CORPORATE LAW BULLETIN
Bulletin No 69, May 2003
Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation
Published by LAWLEX on behalf of
Centre for Corporate Law and Securities
Regulation,
Faculty of Law, The University of Melbourne
(http://cclsr.law.unimelb.edu.au)
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The Australian Securities and Investments Commission (http://www.asic.gov.au),
The
Australian Stock Exchange (http://www.asx.com.au)
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Clayton Utz (http://www.claytonutz.com)
Corrs Chambers Westgarth (http://www.corrs.com.au)
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Mallesons Stephen Jaques (http://www.mallesons.com)
Phillips Fox (http://www.phillipsfox.com)
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CONTENTS
1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) New study on executive remuneration
(B) Audit of company accounts: European Commission sets out ten
priorities to improve quality and protect investors
(C) Company law and corporate governance: European Commission presents
action plan
(D) Inquiry into Australia's corporate
insolvency laws
(E) UK Financial Reporting Council -
Consultation on the Higgs Report
(F) Corporate Law Budget
Initiatives
(G) Study finds forced turnover of CEOs has
reached a record high
(H) New Zealand Stock Exchange -
Proposed enforcement changes
(I) Cross Border Proxy Voting,
Case Studies 2002
(J) Annual survey of corporate governance
in Asia
(K) Reform of Australia's bankruptcy
system
(L) Financial literacy survey
(M) New governance publications aim to help boards of
directors
(N) FPA launches Professional Partner
strategy
(O) Fund managers lift industry practice on
corporate governance
(P) ABA corporate responsibility task
force urges new corporate governance policies and lawyer ethics rules
(Q)
Investment firms settle enforcement actions involving conflicts of
interest between research and investment banking
(R) SEC
votes to mandate electronic filing of ownership reports; prohibit improper
influence of auditors
(S) FSA advises industry on
definition of "mis-selling"
(T) Institute of Chartered
Accountants to pursue individuals mentioned in HIH Report
(A) Draft guidelines on value of options in directors'
reports
(B) Court finds against Water Wheel
directors
(C) Policy Statement 49: Employee share
schemes
3. RECENT TAKEOVERS PANEL MATTERS
(A) Panel makes orders in Cobra Resources Limited
proceedings
(B) Panel declines application in relation to
Sirtex Medical
(C) Panel declaration of unacceptable
circumstances in relation to affairs of AMP Shopping Centre Trust
(D) Review Panel affirms Anaconda 15 decision in relation to Anaconda
Nickel Limited and, in addition, requires disposal of on-market acquisitions by
Sherritt
4. RECENT CORPORATE LAW DECISIONS
(A) Insolvent trading by directors - the Water Wheel case
(B) Running away with the accounts: preferential payments
in insolvency in the building industry
(C) Imputed waiver
of legal professional privilege by pleading state of mind
(D) Mareva injunctions and the ACCC
(E) The effect
of a deed of company arrangement on personal guarantees
(F) Corporate succession: disputed share entitlements and oppressive
conduct
(G) Consent of a sole shareholder to fraudulent
conduct by a director
(H) Unfair preference payment not
avoided where delay in payments had been routine business practice
(I) Previous year tax losses transferred to a subsidiary are deductible
despite winding up orders
(J) Redundancy payments in the
context of transmission of business
(K) Deed creditors
entitled to administration fund collected but not paid before
liquidation
(L) Court confirms tough stance against
sleeping directors
(M) What is good service? - setting
aside a creditor's statutory demand
(N) Union
representation at a creditor's meeting - section 447A of the Corporations Act
(O) Breach of fiduciary duties and the appropriateness of
personal versus proprietary remedies
5. CORPORATE LAW TEACHERS' ASSOCIATION: ANNUAL CONFERENCE 2004 - REGULATING CORPORATIONS
6. RECENT CORPORATE LAW JOURNAL ARTICLES
9. DISCLAIMER
1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) NEW STUDY ON EXECUTIVE REMUNERATION
On 22 May 2003 a new study on executive remuneration was published. The Labor Council of NSW commissioned three academics to look behind the current debate on executive pay levels to gauge whether Australian executives are delivering value. In particular the authors were asked to consider the use of share options, ostensibly as a way of linking executive rewards more closely to growth in 'shareholder value'.
Key findings of the study are as follows:
(1) Executive remuneration levels in Australia grew over the decade 1992-2002 from 22 times average weekly earnings to 74 times average weekly earnings.
(2) At the same time, executive option packages, with 'long-term incentives' (share bonuses, share purchase plans and share option entitlements) for Australian CEOs increased from 6.3 per cent of total remuneration in 1987 to 35.2 per cent of total remuneration in 1998.
(3) The often-stated link between high executive pay and company performance does not exist. Indeed, the evidence is that as an executive's pay increases, the performance of the company deteriorates. Against three criteria: return on equity, share price change and change in earnings per share, statistical analysis shows that high excessive pay levels actually coincide with a lower bottom line.
(4) Applying this analysis, the authors identify a performance-optimal range for executive remuneration of between 17 and 24 times average wage and salary earnings, beyond which the performance of a company begins to deteriorate.
(5) The finance sector emerges as a case study in corporate excess according to the authors, with CEOs of the four major banks averaging 188 times the pay of their customer service staff. Substantial elements of executive packages are not disclosed to shareholders according to the authors, and not withstanding the growth in bank profits in recent years, the accompanying increase bank CEO cash and equity-based remuneration has not been matched by sustained improvements in shareholder-focussed measures of financial performance.
The study is available at http://www.council.labor.net.au/
(B) AUDIT OF COMPANY ACCOUNTS: EUROPEAN COMMISSION SETS OUT TEN PRIORITIES TO IMPROVE QUALITY AND PROTECT INVESTORS
On 21 May 2003 the European Commission proposed ten priorities for improving and harmonising the quality of statutory audit throughout the EU. The objectives are to ensure that investors and other interested parties can rely fully on the accuracy of audited accounts, to prevent conflicts of interest for auditors and to enhance the EU's protection against Enron-type scandals. The plan announces forthcoming proposals for new EU laws to radically overhaul existing legislation and to extend it. Once adopted, these proposals will, for the first time, provide a comprehensive set of EU rules on how audits should be conducted and on the audit infrastructure needed to safeguard audit quality. The plan is divided into short and medium-term priorities. Among the short-term ones are strengthening public oversight of auditors at Member State and EU level, requiring ISAs (International Standards on Auditing) for all EU statutory audits from 2005 and the creation of an EU Regulatory Committee on Audit, to complement the revised legislation and allow the speedy adoption of more detailed binding measures. The priorities on audit complement the Commission's wider action plan on company law and corporate governance, published simultaneously (see IP/03/716 and Item 1(C) of this Bulletin).
Internal Market Commissioner Frits Bolkestein said: "I want European solutions tailored to our needs, respectful of our different cultures with the full support of the European profession. I do not accept the imposition of US standards on our firms and that is why the European Union strongly opposes registration of EU audit firms with the United States' Public Company Accounting Oversight Board. The EU will regulate its own businesses."
Once implemented, the steps set out in the Communication will significantly change the EU regulatory landscape. In particular, a forthcoming proposal for a new Directive on auditing would replace and extend the current EU legislation, the 8th Company Law Directive, covering the education, approval and registration of persons who can be approved by Member State authorities to perform audits.
The EU regulatory infrastructure would also be altered. The Commission is proposing that it would be able to adopt, on the basis of the new Directive and in accordance with comitology procedures, binding implementing measures. A new Audit Regulatory Committee will be established and the present EU Committee on Auditing, will be renamed the Audit Advisory Committee.
The main driver for this Communication is the development of the single European capital market with 7000 listed companies and continued efforts to harmonise and improve the approximately two million statutory audits conducted annually in the EU.
(1) Summary of the short-term priorities:
(a) Modernising the 8th Company Law Directive
The Commission will propose to modernise the 8th Company Law Directive (84/253/EEC) to ensure a comprehensive, principles-based Directive applicable to all statutory audits conducted in the EU. The modernised Directive would include principles on: public oversight, external quality assurance, auditor independence, code of ethics, auditing standards, disciplinary sanctions and the appointment and dismissal of statutory auditors.
(b) Reinforcing the EU's regulatory infrastructure
The proposals for a modernised 8th Directive will also include the creation of an Audit Regulatory Committee. The Commission will adopt, in accordance with comitology procedures, the implementing measures necessary to underpin the principles set out in the modernised 8th Directive. The present EU Committee on Auditing, renamed the Audit Advisory Committee, composed of representatives of Member States and of the profession, will continue its work as an advisory committee.
(c) Strengthening public oversight of the audit profession
The Commission, together with the Audit Advisory Committee, will analyse existing systems of public oversight and develop minimum requirements (principles) for public oversight. The Commission will define a co-ordination mechanism at EU level to link up national systems of public oversight into an efficient EU network.
(d) Requiring International Standards on Auditing (ISAs) for all EU statutory audits
The Commission and the Audit Advisory Committee will work to prepare the implementation of ISAs from 2005. These will include: an analysis of EU and Member State audit requirements not covered by ISAs; the development of an endorsement procedure; a common audit report and high-quality translations. The Commission will work towards further improvements to the IFAC/IAASB audit standard setting process, notably by ensuring that public interest is taken fully into account. Assuming satisfactory progress, the Commission will propose a binding legal instrument requiring the use of ISAs from 2005.
(2) Summary of the medium-term priorities
(a) Improving disciplinary sanctions
The Commission and the Audit Advisory Committee will assess national systems of disciplinary sanctions to determine common approaches and will introduce an obligation on Member States. to co-operate in cross border cases.
(b) Making audit firms and their networks more transparent
The Commission and the Audit Advisory Committee will develop disclosure requirements for audit firms, covering among other things their relationships with international networks.
(c) Corporate governance: strengthening audit committees and internal control
The Commission and the Audit Advisory Committee will work on the appointment, dismissal and remuneration of statutory auditors, and on communication between the statutory auditor and the company being audited. The Commission and the Committee will also examine statutory auditors' involvement in assessing and reporting on internal control systems.
(d) Reinforcing auditor independence and code of ethics
The Commission will carry out a study on the impact of a more restrictive approach on additional services provided to the audit client. The Commission will continue the EU-US regulatory dialogue on auditor independence, with the aim of obtaining US recognition of the equivalence of the EU approach. The Commission and the Audit Advisory Committee will analyse existing national codes of ethics and the IFAC code of ethics and consider further appropriate action.
(e) Deepening the internal market for audit services
The Commission will work on facilitating the establishment of audit firms by proposing to remove restrictions in the present 8th Directive on ownership and management. The Commission will exempt the provision of audit services from its proposal on the recognition of professional qualifications (see IP/02/393) by amending the 8th Directive to include the principle for mutual recognition subject to an aptitude test. The Commission will carry out a study on the EU audit market structure and on access to the EU audit market.
(f) Examining auditor liability
The Commission will also study the economic impact of auditor liability regimes.
The full text of the Communication is available at:
http://europa.eu.int/comm/internal_market/en/company/audit/index.htm
(C) COMPANY LAW AND CORPORATE GOVERNANCE: EUROPEAN COMMISSION PRESENTS ACTION PLAN
Strengthening shareholders rights, reinforcing protection for employees and creditors and increasing the efficiency and competitiveness of business are the main aims of an Action Plan on "Modernising Company Law and Enhancing Corporate Governance in the EU" published by the European Commission on 21 May 2003. It is based on a comprehensive and prioritised set of proposals for action, covering several years. The Action Plan devotes special attention to a series of corporate governance initiatives aiming at boosting confidence on capital markets. The Plan is open to public consultation for three months. The Commission will publish a synthesis of the comments received which will be given adequate consideration. The Commission intends to launch some initiatives this year or early next year.
The Action Plan is the Commission's response to the Final Report, presented in November 2002, of the High Level Group of Company Law Experts appointed by Frits Bolkestein and chaired by Jaap Winter (see IP/02/1600).
