Bulletin No 70, June 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 Stock Exchange (http://www.asx.com.au)

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CONTENTS

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS

(A) New book on experts' reports
(B) SEC to increase staff
(C) Ethics officers say they don't train their boards in ethics
(D) OECD releases White Paper on Corporate Governance in Asia
(E) GMI launches ratings on Australia's ASX50
(F) Financial Services Reform Amendment Bill
(G) New guide to triple bottom line success
(H) Initial Report of the Special Committee on Governance of the New York Stock Exchange
(I) Six former senior executives of Xerox settle SEC enforcement action charging them with fraud
(J) IAASB issues Exposure Draft to enhance firm quality control practices
(K) NYSE/NASD IPO Advisory Committee publishes report and recommendations
(L) SEC implements internal control provisions of Sarbanes-Oxley Act
(M) Australia's globalisation experience
(N) Companies makes changes to US board compensation in 2003 study shows
(O) Review into Part 23 of the Superannuation Industry (Supervision) Act 1993

2. RECENT ASIC DEVELOPMENTS

(A) ASIC and Hong Kong SFC sign MoU
(B) ASIC Policy Statement: Advisers' conduct and disclosure obligations
(C) Excesses on PI insurance for insurance brokers
(D) Externally administered companies: financial reporting and AGMs
(E) Rene Rivkin sentenced to jail

3. RECENT ASX DEVELOPMENTS

(A) ASX Corporate Governance Council
(B) ASX referrals to ASIC

4. RECENT TAKEOVERS PANEL MATTERS

(A) Panel publishes final guidance on frustrating action
(B) Panel releases final guidance on broker handling fees

5. RECENT CORPORATE LAW DECISIONS

(A) Adverse commercial effects and section 437F of the Corporations Act
(B) Senior management owes a duty of fidelity equivalent to that of a director
(C) Factors relevant to determining whether to grant leave to a disqualified director under section 206G(1) of the Corporations Act
(D) Applications under section 411 of the Corporations Act for court approval to convene meeting of members to consider a scheme of arrangement
(E) Company directors must have authority to issue statutory demands
(F) Lessons in corporate governance
(G) Payment of liquidator's remuneration from trust assets
(H) Insider trading - the Rivkin conviction
(I) Variation of a statutory demand
(J) Whether a curative order should be made for an invalid resolution to appoint an administrator and whether the administration should continue or a provisional liquidator be appointed
(K) Examination of the court's power to validate an "invalid" issue of shares and to confirm the terms of their issue under section 254E of the Corporations Act

6. NEW BOOK ON EXPERTS' REPORTS

7. RECENT CORPORATE LAW JOURNAL ARTICLES

8. CONTRIBUTIONS

9. MEMBERSHIP AND SIGN-OFF

10. DISCLAIMER

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS

(A) NEW BOOK ON EXPERTS' REPORTS

A new book titled 'Experts' Reports in Corporate Transactions has been published by Federation Press. For further details, please see item 6 of this Bulletin.

(B) SEC TO INCREASE STAFF

On 20 June 2003 the United States Securities and Exchange Commission praised US Congress House and Senate leaders for expediting passage of H.S. 658 the Accountant, Compliance, and Enforcement Staffing Act of 2003, which will greatly streamline the Commission's efforts to add more than 800 lawyers, accountants, economists and examiners to its staff.

The House of Representatives passed the bill on suspension June 17. The Senate approved the legislation by unanimous consent. President Bush is expected to sign the measure into law soon.

"The passage of this legislation will allow the SEC to more quickly hire and assimilate the many new employees needed to fulfill the corporate governance reforms of the Sarbanes-Oxley Act, and will help the Commission to continue its efforts aimed at increasing investor protection and restoring confidence in our markets," SEC Chairman William Donaldson said.

(C) ETHICS OFFICERS SAY THEY DON'T TRAIN THEIR BOARDS IN ETHICS

Despite a continuing wave of ethical lapses in major corporations, large numbers of ethics officers from US companies say their boards of directors have never received training in ethics or compliance issues, The Conference Board reports in a survey released on 17 June 2003.

The survey covers more than 80 ethics, human resources and legal officers participating in The Conference Board's 2003 Ethics Conference in New York.

While 81 percent of firms have conducted ethics and compliance training among their employees, only 27 percent have held any training sessions for their directors. About 55 percent of those surveyed say their boards are "not engaged enough" in major ethical issues involving the company.

Some 67 percent of the surveyed executives say compensation for senior executives is "out of control" in their companies. About 62 percent acknowledge that executives who leave their companies because of major violations of the company's ethics and compliance codes "get a financial package and go." In about 38 percent of the firms, wrong-doing executives leave the company without a package.

"Although board involvement in governance has increased dramatically in the past year, this is a clear indicator that ethics officers, boards and executives need to strive for higher levels of ethical leadership and accountability," said Steve Priest, who conducted the survey, and is founder of the ten-year-old Ethical Leadership Group. "Ethics officers, along with Warren Buffett, recognize that extremely high short term incentives can distort long-term business performance. The finding that is most troubling - both in itself and because of the message it sends to all the honest, decent employees - is that in over 60 percent of companies, executives who do the wrong thing actually get rewarded with a severance package".

The Conference Board survey finds that nearly 5 percent promote "great performers" who don't live up to their companies' values, with 22 percent saying they "tolerate them" and more than 25 percent reporting that they "coach them." Less than 8 percent of the companies fire them.

The survey shows that while most believe corporate ethics training can play only a modest role in preventing major scandals, it won't halt malfeasance in all companies. About 42 percent say ethics training would have made no difference in the Health South business scandals, just as a majority of these officers said ethics training would not have prevented the Enron debacle. "This is not an indictment of ethics training," according to Priest, "it is recognition that ethics codes, training and hot-lines are only part of the answer to preventing wrong doing. Good ethics programs pay as much attention to incentives, culture and management as they do to codes and training."

While a large majority of these surveyed firms have toll-free hot-lines for employees to report concerns about ethical lapses, 69 percent of the executives say that fear of retaliation is a "big issue" in their companies. Only 6 percent say their companies have a "culture of dissent" where employees can openly speak their minds.

Among other key findings:

- 59 percent say the Sarbanes-Oxley Act is a "plus that will foster improvement in ethics, compliance and governance."
- About 41 percent expect 6-10 more major business scandals among Fortune 500 companies during the next 12 months.

(D) OECD RELEASES WHITE PAPER ON CORP0RATE GOVERNANCE IN ASIA

On 10 June 2003 the OECD Asian Roundtable on Corporate Governance released a White Paper on Corporate Governance in Asia. Following is the Background and Executive Summary from the Paper.

(1) Background

(a) The Asian Roundtable and the White Paper on Corporate Governance in Asia

The Asian Roundtable on Corporate Governance ("Roundtable") serves as a regional forum for structured policy dialogue on corporate governance. Established in response to a G-7 mandate to the Organisation for Economic Co-operation and Development (OECD) and the World Bank to encourage the implementation of the OECD Principles of Corporate Governance (the "OECD Principles"), the Roundtable comprises senior policy-makers, regulators, and representatives from stock exchanges, private-sector bodies, multilateral organisations, and non-governmental institutions.

Between March 1999 and March 2003, the OECD and the World Bank Group, in partnership with the government of Japan, the Global Corporate Governance Forum and the Asian Development Bank, and in co-operation with regional and local partners, organised five Roundtable meetings to discuss improving corporate governance in the Asian region. Using the OECD Principles as a conceptual framework, the Roundtables examined a range of subjects, from boards of directors to minority-shareholder protection to disclosure and transparency issues. In the May 2000 Roundtable meeting in Hong Kong China, participants decided to develop a region-specific corporate governance white paper ("White Paper") that would identify common policy objectives and formulate a practical reform agenda to improve corporate governance in Asia.

The White Paper is a non-binding, consultative document reflecting the discussions and recommendations of Roundtable meetings. Without assessing or ranking individual Asian countries, the White Paper provides region-specific guidance and suggestions to assist policymakers, regulators (including stock exchanges), and other standards-setting bodies in non-OECD-member countries of the Asian region ("Asian Roundtable Countries"). The White Paper also targets companies, investor and other parties that have a role or interest in promoting good corporate governance practices. The White Paper focuses primarily on publicly-traded companies although some may also find the document useful for the governance of privately-held firms and state enterprises.

While the White Paper represents a home-grown response to the corporate governance issues faced in Asia, the White Paper utilises the general structure of the OECD Principles. In so doing, the White Paper builds upon the OECD Principles, reflecting the importance of both coherence and convergence in international corporate governance standards.

The substantive chapters of the White Paper match the five key elements of a strong corporate governance framework described in the OECD Principles: (i) the rights of shareholders; (ii) the equitable treatment of shareholders; (iii) the role of stakeholders in corporate governance; (iv) disclosure and transparency; and (v) the responsibilities of the board.

The White Paper was written, debated, and endorsed on a consensus basis by an informal but highly influential group of policy-makers, regulators, stock exchange officials, private-sector participants, investors, and other interested groups. The Roundtable's inclusive approach recognizes that the OECD Principles are drafted as aspirations and that different jurisidictions may adopt different approaches to the same concerns based on their understanding of local conditions. Of course, while local conditions may determine how corporate governance aspirations should be fulfilled, these conditions do not excuse jurisdictions from fulfilling them.

