONTROL OF DECISIONS

TABLE 14.2 Who can sue for what? (Continued} WHO

SUING FOR ...

PRIME

1 ALTERATION OF CLASS RIGHTS EXPLANATION

DOCTRINE*

cases are alterations of the constitution affecting members (note also the operation

SOURCE

Liquidators or Enforce any right administrators the company has

Creditors

Enforce the Corporations Act

Recover a debt due to them in situations of insolvent trading

No right to sue in relation to directors acting for an improper purpose

Section 598

Section 1324

Section 588M

Spies v R (2000) 201 CLR 603

Some actions may be considered to be a change in he rights of members. Obvious

Liquidators and administrators have power to take the company into legal action.

4

Creditors can apply for an injunction to prevent a contravention of the Act if it affects them . Damages are payable for breach.

5

Directors who have incurred a debt on behalf of a company while it is or becomes insolvent may be personally liable to the creditor. Note extension for employees in Part 5.8A.

4

While there may be duty to take into account the interests of creditors in cases of impending insolvency, a creditor does not have standing in themself to enforce that duty. A liquidator may sue.

of the Gambotto principle here), alterations of the terms of issue of shares or even simple declarations that the company is going to do this or pay that. Less obvious examples are the issue of preference shares, leaving less profit available to ordinary shareholders, or issuing preference shares to ordinary shareholders allowing for a dilution of the preference. The critical distinction is whether the action varies or negates ('vafiation, abrogation or alteration') the right itself or merely the 'enjoyment' of the right. The relevant authority is White v Bristol Aeroplane (1 g53] Ch 65. The difference is

..

exemplified by the right to vote. To take that away is a variation of the rights of the shares but to issue more shares w ith votes lessens the effect of the vote, but does not alter the right to vote. Some non-alterations are declared in s 246C to be variations and therefore subject to the variations of rights procedures. Particularly important in this respect is the issue of new classes of shares being deemed to vary the rights of exiting classes and the issue of new rj.reference shares being deemed to vary the rights of existing preference shareholders. LEARNING EXERCISE

4

'Doctrine numbers match the heading numbers of each doctrine discussed in the text on pages 239-72.

Look up s 246C. Work out why each action there declared to be a variation is: not considered actually to vary the rights of a particular class of members; and considered to so affect the position of those members that parliament has deemed the action to be subject to the alteration procedures. The procedures for alteration are set out in s 2468. Even if the procedures are followed (and the s 1324 injunction discussed below ensures it). a holder of 10% of the votes in the class may challenge the alterations. If the court thinks that the alteration unfairly prejudices the applicant. it can set aside the alteration.

APPROACH TO PROBLEMS: ALTERATION OF A MEMBER'S RIGHTS Is this an alteration, abrogation or variation of rights? Compare rights with enjoyment 2

of rights. If it is not an alteration, abrogation or variation does it fall within s 246C?

3

Is there an alteration procedure specified in the company constitution?

4

If there is, has it been followed? If not, has the procedure specified in s 2468(2)

5

been followed? If the procedure has not been followed, use s 1324 injunction (see page 254).

6

If it has, 10% of votes in class meeting have application rights.

239

240

CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATTERS

2 CORRECTION OF THE REGISTER

Who may apply?

Under s 175, any person aggrieved may apply to the court to have a register

The following may bring a derivative action:

corrected. This is most important when title to shares is at issue. The buyer or seller

•

a member, former member, or person entitled to be registered as a member of the company or a related company; or

•

an officer or former officer of the company.

may have their property rights in shares confirmed or otherwise by application to correct the register of members.

What is the effect? THINK ABOUT IT

Even though a member or officer brings a derivative action, the action is not for the

Section 175 can be put to some surprising uses. In Kathleen Investments (Aust.) Ltd v Australian Atomic Energy Commission [1977] HCA 55; (1977) 139 CLR 117 the challenge to the register was on the basis that the ownership of shares was ultra vires the statutory corporation to which they had been issued. The application was made by another member of the company who was concerned that the statutory corporation was gaining too much control. A notable aspect of this case is that it was litigated in the context of a furore about nuclear power and French atomic bomb testing in the Pacific. To what extent does the case represent a means of controlling the mining of uranium?

benefit of the member or officer-it is for the company's benefit. Ttlis '"1eans: •

any remedies go to the company;

•

the company is the plaintiff; wrongdoers are defendants; and the member retains control of the ~uit, subject to s 240: settlements need the leave of the court.

What are the criteria? Section 237 sets out the criteria which must be satisfied before the court will give the

APPROACH TO PROBLEMS: CORRECTING A REGISTER Is this person a person 'aggrieved '? 2 What is the nature of application to court? 3 What is the claim founded on? Proceed to discuss the substance of the claim.

applicant leave to take. a derivative action: •

it is probable that t'he company will not take legal action;

•

the applicant is acting in good faith;

•

it is in the best interests of the company for the applicant to be granted leave; and

•

there must be a serious question to be tried. If the action is against a non-related party, and the directors acted in good faith ,

had no material personal interest, were informed and rationally believed (which is

3 DERIVATIVE ACTIONS

itself defined in s 237(4)), it is presumed to not be in the best interests of the

What is a derivative action?

company: s 237(3).

A 'derivative action ' is when someone other than the company brings, or intervenes in , proceedings on behalf of a company. It therefore makes possible actions to

APPROACH TO PROBLEMS: TAKING LEGAL ACTION ON BEHALF

enforce rights of the company when the organ given the authority to determine

OF THE COMPANY Can this person apply under s 236? 2 Consider each criterion and apply to facts. Note presumption in s 237(3).

whether or not the company should sue decides not to sue, but the applicant thinks that it should sue. The most obvious use of a derivative action is to enforce a breach of directors' duties when the board will not sue. The statutory derivative action is set out in Part 2F.1 A (ss 236-42) of the

Explain effect of derivative action. Conclude as to whether derivative action might be available. Proceed to substance of wrong to company.

Corporations Act. It was introduced March 2000 and there are few cases exploring

its limits. It deals with the 'standing' of the applicant-not the 'merits' of the case. All other rights to bring actions

OR

behalf of the company are excluded: s 236(3). This

repeals much very complicated and confused case law.

4 DIRECTORS' DUTIES There is a great deal of law on directors' duties. Whole books are written on the subject. Here we can only sketch the terrain, with a particular emphasis on how

241

242

PART 3: INTERNAL MATIERS

CHAPTER 14: CONTROL OF DECISIONS

duties work to control decisions and how they are best applied . The detail of the duties may be found elsewhere.

r;;-ySECTION: S 180(1) OF THE_ CORPORAIJf>NS ACT

.

duties, with the degree of care and diligence that a reasonable person would exercise if they:

OVERVIEW Duties arise from both case law and legislation, as can be seen in Table 14.3.

were a director or officer of a corporation in the corporation's circumstances; and occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

TABLE 14.3 Directors' duties CASE LAW

.

I ;~irector or other officer of a corporation must exercise their powers and discharge their

LEGISLATION

Care and diligence To act for a proper purpose To act bona fide for the benefit of the company as a whole To avoid conflicts of interest To retain discretionary power

To use care and diligence: s 180(1) To act in good faith in the best interests of the company: s 181 To act for a proper purpose: s 181 To not misuse information: s 183 To not misuse position: s 182 To prevent insolvent trading: s 588G To declare interests in transactions: ss 191-5, Ch 2E

L__ Requirements of the duty There are three overlapping requirements:

1

ski//: a director must be able to form a view as to the company's financial state-

2

care: directors are expected to use reasonable care, taking into account their

other skills are dependent on

know~dge

and experience;

knowledge and experience, and the size and nature of the company-the core duty is to guide and monitor management, be familiar with and understand the company's activities and financial status; 3

These duties are generally categorised under the case law headings-the structure followed here.

diligence: a director must attend board meetings unless there are exceptional circumstances,

ma~

themselves familiar with company's business and financial

status, and conduct periodic reviews of company's financial statements.

There are many other requirements on directors arising from legislation beyond the immediate corporations law provision. In particular, liabilities and duties arise under statutes relating to:

The business judgment ru le The business judgment rule can be found in s 180(2). There is no equivalent in the

•

taxation;

general law, but s 180(2) applies to the general law duty. It protects directors and

•

environment;

officers against liability for breach of the general law or statutory duty of care, but

•

health and safety;

does not protect against liability for other breaches (such as insolvent trading). It

•

equal opportunity;

states that a director or officer meets their Giuties of care and diligence in making a

•

trade practices;

'business judgment' (defined in s 180(3)) if:

•

consumer protection; and

•

the ASX Listing Rules .

•

case: AWA Ltd v Daniels (1992) 7 ACSR 759, 10 ACLC 933; on appeal Daniels

it is made without a material personal interest; the director or officer has informed themselves about the subject matter to the

CARE AND DILIGENCE Directors are required not to be careless. This is both a case law proposition {leading

it is made in good faith and for a proper purpose;

extent they reasonably believe is appropriate; and •

the director or officer rationally believes that the decision is in the best interests of the corporation.

v Anderson (1995) 37 NSWLR 438) and a statutory provision (s 180). It is best to discuss them together as if they state the same thing. The main issues in relation to this duty are: •

requirements of the duty;

•

the business judgment rule;

•

differing standards for different directors; and

•

delegation and reliance.

LEARNING EXERCISE Who bears the burden of proof in relation to the requirements of the business judgment rule? What did the explanatory memorandum say? How have the courts dealt with it? Can you see how important the burden of proof is in this situation? For example, how can directors establish that they have no personal interest?

243

244

PART 3: INTERNAL MATTERS

Differing standards The question here is whether the law requires different standards of behaviour of different directors : •

CHAPTER 14: CONTROL OF DECISIONS

APPROACH TO PROBLEMS: DUTY OF CAR~ AND DILIGENCE 1

Executive as opposed to non-executive directors? AWA v Daniels (1992) 7 ACSR 759, 1O ACLC 933; comp. Daniels v Anderson (1995) 37 NSWLR 438. In the first Rogers J was very clear that although the standard was the same, that standard

together. Isolate in what ways the director or officer has or may have fallen short. 2

meant more was required of executive directors. The Court of Appeal was not Non-executive chair of board of directors? In ASIC v Rich (2003) 21 ACLC 450; 44

knowledge or skills, are they executive directors, are they the chair of the board? Discuss the extra requirements and apply. 3

Has there been a delegation or reliance which is part of the condl!Ct oomplained of? If so apply the relevant section.

4

Apply the business judgment rule.

ACSR 341 and (2004) 50 ACSR 500; 22 ACLC 1232 it is arguable that more was required of a non-executive chairman, although the case is complex.

Delegation

Determine whether there is anything extra required of this director or officer: do they have special knowledge or skills, have they held themselves out to have extra

so firm. •

State the required standard of care. State that it arises in both case Jaw and statute, and since they are to all intents and purpose identical, they will be considered

5

..

If there is a breach, discuss remedies. The general law gives rise to compensation , and s 180(1) is a civil penalty provision, allowing for declarations of contravention,

Directors have express statutory authority to delegate (s 1980), but they are

civil penalties, banning orders and compensation.

responsible for actions of the delegate (s 190(1 )) . The issue for the duty of care and diligence is, what happens when the delegate is careless? Section 190(2) provides an answer: directors are not responsible if they believed that the delegate:

DUTY TO PREVENT INSOLVENT TRADING

•

would exercise the power properly; and

•

was reliable and competent (s 190(2)).

This duty is the creation-of statute. It should be applied exactly as formulated in the ,# statute.

Reliance Similarly, directors sometimes (in reality, mostly) rely on information or professional or

APPROACH TO PROBLEMS: INSOLVENT TRADING Are all the following questions answered affirmatively (state and apply)?

expert advice from: •

Has a debt been incurred? See also s 588G(1A). Note also the deeming provision

employees;

•

professional advisers or experts;

•

other directors or officers; or

•

committees of directors.

for transactions defeating employees' claims under Part 5.8A. Is this person a director of the company when it incurred the debt? Was the company insolvent at the

ti~e

of incurring the debt or because the debt

was incurred?

The information or advice may prove to be wrong or carelessly given . Is relying on

Were there reasonable grounds for suspecting that the company was insolvent,

advice careless? Section 189 says not if the reliance was:

or would become insolvent at the time the debt was incurred?

•

in good faith; and

Was the person aware of such grounds, or a reasonable person in like position

•

accepted only after making an independent assessment of the information or

and same circumstances would be aware?

advice.

Did the person fail to prevent the company from incurring the debt? If so, the person has engaged in insolvent trading in breach of s 588G .

Note the burden of proof again : the reliance is taken to be reasonable unless the contrary is proved. However, in ASIC v Hellicar [2012] HCA 17 (one of the cases dealing with the James Hardie transactions) and Shafran v ASIC (2012] HCA 18 the

2

Are any of the following defences in s 588H available exculpating this person? The director could and did reasonably expect that the company was solvent at

limitations of this were emphasised. A director, it was said, cannot simply rely on the

the time and would remain solvent, even if it incurred the debt.

opinions of fellow directors, company management and advisers. Directors must also

The director expected that the company was solvent, on the basis of information

independently scrutinise the accuracy of the contents of announcements.

supplied to them by a subordinate the director believed on reasonable grounds to be competent, reliable and responsible for providing adequate information about the solvency of the company.

245

C HAPTER 14: CONTROL OF DECISIONS 246

PART 3: INTERNAL MATTERS

The following are some discernible principles: The director, because of illness etc., did not take part in the management of the

•

company at the relevant time. The director took all reasonable steps to prevent the company from incurring the debt. Especially important here is to determine whether the company went into 3

rn Darvall v North Sydney Brick and Tile Co Ltd (1987) 16 NSWLR 212 to consider interests of the company as a commercial entity as well as the members of the company. It is not the company as a commercial entity separate from its

voluntary administration. Consider remedies. This is a civil penalty provision allowing for declarations of contravention, civil penalties, and banning orders under Part 9.48. There are special compensation provisions in ss 588J-Q. Creditors may sue for individual

Interests of company are generally those of its'members although we are exhorted

members, and certainly never legal entity as such: Ngurli Ltd v Mccann (1953) 90 CLR 425. •

compensation under ss 588R-U.

The interests of members may conflict. Fairness between members ·s · d: 1 require Mills v Mills (1938) 60 CLR 150. Statements in the corporate constitution may define the interests of the company, recognised in the formulation of the interests of the company being those of 'totality of members viewed in the light of their corporate objects': Peters '

DUTY TO ACT BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE

American Delicacy Co Ltd v Hel1fh (1939) 61 CLR 457. In Whitehouse v Carlton

Directors are required to act in good faith in the interests of the company as a whole: Re Smith & Fawcett (1942] Ch 402 and ss 181 and 184. In Re Smith & Fawcett the

company were taken to define the interests of the company.

duty was expressed to be merely to act in what the directors consider are the best

Hotel Pty Ltd (1987) 162 CLR 285 statements about who was to control the •

shareholders, perhaps as 'the individual hypothetical shareholder' are often taken

interests of the company, but that is almost universally disregarded. There is one overriding issue in respect of this duty: what are the company's interests? Possibilities are those of:

to be the touchstone for the interests of the company: Peters' American Delicacy Co Ltd v Heath •

present members; •

present and future members; the company as a legal entity separate from its members;

•

the company as a commercial entity separate from its members;

•

the company as accumulated or associated members;

• •

creditors; other companies within a group of companies;

CLR 457.

impending insolvency, creditors are the 'stochastic residual cash flow claimant'they are last in line for the cash in the company because the members have lost their whole investment. Director must not then act to the detriment of creditors , even if in favour of members. See Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722. While they cannot sue

wenforce this duty, it being owed to the

company (Spies v R (2000) 201 CLR 603), liquidators can . Also note thats 588G deals with many of the situations in point, although it only operates at the time of

employees, customers, suppliers and the community.

insolvency, not impending insolvency. •

LEARNING EXERCISE Can you envisage situations where the present members' interests are different from those of the present plus future members? (Clue: Think about takeover situations.) Or where the company as a commercial entity's interests differ from the interests of the members? How would you define the interests of a charitable company and how would you reconcile that with the interests of the commercial entity or future members? Work through the list.

(I 939) 61

The interests of creditors may be a part of the definition of the interests of the company when the company is insolvent or nearly insolvent. In situations of

beneficiaries of trusts of which the company is trustee; and •

The accumulated or associated members, sometimes including future

Corporate groups raise further definitional issues for 'the interests of the company '. If the company is a member of a group of companies, may the directors act for the benefit of the group rather than the particular company? No case says the interests of the company can be subordinated to that of the group. Charterbridge Corp Ltd v Lloyds Bank Ltd [1970) Ch 62 says that directors can have regard to interests of the group in addition to interests of the company but in Walker v Wimborne (1976) 137 CLR 1 it was held that the interest of the individual company was to be considered separately and alone from interests of the group.

There are many cases in which this issue is considered . Indeed, it is often confused with the contiguous issues of, 'To whom are the duties owed? ' and 'Who can enforce this duty? ' It should be kept separate. Mind you, there is nevertheless little certainty in the principles to be applied.

Note, however, s 187, which applies when the director is a nominee of a holding company which owns 100% of the company of which the director is a nominee.

247

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CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATIERS

If the constitution of the subsidiary allows it, the director can act in the interests of

•

a holding company. None of the other categories are included in the interests of the company.

•

the 'but for' test: Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; the 'substantial object' of the decision: Mills v Mille;,.(1938) 60 CLR 150;

•

the 'dominant purpose' test: Har/awe 's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483.