(1) Aims and objectives
The main objectives of the Action Plan are:
- to strengthen shareholders' rights and protection for employees, creditors
and the other parties with which companies deal, while adapting company law and
corporate governance rules appropriately for different categories of company;
and
- to foster the efficiency and competitiveness of business, with special
attention to some specific cross-border issues.
(2) Why the Plan is needed
The European regulatory framework for company law and corporate governance needs to be modernised for the following reasons: the growing trend for European companies to operate cross-border in the Internal Market, the continuing integration of European capital markets, the rapid development of new information and communication technologies, the forthcoming enlargement of the EU to 10 new Member States, and the damaging impact of recent financial scandals.
(3) Outline of the Plan
The Action Plan is prioritised over the short-term (2003-2005), medium-term (2006- 2008) and long-term (2009 onwards), and indicates which type of regulatory instrument should be used for each proposal, with approximate timescales.
The Action Plan is based on a comprehensive set of legislative and non-legislative proposals, under the following headings:
(a) Corporate governance
The Commission does not believe that a European Corporate Governance Code would offer significant added value but would simply add an additional layer between international principles and national codes. However, a self-regulatory market approach, based solely on non-binding recommendations, is not sufficient to guarantee sound corporate governance. In view of the growing integration of European capital markets, the European Union should adopt a common approach covering a few essential rules and should ensure adequate coordination of national corporate governance codes.
The Commission sees the following initiatives as the most urgent ones:
- introduction of an Annual Corporate Governance Statement. Listed companies
should be required to include in their annual documents a coherent and
descriptive statement covering the key elements of their corporate governance
structures and practices;
- development of a legislative framework aiming at
helping shareholders to exercise various rights (for example asking questions,
tabling resolutions, voting in absentia, participating in general meetings via
electronic means). These facilities should be offered to shareholders across the
EU, and specific problems relating to cross-border voting should be solved
urgently;
- adoption of a Recommendation aiming at promoting the role of
(independent) non-executive or supervisory directors. Minimum standards on the
creation, composition and role of the nomination, remuneration and audit
committees should be defined at EU level and enforced by Member States, at least
on a "comply or explain" basis;
- adoption of a Recommendation on Directors'
Remuneration. Member States should be rapidly invited to put in place an
appropriate regulatory regime giving shareholders more transparency and
influence, which includes detailed disclosure of individual remuneration;
and
- creation of a European Corporate Governance Forum to help encourage
coordination and convergence of national codes and of the way they are enforced
and monitored.
Other corporate governance initiatives proposed in the Action Plan cover: achieving better information on the role played by institutional investors in corporate governance; giving further effect to the principle of proportionality between capital and control; offering to listed companies the choice between the one-tier and two-tier board structures; and enhancing directors' responsibilities for financial and key non- financial statements. The Action Plan notes that there is a strong medium to long-term case for aiming to establish a real shareholder democracy and that the Commission intends to undertake a study on the consequences of such an approach.
(b) Capital maintenance and alteration
The Commission considers that a simplification of the 1976 Second Company Law Directive, on the formation of public limited liability companies and the maintenance and alteration of their capital, would promote business efficiency and competitiveness without reducing protection for shareholders and creditors.
A proposal to amend the Second Directive is therefore a priority for the short-term. Such a proposal may include a partial relaxation of certain rules (applicable inter alia to contributions in kind, acquisition of own shares, or limitation/withdrawal of pre- emption rights allowing a company's shareholders to have first refusal on new shares issued).
It could also include the introduction of "squeeze-out rights", meaning that the holder of a large majority of a company's securities could compel minority shareholders to sell their stock at a fair price, and of "sell-out rights" allowing minority shareholders to compel holders of a large majority of the capital to purchase their securities at a fair price. This would go further than the proposed Directive on Takeover Bids, which offers those rights only in listed companies and only when there has been a takeover bid.
Later on, an alternative regime not based on the concept of legal capital could be offered as an option to Member States. The Commission will, in the medium term, launch a study into the feasibility of an alternative based on a solvency test.
(c) Groups and pyramids
Groups of companies, which are common in most Member States, are a legitimate way of doing business, but they may present risks for shareholders and creditors. More transparency can help minimise those risks. Initiatives aiming at improving the financial and non-financial information disclosed by groups are priorities for the short-term. Such initiatives would aim to ensure better information on the group's structure and intra-group relations, as well as on the financial situation of the various parts of the group.
The Action Plan advocates a framework rule to allow those managing a company belonging to a group to implement a coordinated group policy. It underlines the need for action against abusive pyramids, defined by the High Level Group as chains of holding companies whose sole or main assets are their shareholding in another listed company.
(d) Corporate restructuring and mobility
European companies need to be able more easily to do business across national borders within the EU. The Commission intends to present in the short term a new proposal for a Tenth Company Law Directive facilitating mergers between companies from different Member States, as well as a proposal for a Fourteenth Company Law Directive on the transfer of "seat" (a company's centre of activities and/or registered office) from one Member State to another. The Action Plan also covers: simplifying some of the requirements under the Third Company Law Directive (national mergers) and the Sixth Directive (national divisions), and introducing squeeze-out and sell-out rights for all public limited liability companies (see above).
(4) Other matters
The Action Plan includes a number of other proposals, as follows:
- launching a feasibility study on the possible introduction of a European
Private Company Statute, which would primarily serve the needs of SMEs active in
more than one Member State;
- supporting in the short-term the ongoing
process aimed at the introduction of several European legal forms (European
Cooperative, European Association, European Mutual Society), and considering in
the medium term the development of a European Foundation; and
- increasing
the disclosure requirements applicable to a series of limited liability legal
entities existing at national level.
Simultaneously with the Action Plan, the Commission has published ten priorities for improving and harmonising the quality of statutory audit throughout the EU, to ensure that investors and other interested parties can rely fully on the accuracy of audited accounts and to prevent conflicts of interest (see IP/03/715).
(5) Next steps
The Action Plan will be considered by the European Parliament and the Council.
The Competitiveness Council, which originally invited the Commission to produce the Action Plan - an invitation endorsed by the Council of Economic and Finance Ministers, and by Heads of State and Government at the European Council on 20-21 March 2003 - has declared its intention to deal with it as a priority.
Meanwhile, comments from all interested parties are invited by 31 August 2003 to MARKT-COMPLAW@cec.eu.int
The Commission will publish a synthesis of the comments received, and they will be taken into account in implementing the Action Plan. The full text of the Plan is available at:
http://europa.eu.int/comm/internal_market/en/company/company/news/index.htm
(D) INQUIRY INTO AUSTRALIA'S CORPORATE INSOLVENCY LAWS
The Parliamentary Joint Committee on Corporations and Financial Services is currently conducting an inquiry into the operation of Australia's corporate insolvency laws.
On 16 May 2003 the Committee released an Issues Paper to assist the Committee's Inquiry. The Issues Paper provides background material and information on aspects of insolvency law that have been highlighted in submissions to date and/or in media and professional commentary on corporate insolvency law and practice. It seeks to assist interested parties in commenting on matters of concern about the operation of Australia's insolvency laws and focus discussion on issues that appear to offer good prospects for improving the operation of Australia's insolvency laws. At the same time it does not seek to limit the issues that commentators may wish to raise.
A copy of the Issues Paper and advice concerning the lodgment of submissions is available from the website at http://www.aph.gov.au/senate/committee or the Secretariat (tel: 02 6277 3581).
(E) UK FINANCIAL REPORTING COUNCIL - CONSULTATION ON THE HIGGS REPORT
At its meeting on 14 May 2003, the UK Financial Reporting Council (FRC) decided to set up a working group of FRC members to produce a revised draft of the Combined Code in the light of points made in response to the FRC's recent consultation.
The group will be chaired by Sir Bryan Nicholson, Chairman of the FRC, and will comprise:
Sir John Egan, President CBI and Deputy Chairman FRC
Peter Wyman,
President ICAEW and Deputy Chairman FRC
Charles Allen-Jones, Formerly Senior
Partner, Linklaters and Alliance
David Clementi, Chairman, Prudential
plc
Derek Higgs, Chairman, Partnerships UK plc and Senior Adviser in the UK
to UBS Warburg
Paul Myners, Chairman, Guardian Media Group plc and former
Chairman, Gartmore Investment Management plc
Colin Perry, Chairman, LTE
Scientific Ltd and former chairman of the CBI SME Council
Sir Robert Smith,
Chairman, The Weir Group PLC
Sir Bryan Nicholson said:
"The consultation exercise reinforced the wide welcome for the general thrust of the Higgs report and its recommendations to strengthen the role of non-executive directors and the transparency and accountability of boards to shareholders. Responses included a great deal of thoughtful comment and many good suggestions, but also identified some strong criticism about certain aspects of the proposed Code changes. The FRC will now work to produce a draft taking account of the consultation, with the intention of reaching a final draft of the Code that will build on Higgs' approach and command general support. I believe the new Code will make a substantial contribution to strengthening corporate governance in the UK."
In the discussion, the FRC strongly supported the incorporation of the substance of the Higgs and Smith reports into the Combined Code.
It was recognised that the 'comply or explain' principle was key to the successful working of the Code and that the dialogue between companies and institutional shareholders was not as well developed as it should be. Both needed to put more effort into making the system work; there would be occasions when a company would choose to use the 'explain' option, and institutional investors should consider such explanations carefully, giving reasons if they did not accept the explanation.
On the basis of the consultation responses, the FRC concluded that:
- the chairman should be allowed to chair the nomination committee (though
the chairman should stand down when the committee was discussing recruitment of
a new chairman);
- the chairman should chair regular meetings of the
non-executive directors; but the senior independent director should chair at
least annual meetings of the non-executive directors without the chairman
present to appraise the chairman's performance;
- the chairman should ensure
that shareholders' views are communicated to the board as a whole; the senior
independent director should attend as an observer sufficient meetings of
management with a range of major shareholders to help develop a balanced
understanding of their concerns;
- re-election of non-executive directors
beyond six years should not require special explanation but should be subject to
rigorous review, with no automatic re-appointment;
- the provision that at
least half the board, excluding the chairman, should comprise independent
non-executive directors could be difficult for many smaller listed companies
(below FTSE 350); for them, the Code should provide for boards of such companies
to include at least two independent non-executive directors but should encourage
them to move towards meeting the full provision;
- some of the 'provisions'
in the draft (with which companies must 'comply or explain') were more akin to
'principles' (where companies must report how they are applying those
principles); a new draft should take this into account.
The working group will aim to produce a revised text by July, with a view to bringing the new Code into effect as soon as possible consistent with a high quality output.
(F) CORPORATE LAW BUDGET INITIATIVES
On 13 May 2003 the Australian Treasurer, the Hon Peter Costello MP, handed down the 2003 Federal Budget. Following are four corporate law initiatives contained in the Budget:
(1) Corporate insolvency initiative
The corporate insolvency initiative is a program that will involve the corporate regulator, the Australian Securities and Investments Commission (ASIC), increasing its level of surveillance and enforcement, and winding-up actions, to prevent corporate abuse.
A particular focus will be phoenix company activity. The initiative will involve targeted surveillance of misconduct by officers of small/medium enterprises (SMEs) and high-risk industry sectors identified by ASIC, the Australian Taxation Office, insolvency practitioners and the Cole Royal Commission.
Additional resources of $12.3 million over four years will be provided.
(2) HIH Royal Commission - ASIC Taskforce
A taskforce has been established within the Australian Securities and Investment Commission (ASIC) to investigate the HIH Royal Commission's recommendations and prepare briefs for prosecution.
ASIC has been provided additional funding of $17.5 million in 2003-04 and $10.7 million in 2004-05 to undertake the investigations and civil prosecutions. Funding for criminal prosecutions has also been provided for in the budget. Those prosecutions may be undertaken by the Director of Public Prosecutions or by a Special Prosecutor. Funding for investigations and prosecutions will be reviewed before the end of 2003 to take into account actual cases and costs.