Upon completion, the White Paper will be distributed to key national policy-makers, securities regulators and representatives of stock exchanges, standards-setting bodies and relevant private-sector institutions in the Asian region. The White Paper will also be submitted to multilateral institutions for consideration. Finally, the White Paper will be disseminated to the general public.

The Roundtable plans to conduct a stock-taking of developments in Asia two years after issuance of the White Paper. This stock-taking will enable Roundtable participants and the public to assess progress and to identify remaining challenges.

(b) The OECD Principles of Corporate Governance and Regional Roundtables

The OECD Principles of Corporate Governance constitute the only internationally accepted body of governance principles that address the entire corporate governance framework: the legal, institutional, and regulatory structures and practices that create the context within which firms operate. The OECD Principles resulted from broad consultation among OECD-member countries and key non-member countries, including many from Asia. The Financial Stability Forum has identified the OECD Principles as one of 12 core standards for sound financial systems. The OECD Principles have also been endorsed by the International Organisation of Securities Commissions (IOSCO), as well as by private-sector bodies, such as the International Corporate Governance Network. The OECD Principles have served as a reference point in the development of national codes of corporate governance. In Asia, the OECD Principles have been cited extensively in public- and private-sector initiatives to improve corporate governance.

The OECD Ministers formally endorsed the OECD Principles in May 1999, after which the OECD entered into an agreement with the World Bank to advocate jointly for better corporate governance worldwide. As part of this collaboration, the OECD has taken the lead in establishing regional roundtables to promote corporate governance policy dialogue and reform. A total of five regional roundtables - in Asia, Eurasia, Latin America, Russia and Southeast Europe - have been established, each of which has completed or will complete a regional white paper or a comparative paper.

In addition to the involvement of the OECD and the World Bank, each of the regional roundtables has benefited from the support of regional partners, whose active participation and support has been crucial. In Asia, the Roundtable has enjoyed the invaluable assistance of local hosts, including securities commissions, stock exchanges and private-sector institutions. Other organisations, including the Asia-Pacific Economic Cooperation forum (APEC), have also expressed their support for the objectives of the Asian Roundtable.

(2) Priorities for reform

(a) Priority 1: Public and private-sector institutions should continue to raise awareness among companies, directors, shareholders and other interested parties of the value of good corporate governance.

Since the 1997 financial crisis, Asian regimes have made considerable progress in raising awareness of the value of good corporate governance, which challenges many Asian business leaders and controlling shareholders to re-think their relationships with their companies and with the minority shareholders who lay claim to partial ownership in them. Achieving this re-orientation in thinking requires not only a strong national commitment to corporate governance, but one that is also broadbased.

(b) Priority 2: All jurisdictions should strive for effective implementation and enforcement of corporate governance laws and regulations.

Over the past several years, most Asian jurisdictions have substantially revamped their laws, regulations and other formal corporate governance norms. Such advances in rules must now be matched by advances in their implementation and enforcement, since the credibility - and utility - of a corporate governance framework rest on its enforceability. Leadership from the uppermost reaches of government is necessary to promote public confidence in the state's commitment to the rule of law.

(c) Priority 3: Asian Roundtable Countries should work towards full convergence with international standards and practices for accounting, audit and non-financial disclosure. Where, for the time being, full convergence is not possible, divergences from international standards and practices (and the reasons for these divergences) should be disclosed by standards setters; company financial statements should repeat or reference these disclosures where relevant to specific items.

Full adoption of international accounting, audit and financial disclosure standards and practices will facilitate transparency, as well as the comparability, of information across different jurisdictions. Such features, in turn, strengthen market discipline as a means for improving corporate governance
practices.

From country to country, of course, local conditions may require the adoption of a set of standards, such as IAS,1 individually (rather than all at once) and/or at differing speeds. Until full convergence is achieved, standards setters should disclose where local standards and practices diverge from IAS (and the reasons for these divergences); company financial statements should reference specific disclosures where they apply to specific items and yield materially different results.

(d) Priority 4: Boards of directors must improve their participation in strategic planning, monitoring of internal control systems and independent review of transactions involving managers, controlling shareholders and other insiders.

Persistant problems with minority shareholder exploitation in Asia have called into question the independence and diligence of the region's boards. Recent scandals in developed markets have raised doubts in the public's mind on a global level with regard to directors' ability and willingness to discharge their fiduciary duties to the company and all of its shareholders.

In addressing these challenges, Roundtable recommendations comprise three basic categories. The first focuses on director training, voluntary codes of conduct, expectations for professional behaviour and directors' resources and authority vis-a-vis management. A second set of recommendations seeks to reduce or eliminate loopholes by tightening standards for director "independence", by making "shadow" directors liable for their actions, by increasing sanctions for violations of duties of loyalty and care and by advocating delineation of a core set of related-party transactions (such as company loans to directors and officers) that should be prohibited outright. Finally, Roundtable participants recommend adequately empowering shareholders to seek redress for violations of their rights and to ensure director accountability. Mechanisms to discourage excessive or frivolous litigation should not prevent or frustrate collective action by shareholders with meritorious claims.

(e) Priority 5: The legal and regulatory framework should ensure that non-controlling shareholders are protected from exploitation by insiders and controlling shareholders.

All Asian governments should introduce measures, or enhance existing measures, to provide non-controlling shareholders with adequate protection from exploitation by controlling shareholders. These measures should include, among other things: (i) strengthening disclosure requirements (particularly of self-dealing/related-party transactions and insider trading); (ii) ensuring that regulators have the capacity to monitor companies for compliance with these requirements and to impose substantial sanctions for wrongdoing; (iii) clarifying and strengthening the fiduciary duty of directors to act in the interest of the company and all of its shareholders; (iv) prohibiting indemnification of directors by companies for breaches of fiduciary duty; and (v) providing shareholders who suffer financial losses with private and collective rights of action against controlling shareholders and directors.

(f) Priority 6: Governments should intensify their efforts to improve the regulation and corporate governance of banks.

Asian banks play a dominant role in regional finance. Shortcomings in the governance of banks not only lower returns to the bank's shareholders, but, if widespread, can destabilise the financial system. To restore confidence to both debt and equity markets, policy-makers and regulators need, in addition to ensuring adequate banking laws and regulations and supervision of banks' operations, to promote sound corporate governance practices in the banking sector. Ownership and financial relationships should be disclosed. Self-dealing/related-party transactions should be subject to both banking and corporate governance restrictions. Bank directors should be able to pass "fit and proper" tests for service. These directors should also assume responsibility for bank systems and procedures that ensure sound lending and monitoring practices, as well as the capacity to handle distressed debt. Lastly, local insolvency systems must protect and enforce creditors' rights and provide efficient liquidation of debtors which cannot be expeditiously restructured into commercially viable enterprises.

The full report is available at http://www.oecd.org/EN/document/0,,EN-document-77-nodirectorate-no-20-7445-28,00.html

(E) GMI LAUNCHES RATINGS ON AUSTRALIA'S ASX50

On 9 June 2003 GovernanceMetrics International(GMI), an independent corporate governance ratings agency announced ratings of the constituent companies of Australia's ASX50 index.

GMI rates companies on a scale from one to ten. Of the ASX50 companies, one, CSR Limited, received the highest rating of 10, while Woolworths scored a 9.5. GMI regards these as having governance profiles that are well above average.

Gavin Anderson, GMI's Chief Executive Officer, said: "We score companies relative to each other; they are not scored against some theoretical gold standard. It is important therefore to note that while a company may score a 10, it should not be taken to mean that it is perfect, but rather that its governance is better than others in the same universe. Nonetheless, the overall governance profile of top Australian companies is strong compared to most other markets. An interesting feature, however, is the presence in this index of complex entities such as Dual Listed Companies, "Stapled Securities Trusts" and Listed Property Trusts. The listed property trust in particular presents governance challenges in that shareholders own the underlying asset but have limited control over how it is managed because of restricted voting rights and limits on disclosure."

The main positive factors that GMI noticed in the top-ranked Australian companies were a high level of disclosure, significant separation of executive and chairman roles and a preponderance of boards with independent directors. What was troubling, though, was the amount of related-party transactions. Eighty five per cent of the ASX50 companies had related-party transactions in the last three years. These are levels that are high by US or UK standards. Significant too was the fact that in only 21 of the companies was there disclosure of a policy of board scrutiny of these transactions.

(1) The ASX50 - What was found

- 9 entities with unusual governance structures: 3 dual-listed companies, 4 listed property trusts, and 2 "stapled securities" trusts.
- One telecommunications company with a "golden share" granted to the government, and another telecommunications company with voting and dividend rights that can only be changed through legislation.
- A company with 15 directors, only four of whom are independent.
- One company with such significant related-party transactions (nearly 18% of revenue) that they have established a Related-Party Committee, consisting of three independent directors.
- A very large number of companies with related party transactions in the past three years - 85% of the index.
- 33% of companies in the index give loans to directors and officers as part of equity incentive plans.
- 12 companies that have significant stock ownership limitations.
- Two-thirds of non-executive directors are paid entirely in cash, and half of all non-executive directors acquired shares other than through remuneration plans.
- 90% of companies in the index have a total potential dilution from outstanding options of less than 5%.

(F) FINANCIAL SERVICES REFORM AMENDMENT BILL

On 6 June 2003 the Parliamentary Secretary to the Australian Treasurer, Senator Ian Campbell, released a list of proposed legislative changes designed to clarify aspects of new arrangements introduced by the Financial Services Reform Act (FSRA).

