Bulletin No 72, August 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)
with the support of
The Australian Securities
and Investments Commission (http://www.asic.gov.au),
The Australian Stock Exchange (http://www.asx.com.au)
and the leading law firms:
Blake Dawson Waldron (http://www.bdw.com.au)
Clayton
Utz (http://www.claytonutz.com)
Corrs Chambers Westgarth (http://www.corrs.com.au)
Freehills (http://www.freehills.com)
Mallesons Stephen Jaques (http://www.mallesons.com)
Phillips Fox (http://www.phillipsfox.com)
ACCESS TO ARCHIVED ISSUES
As a subscriber, you may view and print the latest Bulletin immediately from the archive site on the Internet at:
http://research.lawlex.com.au/cclsr/archive
COPYRIGHT WARNING
Centre for Corporate Law and Securities Regulation 2003.
You may use this material for your own personal reference only. The material may not otherwise be used, copied or redistributed in any form or by any means without a multiple user licence with LAWLEX.
CHANGE OF EMAIL ADDRESS
Subscribers who change their email address should notify LAWLEX at "cclsr@lawlex.com.au".
CONTENTS
1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) Survey of
compliance with ASX corporate governance guidelines
(B)
Fund managers and corporate governance
(C) ABA responds to
corporate scandals and adopts new lawyer ethics rules
(D)
IAASB proposes auditors take a more active role in seeking out fraud
(E) NASD proposes disclosure of mutual fund compensation
arrangements
(F) SEC proposes disclosure requirements
related to director nominations and shareholder communications
(G) New report: Do multinational enterprises benefit
Australia?
(H) New guide to the EU Financial Services
Action Plan
(I) New report presents international
perspective on strengthening the financial reporting process
(J) Study: Independent directors see significant changes in
remuneration
(K) ACCC welcomes issue of insurance
report
(L) Study of 2003 financial restatements
(M) HIH Institute of Accountants Task Force
(N)
SEC announces approval of SRO rules addressing research analyst conflicts of
interest
(O) GMI launches global governance ratings
(P) SEC study on adoption by the US financial reporting
system of a principles-based accounting system
(Q) Report:
Corporate Governance and Climate Change
(A)
Retirement of ASIC Chairman
(B) ASIC class order exempts
issuers of certain documents from requirement to hold an AFSL
(C) ASIC releases fee disclosure model
(D) 440
listed entities to be reviewed by ASIC
(E) ASIC releases
surveillance report on research analyst independence
(F)
Superannuation sponsors
3. RECENT
TAKEOVERS PANEL MATTERS
(A)
Resolution of proceedings relating to BreakFree Limited
(B)
Panel declines application for a declaration of unacceptable circumstances in
relation to PowerTel Ltd (No 3)
4. RECENT
CORPORATE LAW DECISIONS
(A) Extending
limitation period for recovery of preferences
(B) Effect on
trusts of liquidation of trustee companies and claims by persons claiming to be
trustees
(C) Directors' duties - fiduciary duties and
derivative proceedings
(D) Pooling in voluntary
administration
(E) The Tax Commissioner's advantage in
insolvent administrations
(F) Misleading and deceptive
conduct under section 52 of the Trade Practices Act
(G)
Whether a receiver is liable to employees in continued employment for annual
leave, long service leave and retrenchment entitlements
(H)
Reliance by insurer on an exclusion clause in a director's insurance policy
before a finding of dishonesty
(I) When is the enforcement
guarantee unconscionable?
(J) Approval of a scheme of
arrangement between United Energy Limited and its members
(K) Extension of time granted to register charge in respect of
company in administration
1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) SURVEY OF COMPLIANCE WITH ASX CORPORATE GOVERNANCE GUIDELINES
On 15 August 2003 Chartered Secretaries Australia (CSA) published a survey of Company Secretaries in the ASX Top 200 companies finding that a majority (67 per cent) had already extensively assessed their compliance with the ASX corporate governance guidelines, while 33 per cent had assessed it to a reasonable extent.
However, a major challenge for many companies will be in the rules relating to directors' independence.
"It seems many companies are finding it impractical to have a majority of independent directors, while some believe the definition of 'independent' is too strict. It is certainly the most commonly cited issue, with around a quarter of respondents choosing to explain their non-compliance", said chief executive of Chartered Secretaries Australia, Mr Tim Sheehy.
On the whole, however, he says, the guidelines are not causing major problems.
"Our survey found that 87 per cent of companies are confident they will meet all minimum requirements by the next phase of reporting, indicating a good understanding of the changes involved", said Mr Sheehy.
For the 64 per cent of companies who do not currently comply, and the 12 per cent who currently comply partially, it is high on the agenda. Ninety seven per cent plan to increase their compliance - 57 per cent in the next six months and 37 per cent within the year.
Despite a high level of cooperation, however, the jury is still out on the impact of the guidelines. Just over half believe the guidelines are fostering a culture of improved corporate governance in their organisation. Some say it has already prompted further discussion, review and action on the subject and, in turn, reinforced better behaviour from decision makers. But the other half is yet to be convinced.
The survey also revealed that the cost of meeting the requirements would not be too onerous for most. Sixty one per cent estimate only a zero to five per cent increase to compliance costs, and 18 per cent estimate a five to ten per cent increase.
(B) FUND MANAGERS AND CORPORATE GOVERNANCE
On 14 August 2003 the Investment and Financial Services Association (IFSA) released at its annual conference the survey results on "Shareholder Activism Among Fund Managers: Policy and Practice" prepared by IFSA and verified by KPMG.
IFSA is the peak Australian national body representing the wholesale and retail investment management, superannuation and life insurance industries. IFSA has over 100 members who invest approximately $630 billion dollars on behalf of over 9 million Australians.
IFSA Chief Executive Officer, Mr Richard Gilbert said, "the survey shows that fund managers are active shareholders in the companies in which they invest. High levels of voting and contact with management were shown to be key areas of fund manager's ever increasing activism to raise the bar on corporate governance."
IFSA members invest approximately $160 billion in the Australian equities market on behalf of superannuation beneficiaries and other investors. This accounts for approximately 25% of the ASX by market capitalisation (based on ASSIRT and ASX data). Survey respondents accounted for 98% of the investment in Australian equities.
Key findings of the report include:
- On average, fund managers
vote on 92% of all company resolutions. This is a dramatic increase from the
Eureka (2001) survey, which reported that the average voting level was 67% of
resolutions.
- Routine voters (who vote on at least 90% of all resolutions)
accounted for 91% of fund managers and 98% of funds under management. This is an
increase from the 2001 survey where 59% of fund managers were routine voters and
accounted for 69% of funds under management.
- Voting accounted for 40% of
all time spent on corporate governance related issues. In 2001, voting accounted
for 29% of time spent on corporate governance activity.
- Voting is
overwhelmingly considered to be the least effective method of influencing
corporate governance outcomes. Fund managers rate direct contact with companies
as nearly twice as effective in influencing board and management decisions as
opposed to casting proxy votes.
- All the major index managers are now voting
their proxies.
- Overwhelming fund managers were against publicly disclosing
how they voted on a specific resolution, as they considered it limited their
flexibility to use other forms of pressure to achieve the same goals.
- On
average less than four retail investors per fund manager requested information
on how a manager voted their proxies in the past 12 months. (The IFSA Blue Book
and Standard Investment Management Agreement require fund managers to disclose
their voting policy and practices to superannuation trustees.)
Copies of the report are
available on the IFSA website at http://www.ifsa.com.au/
(C) ABA RESPONDS
TO CORPORATE SCANDALS AND ADOPTS NEW LAWYER ETHICS RULES
On 12 August 2003 the American Bar Association House of Delegates concluded its 126th Annual Meeting by adopting new lawyer conduct rules responding to recent corporate scandals.
The House of Delegates approved three proposals from the ABA Task Force on Corporate Responsibility. The first amended Rule 1.6 of the ABA Model Rules of Professional Conduct to permit a lawyer to reveal confidential client information if the client is using the lawyer's services to commit a crime or fraud that would cause financial harm to others. The second proposal amended Rule 1.13 to permit a lawyer representing an organisational client to report up the corporate ladder violations by corporate officers of laws or legal duties that would harm the organization. The third endorsed structural and procedural reforms to improve corporate governance.
