Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation

Published by LAWLEX on behalf of
Centre for Corporate Law and Securities Regulation,
Faculty of Law, The University of Melbourne
(http://cclsr.law.unimelb.edu.au)

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The Australian Stock Exchange (http://www.asx.com.au)

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CONTENTS

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) Corporations Amendment (Repayment Of Directors' Bonuses) Bill 2002
(B) Australian Law Reform Commission calls for more transparent, consistent and 'principled' regulation
(C) SEC review of Fortune 500 annual reports
(D) Business Council issues discussion paper on executive salaries
(E) Corporate Governance International guidelines on remuneration
(F) Thirty-one percent more securities class action suits filed in US in 2002 than in 2001
(G) Higgs report recommendation on senior independent director criticised
(H) Accounting for change - survey looks at how private companies are reacting to new corporate governance standards
(I) Superannuation trustees to seek higher standards of corporate behaviour
(J) FSA clarifies standards for investment research and new securities issues
(K) Takeovers Panel appointments
(L) Singapore Monetary Authority invites public comment on proposed corporate governance framework
(M) Compulsory due diligence in takeovers?
(N) Draft ICGN statement on institutional shareholder responsibilities

2. RECENT ASIC DEVELOPMENTS
(A) ASIC releases report into mortgage brokers
(B) ASIC reaches agreement with Brad Keeling in One.Tel proceedings
(C) Fundraising documents have common failures
(D) ASIC files proceedings against Southcorp

3. RECENT ASX DEVELOPMENTS
(A) Australian float activity resilient despite fall in market

4. RECENT TAKEOVERS PANEL MATTERS
(A) Panel declines application in relation to Austar Communications

5. RECENT CORPORATE LAW DECISIONS
(A) Bank's failure to lodge a charge
(B) Direct lodgement of proxy forms with the company required?
(C) Creditors' schemes of arrangement with international dimensions
(D) Liquidator's clawback outside limitation period
(E) What is required to rebut the presumption of insolvency in a winding up action under section 459P of the Corporations Act?
(F) Oppressive conduct amounting to breach of trust where no financial detriment has been suffered
(G) Variation of orders conferred on shareholders in Great Central Mines takeover
(H) One.Tel - extending the role of the chairman?
(I) What factors should be taken into account when assessing the quantum of a pecuniary penalty under the Trade Practices Act?
(J) Changing the rules: Making orders under section 447A of the Corporations Act
(K) Exception to the rule that powers of company officers are suspended during winding up
(L) Real estate club constitutes managed investment scheme

6. RECENT CORPORATE LAW JOURNAL ARTICLES

7. CONTRIBUTIONS

8. MEMBERSHIP AND SIGN-OFF

9. DISCLAIMER

(A) CORPORATIONS AMENDMENT (REPAYMENT OF DIRECTORS' BONUSES) BILL 2002

On 19 March 2002, the report of the Economics Legislation Committee on the Corporations Amendment (Repayment of Directors' Bonuses) Bill 2002 was tabled in Federal Parliament.

The Bill proposes to amend the Corporations Act 2001 to permit liquidators to reclaim unreasonable director-related payments and transfers of property made to directors by their companies up to four years prior to liquidation. The main object of the Bill as stated in the Explanatory Memorandum is to assist in the recovery of funds, assets and other property to companies in liquidation where payments or transfers of property to directors is unreasonable.

Unreasonable director-related transactions are defined as transactions made to a recipient in circumstances where a reasonable person in the company's circumstances would not have entered into the transaction. In determining the reasonableness of a transaction factors such as the benefits and detriments to the company and the benefits to the recipient arising as a result of entering the transaction and any other relevant matters are considered.

The origin of the Bill lies in the collapse of the telecommunications carrier One.Tel in May 2001. Shortly after One.Tel was placed into administration it was reported that the company's co-managing directors, Mr Keeling and Mr Rich, had each received approximately $7 million in bonuses from the company in a year in which it had incurred substantial losses. In response to public concerns about the circumstances surrounding the collapse of One.Tel and the payment of bonuses to its directors, the Prime Minister announced on 4 June 2001 that:

"The Commonwealth intends to amend the law so that in future, where bonuses are paid in the circumstances where those bonuses were paid to the bosses of One.Tel, that money will be refundable and can be used to meet the lawful and legitimate entitlements of workers and also the other creditors of the company."

Other inquiries have brought to light inappropriate transactions between companies and their directors.

The Economics Legislation Committee made three recommendations in its report:

Recommendation 1

The Committee recommends that the Government monitor the application of the legislation with a view to assessing whether appropriate anti-avoidance provisions should be included in the legislation.

Recommendation 2

The Committee recommends that the Bill apply to senior executives who are not directors as well as directors.

Recommendation 3

The Committee reports to the Senate that it has considered that provisions of the Corporations Amendment (Repayment of Directors' Bonuses) Bill 2002 and recommends that the Bill proceed.

(B) AUSTRALIAN LAW REFORM COMMISSION CALLS FOR MORE TRANSPARENT, CONSISTENT AND 'PRINCIPLED' REGULATION

Australian federal regulators run a growing variety of civil and administrative penalty schemes that lack any real common structure, foundation or operational theory, the Australian Law Reform Commission (ALRC) has found after a study of the laws and practices underpinning the work of regulators including the Australian Securities and Investments Commission.

The ALRC's 1043-page report, Principled Regulation: Federal Civil & Administrative Penalties in Australia (ALRC 95), tabled on 19 March 2003 by Attorney-General Daryl Williams QC, completes the major three-year inquiry. The ALRC has identified areas in which a clearer structure and improved laws and procedures would promote greater transparency, consistency and fairness.

Civil penalties are an alternative to fines, prison sentences and other criminal punishments, and must be imposed by the courts. Administrative penalties arise automatically by operation of the law-such as additional tax for late payment, or loss of benefits for breach of social security requirements.

ALRC President, Professor David Weisbrot, pointed out that, "In the criminal law, we have developed and tested rules and safeguards over a long period of time, such as the presumption of innocence, the burden of proof, the right to silence, and double jeopardy. We also have pretty clear rules about how the police and the DPP are meant to behave.

"However, in the regulatory area, we are increasingly likely to use civil and administrative penalties, because they are quicker and easier to enforce. Each regulatory system has developed its own rules and culture. We understand that operating context is important, and we certainly don't advocate a 'one-size-fits-all' approach to cover all of corporate regulation, trade practices, social security, environmental protection, tax, customs, social security, and so on. However, our report does highlight some basic issues that apply across the board," said Professor Weisbrot.

Commissioner Ian Davis said, "A key recommendation of the report is that Parliament should enact a 'Regulatory Contraventions Statute'. This would parallel the Commonwealth Criminal Code and provide a set of principles and standards relating to civil and administrative penalties, as well as to the processes that apply to their imposition.

"We also need to sharpen the legislative distinction between criminal offences and civil and administrative penalties, especially where there the regulator has a choice of which one to use for basically the same behaviour. This choice has many consequences in terms of the nature and cost of proceedings, the safeguards that may apply, the penalties available, and stigma faced upon conviction," said Mr Davis.

Other key recommendations include:

(a) Providing individuals facing a possible civil penalty with a 'privilege against self-exposure' (similar to the privilege against self-incrimination in criminal matters);

(b) Utilising a greater variety of penalties-not just monetary ones-especially in relation to corporations, so that the courts can tailor penalties to the particular circumstances and severity of the breach, and encourage compliance in future;

(c) Improving the transparency of decision-making processes by federal regulators, who should develop and publish guidelines about, eg, how they will use adverse publicity, and how they will exercise a range of discretions (such as leniency policies).

The report is available on the ALRC website at http://www.alrc.gov.au

(C) SEC REVIEW OF FORTUNE 500 ANNUAL REPORTS

A United States Securities and Exchange Commission (SEC) review of annual reports of Fortune 500 companies has found a number of problems. The SEC reviewed the 2002 annual reports filed by the Fortune 500, and issued written comments on its concerns to 350 firms. The issue that raised the most concern for the SEC was management discussion and analysis (MD&A), with the regulators wanting corporate executives to do away with "boiler plate" material to provide more analysis of finances. The SEC also said disclosure of year-to-year changes received "insufficient attention" in annual reports. Among the other problem areas identified by the SEC were: pension accounting, for which the SEC called for more clarity on assumptions and estimates; poor investments; poor disclosure of critical accounting policies; and the use of pro forma accounting.

In relation to lack of adequate disclosure of critical accounting policies, the following are the areas where additional disclosure was required:

- revenue recognition;
- restructuring charges;
- impairments of long-lived assets, investments and goodwill;
- depreciation and amortization expenses;
- income tax liabilities;
- retirement and post retirement liabilities;
- pension income and expense;
- environmental liabilities;
- repurchase obligations under repurchase commitments;
- stock based compensation;
- insurance loss reserves; and
- inventory reserves and allowance for doubtful accounts.

In relation to MD&A, the SEC stated that it issued more comments on the MD&A discussions of the Fortune 500 companies than on any other topic. Item 303 of Regulation S-K requires a company to discuss its financial condition, changes in financial condition and results of operations. A company must include in this section a discussion of its liquidity, capital resources and results of operations. In particular, forward looking information is required where there are known trends, uncertainties or other factors enumerated in the rules that will result in, or that are reasonably likely to result in, a material impact on the company's liquidity, capital resources, revenues and results of operations, including income from continuing operations. A company must focus on known material events and uncertainties that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.

The SEC issued a significant number of comments generally seeking greater analysis of the company's financial condition and results of operations. Comments addressed situations where companies simply recited financial statement information without analysis or presented boilerplate analyses that did not provide any insight into the companies' past performance or business prospects as understood by management. In this vein, the SEC sought information regarding the existence of known trends, uncertainties or other factors that required disclosure that was not included. The SEC issued comments discouraging companies from providing rote calculations of percentage changes of financial statement items and boilerplate explanations of immaterial changes to these figures, encouraging them to include instead, a detailed analysis of material year-to-year changes and trends. In addition, the SEC issued comments addressing key areas, in particular the related topics of liquidity, cash flow and capital resources, which were given insufficient attention. The SEC stated that it will continue to focus on this section of disclosure documents in its review efforts and encourage all companies to present useful and meaningful disclosure of their financial condition and results of operations.

More details of the SEC review are available on the SEC website at http://www.sec.gov/divisions/corpfin/fortune500rep.htm

(D) BUSINESS COUNCIL ISSUES DISCUSSSION PAPER ON EXECTIVE SALARIES

On 18 March 2003, the Business Council of Australia published a Discussion Paper on Executive Salaries. In the Paper, the Council proposes several practices for companies to consider. They are:

(1) Ensuring all listed companies have clearly established and disclosed policies governing the remuneration of their most senior executives, to enable shareholders to understand better how remuneration is determined;

(2) Ensuring companies should have remuneration committees that set and apply those policies in their recommendations to the Board on executive appointment and remuneration;

(3) Short and long-term executive bonuses being tied transparently to pre-agreed performance measures;

(4) No hedging of equity based bonuses, which undermines the performance incentive of these bonuses;

(5) For new contracts, only bonuses for which performance and vesting criteria have already been met, should be paid, together with contracted superannuation and regulated payments, such as holiday pay;

(6) Boards to specifically ensure that the terms and conditions of executive contracts are tightly and clearly framed, particularly in relation to termination payouts which must be minimised wherever performance is poor; and

(7) Boards to work actively with management to ensure an ethical, high-performance culture exists within the company.