(3) Financial Reporting Council - Expanded role
Under CLERP 9, it is proposed that the FRC's role be expanded beyond its present oversight of accounting standard setting to include oversight of auditing standard setting and auditor independence issues. The Auditing and Assurance Standards Board (AuASB) will be moved under FRC oversight with auditing standards being given the force of law.
The Government will provide $4 million over four years to support this new role, in addition to existing Government and industry funding for the FRC's oversight of accounting standard setting. In addition, the Treasury will absorb significant salary costs for FRC secretariat support.
The FRC will work with the professional accounting bodies in their oversight of audit quality assurance and auditor discipline, but will also have the capacity for independent monitoring, including through use of consultants. The new funding will also cover one-third of the annual running costs of the AuASB, with the balance to be contributed by the accounting profession and business community. In addition, the FRC will work with the Australian Securities and Investments Commission which will enforce compliance with the Corporations Act 2001 No. 50 (Cth) and auditing standards. A separate Budget measure provides additional funding for this purpose. Given the FRC's public oversight role, it is proposed that its members receive sitting fees.
(4) CLERP 9 - Corporate disclosure initiatives
CLERP 9 is the ninth phase of the Government's Corporate Law Economic Reform Program (CLERP). It is a package of measures to improve disclosure by Australian corporations. The legislative elements of CLERP 9 are expected to be introduced into Parliament later in 2003 following a period of public exposure.
To facilitate implementation of the CLERP 9 reforms, funding of $12.3 million over four years is being provided to the Australian Securities and Investments Commission, to conduct an enhanced program of surveillance, investigation and enforcement action in relation to alleged contraventions of the revised corporate disclosure requirements.
(G) STUDY FINDS FORCED TURNOVER OF CEOs HAS REACHED A RECORD HIGH
Companies are setting higher standards of performance for chief executive officers than ever before, and CEOs are falling short in record numbers, according to the second annual survey of CEO turnover at the world's 2,500 largest publicly traded corporations released on 12 May 2003 by management and technology consulting firm Booz Allen Hamilton. And despite the high-profile management flameouts in the US, CEO turnover is accelerating faster in Asia and Europe than in North America, the study found.
The study comprehensively examines the linkages between CEO tenure and corporate performance, comparing CEO turnover in major regions and in specific industry sectors. Among the findings:
- Involuntary successions in 2002 increased by more than 70% over 2001, even
though the total number of CEO changes only increased by 10%. Of all CEO
departures globally in 2002, 39% were forced, performance-based changes,
compared to 25% in 2001.
- Regionally, the biggest change occurred in the
Asia/Pacific region, which accounted for nearly one of every five (19%) global
succession events, compared with 8% in 2001 and 6% in 2000. Forced turnover in
Asia accounted for 45% of all transitions there, up from only 6% in 2001.
-
North America accounted for 48% of all successions worldwide in 2002,
significantly lower than the 64% it accounted for in 2001.
- In Europe, the
rate of CEO changes has increased in each of the five years the study examined
since 1995. In 2002, 28% of all CEO successions occurred in Europe.
- The
mean age of chief executives leaving office in 2002 was 58.1, up slightly from
2000 (56.8) and 2001 (57.1).
These results underscore the growing influence of shareholders and their representatives, corporate directors, the Booz Allen study concludes. Boards of directors are now exercising their power on behalf of shareholders with a vigor unseen in modern times.
(1) Key study findings
- Boards are judging CEO underperformance more strictly. Chief executives who
were dismissed in 2002 generated median regionally-adjusted shareholder returns
6.2 percentage points lower than CEOs who retired voluntarily. It took an 11.9%
shortfall to prompt a firing in 2001; in 2000, fired CEOs underperformed
retiring chiefs by 13.5%.
- CEO turnover in Europe and the Asia/Pacific
region continues to rise. CEO succession is up 192% in Europe and 140% in the
Asia/Pacific region since 1995, the study's benchmark year; in North America,
succession events increased only 2% during the same period. In the Asia/Pacific
region, which had been relatively immune to forced succession, involuntary
departures accounted for nearly half of all turnovers last year.
-
Merger-driven transitions declined considerably in 2002. Merger-related
successions comprised 15% of all CEO turnover globally, down from 27% the
previous year and 29% in 2000, as M&A activity declined generally.
- CEOs
appointed from outside the company are a high-stakes gamble. Outsiders excel
early, outperforming insiders by nearly 7 percentage points in the first half of
their tenures. In the "second semester," when most CEOs endure a slump,
outsiders underperform insiders by 5.5 percentage points.
- By failing to
live up to their early promise, outsider CEOs are at greater risk of being fired
than insiders. In 2002, more than half of all turnover of CEOs originally
appointed from outside the company were forced changes; for inside appointments,
only 44% of all changes were involuntary.
(2) Industry-specific findings
- Highest-Risk Industries: In 2002, the industries that saw the highest rates
of CEO turnover were utilities (15.8%), telecommunications services (15.6%),
materials (13.5%), and energy (12.6%). For the five years analysed between 1995
and 2002, telecommunications had the highest turnover rate (12.1%), followed by
energy (11.3%), information technology (9.7%), and healthcare (9.4%).
-
Forced Turnover: Telecommunications services had the highest rate of forced
turnover in 2002 (9.4%), followed by utilities (5.7%), materials (5.2%), and
information technology (4.7%). For the period between 1995 and 2002, information
technology had the highest rate of CEO dismissals (4.3%), followed by
telecommunications services (4.2%), consumer discretionary companies (3.1%), and
healthcare (2.8%).
- The Safest Industries: Financial services was the safest
industry for CEOs in this study - during the period between 1995 and 2002 the
financial services industry had the least turnover overall (6.6%) and the fewest
forced departures (1.5%). Other industries with relatively low turnover rates
during this period were industrials (8.5%), utilities, and consumer
discretionary (both 8.9%). In additional to financial services, other industries
with low forced turnover in this period were energy (1.7%), materials (1.9%),
and industrials (2.0%).
(3) Methodology
Booz Allen studied the 253 CEOs of the world's 2,500 publicly-traded corporations who left office in 2002, and evaluated both the performance of their companies and the events surrounding their departure. To provide historical context, Booz Allen evaluated and the compared this data to information on CEO departures for 1995, 1998, 2000 and 2001.
For purposes of the study, Booz Allen classified each CEO departure as either:
- Merger-driven, in which a CEO's job was eliminated when the CEO of the
other company involved in the merger or acquisition assumed control of the
enterprise.
- Performance-related, where the CEO was asked to leave by the
Board of Directors or there was significant speculation in the business press
that performance was the driver of the change, or where the CEO cited job stress
as the reason for his or her resignation.
- Regular transition, in which the
CEO retired on a long-planned schedule, died in office or left to become the CEO
of another company.
(H) NEW ZEALAND STOCK EXCHANGE - PROPOSED ENFORCEMENT CHANGES
On 6 May 2003, after extensive consultation with industry participants, NZSE Limited ('NZSE') developed and released publicly its final recommendations for Corporate Governance. NZSE also released a detailed proposal for a modified legal and regulatory framework. Both proposals were sent to the Securities Commission for review in accordance with the agreed process under the Memorandum of Understanding, with the legal and regulatory framework open to public submissions until 6 June 2003.
(1) A new compliance and enforcement construct
NZSE is responsible by law to ensure market participants comply with NZSE's Conduct Rules. Under the current system this responsibility is largely discharged by various third parties. The existing structures do not promote consistency between the treatment of Listed Issuers and NZSE Stock Brokers, which has caused concerns for market participants in relation to understanding the underlying principles.
It is critical that NZSE is able to ensure market integrity, safety and confidence. For this reason NZSE recently made a decision to restructure the existing construct, and bring many of these previously external roles, in-house. NZSE has developed a simplified framework for the compliance, enforcement and discipline of all market participants. The new structure has been designed to heighten the Exchange's accountability so that it is better able to effectively discharge its regulatory responsibilities, and promote efficiency and cost effectiveness.
The new framework will consist of a simplified structure made up of three groups:
- NZSE Compliance and Enforcement - an in-house team of NZSE personnel to
deal with both broker and issuer compliance. This team will be responsible for
market surveillance, initial investigations and referrals of suspected
non-compliance to NZSE Discipline, the Broker Audit Programme, risk assessment,
applications for waivers and rulings, compilation of guidance notes and dealings
with new listing applications, amongst other things;
- NZSE Discipline - a
20 person board comprised of both external (75%) and internal (25%) experts to
investigate suspected cases of non-compliance, or hear charges brought before
it, make findings, and impose sanctions or penalties where appropriate; and
-
NZSE Special Division - a three person independent panel taken from NZSE
Discipline, specifically designed to regulate NZSE Limited once listed.
Provision for this panel was made at the time NZSE demutualised and this
division, and the new construct, will ensure the integrity of the market is
preserved.
The proposed new legal and regulatory framework can be downloaded from http://www.nzse.co.nz. All public submissions on the proposed changes should be directed to Elaine Campbell, General Counsel, NZSE Limited, at PO Box 2959, Wellington or elaine.campbell@nzse.co.nz Submissions must be received by 6 June 2003.
(I) CROSS BORDER PROXY VOTING, CASE STUDIES 2002
In May 2003 Institutional Design released its study on Cross Border Proxy Voting, Case Studies 2002. Following is the Executive Summary from the study.
(1) Summary
The study shows how cross border proxy voting works in practice today. The study audits the transmission of proxy materials and voting instructions between five issuers (one each from the US, UK, Germany, Japan and Italy) and six investment managers (three from the UK and three from the US). Commissioned by the International Corporate Governance Network, the first phase of the audit was conducted during the 2002 proxy voting season, the key findings from which are presented below.
(2) Key findings
- In the case studies involving the US and German issuers, all the investment
managers were satisfied with the length of time between the receipt of proxy
materials and the voting deadline. Only a few participants experienced the late
receipt of proxy materials issued by the UK and Italian issuers. However, in the
case studies involving the Japanese issuer, there were several complaints about
the timing of its AGM and the late receipt of its proxy materials.
-
Investment managers were well supplied with the annual reports published by the
US, UK and German issuers but only one manager received the annual report from
the Italian issuer and none received the annual report released by the Japanese
issuer.
- Investment managers still found it hard to obtain the full text of
meeting notices. In many cases, the distribution mediums that connect
sub-custodians to global custodians did not cater for the transmission of
complete (unabridged) resolutions and agendas.
- Although German banks
usually allow deposited shares to be traded up to 24 hours before company
meetings, investment managers and custodians still perceived of share-blocking
as a 'major obstacle' to proxy voting in Germany.
- Despite the growing use
of electronic instruction mediums, investment managers still found it difficult
to verify whether their global custodians/voting agents had received and acted
upon their vote instructions. Although confirmation of receipt was provided in
most of the cases involving the US and UK issuers, such receipts were less
common in the cases involving the German, Italian and Japanese issuers.
-
Even when investment managers could verify the receipt of vote instructions by
their global custodians/voting agents, they were rarely able to audit the onward
transmission of these instructions to sub-custodians and company
registrars.
- Bearing (or ascribing) individual responsibility for the
successful receipt or dissemination of proxy voting materials is frustrated by:
the length and complexity of the proxy voting chains; the multiplicity of
persons involved in the process; and the wide variation in the content and
format of the materials.
- The proxy chains linking investment managers to
global custodians are being streamlined as a result of the consolidation of the
global custody industry and the development of global proxy voting agents. The
continuation of these processes - along with the introduction of new
technologies and the use of proxy solicitors - will help to reduce some of the
obstacles to cross-border proxy voting.