The FSR Amendment Bill containing the changes will be introduced into Parliament in the near future. The main amendments are listed below.

(1) Corporations Act amendments

(a) Section 761A - definition of "basic deposit product" - term deposits

The definition of `basic deposit product' will be amended to include all term deposits of a term of two years or less.

(b) Section 761G - meaning of "retail" and "wholesale" client

It will be clarified that, in relation to bundled contracts of insurance, a person is considered to be a retail client only in respect of specific covers under the contract as opposed to the entire contract.

(c) Section 766E - meaning of "custodial or depository service"

An exception to the definition of providing a custodial or depository service currently applies in respect of the operation of certain superannuation funds. It will be clarified that this exception applies only to trustees, as opposed to other providers of services to those funds. A new exception will be provided for the operation of a statutory fund by a life office (which will also include the operation of a benefit fund by a friendly society).

(d) Paragraph 911A(2)(h) - overseas regulatory bodies

Difficulties have come to light with the application of this provision. It is intended to provide an exemption from licensing for certain persons if they meet prescribed conditions, including regulation by an overseas regulatory authority approved by ASIC, and dealing only with wholesale clients. To improve the practical application of the provision, it is proposed to allow ASIC to specify a financial service performed by a person regulated by an overseas regulatory body.

(e) Section 912D - reporting of breaches to ASIC

The requirements relating to notification of breaches of obligations to ASIC will be relaxed, including through extending the basic reporting period, the introduction of a materiality requirement, and specifying that it is only breaches of financial services laws under which ASIC or APRA are given functions and powers that require reporting.

(f) Section 912F - licence numbers on documents

A regulation-making power will be inserted into the section to clarify the list of documents where an AFSL number is required.

(g) Section 916F - appointment of authorised representatives

The period for notification of the appointment of an authorised representative will be extended from 10 to 15 business days. Notification to ASIC of the appointment of individual authorised representatives by a corporate authorised representative will not be required if certain requirements are met. These requirements will be that the individuals are in a specified class to which the licensee has consented; are employees of the corporate authorised representative; provide only general advice; and the advice is provided in relation to specified categories of financial products.

(h) Sections 942A and 1013B - ability to `combine' Financial Services Guides (FSGs) and Product Disclosure Statements (PDSs)

There is uncertainty over whether disclosure documents, such as FSGs and PDSs, can be combined in a single document. Amendments are proposed to permit combination in certain circumstances. These circumstances will be specified by regulation or ASIC relief and will be aimed at ensuring that the effectiveness of the information contained in the document(s) is preserved.

(i) Section 946B - execution-related telephone advice

The provisions relating to execution-related telephone advice will be refined, for example, by including advice that may not result in a transaction (eg. advice to `hold' a financial product) and advice in relation to financial products traded on appropriately regulated overseas markets.

(j) Section 1012G - verbal Product Disclosure Statement (PDS)

An amendment will be made to allow for the oral provision of PDS information in an effective manner that does not unduly affect business practices.

(k) Section 1015D - lodgement of "in use" notices by trustees of self-managed superannuation funds (SMSFs). Trustees of SMSFs are currently required to lodge a notice with ASIC advising that a PDS or Supplementary PDS is "in use". However, the information which this notice would provide is already generally available to ASIC from the Register of Complying Super Funds database maintained by the Australian Taxation Office. It is therefore proposed to remove the requirement for trustees of SMSFs to lodge in use notices. This will not compromise ASIC's ability to conduct surveillance, but will reduce its administrative workload and reduce compliance costs for SMSFs.

(l) Section 1017B - disclosure of material changes and significant events

It is proposed to clarify the operation of the ongoing disclosure requirements, including in relation to the information required by, the circumstances affected by, and persons subject to the obligation to provide information.

(m) Section 1274 - inspection of registers

It will be clarified that the public may inspect documents lodged with ASIC under sections 1015B (certain PDSs) and 1015D (what are known as "in use" notices).

(n) Parts 7.6-7.9 & 10.2 - ASIC's modification and exemption powers

Modification and exemption powers will be provided to ASIC under Part 7.6 (licensing) in line with its powers under Parts 7.7 to 7.9, to enhance ASIC's ability to grant relief. The powers in Chapter 7 will also be made consistent with those given to ASIC elsewhere in the Corporations Act.

(o) Parts 7.6-7.8 & 7.10 - regulation making powers

To ensure that future FSRA-related issues can be resolved via regulation, more comprehensive general regulation-making powers such as those provided for in section 1020G of Part 7.9 will be included in Parts 7.6, 7.7, 7.8 and 7.10 of the Act.

(p) Part 7.9 - new provisions to regulate off-market share offers

The market value of a financial product will need to be disclosed when any person (licensed or unlicensed) makes an off-market offer to purchase that product from a retail client.

(2) ASIC Act amendments

(a) Section 12AE - saving of State and Territory laws

An amendment is proposed to overcome a potential inconsistency that might prevent the application of the unconscionable conduct provisions of State and Territory fair trading laws.

(b) Section 127 - confidentiality

An amendment is proposed to allow ASIC to disclose confidential information to independent bodies that are established to supervise the conduct of financial markets referred to in Schedule 3 of the Corporations Regulations (but do not themselves operate the market).

(G) NEW GUIDE TO TRIPLE BOTTOM LINE SUCCESS

On 6 June 2003 the Federal Minister for the Environment and Heritage, Dr David Kemp, unveiled a new publication to help more Australian companies reap the rewards from corporate environmental reporting.

Speaking at the Fourth Annual Global Conference on Environmental Taxation Issues in Sydney, Dr Kemp said leading organisations, both internationally and in Australia, were increasingly recognizing the benefits associated with environmental measuring and reporting.

"The role of corporate environmental reporting is to communicate to the market and broader community that appropriate measurement and management systems are in place to address environmental issues and risks associated with their activities," Dr Kemp told the conference.

"Companies who publish environmental or triple bottom line reports say that, in addition to managing risk, they are also gaining from enhanced reputation a greater ability to attract and retain high quality staff and a competitive advantage with both customers and suppliers, which all add to their financial bottom line."

The Triple Bottom Line Reporting in Australia: A Guide to Reporting Against Environmental Indicators can be found on the website at http://www.ea.gov.au/industry/finance/publications/indicators.

(H) INITIAL REPORT OF THE SPECIAL COMMITTEE ON GOVERNANCE OF THE NEW YORK STOCK EXCHANGE

On 5 June 2003 the Special Committee on Governance of the New York Stock Exchange released its initial report. The NYSE Board has announced that it is adopting the recommendations of the Committee. In a 26 March 2003 letter, United States Securities and Exchange Commission Chairman William H Donaldson asked the New York Stock Exchange and the other self-regulatory organisations to review their corporate governance in light of the broad review of governance practices throughout corporate America, to ensure that their governance structures and practices serve the public well.

The Committee recommends that the NYSE Board take a series of actions now to change or codify and disclose a number of the NYSE's existing governance practices. This Initial Report organises the changes and codifications into ten recommendations that can take effect upon action by the Board at the NYSE's annual organisation meeting because they do not require action by the NYSE's members or the SEC.

(1) Revise the charter of the Human Resources and Compensation Committee to provide that only non-industry directors may serve as members of the Committee.

(2) Annually provide the NYSE members, and make publicly available, a report of the Human Resources and Compensation Committee in which the compensation of the directors, the Chairman and the four other most highly compensated executive officers of the NYSE, is disclosed.

(3) Prohibit service by NYSE employees on the boards of directors of business corporations.

To minimise disruption to listed companies on which employees of the NYSE currently serve, such employees may continue to serve on the board of directors of listed companies until the listed company's next annual shareholders' meeting.

(4) Separate the Finance and Audit Committee into two standing committees of the Board and provide in the Audit Committee charter that only non-industry directors may serve as members. To the extent feasible, the Audit Committee should also comply with all of the other listing standards prescribed by the NYSE for listed-company audit committees.

(5) Establish a standing five-member Governance Committee responsible for reviewing the NYSE's governance-related matters. Three of the members should be non-industry directors (one of whom should chair the Governance Committee), and the other two should be the Vice-Chairs of the NYSE.

Given the NYSE's unique structure as a member-owned self-regulatory organisation, the Committee believes it is essential that, although the Governance Committee will have a majority of non-industry Directors, it should include representation of each of the NYSE's major member organisation constituencies. While nominating functions are often the responsibility of the same board committee that addresses governance functions, at this time the Committee is not recommending specific changes to the Nominating Committee. The composition and the responsibilities of the NYSE Nominating Committee are governed by provisions of the NYSE Constitution. Any change to those provisions requires a vote of the NYSE's members. Accordingly such changes cannot be implemented immediately. For that reason this Committee will consider Nominating Committee matters with the benefit of the input received during the review process.

(6) For matters within the Committee for Review's authority to oversee the NYSE Regulatory Group, require voting members to consist of a majority of non-industry directors.

The NYSE's Committee for Review is charged with, among other things, hearing appeals from member firm disciplinary proceedings, conducting listing status and delisting reviews, and reviewing the NYSE's enforcement and disciplinary procedures. The Committee for Review currently consists of 3 industry and 4 non-industry directors. Non-industry members of the Committee for Review rely on industry members to provide relevant industry expertise. This expertise is one of the most effective attributes of the self-regulatory function performed by the NYSE.