The Discussion Paper is available on the website of the Business Council at http://www.bca.com.au/content.asp

(E) CORPORATE GOVERNANCE INTERNATIONAL GUIDELINES ON REMUNERATION

On 17 March 2003, Corporate Governance International (CGI) published Guidelines for institutional investors and listed companies on remuneration.

(1) Introduction

The Guidelines are published by CGI for the attention of investment managers, superannuation trustees and other institutions, all of whom are in charge of the retirement and investment funds of millions of Australians invested in major Australian listed companies. Since 1994, CGI has analysed the governance of the major Australian listed companies for institutional subscribers to CGI's Proxy Advisory Service. These guidelines reflect CGI's experience in reviewing remuneration aspects of the governance of those companies. They are also intended to provide practical assistance to directors of companies who are answerable to investors for the performance of the company and its overall standing among its peers and in the community. The Australian Council of Superannuation Investors (ACSI) and the Australian Shareholders'Association (ASA) have already indicated that they support these guidelines. Other Australian investor bodies will now be invited to add their support.

(2) Guidelines for institutions

Guideline 1 - Resources
Investment managers should increase the resources applied to the analysis of companies' remuneration policies and practices in general and to the analysis of the remuneration of executive and non-executive directors in particular, including resolutions put to shareholders through a vote at an annual or other general meeting.

Guideline 2 - Communication with directors
Investment managers should communicate constructively with the appropriate independent member(s) of the board on the company's remuneration policies and practices in general and those that apply to executive and non-executive directors in particular, including resolutions put to shareholders through a vote at an annual or other general meeting.

Guideline 3 - Voting
Investment managers should vote on all remuneration issues at all Australian company meetings where they have the voting authority and responsibility to do so.

Guideline 4 - Proxy voting policy and procedures
Investment managers should have a written policy on the exercise of proxy votes on
remuneration issues at Australian company meetings and formal internal procedures to ensure that that policy is consistently applied. The policy and procedures, including any changes thereto, should be communicated to their clients.

Guideline 5 - Reporting to clients
Investment managers should, as part of the regular reporting process to each client, report to the client in respect of investments owned by the client for the period since the last such report on communications with companies on material remuneration issues as set out in Guideline 2 and on how they exercised proxy votes (including abstentions) on material remuneration issues as recommended under Guideline 3.

Guideline 6 - Monitoring by clients
Institutional clients of investment managers should communicate constructively with their investment managers on each manager's supervision of companies' remuneration policies and practices under these Guidelines. That should include monitoring from time to time the efficacy of the manager's communications with companies and exercise of proxy votes on material remuneration issues under Guidelines 2 and 3, the appropriateness of the manager's proxy voting policy and procedures under Guideline 4 and the standard of the manager's reporting to the client under Guideline 5.

(3) Guidelines for listed companies

Guideline 1 - Transparency
Transparency is the fundamental requirement in the setting and reporting of remuneration policies and practices.

Guideline 2 - Remuneration policies and practices
The board of a listed company should adopt, document, disclose and review on a regular basis a set of policies for the remuneration of company employees in general and of directors and senior executives in particular and a set of practices to give reliable effect to those policies. The policies and practices should be tailored to and appropriate for the business of the company and the industry sector in which it operates. They should deal, inter alia, with all of the matters listed in the commentary on this Guideline.

Guideline 3 - Remuneration committee
The board of a listed company should appoint a remuneration committee with the composition, role and resources as described in the commentary on this Guideline.

Guideline 4 - Annual remuneration report
The remuneration committee should prepare, and the board of a listed company should approve with or without amendment, an annual remuneration report to shareholders for inclusion in the annual report. The remuneration report should provide public shareholders with all the information they may reasonably require to enable them to understand and assess the company's policies and practices referred to in Guideline 2 above. The remuneration report should address, inter alia, all of the matters listed in the commentary on this Guideline.

Guideline 5 - Equity participation or incentive schemes generally
The board of a listed company should ensure that equity participation or incentive schemes encourage recipients to retain and grow their shareholdings and contain limits on dilution of public shareholders in accordance with the commentary on this Guideline.

Guideline 6 - Equity awards to key executives
The board of a listed company should ensure that the award of shares, options or other equity securities to key executives is subject to the achievement of "stretching" financial performance through an extended period. The proposed award should be fully explained and all material information in connection with the award should be disclosed, in accordance with the commentary on this Guideline.

Guideline 7 - Recognition of costs
For each reporting period, companies should disclose both the value of remuneration of directors, executives and employees and the amount that has been recognised as a cost for the reporting period. That should include the value and cost of awards of shares, options or other equity securities, interest-free or interest-discounted loans and any taxes (eg fringe benefits tax) that may apply as the result of the operation of remuneration schemes.

Guideline 8 - Remuneration of non-executive directors
The remuneration of a non-executive director of a listed company ("NED"):
8.1 should be tailored to the role and work that the NED performs in the listed company
8.2 should fully reward the NED during the year for the role and work that the NED performs during the year
8.3 should not include a retirement benefit when the NED ceases to be a director (although, in companies with existing retirement benefit schemes, accrued benefits may be preserved, but the accrual of benefits in respect of future service by existing or future NED's should be replaced by remuneration structured in accordance with 8.1 and 8.2 above)
8.4 should not include options to acquire shares in the company (the only possible exception being in the case of a company in start-up mode, but in that case any NED options should be on terms materially different from the terms of any executive or employee incentives, should not entitle the NED to acquire shares at a discount to the market price of the shares at the time of option grant and should require the option and/or exercise price to be paid in cash in full not later than the NED's acquisition of the resulting shares and out of the NED's own pocket)
8.5 should include participation by the NED in a share acquisition scheme for NEDs run by the company (whereby at least 25% of the NED's annual remuneration is applied by way of salary sacrifice to fund the acquisition of fully paid shares in the company to be held for the benefit of the NED while the NED remains a director of the company and to be released to the NED when the NED ceases to be a director of the company or on the expiry of ten years from the acquisition date if earlier)
8.6 should be paid to the NED by the company (and not by a third party) and should be received and retained by the NED in his or her own right
8.7 should be fully explained and disclosed in the annual remuneration report in accordance with Guideline 4
8.8 in the case of requests to shareholders to increase the cap on NEDs' fees, should be fully explained and disclosed in the explanatory notes accompanying the notice of meeting in accordance with the commentary on this Guideline.

Copies of the Guidelines and commentary on the Guidelines are available from CGI: tel (02) 9231 1700; fax (02) 9231 1708.

(F) THIRTY-ONE PERCENT MORE SECURITIES CLASS ACTION SUITS FILED IN US IN 2002 THAN IN 2001

On 13 March 2003, the Securities Class Action Clearinghouse at Stanford University published research showing that Federal securities class action litigation suits in the United States increased by 31 percent between 2001 and 2002, rising from 171 to 224 filings. The companies sued in 2002 also lost more than $1.9 trillion in market capitalisation during the class periods, a 24 percent increase over the comparable figure for companies sued in 2001.

These comparisons do not include the 312 "IPO Allocation" securities class action filings in 2001 alleging fraud in the IPO underwriting process, or the more recent "Analyst" class actions naming securities analysts and investment banks as defendants, which are categorised separately by the Clearinghouse.

The Clearinghouse found that the suits filed in 2002 cut a broad swath across industries and hit hard at communication companies (including Internet-related companies), consumer products companies, and financial services firms. However, suits against technology companies had a lower impact on total filings and market capitalisation losses than they did in 2000 and 2001. The shift in litigation activity to the broader market is also evidenced by the incidence of the stock exchange on which the 2002 defendants list their shares: in 2001, almost 60 percent of the companies sued were listed on the Nasdaq; in 2002, fewer than 40 percent of the companies sued were listed on the Nasdaq. A total of 3.0 percent of companies listed on the national stock exchanges were defendants in securities class action lawsuits filed in 2002 compared to 2.3 percent in 2001.

The Clearinghouse also found that 85 percent of the filings charge defendants with 10b-5 violations (i.e. affirmative fraud or failures to disclose material information). More than 80 percent of the complaints cite misrepresentations in financial documents. Almost 60 percent allege GAAP violations, and half of those contain allegations related to revenue recognition. Insider trading is alleged in 26 percent of the complaints.

The full text of the report can be found on the Clearinghouse site at http://securities.stanford.edu

(G) HIGGS REPORT RECOMMENDATION ON SENIOR INDEPENDENT DIRECTOR CRITICISED

Derek Higgs' proposals for an enhanced role for the Senior Independent Director would undermine the role of company chairmen and their ability to run an effective unified Board, according to a Confederation of British Industry (CBI) poll of FTSE 100 Chairmen published on 10 March 2003. Director-General Digby Jones said the findings backed anecdotal member comment and other evidence from across the business community.

Over sixty chairmen completed the formal survey while many others sent letters expressing their concerns. Eighty-two percent agreed or strongly agreed that their role as chairman would be undermined if the extra powers for a senior non-executive director proposed by Higgs were enforced.

Chairmen were also unconvinced that the recommendation for an independent non-executive to chair the Nominations Committee would strengthen corporate governance. Eighty-seven percent disagreed or strongly disagreed with this proposal.

Commenting on these findings Digby Jones said: "Business backs the broad approach proposed by the Higgs Report but chairmen have got to be allowed to run an effective unified Board. My greatest fear is that the law of unintended consequences might stifle the creativity and drive that characterises so much of what is good about UK business.

"The Senior Independent Director should not open up a separate and potentially divisive channel of communication with shareholders or have responsibility for reporting back to the other non-executives on an exclusive basis.

"Primary Board responsibility for communication with shareholders must rest with the Chairman. Only in exceptional circumstances, when normal channels of communication have broken down, should the Senior Independent be available privately for shareholders to voice concerns. This is how the governance of modern major companies already operates.

"Disallowing the chairman from Chairmanship of the Nominations Committee is also seen as running counter to the drive to maintain a strong and unified Board. This ban should not apply. Attempts by chairmen to recruit other than on the basis of merit, ability and independence should be resisted and seen to be resisted by the rest of the Board. Business clearly has to prove that the days of mutual back-scratching have ended."

Views were more evenly spread on the other two issues put to company chairmen: would the proposal for non-executive directors to meet once a year in the absence of the chairmen be useful for good corporate governance; and would disallowing a Chief Executive Officer to become chairman of the same company lead to better Board performance.

Fifty-six percent disagreed or strongly disagreed that the meeting proposal would be good for corporate governance while fifty percent disagreed or strongly disagreed that disallowing CEOs to become chairman would lead to better Board performance.

Digby Jones added: "Views in these areas are less polarised. However, the main danger is that the whole code is too prescriptive. The wording needs to be more flexible to guard against regulatory creep in the area of 'comply or explain'. Derek Higgs' good intentions could become institutionalised over a period of time so the only imprint left on the mind of the over zealous regulator or fund manager is 'comply'."

Further details of the CBI survey are available on its website at http://www.cbi.org.uk

(H) ACCOUNTING FOR CHANGE - SURVEY LOOKS AT HOW PRIVATE COMPANIES ARE REACTING TO NEW CORPORATE GOVERNANCE STANDARDS

New accounting regulations have placed a spotlight on public companies, but how is the rest of corporate America reacting? In a survey of privately held businesses published on 6 March 2003, 58 percent of chief financial officers (CFOs) said they are implementing new practices in response to these regulations. Steps they reported taking include changing their firms' accounting procedures and enhancing their organizations' internal audit function.