Whether they should do so is a question about the social responsibility of

The power to issue shares is frequently at issue. Normally it is a power of the

companies, considered exhaustively elsewhere.

board of directors. Its legal purposes include: to raise capital, for an employee share

APPROACH TO PROBLEMS: DUTY TO ACT BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE

scheme, and as consideration for purchase of an asset. Improper purposes include: to entrench the existing board of directors, to fight off a hostile takeover bid, and to

Describe on whose interests action was taken on the facts. Isolate which difficulty is

make a majority member a minority member. In other words, it is impfOP.er to maintain control of a company through the exercise of the power to issue shares.

2

at issue. Provide formulation of duty in general, with authority. Note ss 181 and 184 replicate

3

this. Provide principles from those above which apply to that difficulty.

4 5

APPROACH TO PROBLEMS: DUTY TO ACT FOR A .. PROPER PURPOSE

Conclude. Indicate consequences if duty is breached: the general law gives rise to compensation, and s 181 is a civil penalty provision, allowing for declarations of contravention, civil penalties, banning orders and compensation . If the intention or recklessness criteria in s 184 are present, breach may lead to criminal prosecution.

1 2

Work out what power is being exercised . Determine its legal purpose.

3

Using the tests ('but for', 'substantial object' and 'dominant purpose'), determine

4 5

from the facts the possible actual purpose. Compare the two and conclude whether the duty might have been breached. > Indicate consequences if duty is breached: the general law gives rise to

DUTY TO EXERCISE POWERS FOR A PROPER PURPOSE Directors must act for the purpose for which a power was given. Useful cases to cite for this proposition are Howard Smith v Ampol Petroleum Ltd [1974] AC 821 and Permanent Building Society v Wheeler (1994) ACSR 109. It is also the thrust of s

l

compensation, ands 181 is a civil penalty provision, allowing for declarations of contravention, civil penalties, banning orders and compensation. If the intention or recklessness criteria in s 184 are present, breach may lead to criminal prosecution.

181(1)(b) ands 184(1)(c). This duty is sometimes seen as a subset of the duty to act bona fide for the

DUTY TO DISCLOSE CONFLICTS OF INTEREST

benefit of the company as a whole and sometimes vice versa. For the former, the

This duty operates in a number of different ways, with differing levels of specificity

benefit of the company is defined by the purposes of the power; for the latter,

and various sources. It operates as:

'bona fide for the benefit of the company as a whole' is simply the legal purpose

•

when no narrower formulation is possible. Nothing much appears to hang on the

•

categorisation-it is simply useful to adopt one for convenience's sake. To determine whether there has been a breach simply apply the following two-

general law rules; provisions in the company's constitution; or statutory regulation . All derive from the principle that good faith must not only be done, but be seen to

step test (cite Howard Smith v Ampol Petroleum Ltd) :

be done: Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461. Hence there is a

1

ascertain from the constitution of the company the nature and purposes for which

duty in relation to conflicts of interest.

2

compare that with the actual purpose or reason for which power exercised.

power conferred-its legal purpose; and There may be considerable difficulty in determining the actual purpose. After all, the board is a collective, each member of which has their own purposes and

The general law rule Directors must not place themselves in a position where there is an actual or substantial possibility of conflict between a personal interest and a director's duty to

opinions. Moreover, most decisions have multiple reasons. When the evidence is

act in the interests of the company unless the conflict is disclosed or, more strictly,

reviewed, the test for determining the actual purpose has varied. Some are:

permission of the company is obtained: Boardman v Phipps [1967) 2 AC 46; Regal (Hastings) Ltd v Gulliver [1967) 2 AC 134n; [1942) 1 All ER 378. If they do, the court

249

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PART 3: INTERNAL MATTERS

CHAPTER 14: CONTROL OF DECISIONS

has a range of remedies it may grant. most importantly rescission and accounting for

TABLE 14.4 Conflicts over corporate property, information and opportunities

profit. Note that the company's constitution may modify the duty. EXAMPLES

Disclosure

Furs Ltd v Tomkies (1936) 54 CLR 583

Tomkies negotiated the sale of the company's business to another company and then was offered the job of managing the business for the new company.

Cook v Deeks (1916] 1 AC 554

When negotiating a contract for the company, the directors eot~ed into it in their own names for themselves.

Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1

Cropper purchased mining claims which had been offered to the company but which had been refused by the company.

Queensland Mines Ltd v Hudson (1978) 18 ALR 1

The company refused to take up the opportunity. The director undertook a tortuous process of trying to finance the development of the project himself.

The duty is to disclose the conflict. Rigorous analysis would say that full disclosure must be: • made to members in general meeting: Regal (Hastings) Ltd v Gulliver. (Must a resolution approving be passed and can the director with the conflict vote?); or •

made to the board, assuming: -

the company constitution allows disclosure to board; or

-

it is a proprietary company and the replaceable rules apply (for example, the

replaceable rule in s 194). However, courts have been willing to soften their stance. In Queensland Mines Ltd v Hudson (1 978) 18 ALR 1 the Privy Council considered that the fact that everyone

in the business community knew of the defendant's efforts constituted sufficient disclosure. Moreover, disclosure to an independent board is frequently sufficient.

Situations: oveNiew While there is no limit to the nature or number of situations which a court may nominate as a conflict of duty and interest (Boardman v Phipps), there are several

LEARNING EXERCISE

identifiable contexts for special consideration:

There are two interesting special features about Regal (Hastings) Ltd v Gulliver (1967] 2 AC 134n; (1942] 1 All ER 378. One is that it is probably the only reported case you will read that is a footnote to another reported case. The second citation gives a clue to when it was actually decided. The second feature is that the most blameworthy individuals get off scot-free. Find out why. Then consider whether on today's understandings they would have escaped liability.

•

director entering contract with their company;

•

director making personal profit as a result of their position as a director;

•

director misusing confidential company information; or

•

director working for a competitor.

Situation 1 : Transactions with the company Directors being involved as a party contracting with the company is a very common situation where a general law conflict rule applies. Director's interest may be direct,

Courts often appear to try hard to protect directors against liability when they have

where the director actually is the contracting party, or indirect, for example through

developed a corporate opportunity after the company has refused it. Examples are:

another company or a partnership ?

criminal prosecution.

The section is broadly expressed. It seems to generate a self-evident proposition,

If the company is a public company, consider whether there is a breach of the civil

that if the Act protects someone, they should be able to enforce it. (There was,

penalty provision in s 208 as to approval of related party transactions. Although this

indeed, an antecedent limited general law doctrine to this effect: Colortone Holdings

breach does not lead to invalidity of the decision, the remedies for breach of civil

Ltd v Ca/sit [1965] VR 129.) However, in relation to those provisions which already

penalty provisions, allowing for declarations of contravention, civil penalties, banning

have an enforcement mechanism, to allow its use could be seen to infringe the

orders and compensation, are available to all involved in the contravention, apart

maxim expressio unius est exclusio alterius (to state the particular excludes the

from the company. The process to use is:

general). It is a general remedy which should be excluded by the provision of

(a) Has a 'financial benefit' been given? The term is defined in s 229.

particular remedies. Hence, in relation to the duties of directors which are civil penalty

(b) Has it been given by a public company or an entity controlled by a public company? 'Entity' has a broad definition ins 9, and control is defined ins 50AA.

provisions, there is a comprehensive enforcement mechanism in Part 9.48. Does this excludes 1324? See Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 1g

(c) Has the benefit been given to a 'related party'? This term is defined in s 228.

ACSR 483; 14 ACLC 519, which says it does. Indeed, Young J thought that maybe

(d) Does the financial benefit fall within an exception in ss 210-15 . Of particular

s 1324 should be confined by the internal management rule more generally. The

importance is the arm's length commercial transaction (s 21 O). (e) Has the procedure for obtaining member approval been followed? It is set out in ss 217-27, but most importantly requires full disclosure.

5 ENFORCING THE ACT: S 1324 Section 1324 provides for injunctions to stop someone breaching the Corporations

Act. Compensation may also be awarded by the court.

decision was howled down by academia. In the subsequent case, Airpeak Pty Ltd v

Jetstream Ltd (1997) 15 ACLC 715, the opposite position was taken.

255

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CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATIERS

v Gardiner [1875] 1 Ch D 13, in which even the right to demand a poll was not

THINK ABOUT IT

enforceable as being direct and personal. A mid& way is indicated by Kraus v

What is your opinion in relation to the extent of operation of s 1324 in the internal affairs of a company? Is the argument that it should be confined as weak as is often presented? After all , the majority of the company might prefer a breach go unremedied than expensive litigation be brought upon all. This is a very old conundrum, perhaps deserving more serious consideration than has been given in relation to s 1324.

JG Lloyd Pty Ltd [1965] VR 232, that a shareholder can insist on the company

APPROACH TO PROBLEMS: S 1324 Explain injunction. Note compensation may be payable.

2

Is this person 'someone whose interests have been affected'? Note that it is widely

being managed according to the structure set out in the constitution.

THINK ABOUT IT Did the law take a wrong turn when it was decided that not all terms of the constitution of a company could be enforced by members? On one hand the idea of internal management is that the members should be able to suspend the rules ~t~ir association if they want to; on the other if the constitution is contractual, it should be fully enforceable and in that situation drafters of company constitutions might take a little more care in what they draft.

interpreted. Demonstrate the way in which the interests are affected. 3 4 5 6

Has the Act been breached? Explain how. Is it being used where an injunction is not being requested or won't be given? If so,

APPROACH TO PROBLEMS: BREACH OF THE COMPANY CONSTITUTION

express the doubt. Is it being used for internal affairs? Again discuss the doubt.

Identify the breach of the constitution. This involves:

Conclude as to likelihood an injunction will be ordered. Can damages be awarded?

(a) working out ~hat the provisions of the constitution are, including the replaceable

rules-it also might involve going back to the transition provisions from the system of memorandum and articles system to the current one; and

6 ENFORCING A COMPANY'S CONSTITUTION

(b) construing the relevant provisions to determine whether they have been

Members have a right to enforce the constitution of the company as if it were a

breached; and

contract. This right is derived from two sources: s 140 and Hickman v Kent and

(c) asserting the right to enforce, giving the authority on which it is based.

Romney Marsh Sheep-Breeders' Association (1g15] 1 Ch 881. Section 140 is

2

broader and asserts that the company's constitution and the replaceable rules have effect of a contract between: •

3

the company and each member; and

three positions that may be taken to this question and indicate whether adopting a

the company and each director and secretary; and •

a member and each other member under which each party agrees to comply with

4

constitution/replaceable rules. If the constitution is a contract, it is a strange one indeed because not all the terms of a company's constitution are enforceable under s 140 in any particular situation. Enforceability is limited to: The capacity in which the plaintiff is bound. Thus, before statute extended enforceability to directors, in Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 20 a director could not enforce a provision that they were to be a director; see also Beatty v E & F Beatty [1938] Ch D 708; Andy Kala Pty Ltd v

E J Doherty Pty Ltd (1995) 13 ACLC 1630. •

Personal and direct rights-that is, not for mere irregularities: Quin &Axtens

Ltd v Salmon [1 go9] 1 Ch 714 . This begs the question of what is a personal and direct right. Compare Pender v Lushington (1877) 6 Ch D 70 with MacOougall

Consider the capacity in which the complainant sues; is it members or director? Does the right appertain to that capacity? Consider whether the provision creates a personal and direct right. Nominate the narrow vision would preclude a remedy. Consider remedies. Note that courts generally only specifically enforce the contract and are extremely reluctant to award damages: Houldsworth v City of Glasgow

l

Bank (1880) 5 App Gas 317.

7 EXTRINSIC AGREEMENT Sometimes courts will enforce rights which appear or did appear in a company constitution not because they are a provision in the constitution but because they are a term or terms in an 'extrinsic' contract. These are contracts which : cover the same ground as the constitution; or •

incorporate some provisions of the constitution; or

•

are incorporated in the constitution; or

•

are part of the constitution .

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CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATIERS

A separate binding force is necessary; this means that they must be established as a separate contract. The most frequent example is a contract to be a director. The facts of Andy Kala Pty Ltd v E J Doherty Pty Ltd (1995) 13 ACLC 1630 provide another example (although counsel in that case did not raise the possibility of an extrinsic contract when to do so might have altered the result). The main issue involved in extrinsic contracts is what happens when the constitution is changed: Can the contracting party stop the alteration? Answer: No-Allen v Gold Reefs of

West Africa Ltd (1900] 1 Ch 656. •

If the contract incorporates the articles or says nothing , does the change in the

A CASE TO REMEMBER Peters' American Delicacy Co v Heath (1939) 61

ClR 457

The constitution of the company provided for dividends to be paid according to paid-up value and bonus shares to be paid in accordance with number of shares held. In order to restructure the company, these two provisions were to be aligned in favour of payment of both in accordance with paid-up value. Those members who held partly paid shares objected. (Can you work out why?) It was held that the alteration was not made in fraud of the minority. The judgments of Latham C J and Dixon J are particularly worth reading. The court said if the instant situation fell within one of the particular situations, to be valid the majority had to be able to show that it was 'bona fide for thet>~efit of the company as a whole'. In other words, the onus was reversed.

articles change the contract? Answer: it depends on the contract -Southern

The court tried to generalise the situations into:

Foundries (1926) Ltd v Shir/aw [1940] AC 701; Carrier Australasia Ltd v Hunt

•

detriment to the individual hypothetical shareholder; and

(1939) 61 CLR 534. The Carrier Case is interesting because the contract was

•

where one member or group was given a benefit of which the minority was deprived.

subject to the articles and the articles were subject to the contract; there were

The court was not convinced that any of these tests actually accurately summed up the position.

only four on the High Court bench and they split down the middle.

APPROACH TO PROBLEMS: EXTRINSIC CONTRACTS 1

2

3

...

After Peters' the law remained very confused. Most of the confusions arose when

Is there a separate binding force for the claimed term?

there were attempted ~leases, exculpations, forgiveness, or ratifications of breaches

If so, has the constitution of the company been altered so that the term might have

of directors' duties. Fortunately for students of corporations law (but not the legal

been altered?

profession) the derivative action replaced much of this law in 1999. Much of the rest

If so, does the contract incorporate the term as altered or as at the time it was

(how much?) was modified by Gambotto v WCP Ltd.

entered into? This is a matter of construction of the contract.

A CASE TO REMEMBER

8 FRAUD ON THE MINORITY, EQUITABLE LIMITATIONS AND GAMBOTTO

Gambotto v WCP Ltd (1995) 182 CLR 432

Doctrines limiting the exercise of power by majorities in general meeting have existed

FIGURE 14.2 IEL shareholding structure

for over 150 years. The main such doctrine was 'fraud on the minority'. It applied in particular situations: •

expropriation of company property;

•

expropriation of a member's property;

•

release of directors' duties;

•

changing the constitution; and

•

some others. It said that in those situations, but not otherwise, the decision had to be bona fide

for the benefit of the company. Otherwise, members were free to vote in their own self-interest, even if that was in respect of their position as director: see Pender v Lushington (1877) 6 Ch D 70.

259

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CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATIERS

' IEL held 99. 7% of the shares in WCP Ltd (see Figure 14.2). It wished to gain 100% to avoid having to worry about minority rights . It proposed an amendment to the constitution allowing for the compulsory purchase by IEL of the remaining shares. It was passed: IEL did not vote;

Compare the sophistication of analysis revealed in Peters' with the approach of the 1995 High Court of Australia in Gambotto. Rank the~ out of 1o. Which High Court does better? Consider the following passage from the judgment of McHugh J. Is it simplistic?

•

Mr Gambotto did not attend or vote.

Under these circumstances, to require shareholders to sell their shares against their will is an infringement of their rights as autonomous beings to make their own decisions and to carry out their own actions. In a society and under a legal system that is predicated on its members being free and equal agents any interference with the autonomy of any individual needs to be justified if it is not to be regarded as oppressive. Because those proposing an alt~r~on for the purpose of expropriation must justify their action, the onus must be on them to establish that there has been no oppression. ((1995) 182 CLR 432, 456)

IEL then attempted to invoke the provision, allowing for the compulsory purchase of the shares at a sizeable premium (amount above assessed fair value). Mr Gambotto complained. The High Court of Australia held: •

The amendment to the constitution was invalid. Mr Gambotto could keep his shares.

•

Such amendments had to be: for a proper purpose; and not oppressive. 'Proper purpose' was not a mere commercial advantage (for example, taxation benefits or structural rearrangement).

•

'Not oppressive' means fair in procedure and in substance. The majority has the burden of proof.

APPROACH TO PROBLEMS: FRAUD ON THE MINORITY AND GAMBOTTO AS CONTROL OF ACTIONS OF MAJORITY IN GENERAL MEETING Is this an amendnfent to the constitution authorising expropriation of shares? If so,

THINK ABOUT IT Do you agree with the decision in Gambotto? (It is quite short and worth reading.) Immediately after the decision there was considerable academic debate. The most cogent critiques are as follows : • Gambotto v WCP Ltd is stated to apply where a member's property is being expropriated but leaves unclear whether it applies:

use Gambotto:

(a) Is it for a proper purpose?

{b) Is it fair in procedure? (c) Is it fair in substance? 2

only to property in the form of shares or to 'proprietary' rights more widely defined or any right; and

(a) Apply Gambotto:

only to expropriations under alterations of the constitution or also to expropriations authorised by pre-existing rules or to all expropriations by whatever means.

Is it for a proper purpose?

Its effect was immediately reversed in Part 6A.2.

