Bulletin No 68, April 2003
Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation
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Law, The University of Melbourne
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CONTENTS
1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) Report of
the HIH Royal Commission
(B) Commonwealth Government
response to the review of the competition provisions of the Trade Practices Act
1974
(C) New European Corporate Governance Transparency and
Disclosure Report published
(D) SEC to review current proxy
rules and regulations to improve corporate democracy
(E) Government acts to regulate unsolicited offers to buy shares at below
market price
(F) Regulators issue interagency paper on
Sound Practices to Strengthen the Resilience of the US Financial
System
(G) FSA proposals to make fund managers more
accountable to investors
(H) Group of 100 releases guide to
review of operations and financial condition
(I) CLERP 7
becomes law
(J) SEC requires exchange listing standards for
audit committees
(K) Corporates split over response to
executive remuneration concerns
(L) Senate passes Repayment
of Directors' Bonuses Bill
(M) CalPERS releases 2003
corporate governance Focus List
(N) Securities markets:
European Commission proposes Directive to increase investor protection and
transparency
(O) Change required for companies to comply
with UK Higgs report
(P) Sarbanes-Oxley Act requires
changes in corporate control, compliance, according to PricewaterhouseCoopers
survey of senior executives
(Q) European Union not to cap
auditor liability
(R) Australia's funds management market
fifth largest in the world
(A) Managed
discretionary account services PPP
(B) Long-range financial
forecasts
(C) ASIC releases stage two results of accounting
surveillance
(D) ASIC provides relief on requirement to
provide up to date information in PDSs
(E) ASIC moves to
protect integrity of its database
(F) ASIC acts to prevent
insolvent trading
(G) ASIC launches managed funds fees
calculator
(H) Corporate Law Economic Reform Program
7
(I) ASIC releases results of code monitoring
report
(J) ASIC expands relief for differential
fees
(A) ASX
Listing Rules - Package of Guidance Note amendments
(B) ASX
Corporate Governance Council publishes Principles of Good Corporate
Governance
4. RECENT TAKEOVERS PANEL MATTERS
(A) Anaconda
18 Review Panel affirms decision on dispersal of excess shares
(B) Takeovers Panel publishes Guidance Note on broker handling fees for
comment
5. RECENT CORPORATE LAW DECISIONS
(A) Forecasters beware: independent expert liability for negative
assurances
(B) When available indemnity under insurance
policy is considered to be examinable affairs of company
(C) When action for recovery of a loan arises and whether an annual
return constitutes acknowledgment of debt owed to a company
(D) Alleged breach of Trade Practices Act
(E) Residual powers of director to defend a winding-up of the company
after an interim receiver has been appointed
(F) Section
588F of the Corporations Act operates to deny a chargee their interest in
non-specific property
(G) Authority of directors to
institute proceedings in the name of the company after appointment of
receivers
(H) Settlement of ASIC proceedings involving
multiple defendants - one defendant objecting to settlement between ASIC and
another defendant
(I) Rejecting proofs of debt at a
creditors' meeting
(J) Unjust mortgages: family acquired
debt
(K) Can leave to commence legal action against a
company being wound up be given by a court that did not grant the winding up
order?
6. NEW BOOK - CORPORATE GOVERNANCE AND INVESTMENT FIDUCIARIES
9. DISCLAIMER
1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) REPORT OF THE HIH ROYAL COMMISSION
On 16 April 2003, the Commonwealth Treasurer, The Hon Peter Costello MP, released the Report of the HIH Royal Commission. The Royal Commission was established at the Government's instigation following the financial collapse of the HIH Insurance Group in March 2001. HIH was the second largest general insurance company in Australia and its collapse affected individuals, community groups, and the public generally. The Commission operated from September 2001 until the Report was delivered to the Governor-General on 4 April 2003. The Government appointed Mr Justice Owen as the Commissioner.
(A) Government response to the report
When releasing the report, the Treasurer made a number of responses to the recommendations of the Commissioner. They are outlined below.
The Commissioner concluded that the primary reason for the collapse of HIH was the failure to provide properly for future claims. This failure was essentially due to mismanagement and an inadequate response to pressures emerging in insurance markets internationally.
The Commissioner identified a number of possible breaches of the Corporations Law (Cth) and the Crimes Act 1900 No. 40 (NSW). There are 56 matters (relating to 18 individuals) that Mr Justice Owen has indicated should be referred either to the Australian Securities and Investments Commission (ASIC) or (in a small number of cases) to the NSW Director of Public Prosecutions. The Government is referring these possible breaches to those authorities immediately.
In respect of the Corporations Law referrals, a taskforce will be established immediately under the direction of ASIC to examine these issues and prepare briefs for possible proceedings. Additional funding will be provided in the budget for this task. The Government will give consideration to whether a Special Prosecutor will be appointed to prosecute criminal charges.
ASIC has already brought some proceedings arising from the failure of HIH. None of the Commissioner's findings that there might have been a breach of the law relates to or touches on those proceedings.
There were many individuals and companies who were the subject of adverse comment in counsel assisting's closing submissions. The Commissioner makes it clear in the first volume of his report that "where there is no finding in this report against [a] person or company, the reputation of that person or company emerges entirely free of any adverse implications".
The Commissioner also concludes that the Australian Prudential Regulation Authority (APRA) did not cause the collapse of HIH. He notes in the third volume of his report that "APRA's failure to act did not contribute to the collapse of HIH. However, the manner in which APRA exercised its powers and discharged its responsibilities under the Insurance Act fell short of that which the community was entitled to expect from the prudential regulator of the insurance industry".
The Commissioner has made 61 policy recommendations. The recommendations cover corporate governance and financial reporting, APRA's governance arrangements, the regulation of general insurance and APRA's internal processes. Some recommendations seek action by the States and Territories.
The demise of HIH occurred under regulatory arrangements that have since been substantially strengthened. New legislation for general insurers was enacted in September 2001 and new prudential standards were issued in February 2002. This new framework, which commenced on 1 July 2002, means that general insurance companies are now subject to much more robust arrangements. The reforms ensure that companies establish appropriate systems of governance and internal controls, in addition to more transparent valuation of liabilities and risk-based capital adequacy.
There has also been a transition in supervisory practice from one based on oversighting individual `transactions' to a `systems' based approach, consistent with international regulatory standards and the direction of modern regulatory practice.
The Government will consider very carefully the Commissioner's recommendations. The recommendations propose continuing the broad architecture for the financial system introduced by the Government following the Wallis Report. Under this structure APRA is responsible for prudential regulation of all deposit-taking institutions, general and life insurance and superannuation, and ASIC is responsible for maintaining market integrity, consumer protection and the supervision of companies. The Commissioner notes the potential for improving the clarity of roles and coordination between the regulatory agencies.
The Government accepts in-principle the Commissioner's recommendation to replace APRA's non-executive board with an executive group (or commission). The executive group would carry the responsibility and be accountable for the operation and performance of APRA - this arrangement would further strengthen Australia's existing regulatory framework. As the Commissioner has suggested, the Government wishes to consider his recommendations on these matters in light of the Uhrig Report into Statutory Authorities and Office Holders, which is due to be delivered to the Government in mid-May. Soon after, the Government expects to be able to introduce legislation into the Parliament to give effect to any changes to the governance arrangements of APRA.
The Government released its proposals to enhance corporate disclosure under the CLERP 9 paper in September last year. At that time the Government indicated that the CLERP 9 proposals would also allow any further recommendations from the Royal Commission to be added to legislative proposals.
The Commissioner's recommendations are generally consistent with the CLERP 9 proposals. The Government will be considering the corporate governance and financial reporting recommendations from the Commissioner in preparing the legislation to enact the CLERP proposals.
Draft legislation will be released for public comment in the next few months. The Governments expects to introduce the legislation into the Parliament early in the Spring Sittings.
Copies of the report are available on the Royal Commission website at http://www.hihroyalcom.gov.au
(B) Policy recommendations made by the Commissioner
Following is a list of the 61 policy recommendations made by the Commissioner.
(i) Corporate governance
(1) The disclosure and other requirements of the Corporations Act 2001 No. 50 (Cth), the relevant accounting standards and the Australian Stock Exchange Listing Rules that relate to directors' remuneration be reviewed as a matter of priority, to ensure that together they achieve clear and comprehensive disclosure of all remuneration or other benefits paid to directors in whatever form.
(2) The Corporations Act 2001 be amended to repeal the existing legislative provisions relating to the definition of the extended classes of personnel upon whom duties are imposed by the Act and to substitute instead a definition that is clear, simple and certain of application.
The definition would focus on the function performed by the relevant person-not the classification of their legal relationship to the corporate entity-and avoid expressions such as 'employee' in favour of a functional orientation.
The definition would then form the basis of a regime having the following features:
(a) All the general duties imposed by Chapter 2D of the Corporations Act should be imposed on directors, secretaries and the wider class of personnel encompassed within the functional definition.
