The purpose of this research is to investigate the Corporations Act 2004 (Cth) in relation to the protection it provides for investors of non-profit corporations. Through research of the Trade Practices Act, current case law and the Australian Investment and Securities Commission provide an overview of what has changed in the regulations for corporations in Australia in 2004 thus far.
Australian Supreme Court sated in 2003 that: "the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations." Australia has recently implemented new regulations which, enhance and harmonize corporation law.
The alignment of the regulations with elements that are known to be those of a competent and responsible board of directors in view of strategy determination, performance review, risk management, internal control regulation and reporting to shareholders and stake holders took effect in June 2004. The hoped for achievements are the elimination of the potential for future conflicts of interest, promotion of financial disclosure as well as the strengthening of those minority investors.
Elements Preceding the Change in Law:
The Australia Securities and Investment Commission's (ASIC) media release on January 6, 2004, concerning surveillance that related to debenture prospectuses stated that they (the ASIC) had
Taken action on 14 debenture prospectuses with the issue of 5 final stop orders, 11 interim stop orders and the extension of the exposure period on one prospectus."
According to the report this was done in hopes of raising a sum of one billion.
ASIC Executive Director, Mr. Malcolm Rodgers stated that:
In the current low interest rate environment, ASIC wants to ensure that debenture issuers provide adequate disclosure to enable investors to make an informed investment decision. In particular, ASIC is concerned that debenture issuers make explicit disclosure on the risk associated with their offers and that they do not mislead investors as to the risk return profile on their products."
The report stated that identified in the debenture prospectuses were the following significant defects:
Failure to meet compliance with the Corporations Act. (The Act) requirements for a debenture trust deed and trustee.
Lack of disclosure on bad and doubtful debts provision and experience.
Inadequate disclosure in lending policies, loan approval process and borrowing limitations.
Inadequate financial information.
Inadequate disclosure regarding the use of funds to be raised, especially where the issue was not subject to a minimum subscription condition.
Incorrectly describing the debentures.
An investor alert to "Fixed Interest products" was recently issue by ASIC with Mr. Rodgers stating that:
Not all debenture offerings are the same. While the general rule that a higher return means a higher risk remains true, investors need to read the prospectus carefully to determine if the risks involved in the particular offering are suitable for them."
The day just preceding this release ASIC released information that they had provided an overview of the action taken since July 1, 2003 for the protection of investors from fundraising documents involving equity securities that were defective. Stated by ASIC was the fact that they had
Issued 17 interim stop orders and six final stop orders involving equity prospectuses seeking to raise a total of $465 million." list of these may be viewed from the ASIC web site at (www.asic.gov.)
Executive Director for ASIC stated that:
ASICs' role is to take action against fundraising documents that do not contain sufficient information about the investment to enable investors to make an informed decision about whether to purchased the company's securities'...It is not ASICs' role to evaluate the merits of an investment described in a prospectus, or the likelihood of the company's future success."
The following were listed by ASIC detailing the defects that were discovered:
Lack of disclosure regarding the rights and liabilities attaching to different types of equities.
Deficiencies in the independent expert's report attached to the prospectus.
The failure to disclose the impact of material events on the application of funds raised pursuant to the equity prospectus.
The failure of issuers to include the assumptions, upon which financial forecasts in the equity prospectuses, were based.
Choosing an inappropriate fund raising document for the purpose.
Corporate Law Economic Reform Program (CLERP 9)
Australia has had the CLERP 9 or Corporate Law Economic Reform Program (Audit Corporate Disclosure) Act in force since July of this year. The provisions contained within the CLERP 9 are applicable to financial periods or year that commenced on or after the first day of July 2004. Substantially strengthening disclosure requirements for companies in Australia that are listed the key requirements of this Act are as follows:
Disclosure of director's and executives remuneration packages must be in a detailed Remuneration Report, which is one section of the annual reports. This Remuneration Report will dependent on the approval of the shareholder advisory at the company AGM.
Specifically chosen executives and directors will be named individually as well as listing each of their components of remuneration in disclosure. The components are to be listed under heading classified as either:
There will be a requirement for the company to perform a review of operations as well as a review of condition. The review of condition is generally referred to as MD&A, or Management Discussion and Analysis. Necessary information for the shareholders assessment (guidelines are for what the usual requirement generally is expected to be) of the operation, the financial position, and the business strategy of the entity will all be required as well as the company prospects for the future years in terms of financial elements.
A written declaration to the board will be made by the CEO and CFO stating that the company is in accordance in terms of accounting standards. The declaration will also contain the statement that the record presents a fair and true view and will confirm that financial records are maintained in adherence with the Corporation Act.
The listing of non-audit services, their costs and explanation of why audit independence is not compromised will be in the directors' report.
The ASIC, Australian Securities and Investment Commission has been, under the legislation, granted additional powers with auditors obliged to make report of breaches of attempts to influence audits or in the event of breach of their independence in the audits. Shareholders have been granted additional voice while the penalizing of breaches has been added to the rights of the ASIC under the disclosure category. The shareholder will also receive executive level pay.
ASIC and companies will have at their disposal a Financial Reporting Panel for resolution of disputes in relation to the financial report accounting. Further granted to ASIC are right to issue notices of infringement as well as fines to those companies that interfere with the continuous disclosure regime and may seek penalty or fines against individuals or company officers that are found to be involved in the interference.
The Corporate Law Economic Reform Program Act provides for regulations to be made under the Corporations Act 2004, the Corporations (Fees) Act 2001 and the Australian Securities and Investments Commission Act 2001. These regulations are relating to amendments inclusive of:
Disclosure requirements in annual director's reports: There are now additional requirements.
Registered company auditors must have practical experience and educational requirements.
Authorized audit companies should be registered along with condition of registration
Company auditors: conditions on their registration
Appointments of proxies at meetings of members of companies should be authenticated.
Schedule One makes the following Provisions in Item One:
Regulation 2M.3.03 details (Act's 300A): Division 1 of Part 2M.3 of the Regulations addresses the annual director report, of a listed company, contents. The Corporations Act 2001, Section 300A makes provision for specific items of the remuneration of directors and certain executives to be disclosed in the listed company section of the annual directors report. This is referred to as the "remuneration report," with the purpose of these regulations being the prescription of details the remuneration report is inclusive of. Information for the preceding year and years following should be separated [sub-regulations 3M.2.03(2).]
The remuneration report requires the same level of disclosure as that required by the relevant paragraphs of the AASB 1046. In summary, paragraph 2M.303(1)- of the Regulations, by cross-referencing paragraph 7.1 of the AASB 1046 will require disclosure in the remuneration report of:
Primary benefits: "This is inclusive of salary, fees, commissions, profit sharing and bonuses. Also included are bonuses other than equity compensation, earned by an individual in the reporting period which includes all forms of profit sharing, incentive schemes, performance by pay plans and share-based payment compensation other than equity compensation.
A long-term incentive plan means any plan or arrangement providing benefits, other than equity compensation, as an incentive for performance to occur over a period longer than one reporting period. Non-monetary benefits include items where an individual has been in receipt of the benefit during the reporting period, such as discounts on goods (in excess of that available to trade customers, share holders or…