•

Is it appropriate to disregard commercial advantages to the company in determining what is 'proper'? Should price be the only concern in fairness? Should the High Court dismiss market price as an indicator?

•

Is it fair in procedure?

Recent cases have tended to confine Gambotto. •

Is this an amendment to the constitution of the company authorising expropriation of other valuable rights? If so:

Is it fair in substance?

{b) Note that it may not apply, and refer to old law that it has to be justifiable (use Australian Fixed Trusts Pty Ltd v Clyde (1959) SR (NSW) 33 and Shears v Phosphate Co-op of Australia (1988) 14 ACLR 747; even Peters').

3

Is this some other amendment to the constitution involving conflicts of interest (for example the Peters' situation)?

What does Gambotto imply for our understanding of what a share is? Compare the understanding revealed in Gambotto with that revealed in Sons of Gwalia v Magaretic [2007] HCA 1; 232 ALA 232; 81 ALJR 525. Are they consistent?

(a) Note that this situation is merely mentioned by Gambotto. (b) Apply the Gambotto test but with burden on minority. (c) Describe the Peters' tests and apply.

Does Gambotto facilitate 'greenmail'?

4

Is this an alteration of the constitution and none of the above apply? If so, in all likelihood there is no remedy. Cite the principle (or policy) that the vote is a property

261

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CHAPTER 14: CONTROL OF DECISIONS

PART 3: INTERNAL MATTERS

• right which can and should be exercised in each voter's self-interest: Pender v

•

Lushington (1877) 6 Ch D 70.

5

6

Defences to claims of insider trading are: •

(1953) 90 CLR 425. Is the majority ratifying its own breach, whether as directors (the directors control the votes of the members) or as majority in general meeting? Consider both the following strategies:

ratifications or approvals of conduct.

where someone, usually an investment bank, agrees to buy securities then on •

if the information was required to be communicated or if the securities were required to be traded pursuant to the Corporations Aft (see ss 10430-E); and

•

Where there is a 'Chinese wall' in place: ss 1043F-G. A 'Chinese wall' is a set of arrangements which are supposed to prevent information from being

(b) Invalidate the purported ratification with Bia/a Pty Ltd v Mallina Holdings Ltd

communicated between various pa~ of a business. An interesting example can

(1993) 11 ACSR 785, Ngurli Ltd v Mccann (1953) 90 CLR 425: wrongdoers must control the company and the matter must be serious enough to be counted as equitable 'fraud': Regal (Hastings) Ltd v Gulliver (1967] 2 AC 134n; (1942] 1 All ER 378, Hogg v Cramphorn Ltd (1967] Ch 254. Note also the other limitations: a majority cannot ratify an action if a personal right of shareholder is eliminated or creditors are prejudiced.

where the trading was pursuant to an underwriting agreement- underwriting is offer if no one else does (see s 1043C);

(a) Use the statutory derivative action to take action against the wrongdoers despite majority. Section 239 gives the court a discretion in the weight it accords

if made generally available, would have a materi~ffect on the price of the securities.

Is this a resolution where majority take company property? This is clearly invalid: Menier v Hooper's Telegraph Works (187 4) LR 9 Ch App 350; Ngurli v Mccann

not generally available; or

be found in ASIC v Citigroup Global Markets Australia Pty Limited [2007] FCA 963. Consequences of breach of the prohibitions are: criminal liability under s 1311; •

civil penalty under s 131 ?E; and

•

compensation under 9 1317HA, but note s 1043L.

,.

(c) There is some authority for the proposition that some breaches of duty are not ratifiable at all. Certainly it was stated so in Cook v Deeks (1916] 1 AC 554.

APPROACH TO PROBLEMS: INSIDER TRADING Work out who may be pursued for breach of s 1043 and the information in question.

9 INSIDER TRADING Trading in securities when in possession of 'inside' information is called 'insider trading' . It is thought to be wrong, although the reasons for it being wrong are opaque. A legislative attempt to proscribe it is made in ss 1042A-10430, although the attempt is notoriously unsuccessful. These sections create three separate offences, which, since 2001 , are also civil penalty provisions: •

•

Are they in possession of the information? Is it not generally available, within s 1042C? Is it price sensitive: would a reasonable person expect it to have a material effect on

5

the price of the securities (see s 1042A and D)? Did the person know or ought they reasonably to have known the information was not generally known and was price sensitive?

trading in securities (s 1043A(1 )): -

when in possession of inside information; and

-

knowing (or they ought reasonably to have known) that the information is inside information;

•

Remember to consider tippees for the trading and procuring offence. 2 3 4

procuring someone else to trade in those circumstances (s 1043A(1 )); tipping-communicating the inside information in those circumstances to

6 7 8 9

Did they trade in the securities? Did they procure trading in the securities? Did they communicate the information to someone whom they knew or ought reasonably to have known would trade in the securities? If the answer to any of 6, 7 or 8 is yes, then both an offence and a breach of a

someone else knowing (or they ought reasonably know) that that person would or

civil penalty provision has been committed. Breach of s 1043A as a civil penalty provision brings Part 9.48 into play. ASIC can pursue a contravention order and

would be likely to trade (s 1043A(2)).

consequent upon that a civil penalty and banning order. Compensation may also

Section 183, the duty not to use information for personal profit, also applies if the insider is a director, officer or employee. The definition of inside information is important. Much of ss 1042A-H is dedicated to it, but at core it is simply that the information is:

flow, about which see s 1043L. 1 O Apply s 183 to the situation as well. Apply according to its terms.

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The Australian Consumer Law s 14 (previously Trade Practices Act 1974 (Cth)

1O IRREGULARITIES: S 1322 Allowing a company to decide for itself whether irregular procedures are to be fatal to decision making has since at least Mozely v Alton (184 7) 1 Ph 790; 41 ER 833 been the policy of the general law. The principle is called the internal management rule. It states that anything a majority can do (like fix an irregularity in procedure) will be presumed to have been done. This principle is reinforced bys 1322. Some matters are automatically validated, including procedural irregularities and accidental omissions to give notice of

s 52) may apply to all other misleading or deceptive-t>J:atements in business. The defences to claims are much the same in all cases. They are mostly implied, but are explicitly set out for s 72g . Compensation for misleading or deceptive statements in relation to a member's shares is subordinated to all other debts under s 563A. This is now explicitly stated in order to overcome the decision in Sons of Gwalia Ltd v Magaretic [2007] HCA 1 ; 232 ALR 232; 81 ALJR 525.

....

meetings . There is also provision for validation orders, although the section is rather

APPROACH TO PROBLEMS: MISLEADING OR DECEPTIVE STATEMENTS

repetitive and convoluted . The most important provision in relation to validation orders is that 'any interested

Isolate the statement and which provision is applicable.

person' may apply to the court for a validation order. The court has to be satisfied that one of the three following conditions is met:

1

the matter is essentially procedural;

2 3

those concerned acted honestly; or it is just and equitable that an order be made.

misl~ding

2

Demonstrate in what way it is

3

Determine if any defences apply.

4

or deceptive.

Describe the remedy of compensation . If the company is going into liquidation, mention that the claim is subordinated to other claims and debts.

The court then may validate the procedure, order that a register be rectified, direct relief from liability for the failure and extend limitation periods.

APPROACH TO PRO BLEMS: IRREGULARITI ES

2

12 OPPRESSION' AND UNFAIRNESS: SS 232-5 Since the late 1940s legislation has provided the court with a generalised power to

Explain how declaring this matter an irregularity will help. Describe the general law

inteNene in a company's affairs where a member or members are oppressed. Later

approach and explain that within other doctrines the internal management rule will

this was extended to unfair treatment. These days, the provisions can be found in ss

often be applied.

232-5 of the Corporations Act. The court can give a member a remedy where:

Determine precisely what is required . Is it validity of a procedure or invalidity resulting from it? If the latter, explain the law which results in invalidity (usually the law of

•

the conduct of the company's affairs; a resolution, or a proposed resolution, of members or a class of members

meetings). Is this procedure one which is automatically validated under s 1322?

•

4

Does an application to the court under s 1322 have to be taken? If so: (a) Is this an essentially procedural matter?

is either: •

contrary to the interests of the members as a whole; or

(b) Did those concerned act honestly?

•

oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member

L

(c) Is it just and equitable that a validating order be made? If any of these is affirmative, the court has a discretion to validate.

11 MISLEADING OR DECEPTIVE CONDUCT In a number of situations where misleading or deceptive statements are made the legislation has provided a civil remedy. They are: •

an actual or proposed act or omission b")l.or on behalf of the company; or

3

section 670A: takeover documents;

•

sections 728-9: fundraising disclosure documents;

•

section 1041 H: financial product or seNice.

or members.

LEARNING EXERCISE In theory, the remedy is available in relation to any company's affairs but in practice, most oppression actions are brought by members of proprietary companies which have only a few participants; and in which members are also involved in management. Why might that be the case?

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some only ... fairness cannot be assessed in a vacuum or simply from one member's

Who can apply to the court?

point of view. It will often depend on weighing confti(\ting interests of different groups

The following people can seek relief from oppression: •

within the company. It is a matter of balancing all the interests involved in terms of the

a member, even if the oppression relates to:

policies underlying the companies legislation and s 209 in particular .. . (Thomas v HW

_ the member in a capacity other than a member; or -

Thomas Ltd (1984) 1 NZLR 686 per Richardson J)

another member in their capacity as a member.

a person removed from the register of members because of a selective capital reduction;

THINK ABOUT IT

a person who will cease to be a member if the oppression action relates to the

Richardson J's test from Thomas v HW Thomas Ltd (1984) 1 NZLR 686 was referred to with approval by the majority of the High Court of Australia in Wayde 1'/SW Rugby League Ltd (1985) 3 ACLC 158. There and in commentaries it is thought of as simply requiring a 'balancing of interests'. The genealogy of this approach harks back to the American Realists of the first half of the twentieth century. Is it simply a matter of weighing up the benefits and detriments to the pai:;ies?

circumstances in which they cease to be a member; or •

a person whom ASIC thinks appropriate having regard to its investigations into the company's affairs.

'Oppression' and 'unfairness' The way the court understands the terms 'oppression' and 'unfairness' is crucial to the operation of the remedy. As for oppression:

Clue: Read the passage that immediately follows that quoted above. Ask why Richardson J enumerates the policies involved in company law.

Some unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted as distinguished from mere

Whether a reasonable director of that kind of company would have decided that

resentment on the part of the company. (Elder v Elder and Watson (1952) SC 49,

the decision was ur'8ir having in mind the corporate objects on one hand and the

55 per Cooper LJ)

prejudice on the other. [Is this not like using the fox 's opinions to protect the chickens?] (Wayde v NSW Rugby League Ltd (1985) 3 ACLC 158)

At the lowest involves a visible departure from the standards of fair dealing, and a

In the application of the tests, the following considerations are important:

violation of the conditions of fair play on which every shareholder who entrusts ... money to the company is entitled to rely. (Elder v Elder and Watson (1952) SC 49,

•

It is not necessary for directors or majority shareholders to have acted dishonestly or intended to harm the minority-it is a question of impact: is the conduct

55 per Cooper LJ (again))

oppressive or unfair in effect? Burdensome, harsh and wrongful to the other members of the company or some of

•

The idea of 'reasonable expectations' is often referred to when the applicant

•

them, and lacks that degree of probity which they are entitled to expect in the conduct

is 'locked in and frozen out' of the company. This means that they cannot sell

of the company's affairs. (Scottish Co-operative Wholesale Society v Meyer [1959]

their shares, usually because the oppressors control the right to transfer shares

AC 324 per Viscount Simonds)

('locked in'), yet all benefits of membership are being diverted away from the applicant ('frozen out'). It often arises when a company was founded on the

LEARNING EXERCISE

premise that all wou ld be involved and all would participate in the rewards. It

Viscount Simonds referred to his test as 'the dictionary definition'. What does your dictionary say? Can you find any dictionary that defines 'oppression' as 'burdensome, harsh and wrongful'?

is sometimes called the 'partnership analogy', because the businesses were often conducted as partnerships before they became companies. Moreover, the oppression remedy was a development from the 'just and equitable' ground for w inding up and that in turn had its roots in the 'just and equitable' ground for terminating a partnership. In Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

As for unfairness:

Wilberforce LJ put it this way:

That conduct of the company which is unjustly detrimental to any member whatever

If he [the applicant] can point to and prove some special underlying obligations of his

form it takes and whether it adversely affects all members alike or discriminates against

fellow members in good faith or confidence, that so long as the business continues he

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shall be entitled to management participation-an obligation so basic that, if broken, the conclusion must be that the association must be dissolved ...

APPROACH TO PROBLEMS: OPPRESSIG~ AND UNFAIRNESS Is the applicant a member or approved by ASIC?

This discounts the documentary existence of the company in favour of some sort of relational base. That approach was subjected to somewhat scathing criticism in Tomanovic v Global Martgage Equity Corporation Pty Ltd [2011) NSWCA 104. •

2 3

Similar cases are a very important part of the exercise of this discretion.

LEARNING EXERCISE Find out which cases deal with the following examples of conduct. Make a list of them, each with a short description of the facts and the result. Use this for suitable analogous cases in problem answers. Diversion of business opportunities; Improper exclusion from management; Unfairly restricting dividends; Oppressive conduct of board meetings; Share issue for improper purpose; and Breaches of directors' duties. What conduct is insufficient to convince a court of the need for a remedy?

4 5

What are they complaining of, in terms of oppression , unfairness, or the interests of the members as a whole? What tests are appropriate? Depending on time available, describe and apply them. Especially note, 'balancing' from Thomas , what a reasonable director would think from Wayde, and the reasonable expectations test from Ebrahimi. Find an analogous case or two and compare the facts. Indicate that the court 's discretion with regard to remedy is ver/flr&d, and suggest one or two remedies. Note that the appraisal remedy is very frequently used.

13 PROMOTERS' DUTIES "' As was discussed above, promoters are those who stand to benefit from the formation of the company and the raising of its capital: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. Their duty is to disclose profits they make in relation to dealings with the company. The classic situation is where the promoters sell property to the company for a profit. Jhis was the situation in Erlanger v New Sombrero Phosphate Co (1878) 3 App

ca{ 1218.

The duty is to disclose. The disclosure must be made to the company, either through an independent board of directors or to the members. The court has a very wide discretion in the orders it can make. Section 233(1)

Remedies for breach are generally simply rescission of the contract. Courts are reluctant to award damages as that would involve remaking the contract. However, if

states it may make any order 'it considers appropriate' to regulate the company's affairs. Examples are:

the original acquisition can be said to be on trust for the company, the company can

•

keep the property and claim the profit.

purchase by the other members or the company of the oppressed member's shares (this is usually at a 'fair' price and there is a deal of litigation about what that precisely is)-it is called the 'appraisal' remedy;

•

appointment of a receiver;

•

restraining someone from doing something, or requiring someone to do

Is this person a promoter?

winding up .

2 3 4

Explain the duty. Explain the secret profit on the facts. Has there been disclosure? To whom?

One particularly apposite remedy was granted in Re Harmer [1959) 1 WLR 62.

5

What remedy?

something; and •

•

APPROACH TO PROBLEMS: PROMOTERS' DUTY

In that case the patriarch of the family refused to stop interfering in the running of the company even when he had passed formal control of the general meeting to his sons. The court appointed him president of the company for life (there is no mention

14 RATIFICATION , EXCULPATION AND FORG IVENESS

of that office before in this book- indeed it was to carry no powers, duties or rights)

When things go wrong , people try to fix them. Breaches of the Act, of company

but he was to be hired as a consultant for life at a nominated salary.

constitutions and of duties are subject to this desire. Acts beyond power because they breach the company constitution are ratified. Breaches of duty are forgiven.

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Wrongdoers seek exculpation for breaches of the law. Any of this can be done before

s 199A. Nor may they not indemnify against liability, apart from successful defences.

the action, prospectively, or subsequently.

Even insurance against liability is regulated by s 1900.

THINK ABOUT IT Is there any difference between simply deciding not to sue, and ratifying or forgiving? If there is, would the difference be any more than the wording of a resolution? If not, does deciding not to pursue a director for, say, using company stationery for private purposes, bring into play the whole complexity of forgiving breaches of directors' duties? Differing textbooks provide differing answers-a point raised in an earlier 'Think about it'.

It might seem that law should simply ignore such exculpations, forgiveness and ratifications. Yet as was described under 'Irregularities', courts have taken the view

APPROACH TO PROBLEMS: RATIFICATION, RELEASE, FORGIVENESS, EXCULPATION, EXEMPTION OR EXCUSE Generally, exculpation, forgiveness or ratification becomes an issue as a defence rather than as a cause of action in itself. When it does arise, deal with it as follows: Is this a derivative action under s 236? If so, s 239 provides that ratification is merely something the court may take into account in deciding whether to allow the 2

derivative action. Otherwise, has full disclosure been made? If not, the purported exculpation,

3

forgiveness or ratification is ineffective. Is there a claim that the compan~ constitution or some other agreement releases

4

s 199A. Is this action allowing a fraud on the minority? If you look at the topic 'Fraud on the

or exempts the breach? Such a claim fails as the exemption or release is void under

that it is really up to the company to decide for itself what should be enforced. Indeed, it sometimes goes as far as to say that if the company can ratify or forgive, the law should presume that it has been done.