(b) The duties imposed by ss 182(1), 183(1) and 184(2) of the Act should be imposed on all persons performing functions for and on behalf of corporations, whether employees or suppliers of services under contract.
(c) The liabilities created by s 1309 of the Act should be imposed on all persons and not be restricted to a limited class of management personnel.
(d) The classes of personnel prohibited from acting dishonestly in connection with the performance or satisfaction of any obligation imposed on the company by any written law should be extended.
(ii) Financial reporting and assurance
(3) The Commonwealth Government broaden the membership of the Australian Accounting Standards Board to include people with business or professional backgrounds beyond the accounting profession.
(4) Australia participate fully in the development of international accounting standards and pursue the adoption of high-quality, consistent and readily understood accounting standards.
(5) In adopting international standards, Australia reserve the right to require more stringent standards that are not inconsistent with the relevant international standards. These would generally relate to disclosure requirements.
(6) The Australian Accounting Standards Board alter the Urgent Issues Group or create a separate group that is able promptly to issue binding rulings on important and urgent matters concerning the interpretation and application of the accounting standards.
The board should extend the constitution of the Urgent Issues Group or the separate group beyond accounting professionals and include lawyers and users of financial statements.
(7) The professional accounting bodies develop guidelines to encourage their members to consult independent third parties or the Urgent Issues Group when there is disagreement with the management of companies concerning the interpretation or application of accounting standards.
(8) The Australian Accounting Standards Board amend accounting standard AASB 1023 to include the following:
(a) a definition of insurance that includes the requirement for a material transfer of insurance risk;
(b) a requirement that insurance liabilities be valued at a level of sufficiency of at least 75 per cent, as required by APRA's prudential standards. Companies should be explicitly permitted to set prudential margins in excess of 75 per cent if the company's board considers that appropriately reflects a true and fair view of the financial position of the insurer;
(c) a requirement that entities disclose in their financial statements:
- the valuation of their
insurance liabilities at a central estimate
- a 75 per cent level of
sufficiency
- the margin ultimately adopted by the entity
(d) a requirement that premium revenue and insurance liabilities be recognised on the commencement of a contract of insurance. This will require the recognition of premium liabilities;
(e) a requirement that, in estimating the present value of liabilities, future cash flows be discounted using a risk-free rate similar to that required by the prudential standards;
(f) a requirement that companies subject to the standard disclose a 10-year claims-development table that includes past estimates of claims on an undiscounted basis as well as the actual costs of settling claims. This information should be provided both net and gross of reinsurance.
(9) All standards of independence of auditors in Australia, including those contained in legislation and professional standards such as Professional Statement F1, be consistent with the standard of independence defined as follows:
(a) An auditor is not independent with respect to an audit client if the auditor might be impaired-or a reasonable person with full knowledge of all relevant facts and circumstances might apprehend that the auditor might be impaired-in the auditor's exercise of objective and impartial judgment on all matters arising out of the auditor's engagement.
(b) A reference to an auditor includes both an individual auditor and an audit firm. In determining whether an auditor or an audit firm is independent, all relevant circumstances should be considered, including all pre-existing relationships between the auditor, the audit firm and the audit client, including its management and directors.
(10) The Corporations Act 2001 should be amended to require the board to provide a statement in the annual report that identifies all non-audit services provided by the audit firm and the fees applicable to each item of work and explains why those non-audit services do not compromise audit independence.
(11) In implementing the CLERP 9 proposal for restrictions on employment relationships between an auditor and the audit client, the amendments provide for the following:
(a) a mandatory period of four years following resignation from an audit firm before a former partner who was directly involved in the audit of a client can become a director of the client or take a senior management position with the client. This restriction should be extended to include key senior audit personnel;
(b) an extension of the restriction to a former partner who was not directly involved in the audit of a client. In the opinion of the Commissioner, the current proposed period of two years would be appropriate for such a partner;
(c) a prohibition on any more than one former partner of an audit firm, at any time, being a director of or taking a senior management position with the client.
These restrictions should be enforceable against both the audit firm and the relevant former partner or senior audit team member.
(12) In implementing the CLERP 9 proposal for rotation of audit personnel, the requirement for rotation of the lead engagement partner and review partner be extended to key senior audit personnel.
(13) The Corporations Act 2001 be amended to require the disclosure in audit reports of the following:
(a) the impact of the position taken by the reporting entity where alternative accounting treatments are reasonably open from the reading of an accounting standard and the difference between those accounting treatments is material;
(b) the significant matters arising in the audit process.
The Corporations Act should be amended to require audit reports to be presented in plain English and to require the inclusion of an operating and financial review as part of an annual report, which would be the subject of audit.
(14) The Corporations Act 2001 be amended to require public listed companies to include a brief, plain English summary of the nature and scope of the audit services provided by their auditor each year.
(15) Both the Australian Prudential Regulation Authority and the Institute of Actuaries of Australia introduce compulsory certification of the completeness and accuracy of data.
(16) The Institute of Actuaries of Australia and the Australian Prudential Regulation Authority introduce a requirement for more detailed disclosure of the exercise, incidence and impact of subjective judgment and departure from historical experience.
(17) The Australian Prudential Regulation Authority extend the qualifications of the approved actuary to require that they not be an employee or partner of the organisation to which the approved auditor belongs.
(iii) Regulation of general insurance
(18) The Australian Prudential Regulation Authority Act 1998 No. 50 (Cth) be amended to replace APRA's non-executive board with an executive group. This group would comprise the chief executive officer and two or three executive commissioners and would carry the responsibility, and account to government, for the operation and performance of APRA.
(19) The Australian Prudential Regulation Authority Act 1998 be amended to provide the chief executive with the power to establish an advisory board.
(20) The direct involvement of representatives of the Australian Securities and Investments Commission and the Reserve Bank of Australia in the governance of the Australian Prudential Regulation Authority be discontinued. This will require amendment of the Australian Prudential Regulation Authority Act 1998.
(21) The Australian Prudential Regulation Authority chief executive instigate, as a matter of urgency, a review of APRA's organisational structure. The object of the review should be to achieve a workable and effective balance between accountability for and knowledge of particular financial services on one hand and cross-sectoral functional skills and perspective on the other. In particular, the review should consider the creation of a specialist team to take primary responsibility for the supervision of general insurers.
The review should report to APRA's board with recommendations on APRA's appropriate internal structure, given its responsibilities across the deposit-taking, insurance and superannuation sectors. The board should publicly respond to its recommendations.
(22) The Commonwealth Government consider removing the requirement for the Treasurer's agreement to operational decisions involving APRA's prudential oversight of general insurers.
(23) Given the inconsistencies between the Insurance Act 1973 No. 76 (Cth) and the Banking Act 1959 No. 6 (Cth), the Commonwealth Government review the current legislative provisions for merit review of APRA's decisions for the purposes of ensuring consistency.
(24) The Australian Prudential Regulation Authority implement a programme to build the skills of staff involved in the supervision of general insurers. This should involve a review of its human resource management policies to assess APRA's competitiveness in the financial services sector labour market. The review should take account of the adequacy of remuneration, training and career structures as well as other steps to increase APRA's attractiveness as an employer.
(25) The Commonwealth Government adopt a three-year rolling funding arrangement to set the Australian Prudential Regulation Authority's budget.
(26) The Australian Prudential Regulation Authority develop a more skeptical, questioning and, where necessary, aggressive approach to its prudential supervision of general insurers. Consultation, inquiry and constructive dialogue should be balanced by firmness in its requirements and a preparedness to enforce compliance with applicable standards. In particular, APRA should take a firm approach to ensuring regulated entities' timely compliance in the lodging of returns and the provision of information.
(27) The Australian Prudential Regulation Authority continue to develop and review processes, guidelines and training to assist its staff in considering the appropriate approach to take towards supervised entities in different situations.
(28) The Australian Prudential Regulation Authority develop systems to encourage its staff and management continually to question their assumptions, views and conclusions about the financial viability of supervised entities, particularly on the receipt of new information about an entity.
(29) The Australian Prudential Regulation Authority develop an internal system for tracking all relevant information concerning regulated entities.
(30) The Australian Prudential Regulation Authority develop mechanisms for investigating the reinsurance arrangements of authorised general insurers on a random but frequent basis.
(31) The effectiveness of the current memorandum of understanding between the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission be reviewed.
The processes for liaison, coordination and exchange of information between APRA and ASIC should be reviewed on a regular basis. To facilitate the exchange of information, the Commonwealth Government should make a regulation specifying ASIC for the purposes of s 56(5)(a) the Australian Prudential Regulation Authority Act 1998.
(32) Matters relating to the coordination of Commonwealth regulation affecting the insurance industry be the province of the Commonwealth Treasury.
(33) Coordination of the matters related to the regulation of the insurance industry be addressed through the proposed ministerial council.
(34) Authorised insurers be required to make greater disclosure of information about their financial position. In particular, all financial and statistical information general insurers currently provide to the Australian Prudential Regulation Authority in their regular returns should be made public.