- However, notwithstanding the impact
of market forces and new technologies, many of the problems encountered by the
case study participants (eg voting on a show of hands in the UK, share-blocking
in Italy, the concentration of meetings in Japan, or the hard copy delivery of
proxy materials to registrars) may have to be resolved through: the reform of
national laws, the development of: standards at the EU level, the evolution of
stock exchange requirements and the adoption of voluntary standards by
corporations.
- International bodies, such as the ICGN, will continue to
monitor these problems and urge their swift resolution; but the requisite
reforms will require the concerted efforts of policy makers and market
participants.
(3) About the case studies
The case studies consist of 25 pairs of issuer-to-investor 'proxy chains'. The data contained in these studies is based on questionnaires administered to five global issuers, six cross-border investors, four global custodians, two proxy voting agents and one proxy solicitor. Each study tracks (a) the flow of proxy materials from the issuer down through each custodial layer until their receipt by the voting decision maker and (b) the return of voting instructions up through each custodial layer until their receipt by the issuer. Along each point in this process, the case studies audit transaction and message formatting as well as timing and completeness of transmittals. All the studies were conducted between June and October 2002.
The full report is available at http://www.icgn.org/
(J) ANNUAL SURVEY OF CORPORATE GOVERNANCE IN ASIA
CLSA Emerging Markets, in collaboration with the Asian Corporate Governance Association (ACGA), released its annual survey of corporate governance in Asia. Titled "Fakin' It: Board Games in Asia", the report covers 10 countries and 380 companies across the region. It is the fourth done by CLSA and the first in collaboration with ACGA. Major findings include:
- Companies with strong governance outperformed their markets by an average
of 35 percentage points over 5 years (1998-2002), while those with poor
governance underperformed by 25 percentage points over the same period.
- The
average company score has risen by 4 percentage points--from 58% in last year's
report to 62% this year--but the range in company scores remains extremely wide
and a cause for concern. Much of the improvement in CG is in form rather than
substance.
- Country ratings have gradually improved across the board, with
Singapore holding its position at the top of the rankings and Malaysia and Korea
the most improved. However, some countries (Hong Kong and Indonesia) have
slipped backwards in the "political" category.
An executive summary of the report is available at http://www.acga-asia.org. Go to the "ACGA Archive" section in the vertical menu bar (left side of the homepage) and look under "Reports".
(K) REFORM OF AUSTRALIA'S BANKRUPTCY SYSTEM
On 5 May 2003 the Australian Attorney-General, the Hon Daryl Williams announced important changes to the Bankruptcy Act 1966 No. 33 (Cth) which will make it more difficult for people to abuse Australia's bankruptcy system.
From 5 May 2003, changes under the Bankruptcy Legislation Amendment Act 2002 No. 131 (Cth) will also encourage people in financial difficulty to consider alternatives to bankruptcy. The legislation was passed by the Federal Parliament in December last year and forms an important part of the Government's efforts to balance the interests of debtors and creditors. It also addresses concerns that bankruptcy has become 'too easy' an option for debtors trying to avoid their responsibilities to creditors.
The changes include:
- a new discretion for Official Receivers to reject a debtor's petition where
it appears the debtor can afford to pay their debts and the petition is an abuse
of the bankruptcy system;
- abolition of early discharge, which has permitted
some people to be bankrupt for only six months;
- strengthening of the
trustee's powers to object to the discharge from bankruptcy of uncooperative
bankrupts after the standard three year bankruptcy period; and
- increasing
the debt agreement income threshold by 50 per cent (to about $50,160 after tax)
to encourage greater use of debt agreements as an alternative to bankruptcy.
The Inspector-General of Bankruptcy also has new powers to investigate the conduct of debt agreement administrators and to set out circumstances in which a person is ineligible to act as a debt agreement administrator.
The ineligibility criteria for debt agreement administrators are detailed in new Bankruptcy Regulations (Bankruptcy Amendment Regulations (No. 1) 2003 No. 76 (Cth)), which also commenced on 5 May. These regulations also introduce new rules about the way in which debt agreement administrators are able to obtain payment.
Further information about changes to the Bankruptcy Act and the new Bankruptcy Regulations are available at the Insolvency and Trustee Service Australia website at http://www.itsa.gov.au
On 2 May 2003 ANZ released Australia's first national survey of adult financial literacy providing an insight into the ability of Australians to make informed judgments and effective decisions about the use and management of their money.
The ANZ Financial Literacy Research was conducted by Roy Morgan Research and involved development of a framework for measuring financial literacy in Australia, a quantitative survey of 3,500 adults and in-depth qualitative research. It provides for the first time benchmarks for the ongoing measurement of financial literacy across the Australian population and formally identifies aspects of financial skills, products and services that are causing the greatest problems for consumers and those segments of the population that have low levels of financial literacy.
(1) Key findings
- A high level of banking inclusion in Australia, as compared with some other
countries*, with 97% of adults having an everyday banking account.
- All
people knew how to use cash and around 90% knew how to use common payment
methods such as ATMs, cheques, EFTPOS and credit cards.
- Reasonable levels
of mathematical ability with 81-89% of people correctly performing basic
addition, subtraction, division and percentage calculations - although for
multiplication this dropped to 59%.
- While investment fundamentals are
understood with 85% of people knowing that high returns equal high risk,
investors were potentially susceptible to misleading claims with 47% indicating
they would invest for "well above market rates and no risk".
- Planning for
retirement was low with only 37% of people having worked out how much money they
need to save for retirement. Many also had unrealistic expectations with 50%
expecting to be living "at least as comfortable in retirement as they are
today".
- Knowledge of fees and charges varied with 88% of credit card users
and 78% of those with bank accounts knowing their fees well. However, only 60%
of people with managed investments and 44% of those with superannuation knew
their fees well.
- Most people understand their bank account and credit card
statements however 21% of people could not understand their superannuation
statements and further testing revealed that only 40% could identify key items
on a superannuation statement correctly.
- A strong association between
socio-economic status and financial literacy. The 20% of people with lowest
financial literacy were over-represented by those with lower education levels,
those not employed, people with lower incomes, low savings and people at both
extremes of the age profile - 18-24 year olds and those aged 70 years and
over.
* this compares to 91-94% individuals in the United Kingdom and 90% of households in the United States.
Further details of the survey are available at http://www.anz.com
(M) NEW GOVERNANCE PUBLICATIONS AIM TO HELP BOARDS OF DIRECTORS
Canada's Chartered Accountants are helping directors tackle such controversial areas as executive compensation, risk, and Management's Discussion and Analysis (MD&A) with the release on 30 April 2003 of five new titles in the '20 Questions' series of booklets.
The new books, co-sponsored by the Institute of Corporate Directors, arm directors with the thinking behind key questions they should be asking to meet their responsibilities to shareholders and management.
20 Questions Directors Should Ask about Executive Compensation examines how corporate governance impacts senior compensation; itemizes board responsibilities for overseeing compensation; looks at factors to be used in assessing fair levels of compensation, disclosure and developing a code of best practices.
Other new titles include 20 Questions Directors Should Ask About Risk, which examines the responsibilities directors have for the company's business risks; risks that may impact achieving the organization's strategy; tips for obtaining the right information to develop recommended practices; and monitoring and reporting risk.
20 Questions Directors Should Ask About Management's Discussion and Analysis explains how directors can improve their company's MD&A. The questions are designed to help directors, especially those serving on the audit committee, exercise due diligence in an area of reporting that is under increasing scrutiny from regulators and investors.
Other new titles help directors tackle the issues and ask the right questions about strategy and strategic planning. 20 Questions Directors Should Ask About Strategy and Strategic Planning: What Boards Should Expect from CFOs, include a task checklist for management and boards, and a comprehensive list of the critical elements in a strategic plan.
The five booklets are available on the CICA website at http://www.cica.ca/
(N) FPA LAUNCHES PROFESSIONAL PARTNER STRATEGY
On 30 April 2003 the Financial Planning Association launched a national strategy aimed at "raising the bar" in relation to professional standards in the Australian financial planning community.
Dubbed the Professional Partner campaign, it will be conducted in association with key stakeholders - including the broad FPA membership. The strategy will comprise five campaigns, which will target key disclosure, professionalism, advice, and FSRA transition and consumer issues. The campaigns will be launched over the next 12 months.
FPA Chief Executive, Ken Breakspear, says the campaign will focus on issues impacting on the standard of professional planning advice in Australia.
They include:
- the disclosure of fees and commissions;
- the professionalism of
individual advisers;
- quality advice issues;
- the transition to the Financial Services Reform Act 2001 No. 122 (Cth);
-
consumer education programs; and
- a greater commitment to the FPA's
standards.
In launching the first campaign on disclosure, Mr Breakspear said the FPA was pleased to announce that the former ASIC Deputy Chair - Jillian Segal - had agreed to head an industry taskforce into disclosure issues in the Australian financial planning industry, including remuneration and benefits.
The industry taskforce will make recommendations to the FPA Board of Directors on improvements to the principles and practices of disclosure of adviser remuneration and other benefits as well as factors likely to influence advisers in the provision of advice.
Issues to be addressed include:
- whether payment structures align the interests of the consumer with the
adviser;
- how the market should determine payment structures;
- a review
of the FPA's Practice Guideline No 3 - Disclosure of fees and commissions;
-
the standardisation of disclosure documents; and
- seeking clarity,
description and agreement on soft dollar and other incentives paid to
dealers.
Mr Breakspear said the objective of the Professional Partner campaign was to give Australian consumers greater confidence in the quality of advice they received from financial planners.
(O) FUND MANAGERS LIFT INDUSTRY PRACTICE ON CORPORATE GOVERNANCE
On 29 April 2003 the Investment and Financial Services Association (IFSA) released the 2003 Standard Investment Management Agreement (SIMA) with a view to raising industry awareness of the importance of active corporate governance.
IFSA is a national not-for-profit organisation that represents the retail and wholesale funds management and life insurance industries. IFSA has over 100 members who are responsible for investing approximately $620 billion on behalf of over nine million Australians.
The SIMA is widely used in the industry as a standardised document detailing the agreement between trustees and fund managers for the investment of superannuation and managed investment funds.
The new SIMA will require fund managers to provide trustees with their proxy voting policies and report on their voting activities. IFSA has also encouraged its members to disclose their proxy voting policy on their websites in order to raise the level of awareness of corporate governance among retail investors.
The 2003 Standard Investment Management Agreement (SIMA) can be ordered from the IFSA website at http://www.ifsa.com.au
(P) ABA CORPORATE RESPONSIBILITY TASK FORCE URGES NEW CORPORATE GOVERNANCE POLICIES AND LAWYER ETHICS RULES
On 29 April 2003 the American Bar Association Task Force on Corporate Responsibility released its final report urging changes in corporate governance policies to create a new culture of corporate responsibility stressing constructive scepticism and active independent oversight of corporate executives.
The proposals will be presented in the form of policy recommendations to the ABA House of Delegates in August when it convenes in San Francisco. Unless or until they are adopted, they represent only the views of the task force.
The task force's recommended corporate governance policies also are designed to enhance the role of corporate lawyers in the system of checks and balances needed to ensure corporate compliance with law. The report also makes recommendations for amendments to the ABA Model Rules of Professional Conduct to sharpen existing duties of the corporate lawyer to the corporate client and to act in the best interests of that client when faced with illegal conduct by executive officers.
Specifically addressing lawyers' responsibilities, the report urges routine opportunities for chief legal officers to communicate in executive sessions with corporate boards and for outside counsel to communicate with chief legal officers, to facilitate an internal flow of information about wrongdoing by the corporation or its executive officers.
Additionally, it urges amending the ABA Model Rules of Professional Conduct to:
- conform the Model Rules to the ethical rules of a majority of the states by
permitting lawyers to reveal information to prevent criminal or fraudulent
conduct that is reasonably certain to result in substantial injury to the
financial interests of others when the lawyer's services are being used to
further the fraud or crime;
- refine and clarify when corporate lawyers must
disclose up the ladder of authority within a corporate client, and when
corporate lawyers may disclose externally conduct by the corporation or its
executive officers which a reasonable lawyer would conclude violates law or
fiduciary duty and will result in substantial corporate injury; and
- add a
requirement that lawyers who either are discharged because they report
violations internally or withdraw from serving a corporation because it refuses
to adequately address violations assure that the board is informed of the
discharge or withdrawal.