Pursuant to an SEC inspection and rule approval, the Committee's current charter requires that, when listing appeals come before the Committee, the voting members consist of a majority of non-industry directors. However, all members of the Committee who are industry directors may hear the argument and participate in the discussion.

This recommendation would apply that model to the oversight of the programs of the NYSE Regulatory Group. In this context, the Committee for Review will be responsible for monitoring and regularly reviewing all aspects of the structures, policies and procedures of the NYSE's surveillance, examination and enforcement units to better ensure the effectiveness and fairness of the structures, policies and procedures.

As is currently the case for all matters coming before the Committee for Review, if a programmatic matter came before the Committee that raised a conflict of interest for a particular industry member of the Committee, that member would recuse himself or herself.

The work of this Committee, which will report regularly to the Board, will assure a high degree of Board-level focus on the critical self-regulatory aspects of the NYSE's operations.

(7) For purposes of allocating Board committee assignments, the Board should not consider any director who is the CEO of a bank holding company, one of the subsidiaries of which is a broker or dealer that does business with the public, to be a non-industry director.

Provisions in the NYSE Constitution that predate the repeal of the Glass-Steagall Act make is impossible for a CEO of a bank holding company with a broker-dealer subsidiary that is not its principal subsidiary to be designated as an industry director. However, the NYSE Constitution permits such a CEO to serve as a non-industry director if the broker-dealer subsidiary contributes 20 per cent or less of the revenue of the bank holding company.

This Committee intends to consider in connection with its review process, the size and composition of the Board, including the Constitutional definitions of "industry director" and "public director". As noted, Constitutional changes will require member approval and accordingly cannot be implemented immediately. Nonetheless, the Board has the authority now, as a matter of policy in allocating committee assignments, to ensure that no non-industry position on any Board committee is occupied by a director who is the CEO of a bank holding company with any broker or dealer subsidiary that does business with the public.

(8) Adopt and post on the NYSE's website written Governance Principles (as drafted by the Special Committee) to formalise and establish the practices described therein and including, among others, (a) the regular convening of executive sessions of the Board at which the non-management directors meet without the management directors and (b) designating the Chairman of the newly-formed Governance Committee to preside over these executive sessions.

(9) Collect and augment the NYSE's current ethics requirements for NYSE directors in the form of an ethics code for directors. Post the directors ethics code on the NYSE's web-site, and promptly disclose any waivers of the ethics codes for directors or executive officers of the NYSE.

(10) Require that the committee charters and the membership of each committee be disclosed on the NYSE's website. This policy is included in the proposed Interim Governance Principles.

(I) SIX FORMER SENIOR EXECUTIVES OF XEROX SETTLE SEC ENFORCEMENT ACTION CHARGING THEM WITH FRAUD

On 5 June 2003 the United States Securities and Exchange Commission charged six former senior executives of Xerox Corporation, including its former chief executive officers, Paul A Allaire and G Richard Thoman, and its former chief financial officer, Barry D Romeril, with securities fraud and aiding and abetting Xerox's violations of the reporting, books and records and internal control provisions of the federal securities laws.

The six defendants have agreed to pay over $22 million in penalties, disgorgement and interest without admitting or denying the SEC's allegations. The SEC intends to have these funds paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 for ultimate distribution to victims of the alleged fraud.

The SEC's complaint alleges that the executives engaged in a fraudulent scheme that lasted from 1997 to 2000 that misled investors about Xerox's earnings to polish its reputation on Wall Street and to boost the company's stock price. The scheme involved the use of accounting devices that were not disclosed to investors, many of which violated generally accepted accounting principles (GAAP). The complaint alleges that the defendants' fraudulent conduct was responsible for accelerating the recognition of equipment revenues by approximately $3 billion and increasing pre-tax earnings by approximately $1.4 billion in Xerox's 1997-2000 financial results.

The complaint names the following individuals as defendants who held senior positions at Xerox during 1997 through the publication of Xerox's 2000 financial statements:

Paul A Allaire, former CEO of the company until April 1999 and again from May 2000 through August 2001, and also the former Chairman of Xerox's Board of Directors and a Director throughout the period charged in the complaint;

G Richard Thoman, former President and Chief Operating Officer from July 1997 through April 1999, CEO from April 1999 through May 2000, and also a Director of the company from July 1997 through May 2000;

Barry D Romeril, former CFO from 1993 through December 2001, and executive vice president from 1997 through early 1999 and then Vice Chairman;

Philip D Fishbach, former Controller until his retirement from Xerox in April 2000;

Daniel S Marchibroda, former Assistant Controller until January 2000; and

Gregory B Tayler, former Director of Accounting Policy (March 1997-April 1999), Assistant Treasurer (May 1999-March 2000) and Controller (April 2000-November 2001).

(1) The SEC's Federal Court complaint

The SEC's complaint, filed in US District Court for the Southern District of New York, alleges that the defendants relied on what Xerox internally called "one-time actions," "one-offs," "accounting opportunities" and "non-operational actions" to impose accounting adjustments on operational results for the purpose of increasing equipment revenues and inflating earnings in financial results Xerox reported to the public. These accounting actions, which were not disclosed to investors, were used at the end of each financial reporting period during 1997 - 2000 to "close the gap" between Xerox's actual underlying earnings and its internal targets and those of Wall Street analysts. The accounting devices improved Xerox's earnings, equipment revenues and margins in each quarter and year during 1997 - 2000, and allowed Xerox to meet or exceed Wall Street expectations in nearly every reporting period during 1997 - 1999. By 1998, nearly three out of every ten dollars of Xerox's annual reported pre-tax earnings and up to 37 per cent of its reported quarterly pre-tax earnings came from undisclosed changes to its historic accounting practices and estimates.

The complaint alleges that CEOs Allaire and Thoman, and CFO Romeril, set a "tone at the top" of the company, which equated business success with meeting short-term earnings targets. Romeril directed or allowed lower ranking defendants in Xerox's financial department to make accounting adjustments to results reported from operating divisions to accelerate revenues and increase earnings. Fishbach, Marchibroda and Tayler adopted and applied the accounting devices for the purpose of meeting earnings goals and predictions of outside securities analysts. Allaire and Thoman then announced these results to the public through meetings with analysts and in communications to shareholders, celebrating that Xerox was enjoying substantially greater earnings growth than true operating results warranted.

The complaint alleges that the defendants used undisclosed accounting devices to "close the gap" between underlying and desired financial results, and that the defendants were aware of Xerox's increasing dependence on such accounting actions during 1997-2000 through various internal Xerox reports, memos, e-mails and meetings that addressed the financial performance of Xerox's significant operating units and the company's overall consolidated financial results. For example, the complaint alleges:

- in a September 1997 e-mail copied to Fishbach, Marchibroda and Tayler, Romeril asked the controller of Xerox Europe about his progress in assessing a potential accounting device and stated: "This could be the crucial opportunity for making Quarter 3. I cannot see a higher priority in terms of once-offs";
- in November 1998, Romeril informed Allaire, Thoman, Fishbach and others that over the past four years Xerox's major earnings-generating market in Brazil had "$700M of unreal profits" from "non-marketing actions" and that the "[c]onceptual framework [of] our profile is illusory...the profits are there the question is the timing of when you take them";
- in August 1998, Fishbach told Thoman that although Xerox Europe's "operational" growth was 2 per cent, "the growth that is likely to be reported is closer to 10% given headquarters adjustments for margin normalization and other accounting items";
- in October 1999, Xerox's vice chairman reported to Romeril and Thoman that Xerox Europe's underlying operational results, without accounting devices and restructuring, "have been deteriorating since 1995 and are very different than the reported results," and he provided them a chart from Xerox Europe's president illustrating operational results with and without the use of accounting devices;
- likewise in January 2000, the president of Xerox Europe informed Thoman, Romeril and others that Europe's pre-tax profits had been "declining since 1996," that declines in 1999 profits were "driven by prior year once-offs [including accounting devices], the benefits of which started to reverse during 1999," but that "this declining trend has been fully contained in the reported profit" in part through the use of such accounting devices;
- in November 1999, Romeril told Thoman and other Xerox executives that when accounting actions and certain other items were stripped away from Xerox's overall consolidated reported revenues, Xerox was essentially a "no growth" company from 1998-1999, and in that same month Romeril provided Thoman, Fishbach, and others with documents showing the historical impact of accounting actions and certain other items in order to show the company's "true operating economics."

Specifically, the complaint alleges that all of the defendants fraudulently failed to disclose to shareholders and investors the financial impact of the principal accounting devices Xerox used during 1997-2000. These devices accelerated the recognition of equipment revenue and increased earnings from leases of Xerox copiers that historically were recorded in future periods, and allowed Xerox to portray its business and growth as far more robust in 1997-99 than they in fact were. The complaint further alleges that defendants Romeril, Fishbach, Marchibroda and Tayler, Xerox's senior financial executives, knew or were reckless in not knowing that these accounting devices violated GAAP and should have been disclosed under GAAP. In addition, as alleged in the complaint, Romeril, Fishbach and Marchibroda knowingly or recklessly used excess or cushion reserves and income from tax refunds to manage earnings in violation of GAAP, and Tayler was aware of the improper use of the largest of these reserves. Finally, the complaint alleges that all of the defendants used undisclosed business transactions in 1999 to accelerate the recognition of equipment revenue and earnings that concealed financial and operating weaknesses.