The survey was developed by Robert Half Management Resources. It was conducted by an independent research firm and includes responses from 1,400 CFOs from a stratified random sample of US private companies with more than 20 employees.

CFOs were asked, "In light of new corporate governance standards, what steps has your company taken or does it plan to take to ensure greater control of accounting processes?" Among the 58 percent who cited a specific action, their responses* were:

Review or change current accounting procedure - 44%
Create or expand internal audit function - 36%
Hire an independent firm for consulting work - 23%
Restructure executive compensation plans - 8%
Total = 100%
(*multiple answers were allowed)
Thirty-seven percent of the 1,400 CFOs polled indicated they are not taking any of the above steps, and 5 percent do not know what steps, if any, they would take.

(I) SUPERANNUATION TRUSTEES TO SEEK HIGHER STANDARDS OF CORPORATE BEHAVIOUR

On 12 March 2003, the Australian Council of Superannuation Investors (ACSI) launched its corporate governance guideline intended to apply to all Australian listed companies.

These guidelines were developed by number of superannuation funds who, as members of ACSI, represent over $45 billion in investments. The guidelines provide a framework for superannuation trustees who seek high standards of corporate governance from corporations, their directors, executives and staff.

The ACSI guidelines seek to promote high standards of corporate governance behaviour required by superannuation fund trustees. They represent a set of practices that corporations should follow when conducting their business and reinforce the accountability of corporate boards and management to shareholders.

The underpinning themes of the guidelines include principles of independence, disclosure and performance related remuneration outcomes.

The guidelines deal with the following matters:

(1) Responsibilities of the Board
(2) Board composition
(3) Indemnity and liability of directors
(4) Rights of directors
(5) Board accountability to shareholders
(6) Evaluation of Board performance
(7) Board meetings
(8) Disclosure of Board information
(9) Chairperson
(10) Board Committees
(11) Chief Executive Officer
(12) Remuneration
(13) Shareholders' rights and proxy voting
(14) Continuous disclosure
(15) Corporate financial integrity
(16) Relationship with the auditor

The guidelines are available on the ACSI website at http://www.acsi.org.au

(J) FSA CLARIFIES STANDARDS FOR INVESTMENT RESEARCH AND NEW SECURITIES ISSUES

The UK Financial Services Authority (FSA) has announced plans to clarify the standards which it expects investment banks to meet when publishing investment research and in the new issues of securities. Investment banks must properly manage conflicts of interests if there is to be confidence in the objectivity of investment research and the integrity of the capital raising process.

Howard Davies, Chairman of the FSA, said:

"In London we have been spared the worst of the abusive practices seen on Wall Street. But we have found evidence of systematic bias in analyst recommendations, and of bad management of conflicts of interest. The proposals we are publishing will strengthen the regulatory regime and promote higher standards. They will enhance transparency and outlaw the most blatant abuses of trust. They go with the grain of the US changes, but do not replicate them in every detail. We remain convinced that a regime based on principles, and senior management responsibility, is the right approach."

The key principle in the paper concerning conflicts of interest in investment research is that regulated firms should have systems and controls in place to ensure their own interests do not improperly influence the content of research reports. For example:

- it would be unacceptable for analysts to be involved either in pitches for new investment banking mandates or in the active marketing of new issues; and
- firms should avoid reward structures that create direct incentives for analysts to act in ways that would compromise their judgment.

There would also be specific limitations on personal dealings by analysts both in the securities of the companies they cover and of other companies in the same sector. These would include:

- quiet periods: a quiet period will be introduced for new issues of securities;
- specific disclosures such as a clear and unambiguous explanation of any ratings or recommendations; and
- a three year historical chart showing price movements against recommendations.

Further conflicts of interest also arise in relation to new issue business and the FSA has set forth new proposals for systems and controls to cover allocation policy:

- firms should provide the issuer with relevant information about the proposed allocation policy for the issue before accepting a mandate;
- allocation should be controlled by the senior finance personnel, and not by staff servicing investment clients; and
- any allocation to a private client who is a senior executive of a listed company (or potential or existing investment banking customer) should be confirmed by the audit committee of the company.

The FSA is also concerned that many retail investors are unaware of the potential bias behind headline recommendations. It will be working with other organisations to increase retail investors understanding of investment research.
The consultation paper is available on the FSA website at http://www.fsa.gov.uk

(K) TAKEOVERS PANEL APPOINTMENTS

The Parliamentary Secretary to the Australian Treasurer, Senator Ian Campbell, has announced the re-appointment of 13 members of the Takeovers Panel.

Ms Robyn Ahern, Ms Elizabeth Alexander AM, Mr Denis Byrne, Mr Peter Cameron, Mr Brett Heading, Ms Louise McBride, Ms Marian Micalizzi, Professor Ian Ramsay, Ms Jennifer Seabrook, Mr Jeremy Schultz, Mr Leslie Taylor, Mr Michael Tilley and Ms Karen Wood are to be re-appointed until 7 March 2006.

"These members have already made an outstanding contribution to the work of the Panel and I would like to thank them for their continued commitment," Senator Campbell said.

He said the reappointment process, and the intention of a number of senior members to resign at the end of their appointment period, had given the Government an opportunity to reassess the optimal size of the Panel.

"A key issue to consider in this regard is whether members have the opportunity to sit on a sufficient number of proceedings to maintain their familiarity with takeovers provisions and Panel processes," Senator Campbell said.

"Consequently, a number of people have not been reappointed at this time. I wish to convey the Government's appreciation of their valuable work."

The Takeovers Panel, formerly the Corporations and Securities Panel, was established in 1991 to streamline takeover processes. It is acknowledged as one of the major successes of the Government's Corporate Law Economic Reform Program.

(L) SINGAPORE MONETARY AUTHORITY INVITES PUBLIC COMMENT ON PROPOSED CORPORATE GOVERNANCE FRAMEWORK

The Monetary Authority of Singapore (MAS) has issued a consultation paper on a set of proposed guidelines and regulations to enhance the existing corporate governance framework for locally incorporated banks and direct insurers. The paper consists of two parts: (i) a set of guidelines on the principles of corporate governance and disclosure, and (ii) regulations on corporate governance.

The proposed guidelines are built upon the Code of Corporate Governance, issued by the Corporate Governance Committee in March 2001. The Corporate Governance Committee was set up by the Ministry of Finance, MAS and the Attorney-General's Chambers to promote good corporate governance practices. To safeguard the interests of depositors and policyholders, MAS has added or enhanced certain principles in the guidelines.

The key points to note in the regulations are:

(a) The proposed regulations define clearly what is meant by an independent director and set out the requirements for the composition of the board of directors and board committees, such as the Nominating Committee, Remuneration Committee and Audit Committee. The Banking Regulations also incorporate the separation rules for the board and management as announced by MAS on 21 June 2000.

(b) To help ensure appropriate oversight of the decision-making process, the proposed regulations also require the separation of the roles of Chairman and Chief Executive Officer (CEO)/Principal Officer and outline how this rule is to be applied. Affected financial institutions are not required to revoke any appointment of its Chairman or CEO made before these Regulations come into effect or any subsequent reappointment of such Chairman or CEO in the same office.

The corporate governance principles are:

Principle 1: Every Institution should be headed by an effective Board.

Principle 2: There should be a strong and independent element on the Board, which is able to exercise objective judgment on corporate affairs independently from management and substantial shareholders.

Principle 3: The Board should set and enforce clear lines of responsibility and accountability throughout the Institution.

Principle 4: There should be a formal and transparent process for the appointment of new directors to the Board.

Principle 5: There should be a formal assessment of the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board.

Principle 6: In order to fulfill their responsibilities, Board members should be provided with complete, adequate and timely information prior to Board meetings and on an on-going basis by the management.

Principle 7: There should be a formal and transparent procedure for fixing the remuneration packages of individual directors No director should be involved in deciding his own remuneration.

Principle 8: The level and composition of remuneration should be appropriate to attract, retain and motivate the directors to perform their roles and carry out their responsibilities.

Principle 9: The Board should establish an Audit Committee with a set of written terms of reference that clearly sets out its authority and duties.

Principle 10: The Board should ensure that there is an adequate risk management system and sound internal controls.

Principle 11: The Board should ensure that an internal audit function that is independent of the activities audited is established.

Principle 12: The Board should ensure that management formulates policies to ensure dealings with the public, the Institution's policyholders and claimants, depositors and other customers are conducted fairly, responsibly and professionally.

Principle 13: The Board should ensure that related party transactions with the Institution are made on an arm's length basis.

The consultation paper is available on the MAS website at http://www.mas.gov.sg -> Singapore's Financial Sector -> Reports and Consultation Papers

(M) COMPULSORY DUE DILIGENCE IN TAKEOVERS?
(By Will Moncrieff and Heath Lewis, Clayton Utz)

This article was first published in the March 2003 issue of the Clayton Utz publication Mergers and Acquisitions Insights.

(1) Introduction

A new takeover tactic appears designed to overcome a bidder's inability to conduct due diligence in a hostile takeover bid. The recent bids for Goodman Fielder and Anaconda included conditions apparently aimed at forcing the disclosure of financial information about the targets. In Anaconda's case, other proprietary, non-public information was also targeted. In both cases, the Takeovers Panel gave a qualified green light to the inclusion of the conditions in a bid - but left target directors with little guidance on how to respond.

(2) Goodman Fielder

A hostile bidder who can't conduct due diligence eventually has to decide whether or not to take the plunge. Until now, the only protection a hostile bidder could build into the bid was a "no material adverse change" condition. That, however, falls far short of the assurance offered by due diligence - the bidder is hostage to whatever information happens to become available.

The Burns Philp bid for Goodman Fielder was notable for several things. As well as being highly leveraged, it included conditions apparently designed to maximise the bidder's chances of obtaining financial information from the target. These "Accounting Conditions" required Goodman Fielder's target's statement to supply information about a number of aspects of Goodman Fielder's accounts. These related to:

(a) whether amounts booked to restructuring costs in previous years had included recurring ordinary expenses;

(b) whether the 2003 annual accounts were expected to include restructuring costs additional to those provided for in the 2002 annual accounts;

(c) whether the working capital disclosed in the 2002 annual accounts reflected any materially different payment terms (with creditors or debtors);

(d) whether Goodman Fielder currently had any previously undisclosed off-balance sheet or contingent liabilities; and

(e) whether Goodman Fielder's defined benefit superannuation fund was in deficit (this matter to be certified by an actuary).

According to Burns Philp, these conditions were designed to confirm the publicly-available information about Goodman Fielder's accounts. Goodman Fielder responded by asking the Takeovers Panel to delete these conditions or, at the very least:

(a) declare that the Goodman Fielder directors were not obliged to respond to the conditions; and

(b) give Burns Philp seven days from receipt of the target's statement to say whether it would rely on or waive the conditions.

The Panel refused to give Goodman Fielder what it asked for. It said that it was not unreasonable for a bidder to seek information from the target where that information was relevant to the bid price or the bid objectives. Nor was it unreasonable for a bidder to make that information a condition of the bid.