"These reforms are necessary steps that bring our standards into line with today's legal profession," said ABA President Dennis W Archer of Detroit. "Forty-two states have already adopted such measures on their own, with no adverse effect on client confidentiality."
Further information, including the report of the ABA Taskforce on Corporate Responsibility, is available on the ABA website at http://www.abanet.org/
(D) IAASB PROPOSES AUDITORS TAKE A MORE ACTIVE ROLE IN SEEKING OUT FRAUD
On 12 August 2003 the International Federation of Accountants (IFAC) announced that at a meeting in New York on 21-25 July 2003, the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) addressed one of the most important issues facing auditors today: responsibility for detecting fraud. The IAASB approved the release of an exposure draft (ED) of an International Standard of Auditing (ISA) titled "The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements" (ISA 240).
At the same meeting, the IAASB took actions to strengthen and clarify the IAASB's international standard-setting role and process by issuing amended terms of reference and a Preface to its standards. It also approved the release of a second exposure draft entitled "Planning the Audit."
(1) Proposed ISA expands guidance for fraud detection
The ED of the proposed ISA on fraud sets out the auditor's responsibility to consider fraud in an audit of financial statements. The ED also explains that the primary responsibility for the prevention and detection of fraud rests with both those charged with governance and management of the entity and describes the responsibilities of these parties.
This ED also alerts auditors to risks of material misstatement due to fraud they may encounter in the conduct of an audit and requires the auditor to assess the risks of material misstatement due to fraud and to responds to the assessed risk. The new proposed ISA requires the auditor to respond to the presumed risk of improper revenue recognition and the risk of management override of controls. This response includes testing the appropriateness of journal entries, reviewing the accounting estimates for biases and obtaining an understanding of the business rationale of significant transactions that are outside of the normal course of business for the entity. It also discusses auditor communications with management and those charged with governance, as well as auditor communications to regulatory and enforcement authorities.
(2) New Preface emphasises IAASB's independence
The IAASB issued a new "Preface to International Standards on Quality Control, Auditing, Assurance and Related Services," which includes new terms of reference for the Board. The Preface clarifies the IAASB's role as an independent standard-setting body under the auspices of IFAC, highlights its public- interest responsibilities and emphasises its objective of achieving convergence of standards by working closely with national standard setters.
(3) Audit Planning ED includes new guidance
The ED of proposed ISA 300, "Planning the Audit," complements the IAASB's proposed guidance on audit risk issued in October 2002. It includes basic principles and essential procedures on the considerations and activities applicable to planning an audit of financial statements. In particular, it provides new guidance on matters the auditor should consider prior to performing significant planning activities: client acceptance and retention; ethical requirements including independence and communications with prior auditors; and the terms of the audit engagement. The ED also incorporates more specific guidance regarding planning considerations in initial audits and includes a discussion of the planning considerations related to the direction, supervision and review of the work of engagement team members.
(4) Accessing EDs and new guidance
The exposure drafts may be viewed by going to the IFAC website at http://www.ifac.org/EDs. Comments must be submitted by November 15, 2003 to Edcomments@ifac.org, faxed to the IAASB Technical Director at +1-212-286-9570 or mailed to the IAASB Technical Director at IFAC, 545 Fifth Avenue, 14th Floor, NY, NY 10017.
The Preface can be accessed by going to the IAASB website at http://www.ifac.org/iaasb and looking in the section headed "2003 Publications."
(E) NASD PROPOSES DISCLOSURE OF MUTUAL FUND COMPENSATION ARRANGEMENTS
On 7 August 2003 the United States National Association of Securities Dealers (NASD) proposed for comment a rule that would expand the disclosure of two types of compensation paid for the sale of mutual fund shares. Disclosure of these practices would alert investors to the fact that a brokerage firm or its registered representatives may have financial incentives to recommend particular funds.
NASD's Board of Governors approved a proposal for disclosure of two types of compensation paid for the sale of mutual fund shares. The first type of compensation consists of cash payments to brokerage firms in return for shelf space. The second is the payment of a higher compensation rate to registered representatives for selling certain funds.
The proposal would require firms to disclose the nature of certain compensation arrangements in writing when the customer first opens an account or purchases mutual fund shares. The proposal also would require member firms to update this information twice a year and make it available on their websites.
The proposed amendments would require a securities firm to disclose:
- that information
regarding a fund's fees and expenses may be found in the fund's prospectus;
-
that the fund's policies regarding selection of securities firms (such as soft
dollar and directed brokerage arrangements) are described in the fund's
statement of additional information, which an investor may request;
- if
applicable, that the member receives cash payments from mutual funds and their
affiliates other than the fees disclosed in a fund's prospectus fee table, and
the nature of this compensation;
- a list of mutual fund firms that made
these payments to the firm in descending order based upon the total amount of
compensation received from each firm; and
- if applicable, that registered
representatives receive different rates of compensation for different investment
company products, the nature of these arrangements, and the names of the
investment companies favoured by these arrangements.
More information is available on the NASD website at http://www.nasd.com
(F) SEC PROPOSES DISCLOSURE REQUIREMENTS RELATED TO DIRECTOR NOMINATIONS AND SHAREHOLDER COMMUNICATIONS
At an open meeting on 6 August 2003 the United States Securities and Exchange Commission voted to propose rule changes that would strengthen disclosure requirements relating to nomination of directors and shareholder communications with directors. The proposals follow the recommendations made by the Division of Corporation Finance to the Commission in its 15 July "Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors."
SEC Chairman William Donaldson said, "These rules are an important first step in improving the proxy process as it relates to the nomination and election of directors. The Commission believes that better information about the way board nominees are identified, evaluated and selected is critical for shareholder understanding of the proxy process regarding nomination and election of directors. We also believe that better information about the processes of shareholder communications with boards lies at the foundation of shareholder understanding of how they can interact with directors and director processes. We intend to continue our work in improving the proxy process by considering later this fall additional important proposals regarding enhanced shareholder access to the proxy process for nomination of directors. These are vital issues in strengthening the proxy process for the benefit of shareholders."
These disclosure proposals represent the first step in the implementation of the recommendations in the Staff Report. The Commission anticipates considering further rule proposals later this fall regarding enhanced shareholder access to companies' proxy statements and forms of proxy for nomination of directors. The Staff Report also discusses possible access proposals.
These proposals would call for important additional information regarding a company's process of nominating directors, including:
- whether a company has a
separate nominating committee and, if not, the reasons why it does not and who
determines nominees for director;
- whether members of the nominating
committee satisfy independence requirements;
- a company's process for
identifying and evaluating candidates to be nominated as directors;
-
whether a company pays any third party a fee to assist in the process or
identifying and evaluating candidates;
- minimum qualifications and
standards that a company seeks for director nominees;
- whether a company
considers candidates for director nominees put forward by shareholders and, if
so, its process for considering such candidates; and
- whether a company has
rejected candidates put forward by large long-term institutional shareholders or
groups of shareholders.
These proposals also would call for important new information regarding shareholder communications with directors, including:
- whether a company has a
process for communications by shareholders to directors and, if not, the reasons
why it does not;
- the procedures for communications by shareholders with
directors;
- whether such communications are screened and, if so, by what
process; and
- whether material actions have been taken as a result of
shareholder communications in the last fiscal year.
The proposals would also apply to proxy statements of registered investment companies in the same manner that they apply to other companies.
These proposals are available on the Commission's website at http://www.sec.gov/
(G) NEW REPORT: DO MULTINATIONAL ENTERPRISES BENEFIT AUSTRALIA?
Australia is failing to reap maximum benefit from foreign investment by multinational enterprises (MNEs), according to a new Committee for Economic Development of Australia (CEDA) report released on 6 August 2003.
The report argues that although foreign investment has played a major role in Australia's economic development, there is significant scope to improve the nature of linkages between MNEs and the domestic economy. Authored by Professor Stephen Nicholas of the University of Sydney, Dr Elizabeth Maitland (University of New South Wales), and Dr Andre Sammartino (University of Melbourne), the report presents the findings of a survey of the performance of 270 foreign-owned firms operating in Australia. The findings have significant implications for understanding the way in which Australia is connected to the global economy.