Minority' above, you will see that there are categories of action which fall into the

The result is that ratification, exculpation and forgiveness by the general meeting is possible. It is a limited power: • •

It requires full disclosure.

category. If the wrongdoers control the general meeting, the purported exculpation , 5

It must not: -

be a fraud on the minority;

-

prejudice creditors if the company is nearing insolvency;

forgiveness or rajl"fication is ineffective. Even if the wrongdoers are not in control , did they vote their shares? If so and the wrong is sufficiently serious , the purported exculpation, forgiveness or ratification is

6

ineffective. The purported exculpation, forgiveness or ratification is also ineffective if it:

-

defeat members' personal rights;

(a) prejudices creditors if the company is nearing insolvency;

-

be oppressive (Part 2F.1 ); or

(b) defeats members' personal rights;

-

excuse breach of statutory duty.

•

Interested parties must not vote (Hogg v Cramphorn Ltd (1967] Ch 254).

•

Only the court may excuse breaches of the Act and then only if acts are honest: s 1317S-for civil penalty orders; and

•

s 1318-for other breaches.

7

(c) is oppressive. Breaches of statutory duties cannot b~ratified, or forgiven. However, application can be made to the court to excuse breaches if the breach was honest under ss 13178 and 1318.

Sometimes attempts are made to ameliorate the effect (such as they are) of the requirements on directors by provision in the company constitution or by way of

15 WINDING UP

agreement. As was discussed in respect of the duty to avoid conflicts of interest, the

A member (and some others, for instance a creditor, or ASIC) can apply to court

company constitution can determine what is considered to be a conflicting interest,

to have a company wound up on the grounds set out in s 461 (1 ). While it might

and what counts as disclosure (this is within the constraints of ss 191-5). The

seem a little desperate, it does provide a means to the end of having a member's

internal rules may also prescribe what counts as a proper purpose and what is to be considered to be diligence.

dissatisfactions solved. Quite often (and subject to s 467(4)) the court will indicate that it will make an

On the other hand, the company's constitution or any agreement is void to the extent it exempts any person from liability incurred as a director, officer or auditor:

order that a company be wound up, but that the matter will be adjourned before the final order is made. Not surprisingly, the parties negotiate and a compromise solution, usually involving a buy-out of the member's shares, is found. The application to wind

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272

up the company is then withdrawn . This is what happened in Re Tivoli Freeholds Ltd [1972] VR 445. Largely, the oppression and unfairness remedy replicates whats 461 provides as

APPROACH TO PROBLEMS: WINDING

a member's remedy. The relationship between the two is set out in s 467(4), which (rather indirectly) states that if a member applies for a winding-up order when another remedy is available and the member is acting unreasonably in seeking to have the company wound up instead of seeking the other remedy, the court should not wind

2

3

up the company. Sections 461 (1)(e), (f), and (g) effectively replicate the oppression and unfairness criteria in s 233. Section 461 (k) provides the 'just and equitable' ground for winding up . The 'just and equitable' ground for winding up has a long history, rooted in

4 5

in asking for a winding-up order. If so, s 467(4) should apply and the application be disallowed.

partnership law. Essentially it is a simple discretion conferred on the court. Over time, the courts have developed categories where they have wound up companies on the just and equitable ground , always reserving the capacity to deal with new situations. The categories are:

• Deadlock: Re Yenidge Tobacco Co Ltd [1916] 2 Ch 426. This is a rather charming case where two old men eventually refused to speak to each other, leaving management of the company in disarray.

• Fraud or misconduct: Loch v John Blackwood Ltd [1924] AC 783 . In this case the directors offered to buy out the members without revealing information which

•

showed the company was worth far more than they were prepared to offer. The members could no longer trust the directors to act in their interests.

• Failure of substratum: Re Tivoli Freeholds Ltd [1972] VR 445. Tivoli Freeholds Ltd, as its name suggests, was formed to run a theatre. After a number of years, it ended up in the majority hands of a corporate raider. Good profits were being made, but it was no longer a theatre company. Some of the old members objected on the ground that the whole reason for being of the company had disappeared.

•

'Locked in and frozen out': Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, per Wilberforce LJ. As discussed above under 'Oppression', if a business was founded on the basis that all participants would share in the management and rewards of the business and that it was reasonable for the participants to expect that this state of affairs would continue no matter the legal form the business took, the court wi ll intervene to protect a participant who is locked into the company by the lack of ability to sell their share yet frozen out of the rewards of the business.

LEARNING EXERCISE As for the oppression remedy, make a list of cases where the remedy has been granted, with short descriptions of the facts .

U~

Can this person apply to the court to wind up the company? (Members are 'contributories' and are included by virtue of s 462.) On what grounds is the application being made? Demonstrate how the facts fit the ground. If the ground is s 461 (1 )(k) , the 'just and equitable' ground, into which fact category do the facts fall? Provide an analogous case and discuss the similarities and differences. Conclude as to whether a winding-up order might be made. Determine whether any other order might apply and if the applicant is unreasonable

•

273

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ASSESSMENT PREPARATION Essays This chapter covers the area most frequently examined in corporations law subjects. The chapter has been designed to negotiate a way which most suits problems through the material. That is not to say that essays are not frequently set on the topics covered here. They are usually best dealt with by reference to the policy discussion at the start of this chapter. A number of topics also focus on the details of doctrine. Many of these are referred to in the text, especially in the part before Table 14.1. When discussing topics, refer heavily to the policies behind the law.

Problems The procedure to adopt is: 1 Read the problem to work out who should sue. 2 Go to Table 14.1, 'Who can sue for what?' Choose all the remedies which may give that person what they want. Find the discussion of each in the 'Doctrines' list. 3 Work through the 'Approach to problems' for each doctrine. Two points worth noting are: • Be sure for each doctrine, you cover: - Who can sue? - Whom can they sue? - Forwhat? - What defences? - What remedies? In various doctrines of corporations law, the answers to these may have to be articulated precisely. For example, it is important to note that only the company can sue for breaches of directors' duties, unless it is a duty directly owed. • Doctrines may complement or supplement other doctrines. Covering one issue for a problem is seldom enough. There are normally many ways of solving the problem, and each way can be quite tortuous. A doctrine may supplement another doctrine. Thus if a member wants to sue a director, and the duty is owed to the company, the supplementary doctrine is the derivative action . The whole chain must be covered in an answer. A doctrine complements another doctrine when both may be deployed. Thus, if there is a sequence of events in the management of a company, members should find appropriate doctrines for each single event and also for the whole taken together, such as an oppression action. The more you cover the better, provided there is at least a fair chance of success in each.

,.

FOUR THE SECURITIES MARKET

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CHAPTER15

REGULATION OF THE INDUSTRY COVERED IN THIS CHAPTER Overview of nature and regulation of securities markets Regulation of financial service providers Financial markets regulation: -

licensing of markets

-

market conduct rules

-

mandatory disclosure: (a) public offerings; (b) takeovers; (c) continuous disclosure

CASES TO REMEMBER Gambotto v WCP Ltd (1995) 182 CLR 43 Meridian Global Funds Management Asia Ltd v Securities Commission [1995)

2 AC 500

,.

STATUTES AND SECTIONS TO REMEMBER Australian Securities and Investments Commission Act 2001 (Cth) Part 1o Australian Consumer Law s 14 (previously Trade Practices Act 19 74 (Cth) s 52) Corporations Act 2001 (Cth) Part 6A, Chapters 6, 6C, 7, ss 9, 92, 602, 606, 655A,

656A,657A,674-5, 705-19, 727-30, 731-4, 736, 7610, 761G, 762A-5A, 766A-E, 791A, 7938-C, 795A-8, 798D-E,911A,912 , 912A,913A-C,917A-~ 923A, 941 A-3F, 944A-7E, 945A, 960-28, 9618, 1011 A-16F, 111 AE-AM, 10208, 1041A-G, 1041L-S, 1043A-0, 1044A-~. 1317H, 1324, 1325A Financial Services Reform Act 2001 (Cth)

Listing Rule 3.1A

INTRODUCTION Securities, or share and debentures (loans to the company), have two aspects. One is that each, and each form of them, represents a relationship with the company. This aspect was considered in Part 2 of this book. The other aspect is that, being collections of rights and liabilities, their owners often want to sell them. Other people want to buy them. They are property, although whether they are property because people buy and sell them or they are bought

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and sold because they are property is debateable. This is the external aspect of membership, first considered in Chapter 5, The Entity, and is a corollary of debts being contracts. It is this that is considered in this chapter.

although in the last couple of decades the place has become virtual rather than physical. The securities market is a particular institution, with its.-ld("n rules and procedures, including in the case of the ASX (Australian Securities Exchange), licensing of dealers, rules for trading, and rules for the products traded on it. It is run for profit by a firm , the ASX Group, which consists of a number of entities.

THINK ABOUT IT Reread Gambotto v WCP Ltd (1995) 182 CLR 43 . That a share is property is fundamental to the High Court's reasoning. The corollary to that, states the majority, is that shares may not be expropriated by the company unless there is very good reason. Do you agree with this analysis? After all, it is argued by repetition of assertion rather than reason. Moreover, is it not possible that one of the incidents of a share is that there may be alterations to the company's constitution which may result in expropriation? What, then, is the nature of the property represented by a share?

While theorists claim many virtues for markets there is much harm that can result from their operation. Regulation attempts to ameliorate this harm. Parliament has also tried to facilitate the operation of markets to enhance their virtues, although this may be merely a matter of avoiding the inhibiting effects of the aforesaid ~~lation.

LEARNING EXERCISE What are the virtues and vices of markjts? Note: This is an extremely large question about which there is a great deal written. Much is more ideological than rational. The main point here is to list the virtues and vices and ask to what extent each is relevant for securities markets. Of particular note is the 'market for corporate control', which allegedly maintains the honesty and integrity of directors and the system as a whole, and the market as allocating capital funds to the most efficient use. You also might like to review the experience of the South Sea Bubble, in ~e early eighteenth century. Has anything changed since then?

The saleability of shares and debentures is one of the oldest features of business enterprise. We can see it in the thirteenth century long before most of the other incidents of legal personality are clearly articulated. (There is a picture of a thirteenthcentury share in Chapter 2.) If property is bought and sold, there is, by definition, a market in that property.

The policies of the government (of ~atever persuasion) have some or all of the

KEY CONCEPT Market 'Market' has many different connotations. In one conceptual sense, if there is a possibility of a thing being sold, there is a market in that thing. The word here refers to the saleability of the thing, the separation of buyer and seller and the possibility of a transaction between them. This is the sense that we use when we refer to the 'securities market'. In the refined academia of economics, the first sense of the word receives various qualifications and becomes increasingly abstract, culminating in the 'perfect' market. The perfect market (which, like all perfect things, is an unattainable ideal) is one in which a fungible product is bought and sold, and has many buyers and sellers, each of which is fully informed about the product and prices, and all of whom are rational maximisers of their own utility. Between the first, simple, sense of the word and the economists' abstractions there are many other possibilities. Confusions abound. These are multiplied by the conflation of description and policy advocacy-of 'is' and 'ought'. The 'ought' derives from the argument that since the 'perfect market' has virtues ('efficiency') and no detriments, we ought to make the real world match the ideal one. Discussion and arguments swirl around these confusions, positions are taken and demolished: these are the stuff of the policy arguments surrounding securities regulation. 'Market' can also refer to the place where many different things are bought and sold : Melbourne's Victoria Market. a vegetable market, a local flea market. the Sunday craft market and so forth. Indeed, it is in this sense that we use the term 'securities market',

following aims: •

The market for securities should be efficient, competitive and informed. Actual or attempted market manipulation should be promptly detected.

•

Fair dealing and equity should exist between all members of a company; each member should have equal access to information, equal opportunity to deal in the

•

market, and equal opportunity to participate in any benefits accruing to members . Until recently regu lation in relation to the markets for securities was directed only at market conduct, disclosure in takeovers and issues to the public, and approval of certain securities markets. However, in 2001 regulation was vastly broadened by the insertion of Chapter 7 in the Corporations Act 2001 (Cth) by the Financial Services

Reform Act 2001. This brought far more transactions into the province of the regulation by an extended definition of 'financial product' and extended the matters dealt with by regulation to the provision of advice and other services . The regulation presently applying to securities markets, in the broad sense of the word, is: •

Regulation of the provision of financial services takes three forms: -

licensing of financial service providers;

-

mandatory disclosure in relation to advice as to financial service products; and

-

regulation of conflicts of interest

279

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C HAPTER 15: REGULATION OF THE INDUSTRY

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,

Regulation of financial markets involves:

•

•

- regulation of takeovers. Regulation w ithin securities markets is a matter of the listing rules. Particular

interests in managed investment schemes, such as cash management trusts;

_ licensing of markets; _ prohibitions on certain market conduct; - mandatory disclosure in relation to offering securities; and

property trusts; interests in emu farms and forestry schemes; derivatives (see s 761 D); •

insurance;

attention is paid to: - continuous disclosure; and

•

hedging contracts; and

-

Many arrangements that are regulated elsewhere are excluded, evefl Vlough they would fall under the definition. An example is credit cards provided by banks.

enforcement.

• Administration. This chapter briefly covers these matters. The reason detail is eschewed is that it

deposit accounts.

A 'financial service' is, in relation to 'financial products':

is really an entirely separate topic from corporations law. Few subjects in corporations

providing advice;

law cover it in any detail. The topic of this chapter is often described as 'securities law'. Indeed, in many

•

dealing;

•

jurisdictions it is dealt with in an entirely separate statute. Perhaps in Australia we only include it in the Corporations Act to bolster the constitutional validity of federal

operating a registered scheme (meaning a managed investment scheme as defined in s g); or

•

providing a facility for trading ('making a market').

securities regulation .

• This is set out in s 766A with clarifications in s 766A-E.

FINANCIAL SERVICES Regulation of the provision of fi nancial services is the subject of Chapter 7 of the

Corporations Act. It consumes a considerable portion of that Act.

'FINANCIAL PRODUCT' AND 'FINANCIAL SERVICE' Crucial to the chapter is the idea of 'financial product'. This receives extended definition in ss 762A-5A. There is a general definition, with extensions and exclusions . Section 763A sets out the core idea that a financial product is some arrangement or intangible property by which a person: •

makes a financial investment;

•

manages financial risk; or

•

makes a non-cash payment. Each element is further defined with examples .

LICENSING Financial service providers must hold a licence: s 911 A(1 ). A licence is acquired by applying to ASIC according to the proced'ures set out in ss 913A-C. A key criterion is that the licensee is of good fame and character. If the licensee is a corporation, the requirement applies to the corporation's responsible officers; if it is a partnership , it applies to the partners; and if it is a trust, it applies to the trust's trustees. There is extensive provision for banning orders and disqualification. The licensee may authorise a 'representat"We' to provide the financial services. The representative does not have to be a licensee (s 911 A(2)(b)) . The licensee is responsible for the representative's conduct on which the client could reasonably be expected to rely and on which the client in fact relied in good faith , whether or not the conduct was within authority (s 917 A). There are further provisions (s 917 A(3)-917F) for dividing up responsibility between licensees if the representative represented more than one licensee (as often happens). There is no point to licensing unless licensees are prohibited from doing things

LEARNING EXERCISE

Are pay-day lending services or mortgage brokers 'financial products'? Should they be covered by the regulation?

and are told to do other things and how to do them. There are a number of obligations with which financial service providers must comply, mainly to do with providing honest, efficient and fair services: see s 912A(1 ). Interestingly, licensees and their representatives are not allowed to use the words 'independent', 'impartial' or

Common things which are financial products: •

shares and legal or equitable interests in them;

•

debentures and legal or equitable interests in them;

'unbiased ' in relation to providing services: s 923A. The legislation distinguishes ins 761 G between 'retail' and 'wholesale' services in relation to these obligations and in relation to disclosure. The terminology is a

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TABLE 15.1 Retail client disclosure requirements

little misleading , as it is really between those who have the resources and knowledge to make investment decisions without the protection of disclosure and other decisions and those who do not have those resources and knowledge. The criteria are as to price of the financial product, the size of the client business, the wealth of the client individual or business, and whether the client is a professional investor. The

DOCUMENT

SECTIONS

W HEN REQUIRED

EXPLANATION

Financial Services Guide

941A-3F

Provider not dealing in its own products, in which case a Product Disclosure Statement is required.

Provides information about the financial service being offered.

Statement of Advice

944A-7E

Personal advice is given.

Records the advice given, the basis on whichtt as given, remuneration received by provider.

Product Disclosure Statement

1011 A-16F

Personal advice a particular product; or offer for sale or issue of a financial product, or on sale or issue.

Provides information about particular products, including issuer, financial risks, benefits, characteristics, costs.

amounts are set by regulation . The Global Financial Crisis of 2007-08 spurred a wave around the world of reforms to the regulation of provision of financial advice. The Australian version of these reforms is to be found substantially in ss 960-2S. The key feature of these were to require financial advisers to place the interests of retail clients ahead of their own interests when providing financial advice. This requirement is found in s 961 B.

THINK ABOUT IT The Global Financial Crisis and other scandals such as the LIBOR cartel also spurred a move towards the professiona/isation of the financial advice industry to try to improve the culture of the industry. This would allow for a professional body to be set up which would self-regulate the industry, just as other professions such as law or audit do (or don't). There are also proposals for a Bankers Oath (www.bfo.com):

re~mmending

REGULATION ,OF FINANCIAL MARKETS

Trust is the foundation of my profession.

Financial markets, in the broad sense of the phrase, are regulated in the four ways

I will serve all interests in good faith.

described above. They are the topics

elow.

I will compete with honour. I will pursue my ends with ethical restraint.

LICENSING OF MARKETS

I will create a sustainable future .