That, however, was not the end of the matter. The Panel went on to make comments that bear heavily on future attempts to employ "Accounting Conditions". The first related to the duty of Goodman Fielder's directors. The company had asked for a declaration that its directors had no obligation to provide the information Burns Philp wanted. The Panel declined to make that declaration but the phrasing of its decision suggests that this remains an open issue:

"[T]he Panel has not reached any view that a target is placed under any additional obligation, in general or in particular circumstances, to disclose any or particular information merely because a bidder has chosen to make its bid subject to such a condition."

Then there was the question of what should happen if Burns Philp obtained the assurance it was seeking, but without the specific information it was looking for. The Panel appeared to believe that Goodman Fielder could theoretically address the bidder's concerns without supplying all the information required by the Accounting Conditions. If that happened, the Panel seemed to suggest, Burns Philp would have to waive the conditions.

Finally, in what appears to be a bet each way, the Panel warned that its refusal to knock out Burns Philp's Accounting Conditions "should not be taken as encouragement for the routine use of [similar] conditions". This last comment is difficult to understand, particularly in the light of what happened a few weeks later, in the Anaconda bid.

(3) Anaconda

Anaconda's major asset is a 60% share in the Murrin Murrin nickel and cobalt project in Western Australia. The MatlinPatterson bid for Anaconda included a condition that Anaconda give an independent expert access to the Murrin Murrin project (including access to the mine and processing sites, access to records and access to personnel). The expert would report to MatlinPatterson on the current and future output capacities of the project.

Unsurprisingly, this became a major focus of the subsequent battles at the Panel. Among other things, Anaconda applied for a declaration that the condition was unacceptable. In rejecting that application, the Panel echoed what it said in the Goodman Fielder case:

(a) a bidder is free to make its bid subject to such assurances as it wishes; but

(b) target directors are not under a prima facie obligation to provide the access sought by the bidder.

However, the Panel went further on the question of the duties of directors. It said that, when deciding whether or not to comply with such a condition, target directors should take a number of factors into account. These included:

(a) the target's contractual obligations to third parties;

(b) confidentiality and other undertakings offered by a bidder; and

(c) the value that might be lost to the shareholders if an offer fails because the directors decline to provide access or information to the bidder.

(4) Comment

On one view, the information disclosure conditions in the Goodman Fielder and Anaconda bids are a response to the level of uncertainty faced by any hostile bidder. They go further than the standard "no material adverse change" condition, in that they appear to be an attempt to prise information out of the target.

How effective might they be? As the Panel has now pointed out twice, target directors are under no absolute obligation to comply with the conditions. If the target directors refuse to budge, the bidder is no better informed than when the bid began.

But do the directors have a completely free hand? Comments by both Panels suggest that directors may need to be very careful when faced with such conditions in the future. In the case of Goodman Fielder, the Panel said that the target company was not obliged to disclose the information merely because it was a condition of the bid. What, however, if there were additional factors that had to be considered? The Anaconda Panel suggested a number of factors that might change the situation:

(a) the target's contractual obligations to third parties;

(b) confidentiality and other undertakings offered by a bidder; and

(c) the value that might be lost to the shareholders if an offer fails because the directors decline to provide access or information to the bidder.

The last point directly raises the spectre of directors' responsibility for a bid's failure. What happens if a target shareholder believes that the directors' failure to comply with an information condition deprived the shareholder of the benefits on offer in a bid? Certainly, the Panel's "frustrating action" policy is a precedent for intervening to overrule actions of directors that might trigger a defeating condition in a bid. Would the Panel take a similar position if a defeating condition was triggered by directors' inaction?

Against this, a later Panel decision on the Goodman Fielder bid upheld target directors' freedom of choice: "The Panel found no grounds to override Goodman Fielder's right to choose to whom and on what terms to provide access to its proprietary information in the best interests of Goodman Fielder and its shareholders."

(Panel Media Release, 26 February 2003 - That Panel also refused to order Goodman Fielder to provide Burns Philp with access to non-public information similar to that given to prospective rival bidders. This sets the Panel apart from its UK counterpart, which requires targets to provide equality of information to competing offerors).

Finally, of course, there is the question of target directors' liability to the bidder itself. If they do agree to supply information to the bidder, will they be liable if the information later turns out to have been misleading or incomplete?

(N) DRAFT ICGN STATEMENT ON INSTITUTIONAL SHAREHOLDER RESPONSIBILITIES

The International Corporate Corporate Governance Network (ICGN) Board of Governors has released draft best practice guidelines designed to help shareholders monitor corporations. The ICGN is an international coalition of institutional investors.

This ICGN Statement sets out a framework of best practices describing institutional investors´ fiduciary responsibilities in relation to their equity shareholdings. It is meant to apply to investing institutions around the world.

Without trying to apply a comprehensive legal definition, in this Statement the term "institutional investor" is used for those institutions that invest on a fiduciary basis for the benefit of their beneficiaries as the ultimate bearers of the economic risk of the investments made. As such it embraces pension funds, insurance companies, mutual funds and other collective investment schemes.

(1) General responsibilities

(a) Institutional investors have a general fiduciary responsibility to ensure that investments are managed exclusively in the long-term financial interests of their beneficiaries, as amplified - where relevant - by contract or law.

(b) As a matter of best practice, in discharging this responsibility, institutional investors should contribute to improving and upholding the corporate governance of companies and markets in which they invest, where practicable. The objective is to stimulate the preservation and growth of the companies' long-term value. Institutional investors should judge which actions are suitable and effective to that end, taking into account the specific circumstances of the case at hand.

Appropriate actions to give effect to these ownership responsibilities include:

- Voting;
- Expressing concerns to the board, either directly or in a shareholders meeting;
- Making a public statement;
- Submitting proposals for the agenda of a shareholders meeting;
- Submitting one or more nominees for election to the board as appropriate;
- Convening a shareholders meeting;
- Teaming up with other investors and local investment associations either in general or in specific cases;
- Taking legal actions, such as legal investigations and class actions;
- Lobbying governmental bodies and other authoritative organisations;
- Incorporating corporate governance analysis in the investment process;
- Stimulating independent buy-side research;
- Outsourcing any or all of these powers to specialized agents, for instance in the event the institutional investor concludes that it does not have the ability to muster necessary skills in-house.

(a) These ownership responsibilities should be dealt with diligently and pragmatically. This Statement, for instance, encourages the support of good corporate management initiatives, as much as opposition to bad ones. Furthermore, as a general rule, institutional investors should not interfere with the day-to-day management of companies.

(b) However, it is clear that institutions risk failing to meet their responsibilities as fiduciaries if they disregard serious corporate governance concerns that may affect the long-term value of their investment. They should follow up on these concerns and assume their responsibility to deal with them properly.

Such concerns may for instance relate to:

- The level and quality of transparency;
- The company's financial and operational performance, including significant strategic issues;
- Substantial changes in the financial or control structure of the company;
- The role, independence and suitability of non-executives and supervisory directors;
- The quality of succession practices and procedures;
- The remuneration policy of the company;
- Conflicts of interest with large shareholders and other related parties;
- The level and protection of shareholder rights;
- Minority investor protection;
- Proxy voting;
- The independence of fairness opinions;
- The accounting and auditing practices;
- The composition of the audit- and remuneration committees;
- The adequacy of internal control systems and procedures;
- The management of environmental, ethical and social risks.

(2) Voting

(a) Voting forms a prominent part of institutional investor´s approach to corporate governance. It should be assumed that all votes cast - regardless of their number - contribute to a stronger management focus on the actual (long-term) interests of shareholders in the case at hand, as well as in general.

(b) To strengthen this focus, votes should be cast on the basis of careful analysis, consistent with an institutional investor's well-considered policy and with a view towards improving and upholding the corporate governance of companies and markets. Automatic voting should be avoided.

(c) In this respect, voting guidelines need to be adopted to support the applied policy. In developing these, institutional investors are advised to take due account of already existing international and national influential standards, including the ICGN´s own Statements.

(3) Accountability of the institutional investor

(a) Institutional investors are accountable to the beneficiaries of their investments for the way they execute their ownership responsibilities. To show how they discharge these responsibilities, institutional investors should as a matter of best practice disclose to these beneficiaries:

(i) Their corporate governance policy outlining how they deal with their ownership responsibilities, how corporate governance aspects are taken into account in their investment policy, and their voting guidelines;

(ii) How companies in which they invest are regularly monitored, and how they periodically measure and review the effects of their monitoring and ownership activities;

(iii) A annual summary of their voting records together with their full voting records in important cases, e.g. cases of conflict or controversy. Voting records should include an indication whether the votes were cast for or against the recommendations of company management. The summary should at least include the percentage of shares voted and the extent to which votes have been cast with or against management;

(iv) An explanation of specific action taken in important cases;

(v) A list of all companies in which they are a shareholder, preferably together with the number of shares held;

(vi) What resources they have allocated to execute their corporate governance policy;

(vii) In case no (material) resources have been allocated: how they have weighed the various arguments coming to this decision and an indication of what developments would make them reconsider their position;

(viii) A list of conflicts of interest that may impede an independent approach towards the companies in which they have invested;

(ix) What procedures they have in place to deal adequately with these conflicts;

(x) The names of the agents to which they have outsourced ownership responsibilities together with a description of the nature and extent of this outsourcing and how it is regularly monitored.

(b) Disclosures should be made at least once a year on the investor´s website, and, preferably, simultaneously in or with the annual reports. The investor may choose however to provide voting records to requesting beneficiaries at no cost directly on an annual basis.

(4) Conflicts of interest

(a) Some institutional investors have conflicts of interest that could impair an independent approach towards the companies they have invested in, generally because they directly or indirectly have other actual or prospective relationships with the companies concerned. In all such cases, the institutional investor should ensure full transparency as outlined above. Where such a conflict has the potential to harm the interests of the beneficiaries of their investment in the company, they should consider outsourcing the power to perform their ownership responsibility to a separate independent agent or trust company set up for that purpose.

(b) Institutional investors should also be aware of possible conflicts faced by their agents. If the casting of votes or the performance of other ownership responsibilities are outsourced (whether or not together with asset management), the institutional investor should ensure that the agent acts fully independently from corporate management or other conflicting business relationships. The investing institution should ensure, in particular, that votes are cast in an informed manner and on the basis of voting guidelines that are materially consistent with its own. It should furthermore regularly evaluate the performance of the agent on the basis of detailed reports and ensure that the institutional investor can override agent decisions if need be. In case of doubt regarding the independence of an agent, the institutional investor is advised to outsource the power to perform the ownership responsibilities to a separate independent agent or trust company set up for that purpose.

(5) Other responsibilities

(a) Agents of institutional investors have a general duty to facilitate the proper discharge of their client´s fiduciary responsibilities and should therefore act as if those responsibilities are their own.

(b) Given the large differences in market development around the world, it is apparent that the implementation of the provisions of this Statement in day-to-day practice will be more straightforward for some institutions than others. However, the ICGN believes that if institutional investors take their responsibilities seriously then this can contribute significantly to the creation of an environment suited for solid long-term investment. Therefore, all institutional investors are encouraged to establish an action plan working towards full implementation of the Statement´s recommendations as soon as is practicable.

(c) Although share lending in many cases is useful and appropriate, there are negative effects and abuses that require attention. The ICGN is committed to investigate developing a Code of Best Practice to deal with these issues.