While the task force reiterates recommendations from its preliminary report issued in July 2002 to foster independent oversight of corporate management by directors and other participants in the governance of public companies, it also recognizes that "(d)irect operational control of American public corporations is, and must remain, primarily in the hands of their senior executive officers."
Citing recent "spectacular failures of corporate responsibility," the task force reaffirms the core conclusion from its preliminary report:
"The exercise by independent participants of active and informed stewardship of the best interests of the corporation has in too many instances fallen short."
The final report said events of the last two years "compellingly call for significant reforms and 'consciousness raising' in our system of corporate governance." The task force recommendations are intended "to enhance the ability of corporate counsel and directors to discharge their corporate governance responsibilities more effectively."
The full report of the American Bar Association Task Force on Corporate Responsibility and other related materials are available on the ABA website at http://www.abanet.org/media/corpresp.html
(Q) INVESTMENT FIRMS SETTLE ENFORCEMENT ACTIONS INVOLVING CONFLICTS OF INTEREST BETWEEN RESEARCH AND INVESTMENT BANKING
On 28 April 2003 the United States Securities and Exchange Commission Chairman William H Donaldson, New York Attorney General Eliot Spitzer, North American Securities Administrators Association President Christine Bruenn, NASD Chairman and CEO Robert Glauber, New York Stock Exchange Chairman and CEO Dick Grasso, and state securities regulators announced that enforcement actions against ten of the United States top investment firms have been completed, thereby finalising the global settlement in principle reached and announced by regulators last December. That settlement followed joint investigations by the regulators of allegations of undue influence of investment banking interests on securities research at brokerage firms, and the enforcement actions track the provisions of the December global settlement in principle.
The ten firms against which enforcement actions were announced are:
- Bear, Stearns & Co Inc (Bear Stearns)
- Credit Suisse First Boston
LLC (CSFB)
- Goldman, Sachs & Co (Goldman)
- Lehman Brothers Inc
(Lehman)
- J P Morgan Securities Inc. (J P Morgan)
- Merrill Lynch,
Pierce, Fenner & Smith, Incorporated (Merrill Lynch)
- Morgan Stanley
& Co Incorporated (Morgan Stanley)
- Citigroup Global Markets Inc f/k/a
Salomon Smith Barney Inc (SSB)
- UBS Warburg LLC (UBS)
- US Bancorp Piper
Jaffray Inc (Piper Jaffray)
(1) Penalties, disgorgement and funds for independent research and investor education
Pursuant to the enforcement actions, the ten firms will pay a total of US$875 million in penalties and disgorgement, consisting of US$387.5 million in disgorgement and US$487.5 million in penalties (which includes Merrill Lynch's previous payment of US$100 million in connection with its prior settlement with the states relating to research analyst conflicts of interest). Under the settlement agreements, half of the US$775 million payment by the firms other than Merrill Lynch will be paid in resolution of actions brought by the SEC, NYSE and NASD, and will be put into a fund to benefit customers of the firms. The remainder of the funds will be paid to the states. In addition, the firms will make payments totaling US$432.5 million to fund independent research, and payments of US$80 million from seven of the firms will fund and promote investor education. The total of all payments is roughly US$1.4 billion.
Under the terms of the settlement, the firms will not seek reimbursement or indemnification for any penalties that they pay. In addition, the firms will not seek a tax deduction or tax credit with regard to any federal, state or local tax for any penalty amounts that they pay under the settlement.
Following is a list of how much each firm is paying pursuant to the settlement. The individual penalties include some of the highest ever imposed in civil enforcement actions under the securities laws.
(2) Summary of the enforcement actions
In addition to the monetary payments, the firms are also required to comply with significant requirements that dramatically reform their future practices, including separating the research and investment banking departments at the firms, how research is reviewed and supervised, and making independent research available to investors. The changes that the firms will be required to make are discussed below.
The enforcement actions allege that, from approximately mid-1999 through mid-2001 or later, all of the firms engaged in acts and practices that created or maintained inappropriate influence by investment banking over research analysts, thereby imposing conflicts of interest on research analysts that the firms failed to manage in an adequate or appropriate manner. In addition, the regulators found supervisory deficiencies at every firm. The enforcement actions, the allegations of which were neither admitted nor denied by the firms, also included additional charges:
- CSFB, Merrill Lynch and SSB issued fraudulent research reports in violation
of Section 15(c) of the Securities Exchange Act of 1934 as well as various state
statutes;
- Bear Stearns, CSFB, Goldman, Lehman, Merrill Lynch, Piper
Jaffray, SSB and UBS Warburg issued research reports that were not based on
principles of fair dealing and good faith and did not provide a sound basis for
evaluating facts, contained exaggerated or unwarranted claims about the covered
companies, and/or contained opinions for which there were no reasonable bases in
violation of NYSE Rules 401, 472 and 476(a)(6), and NASD Rules 2110 and 2210 as
well as state ethics statutes;
- UBS Warburg and Piper Jaffray received
payments for research without disclosing such payments in violation of Section
17(b) of the Securities Act of 1933 as well as NYSE Rules 476(a)(6), 401 and 472
and NASD Rules 2210 and 2110. Those two firms, as well as Bear Stearns, J P
Morgan and Morgan Stanley, made undisclosed payments for research in violation
of NYSE Rules 476(a)(6), 401 and 472 and NASD Rules 2210 and 2110 and state
statutes; and
- CSFB and SSB engaged in inappropriate spinning of "hot"
Initial Public Offering (IPO) allocations in violation of SRO rules requiring
adherence to high business standards and just and equitable principles of trade,
and the firms' books and records relating to certain transactions violated the
broker-dealer record-keeping provisions of Section 17(a) of the Securities
Exchange Act of 1934 and SRO rules (NYSE Rule 440 and NASD Rule 3110).
Under the terms of the settlement, an injunction will be entered against each of the firms, enjoining it from violating the statutes and rules that it is alleged to have violated.
These enforcement actions will also reform industry practices regarding the relationship between investment banking and research and will bolster the integrity of equity research. Among other significant reforms included in these actions are the following:
(a) To ensure that stock recommendations are not tainted by efforts to obtain investment banking fees, research analysts will be insulated from investment banking pressure. The firms will be required to sever the links between research and investment banking, including prohibiting analysts from receiving compensation for investment banking activities, and prohibiting analysts' involvement in investment banking "pitches" and "roadshows." Among the more important reforms:
(i) The firms will physically separate their research and investment banking departments to prevent the flow of information between the two groups.
(ii) The firms' senior management will determine the research department's budget without input from investment banking and without regard to specific revenues derived from investment banking.
(iii) Research analysts' compensation may not be based, directly or indirectly, on investment banking revenues or input from investment banking personnel, and investment bankers will have no role in evaluating analysts' job performance.
(iv) Research management will make all company-specific decisions to terminate coverage, and investment bankers will have no role in company-specific coverage decisions.
(v) Research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. During the offering period for an investment banking transaction, research analysts may not participate in roadshows or other efforts to market the transaction.
(vi) The firms will create and enforce firewalls restricting interaction between investment banking and research except in specifically designated circumstances.
(b) To ensure that individual investors get access to objective investment advice, the firms will be obligated to furnish independent research. For a five-year period, each of the firms will be required to contract with no fewer than three independent research firms that will make available independent research to the firm's customers. An independent consultant for each firm will have final authority to procure independent research.
(c) To enable investors to evaluate and compare the performance of analysts, research analysts' historical ratings will be disclosed. Each firm will make its analysts' historical ratings and price target forecasts publicly available.
Further, seven of the firms will collectively pay US$80 million for investor education. The SEC, NYSE and NASD have authorized that US$52.5 million of these funds be put into an Investor Education Fund that will develop and support programs designed to equip investors with the knowledge and skills necessary to make informed decisions. The remaining US$27.5 million will be paid to state securities regulators and will be used by them for investor education purposes.
In addition to the other restrictions and requirements imposed by the enforcement actions, the ten firms have collectively entered into a voluntary agreement restricting allocations of securities in hot IPOs - offerings that begin trading in the aftermarket at a premium - to certain company executive officers and directors, a practice known as "spinning." This will promote fairness in the allocation of IPO shares and prevent firms from using these shares to attract investment banking business.
To implement this global settlement, the SEC filed separate actions against each of the firms in Federal District Court in New York City and, concurrently, the NYSE and NASD completed disciplinary proceedings pursuant to the disciplinary procedures of their respective organizations. At the state level, model settlement agreements have been finalized and the NASAA Board of Directors has recommended that all states accept the terms of the agreements. The proposed Final Judgments in the SEC actions are subject to Court approval.
(3) Payments in global settlement relating to firm research and investment banking conflicts of interest
Bear Stearns - US$80 million
CSFB - US$200 million
Goldman - US$110
million
J P Morgan - US$80 million
Lehman - US$80 million
Merrill Lynch
- US$200 million*
Morgan Stanley - US$125 million
Piper Jaffray - US$32.5
million
SSB - US$400 million
UBS - US$80 million
Total - US$1,387.5 million
* Payment made in prior settlement of research analyst conflicts of interest with the states securities regulators.
(R) SEC VOTES TO MANDATE ELECTRONIC FILING OF OWNERSHIP REPORTS; PROHIBIT IMPROPER INFLUENCE OF AUDITORS
On 24 April 2003 the United States Securities and Exchange Commission voted to require that reports by insiders disclosing their securities holdings be filed electronically with the SEC. The Commission also voted to adopt rules prohibiting company officials from improperly influencing auditors of financial statements.
(1) The Commission voted to mandate the electronic filing of beneficial ownership reports filed by officers, directors and principal security holders under Section 16(a) of the Securities Exchange Act of 1934, and to require issuers with corporate websites to post these reports. Electronic filing and website posting of these reports will result in earlier public notification of insiders' transactions and wider public availability of information about those transactions. The new rules and amendments implement the requirements of Section 16(a)(4), as amended by Section 403 of the Sarbanes-Oxley Act of 2002.
Under the new rules and amendments:
(a) Mandated electronic filing will apply to Forms 3, 4 and 5. To facilitate this, a new on-line filing system for these forms has been created.
(b) Forms 3, 4 and 5 submitted by direct transmission on or before 10 pm Eastern time will be deemed filed on the same business day. In light of these extended filing hours, temporary hardship exemptions will not be available for these forms.
(c) An issuer that maintains a corporate website will be required to post on that website all Forms 3, 4 and 5 filed with respect to its equity securities by the end of the business day after filing. An issuer will be able to satisfy this requirement by providing direct access, or by hyperlinking to a third-party website (such as EDGAR) if certain conditions are satisfied.
In addition, the new rule amendments will eliminate magnetic cartridges as a means of filing any form electronically.
These new rules and amendments will become effective on June 30, 2003.
(2) The Commission adopted amendments to Regulation 13B2 that implement Section 303 of the Sarbanes-Oxley Act of 2002. The new rules prohibit officers and directors of an issuer, and persons acting under the direction of an officer or director, from coercing, manipulating, misleading, or fraudulently influencing the auditor of the issuer's financial statements if that person knew or should have known that such action could render the financial statements materially misleading.
These amendments will be effective thirty days after their publication in the Federal Register.
The full text of the adopting release for the new rules and amendments is available on the SEC's website at http://www.sec.gov
(S) FSA ADVISES INDUSTRY ON DEFINITION OF "MIS-SELLING"
The United Kingdom Financial Services Authority (FSA) has issued a note aimed at clarifying what "mis-selling" is and is not under the FSA's regulatory regime.