The report indicates that Australian subsidiaries of MNEs are often poorly integrated into parent global networks with little evidence of Australia acting as a regional headquarters. In addition, relatively few subsidiaries invest in R&D or product innovation in Australia, apply overseas knowledge learning to Australian operations, or engage in production for export markets. Overall there appears to be considerable scope for subsidiaries to link Australia more tightly into their global networks.
However, the good news is that the firms surveyed predicted that by 2006 there will be greater integration with global and regional subsidiary networks, more regional headquarters and greater production for exports.
The report is available on the CEDA website at http://www.ceda.com.au
(H) NEW GUIDE TO THE EU FINANCIAL SERVICES ACTION PLAN
On 6 August 2003 the United Kingdom Department of the Treasury, the Financial Services Authority and the Bank of England jointly published a guide to the EU Financial Services Action Plan (FSAP). The FSAP consists of a set of measures intended to achieve a Single Market in financial services across the EU by 2005.
John Healey, Economic Secretary to the Treasury, commented:
"With the Financial Services Action Plan nearing completion, it is essential that all stakeholders should be consulted on, and fully understand, the measures. Together with the Financial Services Authority and the Bank of England, we have prepared this guide so that all those involved are aware of the impact of new measures and the competitive opportunities of further EU financial integration ."
The guide is intended for financial institutions, companies and consumer groups in the UK that are not yet sufficiently familiar with the FSAP's potential impact.
The guide is available on the FSA's website at http://www.fsa.gov.uk
(I) NEW REPORT PRESENTS INTERNATIONAL PERSPECTIVE ON STRENGTHENING THE FINANCIAL REPORTING PROCESS
"Rebuilding Public Confidence in Financial Reporting: An International Perspective," a report from an independent task force that was commissioned by the International Federation of Accountants (IFAC) and released on 6 August 2003, includes recommendations for strengthening corporate governance, improving audit effectiveness, and raising the standard of regulation of issuers. It also presents an international perspective on the challenges facing not only the accountancy profession, but also those involved in regulating a profession that has such a significant involvement in capital markets worldwide.
"Rebuilding Public Confidence in Financial Reporting" was developed by a Task Force chaired by John Crow, former Governor of the Bank of Canada. It included individuals with backgrounds in commercial banking, international economics, academia and law, as well as accounting and auditing, from six countries: Australia, Canada, France, Japan, the United Kingdom, and the United States.
The report's recommendations are built on three basic assumptions:
- The credibility of
financial reporting is both an issue in each country and an
international
issue, with action required at both levels.
- To improve credibility in
financial reporting, action will be necessary at all points in the supply chain
that delivers financial information.
- Integrity - both individual and
institutional - is essential for building confidence in financial reporting,
and, therefore, needs to be fostered.
"Failure to recognize the fundamental responsibility to report fairly has been a major contributor to the financial scandals of recent years," states John Crow, chair of the Task Force on Rebuilding Confidence in Financial Reporting (Credibility Task Force).
"In crafting our recommendations, we have kept in mind that public reporting is intrinsically a public-interest activity. So, our report addresses the roles of all those who are involved in the process, including groups such as lawyers, bankers, brokers, analysts, and public relations advisors. All parties, besides the management, board of directors, and independent auditors, have an unavoidable duty to ensure that public reporting presents the information fairly, and the rules and regulations surrounding corporate reporting should clearly reinforce them."
Specific recommendations include the following:
- Effective corporate
ethics codes need to be in place and actively monitored; such codes should be
supported by training.
- Codes of conduct need to be put in place for other
participants in the financial reporting process - such as investment analysts
and lawyers - and their compliance should be monitored.
- Incentives to
misstate financial information need to be reduced, and companies must refrain
from forecasting profits with an unrealistic level of precision.
- Audit
effectiveness needs to be raised, primarily through greater attention to audit
quality control processes.
The members of the International Taskforce were: John Crow (Canada - Chair), Christian Aubin (France), Olivia Kirkley (USA), Kosuke Nakahira (Japan), Ian Ramsay (Australia), Guylaine Saucier (Canada), and Graham Ward (United Kingdom).
The full report and complete list of recommendations can be accessed on IFAC's website at http://www.ifac.org/credibility. A database of relevant articles and speeches may also be accessed through this area of the website.
(J) STUDY: INDEPENDENT DIRECTORS SEE SIGNIFICANT CHANGES IN REMUNERATION
America's largest public companies are changing how they compensate non-employee, independent directors, and paying a sharply higher premium for Audit Committee Chairmen. These are the central findings of an analysis published on 4 August 2003 by The Todd Organization of director compensation practices in 2002 and 2001 at 255 large public companies with revenues of at least $5 billion.
At these 255 companies, the average amount of non-employee directors' compensation actually declined slightly, 1.6 percent, to $112,698 in 2002 from $114,490 in 2001. The primary reason for the decline is a 12.1 percent decrease in the average amount of compensation directors received from stock options. The percentage of companies that offered stock options to directors also declined in 2002 to 52 percent (132 of 255 companies), from 57 percent in 2001 (145 of 255 companies).
Non-employee directors' compensation
2001:
Cash - $37,532 - 33%
Stock - $28,058 - 24%
Stock Options - $48,900 - 43%
Total
compensation - $114,490 - 100%
2002:
Cash - $36,785 -
33%
Stock - $32,939 - 29%
Stock Options - $42,974 - 38%
Total
compensation - $112,698 - 100%
The preceding figures do not include separate board meeting or committee meeting fees that some companies pay to directors.
By contrast, during 2002, directors saw a significant increase, of more than 17.4 percent on average, in more direct forms of stock compensation including outright grants of shares, as well as deferred, restricted, and phantom stock programs. The number of companies compensating directors with more direct forms of stock compensation rose 38.5 percent. In 2002, there were 151, or 59 percent of the 255 companies that offered this compensation, up from 109, or 41 percent of the 255 companies in 2001.
There is also an increase in compensation for independent Audit Committee Chairmen. In 2002, 184 of the 255 companies paid an additional premium averaging $11,499 premium for Audit Committee Chairmen. This premium is a 41 percent increase from the average additional premium of $8,145 that 163 companies paid for non- employee Audit Committee Chairmen in 2001.
The study also found that two-thirds of public companies with revenues of more than $5 billion offer directors compensation deferral plans. A minority of companies also offers retirement plans (13%), charitable gift programs (12%), and matching gift programs (9%) that help bolster directors' philanthropic activities.
(K) ACCC WELCOMES ISSUE OF INSURANCE REPORT
On 4 August 2003 the Australian Competition and Consumer Commission (ACCC) welcomed the Federal Government's issuing of the ACCC's public liability and professional indemnity insurance monitoring report.
The report follows a Federal Government request that the ACCC monitor costs and premiums in public liability and professional indemnity insurance to assess the impact on premiums of measures taken by governments to reduce and contain legal and claims costs. The report is the first in a series of four reports to be produced during the next two years.
"The report shows an improvement in the profitability of both public liability and professional indemnity insurance", ACCC Chairman, Mr Graeme Samuel, said. "Importantly, in a turnaround from recent years, insurers are expected to make an underwriting profit in these classes for the year ending 31 December 2002".
Underwriting profit (where premium income exceeds claims costs and other direct costs attributable to a class of insurance) is just one part of the overall profit picture for a particular class of insurance. This underwriting profit has been secured, in large part, by recent premium increases.
The report found that:
- public liability
insurance premiums rose by an average of 19% in 2001 and 44% in 2002; and
-
professional indemnity premiums rose by an average of 31% in 2001 and 36% in
2002.
In the absence of the recent government reforms, insurers expected that premiums for both classes of insurance would have risen between 11% and 20% in 2003. However, with reforms, some insurers expected that in 2003:
- in the case of public
liability insurance, claims costs would be reduced by around five per cent and
premiums constrained by about three per cent; and
- in the case of
professional indemnity insurance, claims costs would remain the same and there
would be no constraint on premiums. This is because claims under professional
indemnity policies tend to reflect economic loss rather than personal injury.