(2) The settlement

The defendants have each offered to settle by consenting, without admitting or denying the SEC's allegations, to the entry of a final judgment in the civil action that:

- permanently enjoins each of them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, and (except for Allaire and Thoman) violating Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder;
- imposes an officer and director bar against Allaire (5 years), Thoman (3 years) Romeril (permanent), and Fishbach (5 years);
- requires each of them to pay civil penalties in the following amounts: $1 million for Allaire; $750,000 for Thoman; $1 million for Romeril; $100,000 for Fishbach; $75,000 for Marchibroda; and $75,000 for Tayler;
- requires each of them to pay disgorgement and prejudgment interest thereon in the following amounts:
Allaire: $5,696,678 - disgorgement; $1,938,124 - prejudgment interest;
Thoman: $4,668,396 - disgorgement; $1,440,993 - prejudgment interest;
Romeril: $2,987,282 - disgorgement; $1,227,688 - prejudgment interest;
Fishbach: $666,748 - disgorgement; $289,904 - prejudgment interest;
Marchibroda: $273,399 - disgorgement; $88,920 - prejudgment interest;
Tayler: $92,603 - disgorgement; $32,397 - prejudgment interest; and
- requires Fishbach and Marchibroda to relinquish their respective rights to certain deferred bonuses ($127,035 for Fishbach and $50,228 for Marchibroda) plus accrued interest on these amounts.

In addition, both Romeril and Tayler have agreed to the entry by the SEC of an Order pursuant to Rule 102(e) of the SEC's Rules of Practice that suspends each of them (based on the entry of the injunction in the federal court action) from appearing or practicing before the SEC as an accountant. This Order will suspend Romeril permanently and suspend Tayler for three years with a right to apply for reinstatement after the three-year period.

(3) Prior SEC action

The SEC previously brought two other injunctive actions based on the same fraudulent scheme as is alleged against the senior Xerox executives, as well as other allegations. On April 11, 2002, the SEC brought an injunctive action against Xerox. Without admitting or denying the allegations of the complaint, Xerox consented to the entry of a Final Judgment that permanently enjoined the company from violating the antifraud, reporting and record keeping provisions of the federal securities laws. Xerox also paid a $10 million civil penalty, agreed to restate its financial statements and agreed to hire a consultant to review the company's internal accounting controls and policies. In addition, on 29 January 2003, the SEC brought an injunctive action against Xerox's former auditor, KPMG LLP, and four of its audit partners in connection with the audits of Xerox from 1997 - 2000. The action against KPMG and its partners is currently in litigation.

(J) IAASB ISSUES EXPOSURE DRAFT TO ENHANCE FIRM QUALITY CONTROL PRACTICES

In its ongoing efforts to ensure high quality performance by the world's auditors, the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) issued an exposure draft (ED) on 5 June 2003 containing a proposed International Standard on Quality Control (ISQC) 1, Quality Control for Audit, Assurance and Related Services Practices, and a proposed revised International Standard on Auditing (ISA) 220, Quality Control for Audit Engagements.

This ED, which also includes an explanatory memorandum, may be downloaded from the IFAC website at http://www.ifac.org/eds. Comments are requested by 31 August 2003.

The proposed ISQC 1 requires a firm to establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements. It contains new proposed basic principles and procedures regarding leadership and responsibilities within the firm, including a requirement that the chief executive officer (or equivalent) of the firm has ultimate responsibility for the firm's system of quality control. Other areas addressed in the ED include ethics, partner rotation, acceptance and continuance of client relationships, engagement quality control review, and monitoring.

ISQC 1 represents the first in a series of International Quality Control Standards. The ultimate goal of the project is to establish quality control standards for all engagements falling within the scope of IAASB engagement standards.

The proposed revised ISA 220 establishes basic principles and essential procedures, and provides guidance on quality control procedures for audit engagements. These include requirements for an engagement quality control reviewer to perform an objective evaluation of the compliance with applicable professional standards. Guidance is specifically provided on leadership responsibilities, ethics, engagement performance, engagement quality control review, and monitoring.

It is proposed that the new guidance become effective January 1, 2005.

IAASB welcomes comments on any aspect of the ED. Comments may be sent to edcomments@ifac.org, mailed to the Technical Director, IAASB, 545 Fifth Ave, NY,
NY 10017 US, or faxed to the Technical Director at +1-212-286-9570.

(K) NYSE/NASD IPO ADVISORY COMMITTEE PUBLISHES REPORT AND RECOMMENDATIONS

On 29 May 2003 the NYSE/NASD IPO Advisory Committee, formed in October 2002 by the New York Stock Exchange and NASD at the request of the Securities and Exchange Commission, issued its final report and recommendations.

The report, which was developed by a committee of corporate, financial and academic leaders, proposes 20 steps to enhance public confidence in the integrity of the IPO process, along the following themes:

- the IPO process must promote transparency in pricing and avoid aftermarket distortions;
- abusive allocation practices must be eliminated; and
- the flow of, and access to, information regarding IPOs must be improved.

The Committee's report states that its recommendations are intended to complement the numerous recent legislative and regulatory initiatives, including the Global Settlement among regulators and major investment banks.

The report is available on the NASD's website at http://www.nasdr.com/pdf-text/ipo_report.pdf

(L) SEC IMPLEMENTS INTERNAL CONTROL PROVISIONS OF SARBANES-OXLEY ACT

On 27 May 2003 the United States Securities and Exchange Commission voted to adopt rules concerning management's report on internal control over financial reporting.

Section 404 of Sarbanes-Oxley Act of 2002 directs the Commission to adopt rules requiring each annual report of a company, other than a registered investment company, to contain (1) a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) management's assessment, as of the end of the company's most recent fiscal year, of the effectiveness of the company's internal control structure and procedures for financial reporting. Section 404 also requires the company's auditor to attest to, and report on management's assessment of the effectiveness of the company's internal controls and procedures for financial reporting in accordance with standards established by the Public Company Accounting Oversight Board. The Commission received over 60 comments on the Section 404 proposals that expressed general overall support for the Commission's approach to implementing Section 404 of the Act. The adopting release will incorporate a number of changes recommended by commenters.

Under the final rules, management's annual internal control report will have to contain:

- a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company;
- a statement identifying the framework used by management to evaluate the effectiveness of this internal control;
- management's assessment of the effectiveness of this internal control as of the end of the company's most recent fiscal year; and
- a statement that its auditor has issued an attestation report on management's assessment.

Under the new rules, management must disclose any material weakness and will be unable to conclude that the company's internal control over financial reporting is effective if there are one or more material weaknesses in such control. Furthermore, the framework on which management's evaluation is based will have to be a suitable, recognised control framework that is established by a body or group that has followed due-process procedures, including the broad distribution of the framework for public comment.

The new rules implementing Section 404 of the Act will define the term "internal control over financial reporting" to mean:

a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that

- pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorisations of management and directors of the registrant; and
- provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

The Commission also voted to adopt amendments requiring companies to perform quarterly evaluations of changes that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.

Compliance with the rules regarding management's report on internal controls will be required as follows: companies, other than foreign private issuers, meeting the definition of an "accelerated filer" in Exchange Act Rule 12b-2 (generally, US companies that have equity market capitalization over $75 million and have filed an annual report with the Commission) will be required to comply with the management report on internal control over financial reporting requirements for fiscal years ending on or after June 15, 2004, and all other issuers, including small business issuers and foreign private issuers, will be required to comply for their fiscal years ending on or after 15 April 2005.

(M) AUSTRALIA'S GLOBALISATION EXPERIENCE

On 26 May 2003, the Australian Department of Foreign Affairs and Trade published a report "Globalisation: Keeping the Gains". Following is an extract from the Executive Summary.

(1) Overview

Australia's experience shows how a medium sized open economy with appropriate domestic policies and strong institutions can succeed in a more integrated and competitive global economy. Over the past two decades, Australian governments have cut tariffs, opened capital markets to international flows and promoted competition. By 2002, Australia enjoyed one of the world's most open trading and investing environments. Over time, these reforms transformed Australian industries and service sectors, encouraging them to adopt new technologies, increase training efforts and seek export markets. Successive governments also increased the transparency and accountability of important economic governance institutions, enabling Australia to respond effectively to the demands of a globally integrated economy.

Opening to world markets also increased pressure for other domestic reforms, including in labour and capital markets, taxation and utilities, generating higher productivity and living standard growth.

As a result, in the 1990s, Australia's productivity and living standards grew much faster than in the preceding three decades. By 2001, Australians were around 55 per cent better off than in 1980, after adjusting for inflation.

As Australia globalised, its economy and exports also have become more diversified. As trade and investment barriers fell from the 1980s, Australia's manufacturing and services sectors became more efficient and they now provide over 40 per cent of Australia's exports, providing new jobs and income growth. Domestic reforms and a globalised economy also help Australia to remain a profitable exporter of minerals and agricultural products, even though the latter often confront high trade barriers. While agricultural producers in protected economies typically resist reforms and remain inefficient, Australia's agricultural sector is open to world markets, boosting farm efficiency.

(2) Globalisation part of East Asia's success

Opening to world markets also has been central to East Asia's rapid growth over the last 30 years, delivering more people from poverty more quickly than ever before in human history. Labour intensive export oriented industries productively employ millions of surplus agricultural workers across the region and foreign direct investment provides new skills, technologies and markets vital to expanding exports. East Asian governments generally created the policy environment to support this success, investing in education and infrastructure, operating stable macroeconomic policies and providing political stability. As a result, in just 12 years from 1987 to 1998, the number of East Asian citizens living below the international poverty line of US$1 per day dropped from 417 million to 267 million.