2. RECENT ASIC DEVELOPMENTS

(A) ASIC RELEASES REPORT INTO MORTGAGE BROKERS

On 26 March 2003 ASIC released a report on the mortgage broking industry prepared by the Consumer Credit Legal Centre NSW (Inc) (CCLC). The report found that while the consumer use of brokers has expanded greatly, there are still few barriers to entry in the industry such as clear minimum competency or training standards. Up to one in two home loans are now sourced through brokers, who can provide a valuable service to consumers faced with an ever-increasing choice of credit options.

'The CCLC report presents evidence that standards need to improve in the mortgage broking sector in order to reduce the risks to consumers. It is pleasing to see that there is wide acceptance in the industry that this is the case', ASIC Executive Director of Consumer Protection, Mr Peter Kell said.

The report analyses the structure of the industry, identifies a range of problems experienced by consumers, and examines the way in which the industry is regulated in Australia and internationally. It also includes a number of case studies, as well as the results of surveys of consumer caseworkers and brokers.

The CCLC report has found that while consumers are increasingly using brokers, consumers who use the mortgage broking industry can face problems that include:

- poor advice, with the increased costs of the inappropriate loans that might result;
- inadequate disclosure of fees and commissions by some brokers;
- inconsistent documentation from brokers;
- uncertainty about the nature and price of the service; and
- in a small number of cases, fraudulent activity such as manipulating loan applications.

''There is also a need for clarity as to whether brokers are acting for consumers or are really agents for lenders', Mr Kell said.

'The CCLC report has identified significant issues about the structure and practices of the industry, and raised possible options for addressing these issues', Mr Kell said.

'ASIC will provide copies of the report to state governments across Australia, as they are primarily responsible for detailed regulation of the credit marketplace. We will provide copies to the Federal Government as well as key industry players, such as the Mortgage Industry Association and the Finance Brokers Association, and consumer organisations.

'While ASIC does not have full responsibility for the mortgage broker market, the report has greatly assisted in identifying the types of problems that ASIC can address with its consumer protection powers, including examples of misleading conduct', Mr Kell said.

'We are currently investigating a number of matters with a view towards possible enforcement action, and some of these were identified in the process of the report's development', Mr Kell said.

'We are also pleased that in response to the gap identified in the CCLC report regarding consumer complaint schemes, the Mortgage Industry Association of Australasia (MIAA) has announced that it will seek formal ASIC approval for its external dispute resolution scheme, the Mortgage Industry Ombudsman Scheme (MIOS). While the MIOS scheme does not cover the whole industry, ASIC is committed to ensuring that the scheme meets proper standards for those it does cover', Mr Kell said.

Additionally, in response to the report findings, ASIC will be increasing its information to consumers about the best ways to choose and deal with brokers. A new guide to 'Using a Mortgage Broker', is available on ASIC's consumer website at http://www.fido.asic.gov.au.

'ASIC is also in the process of developing an online 'mortgage calculator' to help consumers understand the costs of home loans', Mr Kell said.

The report is available on the ASIC website at http://www.asic.gov.au.

(B) ASIC REACHES AGREEMENT WITH BRAD KEELING IN ONE.TEL PROCEEDINGS

On 21 March 2003, Mr David Knott, Chairman of ASIC, announced that ASIC has reached an agreement with Mr Bradley Keeling, a former director of One.Tel Limited (One.Tel), in the court proceedings against him and that the New South Wales Supreme Court had approved the settlement.

Mr Keeling is one of four defendants in the proceedings brought by ASIC following the collapse of One.Tel in May 2001. The other defendants are Mr Jodee Rich, Mr Mark Silbermann and Mr John Greaves.

Under the agreement with ASIC, Mr Keeling has admitted to contraventions of the Corporations Act 2001 between February and May 2001 in relation to the discharge of his duties as a director of One.Tel.

The New South Wales Supreme Court has made order giving effect to the settlement. Under the orders Mr Keeling:

- is banned from being a director, or otherwise being involved in the management of any corporation, for 10 years;
- is liable to pay compensation of $92 million to One.Tel; and
- has agreed to pay ASIC's costs of $750,000.

As part of the terms of agreement Mr Keeling denies that he deliberately misled the board and the market, but admits that he failed to take the reasonable steps he should have in order to apprise himself of the true financial position of the company during that period.

(C) FUNDRAISING DOCUMENTS HAVE COMMON FAILURES

On 10 March 2003 ASIC announced recent results in its ongoing campaign to improve the quality of information and levels of disclosure in fundraising documents.

Since 1 July 2002, ASIC has issued 51 interim stop orders and 8 final stop orders on prospectuses or Offer Information Statements (OIS).

'Stop orders are an outcome of ASIC's risk-based review of selected documents. This means we identify areas where we suspect the risk of poor information may be greater than usual, and we review documents that fall into that area', ASIC Director of Corporate Finance, Mr Richard Cockburn said.

'What ASIC does is to ensure the documents comply with the law. The company is required to include all the information an investor would reasonably require to make an informed decision about whether to invest. This includes information about both potential risks and rewards. It's then up to the individual to make a decision about whether the proposal is a suitable investment for them', Mr Cockburn said.

'If ASIC reviews a document which we think is misleading, or lacking in information, we have the power to issue an interim stop order on the document. The company can't accept any applications from investors while this is in place', he said.

'ASIC can lift the stop order if the company amends its document, or issues a new one that includes all the information the Act requires. If not, we can put a final stop order on the prospectus - and that's permanent. A company has to go through the entire process again if they want to make the offer public for a second time', Mr Cockburn said.

ASIC periodically issues media releases advising which fundraising documents have had interim stop orders placed on them, and the reasons why these stop orders have been issued. This is intended to assist companies and their advisers identify what particular information must be disclosed.

'It is disappointing that we detect similar non-disclosure issues time and time again. Generally, it is the companies seeking to raise relatively small amounts, typically less than $5 million, where the following defects most commonly occur', Mr Cockburn said.

(1) Failure to deal with the consequences of the company not raising the full amount sought.

Of all the interim stop orders issued since 1 July 2002, 26 per cent resulted from the failure of the company to disclose the financial position and prospects of the company in the event that the offer is not fully subscribed.

ASIC expects all fundraising documents to address how the company will use the funds raised. A breakdown should be given if the company has different uses for the funds raised.

If the company fails to reach the minimum subscription amount specified in the document, the company is required to refund all application money. This helps to protect investors from being locked into a company that cannot achieve its stated objectives as a result of insufficient funds.

Where the minimum subscription equals the full amount of the funds sought to be raised (full amount), or where the fundraising is fully underwritten, ASIC considers it sufficient for the document to detail how the funds raised will be applied on the basis the full amount is raised.

Where the fundraising is not fully underwritten, or where the minimum subscription is less than the full amount, it is not sufficient only to disclose how the funds will be applied if the full amount is raised. The document must also describe how funds will be applied if less than the full amount is raised.

For example, the document must explicitly state:

(i) whether some or all of the stated activities may need to be scaled back, and if so, how this will be done. It is not sufficient to state that the activities will be scaled back 'as appropriate' or 'as the directors determine';

(ii) whether funds will be allocated to stated activities in any particular priority until each activity is fully funded, or whether they will be allocated pro rata across all stated activities;

(iii) the effect if any, this has on the company's financial position and prospects. For example, it may affect a company's ability to continue as a going concern, or materially alter its debt levels.

Recently, interim stop orders have been placed on the fundraising documents of the following companies:

- Reedy Lagoon Corporation Limited;
- Conquest Mining Ltd;
- Olea Australis Ltd;
- Solagran Ltd (formerly Travelshop Limited);
- Rusina Mining Ltd; and
- First Australian Resources Ltd.

All companies have subsequently lodged a supplementary or replacement document which satisfactorily addresses ASIC's concerns.

(2) Prospective financial information

Another area where ASIC commonly identifies problems relates to the provision of prospective financial information. 16 per cent of the interim stop orders which have been issued since 1 July 2002 resulted from defective disclosure in this area.

ASIC requires all prospective financial information to be prepared in accordance with ASIC Policy Statement 170.

ASIC has also released guidelines for preparers and reviewers of prospective financial information included in disclosure documents, in response to requests by companies and their experts for guidance on this matter.

Examples of defects commonly identified by ASIC include:

(i) stand-alone, unsubstantiated statements, such as 'the directors expect that the company will become profitable by the end of the 2004 financial year';

(ii) insufficient distinction between hypothetical assumptions and assumptions as to future matters which management expects to take place;

(iii) lack of reasonable grounds for predictions beyond two years, such as the absence of an independent expert's report, or the absence of contracts relating to forward sales, or future expenses.

Recently, ASIC has placed interim stop orders on the fundraising documents of the following companies, due to concerns in relation to prospective financial information:

- Teebook Global Limited;
- Pisces Marine Aquaculture Limited; and
- Argus Solutions Limited.

These interim stop orders have now been revoked due to the lodgement of replacement documents which address ASIC's concerns.

(D) ASIC FILES PROCEEDINGS AGAINST SOUTHCORP

On 26 February 2003ASIC filed proceedings in the Federal Court against Southcorp Limited (Southcorp) alleging a breach of its continuous disclosure obligations in April 2002.

The proceedings relate to an email sent by Southcorp to selected analysts containing information relevant to the company's forecast earnings for the year ending 30 June 2003. ASIC is seeking a court declaration that Southcorp's conduct contravened its market disclosure obligations, together with the imposition of a pecuniary penalty.

'This is the first case of its type commenced by ASIC and will test the operation of both the ASX Listing Rules and the relevant provisions of the Corporations Act', ASIC Chairman, Mr David Knott said.

On 18 April 2002 Southcorp's then Executive General Manager of Corporate Affairs, Mr Glen Cunningham, sent an email to selected analysts containing information about the likely impact of the poor 2000 vintage for premium wines on Southcorp's 2003 gross profit. ASIC alleges that the information should have been disclosed to the Australian Stock Exchange under its Listing Rules and in accordance with the Corporations Act, rather than to selected analysts.

ASIC will seek to establish, inter alia, that:

(i) the information was of a type required to be disclosed to the ASX under its Listing Rules (that a reasonable person would expect the information or some of it to have a material effect on the price or value of Southcorp's shares); and

(ii) the information was required to be disclosed pursuant to section 674 of the Corporations Act (that the information was not generally available and a reasonable person would expect, if all or some of it were generally available, that it would have a material effect on the price or value of Southcorp's shares).

Under Section 1317E of the Corporations Act the Court has power to make a declaration that the continuous disclosure provisions of the Act have been breached. If a declaration is made the Court may impose a pecuniary penalty of up to $200,000. These provisions took effect on 11 March 2002.

In this case, ASIC is seeking a declaration and penalty against Southcorp itself, not against existing or former officers. ASIC will seek to establish that Southcorp is legally responsible for this alleged breach of the continuous disclosure provisions.

3. RECENT ASX DEVELOPMENTS

(A) AUSTRALIAN FLOAT ACTIVITY RESILIENT DESPITE FALL IN MARKET

Despite a fall in the market in 2002, a small increase in float activity saw the total value of new listings on the Australian Stock Exchange (ASX) more than double, according to a report released by PricewaterhouseCoopers.

The report showed 42 floats listed on the ASX in 2002 (excluding resource sector floats), compared with 40 the previous year. However, the total amount raised through new listings increased significantly to around $3.2 billion, compared with $1.5 billion in 2001.