The note has been issued in the light of continuing uncertainties in the market and at a time when some independent financial advisers are finding it difficult to obtain professional indemnity insurance because insurers are concerned about potential liabilities for the future.
The note sets out the statutory context within which the FSA has developed its risk-based approach to regulation and emphasises the responsibility this places on firms and their senior management for compliance with regulatory standards. It then explains the FSA's approach where there are claims of "mis-selling". The note acknowledges that firms are rightly concerned that they should not be subject to retrospective regulation coloured by hindsight.
The note is available on the FSA website at http://www.fsa.gov.uk/pubs/press/2003/052.html
(T) INSTITUTE OF CHARTERED ACCOUNTANTS TO PURSUE INDIVIDUALS MENTIONED IN HIH REPORT
The Institute of Chartered Accountants in Australia (ICAA) has advised their members referred to ASIC by Justice Owen, that the matters raised in the HIH Royal Commission Report are being investigated to determine what references should be made to the Institutes Disciplinary Committee. The Institute's independent taskforce will also review all other comments in the Report relating to the conduct of members to see whether similar action should be taken.
In anticipation of the release of the HIH Royal Commission Report, the ICAA established an independent taskforce in January 2003, to review the findings upon release. The taskforce is charged with identifying and recommending to the Institute's board action the ICAA should take in response to the findings. This will include examination of all referrals of ICAA members to ASIC or the DPP and reference to any activity of a member or event which might be regarded as having brought the profession into disrepute. The taskforce will provide early recommendations regarding these members named in the Report, and strategic advice to the ICAA Board on other issues arising from HIH.
On the macro level, the Institute has supported a number of initiatives aimed at restoring public trust in corporate governance and financial reporting, favouring the shared regulatory model approved and promoted by the Federal Government. These include the Ramsay Report on Auditor Independence, the CLERP 9 proposals for reform released by the Federal Government late last year, and the activities of the Corporate Governance Council established by the ASX.
In May last year the ICAA released a new internationally harmonised standard for professional independence. These measures introduced as part of the F1 Standard for Professional Independence not only strengthen existing guidelines to reflect Australian community expectations and reflect international best practice, they also implemented a number of key recommendations outlined in the Ramsay Report as acknowledged in CLERP 9. Further enhancements have been recommended by Justice Owen.
ICAA CEO Stephen Harrison said these measures will never prevent corporate failures but taken all together should make a major contribution to the integrity and reputation of Australias capital markets.
In particular they reinforce the importance of quality, objective and informed audits conducted by independent auditors working with company boards and their Audit Committees. They also reinforce the importance of oversight and review of the accounting profession, and the disciplinary responsibilities of ASIC, the Company Auditors and Liquidators Disciplinary Board (CALDB) and the professional bodies responsible for accountants and directors.
It should be noted that even before the HIH Royal Commission's report was tabled, the ICAA had acted in the case of two of its named members. Following the Supreme Court decision in the Pacific Eagle Equities matter handed down in relation to Rodney Adler, the Institute wrote to Mr Adler advising him that the matters raised were being investigated to determine whether there should be a reference to the ICAA Disciplinary Committee once his appeal against the Supreme Court decision had been finalised. Rodney Adler offered his resignation, which was accepted by the board of the ICAA.
Following the Supreme Court's decision also regarding the Pacific Eagle Equities matter handed down in relation to Dominic Fodera, Mr Fodera appeared before the ICAA 's Disciplinary Committee. The Committees determination was that his membership was suspended for three years.
(A) DRAFT GUIDELINES ON VALUE OF OPTIONS IN DIRECTORS' REPORTS
On 7 May 2003 ASIC released draft guidelines aimed to assist listed Australian companies when including values of options in the disclosure of emoluments for directors and executive officers, in their annual directors' reports for years ending on or after 30 June 2003.
ASIC expects listed companies to include amounts relating to granted options when disclosing the emoluments of each director, and each of the five highest paid executive officers, pursuant to section 300A(1)(c) of the Corporations Act 2001 No. 50 (Cth).
The proposed guidelines cover the valuation methods to be applied, as well as directions for allocating values between financial years, for the purposes of section 300A(1)(c).
In developing these guidelines ASIC has drawn on the International Accounting Standard Board's Exposure Draft ED 2 'Share Bared Payment' (ED2), which provides an appropriate basis for valuing options and allocating the value over time.
The guidelines do not deal with the expensing of options of other share-based payments in the financial statements.
Comments on the guidelines should be sent to Greg Pound, ASIC Chief Accountant by email to greg.pound@asic.gov.au or by fax on 03 9280 3325, no later than Friday 23 May.
Copies of the draft guidelines can be downloaded from http://www.asic.gov.au
(1) Details of the draft guidelines
(a) Directors' report disclosure
Paragraph 60 in Practice Note 68 'New financial reporting and procedural requirements' issued in 1998 states that listed companies must include options issued to directors and executive officers in the disclosure of emoluments of each director and each of the 5 executive officers receiving the highest emoluments under section 300A(1)(c) of the Corporations Act 2001 (the Act).
ASIC expects all listed companies to comply with their obligations under section 300A(1)(c) by disclosing the value of emoluments relating to options in their directors' reports. This will ensure that shareholders are properly informed as to the full value of the remuneration of individual directors and executive officers.
In 1998 there was no Australian accounting standard or exposure draft dealing with the accounting or valuation methods for options. Paragraph 60 of Practice Note 68 indicated that ASIC did not intend to prescribe these methods.
ASIC believes that the International Accounting Standards Board's Exposure Draft ED 2 'Share-Based Payment' (ED 2) now provides a basis for valuing options and allocating those values over time that it is appropriate to draw on for the purposes of the disclosure of emoluments of directors and executive officers.
The Australian Accounting Standards Board (AASB) is committed to adopting International Financial Reporting Standards (IFRSs) and has issued ED 2 as Exposure Draft ED 108.
The AASB proposes that a standard be operative for years beginning on or after 1 January 2004, the same time as proposed for the corresponding IFRS. The AASB has also recently announced it proposes that its forthcoming Accounting Standard 'Director and Executive Disclosures by Disclosing Entities' require the disclosure of an individual's remuneration for a reporting period include the amount recognised as an expense for that year in accordance with the accounting standard based on ED 108.
(b) Value of options
ED 2/ED 108 provide clear guidelines on the types of option valuation models that can be applied and ASIC considers that these models can be applied to value all types of options granted to directors and executive officers.
For the purposes of section 300A(1)(c), listed companies should now value exchange-traded options at their market price at grant date, consistent with ED 2/ED 108. Other options should be valued as at grant date using an option pricing model that takes into account all of the 6 factors specified in ED 2/ED 108 and the other guidance on valuing options contained in ED 2/ED 108.
The six factors are:
(i) the exercise price of the option;
(ii) the
life of the option;
(iii) the current price of the underlying
securities;
(iv) the expected volatility of the share price;
(v) the
dividends expected on the shares; and
(vi) the risk-free interest rate for
the life of the option.
ED 108 says that the expected life rather than the contracted life shall be used for non-transferable options.
In determining the amount to be recognised as remuneration over time, where appropriate, allowance should be made for amounts payable by the director or officer for the option.
(c) When to disclose amounts as remuneration
ED 2/ED 108 propose that an expense be recognised in relation to options over the period from grant date to the vesting date. For options that vest immediately, the value is recognised as an expense at grant date.
ED 2/ED 108 recognise that some employees in a group of employees participating in an option scheme may not be expected to complete the full period of service required for options to vest. They also recognise that actual service may differ from that originally expected.
As a result, certain adjustments are required to the amounts allocated to each financial year from grant date to vesting date. That approach may be appropriate in the context of a group of employees where differences in the expected service lengths of individual employees may not materially affect the amount expensed in any period.
However, it is usually difficult to estimate when a single individual will cease to be a director or executive officer with any accuracy. Hence, for the purposes of measuring the remuneration of an individual for disclosure in the directors' report, it should be assumed that the individual directors and executive officers will continue to provide service until the vesting date, unless it is probable that the particular individual will cease at an earlier date.
Consistent with ED 2/ED 108, changes in the value of options after grant date are only required to be included as emoluments when they result from changes to the terms and conditions of the options made by the issuing entity. In that case, emoluments should include the change in the value of the options.
Remuneration should not be reversed if the options are forfeited before vesting, or not exercised after vesting.
(d) Other disclosures
Subsection 300(1)(d) of the Act requires directors' reports of all entities reporting under Chapter 2M of the Act to disclose details of options granted to directors and executive officers as a part of their remuneration. It also specifies the details to be disclosed.
In addition, listed companies are encouraged to disclose information as to how option values have been determined (including the model used, inputs to the model, historical and expected volatility, the risk-free interest rate, assumptions on vesting, and other significant assumptions affecting the value), a description of the basis of recognising the options over time, and the grant and vesting dates of the options.
(e) Transitional arrangements
The guidelines in this release apply to all options, whether granted before or after the date of the release, that had not vested prior to the commencement of the first financial year to which these guidelines apply.
In adopting the guidelines, companies may include option values as emoluments at different amounts or in different financial years compared to their previous approach.
To ensure that emoluments are reported on a consistent basis across listed companies, no adjustment should be made to emoluments reported in the first financial year that the guidelines in this release apply to:
(i) exclude amounts reported as emoluments in prior financial years that are
required by the guidelines to be reported as emoluments in the current year;
or
(ii) include amounts that would have been reported as emoluments in prior
financial years had these guidelines been applied in those prior years but which
were not previously reported.
This approach may result in some amounts being reported as emoluments in more than one year or some amounts not being reported as emoluments at all. In these circumstances, companies should briefly explain the change in basis and are encouraged to disclose the financial effect on the amounts of emoluments shown in the directors' report.
(f) Further guidance on applying section 300A(1)(c)
Directors of listed companies should refer to ASIC Practice Note 68 'New financial reporting and procedural requirements' for further guidance on the application of section 300A(1)(c).
(g) Disclosures in financial report
All entities preparing financial reports under the Act are encouraged to apply the guidelines in the release in relation to options granted in disclosing the remuneration of directors and executive officers in their annual financial reports for the purposes of AASB 1017 'Related Party Disclosures' and AASB 1034 'Financial Report Presentation and Disclosures'.
(h) Surveillance of reports
ASIC will review compliance with the guidelines in its surveillance of financial reports and directors' reports of listed companies for the year ending 30 June 2003. Enforcement action may be considered where companies fail to disclose the value of emoluments relating to options granted.
(i) Interim guidelines
It is ASIC's intention to withdraw the guidelines in the release should the Act be amended to specify a method of valuing and accounting for options issued as remuneration of directors and executive officers.
(j) Expensing of options granted as remuneration
The guidelines do not deal with the expensing of options or other share-based payments in the financial statements.
(B) COURT FINDS AGAINST WATER WHEEL DIRECTORS
On 5 May 2003 Mr David Knott, Chairman of ASIC, welcomed the decision handed down by Justice Mandie of the Supreme Court of Victoria, in ASIC's civil penalty action against Messrs Bernard Plymin, John Elliott and William Harrison.
The court has found that Messrs Plymin and Elliott failed to prevent Water Wheel Holdings Limited and its subsidiary, Water Wheel Mills Pty Ltd (Water Wheel), from incurring debts after the companies became insolvent on 14 September 1999.
During the course of the proceedings, Mr Harrison reached a settlement with ASIC under which he made full admissions relating to the contraventions.
'[The] finding by the court that the directors of Water Wheel breached the insolvent trading provisions of the Corporations Act 2001 No. 50 (Cth) is a significant win for ASIC in this important area of the law', Mr Knott said. 'Insolvent trading cases involve complex evidentiary issues that make them challenging for ASIC and liquidators to pursue. I am aware that the insolvency profession has been keenly awaiting the outcome of this case.