However, to encourage FDI and domestic investment and regain past growth rates, East Asian governments are aware they must strengthen market discipline and regulation of their financial and corporate sectors.

(3) Implications

Over the past three decades, the experience of Australia and successful East Asian countries shows that economies gaining most from globalisation have governments which provide effective and accountable economic policies and institutions, flexible markets, efficient infrastructure and quality mass education and training. Opening international markets to developing country exports is a key priority to help low income countries gain from globalisation; all economies also would gain significantly from further trade and investment opening, including through the WTO's current Doha Round.

Development assistance to help regional economies strengthen their key economic institutions also can help our neighbours maximise their gains from globalisation.

Further information about the report is available at:

http://www.dfat.gov.au/publications/globalisation_gains/index.html

(N) COMPANIES MAKE CHANGES TO US BOARD COMPENSATION IN 2003 STUDY SHOWS

The shortage of qualified board candidates and a stronger corporate governance environment have prompted nearly 60 per cent of companies to change some aspect of their outside board of director compensation in 2003, according to Hewitt Associates, a global human resources outsourcing and consulting firm.

Hewitt surveyed 187 US companies (with median revenues of $3.7 billion) in its "Timely Topic Study on US Board Compensation," and found that 36 per cent of the organisations with board retainers are increasing them in 2003. Specifically, the median cash retainer for a board member this year is $35,000. In addition to that, the median cash retainer for committee chairs went from $4,000 in 2002 to an anticipated $7,500 in 2003. Retainers for audit committee chairs, in particular, doubled from $5,000 in 2002 to $10,000 in 2003, and retainers for compensation committee chairs more than doubled from $3,500 in 2002 to $7,500 this year.

As for meeting fees, 22 per cent of companies providing committee member meeting fees are paying more this year and 20 per cent of organisations with board member meeting fees are increasing them in 2003. The median fee paid per meeting in 2003 is $1,250.

(1) Options still a favoured form of equity compensation for board members

As for equity compensation, 73 per cent of the companies surveyed offer stock options as part of board compensation and 65 per cent provide either deferred, restricted or outright stock/units. Of the companies offering stock options to the board, 82 per cent do not plan to change to another form of stock incentive, at least in 2003. As for the remaining 18 per cent, approximately half are changing to restricted stock units and nearly a quarter are switching to deferred stock units.

Furthermore, the study indicates that 67 per cent of companies currently do not have director stock ownership guidelines, and 81 per cent do not require stock be held by directors for a set period of time. Of the 19 per cent that do have mandatory stock holding requirements, more than two-thirds said board members need to hold stock for their entire board tenure.

(2) Companies provide limited benefits and perks

In addition, when asked about benefits and perquisites, 48 per cent of the companies in the study said they do not offer benefits, while 51 per cent of these organisations do not offer perks. Of those companies offering benefits, travel/accident insurance is the most popular (37 per cent of those surveyed). Meanwhile, the most popular perks include a charitable matching gift program (30 per cent) and first-class air travel (24 per cent).

(3) Additional study highlights

- Lead/presiding directors
Currently, one quarter of companies have a "Lead" or "Presiding" Director, and Hewitt expects this number to increase over time. Most often, these roles are responsible for presiding over executive sessions of the board and helping to determine board agendas.
- Director retirement
Two-thirds of companies specify a mandatory retirement age for directors, the most common being 70. However, half of these organisations allow for exceptions if the director has a special skill or knowledge that is important to the company.
- Board meetings in 2003
Compared to 2002, a large majority of companies expect that their boards will not change the number of full board meetings they hold. However, there are several committees where a significant proportion of companies do expect more meetings. These include Governance, Nominating and Audit committees.

(O) REVIEW INTO PART 23 OF THE SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993

Part 23 of the Australian Superannuation Industry (Supervision) Act 1993 (SIS Act) enables a trustee of a superannuation fund to apply to the Minister for a grant of financial assistance where the fund has suffered a loss as a result of fraudulent conduct or theft. The Minister must be satisfied that loss has caused a substantial diminution in the fund's assets leading to difficulty in paying benefits, and that the public interest requires a grant to be made. The first grant of financial assistance under the provisions of Part 23 of the SIS Act occurred in 2002.

The issue of compensating members affected by fraud or theft in superannuation funds was raised in the October 2001 Issues Paper released by the Government, "Options for Improving the Safety of Superannuation", which can be found on the Department of Treasury webpage at http://www.treasury.gov.au/content/superannuation.asp?ContentID=344&titl=Superannuation.

The Final Report of the Superannuation Working Group (SWG) into the Issues Paper recommended that the provisions not be changed at that time, but that the Government should review the operation of Part 23 and consider possible amendments to it, in consultation with relevant stakeholders, once the first decision under Part 23 had been made. In responding to the SWG recommendations, the Government agreed to review the operation of Part 23.

Accordingly, the Government invites written submissions on the issues relating to Part 23 of the SIS Act and the associated levy process under the Superannuation (Financial Assistance Funding) Levy Act 1993 (Levy Act).

Closing Date for submissions is Friday, 1 August 2003. Submissions should be addressed to:

Part 23 Review
Superannuation and Insurance Unit
The Treasury
Langton Crescent
PARKES ACT 2600

Fax: (02) 6263 3030
Email: part23review@treasury.gov.au

Inquiries concerning the paper can be made to:

Joanne Evans (02) 6263 3240
Karen Wood (02) 6263 2906
Aaron Broughton (02) 6263 3806

2. RECENT ASIC DEVELOPMENTS

(A) ASIC AND HONG KONG SFC SIGN MOU

On 26 June 2003 Mr David Knott, Chairman of ASIC signed a Memorandum of Understanding (MoU) with Mr Andrew Sheng, Chairman of the Hong Kong Securities and Futures Commission (SFC).

The new arrangements will enable ASIC licensed managed investment scheme operators outside of Hong Kong to manage SFC authorised funds without having to apply for separate registration in Hong Kong.

'This is a further important step towards international reciprocity of regulation. From the perspective of Australian fund managers, today's initiative opens up new marketing opportunities without the requirement of additional licensing requirements in Hong Kong', Mr Knott said.

'Australia greatly values its close working relationship with the Hong Kong SFC and looks forward to further opportunities of this type throughout the Asia-Pacific region', he said.

The MoU (Declaration on Cooperation and Supervision of Cross-Border Investment Management Activity) lays the groundwork for the recognition of Australia as an Acceptable Inspection Regime (AIR) under the SFC's Code on Unit Trusts and Mutual Funds.

Under the MoU, the SFC and ASIC have agreed to exchange information and offer assistance to each other concerning the activities of fund managers licensed in one jurisdiction and also operating in the other jurisdiction. This regulatory co-operation facilitates ASIC in its supervision and inspection of fund managers that are licensed with the SFC and also operating managed investment scheme funds in Australia.

(1) Background

Australia is an active participant in the International Organization of Securities Commissions (IOSCO). Mr Knott chairs the IOSCO Technical Committee, which is undertaking substantial work in streamlining international regulation, including acceptance of international accounting standards.

On 18 November 2002, ASIC released a discussion paper on principles for cross-border financial services recognition, which address issues relating to the regulation of foreign markets, products and services across international borders. ASIC is also finalising a policy on foreign financial service providers for release shortly.

For further information contact:

Greg Tanzer
Executive Director
Regional Coordination and International Relations
ASIC
Tel: (07) 3867 4704
Mobile: 0411 549 144

(B) ASIC POLICY STATEMENT: ADVISERS' CONDUCT AND DISCLOSURE OBLIGATIONS

On 26 June 2003 ASIC explained how it will administer the new conduct and disclosure obligations for financial advisers that have been designed to raise the standard of financial product advice that investors receive.

These new obligations are part of the amendments to the Corporations Act made by the Financial Services Reform Act 2002 (FSR) which came into effect on 11 March 2002.

'The new obligations are designed to ensure that investors are given suitable personal advice, and that they ate adequately informed about the adviser and the advice they receive through the Financial Services Guide (FSG) and Statement of Advice (SOA) disclosure obligations', ASIC Executive Director, Financial Services Regulation, Mr Ian Johnston said.

Policy Statement 175 Licensing: Financial product advisers - conduct and disclosure provides guidance from ASIC for advisers on their conduct and disclosure obligations. In future we may issue additional guidance if it is deemed necessary, taking into account developments in industry practice and our experience', he said.

However, PS 175 does not constitute legal advice. In PS 175 ASIC has sought to provide helpful assistance but it remains the responsibility of each licensee and adviser to comply with the Corporations Act and regulations.

The PS 175 was developed after giving careful consideration to the views expressed in the submissions received in response to ASIC's policy proposal paper Licensing: Financial product advisers - Conduct and disclosure, that was released for public comment in December 2002.

(1) Summary of licensing: financial product advisers

Conduct and disclosure Part 7.7 of the Corporations Act 2001 requires a 'providing entity' (licensee or authorised representative) to comply with certain conduct and disclosure obligations when it provides financial product advice to retail clients. These conduct and disclosure obligations vary depending on whether the advice is general advice or personal advice.