(35) Information that enables external users to make an informed assessment of an insurer's outstanding claims provisions and reinsurance arrangements be published by the insurer or the Australian Prudential Regulation Authority. APRA should develop reporting returns for insurers that would enable this to occur if existing returns are insufficient.
In particular, general insurers should publish:
(a) material equivalent to the 'schedule P' loss-development data published in the United States;
(b) a summary of the approved actuary's valuation of the outstanding claims liabilities, including the methodologies and assumptions underlying that valuation.
(36) Insurers be required to make greater disclosure of qualitative information relating to their risk- and reinsurance-management strategies. Other qualitative information-where the prospect of disclosure may affect the quality of information provided to companies-need not be disclosed.
(37) The Australian Prudential Regulation Authority identify and make known the kinds of regulatory activities that in its view should be disclosed publicly (whether or not the insurer in question is a listed company) and should specify the process by which such disclosure should occur.
(38) As a matter of high priority, the Australian Prudential Regulation Authority develop and promulgate a standard for the effective regulation of authorised insurers that operate as part of a corporate group.
The proposed prudential standard on corporate groups should include a minimum capital requirement at the group level as well as the authorised entity level.
(39) The Australian Prudential Regulation Authority monitor the financial condition of corporate groups, including those with foreign operations. Pending the development of the proposed prudential standard on supervision of corporate groups, APRA should use existing powers to require groups to provide any information it considers necessary to perform this role.
(40) The Australian Prudential Regulation Authority take steps to ensure that it effectively exchanges with relevant foreign regulators information and intelligence on the operations of Australian insurers with international operations.
(41) The Australian Prudential Regulation Authority modify the prudential standards to require the annual production by an authorised general insurer's approved actuary of a report on the overall financial condition of the insurer.
(42) The Commonwealth Government amend the Insurance Act 1973 to extend prudential regulation to all discretionary insurance-like products-to the extent that it is possible to do so within constitutional limits.
(43) Section 462(3) of the Corporations Act 2001 be amended so that the Australian Prudential Regulation Authority may apply to wind up a company that is an authorised insurer if any of the criteria specified in section 52(1)(aa), (ab) or (a) of the Insurance Act 1973 are met.
(44) Section 461 of the Corporations Act 2001 be amended to specify that the interests of policyholders are interests to which the court should have regard in deciding whether to make a winding-up order.
(45) The Australian Stock Exchange amend Listing Rule 3.1 to require - or publish a guidance note making it clear - that price-sensitive announcements have the approval of either the board or a delegate of the board subject to ratification by the board.
(46) The Australian Stock Exchange amend the Listing Rules to prohibit 'blacklisting'-defined as exclusion of a person or organisation from briefings by a company or a pattern of such exclusion in the face of negative reports on the company by those analysts over a specific period.
(47) The Australian Stock Exchange clarify Listing Rule 11.1, so that it applies to any significant change in the business or assets of a listed company, whether it be by acquisition, disposal, amalgamation or otherwise. The ASX amend the Listing Rules to define 'significant change', so that it encompasses financial and geographic factors as well as the nature and scale of the company's business.
(48) The Australian Stock Exchange amend Listing Rule 11.2, so that it applies to any disposal of the whole or substantially the whole of the assets or operations of a listed company.
(iv) State and territory regulation
(49) That the states and territories not undertake any prudential regulation of general insurance. The Australian Prudential Regulation Authority should be the sole prudential regulator in this field.
If such regulation is to continue, state and territory governments should ensure that it is consistent with the requirements of the Insurance Act 1973. This is a matter that might properly be referred to the proposed ministerial council.
(50) To the extent that states and territories continue to involve themselves in prudential regulation, the Australian Prudential Regulation Authority should share all information relating to the prudential regulation of relevant general insurers with relevant state and territory bodies.
The states and territories should provide APRA with all relevant information that may concern the financial condition of relevant general insurers. This exchange of information should proceed through memorandums of understanding between APRA and each relevant state and territory body.
APRA and the state and territory instrumentalities should review applicable secrecy provisions and where necessary seek legislative action to ensure they do not inhibit the free flow of information between APRA and the instrumentalities relevant to the prudential regulation of general insurers.
(51) The states and territories implement a process designed to reduce inconsistencies in their statutory schemes. This is a task that would appropriately be overseen by the proposed ministerial council.
(52) State and territory governments apply relevant prudential requirements to government insurers and statutory fund schemes. This is a matter that would appropriately be overseen by the proposed ministerial council.
(53) The states and territories consider allowing greater price flexibility in their statutory schemes. This is a matter that would be appropriate for consideration by the proposed ministerial council.
(54) The Commonwealth Government move to identify or establish a ministerial council or like arrangement to provide a ready and regular forum for the discussion and resolution by the Commonwealth and the states and territories of matters relevant to general insurance-and perhaps to other financial services.
The ministerial council (or other similar body) should consider measures to:
(a) avoid duplication in the prudential regulation of general insurers;
(b) remove regulatory inconsistencies;
(c) achieve a consistent approach to the prudent management of state and territory monopolies.
It could also play a part in:
(a) moves to introduce greater price flexibility in statutory schemes;
(b) the introduction of a policyholder support scheme;
(c) the removal of anomalies in the taxation arrangements applicable to general insurers.
(v) Taxation and general insurance
(55) State and territory governments abolish stamp duty on general insurance products. It would be appropriate for this process to be coordinated through the proposed ministerial council with responsibility for general insurance.
(56) Those states that have not already done so abolish fire services levies on insurers.
(57) State and territory governments exclude the cost of the GST for the purposes of calculating stamp duties or any other state or territory levies that are imposed on insurance premiums.
(58) Governments avoid imposing on insurers levies and other taxes that cannot be passed on to policyholders.
(59) The Commonwealth Government review the current requirements of the Income Tax Assessment Act 1936 No. 27 (Cth) with a view to changing the Act to bring it into alignment with the modified accounting standards proposed by the Commissioner.
(60) The Commonwealth Government amend the income tax regime to encourage the creation and use of catastrophe reserves. Contributions to catastrophe reserves would be tax deductible. Releases from the reserve would be assessable for tax.
(vi) A policyholder support scheme
(61) The Commonwealth Government introduce a systematic scheme to support the policyholders of insurance companies in the event of the failure of any such company.
(B) COMMONWEALTH GOVERNMENT RESPONSE TO THE REVIEW OF THE COMPETITION PROVISIONS OF THE TRADE PRACTICES ACT 1974
On 16 April 2003 the Commonwealth Government released the report of the Dawson Committee on the review of the competition provisions of the Trade Practices Act 1974 No. 51 (Cth) and at the same time released the following response.
The report is available on the Treasury website at http://www.treasury.gov.au
Part 1: Overview
(a) The importance of competition
The object of the Trade Practices Act 1974 (the Act) is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection. The competition laws are contained in Part IV of the Act and are comprehensive and far-reaching. Broadly speaking, Part IV prohibits collusive agreements, misuse of market power, exclusive dealing and mergers that substantially lessen competition in a market. Some provisions are subject to a competition test, while other provisions prohibit conduct on a per se basis, that is, regardless of their likely effect on competition. Part VII of the Act provides for the authorisation and/or notification of otherwise prohibited conduct when that conduct is justified in the public interest, notwithstanding a lessening of competition.
Whilst various specific provisions of the Act have been reviewed in recent years, there had not been a comprehensive review of the competition provisions since the Hilmer Committee in 1993. In light of significant structural and regulatory changes that have impacted upon the competitiveness of Australian businesses, economic development and consumer interests, it was considered timely to review the competition provisions of the Act.
The Committee reviewed the competition and authorisation provisions of the Act to establish whether they meet the needs of business, consumers and the economy in the current environment or whether improvements might be made to ensure that they are effective. The Committee also had regard to the way in which the competition provisions and related aspects of the Act have been administered.
Against this background, the Government's response to the Committee's recommendations is set out below.
Recommendation 1.1 The consideration of possible changes to Australia's regulatory framework should continue to have regard to international developments in the area of competition.
Recommendation 1.2 Australian Governments should ensure that the competition provisions of the Act are applied as broadly as possible across the economy and extend to the commercial activities of governments themselves.
Recommendation 1.3 Competition provisions should be uniformly applied and measures which are specific to a particular industry should be avoided.
Recommendation 1.4 The competition provisions should not be regarded as a means of implementing an industry policy or the preservation of particular corporations that are not able to withstand competitive forces.
Government response:
The Government notes the Committee's conclusion that the competition provisions in Part IV of the Act have served Australia well and that the ACCC has been commendably vigorous in discharging its responsibility to enforce those provisions.
The Government agrees with the values expressed in Recommendations 1.1 to 1.4. The Government supports the need to make sure that our competition provisions reflect international best practice and notes the international consultation and research undertaken by the Committee in completing this review. The Government supports a broad and uniform application of the competition provisions across the economy.