Most of the law reform to date has focussed on personal injury rather than
economic loss. Other insurers considered it too early to try and quantify the
impact of government reforms on premiums.
Copies of the report can be obtained at the ACCC website at http://www.accc.gov.au/
(L) STUDY OF
2003 FINANCIAL RESTATEMENTS
On 29 July 2003 Huron Consulting Group released findings regarding financial restatements filed with the US Securities and Exchange Commission (SEC) as of 30 June 2003. For the twelve months ending 30 June 2003, 354 public companies have restated earnings because of accounting errors. Of these, 158 restatements were filed during the first six months of 2003. Problems applying accounting rules, human and system errors and fraudulent behaviour are the three primary causes for accounting errors.
Hurons data regarding financial reporting matters for the twelve months ending 30 June 2003, is included in the report titled "Rebuilding Investor Confidence, Protecting US Capital Markets, The Sarbanes-Oxley Act: The First Year" released by the House Committee on Financial Services. The report from the Committee is available at http://financialservices.house.gov/
Quarterly restatement activity for the four quarters ending 30 June 2003 is: Q3 2002 93; Q4 2002 103; Q1 2003 70; and Q2 2003 88. The number of restatements filed during Q3 and Q4 2002 represent the highest two quarters during the past five years.
In the past twelve months as of 30 June 2003, 22 percent of the restatements were filed by companies with greater than $1 billion in revenue and 44 percent were filed by companies with under $100 million in revenue. During this twelve-month period, revenue recognition, which is defined as instances where a company improperly recognizes revenue from transactions, was the leading cause of restatements.
Huron tracks restatements
based on filing date, not announcement date. Some companies announce a
restatement, but do not file amended financials due to bankruptcy or delisting.
Huron's full analysis of financial reporting matters for the year ending 31
December 2003 will be available in January 2004.
(M) HIH INSTITUTE OF ACCOUNTANTS TASK FORCE
On 29 July 2003 the Institute of Chartered Accountants in Australia (ICAA) accepted recommendations made by its independent HIH Task Force focusing on discipline of members, member support and whistleblowers, following review of the formal HIH Royal Commission report released in April.
The key recommendations in the report cover the following areas:
(1) Professional conduct (discipline) and Institute membership
(a) Start the disciplinary process as soon as evidence of possible misconduct becomes available, so that any members who have forfeited their right to the CA designation because of gross incompetence, dishonesty, or serious negligence have their membership terminated at the earliest possible time.
(b) In the interests of transparency, members names and details of the charges against them to be made public immediately after it is determined there are grounds for disciplinary action, and again at the completion of the disciplinary process.
(2) Member support
(a) Strengthen support processes for members under pressure to act unethically.
(b) Provide guidance in difficult professional circumstances in a secure and confidential setting.
(c) Expand the scope and coverage of the Chartered Accountants Advisory Group, CAAG, (formerly the Members Ethical Counselling Service). CAAG provides secure and confidential support to members under pressure to act unethically.
(3) Whistleblowers
(a) The Institute is to champion legislative change to implement extension of corporate responsibility to provide an acceptable means for whistleblowers to act within the corporation.
(b) Non-executive directors to receive written concerns on issues such as questionable conduct or regulatory standards.
(4) Standards
(a) Support the establishment of a Financial Reporting Panel to review financial statements, as proposed in the Government's Corporate Law Economic Reform Program proposals.
(b) Amend audit standards to require audit firms to classify clients according to risk and to require the audit opinion to be subjected to an effective second partner review.
(5) Institute members as directors
(a) Provide guidelines for members considering Board appointments with ongoing education opportunities for this segment of the membership.
The Report of the HIH Taskforce is available at http://www.icaa.org.au/news
(N) SEC ANNOUNCES APPROVAL OF SRO RULES ADDRESSING RESEARCH ANALYST CONFLICTS OF INTEREST
On 29 July 2003 the United States Securities and Exchange Commission Chairman William H Donaldson announced the approval of a series of self-regulatory organisation ("SRO") research analyst rules that fulfil the requirements of the Sarbanes-Oxley Act of 2002. The rules approved build on previous regulatory actions and take a number of significant additional steps towards promoting the independence and objectivity of research.
SEC Chairman William H Donaldson said, "Working closely with the New York Stock Exchange and the NASD, the rules approved by the SEC require a critical and necessary separation of research analyst compensation from investment banking. Such conflicts have undermined confidence in our markets, and must stop. This effort will provide participants with clear guidelines for restoring confidence in the integrity of research. I applaud the efforts of all involved in reaching this important milestone."
Specifically, the rules approved separate research analyst compensation from investment banking influence and insulate research analysts from investment banking interests by prohibiting analysts from participating in "pitches" or other communications for the purpose of soliciting investment banking business. They extend quiet periods for all firms involved in offerings and prohibit "booster shot" research reports in and around lock-up expirations. The rules also require enhanced disclosure of compensation arrangements between firms and issuers and client relationships between firms, their affiliates, and issuers.
The rules also require firms to notify their customers in final reports when they are terminating research coverage of covered companies. Analyst independence will be further protected by a rule that prohibits firms from retaliating, or threatening to retaliate, against research analysts who publish research reports or make public appearances that may adversely affect firms' investment banking business. Finally, the rules impose registration, qualification, and continuing education requirements on research analysts.
These rules are the latest among a series of regulatory actions taken during the last year to promote the integrity of research. Most recently, on 28 April 2003, the Commission, the NASD, the NYSE, and the States announced the settlement of enforcement actions against ten of the nation's top securities firms alleging undue influence by investment banking interests on the firms' research. This Global Settlement includes substantial monetary relief and imposes structural reforms that seek to promote analyst independence. Earlier, the Commission approved a series of SRO rule changes addressing analyst conflicts, as well as a Commission rule requiring that analysts certify that their research reports accurately reflect their personal views and disclose whether they received compensation for their specific recommendation.
(O) GMI LAUNCHES GLOBAL GOVERNANCE RATINGS
On 28 July 2003 GovernanceMetrics International (GMI), an independent governance ratings agency, announced ratings on 1600 global companies. Seventeen companies - fifteen US and two Canadian, received scores of 10.0, GMI's highest rating (see below). The rating universe covers 1000 US and 600 non-US companies from a total of fifteen countries.
In the GMI sample, Canadian companies had the highest overall average rating of 7.2 followed closely by the UK, US and Australia, in that order. Companies with overall global ratings of 7.5 or more, which GMI considers above average, are almost exclusively from these four countries. In continental Europe, French companies scored the lowest with an average of 4.1, but the lowest governance performance of all was Japan, where the average rating was 3.5. US companies comprise 62% of the GMI universe and include a number of smaller corporations which skew the country results somewhat. The average rating for the top 100 US companies was 7.7 which is a more accurate comparison with the UK, Canadian and Australian companies in the universe.
Even though US and Canadian firms scored well overall, there are still five companies from these two countries that received a global rating of 3.0 or less, which GMI considers well below average. This indicates that despite a strong legal and regulatory framework, companies can still satisfy basic requirements but represent a governance risk to shareholders. Sixteen companies received GMI's lowest rating of 1.0; of these, ten were Japanese, two were French, two were Dutch, and one Swiss and one American.
The data provided useful insights into differences between industries and markets. The highest scoring industries globally were Utilities (average rating of 7.0), Energy (6.9) and Insurance (6.8). The poorer performers were Construction (4.9), Autos (5.6) and Media (5.8). Not surprisingly, more regulated industries tended to have better governance practices overall, although GMI would have expected Financial Services as a regulated industry to have had better ratings overall than the 6.1 the industry achieved.
Noticeable differences were found in how companies performed in particular categories. In the area of potential dilution, Japanese companies scored well since stock options are generally not a feature of compensation practices in that country. On the other hand, of the 483 companies in the ratings universe with potential options dilution of 15% or more, all but seven were American. In financial disclosure, Japanese and European companies tended to score lower than US, Canadian, UK and Australian companies because of fewer disclosure requirements. In addition, 21% of the companies in the ratings do not report their accounts under US GAAP or International Accounting Standards practices, but under purely local standards. These companies are predominately Japanese and Continental European.