'Insolvent trading contraventions deserve to be treated seriously. Suppliers of goods and services have a right to expect that they will be paid in the ordinary course of business. Failure to honour payment obligations can have a devastating effect on small business suppliers and their families. That is why the law prevents trading in circumstances where there are reasonable grounds for suspecting that the company is insolvent. This decision will be warmly welcomed by the many small businesses throughout Victoria and southern New South Wales, including primary producers, who lost money in the collapse of Water Wheel', Mr Knott said.
Justice Mandie will now hear submissions from the parties on penalties.
'We are submitting that the directors be banned from managing companies for as long as the court sees fit, as well as pecuniary penalties against each director. We have also sought an order that they pay compensation for the benefit of the companies' unsecured creditors. The court has ordered that the total net amount which might become the subject of compensation orders is approximately $2.619 million', Mr Knott said.
(1) Background to the civil proceedings
ASIC commenced civil penalty proceedings in the Supreme Court of Victoria on 27 November 2000, against Messrs Bernard Plymin, John Elliott and William Harrison, in relation to their conduct as directors of Water Wheel Holdings Ltd and its subsidiary Water Wheel Mills Pty Ltd (the companies).
ASIC alleged that between 14 September 1999 and 17 February 2000 the defendants allowed the companies to incur further debts after the companies became insolvent, contrary to section 588G(2) of the then Corporations Law.
In the week before the Supreme Court trial was due to begin, Mr John Elliott applied to the Federal Court for an order restraining the trial's commencement, and sought to quash the decision made by ASIC to institute the Supreme Court action. This application was dismissed and the trial commenced accordingly, on 19 August 2002.
Once the trial had begun, Mr Elliott further applied to the Supreme Court trial judge for orders staying the trial, but those orders were not granted. In October 2002, Mr Elliott then made application for the High Court to hear certain constitutional law issues that he wished to raise against ASIC. The High Court declined the transfer of those issues from the Supreme Court to the High Court.
The Supreme Court trial concluded on 14 November 2002.
(2) Water Wheel Holdings Limited
Water Wheel Holdings Limited is a company listed on the Australian Stock Exchange Limited. Trading in its shares has been suspended since 16 February 2000 at the directors' request. The directors placed the companies into voluntary administration on 17 February 2000, after announcing a loss of $6.7 million for the year to December 1999.
When the companies were placed in administration, they owed in excess of $18 million to more than 220 unsecured creditors. The unsecured creditors include wheat and rice farmers in New South Wales and near the former Water Wheel mill at Bridgewater, near Bendigo Victoria, as well as suppliers of agricultural products, transport and other business services.
The Water Wheel judgment is further discussed in Item 4(A) of this Bulletin.
(C) POLICY STATEMENT 49: EMPLOYEE SHARE SCHEMES
On 1 May 2003 ASIC released an update of Policy Statement 49: Employee Share Schemes [PS 49]. The amendments aim to assist employers offering share schemes, while maintaining investor protection.
The amendments to the policy are consistent with ASIC's policy rationale to allow employee share schemes where:
- the aim of the offer is not fundraising but rather to enable employees to
participate in the ownership of a corporation;
- the offer sufficiently
supports the long term mutual interdependence between employers and employees;
and
- adequate disclosure is provided to investors.
(1) Summary of amendments
(a) The extension of class order relief from the disclosure requirements of the Corporations Act 2001 No. 50 (Cth) (the Act) for employee share schemes to include relief for some stapled securities;
(b) Consequential relief from the requirement to hold an Australian Financial Services license (AFSL) and the Chapter 7 hawking provisions. An employee share scheme offer that complies with disclosure relief contained in the updated class order will automatically qualify for additional licensing and hawking relief on conditions set out in the class order;
(c) Relief for offers of options offered for nominal consideration by companies not listed on the Australian Stock Exchange (ASX) or an approved foreign exchange at the time of the offer, provided that the issuer will have been listed for 12 months by the time the options are exercised;
(d) Reduction of the required listing period for foreign issuers of employee share schemes offers to Australian employees from 36 months to 12 months;
(e) Additional guidance in PS 49 on case-by-case relief for employee share scheme offers; and
(f) Relief to permit employee share scheme offers to be disregarded for the purposes of calculation of the number or value of offers made under section 708(1) of the Act dealing with small-scale offerings.
(2) Background
PS 49 was first issued in March 1993 and substantially reviewed in 1995. ASIC also issued an information release in December 2000 noting changes to its policy in this area (Information Release [IR 00/39]).
ASIC has updated PS49 to reflect legislative changes to the Act arising from the Corporate Law Economic Reform Program Act 1999 No. 156 (Cth) and the Financial Services Reform Act 2001 No. 122 (Cth). The updated PS49 also incorporates ASIC operational experience in employee share schemes, including information contained in Information Release [IR 00/39].
Class order relief for employee share schemes has been updated to reflect the amendments to PS 49. This relief is contained in a new class order Class Order [CO 03/184] which incorporates relief for offers of shares, options over shares and offers involving a contribution plan or through a trust previously contained in class orders [CO 00/220], [CO 00/221], [CO 00/223] and [CO 02/264]. It also gives relief for some stapled securities.
The new class order which gives effect to the updated employee share scheme policy is Class Order [CO 03/184], which provides conditional relief from the disclosure provisions of the Act for offers of stapled securities, listed shares, units of shares or options over shares and consequential relief from licensing and hawking provisions.
3. RECENT TAKEOVERS PANEL MATTERS
(A) PANEL MAKES ORDERS IN COBRA RESOURCES LIMITED PROCEEDINGS
On 23 May 2003 the Takeovers Panel advised that it had made orders in the proceedings in relation to Cobra Resources Limited.
Mr Terry Stephens agreed to consent orders from the Panel that he not proceed with the takeover which he announced on 28 April 2003 and 5 May 2003. The orders result from an application from the Australian Securities and Investments Commission on 16 May 2003.
The Panel considered that the confusion which Mr Stephens' announcements had caused in the market for Cobra shares, which was largely due to his failure to seek qualified advice prior to making his announcements, and then subsequently when ASIC advised him of deficiencies in his announcements, caused unacceptable circumstances in relation to the affairs of Cobra.
The Panel said that in the interest of efficient, competitive and informed markets, persons announcing or commencing public takeovers will normally require proper, experienced advice.
The Panel made the following orders.
(1) On 28 April 2003 Mr Terry Stephens gave a notice (Notice) to Cobra Resources Limited (Cobra) of his intention to make a takeover bid for all of the shares in Cobra (Bid).
(2) The Notice was released by Cobra to Australian Stock Exchange Limited (ASX).
(3) On or about 7 May 2003 a document from Mr. Stephens entitled 'Bidder's Statement,' setting out the Bid referred to in the Notice, was given to Cobra. Cobra then released that document to ASX.
(4) It is likely that the Notice and Bidder's Statement contravened various sections of Chapter 6 of the Corporations Act 2001 No. 50 (Act).
(5) In particular the Bidder's Statement did not address the issues required by section 636 of the Act.
(6) The Notice and Bidder's Statement created a degree of confusion in the market for Cobra shares and frustrated the principle set out in section 602(a) of the Act that the acquisition of control over the voting shares in a listed company take place in an efficient, competitive and informed market.
Therefore, the Takeovers Panel:
(a)`declares that the circumstances set out above are unacceptable circumstances in relation to the affairs of Cobra; and
(b) orders that Mr Stephens not proceed with the Bid, and not make or announce any other bid for Cobra, before he has lodged a fresh bidder's statement with the Australian Securities and Investments Commission (ASIC), and been informed in writing by an officer of ASIC occupying the position of Assistant Director of Corporate Finance or Corporate Finance Counsel that he or she has accepted the document for lodgment.
(B) PANEL DECLINES APPLICATION IN RELATION TO SIRTEX MEDICAL
On 14 May 2003 the Takeovers Panel declined to make a declaration of unacceptable circumstances in relation to the affairs of Sirtex Medical Limited in response to an application by Hunter Hall Investment Management Limited (in its capacity as responsible entity for the Australian Value Trust, the Value Growth Trust and the International Ethical Fund) dated 17 April 2003.
The application related to an off-market takeover bid by Cephalon Australia Pty Ltd, a subsidiary of US-based biopharmaceutical Cephalon, Inc for all the shares in Sirtex.
Hunter Hall alleged that unacceptable circumstances existed because Sirtex shareholders did not have sufficient information to assess whether or not to accept the bid. Hunter Hall asserted that there was deficient information regarding the possibility raised by Cephalon in its first and second supplementary Bidder's Statements that if it achieved between 50% and 90% acceptance levels under the bid:
(a) Cephalon would consider Sirtex entering into an agreement under which Sirtex licensed (non-exclusively) its only significant asset to Cephalon; and
(b) Cephalon may consider underwriting a capital raising by Sirtex that could have a dilutive effect on other shareholders.
Hunter Hall was also concerned about the relationship between Cephalon, on the one hand, and Sirtex and its principal shareholder, on the other.
The Panel declined the application although it acknowledged some of the applicant's concerns regarding disclosure. However, the Panel believed that most of those concerns were no longer relevant following a binding statement in Cephalon's third supplementary Bidder's Statement dated 8 May that it would not waive the minimum 90% condition in its bid.
The Panel did not believe that an Independent Expert's Report was necessary or desirable in the circumstances.
The Panel considered that Cephalon's description in its third supplementary Bidder's Statement of Sirtex shareholders' withdrawal rights (caused by its bid extension) could inform shareholders more clearly of their rights.
The Panel also noted that it was provided with no evidence that any aspect of Cephalon's bid prevents a rival bid from emerging.
The sitting Panel comprised Alison Lansley (sitting President), Scott Reid and Luise Elsing.
(C) PANEL DECLARATION OF UNACCEPTABLE CIRCUMSTANCES IN RELATION TO AFFAIRS OF AMP SHOPPING CENTRE TRUST
On 13 May 2003 the Takeovers Panel advised that it had made a declaration of unacceptable circumstances in relation to the affairs of the AMP Shopping Centre Trust (ART). ART is a listed managed investment scheme which has investment interests in a number of shopping centres. The Panel has made orders preventing ART's interests in five major shopping centres being bought out solely because AMP Henderson Global Investors Ltd. (AMPH) is removed as Responsible Entity of ART following a successful takeover bid for ART.
On 15 May 2003 AMP applied for a review of the orders. On 26 May 2003 the Review Panel announced that it declined to vary the orders announced by the Panel on 13 May 2003.
CPT Manager Limited (as responsible entity for Centro Property Trust) (Centro) announced a takeover bid for ART on 18 March 2003.
On 26 March 2003 AMPH announced that a change of Responsible Entity of ART as a result of a takeover bid under Chapter 6 of the Corporations Act 2001 No. 50 (Cth) (Act) (Change of Responsible Entity) would be likely to breach provisions contained in agreements (Co-Owners' Agreements) in relation to five of the largest and most important shopping centres in which ART owned interests (the Shopping Centres). AMPH said that those breaches may activate pre-emptive rights (Pre-Emptive Rights) in the Co-Owners Agreements which may lead to the Co-Owners being entitled to require ART to sell its interests in the shopping centres to the other Co-Owners at market value.
The interests are worth over $1 billion and comprise around 63% of ART's assets. AMPH's announcement in relation to the Pre-Emptive Rights was in response to the announcement by Centro of its takeover bid.
The Co-Owners to the Co-Owners Agreements are essentially all subsidiaries of, or insurance or investment funds within, AMP Life Limited (AMP Life) or the AMP Ltd. group.
Centro applied to the Panel for a declaration of unacceptable circumstances and orders under sections 657C & D of the Act on 10 April 2003.
The Panel accepted Centro's submissions that the commercial effect of the Pre-Emptive Rights are such that they would effectively deter any takeover bid by any person who wasn't acceptable to the AMP group.