The Government accepts that the competition provisions are designed to protect the competitive process rather than a specific market structure or individual competitors and that competition laws should be distinguished from industry policy. Competition laws should not be seen as a means of achieving social outcomes unrelated to the encouragement of competition, or of preserving businesses that are not able to withstand competitive forces.
Recommendation 1.5 Businesses should seek to ensure that voluntary compliance programs are provided for their staff and the ACCC should review the assistance it is able to provide to business in this regard in consultation with interested parties through the reconstituted consultative committee recommended by the Committee.
Government response:
The Government accepts the principle expressed in this recommendation. Compliance is enhanced by businesses ensuring staff understand the competition provisions.
Part 2: Mergers
(a) Merger clearance under section 50
Section 50 of the Act prohibits mergers that would have the effect or be likely to have the effect of substantially lessening competition in a market. In the absence of a formal statutory arrangement, a system has evolved under which the ACCC provides informal clearances for proposed mergers which it considers would not be in breach of section 50.
The Committee did not consider that any amendment to the current section 50 mergers test was necessary, but did recommend changes to the ACCC's merger processes.
While the Committee found that there is generally widespread support for the informal clearance system, which is praised for its relative speed and efficiency, it also found significant weaknesses with the system. These weaknesses are evident in the absence of an effective mechanism for review and the absence of reasons for the ACCC's decisions.
Recommendation 2.1 The ACCC should provide adequate reasons for its decisions (taking care to protect any confidentiality) in the informal clearance process when requested to do so by the parties and in cases where it rejected a merger or accepted undertakings.
Government response:
The Government supports the provision of reasons by the ACCC for its informal clearance decisions when requested by the applicants and in cases where it has rejected a merger or accepted undertakings. This will improve the process by promoting a better understanding of the ACCC's decisions and reducing uncertainty.
Recommendation 2.2 A voluntary formal clearance process should be introduced, parallel to the existing informal clearance process, in relation to merger applications requiring consideration under section 50. This formal clearance process should have the following features:
2.2.1 on application by the parties, the ACCC might grant a binding clearance upon the basis that a proposed merger would not contravene section 50. The applicant would have immunity from proceedings by any party while complying with any conditions specified by the ACCC as a condition of the approval of the merger. The ACCC would be required to monitor compliance with these conditions;
2.2.2 the information required for such an application, which could be set out in revisions to the ACCC's Merger Guidelines, should not be onerous but should be sufficient for the ACCC to make a reasoned assessment;
2.2.3 the Act should require the ACCC to make a decision within 40 days which would allow the ACCC to consult with third parties. If a decision is not provided within 40 days, the clearance of the merger should be deemed to be refused. The 40 day limit should be capable of extension only at the request of the applicant; and
2.2.4 only the applicants should be granted a right of review on the merits by the Tribunal. The application for review should be made within 14 days of the ACCC's decision. The hearing before the Tribunal should be on the material before the ACCC and not a hearing de novo. Decisions of the Tribunal should be made within 30 days. The Tribunal should be able to grant or reject a clearance or grant a clearance subject to conditions.
Government response:
The Government agrees that the creation of a formal, but not compulsory, clearance process, operating in parallel with the existing informal system, will retain the advantages of the current system but will overcome some of its disadvantages.
An optional formal system will provide parties with an alternative process for progressing their merger. Parties will be able to use the informal system and request reasons and/or use the optional formal system. Under the formal system parties would be presented with reasons for the ACCC's decision and be given the opportunity to have the Tribunal review an unfavourable decision. The decisions of the Tribunal will also provide guidance to the ACCC in its approach to clearance upon questions such as the definition of the relevant market or the lessening of competition likely to result from the merger. Under this system, the ACCC will have 40 days to make a decision. This will increase the level of certainty for business.
(b) Merger authorisation process
Mergers that would otherwise contravene section 50 may be authorised where the public benefit arising from the merger is such that the proposal ought to proceed.
Currently the ACCC is responsible for assessing merger authorisations. The Committee found that this process has been less than satisfactory, largely as a result of the time taken by the ACCC to reach a decision and the risk of third party intervention by way of review by the Tribunal. These factors have rendered the authorisation process commercially unrealistic for many merger proposals. The Committee noted that only five authorisations of mergers have been sought from the ACCC since 1995.
Recommendation 2.3 Applications for the authorisation of mergers should be made directly to the Tribunal. This process should have the following features:
2.3.1. applications should be considered within a statutory time limit of three months;
2.3.2. there should be no review on the merits of the Tribunal's decision; and
2.3.3. the Tribunal should have the power to remit an application for consideration by the ACCC if it were of the view that the application required a decision solely on competition issues under section 50 rather than a decision concerning public benefit and the ACCC had yet to formally examine the matter.
Government response:
The Government agrees that direct applications to the Tribunal will greatly reduce the time required to consider merger authorisations. It will also meet the perception of some parties that the ACCC is not able to look afresh at authorisation applications based upon public benefit where it has previously considered a matter under section 50. If third party interests are considered as part of the Tribunal's assessment, rather than through an appeal process, great savings in time and certainty of outcome will be achieved.
Part 3: Market conduct
(a) Misuse of market power
Section 46 of the Act prohibits the misuse of market power, which requires the demonstration of an anti-competitive purpose. The addition of an effects test was proposed in a number of submissions because of the perceived difficulty of proving purpose.
The Committee recommended against the amendment of section 46 to introduce an effects test. The Committee was of the view that the introduction of an effects test would increase the risk of regulatory error and render purpose ineffective as a means of distinguishing between pro-competitive and anti-competitive behaviour. Overseas experience, so far as it is of assistance, did not indicate that the introduction of an effects test would be appropriate.
In March 2003, the Committee reaffirmed its recommendations in light of the High Court decision in Boral v ACCC, maintaining that no amendment should be made to section 46, although the position could be reviewed after a number of other cases are determined, such as Safeway, Rural Press and Universal Music. The Committee noted and endorsed observations by the High Court in the Boral case that the purpose of section 46 is to promote competition and that successful competition is bound to cause damage to some competitors.
Recommendation 3.1 No amendment should be made to section 46.
Recommendation 3.2 The ACCC should give consideration to issuing guidelines on its approach to Part IVA.
Recommendation 3.3 The ACCC should consult with industry and issue guidelines on the application of Part IV to intellectual property.
Government response:
The Government acknowledges the extensive consideration given to possible amendments to section 46, including the introduction of an effects test, by this and previous reviews, and supports the recommendation that no amendment should be made to section 46.
The Government supports the development of guidelines by the ACCC.
(b) Price discrimination
Price discrimination occurs when like goods or services are provided to different people at different prices and the differences in price are unrelated to the costs of providing the goods or services. Price discrimination can be pro-competitive or anti-competitive. To be anti-competitive, the corporation engaging in price discrimination must have market power. For these reasons, the Committee concluded that it was appropriate to consider the effect of price discrimination on competition on a case by case basis in accordance with section 46. The Committee also concluded that the principle of 'like terms for like customers' did not offer a suitable basis for regulation of the grocery industry.
Recommendation 4.1 No change should be made to the Act in relation to price discrimination.
Government response:
The Government accepts the Committee's reasoning and hence this recommendation.
(c) Cease and desist orders
Cease and desist orders have been described by proponents as emergency administrative cessation of conduct orders that would be issued by the ACCC if it considered that a breach, or threatened breach of the Act has occurred. The Committee found no evidence that the existing process of obtaining an interim injunction, to cease conduct that may potentially be in breach or threatened breach of certain parts of the Act, was cumbersome or overly difficult. Moreover, the Committee was of the view that it was not clear that the proposed cease and desist powers would be any speedier or more efficient than the existing process of obtaining an interim injunction.
Recommendation 5.1 The Act should not be amended to introduce a power to make cease and desist orders or to extend the powers of the ACCC under section 155 of the Act so that they apply after the commencement of judicial proceedings.
Government response:
The Government accepts the view of the Committee that the case for cease and desist orders has not been made and that the existing provision of obtaining an interim injunction has not been demonstrated to be deficient.
(d) Authorisation
Non-merger market conduct that would otherwise contravene the competition provisions may be granted immunity through authorisation. Authorisation enables efficient or welfare enhancing arrangements, such as joint ventures or collective bargaining processes, to be protected even though they may reduce competition.
Depending on the provision that would otherwise be contravened, conduct may be authorised by the ACCC either because the public benefit arising from the conduct outweighs the detriment caused by the lessening of competition or because the public benefit arising from the conduct is such that the proposal ought to proceed. An exception is misuse of market power, which cannot be authorised. Any person with sufficient interest, including third parties, may seek review of the ACCC's authorisation determinations before the Tribunal.
The Committee agreed that the considerable time and expense associated with non-merger authorisation applications were of concern. A large part of the expense was said to be associated with the costs of preparing an authorisation application, which may be addressed through a better understanding of the process.
Recommendation 6.1 The Act should be amended to include a time limit of six months for the consideration of non-merger applications for authorisation by the ACCC, and consideration should be given to imposing a time limit on any review by the Tribunal.