Operating a securities market (in the sense of the market as an institution) is just like

I will help create a more just society.

any other business. And like many others, it requires a licence to do so (s 791 A). The

I will speak out against wrongdoing and support others who do the same.

application for a licence is made to ASIC (s 795A) and the decision to grant one is

I will accept responsibility for my actions.

made by the minister (s 7958).

In these and all other matters; My word is my bond. Do you think this or any of the proposals would improve the culture of the financial advice industry?

DISCLOSURE Disclosure is required to be made to retail clients in relation to the provision of financial services in three documents. They are set out in Table 15.1.

,.

The minister is required to be satisfied that the market has adequate arrangements for: •

operating rules;

•

supervision;

•

clearing and settlement; and

•

compensation in the event of default by participants. The market must maintain these arrangements and notify ASIC if it can no longer

comply with them .

PROHIBITIONS ON CERTAIN MARKET CONDUCT Market conduct has been regulated since at least the thirteenth century. Many erstwhile prohibited practices are now considered to be of the essence of the workings of markets. Nevertheless, there are practices which are currently prohibited. Their prohibition is justified by the desire to stop some people getting an unfair advantage, and to avoid false markets leading to a diminution of confidence in the market.

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Currently prohibited practices are: • Short selling: this is selling securities, managed investment products and other financial products without having a 'presently exercisable right to vest the product

All except misleading or deceptive conduct are offences . Misleading and deceptive conduct, making fal~or misleading statements, and dishonest conduct all give rise to civil liability to any person who suffers

in the buyer' (loosely: 'owning it'). Section 10208 bans it. Why would anyone short

loss or damage as a result. A moment's thought will reveal that the amounts of

sell? If prices are falling and you sell first then buy what you have just sold , you

compensation which might then be payable might be extraordinary. There is some

pocket the difference in price without ever having to pay for them. The problem

relief for those concerned , in the proportionate liability provisions in ss 1041 L-S and

is that short selling exacerbates crashes . On the other hand, the Australian

in the statutory limits on liability for some professionals (ss 1044A-B).

Securities Exchange is persuaded that short selling is good for market efficiency, whatever that might mean. Accordingly 'covered' short selling of certain securities is permitted under its rules. Despite attempts to control such behaviour, other financial products easily fil l in the gaps (for example, 'contracts for the difference').

•

Insider trading: this is the practice of buying or selling securities when you know more than the market. It is thought unfair and prohibited in ss 1043A-O. For

THINK ABOUT IT Do these provisions act as a deterrent to potential wrongdoers? Calculate the risk of discovery and the potential civil and criminal liabilities, and compare them with the potential rewards. Do you think that mt,dtiples of damages on the US model would be a greater deterrent? What would be the detriment of such an approach?

further discussion, see Chapter 14, Control of Decisions.

•

Market manipulation: entering into transactions that have the effect of creating or maintaining an artificial price (s 1041 A).

•

False trading and market rigging type 1: creating a false or misleading appearance

•

•

•

of active trading by trading in such a way as the ownership of the securities does not change.

PROSPECTUSES: MANDATORY DISCLOSURE IN RELATION TO THE OFFER OF SECURITIES FOR ISSUE OR SALE Why mandate disofbsure?

False trading and market rigging type 2: by means of some other fictitious or

Securities have long been a worry for regulators. They are complicated. People are

artificial transaction causing the price for securities to be maintained, inflated or depressed (ss 1041 B and 1041 C).

warns, the greater the promised return, the less likely it wi ll happen. The issuers of

Making false or misleading statements inducing dealing: rumour-mongering is provided for in ss 1041 E and 1041 F.

of information , in economists' terms) .

easily fooled by promises of great and ~asily gained wealth . As ASIC repeatedly securities often have much better information than the purchasers do (asymmetries

Disseminating information about illegal transactions: s 1041 D is a support provision where information was disseminated to support the process of market manipulation, false trading, market rigging or rumour-mongering.

•

Dishonest conduct: this is simply defined by the standards of ordinary people and is an offence under s 1041 G.

•

Misleading or deceptive conduct-civil liability only: on the basis of the very successful s 52 of the Trade Practices Act 1974 (Cth}, engaging in conduct in

THINK ABOUT IT

•

What is the efficient market hypothesis and what does it have to do with securities markets? What traces of the theoretical approach can be found in the prospectus provisions? Clue: Look up an economics text.

relation to a financial product or service that is misleading or deceptive or is likely to mislead or deceive may lead to liability to any person who suffers loss or damage as a result.

On the other hand, the core principle of the liberal market economy is that people should not be told what to do. They should be free to choose. After all, they

LEARNING EXERCISE

may choose to bear great risk of loss in retu rn for the prospect of great returns.

Make a list of activities that may be engaged in. Examples are churning , ramping, arbitrage, forestalling , regrating. Find out what each means. Find some more. Then work out which ones are covered by the prohibitions.

Why else do people invest in lottery tickets? The solution to this apparent dilemma

Clue: Two of the examples are no longer banned, one is now a Good Thing, and two are banned under the general market manipulation prohibition in s 1041 A.

13, Information.) If those who are fooled had access to information about the risks

lies in the· principle of disclosure, articulated by Arthur Lowe, one of the parents of modern company law, in the 1850s. (See also the discussion at the start of Chapter

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they took, they have only themselves to blame. Yet those who want to take the risk are not prevented from doing so. The risk of being fooled is at its greatest when securities are first offered (on issue).

Disclosure documents The four different types of disclosure documents 1

In a sense, everything is 'promises' at that stage. There is no market price as yet. For

2

short form prospectus;

those reasons, disclosure on the first offer of securities has long been mandated. The

3

offer information statement; and

original scheme was to require a 'prospectus' with defined information when an offer

4

of shares was made to the public . The current scheme does much the same sort of thing, but has greater coverage and is considerably more sophisticated.

am:

prospectus;

profile statement. Section 705 sets out a table which describes each and the circumstances in

which each may be used. That section is backed by s 709, which is the operative section requiring the use of the various disclosure documents. In simple terms, the prospectus is the standard document which should be prepared and used; the other

LEARNING EXERCISE

three are shorter forms which can be used in particular circumstances.

Prospectuses are often said to be required when an issue is to be made 'to the public'. What does this mean and whence does it arise? How does current law deal with the same idea about when disclosure is required?

replacement prospectus. This is som1!times necessary if circumstances change or

There is one more type of disclosure document: the supplementary or new information comes to light: s 719 . All disclosure documents must be lodged with ASIC: s 718.

The regulatory net These practices are caught in the regulatory net: •

Share hawking (offering securities either for issue or sale personally by meeting or telephone) is prohibited: s 736.

•

Content of disclosure documents Required content of the disclosure document varies according to its type:

Advertising an offer or intended offer of securities that would require a disclosure document is banned, with exceptions: s 734.

which has been lodged with ASIC(~ 712). • Profile statement: refers to the whole prospectus which has been lodged with

All written offers or invitations to subscribe for securities must have a disclosure document with them: ss 706 and 709: -

'securities' is defined in s 92;

-

exceptions to the requirement to prepare a disclosure document are set out ins 708 .

•

Some offers for the sale of already issued securities need a disclosure document: s 707.

• •

Contraventions of these requirements are offences. If there is a misstatement or omission in a disclosure document, civil liability follows and perhaps an offence is committed: ss 728-9 . A series of defences is set out in ss 731-3. It is worth noting that these provisions were redrafted during the simplification

process and are very clear and easy to follow. Extensive use is made of tables. For most purposes an understanding of the above and reference to the appropriate section is all that is necessary. What follows here assumes the Act is available and simply explains a few matters-it is by far better to refer to the source than to rely on a precis (or, worse, an expansion).

1

710-716. • Short form prospectus: this refers to information required of a prospectus but

SS

•

ASIC (s 714). Offer information statement: being for small, early-life funds raising, requires only

the basic information set out in s 715. • Prospectus: the content of a prospectus varies according to whether the

•

securities are continuously quoted securities or not. Following a definition trail through the Act to s 111 AE and thence to s 111 AM reveals that these are securities of a company listed on a securities exchange. They require less disclosure in the prospectus because most relevant information about the company is already in the public domain because of disclosure requirements of the securities exchange. Moreover, that information should already have been incorporated in the price for the company's securities. Whether or not the securities are continuously quoted securities, there is specific information required bys 711 and a general disclosure test setting out a standard for the amount of information to be provided. For continuously quoted securities the test is the information investors and their professional advisors would require to make an informed assessment of the effect of the offer on the issuing body (usually company or managed investment scheme) and the rights and liabilities of the

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The rights of the minority still subsist as a constraint on controllers. For that

securities on offer: s 713(2). For all others it is much broader and set out in s 710(1 ). It is still the information that investors and their professional advisors would require to make an informed assessment, but extends to the prospects of the issuing body.

reason there can be a point where controllers wish1o completely eradicate the minority. There are also substantial taxation benefits for the owners of wholly owned companies. In Australia we have one of the most generous schemes for allowing the

Who may be liable for false or misleading information in a disclosure document? Section 729 sets out a table of who may be liable and for what they may be liable :

eradication process following a takeover in which 90% of the securities are acquired or following the acquisition by other means of 90% of the securities . It is set out in Part 6A of the Act. Ironically, it was provided as a response to Gambotto v WCP

the company;

Ltd (1995) 182 CLR 43 which disallowed an acquisition of less than 0.3% (three-

•

directors;

tenths of 1%).

•

proposed directors;

•

an underwriter (if any);

votes gives full control over decisions, apart from those requiring social resolutions.

•

experts;

However, various mechanisms give control at percentage shareholdings of far less

•

brokers, auditors, bankers, solicitors; and

than 50%. These mechanisms are: ""

•

other professional advisers.

How then might one gain control of the general meeting? Fifty per cent of the

the proxy system: once a management is incumbent, it tends to control most votes through the tendency of shareholders to simply give their proxies to the

REGULATION OF TAKEOVERS

existing managers;

Why regulate?

•

share voting agreements, between blocks of shares; and

The board of directors controls a company. The general meeting elects the directors.

•

the simple fact that_if shareholdings are widely dispersed, in the absence of any strong reasons ot~rwise, voting will be randomly distributed, giving a block

If someone controls the general meeting, they control the company, at least after the

holder the capacity to swing the decision.

first general meeting after acquisition of control.

Whatever the case, one person or ~mpany may wish to buy sufficient shares

Why seek control? Directors' duties presuppose that the company is to be managed to benefit the shareholders as a whole. The identity of the members should

to give them control. This is a 'takeover'. Takeovers pose special problems for

be irrelevant to this. This is misleading for two reasons:

regulators. In particular:

1

Insofar as they collectively determine the interests of the company what the

• At what percentage of shareholding is control achieved? Who should get the premium for control? Imagine one shareholder holds out on

shareholders think is important. Since decisions are taken by majority, the interests

2

of the company are, within the limits of fraud on the minority, determined by the

sale, knowing that without their block o! shares control will be impossible. They

majority.

can then charge a much higher price for their shares, so acquiring the whole premium for control for themselves. Is this fair?

Enforcement of the rights of minorities, including the derivative action, only operates in practice outside very broad margins of acceptable behaviour.

•

Matters can move very quickly in takeovers. Moreover, the sources of information

Effectively, for public companies traded on the securities exchange, it is only when

at the disposal of shareholders may be patchy. Normally many rely on the

they crash.

internalisation of information of the market price. Accordingly, decisions are at risk of being made in an information vacuum. The shareholders do not know

For many businesses, then, there are benefits to be gained by control of other

what the position of the company is and what the prospects are if control

companies and businesses. Often these benefits are encapsulated in the phrase 'strategic alliance'. Car manufacturers often forge these alliances to enable joint projects to go ahead. Information and products are shared with a greater sense of security than may be provided by simple contract. There are many other reasons

•

changes. Directors of the target company will lose their positions. They may have substantial interest in maintaining the status quo. Their reputations may be at

to gain control. For example, the company might have accumulated tax losses, or

stake if the takeover is on the basis that the company has been mismanaged and

it might have a business or distribution network which might be of great use to the

would be much better managed under new controllers. The incumbent directors

acquiring company. The benefits can be assessed in monetary terms and are called the 'premium for control' .

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. t"ive to engage in conduct designed to stop the takeover to save have an 1ncen themselves. For quite some time, Australian regulators have taken the following positions on these issues: • control is achieved somewhere between 15% and 30% Gurisdictions around the

Supporting disclosure Given the importance of control, two extra measl.ir\,s are in place to force disclosure of possible controlling interests. Both are set out in Chapter 6C. They are: •

of the total votes- after 5% has been reached, every variation of more than 1 %

world vary in their threshold); in Australia it is set at 20%. • The premium for control should be shared by all members. • All members of a company in receipt of a takeover bid should be supplied with •

sufficient information to assess the offer's merits. The directors of a company whose members are in receipt of a takeover offer should not, by exercising managerial powers, do anything to frustrate the offer

disclosure of the acquisition of substantial interest when it reaches 5% or more must be disclosed; and

•

disclosure upon demand of the actual beneficial interest (and hence control of voting) of shares when it does not rest with the owner revealed on the share register. Failure to disclose in either circumstance is a strict liability offence. Moreover,

under s 1325A the court may order, inter alia that the shares vest in ASIC.

before the members have had an opportunity to consider it. There is, of course, a vigorous policy debate about these positions. It is often contended that the premium for control properly belongs to the controller, that

LEARNING EXERCISE

Takeovers regulation

Imagine that you are the CEO of a large financial institution. The many employees of the institution each trade millions of shares every day, both on account of the institution and for others under various arrangements. How do you know when the institution becomes a substantial shareholder so that you can disclose it? What sort of knowledge is imputed to the institution?

The scheme of regulation is this: 1 Acquisitions of blocks of shares which might lead to control are signalled by the

Clue: See MeridiarfGlobal Funds Management Asia Ltd v Securities Commission [1995) 2 AC 500.

information provision is costly yet useless (who reads it, let alone understands it?), and that procedures simply impede the proper workings of the market.

•

beneficial ownership and substantial ownership disclosure regimes. 2

All acquisitions above a threshold of 20% of the voting shares in a company are

3

Acquisitions of above 20% are exempted if:

banned by s 606, subject to exceptions. - the target has no more than 50 members; _ it results from the acceptance of an offer under a takeover bid that complies with the extensive procedural requirements; _ it results from the operation of the tracing of voting power (relevant interests) through shareholdings held by a public listed company;

4

-

it results from acquisitions of no more than 3% every six months-a 'creeping

-

takeover'; it results from an acquisition under a disclosure document;

-

it was made under a compromise or arrangement; or

-

it was as a result of the operation of a will.

Special procedures for determining fair and unfair conduct are set up. These involve: - special powers for ASIC to exempt from compliance; and -

a special forum to deal with disputes: the Takeovers Panel.

REGULATION WITHIN SECURITIES MARKETS The business of a securities market is to provide a facility for trading securities. Securities markets regulate trading by requiring listed entities (the companies) to comply with 'listing rules'.

LEARNING EXERCISE

Find the listing rules of the Australian Securities Exchange. What types of matter do they cover? Clue: The website for ASX is at www.asx.com.au.

THINK ABOUT IT The Australian Securities Exchange is a group of entities, ASX Group. ASX Ltd, one of that group, is listed for trading in its securities on itself, the Australian Securities Exchange. Do you find anything strange about this? Is it a case of the snake swallowing its own tail? Are there any regulatory issues which follow? Does the Act provide for these issues? Clue: See ss 798D-E. Are these provisions adequate?

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Of particular importance is the system of continuous disclosure because that

The continuous disclosure regime is considered so important to the operation of

system is designed to ensure the market is fully informed. Also of importance is the

markets that it has additional enforcement measures;. Under ss 67 4-5 contravention

means of enforcement of the listing rules.

of the continuous disclosure rules is a civil penalty offence. Note that compensation is payable under s 1317H if there is a contravention, but only to the entity. Perhaps in

ENFORCEMENT OF LISTING RULES The listing rules have always been viewed as a contract between the Australian Securities Exchange and the listed entity. This is overly limited, because it prevents other entities from enforcing them, nor does it allow ASIC to insist on compliance. Hence s 7938 expands contractual enforceability to include between listed entities. Section 793C allows ASIC, the Australian Securities Exchange and any aggrieved person to apply to the court for an order directing compliance and enforcement.

that case compensation under s 1324 might be available.

ADMINISTRATION ASIC Notable in all of the above is the role of ASIC. In relation to financial markets generally defined, it is the main regulator. In relation to the securities market, it regulates together with the Australian Securities Exchange, roles which both institutions prefer to call 'co-regulation'. The Australian 'gecurities Exchange receives from this the

LEARNING EXERCISE

reflected authority of a government regulator and ASIC the legitimacy of the apparent

What remedies are available to which applicants under these sections? In particular, consider whether compensation is payable.

consent of the regulated. AS/C's roles include: •

licensing of financial service providers;

CONTINUOUS DISCLOSURE

•

advising the minister with regard to approval of new securities markets;

Security prices factor in all publicly known information about the security. To some

•

enforcing market ctGnduct rules;

•

performing its usual policy, educati~ and disclosure functions.

enforcing the continuous disclosure regime; and

arguable extent (see the 'efficient market hypothesis mentioned above') they also factor in information not publicly available. Yet, as was discussed in Chapter 13,

In addition to these, in relation to takeovers (see Chapter 6), ASIC has a broad

Information, financial reports and directors' statements are only required to be released every year, or six months at most. This leaves a considerable time lag in which the market cannot serve its functions because it does not have all the

power to exempt and modify the provisions of the Corporations Act: s 655A. It exercises these powers frequently and many appear in its policy statements. For more about AS/C's role, see Chapter 4, Administration.

information it needs. Accordingly, the Australian Securities Exchange requires there to be continuous disclosure of material information to the market. Listing Rule 3 requires that listed entities disclose all information that a reasonable person would expect would have a material effect on the price of a security as soon as the entity becomes aware of the information. Certain matters are excepted from the rules by Listing Rule 3.1A. They include

THE TAKEOVERS PANEL

Part 10 of the Australian Securities and Investments Commission Act 2001 sets up a body called the Takeovers Panel. It consists of quite a large number of members that are constituted into panels of three for particular matters. The panel's tasks are: To hear appeals from ASIC decisions to exempt or modify in relation to Chapter 6:

confidential information, trade secrets, internal governance material and information

s 656A.

about incomplete proposals or negotiations. There is considerable material explaining these in the notes and examples in the Listing Rules.