European corporations outperform in the area of broader stakeholder relations. In environmental, labour and social matters, European companies have far better practices and disclosure policies than US companies and consistently score better in this category. This is not surprising given the greater attention to those issues by European investment houses, governments and communities.
Legislative and regulatory initiatives this past year in the US, Europe, Japan and Australia have been designed to strengthen corporate governance practices and produce greater shareholder protection, but GMI's Chief Executive Officer, Gavin Anderson said, "that while compliance with new standards has produced improvement, there are still practices and patterns of behaviour at many companies that cause shareholder concern; among the myriad of questionable practices we found are a chairman and president who were forced to resign because of bid rigging, but have now been re-hired as advisors; directors who sit on as many as fourteen public company boards as well as several committees; one director who collects a $600,000 annual consulting fee on top of his director fees, and one firm that does not designate either executive directors or a CEO and thus regulations relating to directors remuneration do not apply to them. What our ratings help determine is the culture of accountability and integrity at companies. We know from a number of studies that shareholders will pay a premium for companies with good corporate governance."
GMI's rating system incorporates more than 600 data points across seven broad categories of analysis, including board accountability, disclosure, executive compensation, shareholder rights, ownership base, takeover provisions and corporate behaviour and social responsibility.
Companies with a global score of 10 (GMI's highest rating) are:
Alcan Inc (Canada)
McDonald's Corporation (US)
BCE Inc (Canada) Occidental Petroleum Corporation
(US)
ChevronTexaco Corporation (US) PepsiCo, Inc (US)
Chubb Corporation
(US) Pfizer Inc (US)
Colgate-Palmolive Company (US) Pinnacle west Capital
(US)
E I DuPont de Nemours & Co (US) Praxair Inc. (US)
Eastman Kodak
Company (US) SLM Corporation (US)
Exxon Mobil Corporation (US) The Allstate
Corporation (US)
Gillette Company (US)
Average Overall Ratings by Country
Country, Number of companies, % of GMI Global Cos, Avg Overall Rating
Canada (3) 301.9% 7.2
UK
(101) 6.3% 7.1
USA (1002) 62.3% 7.0
Australia (48) 3.0% 6.9
Finland (5)
0.3% 6.3
Germany (30) 1.9% 5.8
Sweden (29) 1.8% 5.8
Italy (29) 1.8%
5.3
Portugal (4) 0.2% 4.3
Netherlands (24) 1.5% 4.2
Spain (16) 1.0%
4.2
Switzerland (26) 1.6% 4.2
France (39) 2.4% 4.1
Japan (225) 14.0%
3.5
Total (1608) 100.0% 6.3
(P) SEC STUDY ON ADOPTION BY THE US FINANCIAL REPORTING SYSTEM OF A PRINCIPLES-BASED ACCOUNTING SYSTEM
On 25 July 2003 the United States Securities and Exchange Commission announced the release of a staff study prepared by the Office of the Chief Accountant and the Office of Economic Analysis on the adoption by the US financial reporting system of a principles-based accounting system. The study was conducted pursuant to the provisions of section 108(d) of the Sarbanes-Oxley Act of 2002. The study has been submitted to the Committee on Banking, Housing, and Urban Affairs of the US Senate and the Committee on Financial Services of the US House of Representatives.
The staff study recommends that accounting standards should be developed using a principles-based approach and that such standards should have the following characteristics:
- be based on an improved
and consistently applied conceptual framework;
- clearly state the
accounting objective of the standard;
- provide sufficient detail and
structure so that the standard can be operationalised and applied on a
consistent basis;
- minimise the use of exceptions from the standard;
and
- avoid use of percentage tests ("bright-lines") that allow financial
engineers to achieve technical compliance with the standard while evading the
intent of the standard.
To distinguish the particular approach taken to implementing principles-based standard setting, the staff labels its approach "objectives-oriented." Fundamental to this approach is that the standards would clearly establish the objectives and the accounting model for the class of transactions, while also providing management and auditors with a framework that is sufficiently detailed for the standards to be operational. The staff concludes in the study that an objectives-oriented approach should ultimately result in more meaningful and informative financial reporting to investors and also would hold management and auditors responsible for ensuring that financial reporting complies with the objectives of the standards.
The staff acknowledges that the FASB has begun the shift to objectives-oriented standard setting and is doing so on a prospective, project-by-project basis. The staff expects that the FASB will continue to move towards objectives-oriented standard setting on a transitional or evolutionary basis. Operationalising an objectives-oriented approach to standard setting in the US requires that the following key steps be taken over time:
- ensure that
newly-developed standards articulate the accounting objectives and avoid scope
exceptions, bright-lines and excessive detail;
- address deficiencies and
inconsistencies in the conceptual framework;
- when developing new
standards, ensure that they are aligned with an improved conceptual framework;
- address current standards that are more rules-based;
- redefine the
GAAP hierarchy; and
- continue efforts on convergence of US, foreign, and
international accounting standards.
The full text of the staff study can be found at http://www.sec.gov/news/studies/principlesbasedstand.htm
(Q) REPORT: CORPORATE GOVERNANCE AND CLIMATE CHANGE
On 9 July 2003 a report titled 'Corporate Governance and Climate Change: Making the Connection" was published. The report, was commissioned by CERES, a coalition of investor, environmental and public interest groups, and written by the Investor Responsibility Research Center (IRRC), an independent firm that advises institutional investors managing more than $5 trillion in assets.
The report is a study of 20 of the world's largest companies and it is argued in the report that most of America's biggest carbon dioxide-emitting companies are not adequately disclosing the financial risks posed by climate change and also are failing to deal with global warming issues in other key corporate governance areas.
The widest disparity in corporate governance responses to climate change is in the oil industry, according to the study. BP (BP) and Royal Dutch/Shell (RD) have pursued all 14 items listed on the Climate Change Governance Checklist contained in the report, positioning the companies to deal with emerging issues related to climate change, while American-based ChevronTexaco, ConocoPhillips (COP) and ExxonMobil have pursued only four or five actions. The report notes that the US-based oil companies are continuing to devote virtually all development efforts toward fossil fuels, while European competitors are gaining a foothold in renewable energy technologies that are among the fastest-growing energy sources.
The electric power industry as a whole scored lowest on the checklist, despite being the largest source of US emissions and vulnerable to changing clean air regulations. The auto industry failed to measure and disclose the emissions of its products, the source of more than 95 percent of that industry's emissions. At the same time, Japanese competitors are taking the lead in introducing hybrid gas-electric vehicles that substantially reduce tailpipe emissions.
(1) Key findings
(a) Board oversight and shareholder disclosure: The boards of 17 of the profiled companies have discussed climate change, illustrating the growing importance of the issue, yet only 12 of the companies made reference to climate change in their 2001 SEC Form 10-K filings. Just nine mentioned the issue in the front section of their 2001 annual reports.
(b) Executive compensation and management accountability: All 20 profiled companies have environmental links to compensation, and 19 of the 20 companies have their top environmental officer reporting directly to the CEO or one level below. Yet only three of the companies have linked attainment of greenhouse gas targets to executive compensation.
(c) Emissions inventories and reporting: By the end of 2003, all 20 profiled companies will be taking regular greenhouse gas inventories of emissions from their facilities. Yet only 11 companies have set historical emissions baselines (dating back at least 10 years), and only nine companies have made forward-looking emissions projections. Especially lacking are inventories and projections of product and other end-use emissions, the major share of worldwide emissions.
(d) Product development and renewable energy: Seventeen of the profiled companies are purchasing and/or developing renewable energy sources that do not emit greenhouse gases. However, the commitments and investments made by most of these companies still account for only a tiny fraction of their total energy budgets. Greater progress is being made in terms of improving the energy efficiency of manufacturing.
- Independent directors: New governance listing standards require corporations to have a majority of independent directors, while the SEC is considering new rules allowing shareholders to nominate their own board candidates, clearing the way for nomination of directors who understand the issue and would take steps to address it.
- Executive compensation:
Emerging efforts to redefine "pay for performance" - and align executive
performance with long-term investor value - make attainment of greenhouse gas
targets a logical addition to many executive compensation plans.
Proxy
voting: New SEC rules require mutual funds to disclose their proxy guidelines
and proxy votes, opening them to scrutiny and client pressure to support global
warming related shareholder resolutions.