Recommendation 6.2 The ACCC should be given a discretion to waive, in whole or in part, the fee for filing a non-merger application for authorisation where it would impose an unduly onerous burden on an applicant.
Recommendation 6.3 The ACCC should develop an informal system of consultation with non-merger applicants for authorisation designed to provide those persons with guidance about the authorisation process and the requirements of the Act.
Government response:
The Government considers the non-merger authorisation provisions to be an important feature of the Australian system of competition regulation. These provisions allow a flexible response to evolving market situations, including industries undergoing structural change.
The Government will amend the Act to include a time limit of six months for the consideration of non-merger applications for authorisation by the ACCC. The ACCC will be provided with a discretion to waive, in whole or in part, the fee for filing a non-merger application for authorisation. The Government supports the development by the ACCC of an informal system of consultation with non-merger applicants for authorisation.
These changes will improve the accessibility and effectiveness of the authorisation process by reducing the time and cost involved in obtaining authorisation.
(e) Collective bargaining
Any contract, arrangement or understanding (agreement) that has the purpose, effect or likely effect of substantially lessening competition will breach the Act. Collective bargaining agreements are therefore constrained by the Act because they will often, for example, involve agreements between competitors on the price of goods or services. Such agreements are deemed to substantially lessen competition. However, the Committee found that collective bargaining by small businesses negotiating with big business may also benefit the community. Such arrangements may provide competing small businesses with sufficient bargaining power to balance that of the big businesses with which they have to deal.
Recommendation 7.1 A notification process should be introduced, along the lines of the process provided for by section 93 of the Act, for collective bargaining by small businesses (including co-operatives that meet the definition of small business) dealing with large business.
Recommendation 7.2 A transaction value approach should be adopted to provide a definition of small business. Initially the amount of transactions should be set at $3 million but be variable by the Minister by regulation.
Recommendation 7.3 A period of 14 days should be required to elapse before a notification takes effect.
Recommendation 7.4 Provision should be made for third parties to make a collective bargaining notification on behalf of a group of small businesses.
Government response:
The Government accepts these recommendations and will develop a notification process for collective bargaining by small businesses dealing with large business. While small business will retain access to the authorisation provisions, the proposed notification process is to be based on the Committee's recommendations and will be speedier and simpler for small business than existing processes. To ensure that costs are kept to a minimum for small businesses, the notification fee is to be set at an appropriately low level. Immunity is to extend for three years from the date of notification, and third party representative actions will be allowed. It will aim to provide an appropriate balance of power where small businesses are competing or dealing with businesses that have substantial market power.
(f) Per se prohibitions
Certain types of agreements between competitors are prohibited per se, that is, they are deemed to be illegal regardless of their likely effect on competition. These agreements include those that contain exclusionary provisions, fix prices or involve third line forcing. Where net public benefits arise from such agreements they may be authorised.
(g) Exclusionary provisions
An exclusionary provision has the purpose of preventing, restricting or limiting the supply or acquisition of goods or services to or from particular persons or classes of persons either altogether or in particular circumstances or on particular conditions.
Recommendation 8.1 The Act should be amended so that it is a defence in proceedings based upon the prohibition of an exclusionary provision to prove that the exclusionary provision did not have the purpose, effect or likely effect of substantially lessening competition.
Recommendation 8.2 The Act should also be amended to restrict the persons or classes of persons to which a prohibited exclusionary provision relates, to a competitor or competitors, actual or potential, of one or more of the parties to the exclusionary provision.
Government response:
The Government agrees with these recommendations. Although much of the behaviour covered by the present prohibition may damage competition, there is a risk that the prohibition may also be capturing some behaviour that is not detrimental to competition. To ensure the prohibition only ever stops harmful behaviour, the Government will establish a competition defence, as outlined in Recommendation 8.1. In addition, the prohibition will be confined to those agreements that target competitors, actual or potential, of the parties to the agreement.
(h) Third line forcing
Third line forcing occurs when goods or services are sold, or sold at a discount, but only if the purchaser also buys other goods or services from a third person. The petrol discounts offered by some supermarkets are an example of third line forcing conduct.
Recommendation 8.3 The prohibition of third line forcing should cease to be a per se prohibition and be made subject to a substantial lessening of competition test.
Recommendation 8.4 Related companies should be treated as a single entity for the purposes of section 47.
Recommendation 8.5 Section 93(2) should be repealed.
Government response:
The Government accepts that the prohibition on third line forcing should no longer be prohibited per se because third line forcing can be beneficial and pro-competitive. The Government notes that very few of the hundreds of notifications received annually by the ACCC are opposed. This amendment will generate benefits for business by reducing the need for notifications, generating savings in terms of cost and time. The technical amendments outlined in Recommendations 8.4 and 8.5 will improve the operation of the third line forcing provisions.
(i) Joint ventures
Goods and services can be supplied more efficiently by businesses cooperating in joint ventures that provide scale and scope not achievable by any single business. The businesses involved will usually need to agree on the price to be charged for the venture's output. Consequently, the Act recognises the need to exempt joint ventures from the per se prohibition of agreements that fix prices.
The existing joint venture exemption was introduced primarily to benefit ventures in the mining and manufacturing sectors. However, this exemption was found by the Committee to be too narrow for many newer forms of joint venture, such as those found in e-commerce. The Committee was of the view that many joint ventures may be pro-competitive, particularly when they are employed as a means of developing new products or services, or producing existing products or services more efficiently. Although the Committee was also conscious of the potential for anti-competitive effects, it felt that on balance the existing provisions of the Act to be too narrow.
Recommendation 9.1 The Act should be amended by substituting for the current exemption to section 45A(1) provided by section 45A(2), a provision that section 45A(1) does not apply to a provision of a contract or arrangement made, or of an understanding arrived at, or of a proposed contract or arrangement to be made, or of a proposed understanding to be arrived at, if it is proved that the provision is for the purposes of a joint venture and the joint venture does not have the purpose, effect or likely effect of substantially lessening competition.
Recommendation 9.2 The ACCC should develop and issue guidelines outlining its approach to joint ventures.
Government response:
To ensure that legitimate joint ventures are not impeded by the Act, the Government proposes a competition defence similar to that set out in Recommendation 9.1. The Government supports the issuing of guidelines by the ACCC.
(j) Dual listed companies
A dual-listed company (DLC) operates in a similar manner to an entity established via a merger and involves two corporations, one listed on a domestic stock exchange and the other listed on a foreign stock exchange, contracting to operate their businesses as a unified enterprise. Unlike the corporate groups established by merger, DLCs are not considered a single economic entity for the purpose of the competition provisions.
Recommendation 9.3 The Act should be amended to allow intra-party transactions in a DLC to be treated on the same basis as related party transactions within a group of companies. Consistently with this, the aggregate size of the DLC should be recognised for the purposes of assessing the entity's market power.
Government response:
The Government will amend the Act as proposed to ensure consistency between DLCs and corporate groups.
Part 4: Penalties
(a) Criminal penalties
'Hard core' or serious cartel behaviour, such as price fixing, can cripple competition and harm the economy. The competition provisions already prohibit such behaviour. The Act enables the Federal Court to impose significant civil penalties for any breach, including pecuniary penalties of up to $10 million for corporations and $500,000 for individuals.
Such penalties aside, many submissions supported the introduction of criminal penalties, including imprisonment, for serious cartel behaviour, primarily because criminal sanctions were said to be better able to deter corporations and individuals from engaging in such behaviour.
Other submissions to the Committee questioned the need for criminal sanctions and highlighted the problems that would have to be addressed if criminal sanctions were to be introduced. These problems include developing an appropriately defined criminal offence and combining any such offence with a workable leniency or amnesty policy (to encourage cartel participants to reveal the existence of cartel behaviour). Problems also relate to the concurrent operation of civil and criminal sanctions, and the development of a workable method of combining a clear and certain leniency policy with a criminal regime.
Recommendation 10.1 The Committee is of the view that solutions must be found to the problems identified by it before criminal sanctions are introduced for serious cartel behaviour. The problems are, importantly, the development (preferably by a joint body representing the Director of Public Prosecutions (DPP), the Attorney-General's Department, the ACCC and the Treasury) of a satisfactory definition of serious cartel behaviour and a workable method of combining a clear and certain leniency policy with a criminal regime. Subject to this proviso, the Committee recommends the introduction of criminal sanctions for serious, or hard-core, cartel behaviour, with penalties to include fines against any convicted corporation and imprisonment and fines, as appropriate, for implicated individuals.
Government response:
The Government accepts, in principle, that criminal penalties may be more effective than civil penalties in deterring people from engaging in serious cartel behaviour.
The Government will further consider the introduction of criminal penalties for serious cartel behaviour. Appropriate solutions must be found to the problems identified by the Committee. In addition, to enhance the welfare of Australians, any new criminal penalty must be applied broadly and must not impose significant additional uncertainty and complexity for business. Any new offence must also work well in the context of the Australian legal system, because it will only deter if the risk of conviction and substantial penalty are real.