•

•

To hear applications from participants in takeovers to declare circumstances unacceptable: s 657A. It does no more than make such a declaration. The circumstances are unacceptable if, no matter the law, the circumstances lead to

THINK ABOUT IT To what extent do the exemptions make the rule mere window dressing?

effects on control or the public interest which are not consonant with the proper working of the securities market; that is, that they are efficient and competitive, informed, provide adequate time for decision-making and equal opportunities for

Clue: Think in terms of a management that does not want to disclose something.

all . These are the policies applicable to Chapter 6 by virtue of s 602. For more about the Takeover Panel's role, see Chapter 4, Administration.

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ASSESSMENT PREPARATION Problems Given that in most corporations law subjects little time can be dedicated to securities regulation, it is highly unlikely that complex problems dealing with this will be set. (Besides, it is often covered right at the end of the subject, just as it is at the end of this book. That makes it a little unfair to ask difficult questions.) The one exception is the prospectus provisions. Deal with problems in that area in this way: 1 Are 'securities' , as defined in s 92, involved? If not, there is no problem. 2 Consider the activities the facts reveal to have taken place. Has there been : a Share hawking? If so, apply s 736 to the facts and conclude as to enforcement. b Advertising as banned bys 734? If so, does it fall within an exception and, if not, consider liability. c Written offers or invitations to subscribe? If so, move on to 3. d An offer for sale of already issued securities which fall within s 707? If so, move on to 3. 3 Does this offer or invitation fall within the exceptions set out in s 708? In particular note the exceptions for small scale offerings (the '20/ 12 rule ') in s 708(1 ), personal offers in s 708(2), and offers to sophisticated investors in s 708(8). 4 What disclosure document is required? See the table in s 705. 5 What standard of disclosure is required if the document is a prospectus? The main difference is between securities of listed entities (go to s 713) and others (go to s 711 ). Do not forget the specific disclosures required under s 711. 6 Has there been a failure to issue, lodge or attach a disclosure document? If so s 727 applies. See the procedure as set out in s 717. 7 Has there been a misstatement in the disclosure document? Establish the misstatement, with particular attention to the requirement in s 728(2) of reasonable grounds for forecasts and other forward-looking statements. Note also the possibility of changes in circumstances and the need for supplementary disclosure documents. Liability for failure to do so is set out in s 730. Note the defence to liability in s 733(4). 8 If there is a misstatement, set out all w ho may be liable on the facts according to the table in s 729 and what they may be liable for. 9 Consider the defences that may apply to each. In particular, note the due diligence defence ins 731 , reasonable reliance ins 733(1), professional advice or advisory function only in s 733(2), and withdrawal of consent in s 733(3) . Problems may also involve some market misbehaviour, but these are easy to spot and to answer by simply applying the relevant section.

Essays Essays in this area are usually descriptive. Many are engineering: asking you to set out procedures to be fol lowed. Essays requiring some sort of argument, in addition to those noted in the text, might be: • critical analysis of the utility of securities markets; • critical analysis of the various requ irements to disclose-note in particular the tension between the desire for a fully informed market and the cost of disclosure; • examination of the desiderata of securities markets as set out above-note particularly the question of the premium for control and the threshold at 20%; • the constitutionality of the Takeovers Panel 's functions ; • the legitimacy, in terms of principle, of ASIC 's or the Takeover Panel 's respective roles.

TABLE OF CASES Bold entries indicate 'Cases to Remember'. Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; 1 All ER Rep 249 249, 250 Adler v ASIC [2003) NSWCA 131; (2002) 46 ACSR 504 175 Airpeak Pty Ltd v Jetstream Ltd (1997) 15 ACLC 715 255 Allen v Gold Reefs of West Africa Ltd [1900) 1 Ch 656 258 Andy Kala Ply Ltd v E J Doherty Pty Ltd (1995) 13 ACLC 1630 256, 258 Ascot Investments Pty Ltd v Harper [1981) 148 CLR 337 97 ASIC v Citigroup Global Markets Australia Pty Limited [2007) FCA 963 263. ASIC v Hellicar [2012) HCA 17 244 ASIC v Rich (2003) 21 ACLC 450 111, 244 Ausbro Forex Pty Ltd v Mare (1986) 4 NSWLR 419 98-9 Australian Fixed Trusts Pty Ltd v Clyde (1959) SR (NSW) 33 261 Australian Pipeline Ltd v Alinta Ltd [2007) FCAFC 55 60 Automatic Self-Cleaning Filter Syndicate v Cunninghame [1906) 2 Ch 34 27 Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2Ch24 195, 197 AWA Ltd v Daniels (1992) 10 ACLC 933; 7 ACSR 759 211, 214, 242, 244 Beatty v E & F Beatty [1938) Ch D 708 256 Biala Ply Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785 262 Boardman v Phipps [196}] 2 AC 46 249, 250 Borg v Northern Rivers Finance Pty Ltd [2004) QSC 29 112 Borland's Trustee v Steel Bros & Co Ltd [1901) 1 Ch 279 90 Boulting v ACTAC [1963) 2 OB 606 250 4 Bowman v Secular Society [1917) AC 406 86 Briggs v James Hardie & Co Ply Ltd (1989) 16 NSWLR 549; 7 ACLC 841 Brunninghausen v Glavanics (1999) 46 NSWLR 538 225 Burland v Earle [1902) AC 83 91

99

C Evans & Sons Ltd v Spritebrand Ltd [1985) 2 All ER 415; [1985) 1 WLR 317 226 Canadian Aero Service v O'Malley (1973) 40 DLR (3d) 251 Carrier Australasia Ltd v Hunt (1939) 61 CLR 53ll' 258 Case of Suttons Hospital (1612) 1O Co Reo 23a 18 Charterbridge Corp Ltd v Lloyds Bank Ltd [1970) Ch 62 247 City of Glasgow Bank v Houldsworth (1880) 5 App Gas 317 163, 176 Colortone Holdings Ltd v Calsil [1965) VR 129 232, 255 Cook v Deeks [1916) 1AC554 251, 262 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72 111, 113 Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916) 2 AC 307 98-9 Daniels v Anderson (1995) 37 NSWLR 438 214, 242, 244 Darby, Re [1911 ) 1 KB 95 97 Darvall v North Sydney Brick and Tile Co Ltd (1987) 16 NSWLR 212 Duomatic Ltd, Re [1969) 2 Ch 365 195

174, 247

E. H. Dey Pty Ltd (in liq) v Dey [1966) VR 464 17 4 Ebrahimi v Westbourne Galleries Ltd [1973) AC 360 150, 151 , 235, 267, 272 Elder v Elder and Watson (1952) SC 49 266 Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 20 256

TABLE OF CASES 296

TABLE OF CASES Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 24, 269 Esanda Finance Corp. Ltd v Peat Marwick Hungeriords (1997) 188 CLR 241

211-12

Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 23, 89, 106, 227 Fowlers Vacola Manufacturing Co Ltd, Re [1966] VR 97 174 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964] 2 QB 480 Furs Ltd v Tomkies (1936) 54 CLR 583 251

111, 113

Gambotto v WCP Ltd (1995) 182 CLR 432 32, 38, 194, 232, 259-60, 278, 289 Gilford Motor Company v Horne [1 933] Ch 935 97 Glavanics v Brunninghausen (1996) 19 ACSR 204; 14 ACLC 345 225, 235 Glencore International AG v Takeovers Panel (2005) 54 ACSR 708 60 Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 249 Harmer, Re [1959] 1 WLR 62 268 Hickman v Kent and Romney Marsh Sheep-Breeders' Association [1 915] 1 Ch 881 231, 256 Hogg v Cramphorn Ltd [1967] Ch 254 262, 270 Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 38, 176, 257 Howard Smith v Ampol Petroleum Ltd [1974] AC 821 248 Huddart, Parker & Co Ply Ltd v Moorehead (1909) 8 CLR 330 27, 43 Hurley v BGH Nominees Pty Ltd (1982) 1 ACLC 387 225-6 Hurley v BGH Nominees Pty Ltd (No 2) (1984) 2 ACLC 497 226 Industrial Equity v Blackburn (1977) 137 CLR 567

89

James Hardie Industries Ltd, Re (2001) 39 ACSR 552

138, 139

Kathleen Investments (Aust.) Ltd v Australian Atomic Energy Commission [1977] HCA 55; (1977) 139 CLR 240 Kaye v Croydon Tramways Co [1898] 1 Ch 358 232 Kingston Cotton Mill Co (No 2), Re [1 896] 2 CB 279 213 Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 247 Kraus v J G Lloyd Pty Ltd [1 965] VR 232 257 Lawrence v Aboriginal Legal Service of Western Australia Inc [2007] WAIR Comm 435 Lee v Lee's Air Farming Ltd [1961] AC 12 89 Loch v John Blackwood Ltd [1 924] AC 783 151, 235, 272 Macaura v Northern Assurance Co Ltd [1925] AC 619 89, 105 MacDougall v Gardiner [1875] 1 Ch D 13 256-7 Macleod v R [2003] HCA 24; (2003) 197 ALR 333 89, 105 Menier v Hooper's Telegraph Works (1874) LR 9 Ch App 350 262 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 115, 291 Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483; 14 ACLC 519 Mills v Mills (1938) 60 CLR 150 29, 24 7, 249 Mousell Bros Ltd v London and North-Western Railway Co [1917] 2 KB 836 115 Mozley v Alston (1847) 1 Ph 790; 41 ER 833 23, 195 Ngurli v Mccann (1953) 90 CLR 425 29, 247, 262 Noel Tedman Holdings Pty Ltd, Re [1967] Qd R 561 149 NSW v Commonwealth (1990) 169 CLR 482 31, 44, 44, 47 NSW v Commonwealth (2006) 229 CLR 1 37, 43, 43, 45 Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315

112

Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 Parke v Daily News Ltd [1962] Ch 927 177

213

42

255

Patrick Stevedores Operations No 2 Pty Ltd v MUA (1998) 195 CLR 1 ; 153 ALR 643; 88 IR 34 98, 144, 178 Pender v Lushington (1877) 6 Ch D 70 256, 258, 262 ~ Percival v Wright (1902] 2 Ch 421 227, 235 Permanent Building Society v Wheeler (1994) ACSR 109 248 Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1 251 Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457 29, 232, 233, 247, 259 Plashett Pastoral Co Pty Ltd, Re (1960) 90 WN (Pt 1) (NSW) 295 91 Pramatha Nath Mullick v Pradyumna Kumar Mullick (1925) LR 52 Ind App 245 71 Precision Data Holdings Ltd v Wills (1991) 173 CLR 167 60 Prest v Petrodel [2013] UKSC 34 100 Queensland Mines Ltd v Hudson (1978) 18 ALR 250, 251 Quin & Axtens Ltd v Salmon [1909] 1 Ch 714 256 Quintex Australia Finance Ltd v Schroeders Australia Ltd (1991) 9 ACLC 1og; 3 ACSR 267 R v Hughes (2000) 202 CLR 535 34, 42, 44 Regal (Hastings) Ltd v Gulliver [1967] 2 AC i'~4n; [1942] 1 All ER 378

249, 250, 251, 262

Salomon v Salomon & Co Ltd [1897] AC 22 24-5, 87, 88, 89, 94, 96, 98, 99, 128, 178 Scottish Co-operative Wholesale Society v Meyer [1959] AC 324 266 Shafron v ASIC [2012] HCA 18 244 Shears v Phosphate Co-op of Australia (1988) 14 ACLR 747 261 Smith & Fawcett, Re [1942] Ch 402 246 Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 98 Sons of Gwalia Ltd v Mafgaretic (2007] HCA 1; 232 ALR 232; 81 ALJR 525 37-8, 163, 163, 176, 194, 231 South Australia v Marcus Clark (1996) ACSR 606 25 1 Southern Foundaries (1926) Ltd v Shirlaw [19~0] AC 701 231, 258 Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068 112 Spies v R (2000) 201 CLR 603 238, 247 Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 112 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 116 Thomas v HW Thomas Ltd (1984) 1 NZLR 686 267 Tivoli Freeholds Ltd, Re [1972] VR 445 151, 234,. 272 Tomanovic v Global Mart9age Equity Corporation Pty Ltd [2011] NSWCA 104 Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 222, 269 Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 115 Trevor v Whitworth (1887) 12 App Cas 409 24 Turquand's Case (1856) 6 E&B 327; 119 ER 886 11 O Tussaud v Tussaud (1890) 44 Ch D 678 82 Ultramares Corporation v Touche (1931) 174 NE 441

211

Wakim, Re; Ex parte McNally (1999) 198 CLR 511 34, 44 Walker v Wimborne (1976) 137 CLR 1 24 7 Wayde v NSW Rugby League Ltd (1985) 3 ACLC 158 267 Webb v Earle (1875) LR 20 Eq 556 91 White v Bristol Aeroplane [1953] Ch 65 239 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 247, 249 Will v United Lanka! Plantations Co Ltd [1914] AC 11 91 Yenidge Tobacco Co Ltd, Re [1916] 2 Ch 426

151, 234, 272

268

89

297

TABLE OF STATUTES 298

TABLE OF STATUTES Commonwealth Acts Interpretation Act 1901 s 2B 55, 104 SS 19-19C 55 s 22(1 )(aa) 190 s 28 105 Administrative Appeals Tribunal Act 1975 63 s 25 63 Administrative Decisions (Judicial Review) Act 1977 s 5 62 s 6 62 s 7 62 ASX Listing Rules 94, 198, 242, 280,291, 292 rule 3 292 rule 3.1 A 292 rule 12.7 189 Australian Industries Preservation Act 1906 166 Australian Securities Commission Act 1989 s 7 52 s 171 59 Australian Securities and Investments Commission Act 2001 6, 52, 61, 149 Pt 2 55 Pt4 53 Pt 7 53 Pt 8 54 Pt9 61 Pt 9.4AA 57 Pt 9.4B 57 Pt 10 293 Pt 14 61 s 1(2) 55 s 8 52, 53 s 9 53 s 9(2) 62 s 12 56 s 12(3) 56 s 12D 163 s 13 206 SS 13-27 56

s 109X 105 111AA-111AX 207 s 111AC 207 s 111AE 287 s 111AM 287 s111J 4 s 113 78 s 114 78, 94 s 115 78 s 118 85 s 119 8, 87, 104 s 123(1) 107 s 124 8, 77, 87, 95 s 124(1) 103 s 124(2) 233 s 125 95, 96 s 125(2) 233 s 126 107 SS 126-30 9 s 127 112 s 127(1) 107 s 127(2) 107 SS 128-9 112 s 128(3) 110 s 129 110, 112 s 129(1) 110 ,. s 129(2) 109, 110 s 129(3) 110, 111 ' 112 s 129(4) 112 s 129(5) 111 ' 112 s 129(6) 111 ' 112 s 129(8) 112 s 130 109 ss131-3 9,114,222 SS 134-41 85 s 135 196 SS 136-41 195 s 139 204 s140 10,204,231, 237,256 s 141 84, 85, 195 s 142 209 s 146 209 s 147 82 SS 147-9 83 s 150 77 s 152 82 s 153 108 SS 153-5 82 s 157 82 s 162 74 s 165(3) 75 SS 168-9 92 s 173 203 s 173(3) 203 SS

Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) s 51 206 Act 2004 36 SS 51-62 56 SS 53-93AA 206 Corporate Law Reform Act s 120 53 1992 32 s 172(2) 62 Corporations Act 1989 31, s 244 64 45,47,57 s 261 52, 59 s 47 42 s 82 31, 47 Business Names Registration Corporations Act 2001 Act 2011 55 4-5, 6, 35, 36, 55, 72, 80,83-4, 86, 127, Business Names 139, 177, 185, 222 Registration (Transitional and Consequential Ch 2C 203 Ch 2E 100, 191, 198, Provisions) Act 2011 55 242, 253 Ch 2L 128 Close Corporations Act Ch 2M Divs 6-8 206 1989 31 Ch 5C 6 Commonwealth Ch 6 59, 60 Authorities and Ch 6C 291 Companies Commission Ch 7 279, 280 Act 1997 59 Pt 1.1A 46 Companies Pt 2A.2 71 (Acquisition of Shares) Pt 2D 191 Act 1980 30 Pt2F.1 150,191, Company Law Review Act 240,270 1998 32 Pt 2F.1A 198 Competition and Consumer Pt 2J .1 171 Act2010 26, 115, 166 Pt 5B 71 s 46 166 Pt 5C 82 s 50 26, 166 Pt5.1 138 s 84(1} 116 Pt 5.2 142 Constitution 26, 40-1 , 46 Pt 5.3A 142 s 51 42 Pt 5.7B 152 s 51(i) 42 Pt 5.8A 26, 33, 100, s 51 (xiii) 42, 44 178, 179, 238, 245 s 51 (xx) 27, 42, 45 Pt 6A 289 s 51 (xxix) 42 Pt 6A.2 260 s 51 (xxxi) 46 Pt 9.4AA 46, 63 s 51 (xxxix) 42 Pt 9.4B 229, 246, s 51 (xxxvii) 45 255, 263 s 75 62 s9 7, 123-4, 159, 189, s 77(iii) 44 194,207, 223, 281 s 109 46 s 29 208 s 45A 74 Corporate Law Economic s 45A(2) 207 Reform Program s 92 286 Act 1999 34 SS 28-38 205 SS 28-39B 56 SS 4Q--8 56

s s s s

175 93, 236, 240 176 92 180 224, 242 180(1) 242, 243, 245 s 180(2) 243 s 180(3) 243 s 181 224, 242, 248, 249 s 181 (1 }(b) 248 s 182 224, 242, 253 SS 182-3 253 s 183 224, 227, 242, 253,262,263 s 184 224, 248, 249 s 184(1 )(c) 248 s 1~(3) 227 s 187 247 s 189 244 s 190 189, 224 s 190(1) 244 s 190(2) 244 s 191 224 SS 191-5 242, 252, 270 s 194 250, 252 s 195 188, 198, 252 s 19~A 196, 197 s 198A(1) 192, 196 s 198A(2) 196 s 198C 191 s198D 189,244 s 198E 196 s 198F 192, 205 s199A 271 s 199B .,271 s 201A 190 s 2018 190 s201D 190 s 201 J 191 s 201K 190 s 202A 191 s 202C 191 s 203D 191 s 206B 191 s 206BA 191 SS 206D-206E 191 s 206F 46, 191 s 208 253 s 209 267 s 231 8, 92 s232 149,150,171 SS 232-4 234 SS 232-5 265-8 s 233 140, 229, 230,272

s 236 233, 271 236-42 228, 240 s 236(3) 240 s237 230,241 s 237(3) 241 s 237(4) 241 s 239 262, 271 s 242 209 s 246B 239 SS 2468-246D 91 s 246B(1) 91 s 246B~) 91' 239 s 246C 92, 239 s 246D 236 s 247A 204, 236 s 247A(3) 204 s 248A 188 s 248B 188 s248C 188 s 248D 189 s 248F 188 s248G 188 s 249(7) 195 s 249B 193 s 249C 193 s 249CA 193 s249D 193 s249F 193 s249G 193 s 249H 193 s 249HA 193 SS 249J-249K 193 s 249L 193, 194 s 2490 193 s 249T 193 SS 249X-250D 194 s 250N 192, 193 s 250R 193 s 250RA 212 s 250T 212 s 251A 189 s 2518 204 s 254A 91 s 254D 94 s 254S 173 s 254T 176 s 254T(1) 175 s 254T(2) 175 s 254U 175 ss 254X-254Y 209 s 254Y 172 s 256B 173 s 256B(2) 173 s 256C 173 s 2578 171, 172 s 257B(2) 171 SS

299

300

TABLE OF STATUTES TABLE OF STATUTES

s 257C 172 s 2570 172 s 257E 172 s 257F 172 s 257G 172 s 257H 172 s 259A 171 SS 259A-2590 171 s 2598 100 s 259C 100 s 260A 100 s 260C 174, 175 s 2600(2) 100 s 2838H 124 s 285 206 s 286 207 s290(1) 192,205 s 290(2) 205 s 292 208 s 292(2) 207 s 295 208 s 296 208 s 297 208 s 298(3) 205 SS 299-300A 208 s 300A 191 s 301 211 s 307 205, 212 s308 205,212 s310 205,212 s 311 205, 212, 213 s 312 205, 212 s313 205,212 SS 314-22 209 s 323EH 63 s 324 211 ss 324CA-32400 212 SS 327-9 211 s 344 207 SS 345A-3490 21 0 s 418 142 s 418A 142 s 419 142 SS 435A-436C 143 s 440A 143 s 4408 143 s 4400 143 s 440F 143 s 440J 143 s 441A 143 s 441C 143 s 441EA 143 ss 449A-4490 143 s 459A 148 s 459C 148 SS 459E-459N 148

s 459P 148 s 4590 148 s 461 230, 272 s461(1) 118, 149, 271 s 461 (1 )(a) 149 s 461 (1 )(c) 149 s 461(1)(d) 149 s 461 (1 )(e) 149, 150, 272 s 461(1)(~ 149, 150, 272 s 461(1)(g) 150, 272 s 461(1)(h) 149, 150 s 461(1)(k) 149, 150, 234, 235,273 s 461(~ 234 s 461(g) 234 s 461 (k) 234, 272 s 462 148, 273 s 464 148 s 467(4) 150, 271, 272, 273 s 468 152 s4718 152 s471C 152 s 473 153 s 477 153 s491 151 s 494 151 s 495 151 s 497 148 s 506 153 SS 513A-5130 159 SS 514-29 73 s 532(4) 151 s 553(1) 163 s 555 153 s 556 153, 162 s 556(1) 157 s 556(1)(e) 177-8 178 s 556(1 s 556(1 )(g) 178 s 556(1 )(h) 178 s 561 157, 162 SS 561-63AA 162 s 562 162 s 563 162 s 563A 162, 163, 265 .. s 568 152 s 588E 207 s 588FA 159 ss 588FA-588FJ 157 s 588FA(3) 161 s 588F8 159 SS 588F8-588FF 100

lm

s 588FC 160 s 588FO 160 s 588F0(2) 160 s 588FOA 160 s 588FE 156 s 588FE(2) 160 s 588FE(3) 160 s 588FE(4) 161 s 588FE(5) 160, 161 s 588FE(6) 160, 161 s 588FE(6A) 160, 161 s 588FF 161 s 588FJ 152, 157 s 588FL 157 s 588FM 157 s 588FP 152, 157 s 588FP(4) 157 s 588G 137, 143, 152, 169, 176, 224, 242, 245 ss 588G-588U 142 s 588G(1 A) 245 s 588H 245 SS 588J-588Q 246 s 588M 238 SS 588R-588U 246 s 588V 179 SS 588V-588X 100, 169 s 598 179 SS 601-2 4 ss 601AA-601AH 86 ss 601AA-601AC 153 ss 601AD-601AF 154 s 601AG 154, 179 s 601AH 154, 179 s 601CX 105 s 601E8 207 s 602 293 s 606 290 s 607A 236 s 655A 293 s 656A 293 s 657A 60, 293 s 657A(5) 60 s 657EA 60 ss 659A-659C 60 s 659AA 60 s 6598 60 s 670A 264 SS 674-75 293 s 705 287 s 706 286 s 707 286 s 708 286 s 709 286, 287

710-16 287 s710(1) 288 s 711 287 s712 287 s 713(2) 288 s 714 287 s 715 287 s 718 287 s 719 287 s 728 236 SS 728-29 264, 286 s 729 214, 265, 288 SS 731-33 286 s 734 286 s 736 286 s 7610 281 s 761G 281 SS 762A-765A 280 s 763A 280 s 766A 281 ss 766A-766E 281 s 791A 283 s 7938 292 s 793C 292 ,. s 795A 283 s 7958 283 SS 7980-798E 291 s911A(1) 281 s 911A(2)(b) 281 s 912A(a) 281 ss 913A-913C 281 s917A 281 ss 917A(3)-917F 281 s 923 281 SS 941 A-943F 283 ss 944A-947E 283 SS 960-962S 282 s 9618 282 SS 1011A-1016F 283 s 10208 284 s 1041A 284 s 10418 284 s 1041C 284 s 10410 284 s 1041E 284 s 1041F 284 s 1041G 284 s 1041H 163, 236, 264 s 10411 214 ss 1041L-1041S 285 s 1042A 263 ss 1042A-1042H 262 SS 1042A-1 0430 227,262 SS

s 1042C 263 s 10420 263 ~ ' s 1043 263 SS 1043A-1 0430 284 s 1043A(1) 262 s 1043A(2) 262 s 1043C 262 SS 10430-1043E 263 ss 1043F-1043G 263 s 1043L 262, 263 SS 1044A-10448 285 s 1070A 79, 90 SS 1071E-1071F 94 SS 1073A-1075A 94 SS 1101 J-1200A 4 SS 1274-1274A 204 s 16.74(7A) 85 SS 1278-80 211 s 1282 153 s 1283 153 s 1306 92 s 1311 262 SS 1311-17 230 s 1313 230 s 13178 63 s1317C 63 s 13170 63 s 13)7E 207, 229, 262 s 1317H 170, 229, 237, 293 s 1317HA 262 s 1317S 270, 271 s 1318 270, 271 s 1322 236, 237' 264 s 1322(~b) 236 s 1323 140 s 1324 169, 170, 176, 229, 235, 237, 238, 239, 254-6, 293 s 1324(1A) 169 s 1324(1 8) 255 s 1324(10) 255 s 1325A 291 s 1335 106 s 13378 62 s 1337H 62 s 1408 4 Corporations Amendment (Short Selling) Act 2008 38 Corporations Amendment (Sons of Gwalia) Act 2010 38

Corporations (Commonwealth Authorities and Officers) Regulations 1990 reg 3(1 )(d) 42 Corporations Legislation Amendment Act 2003 36 Corporations Regulations 2001 6 Sch 4 74 Sclri 208 Sch 6 Pt 2 82 Corporations Review (Fees) Act 2003 210 Criminal Code Act 1995 32 s 12.3 116, 117 s12.4 115 Federal Court of Australia Act 1976 Pt IVA 230 Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Act 2009 38 Financial Services Reform Act2001 36,59, 279 Financial Services Reform (Consequential Amendments) Act 2002 36 First Corporate Law Simplification Act 1995 32 Freedom of Information Act 1982 63 Insurance Contracts Act 1984 55 Judiciary Act 1903 s 30 62 Life Insurance Act 1995 55 Managed Investments Act 1998 33 Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 55 National Companies and Securities Commission Act 1979 31

301

302

303

TABLE OF STATUTES

National Consumer Credit Protection Act 2oog 55 Personal Property Securities Act200g 3g, 122, 123, 12g-34, 141, 158 Ch 4 130 s 10 134 s 12 134 s 55(2) 158 s 55(3) 158 s 55(4) 158 s 57 158 s 61 158 SS 62- 5 158 s 150 134 s 172 134 Privacy Act 1g88 63 Public Governance, Performance and Accountability Act 2013 60 Public Service Act 1g8g 53 Retirement Savings Accounts Act 1gg7 55 Securities Commission Act 1989 31 Superannuation Industry (Supervision) Act 1993 55 Superannuation (Resolution of Complaints) Act 1g93 55 Trade Practices Act 1g74 26 s 52 163, 236, 284 Workplace Relations Act 1gg5 42 Workplace Relations Amendment (Work Choices) Act 2005 37, 43

New South Wales Corporations (Commonwealth Powers) Act 2001 Corporations (New South Wales) Act 1ggo 31, 45

45

Queensland

Western Australia

Corporations (Commonwealth Powers) Act 2001 45 Corporations (Queensland) Act 1ggo 31, 45 Defamation Act 2005 106

Corporations (Commonwealth Powers) Act 2001 45 Corporations (Western Australia) Act 1g90 31 Defamation Act 2005 106

South Australia

United Kingdom

Corporations (Commonwealth Powers) Act 200 1 45 Corporations (South Australia) Act 1990 31, 45 Defamation Act 2005 106

Tasmania Corporations (Commonwealth Powers) Act 200 1 45 Corporations (Tasmania) Act 1990 31, 45 Defamation Act 2005 106

Victoria Associations Incorporation Reform Act 2012 77 Pt 2 Div 2 77 Companies Act 1g58 29 Companies (Mining) Act 1871 25 Corporations (Commonwealth Powers) Act 2001 45 Corporations (Victoria) Act 1ggo 31 , 45 Defamation Act 2005 106 Partnership Act 1g58 78 s 5 76 s 6 76 Supreme Court Act 1g86 Pt 4A 230

Bubble Act 1719 19-20, 21, 22 Chartered Companies Act 1837 22 Companies Act 1862 24, 25 Companies Clauses Consolidation Act 1845 23 Joint Stock Companies Act 1844 22, 23, 24 sXXV 87 Joint Stock Companies Act 1856 24 Joint Stock Companies Act 1862 87 Limited Liability Act 1855 23, 24, 201 Statute of Monopolies 1623 18 Trading Companies Act 1834 22

New Zealand Companies Act 1gg3

United States Dodds-Frank Act Sarbanes-Oxley Act 35, 36

38

g, 1O

INDEX Bold entries indicate the standard names of topics in corporations law subjects (see note on page xiv). abuse of power general meeting , by 228 policy 220, 221, 224 undifferentiated decision making 224 accessories, corporations as 118 accounting standards 34, 51 , 175, 201, 205, 208, 213 Accounting Standards Board 61 actus reus 11 4 Administrative Appeals Tribunals 63-4 administrative bodies 51-61 administrative review 62-4 administrators, 142-3, 238 agency authority and 10g, 11 O lifting of corporate veil 98-9 agency theory of the firij.'30 alternative directors 190 annual general meetings 192 anti-trust law 168 articles of a company 83-4, 195 ASIC see Australian Securities and Investments Commission asset backing 173 associational model of a company 186 ASX see Australian Stock Exchange auditing, purpose of 187, 202-3, 210 • auditing contract 211 Auditing and Assurance Standards Board 61 auditors breach of duties 213-14 conflicts of interest 35, 36 duties25,211-12 false and misleading statements by 214 inspection of financial records 205 liability 214 prospectus preparation 214 qualifications 211 removal and resignation 211 Australian Business Number (ABN) 81 Australian Company Number (ACN) 81 Australian Prudential Regulation Authority (APRA) 55 Australian Registered Body Number (ARBN) 82

•

Australian Registered Scheme Number (ARSN) 82 Australian Securities Commission (ASC) 31, 34, 47 Australian Securities and Investments Commission (ASIC) accountability 58-9 ALERT system 170 annual reviews of companies 2og-1 O committees 53 enforcement 57 establishment 34, 47, 52 finances 54 functions 6, 51, 54- 6, 2g3 hearings 206 incorporation process 75 information gathering 56, 64, 205 inspection of company books 205 investigations 206 merits review 63-4 ministerial direction 56 objectives 55 political responsibility 58-9 powers 46, 57 , 293 regulatory triangle 58 relief from compliance 57, 293 review of decisions 62, 63-4 structure and operation 52-3 Australian Stock Exchange (ASX) Listing Rules compliance 291 continuous disclosure 2g2-3 enforcement 292 matters referred to general meetings 198 regulation of security markets 291-3 authority agency doctrine 109, 110 conferral 108-9 constructive notice 109 exceeding of 107-13 implied authority 110 indoor management rule 110, 112 liability for unauthorised contracts 10g mediation of interests 109

...

304

INDEX

INDEX

authority cont. ostensible authority 111 statutory assumptions 109, 112 to contract 108 Turquand's Case, rule in 109, 11 O balance sheet 208 banks, incorporation 42, 44 boards of directors chairpersons, authority of 110-11 controls over 221 function and roles 187, 220-1 meetings 188-9 minutes of meetings 204 powers, qualifications on 197-8 body corporate 8-10, 71 bona fide for the benefit of the company 246-8 borrowing see debt business forms 77-81 business judgment rule 219, 220, 224, 242, 243 business numbers 81-2 capital maintenance see maintenance of share capital capital reductions 170, 172-4 capital repayment 173 care and diligence, directors duty 242-4 case law, role in corporate law 9-11 cash flow statement 208 certificate of registration 85-6 charges 39, 130 charities 76-7 chartered corporations 17-19, 23, 25, 71 CHESS (Clearing House Electronic Subregister System) 92, 94 Chief Executive Officers (CEOs) 187 Chinese walls 263 chose in action 123-4 civil actions 57 civil penalties insider trading 263 provisions 57, 230 regime introduced 32 statutory duties, breach of 237 class actions 230-1 class meetings 192 class rights, alteration of 236, 239 classes of shares 90-2 Clearing House Electronic Subregister System (CHESS) 92, 94