Where personal advice is provided to a retail client, the key obligations are:

(a) preparing and providing a Financial Services Guide (FSG);

(b) complying with the suitability rule (section 945A);

(c) warning the client that the personal advice is based on incomplete or inaccurate information (if this is the case), and

(d) preparing and providing a Statement of Advice (SOA).

Whenever general advice is provided to a retail client, the providing entity must generally give the client a FSG, and provide a warning to the client that the advice has been prepared without taking into account the client's objectives, financial situation or needs.

PS 175 sets out ASIC's policy in relation to these obligations. In particular, it considers:

(a) the difference between personal and general advice;

(b) when and how a FSG must be provided;

(c) when a FSG can be combined with a PDS;

(d) the FSG content requirements, including the requirement to disclose fees, commissions and other benefits;

(e) the suitability rule (section 945A), including the extent of the obligation to make 'client inquiries' and the meaning of 'appropriate' advice; and

(f) the SOA content requirements, including the obligation to disclose the 'basis' of the advice and to disclose fees, commissions and other benefits.

PS 175 also refers to standard licence conditions which ASIC will impose requiring
certain records to be kept by licensees.

PS 175 does not consider the full range of conduct and disclosure obligations imposed by Part 7.7 or on all issues raised in submissions received on ASIC's policy proposal paper Licensing: Financial product advisers - Conduct and disclosure (December 2002). It does not cover the following issues that are now covered by regulations:

(a) FSG relief for general advice provided by product issuers (paragraphs B3-B4 of the policy proposal paper) - this is now covered by reg 7.7.02(4); and

(b) personalised FSG relief (paragraphs B5-B6 of the policy proposal paper) - this is now covered by reg 7.7.05B.

PS 175 should be read in conjunction with ASIC's other policy statements and guidance publications that explain how ASIC administers the FSR licensing and disclosure' regimes.

PS 175 will also need to be read in conjunction with any relevant changes to the Corporations Act or the regulations which may be made.

(2) List of key related ASIC policy statements and guidance publications

Policy Statement 146 Licensing: Training of financial product advisers [PS 1461]

Policy Statement 164 Licensing: Organisational capacities [PS 1641]

Policy Statement 167 Licensing: Discretionary powers and transition [PS 1671]

Policy Statement 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) [PS 1681]

Building the FSRB Administrative Framework - Policy to implement the Financial Services Reform Bill 2001 (April 2001) and Supplement (September 2001)

Licensing and disclosure: Making the transition to the FSR regime -An ASIC guide (October 2001, updated November 2002)

Licensing: The scope of the licensing regime: Financial product advice and dealing -An ASIC guide (November 2001, updated November 2002)

Australian Financial Services (AFS) Licensing Kit (Version 3, April 2003)

Makingg the transition to an AFS licence: pre-FSR licences and insurance broker registrations - An ASIC Guide (April 2002)

(C) EXCESSES ON PI INSURANCE FOR INSURANCE BROKERS

On 10 June 2003 ASIC announced its interim position in relation to the circumstances in which it will permit excesses or deductibles on professional indemnity (PI) insurance cover to exceed the level prescribed by the Insurance (Agents & Brokers) Act 1984 (IABA).

'ASIC recognises that the PI insurance market is difficult for some professionals at present', ASIC Executive Director of Financial Services Regulation, Mr Ian Johnston said.

'We acknowledge that the maximum permissible excess has not been reviewed for some time, and have adopted an interim position regarding the circumstances in which we will permit excesses or deductibles to exceed the IABA-prescribed levels, to assist brokers in obtaining more affordable insurance', he said.

Under current compensation arrangements, an acceptable contract of PI insurance must be maintained by insurance brokers registered under IABA, and Australian Financial Services Licence (AFSL) holders whose licence authorises them to carry on an activity to which the IABA PI insurance requirements previously applied.

These current compensation arrangements will continue to apply until 10 March 2004, after which time, it is anticipated that new compensation arrangements, under s912B of the Corporations Act (the Act), will come into effect.

Under IABA, an acceptable contract of PI insurance is prescribed as one where any excess or deductible on the PI insurance cover does not exceed $10,000 or 2.5 per cent of the insurance brokerage income for the previous financial year (whichever is greater), ASIC has the discretion to allow an excess or deductible to exceed this particular requirement.

Under the interim arrangements announced today, ASIC will permit an excess or deductible to exceed the IABA requirements, provided the excess or deductible does not exceed $18,750, or 20 per cent of the surplus liquid funds (SLF) of the insurance broker or AFSL holder, whichever is greater. The SLF is to be calculated in accordance with Policy Statement 166 Licensing: Financial Requirements.

In order to qualify, an insurance broker or AFSL holder will need to apply to ASIC in writing. Where the excess or deductible is greater than $18,750 but does not exceed 20 per cent of SLF, applicants must also provide a supporting letter from a registered company auditor confirming the current amount of SLF. Where the excess or deductible is less than $18,750, a supporting letter is not required.

Further guidance will be provided in the event that the law is amended or ASIC's position changes.

For further information contact:

Parnela McAlister
Director FSR -Legal & Technical Operations
ASIC
Tel: (03) 9280 3450
Mobile: 0402 426 956

(D) EXTERNALLY ADMINISTERED COMPANIES: FINANCIAL REPORTING AND AGMs

On 5 June 2003 ASIC released an interim policy statement about the financial reporting and annual general meeting (AGM) obligations of externally administered companies, PS 174 - Externally administered companies: Financial reporting and AGMs.

ASIC has also issued Class Order [CO 03/0392] which exempts companies in liquidation from the financial reporting obligations in Part 2M.3 of the Corporations Act (the Act), and grants certain other externally administered companies an extension of time in which to lodge and, where applicable, distribute an upcoming financial report.

'ASIC's view is that companies which become externally administered are still obliged to prepare and lodge financial reports', ASIC Director, Corporate Finance, Mr Richard Cockburn said.

'The interim policy statement is intended to ensure external administrators are aware of a company's ongoing obligations under Part 2M.3 and s250N of the Act, and to assist externally administered companies to determine when it may be appropriate for the company to seek relief from those obligations', he said.

The Class Order and interim policy statement are the outcome of consultation undertaken by ASIC in the second half of last year on the financial reporting and AGM obligations of companies in external administration under Part 5.3A of the Act.

The interim policy statement discusses the Class Order relief, and sets out what individual relief is available for externally administered companies from the financial reporting obligations, as well as the circumstances in which ASIC may grant an externally administered public company an extension of time to hold an AGM.

For further information contact:

Richard Cockburn
Director, Corporate Finance
ASIC
Tel: (03) 9280 3201
Mobile: 0411 549 034

(E) RENE RIVKIN SENTENCED TO JAIL

On 29 May 2003 Mr Rene Walter Rivkin was convicted and sentenced in the NSW Supreme Court on one count of insider trading in the shares of Qantas Airways Limited (Qantas). Mr Rivkin was sentenced to nine months imprisonment, to be served by way of periodic detention, and was fined $30,000.

On 30 April 2003 Mr Rivkin was found guilty by jury on one count of insider trading in contravention of section 1002G(2) of the Corporations Act, following a 21-day trial in the NSW Supreme Court before Justice Whealy.

Justice Whealy entered a conviction against Mr Rivkin and recorded a sentence.

The judgment of Justice Whealy is discussed in Item 5(H) of this Bulletin.

(1) Background

ASIC alleged that Mr Rivkin contravened the insider trading provisions of the Corporations Act when, on 24 April 2001, he purchased 50,000 Qantas shares.

The shares were purchased in the name of Rivkin Investments Pty Ltd, a company of which Mr Rivkin is the sole director. The charge followed an investigation by ASIC into the circumstances surrounding trading in Qantas shares shortly before Qantas announced that it would take over the operations of Impulse Airlines. Mr Rivkin has lodged a notice of intention to appeal in respect of the jury decision.

(2) Statement on conviction of Rene Rivkin by Mr David Knott, Chairman of ASIC

"Mr Rene Rivkin was convicted of the criminal offence of insider trading. Insider trading is a serious offence that undermines the fairness and integrity of our stock market. Mr Rivkin sought to trivialise these proceedings from the time they were first instituted. In doing so he mocks every investor who expects fair dealing and proper disclosure in share markets transactions.

"The fact that he made a relatively small profit from the transaction does not alter its criminal nature. The offence he committed was against the sellers of 50,000 Qantas shares who thought they were dealing in a properly informed market. Instead they were dealing with a person who had gained inside information and withheld it from them. If those sellers had not sold until after the announcement about Impulse Airlines their shares could have increased by more than $30,000.

"Over the past decade Australia has strengthened its determination to make our markets fairer for investors. Stronger insider trading laws, improved surveillance of suspect trading by the ASX and active enforcement by ASIC have all contributed to a market of increased integrity.

"None of this should come as a surprise to Mr Rivkin. He is a stockbroker of long experience and influence in our markets. His deliberate decision to flout the law, even in a small transaction, was a betrayal of the market in which he has been a prominent trader for many years.

"Mr Rivkin has attempted to divert attention from the serious implications of his misconduct with allegations that he was unfairly targeted by ASIC because he is a 'tall poppy'. That is not correct. When ASIC commenced its investigation into suspect trading in QANTAS shares Mr Rivkin's involvement was unknown to us. When the full evidence of the transaction emerged it was inevitable that he be charged. That evidence has now been considered and accepted by a jury, and a conviction recorded by the Supreme Court. Mr Rivkin has no-one to blame for this other than himself.