(b) Civil penalties
The Act enables the Federal Court to impose significant civil penalties for any breach of the competition provisions, including pecuniary penalties of up to $10 million for corporations and $500,000 for individuals. In addition, the Federal Court may make other orders including the cessation of unlawful conduct and the payment of compensation or damages. Civil community service orders, probation orders and publicity orders may also be made.
The Committee concluded that comparable jurisdictions enable Courts to deter illegal behaviour by imposing maximum penalties upon corporations that are either a multiple of the gain or a proportion of the corporation's turnover. The Committee also supported recent New Zealand amendments providing an option for Courts to exclude individuals from being involved in the management of a corporation and prohibiting corporations from indemnifying their officers, employees or agents from the payment of a pecuniary penalty.
Recommendation 10.2 The Act should be amended so that:
10.2.1 the maximum pecuniary penalty for corporations be raised to be the greater of $10 million or three times the gain from the contravention or, where gain cannot be readily ascertained, 10 per cent of the turnover of the body corporate and all of its interconnected bodies corporate (if any);
10.2.2 the Court be given the option to exclude an individual implicated in a contravention from being a director of a corporation or being involved in its management; and
10.2.3 corporations be prohibited from indemnifying, directly or indirectly, officers, employees or agents against the imposition of a pecuniary penalty upon an officer, employee or agent.
Government response:
No corporation should benefit from anti-competitive behaviour. The Government will raise the maximum pecuniary penalty applicable to corporations. Also as proposed, the Government will introduce an option for Courts to exclude implicated individuals from being a director of a corporation or being involved in its management, and will address avoidance issues by prohibiting corporations from indemnifying officers, employees or agents.
Part 5: Administration
(a) Accountability of the ACCC
The Committee's terms of reference required it to examine the administration as well as the policy of the competition provisions. More submissions dealt with the ACCC's administration of the Act than with the Act itself.
Recommendation 11.1 Consideration should be given to the establishment of a single Joint Parliamentary Committee to oversee the ACCC's administration of the Act.
Government response:
The Government accepts this recommendation. The Government notes the Committee's view that the ACCC has been commendably vigorous in discharging its responsibilities under the Act.
The Government encourages the Parliament to establish a Joint Parliamentary Committee to provide further oversight of the administration of the Act by the ACCC. The Joint Committee would be well placed to develop a special understanding of the responsibilities of the ACCC and of the concerns of the parties with whom it deals.
Recommendation 11.2 The Act should be amended to establish a consultative committee to advise the ACCC on the administration of the Act. The consultative committee should be constituted so that it is convened by an independent chairperson appointed by the Treasurer. The chairperson should appoint the members of the committee in consultation with the ACCC. The committee should report to Parliament by way of a dedicated section of the ACCC's annual report.
Recommendation 11.3 An associate commissioner should be appointed to the ACCC to receive and respond to individual complaints about the administration of the Act and to report each year in the ACCC's annual report.
Government response:
The Government accepts the principle of putting in place effective consultative and complaints handling arrangements. The Government has commissioned a report by Mr John Uhrig, AC on the corporate governance of Commonwealth statutory authorities and office holders, which is expected to report shortly. After considering that report, the Government will announce a more specific response on these recommendations.
Recommendation 11.4 Consideration should be given to the manner in which the remuneration of commissioners is determined to ensure that the Government is able to attract as commissioners candidates of sufficient calibre.
Recommendation 11.5 The ACCC should consider the temporary placement of ACCC staff with other parties to develop staff resources.
Government response:
The Government believes that remuneration should be set by the Remuneration Tribunal. The Government notes the Remuneration Tribunal's review of the entitlements of office holders in 2002 (determination 23/2002). This determination has greatly increased the flexibility of remuneration packages which may be offered to full-time office holders (including ACCC Commissioners). Full-time office holders may now convert non-salary benefits into an additional salary payment and may also receive remuneration in lieu of performance pay. Accordingly, the need for the review of ACCC remuneration has been addressed.
The Government accepts Recommendation 11.5 and encourages the ACCC to build upon its existing arrangements for exchanges with other regulatory authorities. The Government also encourages the ACCC to develop staff exchanges with key groups with which it interacts.
Recommendation 11.6 The ACCC should review its service charter, in conjunction with the proposed consultative committee, in the light of the outcome of this review and the relevant recommendations of the Wilkinson Review.
Government response:
The Government agrees that the ACCC should review its service charter. Subject to the Government's specific response to recommendation 11.2, there is no objection to the proposed consultative committee contributing to such a review in order that the concerns of interested parties may be taken into account.
(b) Use of media
The Committee noted that the ACCC has been successful in raising the community's awareness of the importance of competitive markets and in encouraging compliance with the Act. It also noted that many of the submissions it received expressed concern regarding the manner in which the ACCC releases information and makes comments to the media.
Recommendation 12.1 A media code of conduct should be developed through the proposed restructured consultative committee.
Recommendation 12.2 The media code should be based on the following principles:
12.2.1 the public interest is served by the ACCC disseminating information about the aims of the Act and the ACCC's activities in encouraging and enforcing compliance with it. This extends to information about proceedings instituted by it, but an objective and balanced approach is necessary to ensure fairness to individual parties;
12.2.2 the code should cover all formal and informal comment by ACCC representatives;
12.2.3 whilst it may be necessary for the ACCC to confirm or deny the existence of an investigation in exceptional circumstances, the ACCC should decline to comment on investigations;
12.2.4 with the object of preserving procedural fairness, commentary on the commencement of court proceedings by the ACCC should only be by way of a formal media release confined to stating the facts; and
12.2.5 reporting the outcome of court proceedings should be accurate, balanced and consistent with the sole objective of ensuring public understanding of the court's decision.
Government response:
The Government accepts this recommendation. The Report notes the Committee's observation that the ACCC should exercise care in publicising particular matters to ensure that there is no unfairness to the parties involved. The development of a code of conduct governing the ACCC's use of the media will assist the ACCC's relationship with business and consumers. Subject to the Government's specific response to recommendation 11.2, the proposed consultative committee could appropriately contribute to the development of this code of conduct. The principles outlined in Recommendation 12.2 provide a useful foundation for developing this code of conduct.
(c) ACCC investigation powers
Section 155 of the Act provides the ACCC with the power to obtain information, documents and evidence in the course of investigating possible contraventions of the Act and for use in proceedings under the Act. The Committee identified concerns that the ACCC's investigative powers lack adequate safeguards, particularly in relation to section 155(2), which provides the ACCC with the power to enter premises and inspect documents without the need for a warrant.
Recommendation 13.1 The ACCC should continue to give careful consideration to the financial implications of requests for information that are made to businesses consistent with the ACCC's guidelines on this matter.
Government response:
The Government accepts this recommendation. While the ACCC needs broad investigative powers for the purpose of detecting and prosecuting contraventions, it should, nevertheless, be concerned about the effect of information requests upon recipients.
Recommendation 13.2 The function of conducting an examination of a person who is in receipt of a section 155(1)(c) notice should be delegable to senior staff of the ACCC.
Government response:
The Government supports the flexibility provided by this recommendation because ACCC Commissioners need not be directly involved in the detail of particular investigations.
Recommendation 13.3 Section 155(2) of the Act, which provides for the ACCC to enter premises and inspect documents, should be amended to:
13.3.1 require the ACCC to seek a warrant from a Federal Court Judge or Magistrate for the exercise of these powers; and
13.3.2 provide the ACCC with the power to search for and seize information.
Government response:
The ACCC has extensive powers under section 155(2) to enter premises and inspect documents but these do not require that a warrant be sought. Regulatory power must be matched with appropriate accountability.
The Act will be amended to require the ACCC to seek a warrant, although these should be capable of issue by a State or Territory judicial officer. Providing the ACCC with the power to search and seize information will provide greater clarification and certainty, as the elements of these powers are generally well known.
Recommendation 13.4 Section 155 should also be amended to:
13.4.1. extend the availability of the ACCC's investigative powers to circumstances where the ACCC is considering the revocation of an authorisation under sections 91B and 91C; and
13.4.2 repeal the redundant section 155(4).
Government response:
The Government agrees with this recommendation. These technical amendments will improve the general application of the ACCC's investigative powers.
Recommendation 13.5 It should be made explicit in the Act that section 155 does not require the production of documents to which legal professional privilege attaches.
Government response:
The Government agrees with this recommendation. Preserving legal privilege is in the public interest because it facilitates the obtaining of legal advice and promotes the observance of the law. This recommendation is consistent with the finding of the High Court in ACCC v Daniels Corporation International.
(C) NEW EUROPEAN CORPORATE GOVERNANCE TRANSPARENCY AND DISCLOSURE REPORT PUBLISHED
On 15 April 2003 Standard & Poor's Governance Services announced that it had published the European component of its global transparency and disclosure study, which examines disclosure of corporate governance-related information by companies in the world's major and emerging markets.