CLERP see Corporate Law Economic Reform Program common seal 107 companies abuse of form 97, 167 associational model 186 business forms 77-81 capacities and powers 8-9, 104 capital raising power 72, 73-4, 80 changes in type 74-5 common seal 107 constitution see constitutions of companies contracting see contracts by companies costs of formation and operation 78 creation 8, 71 decision-making structure see corporate governance definition 71 deregistration see deregistration dissolution see winding up duration 78, 86, 146 forms 72-5 incorporation by registration 71 , 75-81, 85-6 liability of members 72, 73, 79 limits to powers 95-6 members see members of companies; membership of companies naming 82-3 property ownership 104-5 qualities 103 registration ignored see corporate veil, piercing of remedies 237 separate legal entity 77, 87-9, 95, 96 size 72, 73-4, 78, 168 suing and being sued 105-6, 237 taxation 77 transferability of interest 79 Companies Auditors and Liquidators Disciplinary Board 61, 62, 63 companies limited by guarantee 73, 77, 79 companies limited by shares and guarantee 73 company names 82-3 numbers 81-2 officers 223, 224 secretaries 111 , 187 tax rate 77

compensation civil penalties, contravention of 229, 237 employee entitlements 178 injury, priority of 178, 179 insider trading 263 misleading or deceptive statements 163, 265 rights and duties of companies 104 and tort law 114 competition law 26 compliance company constitution, with 229 legislation, with 57, 229-30 relief from 57 compromise, by creditors 137 confidentiality 79 conflicts of interest auditors 35, 36 directors 249-54 financial advisors 38 promoters 222 Constitution (Commonwealth) corporations power~5. 42-5, 43 cross-vesting of powers 44, 45 division of powers 40-1 separation of powers 46 constitutional corporations 42, 43, 45 constitutions of companies alteration 232, 258 breach 231 compliance with 229 conflicts of interest, directors 252 division of power 196-8 enforcement 237, 256-7 extrinsic contracts 225, 231, 257-8 inspection 204 interests of company 247 reasons for 84 constitutive documents 83-5 constructive notice 109 continuous disclosure 292-3 contract law 107 contracts by companies authority, exceeding of 107-13 constructive notice 109 methods of making 107 preregistration contracts 113-14 statutory assumptions 109, 112 Turquand's Case, rule in 109, 110 unauthorised contracts, liability for 109 control, implications of debt or equity 125

convertible debentures/ notes 127 118 corporate collapses 35 corporate culture 11 7 corporate democracy 35 corporate governance boards see boards of directors co-determination system 187 companies registered prior to 1 July 1998 83-4 companies registereo ~i~e 1 July 1998 84-5 constitutions see constitutions of companies constitutive documents 83-5 controls on decision making 218-19, 220-7 and corporations law 188 decision-making structure 3, 23, 80, 187-8 directors see directors division of power 196-8 internal rules 10, 195 meaning 186 replaceable rules 84, 195-6 unanimous consent 195 undifferentiated decision making 224 corporate groups disclosure 206-7 and interests of company 247-8 lifting of corporate veil 100 Corporate Law Economic Reform Program (CLERP) 32, 34, 36, 201 Corporate Law Simplification Program (CLS) 32, 33 corporate social responsibility creditor protection 169-76 employee protection 177-8 inquiries into 36, 37 investor protection 177 meaning 167-8 size of companies 168 tort victims 178-9 corporate veil, piercing of agency cases 98-9 enemy alien companies 99 separate legal entity ignored 96 sham companies 97 statutory direction 100 unforeseen disadvantage 97-8 corp~punishment

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305

306

INDEX

INDEX

corporations as accessories 11 8 creation 3, 70, 71 forms 72 historical development 15-25 as legal entities 70 legal personality 18, 26, 71 liability 114-18 methods of incorporation 72 nature and operation 3 registration as company 71 Corporations Act 2001 (Cth) damages for breach 235, 237, 238 buying and selling shares 5 injunctions to prevent breach 254-5 omissions 7-9 purpose 9 substantive provisions 4-5 technical provisions 5 corporations aggregate 72 corporations law administrative bodies 52-61 administrative functions 51 in Australia 25, 26, 27, 28-34 boundaries of 6-7 Commonwealth vs state powers 27, 29, 30-2, 35, 37, 41 and contract law 107 and corporate governance 188 cross-vesting arrangements 31, 34, 44 key principles 22-3 national scheme 31-4, 45-8 nineteenth-century developments 21-5 origins and evolution 15-22 policies 219-20 referral of state powers 35, 44, 45-6 reform 32-4, 35 role of case law 9-11 simplification 32 state legislation 27 twentieth century developments 25-34 see also Corporations Act 2001 (Cth) Corporations Law scheme 31, 33, 47 Corporations and Markets Advisory Committee (CAMAC) 6, 37, 61 corporations sole 72 Corpus Juris Civilis 15, 16 creative accounting 202-3 creditors compromise 137, 138 debt recovery options 136-7

definition 122 interests 247 moratorium on rights 137, 138, 143 protection 169-71 remedies 238 winding up, effect on 152 criminal law direct liability 115 objectives 114 vicarious liability 115 criminal liability insider trading 263 mental element 32 criminal prosecution 57, 230 damages breach of Corporations Act 235, 237, 238 injunction 255 misleading and deceptive conduct37, 163 misrepresentation inducing contract to purchase shares 170, 176 deadlocks 151, 234, 272 debenture stock 127 debenture trust deeds 128 debentures concept 123-4, 127 register 203 saleability 278-9 transferability 128 debt choosing to borrow 124-6 compared to equity 124 discharge of 127 inability to repay 138-9 priority see priority of debts subordinated debt 128 types of borrowing 126-30 unfair loans 160 debt recovery by creditors liquidation 136, 144 options 136-7 receivership 136, 139-42 schemes of arrangement 136, 138-9 voluntary administration 136, 142-3 workouts 136, 138 debtors, companies as 122-3, 12 6 decision-making see corporate governance defamation 106 demutualisation 7 4

deregistration difficulties 86 insurance claims 154 long tail problem 86, 147, 154, 179 process 153-4 derivative actions criteria 230, 233, 241 effect of 241 introduction 106 nature of 233, 240 who may apply 233, 241 direct liability 115 directors appointment 191 authority 110, 111 definition 7, 185, 189 eligibility criteria 190-1 inspection of books and records 205 liability 100 misconduct and winding up 151 powers 192, 196 removal 191 remuneration 35, 19't' rights 192 types 189-90 winding up, effect on 152 directors' duties breaches, legal proceedings regarding 198, 227-8, 233, 235, 237 care and diligence 242-5 case law 10, 28-9, 221 conflicts of interest 249-54 development 28-9 directly owed 225-6 disclosure of interests 250-2 equitable and common law duties; breaches 237 good faith 246-8 insolvent trading, prevention of 245-6 proper purpose 248-9 statutory duties 10, 25, 221, 224, 242 directors' reports 208-9 disclosing entities 207 disclosure annual review 209-1 O audit see auditing, purpose of continuous disclosure 36 corporate groups 206-7 creative accounting 202-3 financial services 282-3 history 201

inspection 203-5 ~atory disclosure 26, 201, 206-1 o non-corporate entities 207 preparation of statements and reports 208-9 presentation of reports 209 purposes 202 record keeping 207 reporting entities, categories 207 requirements for companies 79 dishonest conduct 284,.,?Jl~ dispute resolution, takeover bids 60 dissolution of companies 86 dividends 175-6

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employees duties 224 entitlements protection 178 interests 26, 33, 177-8 priority on winding up 162, 177 share schemes 171, 172 winding up, impact of 152 enforcement ASIC's role 57-8 civil penalties 229 constitutions of companies 229, 237 criminal prosecution 230 directors duties 227-8 legislation 229-30 mechanisms 229-30 private enforcement of rights 229 procedure 230-1 • see also legal proceedings; remedies Enron collapse 35, 36, 129 equal access share buy-backs 171, 172 equity-debt distinction 124 exculpation 269-71 executive directors 190 executives 187 expressio unius est exclusio alterius 255 extract of particulars 209 extraordinary general meetings 192 extrinsic contracts 225, 231, 257-8 false or misleading statements 284, 285, 288 false trading 284 Federal Court 62 Federal Magistrates Court 62 fiduciary duty 24 financial advisors 38, 282

307

308

INDEX

INDEX

financial markets licensing 283 prohibited practices 283-4 regulation 280, 283-8 financial products 280-1 misleading or deceptive information or conduct236, 264 Product Disclosure Statement 283 financial records 207 disclosure requirements 207 inspection of 204-5 Financial Reporting Council Accounting Standards Board 61 financial reports auditing see auditing directors reports 208-9 disclosure requirements 208 presentation 209 financial services definition 281 disclosure requirements 282-3 financial advice 38, 282 licensing 281-2 misleading or deceptive information or conduct236, 264 Product Disclosure Statement 283 regulation 279, 280-3 Statement of Advice 283 Financial Services Guide 283 financial statements 208 fines 118 floating charges 26, 130-2 forgery 110 forgiveness 269-71 Foss v Harbottle, rule in 227 fraud and authority 11 0 protection against 24 and winding up 151, 272 fraud on the minority 258-62 fundraising company powers 72, 73-4, 80 equity versus debt 125-6 misleading or deceptive information or conduct236, 264 Gambotto principle 32, 194, 232, 239, 258-61 gearing 125, 126 General Employee Entitlements and Redundancy Scheme (GEERS) 33

general meetings abuses of power 220, 228 convening 193 decision making 87, 221, 258-62 fraud on the minority 258-62 Internal Management Rule 228 minutes 204 notice 193 policies 221 powers 197-8 quorum 193 ratification, exculpation and forgiveness 269-71 regulation 192-4 resolutions, suing for 233 types 192 voting 194 Global Financial Crisis 35, 38-9, 282 good faith 219, 246-8, 249 governing directors 190 Heads of Agreement documents 76 High Court 62 HIH collapse 35 holding companies 98, 159, 169 illegal transactions 284 implied authority 11 O incorporated associations 77 incorporation banks 42, 44 effect of 87-9 limits to 95-100 methods 72 incorporation by registration 71, 72, 75-81 , 87 individuals, definition 104 indoor management rule 110, 112 industrial relations law 43, 45 infringement notices 57 injunctions 229, 235, 238, 254-5 insider trading 226-7, 262-3, 284 insolvent trading creditor protection 169 creditors suing to recover debt 238 prevention, directors duty 137, 142, 245-6 transactions 160 inspection of company records ASIC; by 205 auditors, by 205

constitution of company 203 court-ordered inspection 236 directors; by 205 members of company, by 204 members of public, by 203-4 minutes of meetings 204 registers 203 internal management rule 228, 255, 264 internal rules of companies 10 Interstate Corporate Affairs Commission 30 investor protection 177 irregular procedures 264 James Hardie controversy 35-6, 37, 80, 86, 99, 138, 139, 179 joint stock companies 17-18, 19-21 joint ventures 76 legal proceedings appearance 105 civil actions 57 defamation 106 defences 106 derivative actions sa. derivative actions funding 231 procedural problems for corporations 105-6 service of documents 105 substantive problems for corporations 106 validity 237 who can sue for what 231-8 lenders 123 liability auditors 212-14 corporations 114-18 direct liability 115 directors 100 limited see limited liability members of companies 72, 73, 79 rules of attribution 115-17 vicarious liability 115 limited liability 21, 22, 23-4, 73, 79 limited liability companies 73 liquidation 136, 144 liquidators 153, 238 listed registered schemes 207 litigation see legal proceedings litigation funding 231 loans see debt long tail problem 86, 147, 179

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maintenance of share capital A~T system 170 capital reductions 170, 172-4 creditor protection 169-71 dividends after winding up 176 dividends from profits 175-6 financial assistance for share purchases 170, 174-5 misrepresentation inducing contract, no remedy in damages for 170, 176 principle 24, 38, 169,., rules 170 self-acquisitions 170, 171-2 majority rule 220, 221, 224 managed investments 33 managers 187 managing directors 111, 190 market, concept of 278-9 market conditions, and gearing ratio 126 market manipulation 19, 284 market power, use of 168 market processes, as protection 220 market rigging 284 members of companies class rights, alteration of 236, 239 definition 8, 185 interests 247 meetings see general meetings personal rights, breach 232 remedies 231-6 rights , changes in 236 voting as a property right 219 winding up, effect of 152 membership of companies acquiring 93-4 by subsequent dealing 93-4 by subsequent issue 93 on formation 93 classes of shares 90-2 dual nature of 194 nature of shares 90 register of members 92-3 as relationship between persons 89-90 memorandum 83, 195 mensrea 114, 116, 117 merits review 63-4 minimum holding share buy-backs 171 , 172 ministers 55-6 misconduct 151, 272

309

310

INDEX

INDEX

misleading or deceptive conduct 236, 264-5, 284, 285 monopolies 17, 18, 168 moratorium, creditors rights 137, 138, 143 mortgage debentures 124 mortgages 130 mutuals 74 National Companies and Securities Commission (NCSC) 31, 47-8 neo-liberalism 27, 34 no liability companies 25, 73 nominee directors 18g-90 non-corporate entities 207 non-profit organisations 76--7 offer information statements 287 officers of company 223, 224 Ombudsman 63 on-market buy-backs 171, 172 one-person companies 168, 196 oppression court discretion 268 locked in 267, 272 locked out 267, 272 meaning 266 members remedies 234, 265-9 reasonable expectations 267-8, 272 who can apply for relief 266 ordinary shares 91 organic theory, state of mind 116 ostensible authority 111 Parliamentary Joint Committee on Corporations and Financial Services 37, 59, 61 partnership analogy 267 partnerships decision-making structure 80 definition 76 development of 21, 22, 23 duration 78 finance options 80 formation costs 78 liability 79 size 78 termination 267 transferability of interests 79 penalty notices 230 perfection, security interests 130, 133 perjury 118 perpetuities, rule against 78

personal actions 230, 232 Personal Property Securities Register 130, 133--4 piercing corporate veil see corporate veil preference shares 91 preregistration contracts 113-14 principle of subsidiarity 41 priority of debts concept 132, 158 deferred claims 162-3 employees 162 litigation over 156 order of payments 162 priority payments 162 rules 158 secured creditors 162 tort victims 178-9 unenforceable security interests 157 unsecured creditors 162 private enforcement of rights 229 probity, loss of faith in 234 profile statements 287 profit and loss statement 208 promoters 222, 269 Proper Plaintiff Rule 227 property ownership 104-5 proprietary companies 25, 75, 78, 196, 207 prospectuses disclosure documents 287-8 false or misleading information, liability for 288 mandatory disclosure 285--8 offer information statements 287 profile statements 287 regulatory net 286 short form prospectuses 287 public companies 74, 196, 207 punishment, of corporations 118 Rae report 30 ratification 269-71 receivers 140--2 receivership 136, 139-42 reconstruction, and debt repayment 137 redemption (debts) 127 reductions 173 register of debentures 203 register of members correction 93, 236, 240 importance 92 inspection 92, 203

register of option holders 203 Registered Australian Bodies 77 registered schemes 207 Registrar of Companies 22, 46, 47 registration certificate 85 companies 71 concept54 corporations other than companies 71 process 75 reasons for 75-81 validity 85-6 regulation 6, 26 regulatory theory 57, 58 relation-back day 159 remedies administrators 238 companies 237 liquidators 238 members 231-6 replaceable rules 84, 195-6 reporting entities 207 representative actions 2~ rumour mongering 284 schemes of arrangement 136, 138--9 SEATS (Securities Exchange Automated Trading System) 94 Securities Exchange Automated Trading System (SEATS) 94 securities law 26, 29-30 securities markets continuous disclosure 292-3 regulation 291-3 security interests concept 122, 129-30 nature of 277 perfection 130, 133, 158 priority 132, 133, 134, 158 registration of 123, 132-4 unenforceable security interests 157 selective share buy-backs 171 , 172 self-incrimination, privilege against 106 Senate Estimates Committee 59 separate legal entity 70, 77, 87-9 sham companies 97, 98 share buy-backs 171-2 share hawking 286 share registers 92-3 share transfers

exchange system 93 re~ctions on 94-5 shareholoers, and membership of company 90 shares allotting 93 classes 90-2 definition 90 financial assistance to purchase 170, 174-5 issuing 93, 124 nature of 90 ordinary shares 91 preference shares 91 saleability 278-9 shelf companies 75 short form prospectuses 287 short selling 38, 284 size of companies business form, choice of 78 one-person companies 168 power and control 168 proprietary companies 74 public companies 74 and type of company 72, 73-4 Small Business Guide 4 sole traders 76, 77, 78, 79, 80 solvency 36 South Sea Bubble 19-21 , 168 state of mind 116 stock exchanges 18, 19 subsidiary companies 98 substratum, failure of 151, 234, 272 Supreme Courts 62

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takeovers disclosure 291 dispute resolution 60 misleading or deceptive information or conduct236,264 regulation, need for 288--90 regulation scheme 290 Takeovers Panel 59-60, 62, 293 taxation 77, 125, 129 tort law auditors' duties 211-12 and compensation 114 and long tail problem 86, 14 7, 154, 179 priority for victims 178-9 vicarious liability 115 trading and financial corporations 42, 44

311

312

INDEX

trading trusts 76 trustees, liability 79 trusts for charities 77 decision-making structure 80 definition 76 duration 78 finance options 80 Turquand's Case, rule in 109, 110

ultra vires doctrine 95-6, 233 unanimous consent 195 unconscionable dealing 106 unfair loans 160 unfair preference 159 unfairness court discretion 268 meaning 266-7 members remedies 234, 265-9 reasonable expectations 267-8 who can apply for relief 266 unincorporat ed associ ations 19,

22, 23, 76 unit trusts 76 unlimited liability companies 23, 73 unsecured notes 124 usury 126 validation orders 264 vicarious liability 115 voidable transactions court orders 161 insolvent transactions 160 periods and requirements 160-1 related entities 159 relation-back day 159 terms defined 158-60 transactions to defeat creditors 160 uncommercial transactions 159 unfair loans 160 unfair preference 159

volunt ary administration 136, 142-3 voting, as property right 219 Wallis report 32 waterfront dispute 33 w inding up breakdown of trust 151 , 234 company defunct 149 company, effect on 152-3 court-ordered 148-51 , 271 creditors, effect on 152 creditors voluntary winding up 148-9 deadlocks 151, 272 deregistration; see a/so deregistration directors, effect on 152 effect 152-3 employees, effect on 152 fraud or misconduct 151 , 272 ' frozen out 267, 272 initiating 148-51 in insolvency 148-9 just and equitable grounds 150-1, 235,

267, 272 locked in 267, 272 members, effect on 152 members interests not followed by management 149, 150 members remedy 271-2 members voluntary winding up 151 motivation for 149-50 orders for 118 process 14 7-8 in public interest 149 reasons for 86, 147, 149 substratum failure 151, 234, 272 voidable transactions see voidable transactions workout s 136, 138

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