Overall, investor returns from new listings were relatively poor in 2002. This was also the case across Australian equities more generally, with the S&P/ASX 300 Industrials Index falling by around 14 per cent over the course of the year.

The report showed increased float activity in the second half of 2002; a positive sign for 2003. However, the S&P/ASX 300 Industrials Index has declined a further 6% since the beginning of this year.

Key findings from the survey include:

(a) In 2002, 42 companies, property trusts and investment funds were listed on the ASX, a slight increase on the 40 listings in 2001, but still making 2002 the third lowest year for new listings in the last decade.

(b) Total funds raised were $3.2 billion, more than double the funds raised in 2001, and only 11% lower than the $3.6 billion raised by the 141 floats in 2000.

(c) The bulk of funds raised in 2002 came from the 7 large cap floats ($2.4 billion) with the median amount raised per float at $285 million, a 157% increase from 2001.

(d) 24 of the 42 floats (57%) occurred in the second half of the year, with particularly strong activity from September through to December.

(e) Investment & Financial Services (11 floats), Infrastructure & Utilities (6 floats) and Health & Biotechnology (5 floats) were the most prominent sectors for float activity.

(f) Continuing the downward trend, there was only 1 technology float in 2002, compared with 6 in 2001 and 69 in 2000.

(g) Overall, listing premiums (stag profits) were low, with a third of companies (14) ending the first day of trading with their share prices below issue price.

(h) There was a continued decline in the proportion of companies including forecasts in their prospectuses.

(i) Generally, company performance against prospectus forecasts continued to be poor.

4. RECENT TAKEOVERS PANEL MATTERS

(A) PANEL DECLINES APPLICATION IN RELATION TO AUSTAR UNITED COMMUNICATIONS

On 18 March 2003, the Takeovers Panel advised that it had declined an application in relation to the affairs of Austar United Communications Limited (Austar). The application was made on 28 February 2003 by a shareholder in Austar, Pondale Properties Pty Limited (Pondale).

The Panel declined the application because, while it considered that the applicant had made out some of the concerns it alleged, the Panel believed that those concerns were addressed by the recent issue of a detailed media release to the market, and the disclosure to the market of a copy of an agreement (Shareholders Agreement) between the future controllers of 81% of Austar in supplementary substantial shareholding notices.

The application was in relation to the acquisition by CHAMP SPV Pty Ltd and its related entities (CHAMP Group) of a relevant interest of approximately 81% of the shares in Austar (the Austar Shares) for the sum of US $34.5 million. The CHAMP Group acquired the relevant interest in the Austar Shares through funding a US Chapter 11 debt restructure of a subsidiary of United Asia/Pacific Communications Inc. (UAPC). A US court will consider the Chapter 11 proceedings on 18 March 2003.

Pondale asserted in the application that the market was not adequately informed about the ultimate ownership and control of the CHAMP Group. It alleged that the acquisition by the CHAMP Group of a controlling interest in Austar will not take place in an efficient, competitive and informed market.

Specifically, Pondale's application raised four issues:

(1) Ownership and control of CHAMP Group

Pondale asserted that the market, and Austar shareholders, were inadequately informed about the ownership and control of the CHAMP Group. Pondale asserted that the ultimate ownership and control of the CHAMP Group (to the extent that additional entities have a relevant interest in the Austar Shares) should be disclosed. As a result of the Austar Proceedings, the CHAMP Group issued a detailed media release to the market on 5 March 2003 dealing (in part) with this matter, while the controlling shareholders of CHAMP P/L (the 100% parent of CHAMP SPV) gave substantial shareholding notices on 13 March 2003, concerning their substantial holding in Austar as owners of more than 20% each of CHAMP P/L, CHAMP SPV being the entity which entered the agreement with UAPC.

The Panel considered that the media release and the substantial shareholding notices given by owners of CHAMP P/L now adequately disclose their interests and substantial holdings in the Austar Shares and there is no longer a need for the Panel to consider whether their failure to lodge substantial shareholding notices in December 2002 constituted unacceptable circumstances.

The funding structure which the CHAMP Group has put in place to fund the acquisition of its interests in the Austar Shares will include a number of Belgian limited liability companies. The identities of the investment companies were disclosed in the CHAMP Group substantial shareholding notices of 23 December 2002 (but not the individual investors in the funds which will invest in the investment companies).

The CHAMP Group advised that none of the investors in the CHAMP investment funds will have an interest in the Austar Shares which the Corporations Act would require to be disclosed. The CHAMP Group advised that the investors in the CHAMP investment funds will not have relevant interests in the Austar Shares, in a similar way to sub 20% shareholders in any entity owning shares in a public company.

The Panel considered that the advice provided by the CHAMP Group as to the dispersed ownership of the investment funds supports the claim by the CHAMP Group that substantial shareholding notices are not currently required from the investors in the investment funds. Changes in the structure or relationships of the CHAMP Group or the investment funds may bring about different disclosure requirements, but that is not a question currently before the Panel.

(2) Disclosure of the Shareholders Agreement

Pondale asserted that the Shareholders Agreement, entered into by CHAMP SPV, UAPC and United Austar Inc (the direct holder of the Austar Shares) on 23 December 2002 (US time) was required to have been attached to the substantial shareholding notice given by CHAMP SPV on 23 December 2002 (Australian time). CHAMP SPV had entered into two separate agreements (the Master Agreement and the Reorganization Agreement) on 20 December 2002 (US time) which had given CHAMP SPV the substantial shareholding in the Austar Shares. CHAMP SPV was then required to give its substantial shareholding notice on or before the end of 24 December 2003. It gave the substantial shareholding notice on 23 December 2002 at 2.00 pm or thereabouts Sydney time. CHAMP SPV attached both the Master Agreement and the Reorganization Agreement to its substantial shareholding notice on 23 December 2002, but not the Shareholders Agreement which was still in the process of finalisation.

The Panel accepted that the Shareholders Agreement had not been executed at the time the CHAMP SPV substantial shareholding notice was given. On the other hand, it considers it highly likely that the material terms of the agreement were sufficiently well developed that section 671B(4)(b) of the Corporations Act (Act) required CHAMP SPV to have attached a written description of the Shareholders Agreement to its substantial shareholding notice. The owners of CHAMP P/L have attached a copy of the Shareholders Agreement to their substantial shareholding notices dated 13 March 2003.

The Panel considered that the better view is that the CHAMP Group, or the owners of CHAMP P/L, were in breach of the disclosure required under the substantial shareholding provisions, and section 602 of the Act, for nearly 3 months. Because they volunteered to make full disclosure once they fully understood the Panel's interpretation of section 671B(4)(b) of the Act, the Panel was not required to decide whether or not to make a declaration of unacceptable circumstances in this instance.

The Panel considered that where a commercial transaction is the subject of a number of interlinked agreements, and the obligation to give a substantial shareholding notice is triggered by entry into the first agreement, with negotiations proceeding on subsequent documents, it will frequently be likely that section 671B(4)(b) will require disclosure of a written description of the agreements still under negotiation. It is likely that commercially, the onus will be on the person giving the substantial shareholding notice to explain why, having entered the triggering agreement, the parties have not reached sufficient consensus on the terms of the other agreements to bring section 671B(4)(b) into play. Thus, it is likely that the decision in New Ashwick Pty Ltd v Wesfarmers Ltd (2000) 35 ACSR 263 in many cases will have effect in requiring the disclosure of the related agreements (or a summary of them if they are not yet concluded) despite any timing anomalies arising out of one agreement being signed before the others have been concluded.

The Shareholders Agreement contains provisions relating to, inter alia:

- The number of CHAMP Group and UAPC nominee directors elected to the Austar board;
- Future independent directors on the Austar board;
- The chairmanship of the Austar board;
- The CEO of Austar;
- The make-up of the underwriting agreement for a proposed future rights issue by Austar;
- Restrictions on transfer of Austar shares controlled by CHAMP Group and UAPC;
- Management fees in relation to Austar; and
- Standstill agreements between UAPC and CHAMP Group.

The CHAMP Group disclosed a summary of aspects of the Shareholders Agreement on 5 March 2003 in supplementary disclosures through its media release to the market.

(3) Difference between percentage exempted under ASIC Relief and CHAMP Group Substantial Shareholding Notices.

On 20 December 2002, ASIC granted CHAMP Group an exemption from section 606 of the Act (the 20% threshold ) to allow CHAMP Group to enter the debt restructure agreements under which it acquired relevant interests in the Austar Shares. The relief is conditional on CHAMP Group making takeover offers for the 18.1% of shares in Austar held by the public.

The percentage specified in the ASIC instrument did not include two parcels of Austar shares: 0.6% owned directly by UAPC and 0.000196% held by an associate director of the CHAMP Group.

The CHAMP Group's initial substantial shareholding notice did not disclose its interest in either of these parcels of shares. The CHAMP Group subsequently gave amended substantial shareholding notices on 18 and 20 February 2003 disclosing the CHAMP Group's associates' relevant interest in the two additional parcels of shares.

It is unclear whether or not the 0.6% parcel should have been included in the relief. However, the Panel does not consider in these circumstances that a breach (if any) of section 606 occasioned by the ASIC relief relating only to 80.7% of Austar would constitute unacceptable circumstances.

(4) CHAMP Group's intentions for Austar

Pondale asserted that the market for control of Austar is uninformed because the CHAMP Group has not made detailed disclosures about its intentions for the future of Austar.

The Panel considered that ASIC's relief requires CHAMP Group to make takeover offers for the publicly held shares in Austar and that the proper time for the CHAMP Group to make such disclosures is when it issues its bidder's statement. The Panel considered that in the present circumstances, the market and Austar shareholders have been properly informed of CHAMP Group's substantial shareholding and of the requirement in ASIC's relief for a follow-on bid.

(5) Pondale's standing

An issue of concern to the Austar Panel, which was not raised by Pondale, was Pondale's standing, and good faith, in making its application. Pondale is the owner of 3,000 shares in Austar. It paid $622 for the shares, which it acquired on 23 January 2003 (almost a month after the CHAMP Group announcements and first substantial shareholding notice).

Pondale is a private company of the solicitor acting for Pondale.

The Panel was concerned that it know the identity of any person bringing an application before the Panel. It therefore sought information from Pondale, and its solicitors, as to any person who had given instructions to Pondale in relation to the application that Pondale had made. Pondale has advised the Panel that a client of Watson Mangioni (Pondale's solicitors) requested Watson Mangioni to acquire shares in Austar, to acquire those shares through a vehicle connected with Watson Mangioni ie Pondale, and to commence the application. The client agreed to pay all of Pondale's costs of the application.

Pondale gave none of this information to the Panel in its initial application.The Panel seriously considered declining the application when advised of the instructions behind Pondale's application. However, as Pondale formally had standing, the Panel decided to consider whether the issues raised by the Pondale application raised issues which would properly concern the market for Austar shares, and Austar shareholders. It decided that at least two of the issues raised were, of themselves, sufficiently material to the market for Austar shares to proceed with the application, regardless of the hands behind Pondale.

The Panel is continuing with its enquiries concerning the instructions given to Watson Mangioni in relation to the application by Pondale and may make further comment in its published reasons.

The Panel considered it was appropriate to publish its decision, and the outline of its reasons, to allow Austar to give the decision to the US court considering the Chapter 11 arrangements to reassure the US court that it need not make any provision for any decision by the Panel in the US court's considerations.