- Investment research: A legal settlement involving major US investment banks is putting greater separation between banks' brokerage and underwriting arms, giving analysts more leeway to conduct critical analyses of companies' responses to climate change.
- Potential liability: As a sign of growing legal and economic concerns about how companies respond to global warming, the giant Swiss Re reinsurance company has begun asking companies applying for directors and officers liability insurance whether they have developed a strategy for addressing the issue.
(2) Report recommendations
(a) Investors:
- Encourage best practice
among portfolio companies, including the 14 actions on the "Climate
Change
Governance Checklist."
- Seek expert science and policy advice on
climate change and discuss climate change risks and opportunities with fund
managers and trustees.
- Join in discussions with other investors concerned
about climate change risks and opportunities, through CERES, IRRC, and other
organizations.
- Support requests for greater disclosure of climate change
risks and opportunities by portfolio companies,
including taking steps such
as: voting proxies in favour of climate change shareholder resolutions and
disclosing those votes publicly, communicating with companies and sponsoring
shareholder resolutions.
- Undertake a portfolio-wide assessment of climate
change risk exposures, and have portfolio managers integrate climate change
considerations into investment policies and strategies.
- Identify and pursue
clean energy investment opportunities that are advancing the transition to
a
low-carbon economy.
- Ask stock exchanges to include disclosure of
climate change risk in their listing standards.
- Support recommendations for
corporate boards/CEOs, Congress, SEC.
(b) Corporate Boards/CEOs:
- Ensure that the board has
sufficient expertise and counsel to make informed and responsible decisions
regarding climate change.
- Consider taking the 14 actions on the Climate
Change Governance Checklist and report to shareholders regularly on company
progress.
- Develop, announce and implement an explicit strategy on climate
change that is integrated into the company's overall business strategy.
-
Support climate change policy solutions.
(c) Policymakers:
- SEC: Enforce regulations
that require companies to disclose material financial risks and opportunities
related to climate change and regulation of greenhouse gases, and companies'
strategies for addressing these risks and opportunities.
- Congress: Develop
national policies to limit US greenhouse gas emissions to create certainty for
companies and investors, including, among others policies and measures,
(i) a national mandatory program that is marketbased, with reduction targets and timetables for large-emitting sectors, and
(ii) a national renewable energy standard requiring an increasing amount of electricity produced from renewable resources such as biomass, geothermal, solar and wind.
The report is available on the IRRC website at http://www.irrc.org
(A) RETIREMENT OF ASIC CHAIRMAN
On 12 August 2003 the Chairman ASIC, Mr David Knott, informed the Commonwealth Treasurer, the Hon Mr Peter Costello MP that he will step down from the position at the end of 2003.
The Treasurer stated that Mr Knott has been a highly successful member of ASIC over the past four years. He was appointed as ASIC Deputy Chair in July 1999 and was appointed as ASIC Chairman in November 2000.
Under David Knott's leadership, ASIC has proven to be highly effective. Action taken by ASIC over the last 3 years has resulted in the jailing of 70 people, the removal of 40 company directors from office and over $1 billion of funds protected, recovered or ordered in compensation.
According to the Treasurer, Mr Knott's commitment to the timely and vigorous enforcement of the Corporations Act has succeeded in better protecting Australian consumers and promoting best corporate practice amongst Australian business.
(B) ASIC CLASS ORDER EXEMPTS ISSUERS OF CERTAIN DOCUMENTS FROM REQUIREMENT TO HOLD AN AFSL
On 6 August 2003 ASIC released a new Class Order exemption, [CO 03/606], relating to the requirement to hold an Australian financial services licence (AFSL) for the provision or giving of financial product advice in certain documents.
The Class Order relief exempts a person from the requirement to hold an AFSL for the provision of financial product advice where that advice is general advice, and the advice is contained in a document that is required by, and prepared by the person as a result of a requirement in the Corporations Act 2001 (the Act) or the Superannuation Industry (Supervision) Act 1993.
The relief has been provided using ASIC's general licensing relief power under section 911A(2)(l), relating to the need for an Australian Financial Services Licence, rather than specific legislative provisions regarding exempt documents.
The Class Order relief applies to the following documents or statements:
- a statement setting out
information about a reduction in share capital of the kind referred to in
subsection 256C(4) of the Act; or
- a statement setting out information about
a share buy-back of the kind referred to in subsections 257C(2) or 257D(2) or
section 257G of the Act; or
- a statement setting out information about
financial assistance given by a company to a person to acquire shares of the
kind referred to in subsection 260B(4) of the Act; or
- a financial report;
or
- an explanatory statement about a compromise or arrangement of the kind
referred to in section 412 of the Act or a draft of such a statement of the kind
referred to in subsection 411(3) of the Act; or
- a bidder's statement, a
supplementary bidder's statement, a target's statement or a supplementary
target's statement; or
- a document setting out information about a proposed
acquisition of shares of the kind referred to in item 7 of the table in section
611 of the Act; or
- a continuous disclosure notice; or
- a disclosure
document; or
- a supplementary or replacement document of a kind referred to
in section 719 of the Act; or
- a document setting out information given to
members of superannuation funds and others under Part 2 of the Superannuation Industry (Supervision) Regulations 1994 (SIS
Regs); or
- a document setting out information about investment strategies of
the kind referred to in paragraph 4.02(2)(b) of the SIS Regs.
A copy of the Class Order can be obtained from the ASIC's Infoline by calling 1300 300 630 or from the ASIC website at http://www.asic.gov.au
(C) ASIC RELEASES FEE DISCLOSURE MODEL
On 5 August 2003 ASIC released a good practice model for fee disclosure in the Product Disclosure Statements (PDSs) of investment products.
'Investors have a right to clear, concise, and comprehensive information about the fees they will pay for an investment product', ASIC Executive Director, Financial Services Regulation, Mr Ian Johnston said.
'ASIC believes that significant fees should be disclosed in a single table which investors can read easily "at a glance". Used consistently by providers, this sort of table will help people understand their fees, and help them to compare fees across different products', Mr Johnston said.
ASIC suggests that a second table should itemise ongoing fees, and be supplemented by a section for other important additional disclosure items such as worked examples, information about adviser remuneration and information about fee changes.
'Improving fee disclosure is an ongoing process, and our good practice model is an important foundation of that process. While we acknowledge that it will take time to make the transition to using it consistently, we encourage industry to adopt it as soon as possible', Mr Johnston said.
The development of a fee disclosure model follows the release in September 2002 of Professor Ian Ramsay's report Disclosure of Fees and Charges in Managed Funds, which was commissioned by ASIC. Professor Ramsay is Dean of the Law School at Melbourne University, and Director of the Centre for Corporate Law and Securities Regulation.
'ASIC has prepared this report using Professor Ramsay's recommendations as a basis, and we believe it is the best example that can be achieved through a consensus-based approach. In the absence of specific legislation regarding a comparability tool such as an MER or OMC*, ASIC encourages industry to do further work on these issues and is happy to be involved in the process', Mr Johnston said.
ASIC's model aims to address issues identified in the report as requiring attention, such as:
- the use of common terms;
- standardised descriptions;
- disclosure of the purpose of particular
fees;
- improved disclosure of adviser remuneration; and
- transparency
of fees.
ASIC recommends that industry participants undertake consumer testing of the model, as suggested by Professor Ramsay.
The fee disclosure model appears as Appendix A to ASIC's report on the fee disclosure project. The report outlines the approach taken in developing the model, the consensus reached and potential areas for further development as industry standards.
The model was developed following extensive consultation with industry stakeholders over more than six months.
ASIC consulted stakeholders including:
- the Investment and
Financial Services Association Ltd (IFSA);
- the Association of
Superannuation Funds of Australia Ltd (ASFA);
- the Australian Consumers
Association (ACA);
- the Industry Funds Forum (IFF);
- the Australian
Institute of Superannuation Trustees (AIST);
- the Corporate Superannuation
Association (CSA);
- the Institute of Actuaries;
- the Australian
Investors Association (AIA);
- the Australian Friendly Societies Association
(AFSA); and
- Mr Colin Grenfell.