The new report 'Transparency and Disclosure Study: Europe' examines aggregate transparency and disclosure standards among companies in the Standard & Poor's Europe 350 index, based on their annual reports and, where applicable, their 20-F regulatory filings in the US. Previous studies have examined corporate transparency and disclosure standards in the US, Canada, Japan, Asia, and Latin America.
The authors of the study have focused on aggregated data instead of individual company rankings as in previous studies, thereby enabling better country-by-country comparison and analysis. Standard & Poor's emphasises that the study is not a measure of countries' corporate governance standards and should not be interpreted as a proxy for measuring companies' corporate governance standards. The study, however, does examine the level of disclosure of governance-related issues, which, in turn, facilitates analysis of the governance practices of individual companies.
The study's findings include:
- Disclosure of corporate
governance-related information in Europe compares favourably with Asia, but less
favourably with North America, although the level of disclosure in annual
reports alone (excluding other regulatory filings) is higher in Europe than in
the US;
- Disclosure of governance-related information in the UK, France, and
the Netherlands is among the highest globally. Within Europe, disclosure
standards are lowest in Italy and Spain;
- The varying practices in
individual countries suggest that governance-related disclosure is not
constrained by local regulatory filing requirements;
- In all countries
analyzed, companies with American Depositary Receipt (ADR) listings have higher
governance-related disclosure levels than companies without an ADR listing;
and
- European companies provide consistently high levels of financial
information, but are weaker in disclosing ownership information and investor
rights in annual reports.
Questions that are less likely to be answered in European annual reports include: The percentage of cross-ownership; the ownership structure of affiliates; details of the chief executive officer's contract; specifics on performance-related pay for directors and senior executives; the form in which directors' salaries are paid; and the number of shares held in other affiliated companies by managers.
The full report 'Transparency and Disclosure Study: Europe' is available at http://www.governance.standardandpoors.com under the Transparency & Disclosure Study icon in the right-hand column.
(D) SEC TO REVIEW CURRENT PROXY RULES AND REGULATIONS TO IMPROVE CORPORATE DEMOCRACY
On 14 April 2003 the United States Securities and Exchange Commission announced that it had directed the Division of Corporation Finance to examine current proxy regulations and develop possible changes to those regulations to improve corporate democracy.
"The current rules concerning shareholder proposals and director elections are clear and we are enforcing them as such, but the time has come for a thorough review of the proxy rules and regulations to ensure that they are serving the best interests of today's investors, while at the same time, fostering sound corporate governance and transparent business practices," said Chairman William Donaldson.
The Commission has directed the Division of Corporation Finance to formulate possible changes in the proxy rules and regulations and their interpretations regarding procedures for the election of corporate directors. This review will address shareholder proposals, the nomination process, elections of directors, the solicitation of proxies for director elections, contests for corporate control, and the disclosure and other requirements imposed on large shareholders and groups of shareholders. As part of this process, the Commission has asked the Division to consult with all interested parties, including representatives of pension funds, shareholder advocacy groups, and representatives from the business and legal communities. The Commission has requested that the Division provide its recommendations to the Commission by 15 July of this year.
(E) GOVERNMENT ACTS TO REGULATE UNSOLICITED OFFERS TO BUY SHARES AT BELOW MARKET PRICE
On 8 April 2003 the Parliamentary Secretary to the Treasurer, Senator Ian Campbell announced new Regulations to deal with unsolicited offers to buy shares at below market price.
Section 1364 of the Corporations Act 2001 No. 50 (Cth) (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
A market practice had developed whereby persons approach shareholders off-market and make offers to purchase shares well below market value, essentially trading on the potential ignorance of those shareholders. In the past, the Financial Services Reform Act 2001 No. 122 (Cth) (FSRA) has not imposed conditions or restrictions upon the practice of such businesses.
The purpose of the Regulations is to expand the definition of a financial service under the Act to include the making of unsolicited off-market offers to purchase financial products from investors, by persons in the business of acquiring financial products. Defining these offers as financial services ensures that persons involved in this practice would need to become licensed under the Financial Services Reform Act 2001 (FSRA) licensing regime. A licensing exemption would, however, be available if the person discloses the current market value of the financial product they wish to purchase when making the offer.
The Regulations would support the reforms to the regulation of the financial services industry, which were included in the FSRA and associated legislation, by promoting disclosure and protecting inexperienced financial product holders from businesses that offer to purchase financial products off-market at grossly undervalued prices.
(F) REGULATORS ISSUE INTERAGENCY PAPER ON SOUND PRACTICES TO STRENGTHEN THE RESILIENCE OF THE US FINANCIAL SYSTEM
On 8 April 2003 the United States Securities and Exchange Commission announced that three federal regulatory agencies issued an "Interagency Paper on Sound Practices to Strengthen the Resilience of the US Financial System." Among other things, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission identified sound practices to strengthen the resilience of critical US financial markets and minimize the immediate systemic effects of a wide-scale disruption.
On 5 September 2002, the agencies published for comment a draft of the paper in the Federal Register. The agencies have incorporated many of the suggestions that were made. The final paper, which applies most directly to the clearing and settlement activities of a limited number of financial institutions, provides more flexibility to firms in managing geographic dispersion of backup facilities and staffing arrangements, and takes into account other considerations relevant to cost-effective implementation of sound practices.
The paper is available on the SEC's website at http://www.sec.gov
(G) FSA PROPOSALS TO MAKE FUND MANAGERS MORE ACCOUNTABLE TO INVESTORS
On 7 April 2003 the United Kingdom Financial Services Authority (FSA) proposed a new policy where managers would be more accountable to investors. Under this policy fund managers would no longer be able to incur costs for services additional to dealing without the customer's express agreement. This means that managers would have to negotiate with their customers on how much to pay for such services. The FSA is also proposing that managers would no longer be able to use soft commissions to purchase services such as dealings screens.
Gay Huey-Evans, Director of the FSA's Markets and Exchanges Division said:
"Up to 40% of total commission spend is used to acquire services additional to dealing so it is important that investors are clear on how their money is spent. These proposals are designed to do away with distortions in the market and make fund managers more answerable to their clients. Our analysis suggests changes to the regulatory approach should foster competition and ensure a better overall outcome for investors."
At the moment brokers typically provide a range of additional services to fund managers. The main ones are market information technology and investment research. Services are provided under two types of arrangements - 'bundling' and 'softing'. 'Bundling' refers to the provision by brokers of other in-house services, such as research, together with dealing in securities in a single commission charge. 'Softing' is the practice by which a broker agrees to pay for the supply of services from a third party to a fund manager in return for an agreed volume of business at an agreed commission rate. In both cases, the value of the services provided is dependent on how much business the fund manager places with the broker. The costs for these services are included in the commissions which are passed through by fund managers directly as charges to their clients.
In 2000 over £2.3 billion were paid as commission by UK institutional fund managers to UK brokers. It is estimated that fund managers spent between £660 and £880 million of the commission on services additional to dealing. Of this between £500 million and £720 million was spent on investment research. In 2001 at least £90 million was spent on market pricing and information services.
Paul Myners' review of institutional investment published in March 2001 suggested that commission costs incurred by fund managers on their clients' behalf should be reflected in the fund manager's fee to investors. The Government subsequently agreed with the FSA that it would examine these issues in the context of its review of best execution. The FSA's proposals deal with the fund managers' conflicts of interest by requiring them to be directly accountable to their clients for the costs of additional services.
The consultation ends on 29 August 2003. Consultation paper 'CP176: Bundled Brokerage and Soft Commission Arrangements' can be accessed at http://www.fsa.gov.uk/pubs/cp/
(H) GROUP OF 100 RELEASES GUIDE TO REVIEW OF OPERATIONS AND FINANCIAL CONDITION
On 2 April 2003 the Group of 100 (which represents Australia's senior finance executives) published its Guide of Review of Operations and Financial Condition. The Guide provides general guidance on the form and content of a review of operations and financial condition that is aimed at complementing and supplementing the financial statements. It provides a framework for the directors of a company to discuss and analyse its performance and the opportunities and risks underlying its results and financial condition to ensure communication by the company on a consistent basis.
The review is aimed at meeting the information needs of users of financial reports and providing them with a basis for forming a view as to the likely future performance of the company in the context of the strategies of the company for achieving long term value creation and known trends in performance. This requires that the review contains a discussion of the operations of the period, including an explanation of unusual or infrequent events and transactions, and an analysis of the opportunities and risks facing the company, together with a planned approach to managing those opportunities and risks.
The Guide states that the review should:
- Explain the objectives of
the company and how they are to be achieved.
- Include discussion and
analysis of key financial and non-financial performance indicators used by
management in their assessment of the company and its performance.
- Discuss
the main factors and influences that may have a major effect on future results
whether or not they were significant in the period under review.
- Discuss
the main activities of the company, including significant features of operating
performance within the period covered by the financial report.