The Panel will publish its reasons on its website when finalised.

The President of the Panel appointed Nerolie Withnall, Alice McCleary and Michael Ashforth to be the Sitting Panel to consider the application.

5. RECENT CORPORATE LAW DECISIONS

(A) BANK'S FAILURE TO LODGE A CHARGE
(By Martin MacDonald, Freehills)

National Australia Bank Limited v Davis and Waddell (Vic) Pty Ltd [2003] VSC 00001, Supreme Court of Victoria, Hansen J, 13 February 2003

The full text of the judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/vic/2003/february/2003vsc00001.htm or http://cclsr.law.unimelb.edu.au/judgments/

(1) Overview

On 13 February 2003, Justice Hansen in the Supreme Court of Victoria granted National Australia Bank ("NAB") an order extending the time to register a charge granted in its favour by Davis and Waddell (Vic) Pty Ltd ("Davis").

Pursuant to section 266 of the Corporations Act, the charge would have been void as against the liquidator of Davis without the grant of an extension of time. This would have resulted in NAB constituting an unsecured creditor in the winding up of Davis (significantly reducing the amount that NAB would recover).

On the facts, Hansen J held that the failure by NAB to lodge a notice of the charge within the relevant period (45 days) was "accidental or due to inadvertence or some other sufficient cause". Accordingly, pursuant to section 266(4), the court had the discretion to extend the period for lodgement of that notice on such terms and conditions as the court thought just and expedient. The court considered that it was just and expedient to extend that period to the date the charge was actually lodged by NAB.

(2) The case

Davis had created a charge in favour of NAB on 6 December 2000. NAB lodged notice of the charge on 15 February 2001 - this was 24 days after the period of 45 days within which it should have been lodged. On 10 April 2001, Davis resolved that it was insolvent and appointed an administrator to the company. On 12 April 2001, NAB appointed a receiver and manager to the company's assets. On 10 May 2001, at a meeting of the creditors of Davis, it was resolved that the company be wound up (upon which the administrator assumed the role of liquidator).
Section 266 of the Corporations Act provides that:

- where an order is made, or a resolution is passed, for the winding up of a company;
- an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act; or
- a company executes a deed of arrangement,

a registrable charge of property of the company is void as against the liquidator of the company unless (among other things) a notice of the charge was lodged within the relevant period (pursuant to section 264 of the Corporations Act, this period is 45 days after the charge is created) or at least six months before the critical day (in the context of a winding up, the critical day is the day the winding up commenced).

As NAB's charge was not registered within the relevant period, it would be considered void against the liquidator and NAB would be considered an unsecured creditor in the winding up. This would have resulted in an amount of between 40 and 50 cents in the dollar being paid to the unsecured creditors (including NAB).

However, if an extension of time was granted, NAB would constitute a secured creditor and recover virtually the full amount owing to it.

(3) The decision

Section 266(4) of the Corporations Act provides that, if the failure to lodge a notice in respect of a charge was (among other things) "accidental or due to inadvertence or some other sufficient cause", then the court may, on the application of the company or any person interested, extend the period for registration on such terms and conditions as seem to the court "just and expedient".

In the course of his judgment, Hansen J noted that section 266(4) is a benevolent section in that it appears to give the chargee a complete and unfettered opportunity for repentance and to place the chargee in the same position as if it had been careful and diligent.

(a) "accidental or due to inadvertence or some other sufficient cause"

Hansen J noted that the failure to lodge the notice need only be either accidental, due to inadvertence or due to some other sufficient cause.

(i) Accidental

Hansen J found that the employee of NAB responsible for the charge made a deliberate decision to delay lodgement of the charge beyond the 45 day period. This decision was made as not all the documents relating to the charge were ready by the expiration of that period. However, Hansen J found that this decision was based on two mistaken beliefs held by the employee:

- that, while the employee was aware of the requirement to lodge the notice within 45 days, he believed that the only consequences of failing to do so would be that a penalty registration fee would be payable; and
- that it was not possible to lodge documents in an incomplete form.

Therefore, while it could not be said that the failure to lodge the notice was "accidental" in the sense that it was unintentional (as argued by the liquidator), Hansen J held that the failure was "accidental" in the sense that the intention to delay lodgement was founded on a mistake. This was within the ordinary meaning of the word "accidental" and the terms of the Corporations Act. Accordingly, section 266(4) provided the court with discretion to extend the period for lodgement.

Given the above finding, it was not necessary for the court to express a view on whether the failure to lodge the notice was due to inadvertence or some other sufficient cause. However, Hansen J did consider those two points.

(ii) Due to inadvertence

Hansen J followed earlier judgments and held that ignorance of a legal requirement is sufficient to constitute inadvertence. Ignorance of the law includes ignorance of the adverse effects of a failure to register a charge. Accordingly, Hansen J found that the mistaken beliefs outlined above did amount to a failure to properly avert to the precise registration requirements and, on the facts, it was this failure to avert to those requirements which led to the failure to lodge the notice.
In addition, the failure by NAB was not made with any fraudulent or improper intention and, accordingly, was not beyond the scope of the acts and omissions for which the curative power of the court under section 266(4) is intended.

(iii) Due to some other sufficient cause

Hansen J found that the grounds of accident and inadvertence were also sufficient to support a finding that the failure was due to some other sufficient cause. While NAB's failure was negligent, it was not in wilful and deliberate contravention of the law.

(b) On terms "just and expedient"

If a chargee's failure to lodge the charge is accidental, due to inadvertence or some other sufficient cause, the court will have the discretion to extend the period for lodgement on terms that it considers "just and expedient". Hansen J noted that, in exercising its discretion, the court is to make the decision it considers just having regard to the competing considerations and circumstances of the case.

Hansen J considered the "right" of creditors that, when a liquidation has commenced, one creditor should not be assisted by the court to improve its position vis-à-vis the other creditors. Davis submitted that if the court ordered an extension of time, NAB's position would be improved with respect to the other unsecured creditors. Hansen J noted that this "right" was contingent upon the exercise of the court's discretion under section 266(4). Therefore, while the fact of liquidation and the detriment to unsecured creditors were factors which militated against ordering an extension of time, they were not fatal to NAB's application.

The parties proceeded on the basis that, when a liquidation has commenced, exceptional circumstances must be shown before a court should make an order which will adversely affect the interests of the unsecured creditors. Hansen J appeared comfortable to proceed on that basis (although, he did note that this requirement could constitute an impermissible fetter on the court's discretion under section 266(4) - this was an issue which Hansen J considered more appropriate for an appellate court).

Hansen J held that, on the facts, exceptional circumstances did exist. In reaching this conclusion, he placed importance on the following factors:

- that, at all times, a charge did appear on the ASIC register. NAB had provided finance to Davis which allowed Davis to discharge its liability to HSBC (its previous banker). The amounts owing to HSBC had been secured by a charge - this charge was only removed from the register at the time the NAB charge was lodged. Although this charge did not reflect reality, it ensured that a creditor searching the register would be aware that a charge over the property of the company existed;
- NAB was entitled to be subrogated to the HSBC charge in respect of the amount it had paid to HSBC;
- there was no evidence that any person, whether an existing creditor or a person minded to transact with Davis, searched the register or that NAB's failure to register its charge misled or caused prejudice to any person;
- at all times prior to lodgement of the notice, NAB believed Davis was solvent. It could not be said that the charge was registered due to concerns over Davis' solvency; and
- the delay in lodging the notice was relatively short.

Accordingly, Hansen J considered it just and expedient to extend the period for registration of the charge until 15 February 2001 (the date the charge was registered). This allowed NAB to constitute a secured creditor for the purposes of the winding up.

The court did not consider it necessary for a proviso be added to the order which would protect the rights of parties which acquired rights in the period between the date of creation of the charge and the date of its registration as there was no evidence that any unsecured creditor was misled or prejudiced as a result of the charge not being registered.

(B) DIRECT LODGEMENT OF PROXY FORMS WITH THE COMPANY REQUIRED?
(By Andrew Walker and Nigel Vise, Clayton Utz)

Bisan Ltd v Cellante; Eromanga Hydrocarbons NL v Cellante [2002] VSC 430, Supreme Court of Victoria, Dodds-Streeton J, 15 October 2002

The full text of the judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/vic/2002/october/2002vsc430.htm or http://cclsr.law.unimelb.edu.au/judgments/

(1) Facts

The plaintiffs, Bisan Ltd and Eromanga Hydrocarbons NL, were listed public companies which had significant cross-shareholdings and common directors. Both plaintiffs sought injunctions restraining the holding of general meetings of their respective members convened by the defendants (Mr Cellante and others) pursuant to section 249F of the Corporations Act (Cth) 2001 in their capacity as the holders (or agents for the holders) of at least 5% of the votes. Bisan Ltd claimed that the defendants had no power to call the meetings under section 249F by reason of the revocation of a power of attorney by one member in favour of Cellante.

Members of both plaintiffs had been provided with a notice of meeting and a pre-completed proxy form which stipulated the address of an agent of the defendants (Omnium Corporate) for return. Both plaintiffs alleged that the proxy forms were invalid.

(2) Requisitioned meetings (section 249F)

Dodds-Streeton J held that, due to the potential for requisitioned meetings to be disruptive and distracting to management, the pre-conditions enlivening this entitlement should be strictly observed. A member which held 1.21% of the shares in Bisan Ltd had executed a power of attorney in favour of Cellante, who then called a general meeting pursuant to section 249F. That member then executed a transfer of the shares in favour of one of the defendants (which the directors declined to register) and subsequently notified Cellante of the revocation of the power of attorney. Without these shares, the defendants would not have had 5% of votes for the purposes of section 249F.

Her Honour concluded that there was at least a serious question that the minimum statutory percentage was lacking on the basis that there was no authority from the member for any subsequent acts necessary for calling and holding the meeting, and that the defendant who was the beneficial owner had no power to direct the member to participate in calling and/or holding a meeting under section 249F (notwithstanding that she was entitled to direct the member as to the exercise of voting rights).

The plaintiffs failed to establish that the meetings had been convened for an improper purpose within the meaning of section 249Q. Her Honour held that the stated purpose of the meetings to change the composition of the plaintiffs' respective boards of directors was proper and expressly contemplated by sections 203D and 203E. The plaintiffs alleged the existence of a further purpose of obtaining control of the plaintiffs without making a takeover offer. Her Honour concluded that, even if the evidence had established such a purpose on the part of the convening shareholders, it would generally not be unlawful or improper assuming that Chapter 6 of the Corporations Act was not infringed.

(3) Form of proxy appointments

It was alleged that the proxy forms provided by the defendants with the notices of meeting did not conform with the plaintiffs' respective constitutions. Her Honour considered that section 250A is inconsistent with the prescription of a form of proxy (or any additional formal requirements) by the company's constitution. As the limited statutory requirements were satisfied, the proxy forms were valid notwithstanding that Cellante (rather than the chairman of the meeting as per the form prescribed by the constitution) was appointed the proxy in the absence of another individual being specified.