"I want to acknowledge the very difficult task of the jury in this matter. Insider trading cases are among the most complicated types of offences under our corporations law. It is no easy matter for a jury to come to grips with the various legal ingredients of the offence, and I believe that the members of this jury deserve the thanks of all investors in our market. I also thank the office of the Commonwealth DPP for its professionalism in the preparation and prosecution of the case.

"The decision of Justice Whealy to impose a sentence of nine months imprisonment to be served by periodic detention is the decisive judgment on the seriousness of Mr Rivkin's offence. By operation of law he is now banned from managing any corporation for the next five years, except by permission of the court.

"To any who suggest that the absence of a full time custodial sentence somehow diminishes the seriousness of the offence, I say 'think again'. Mr Rivkin broke the law and was caught. He now has a criminal conviction against his name. That fact will not be lost on others who may be tempted to test their luck with small inside trades.

"In the light of the sentencing by Justice Whealy ASIC will review the status of any license held by Mr Rivkin or any company in which he has a relevant interest. Such review will be conducted in accordance with legal requirements which will include an opportunity for Mr Rivkin to make submissions to ASIC. While I expect this process to commence in the near future, ASIC will observe strict confidentiality until hearings are concluded and decisions finalised.

"I conclude my statement by noting that Mr Rivkin has lodged a notice of appeal against the jury's verdict and is expected to also appeal today's sentence."

3. RECENT ASX DEVELOPMENTS

(A) ASX Corporate Governance Council

On 24 June 2003 the ASX Corporate Governance Council, chaired by ASX Executive General Manager, Issuers and Market Integrity, Karen Hamilton, met for the first time since the release of its Principles of Good Corporate Governance and Best Practice Recommendations on 31 March 2003. Ms Hamilton acknowledged the commitment and significant efforts of all Council members in this achievement and reiterated the aim of the Council to produce such a collaborative, broadly endorsed tool to assist companies in meeting the governance expectations of their investors.

The Council noted the extensive communications and education strategy undertaken by ASX and by various other Council members and the benefit of these in eliciting feedback, encouraging understanding and acceptance of the recommendations and emphasising the importance of the "if not, why not" regime. This regime is specifically designed to allow companies the flexibility to adopt different governance structures to suit their needs, a flexibility properly tempered by the requirement to be accountable and to explain the company's position to investors.

The Council discussed its continuing role and in particular the mechanisms for capturing feedback and ensuring that the recommendations remain at the forefront of best practice.

ASX outlined how it will be promoting and facilitating appropriate disclosure by listed entities against the best practice recommendations and how it will review and facilitate compliance with the requirement for the top 500 companies to have in place an audit committee.

The Council has committed to periodic review of the best practice recommendations and to establishing an Implementation Review Group to facilitate this. The Council agreed that the purpose of the IRG is to provide an independent perspective from those with a practical understanding of the issues associated with implementing and managing the recommendations and to make suggestions for improvements to the Council. Council appointed a nominations sub-committee to consider appointees to the IRG who would be able to bring an appropriate mix of views and experience. Council is seeking expressions of interest from senior candidates with practical implementation experience willing to commit to this important process. Expressions of interest and brief curriculum vitae should be forwarded to ASX by Thursday 31 July 2003.

Council agreed to meet again on 7 August when the composition of the Implementation Review Group will be finalised.

Principles of Good Corporate Governance and Best Practice Recommendations and additional supporting guidance are available on the ASX website at http://www.asx.com.au/corporategovernance

(B) ASX REFERRALS TO ASIC

(1) Summary

ASX made 14 referrals to ASIC for the quarter ended 31 March 2003. ASX made 54 referrals to ASIC for the Year ended 30 June 2002.

(2) Companies

These are referrals to ASIC from the ASX Companies Department under the MOU between ASX and ASIC in relation to possible breaches of the ASX Listing Rules by listed companies including possible breaches of disclosure obligations.

For the 12 months ended 30 June 2002 ASX made 8* referrals to ASIC. For the quarter ended 31 March 2003 ASX made 2* referrals to ASIC.

(3) Surveillance

These are referrals to ASIC from ASX Surveillance Department under the MOU between ASX and ASIC in relation to possible serious market abuse criteria which includes insider trading and manipulation offences.

For the 12 months ended 30 June 2002 ASX made 29 referrals to ASIC. For the quarter ended 31 March 2003 ASX made 8 referrals to ASIC Investigations.

(4) Enforcement

These are referrals to ASIC from the ASX Investigations and Enforcement Department under the Membership MOU between ASX and ASIC.

For the 12 months ended 30 June 2002 ASX made 17 referrals to ASIC. For the quarter ended 31 March 2003 ASX made 4 referrals to ASIC

* These numbers include formal and informal referrals but do not include referrals made on the withdrawal of a prospectus.

4. RECENT TAKEOVERS PANEL MATTERS

(A) PANEL PUBLISHES FINAL GUIDANCE ON FRUSTRATING ACTION

On 16 June 2003 the Takeovers Panel published its Guidance Note on Frustrating Action. The final version follows a draft that the Panel released for public consultation.

The Guidance Note is based on the Panel's view that decisions about control and ownership of a company should be made by its shareholders. Where a corporate action could frustrate a proposal concerning control or ownership of a company, the Panel will generally require that shareholders be able to determine the control and ownership of the company.

The Panel's approach is based on legislative policy which requires it to examine the effect of conduct on shareholders and markets, rather than subjective factors.

The Guidance Note indicates the Panel's approach when considering actions of the directors of a company that is subject to a takeover offer, where those actions may lead to the offer lapsing, being withdrawn or not proceeding.

The Guidance Note aims to draw a balance between preserving the rights of shareholders and not unduly limiting the conduct of a target's business while a bid is on foot. The Guidance Note makes it clear that the Panel will not support applications by bidders who attempt to exploit the policy.

The Panel has also published on its website a paper that sets out the major external comments that the Panel received on the consultation draft and its response to those comments.

The Panel would like to thank the Frustrating Action Sub-Committee (Robyn Ahern, Tony Burgess, Kathy Farrell, Irene Lee and Marian Micalizzi) for their work.

The Frustrating Action Guidance Note and the Public Consultation Response Statement are available at http://www.takeovers.gov.au

(B) PANEL RELEASES FINAL GUIDANCE ON BROKER HANDLING FEES

On 3 June 2003 the Takeovers Panel released a final Guidance Note on broker handling fees. The final version follows public consultation on a draft that the Panel released on 28 March 2003.

The final Guidance Note is based on the Panel's view that broker handling fees have potentially two conflicting effects, which must be balanced against each other.

First, where a broker handling fee encourages brokers to inform their clients about the existence of a bid and to discuss the merits of the bid, the fee may facilitate the acquisition of shares taking place in an efficient, competitive and informed market.

Second, however, broker handling fees that are excessively high, or are only available for a limited period of time, may induce brokers to pressure their clients to accept an offer under a bid where they would not otherwise give such advice.

To promote market certainty, the Guidance Note sets out quantitative and other guidelines on the features of broker handling fees that the Panel is likely not to find unacceptable.

The Panel has also published on its website a paper that sets out the Broker Handling Fees Sub-Committee's response to external comments on the consultation draft.

The Panel would like to thank the Broker Handling Fees Sub-Committee (both the Panel's internal members Carol Buys, Braddon Jolley, Simon Mordant and especially the external members Paul Masi and Bruce Skelton) for their work.

The Broker Handling Fees Guidance Note and the Public Consultation Response Statement are available at:

http://www.takeovers.gov.au/Content/guidance/broker.asp
http://www.takeovers.gov.au/Content/consultation/brokerPCRS.asp

5. RECENT CORPORATE LAW DECISIONS

(A) ADVERSE COMMERCIAL EFFECTS AND S437F OF THE CORPORATIONS ACT
(By Jeremy Williams, Freehills)

Sellers; in the matter of Beckley Forge Pty Ltd (Administrators Appointed) FCA 523, Federal Court of Australia, Finkelstein J, 19 May 2003

The full text of the judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/federal/2003/may/2003fca523.htm or http://cclsr.law.unimelb.edu.au/judgments/

(1) Summary

Section 437F of the Corporations Act 2001 (Cth) does not prohibit the creation of a new class of shares where this will have an adverse commercial consequence on the rights of existing shareholders, for example, watering down the value of shares. Section 437F is directed to the protection of legal rights.

(2) Facts

Administrators were appointed to Beckley Forge Pty Ltd and Beckley Appliance Components Pty Ltd upon suspicion by directors, and later confirmation by the administrators, that the companies were insolvent.

The administrators, in conjunction with one of the company's directors, Mr Barbano, sought to put a proposal to creditors which would raise funds to permit the companies to continue to trade. The administrators proposed the creation of a new class of preference shares. Mr Barbano would subscribe for $480,000 of the shares, which would inject sufficient capital to enable the companies to continue trading.

(3) Application

The administrators sought an order from the Federal Court as to whether the proposal was prohibited by section 437F of the Corporations Act 2001 (Cth) (the "Corporations Act"). Section 437F of the Corporations Act states that "a transfer of shares in a company, or...alteration in the status of members of a company, that is made during the administration of the company is void except so far as the Court otherwise orders."

(4) Law

Justice Finkelstein held, upon these facts, section 437F did not prohibit the creation of a new class of sh