- Discuss the
overall return attributable to shareholders in terms of dividends and increases
in shareholders' funds.
- Include a commentary on the results for the
financial year and dividends, both in total and in per share terms indicating
the directors' overall distribution policy.
- Discuss the current level of
capital expenditure and other expenditure enhancing future performance, together
with planned future expenditure (both committed, and authorised but not
committed) and how it is expected to contribute future performance.
- Contain
a discussion of the capital structure of the company, including the maturity
profile of its debt, types of financial instruments used, and currency and
interest rate exposures.
- Discuss the cash generated from operations and
other cash flows during the period under review, including commentary on any
special factors that influenced cash flows.
- Discuss the company's liquidity
and funding at the end of the period under review.
- Comment on the strengths
and resources of the company whose value may not be fully reflected in the
statement of financial position.
- Discuss and explain the significance of
critical accounting policies, estimates and judgments made and their impact on
the company's financial condition, changes in operation and results of
operations.
- Discuss and explain the significance and impact of changes in
legislation, regulations and other external requirements which has had a
material effect in the reporting period or is expected to have a material effect
in future periods on the company's financial condition, changes in financial
condition and results of operations.
- Discuss the company's risk profile and
risk management practices if these are not dealt with elsewhere in the annual
report.
- Discuss the nature of the company's corporate governance policies
and practices if these are not dealt with elsewhere in the annual
report.
The Guide is available on the Group of 100 website at http://www.group100.com.au
(I) CLERP 7
BECOMES LAW
(By Tom Bostock, Partner, Mallesons)
The Corporations Legislation Amendment Act 2003 No. 24 (Cth) ("the CLERP 7 Act") was passed on 27 March 2003 and received Royal Assent on 11 April 2003. The principal objective of the CLERP 7 Act, and the associated Corporations (Review Fees) Act 2003 No. 23 (Cth) and Corporations (Fees) Amendment Act 2003 No. 22 (Cth) ("the Fees Acts") is to implement "CLERP 7 Simplified Lodgements and Compliance Streamlining Paperwork under the Corporations Law", the Proposals Paper for which was issued in early 2000. Except for the other amendments noted in section 3 below, the CLERP Act and the Fees Acts will commence on 1 July 2003. The principal amendments to the Corporations Legislation (as defined in CA s9) are as follows:
(1) CLERP 7 amendments
The main CLERP 7 amendments are:
(a) Abolition of company annual returns (Schedule 1 to the Act)
In place of the annual return, companies will be required to confirm or correct company particulars using information provided by ASIC in the form of an Extract of Particulars and, where necessary a Return of Particulars, and pay an annual "review" fee. There will be new requirements for lodging information about company members and any ultimate holding company.
(b) Streamlining document lodgment requirements (Schedule 3 to the Act)
A number of existing company forms will be replaced by multi-purpose form. In addition, electronic lodgement of, and payment for, documents will be facilitated and encouraged; and telephone notice may be given to ASIC of changes relating to misspelling or other minor typographical error.
(c) Modification of the Corporations Act fees regime (Part 9.10 in Schedule 1 and the Fees Acts)
The Fees Schedule will be simplified and fees relief provided for small business. Annual fees will be introduced for occupational licence holders, while there will be progressive implementation of user pays principles for fees for occupational licensing, fund raising and takeovers.
Because of section 55 of the Constitution, the fee proposals are covered by separate legislation in the form of the Fees Acts.
(2) Harmonisation with the new tax system (use of ABN and extension of lodgment periods)
Schedule 2 to the CLERP 7 Act contains a number of fairly minor and technical amendments that are intended to harmonize some requirements of the Corporations Act 2001 No. 50 (Cth) with similar requirements in the A New Tax System (Australian Business Number) Act 1999 No. 84 (Cth).
In particular, if the last nine digits of a company's ABN are the same as its ACN, the company will from 1 July 2003 have the choice of using either its ABN or its ACN or its common seal on its public documents and in any other case when the company's ACN is required to permitted to be used under a Commonwealth law administrated by ASIC.
(3) Other amendments
Schedule 5 to the CLERP 7 Act contains a number of miscellaneous amendments to the Corporations Legislation as follows:
- increase from $250,000 to
$1,000,000 the amount for which ASIC may render itself liable under contracts
entered into by it without Ministerial approval;
- amend Part 9 of the ASIC
Act to permit the Chairman of ASIC (an ex officio member of CAMAC) to appoint an
alternate (being a member or a senior officer of ASIC) to attend any meeting of
CAMAC;
- repeal CA s201C to remove the prohibition on the election or
re-election of a director of a public company or a subsidiary of a public
company who has reached 72 years of age; and
- amend the CA to exclude
charges over electronically-controlled securities created after 11 April 2003
from the charges provisions in CA Chapter 2K.
The first two of those items commence retrospectively on 15 July 2001, immediately after the commencement of the Corporations Act 2001. The last two items commence on the date of Royal Assent ie 11 April 2003.
(4) Extension of lodging periods
(a) Schedule 4 to the CLERP 7 Act extends from 14 to 28 days the time within which the following may be lodged without penalty with ASIC:
- CA s142(2) - notice of
change of registered office;
- CA s146(1) - change of principal place of
business;
- CA s205B(1) - notice of appointment of director;
- CA s205B(2)
- notice of appointment of alternate director;
- CA s205B(4) - notice of
change of personal details of director;
- CA s205B(5) - notice of cessation
of office of director;
- CA s254X(1) - notice to ASIC of share
issue.
(b) The Schedule 4 changes become operative on 1 July 2003. If at that time a company is required to lodge a notice under any of the above provisions and the time for lodgment has not expired, the extended period under Schedule 4 applies by new CA s1448 to that notice.
(5) Fees
With effect form 1 July 2003 the Corporations (Fees) Act 2003:
- increases from $5000 to
$10,000 the maximum fee which may be prescribed by regulation for lodgement with
ASIC of a document or any other chargeable matter;
- increases from $25,000
to $50,000 the maximum fee, or sum of fees, for any chargeable matter which may
be prescribed by regulation; and
- permits the regulations to prescribe
different fees for the same chargeable matter, depending on whether or not the
matter is complied with by electronic means.
The Corporations (Review Fees) Act 2003, enables the regulations to prescribe review fees up to a maximum of $10,000 for companies, registered schemes, registered Australian bodies, registered auditors and liquidators and persons holding an Australian financial services licence. A review fee need not bear any relationship to the cost of providing any service.
(J) SEC REQUIRES EXCHANGE LISTING STANDARDS FOR AUDIT COMMITTEES
On 1 April 2003 the United States Securities and Exchange Commission voted to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements established by the Sarbanes-Oxley Act of 2002. The new rules and amendments implement the requirements of Section 10A(m)(1) of the Securities Exchange Act of 1934, as added by section 301 of the Sarbanes-Oxley Act of 2002.
Under the new rules, national securities exchanges and national securities associations will be prohibited from listing any security of an issuer that is not in compliance with the following requirements.
- Each member of the audit
committee of the issuer must be independent according to the specified criteria
in section 10A(m).
- The audit committee must be directly responsible for the
appointment, compensation, retention and oversight of the work of any registered
public accounting firm engaged for the purpose of preparing or issuing an audit
report or performing other audit, review or attest services for the issuer, and
the registered public accounting firm must report directly to the audit
committee.
- The audit committee must establish procedures for the receipt,
retention and treatment of complaints regarding accounting, internal accounting
controls or auditing matters, including procedures for the confidential,
anonymous submission by employees of concerns regarding questionable accounting
or auditing matters.
- The audit committee must have the authority to engage
independent counsel and other advisors, as it determines necessary to carry out
its duties.
- The issuer must provide appropriate funding for the audit
committee.
The new rules will establish section 10A(m)'s two criteria for audit committee member independence.
- Audit committee members
must be barred from accepting any consulting, advisory or compensatory fee from
the issuer or any subsidiary, other than in the member's capacity as a member of
the board or any board committee.
- An audit committee member must not be an
affiliated person of the issuer or any subsidiary apart from capacity as a
member of the board or any board committee.
The new rules will apply to both domestic and foreign listed issuers. It is important to note that, based on significant input from and dialogue with foreign regulators and foreign issuers and their advisers, several provisions, applicable only to foreign private issuers, have been included that seek to address the special circumstances of particular foreign jurisdictions. These provisions include:
- allowing non-management
employees to serve as audit committee members, consistent with
"co-determination" and similar requirements in some countries;
- allowing
shareholders to select or ratify the selection of auditors, also consistent with
requirements in many foreign countries;
- allowing alternative structures
such as boards of auditors to perform auditor oversight functions where such
structures are provided for under local law; and
- addressing the issue of
foreign government shareholder representation on audit committees.
The new rules also will make several updates to the Commission's disclosure requirements regarding audit committees, including updates to the audit committee financial expert disclosure requirements for foreign private issuers.
The Commission voted to establish two sets