(4) Lodgement of proxy forms via intermediary

Section 250B of the Corporations Act requires that instruments appointing a proxy are received by the company at least 48 hours prior to the meeting. The defendants' notice of meeting and proxy form stated that the proxy form must be returned to Omnium Corporate (an agent of the defendants) at least 48 hours prior to the meeting in order to be effective. Her Honour considered that this direction was inconsistent with section 250B because the proxy forms would be received by the relevant company only following initial receipt by a third party. In this regard, her Honour applied (arguably with some extrapolation) the decision of Lockhart J in Australian Innovations Ltd v Petrovsky (1996) 21 ACSR 218 in the context of a provision of the company's constitution which was analogous to section 250B.

Section 250BA requires a notice of meeting to specify a place and fax number for the return of instruments of proxy. Section 249F(2) provides that a meeting pursuant to section 249F must be called in the same way, so far as is possible, as a general meeting. Her Honour therefore concluded that it was strongly arguable that notices convening a section 249F meeting must specify the company's address (and fax number) or one nominated by the company for the return of proxies.

Her Honour considered that the abovementioned provisions reflect a legislative intent that directors be able to inspect and verify proxy appointments prior to the meeting (as to which see Armstrong v Landmark Corporation Ltd [1967] 1 NSWR 13; Lew v Coles Myer Ltd (2002) 43 ACSR 432). Her Honour also considered that a further legislative purpose may be to safeguard the actual and perceived integrity of the voting process by requiring the direct return of proxy forms to the company or its agent. The return of proxy forms via an intermediary owing no fiduciary obligations to the company would, in her Honour's view, introduce the possibility of inappropriate handling such as "filtering" (by which her Honour was presumably referring to the selective lodgement of proxy forms according to voting instructions) which "could entail a grave defect in the electoral process". This feature was considered a fatal defect in the form even in the absence of any evidence of such inappropriate handling.

(5) Orders

Her Honour did not consider it appropriate to declare that votes cast pursuant to the proxy forms lodged via the intermediary be disregarded, as to do so would disenfranchise those members who had sought to exercise their votes by the impugned proxy forms. Nor was her Honour satisfied with the defendants offer to give undertakings that all forms received by their agent would be lodged in accordance with section 250B. Her Honour concluded that the direction to return the proxy forms to an intermediary of itself raised a serious question as to whether the proposed resolutions would be valid, and the balance of convenience favoured the proposed meetings being enjoined as a disputed election result which was vulnerable to challenge would not be in the interests of any party.

(6) Conclusions

Her Honour's conclusions concerning the form of the instrument appointing proxies and the purpose for which the general meetings were requisitioned are relatively uncontroversial and generally consistent with other authorities on these issues (see for example Fast Scout Ltd v Bergel (2002) 40 ACSR 376, Totally and Permanently Incapacitated Veterans' Association of New South Wales Ltd v Gadd (1996) 28 ACSR 549, NRMA Ltd v Scandrett (2002) 43 ASCR 401). However, her Honour's interpretation of section 250B, and in particular the identification of an implied prohibition on the nomination of an intermediate recipient of proxy forms, represents a significant gloss on the express terms of section 250B, the purpose of which had generally been regarded as promoting the orderly preparation for general meetings by preventing last-minute proxy appointments. It might have been expected that, had the legislature indeed intended to prohibit the lodgement of proxy forms via intermediaries, it would have done so in clearer terms.

The interpretation of section 250B in this way sits uneasily with the general principle that proxy appointments should be treated benevolently so that members seeking to rely on them are not unfairly disenfranchised, a principle recognised and accepted by Dodds-Streeton J and applied in other aspects of the judgment. As this case involved a meeting called under section 249F, her Honour's findings in this particular case did not impinge on this principle, as the result was that the relevant meetings did not occur and the resolutions could be proposed afresh once the defect had been rectified. The dilemma for a court will be significantly more acute if it is required to rule on the validity of proxy forms lodged via an intermediary where a declaration of invalidity would entail the disenfranchisement of those shareholders who had returned the form in this way.

It may also be significant that the impugned direction in the proxy form in this case was squarely inconsistent with section 250B, as it stated that the form was required to be lodged with the third party intermediary in order to be effective. It is interesting to speculate whether a proxy form which fairly disclosed that a member could either lodge the form directly with the company (or its share registry), or duly constitute a nominated third party as agent to do so on its behalf, would have led to the same outcome. If however the principle expressed by her Honour in this case is extended to its logical conclusion, the practice of utilising proxy solicitation agents to receive proxy forms for the purposes of contested general meetings may well be relegated to history.

(C) CREDITORS' SCHEMES OF ARRANGEMENT WITH INTERNATIONAL DIMENSIONS
(By Heath Lewis, Clayton Utz)

Glencore Nickel Pty Ltd [2003] WASC 18, Supreme Court of Western Australia, McLure J, 7 February 2003

Anaconda Nickel Holdings Pty Ltd [2003] WASC 19, Supreme Court of Western Australia, McLure J, 7 February 2003

The full texts of the judgments are available at:

http://cclsr.law.unimelb.edu.au/judgments/states/wa/2003/february/2003wasc0018.htm
http://cclsr.law.unimelb.edu.au/judgments/states/wa/2003/february/2003wasc0019.htm or http://cclsr.law.unimelb.edu.au/judgments/

(1) Background

In 1997, Glenmurrin Pty Ltd ("Glenmurrin"), a subsidiary of Glencore Nickel Pty Ltd ("Glencore Nickel") and ultimately of Glencore International AG ("Glencore"), and Murrin Murrin Holdings Pty Ltd ("MMH"), a subsidiary of Anaconda Nickel Holdings Pty Ltd ("ANH") and ultimately of Anaconda Nickel Limited, entered into a joint venture for the development of the Murrin Murrin Nickel and Cobalt Project in Western Australia ("Project"). In order to finance their respective participations in the Project, MMH and Glencore Nickel issued bonds to United States investors ("Anaconda Bonds" and "Glencore Bonds" respectively).

MMH and Glencore Nickel had defaulted on the Anaconda Bonds and the Glencore Bonds respectively. In addition, Glencore Nickel defaulted on its obligations in respect of a working capital facility and MMH defaulted on obligations owed to certain parties under foreign exchange hedging contracts ("FX Contracts").

All of Glencore Nickel's obligations in respect of the Glencore Bonds and the working capital facility ("Glencore Obligations"), and all of MMH's obligations in respect of the Anaconda Bonds and the FX Contracts ("Anaconda Obligations"), were secured by way of charges and mortgages given by Glencore group companies and Anaconda group companies respectively. Prior to the Schemes, more than 75% of the holders of the Glencore Obligations and more than 75% of the holders of the Anaconda Obligations (collectively, "Consenting Holders") agreed not to enforce the securities and to vote in favour of the Glencore Scheme and the Anaconda Scheme respectively.

(2) Schemes of arrangement

Each of Glencore Nickel and Glenmurrin (the latter by virtue of its guarantee obligations) proposed a compromise by way of identical Part 5.1 creditors' schemes of arrangement ("Glencore Schemes"), as did each of MMH and ANH (the latter by reason of its guarantee obligations) ("Anaconda Schemes"). All of the Glencore Schemes and the Anaconda Schemes were dependent on the others becoming effective.

In broad terms, the Glencore Schemes and the Anaconda Schemes (collectively, the "Schemes") involved the extinguishment of secured debt and the discharge of securities in consideration for:

(a) a proportionate share of a cash payment ("Cash Payment"); and

(b) a proportionate beneficial interest in proceeds from pending arbitration and litigation proceedings with Fluor Australia Pty Ltd ("Fluor Arbitration").

(3) Expression of schemes

It is usual that the terms of Part 5.1 schemes be set out in a stand-alone "scheme of arrangement". However, in this case, the terms of the Schemes were defined by reference to specific sections of the explanatory statements relating to the Schemes and to specific clauses of the implementation deeds which regulated the Schemes (the implementation deeds annexed a trust agreement, a litigation deed, a fixed charge and a deed of priority, among other documents).

The provisions of Part 5.1 of the Corporations Act 2001 (Cth) ("Act") make it clear that a scheme may bind the company and its members and creditors but not outsiders. Nevertheless, McLure J confirmed that "[t]here seems to be no reason why, as a matter of form, the terms of the Schemes cannot be recorded in agreements involving outsiders who are required to act to facilitate the implementation of the Schemes: see Re Amcor Ltd (2000) VSC 157; (2000) 34 ACSR 199; Bulong Nickel Pty Ltd [2002] WASC 126".

(4) Classes

McLure J concluded that because the holders of the Glencore Obligations all enjoyed security under the same instrument, ranked pari passu under that instrument and were to receive proportionate entitlements under the Glencore Schemes, there was no need to divide the Glencore scheme creditors into classes.

In relation to the Anaconda Schemes, McLure J concluded that separate classes were not necessary notwithstanding that the instrument governing the Anaconda scheme creditors' interests in securities contemplated that certain assets, namely money standing to the credit of specified bank accounts, would be exclusively available for certain creditors in an event of default. The Court appeared to reach this position on the basis that the class distinction was merely a past potentiality and, given that there were no material funds standing to the credit of the specified accounts, this unrealisable potentiality was not a basis for dividing the Scheme Creditors into classes.

Also in relation to the Anaconda Schemes, McLure J noted that Glencore was a scheme creditor in its capacity as an FX Counterparty (entitled to approximately 1.3% of the Anaconda Scheme debt) and held approximately 34% of the shares in Anaconda. Referring to Re Crusader Ltd (1995) 17 ACSR 336 at 344-345 and Re Jax Marine Pty Ltd [1967] 1 NSWR 145, McLure J concluded that Glencore's capacity as a shareholder in Anaconda did not distinguish Glencore to such a degree that it should be required to vote as a separate class. McLure J appeared to be fortified in this view by the fact that Glencore did not have the ability to influence the outcome of the vote of the Anaconda Schemes given that 79% of scheme creditors had contracted to vote in favour of the Anaconda Schemes.

(5) Voting procedures and definition of scheme creditors

The sole registered holder of both the Glencore Bonds and the Anaconda Bonds was The Depository Trust Company ("DTC"), a firm established to hold such securities and to facilitate trading in those securities. DTC recognised trading in the Bonds as between "Custodians", being banks, brokers and other United States institutional investors who in turn held the Bonds on behalf of "Beneficial Owners". Given that economic ownership of the Bonds resided with the Beneficial Owners and on the basis of the usual practices in the United States, voting arrangements were proposed which required Custodians to solicit and aggregate the votes of Beneficial Owners.

Given the "master voting system" which was proposed and the fact that it was the Beneficial Owners rather than DTC (as the legal owner of the Bonds) who would be casting votes, the Court found it necessary to consider whether the voting arrangements adequately contemplated the votes of the "creditors" as required by the Act. It was noted that there was no definition of "creditor" in the Act. The Court did not accept that the designation of certain entities as "scheme creditors" under the terms of the Schemes was sufficient to dictate a proper entitlement to vote on the Schemes pursuant to Part 5.1 of the Act. In fact, the Court held that at the time of considering whether a meeting of scheme creditors should be convened the definition of "creditor" in the scheme was not definitive.

Rather, the Court concluded that the proposed voting arrangements properly conveyed the votes of creditors on the basis that even though it was the Beneficial Owners who cast a vote, that vote would bind not only them but the legal owner of the Bonds (i.e. DTC) given that DTC and the Custodians were equivalent to bare trustees or nominees.

(6) Jurisdiction/section 304 of the United States Bankruptcy Code

The court considered whether it had jurisdiction to approve the Schemes given that they would com