'We have consulted widely in reaching a position on consistent disclosure of fees and charges. Consumer groups, industry bodies and professional experts have all made a valuable contribution to the process, and I would like to acknowledge the cooperation we have received', Mr Ian Johnston said.
A copy of the report is available from ASIC's website at http://www.asic.gov.au
(D) 440 LISTED ENTITIES TO BE REVIEWED BY ASIC
On 4 August 2003 ASIC announced details of its financial reporting surveillance program for 2003-2004.
'ASIC will review the financial reports of 440 publicly listed Australian entities for their compliance with accounting standards', ASIC Chief Accountant, Mr Greg Pound said. 'ASIC is committed to regular and comprehensive surveillance of financial reporting, and every listed entity can expect to have their financial reports reviewed at least once every four years', Mr Pound said.
ASIC will select the companies by a combination of random sample and risk-based selection, including those who receive a qualified audit report for non-compliance with an accounting standard.
(1) Continuous monitoring
The review will cover compliance with all accounting standards, but will be constantly monitored to respond to market circumstances and any indications of inappropriate reporting trends.
(2) Board and auditor accountability
The program reinforces the legal responsibility of Boards to ensure compliance with accounting standards. Performance in this area is being monitored, and blatant abuse of the requirements will be liable for enforcement action. The surveillance program will also result in an increased focus on auditor compliance.
(3) Valuation of options
ASIC has recently issued Guidelines (MR 03/147) about the way listed companies should include values of options when disclosing emolument in directors' reports. ASIC has already announced a specific review of the directors' report for all listed companies, relating to disclosure of the value of options granted to each director and each of the five highest-remunerated executive officers.
Enforcement action will be considered against companies or directors where full remuneration including option values has not been disclosed.
For further information contact:
Greg Pound
Chief
Accountant
ASIC
Tel: (03) 9280 3309
Mobile: 0413 050 353
(E) ASIC RELEASES SURVEILLANCE REPORT ON RESEARCH ANALYST INDEPENDENCE
On 22 August 2003 ASIC released the findings of its industry surveillance review examining the independence of research analysts within the investment banking industry. The review was established to consider the extent to which investment banks identify and manage 'conflicts of interest'. This issue has generated debate both domestically and overseas, primarily in the United States (US).
In conducting this project, ASIC reviewed the practices and activities of research analysts in Australia, the standards of conduct and supervision of research analysts, and the effect of current regulatory requirements.
'The review indicates that Australia is unlikely to have experienced the extent and seriousness of misconduct that occurred in the United States. This is also consistent with the position found to exist in the United Kingdom by the Financial Services Authority', ASIC Executive Director of Financial Services Regulation, Mr Ian Johnston said.
'ASIC emphasises that the review was conduced as a surveillance campaign rather than an investigation, because no breaches of the law have been detected. While none of the findings in the report are indicative of breaches of the law, ASIC cannot say that the industry is without flaw or is immune from misconduct, because its review was necessarily limited to a sample selection of entities and a limited period of time.
'However, the review has identified a number of compliance issues that require further improvement, particularly relating to the independence of research analysts and the processes for managing conflicts of interest when they are identified.
'Our findings will form the basis for our policy proposal paper on managing conflicts of interest. These policy initiatives will further support the legislative reforms introduced through the Federal Government's CLERP 9 Bill, and the statement of principles currently being prepared by the International Organization of Securities Commissions (IOSCO), of which ASIC is a member', Mr Johnston said.
(1) Surveillance methodology
In undertaking the review, ASIC has sought to determine whether conflicts of interest are being adequately identified and managed, and whether the processes and systems currently in place effectively protect the independence of the research analyst function.
The project was carried out in two stages. The first stage was a high-level review of the research practices of eight investment banks, comprising three US, three European and two Australian investment banks. Four of these entities were selected for closer examination in the second stage of the review. The review was conducted in an environment of enhanced compliance procedures, following on from the implementation of regulatory changes in the United States and internationally. The positive impact of these compliance enhancements was observed between the first and second stages of the project, but may also be attributable to ASIC's publicised campaign, proposals by the Australian Stock Exchange (ASX) and the Federal Government's CLERP 9 reform agenda. ASIC was pleased with the level of co-operation it received both from the entities it reviewed, as well as their representative associations.
(2) Report findings
The review identified some particular compliance deficiencies relating to the management and disclosure of conflicts of interest within the investment banking industry in Australia. While these deficiencies are not systemic in nature, ASIC was concerned to find that some of the entities it reviewed had failed to implement adequate conflict management procedures, and placed an unreasonable level of reliance on their staff to identify, and then manage and disclose conflicts of interests. In particular, while many of the entities reviewed had some form of conflicts management procedure, most failed to fully and effectively implement, monitor and enforce them.
ASIC's review also suggested that the industry guidelines developed by the Securities and Derivatives Industry Association (SDIA) and the Securities Institute of Australia (SIA) have not been adopted as closely as intended. ASIC considers that there is still a risk that conflicts of interest will occur and will remain unmanaged. Even if fully implemented, ASIC does not believe that these industry guidelines adequately address the deficiencies identified in this report.
'There are some clear opportunities for improving the current practices to ensure conflicts are either avoided, or in circumstances where they cannot be avoided, appropriately disclosed and effectively managed', Mr Johnston said.
It is important that any policy or regulatory changes introduced domestically are consistent with international regulations, and represent a "best practice", principles-based approach.
'ASIC will undertake extensive consultation with government, industry and other regulators* in order to develop an appropriate policy response based on the findings of this report. We anticipate that a policy proposal paper will set out high-level principles and guidance for Australian Financial Services (AFS) licensees generally about managing conflicts of interest, with more detailed guidance for providers of research reports. 'The paper will also provide guidance about what ASIC would expect of AFS licensees in complying with their obligations for managing conflicts of interest.
'The paper will address a request by the Federal Government to develop policy in response to a new conflicts management obligation on all AFS licensees that the Government proposes to introduce as part of the CLERP 9 law reform', Mr Johnston said.
ASIC expects to release the draft policy proposal paper soon after the introduction of draft legislation for CLERP 9.
* ASIC acknowledges the assistance of the market regulatory authorities, the Australian Stock Exchange, and the Sydney Futures Exchanges, as well as the relevant industry associations, the Securities Institute of Australia, the Securities and Derivatives Industry Association, the Australian Banking Association, the Investment and Financial Services Association, and the International Banks and Securities Association, in undertaking this project.
For further information
contact:
Sean Hughes
Director FSR Regulatory Operations
Telephone: 03
9280 3646
Mobile: 0411 549 026
On 21 August 2003 ASIC announced a supplementary component to its annual financial report surveillance programme. Listed companies will have their financial reports reviewed for the disclosures required by Accounting Standard AASB 1028 'Employee Entitlements', in order to identify companies that are corporate sponsors of an employee defined benefit superannuation or pension plan(s).
ASIC will then assess the company's accounting policy applied to the deficit of that plan(s), for compliance with current accounting standards.
'Corporate sponsors must report their legal obligations for any liabilities that arise from a deficit in the defined benefit superannuation plans for their employees', ASIC Chief Accountant, Mr Greg Pound said.
'ASIC is aware that some sponsors believe that companies can choose to either recognise a liability in the financial statements or make the required disclosures in the notes to the financial report, on the grounds that AASB 1028 does not specifically require recognition of such liabilities.
'However, ASIC's view is that accounting standards in general, and relevant and reliable financial reporting, require the recognition of all legal liabilities. A liability arising from a deficit of a corporate sponsored defined benefit superannuation plan should be treated the same as any other liability under current accounting standards', Mr Pound said.
ASIC expects that each company which is the corporate sponsor of an employee defined benefit superannuation or pension plan(s) to carefully assess its individual arrangements and circumstances to determine whether it has a legal obligation for any deficit of the plan(s), including any in relation to an overseas subsidiary.
A liability should be
recognised when the deficit is evidenced by :
- an actuarial review in
relation to a funding and insolvency certificate under the
SIS
regulations;
- a legal obligation arising from the plan trust deed; or
-
employment contracts or other legal arrangements that establish the
existence
and amount of a liability.