The Panel was concerned that the effect of the Pre-Emptive Rights which is now being contended by AMP Life and AMPH ie the Pre-Emptive Rights being activated by a Change of Responsible Entity, had not been disclosed to ART unitholders or the market prior to AMPH's announcement to ASX on 26 March and the subsequent publication by AMPH of the terms of the Co-Owners Agreements and has not been consented to by ART unitholders. The Panel considered that this had impaired the efficient, competitive and informed market for control of ART units.
(1) Orders
The Panel ordered AMPH (as Responsible Entity of ART and AMP Wholesale 2), AMP Life and the other parties to the relevant Co-Owners' Agreements, not to exercise any Pre-Emptive Rights in relation to shopping centres in which ART owns interests, solely because of a Change of Responsible Entity (as defined).
In arriving at these orders the Panel had taken into account: past disclosure; market participants assessments of the Pre-Emptive Rights; the interests of ART unitholders and their knowledge and consent; whether they would cause any person unfair prejudice; and other potential remedies advanced by the parties to the application.
The Panel offered the Co-Owners an opportunity to resolve the Panel's concerns by giving the Panel undertakings that they would not seek to exercise any Pre-Emptive Rights if they were activated due to a Change of Responsible Entity. The Co-Owners declined the Panel's offer.
(2) AMP Life
AMP Life is essentially the other Co-Owner in the Shopping Centres. The Panel asked AMP Life to advise ART unitholders of its position in the event of a Change of Responsible Entity. AMP Life has declined to do so. AMP Life has consistently suggested that the Panel should not be conducting these proceedings unless to order some form of disclosure by Centro as to whether Centro would waive the defeating condition in its offer. AMP Life has also advised the Panel that it reserved the right to appeal, after the close of Centro's bid, any Court decision unfavourable to it if the Panel referred any question of law to the Court under section 659A of the Act.
The Panel accepted AMP Life's right to make choices concerning participation in Panel proceedings in light of its own commercial interests and fiduciary duties. However, AMP Life chose to join the proceedings on 28 April well after proceedings had commenced and as a participant in the proceedings declined to provide information that the Panel considered may have been relevant for its consideration. Where a person or party chooses not to provide information to the Panel or not to participate in proceedings, the Panel will proceed with its proceedings and make its decision on the information which it has before it.
AMP Life, and to a lesser extent AMPH, had asserted that it had not made any contentions as to how the Pre-Emptive Rights might operate in the event of a Change of Responsible Entity. However, the Panel considered that the statements made by AMP Life and AMPH through the course of these proceedings made it reasonable for the Panel to infer, and to proceed in its decision on the basis, that AMP Life and AMPH can reasonably be taken to have contended to the Panel that the Pre-Emptive Rights would, or would likely, be activated by a Change of Responsible Entity.
(3) Past disclosure
The Panel considered it highly unlikely that prospective purchasers of ART units would reasonably have understood from reading the ART 1997 Prospectus that a change of trustee under the prescribed interest regime would have activated the Pre-Emptive Rights. The Panel considered that they would likely have understood that an attempt by any of the Co-Owners to sell the assets out of the group would have activated the Pre-Emptive Rights. But that is different to the Pre-Emptive Rights being activated merely by a change of trustee with no change in beneficial ownership of the interests in the Shopping Centres (ie still beneficially owned by the unitholders of ART).
Based on the facts presented to the Panel there appeared to have been a series of points since 1997 at which circumstances changed, or AMPH or AMP Life had received advice or information, which might have triggered a decision by AMPH, as Responsible Entity for ART, to make disclosures to the market and to ART unitholders concerning the effect of the Pre-Emptive Rights in relation either to the change of a trustee or a change of the Responsible Entity.
(4) Market participants' knowledge
Centro and Westfield Management Limited (Westfield) had each recently spent over $200 million acquiring units in ART. Their evidence to the Panel was that they did not know, after diligent enquiries prior to acquiring their current stakes in ART in March 2003, that the Pre-Emptive Rights in the Co-Owners' Agreements might be activated by a change of trustee under the prescribed interests regime, or by a Change Of Responsible Entity under the MIA regime. The Panel takes this as supportive evidence that the activation of the Pre-Emptive Rights contended by AMPH and AMP Life had not been adequately or effectively disclosed.
(5) Interests of ART unitholders - disclosure and consent
The Panel notes that:
(a) although the main elements of the Pre-Emptive Rights (ie concerning sale of interests in the Shopping Centres) were disclosed in the 1997 Prospectus, the fact that merely a change of trustee of ART may activate the Pre-Emptive Rights in the Co-Owners' Agreements was not disclosed; and
(b) on or around 12 April 1999, ART offered its unitholders the opportunity to vote on whether unitholders wanted self-custody by AMPH, a related party custodian or an independent custodian when ART moved from the prescribed interests regime to the MIA regime. It would have been appropriate for AMPH to have conducted a thorough review of the effects of the transition, especially in relation to the Pre-Emptive Rights, and disclosed to ART unitholders what the various consequences of those alternatives might have been. It may also have been appropriate for AMPH to seek unitholder consent to those specific effects, or to have proposed alternative arrangements to avoid the entrenching effect of the Co-Owners' Agreements under the MIA regime. Whatever AMPH's conclusion about the impact of appointing an external custodian, this analysis would have revealed the issue whether a Change of Responsible Entity would have triggered the Pre-Emptive Rights;
(c) unitholders did not consent to the effect of the Pre-Emptive Rights proposed by AMP Life and AMPH; and
(d) subsequent disclosures by AMPH to the Panel (after AMPH had reviewed its earlier files on the issues) suggest that persons within AMPH, and likely AMP Life, had turned their minds to the exact, or very similar, issues in relation to a Change of Responsible Entity in ART, as those raised by the Centro bid.
(6) Uncertainty
If the Pre-Emptive Rights would not be activated, but that fact had not been determined with finality by a court, the existence of the uncertainty (initiated for Centro, rival bidders, the market and ART unitholders by the announcement of AMPH on 26 March 2003):
(a) makes it impossible for unitholders to assess the value of their units; and
(b) threatens the prospects of the current takeover bid for ART, or any other takeover offer not supported by the Co-Owners.
Either of these circumstances means that the competitive, efficient and informed market for units in ART has been impaired.
(7) Entrenching
The Panel considered that there was a "non-entrenchment" principle in the Managed Investment Scheme provisions of the Act and in the purposes of Chapter 6 of the Act and that it should apply that principle in its consideration of this application.
It appeared clear to the Panel that the introduction of the CLERP Act 1999 No. 156 (Cth) in 2000, which brought takeovers of listed managed investment schemes under Chapter 6 of the Act, was intended to expose the responsible entity of listed managed investment schemes to similar scrutiny and discipline by an efficient, competitive and informed market as managers of public companies.
To impose the sort of commercial burden on unitholders as exercise of the Pre-Emptive Rights would impose on ART unitholders, in the event of a Change of Responsible Entity, would frustrate the express purpose of bringing listed managed investment schemes under Chapter 6 of the Act.
It appeared to the Panel that the activation of the Pre-Emptive Rights that AMP Life and AMPH contended would very strongly tend to entrench AMPH as Responsible Entity of ART and would therefore constitute unacceptable circumstances. A possible exception to this legislative policy would be where the unitholders had given their informed consent to such entrenchment.
(8) Orders - no unfair prejudice
The Panel is of the view that it would not unfairly prejudice any person to make the orders it had made because it appears from the evidence before the Panel that, amongst other things:
(a) parties had agreed that the Pre-Emptive Rights would not have been activated by a change of management company under the prescribed interests regime prior to the commencement of the MIA. Under AMPH and AMP Life's contentions, that would in effect now occur;
(b) the parties had provided the Panel with no evidence of, or any rational commercial basis for, any intention of the Co-Owners that the Pre-Emptive Rights in the Co-Owners' Agreements, when they were entered into, would be activated merely because of a change of trustee of ART under the prescribed interests regime. The Panel infers that this was likely to be an issue of negligible value under the prescribed interests regime;
(c) the orders affect only a very small portion of the Pre-Emptive Rights compared to the commercial and other value of the aspects of the Pre-Emptive Rights that would be untouched by the Panel's order (ie all the parts which were clearly disclosed in the Prospectus); and
(d) any activation of the Pre-Emptive Rights on a Change of Responsible Entity would be a windfall benefit to the Co-Owners, to the detriment of ART unitholders, that the Co-Owners neither intended or knew about, and which the ART unitholders had not been informed of and to which they had not consented. To deprive the Co-Owners of the windfall and return it to the ART unitholders would not be unfair.
(9) Other potential remedies
(a) Uncertainty
The Panel does not accept AMPH's submissions that the Panel cannot or should not seek to determine these proceedings until the uncertainty (or the proper construction of the Pre-Emptive Rights) has been resolved by referral to a court. That would cause additional delay, in proceedings which have already extended for a long period, and it may well not give the certainty which AMPH said would be a pre-requisite for a court referral being appropriate.
(10) Request for the Panel to refer a question of law to the Court
The Panel considered that the decision and orders above obviate the need to refer the issue to the Court. The Panel considered that its decision was likely to be materially more timely and efficient, while still being fair and reasonable, than referring the question to court (and potentially being faced with the same issue for determination after receiving the Court's advisory opinion). On that basis, the Panel does not intend to refer the requested question of law to the Court.
AMP Life has declined to undertake to be bound by any advice to the Panel by a court on a question of law referred to the Court. It also put forward the possibility of it "advocating and successfully establishing a contrary view to that decided by the Court after the close of the takeover bid." Without an undertaking that AMP Life and the other Co-Owners would be bound by the Court's decision, a decision by a Court of a question of law would have materially reduced certainty and utility for these proceedings.
(11) Disclosure as a remedy
AMP Life had submitted that the proper remedy for any unacceptable circumstances that exist in relation to the affairs of ART (but AMP Life contended that none do) was to ensure that:
(a) AMPH fully disclose to ART unitholders and to the market the terms of the Co-Owners' Agreements;
(b) AMPH and Centro fully disclose their different contentions as to the operation and existence of the Co-Owners' Agreements and Pre-Emptive Rights; and
(c) CPT discloses, in light of that information, whether it intends to seek to rely upon any relevant bid condition.
AMP Life suggested to the Panel that unitholders would then be in a position to determine for themselves what the risk is of the Pre-Emptive Rights existing and being activated by a Change of Responsible Entity.
Disclosure is an inadequate remedy in these proceedings, and cannot be made to become an adequate remedy, because of the potential effect on those ART unitholders who would prefer to stay as unitholders of ART. If Centro proceeds with its bid, acquires more than 50% of the units in ART, replaces AMPH as Responsible Entity of ART, and AMP Life or another Co-Owner exercise their Pre-Emptive Rights, the remaining ART unitholders would have their investment changed from a valuable, diversified, shopping centre fund to essentially a cash box. In addition, any ART unitholders who accepted the offer would receive Centro units and the value and composition of Centro's assets would be materially changed, in similar ways to those of ART, if the Pre-Emptive Rights were exercised.
As noted above, AMP Life, for its part, has declined to disclose to the Panel, ART unitholders or the market, whether or not it would seek to exercise any Pre-Emptive Rights in the event of a Change of Responsible Entity.
(12) Centro's conditions
When and if it is settled that the Pre-Emptive Rights will not be exercised, when and if Centro replaces AMPH as responsible entity of ART, and any reviews of this decision are complete, the Panel expects Centro to waive any conditions of its bid to the extent that they may have been triggered by the existence or disclosure of the Co-Owners' Agreements.
(13) Costs
The Panel considered that parties to the proceedings were likely to have incurred additional costs because of the late time in the proceedings that AMP Life sought to become a party, despite the Panel's repeated invitations for it to become a party. On that basis, the Panel made an order that each party pay their own costs incurred up until 28 April 2003, and that AMP Life pay all parties' costs incurred after that date, in the manner set out in the Panel's Guidance Note on Costs.
(14) Issues for other managed investment scheme and responsible entities
The Panel considered that all listed managed investment schemes and