In other circumstances the company should assess whether there is a contingent liability that needs to be disclosed. In some cases a company with a deficit in a plan will not need to recognise a liability if the specific circumstances surrounding the relationship of the company and the plan, and any legislative requirements, do not create a liability to the company.
'AASB 1028 requires disclosure of the accounting policy applied - so, if a company believes that it does not have a legal liability which should be recognised in its financial statements for a deficit in a plan, the reasons for this accounting policy and for the company not recognising the deficit must be disclosed', Mr Pound said.
'If disclosure under AASB 1028 is not clear about the specific circumstances for the accounting policy applied, or if it suggests that a legal liability has not been recognised, ASIC may seek further information from the company', Mr Pound said.
'Companies should be aware that if an issue is not satisfactorily resolved as a result of further ASIC enquiries, ASIC may take enforcement action', Mr Pound said.
ASIC's announcement is an elaboration of the announcement by ASIC in April 2003. At that time ASIC stated that in conjunction with Corporate Superannuation Association Inc (CSA), it would survey CSA members in relation to financial reporting related matters by sponsoring corporate employers.
The results of the survey
can be found at www.asic.gov.au.
For further information contact:
Greg Pound
Chief
Accountant
Telephone: 03 9280 3309
Mobile: 0413 050 353
3. RECENT
TAKEOVERS PANEL MATTERS
(A) RESOLUTION OF PROCEEDINGS RELATING TO BREAKFREE LIMITED
On 14 August 2003 the Takeovers Panel advised that the proceedings (the proceedings) arising from the application (the Application) made by S8 Limited (S8) on 11 July 2003 in relation to the affairs of BreakFree Limited (BreakFree) have been resolved. The Proceedings were resolved following the termination by BreakFree on 12 August 2003 of certain agreements as contemplated by undertakings voluntarily provided by it to the Panel.
(1) Allegations concerning the Franchising Transactions
(a) The Franchising Transactions
S8 alleged that BreakFree's entry into certain sale and franchise transactions (the Franchising Transactions) amounted to unacceptable circumstances in accordance with the Panel's frustrating action guidance note because they could frustrate S8's announced takeover bid for BreakFree (S8 Bid).
The Franchising Transactions involved the sale by BreakFree of the management rights (Management Rights) to four of the holiday properties under its management. Each of the sales was subject to a condition precedent that the purchasers (the Franchisees) enter into a franchise agreement (together the Franchise Agreements) with BreakFree in relation to the Management Rights so that the relevant properties would continue to be operated under a BreakFree franchise.
After considering a number of submissions from the parties, the Panel decided that the following aspects of the Franchising Transactions required further investigation before the Proceedings could be determined:
(i) BreakFree's intention to include a right in the Franchise Agreements (which were still being negotiated during the Proceedings) which could result in the Management Rights being alienated by BreakFree without it retaining the benefit of the Franchise Agreements if the S8 Bid succeeded. BreakFree submitted to the Panel that the value of the Franchise Agreements had been a factor in determining the sale price for the Management Rights; and
(ii) the question of whether the Franchising Transactions were entered into in the ordinary course of BreakFree's business, and were arms length transactions.
The Panel requested that the parties provide it with further additional information in relation to these aspects.
(b) The resolution of the proceedings
Whilst indicating that it could, and would (if necessary), provide the additional information requested by the Panel, BreakFree responded by making a proposal which it believed would remove the need for further investigation of the matters identified by the Panel. BreakFree's proposal (which was provided voluntarily) was that it would provide undertakings to the Panel to use its best endeavours to terminate the Franchising Transactions within a timeframe set by the Panel.
BreakFree advised the Panel that it was proposing the resolution because of the additional time, costs and resources that would be required if the Proceedings were to continue, particularly in order to provide the additional information requested by the Panel. BreakFree was also concerned about the fact that the Panel's request for further information could result in the provision of confidential information of BreakFree to S8 (which is a competitor of BreakFree).
The Panel decided that if the Franchising Transactions were terminated there would be no need for it to conduct any further investigation, or to obtain any further information from the parties. Therefore, the Panel accepted the undertakings volunteered by BreakFree.
As contemplated by the undertakings, BreakFree terminated the Franchising Transactions (without any liability to, or obligation of, BreakFree arising as a result of those terminations) on 12 August 2003.
(2) Other allegations in the proceedings
The Panel decided that if there were any misleading aspects of BreakFree's announcements in relation to the properties under its management, they were resolved by BreakFree's ASX announcement of 18 July 2003.
The Panel did not conduct proceedings in relation to the allegations made by S8 concerning the acquisition of certain shares in BreakFree.
(3) Conclusion of the proceedings
In concluding this matter, the sitting Panel stressed the need for transactions which are entered into in the context of a takeover bid to comply with the letter and spirit of relevant Panel policies and to be fully and promptly disclosed to the market.
The Panel concluded the proceedings on the basis set out above. The Panel will post its full reasons for this decision on its website at http://www.takeovers.gov.au/ when they have been settled.
The sitting Panel for the proceedings was Kathleen Farrell (sitting President), Peter Cameron (sitting deputy President) and Meredith Hellicar.
(B) PANEL DECLINES APPLICATION FOR A DECLARATION OF UNACCEPTABLE CIRCUMSTANCES IN RELATION TO POWERTEL LTD (NO 3)
On 8 August 2003 the Takeovers Panel declined the application by the Roslyndale syndicate for a declaration of unacceptable circumstances and orders regarding the current bid by TVG for all of the ordinary shares in PowerTel Ltd.
PowerTel has two major shareholders, WilTel Communications Group (WilTel) and DownTown Utilities (DTU). WilTel holds 33% of the ordinary shares and also holds preference shares which WilTel may convert into ordinary shares, after which WilTel would hold 47% of the ordinary shares. WilTel is also owed $24 million by PowerTel. DTU holds 35% of the issued ordinary shares.
(1) TVG's Bid for PowerTel
On 3 July 2003, TVG Consolidation Holdings SPRL (TVG) made a bid to acquire all of the ordinary shares in PowerTel for 3.85 cents each. On Friday 25 July, the bid was conditional on TVG receiving 47% acceptances and on WilTel converting its preference shares into ordinary shares and selling the debt owed to it by PowerTel to TVG for $1 (the Debt Condition).
On 25 July, WilTel made an irrevocable offer to PowerTel to release the debt for a payment of $10 million by PowerTel to WilTel, on condition that TVG waive the Debt Condition and accelerate payment for acceptances under the bid. On 26 July, TVG waived the Debt Condition and announced that it would accelerate payment for acceptances.
(2) Roslyndale's application
The application related to the effect on TVG's bid of the waiver of the Debt Condition. Roslyndale argued that by waiving the condition, TVG gave WilTel a benefit which was not offered or given to any other holder of ordinary shares in TVG, and which was likely to induce WilTel to accept its bid, leading to unacceptable circumstances.
Roslyndale's application was based on the submission that the waiver was a breach of section 623 of the Corporations Act. That section relevantly prohibits a bidder from giving a benefit to some offeree shareholders and not to all of them, if the benefit is likely to induce the offeree shareholders to whom it is given to accept the bid.
Whether or not such a breach occurred, it could have led to unacceptable circumstances, if offeree shareholders did not all have an opportunity to share in a benefit which TVG gave to WilTel in connection with its bid, contrary to the principle in paragraph 602(c) of the Corporations Act, that all holders of shares in the class for which a takeover bid is made should have reasonable and equal opportunities to participate in the benefits received under the bid by any shareholder in that class.
(3) The decision
The Panel rejected a central part of these submissions, namely that the waiver resulted in WilTel receiving a benefit which was not available to other ordinary shareholders. Roslyndale submitted that the waiver of the condition was a benefit to WilTel, because it enabled WilTel to accept TVG's bid for its shares in PowerTel, without prejudicing its ability to deal with its other assets (relevantly, the debt owed by PowerTel to WilTel). Because there was no condition affecting any other shareholder in a similar way, no other shareholder was given a comparable benefit.
The Panel decided that that for a shareholder to be able to accept the bid for their shares and also deal with their other assets is a benefit which WilTel shares with all other ordinary shareholders in PowerTel (if it is properly a benefit at all), because the terms of the bid do not restrain any other shareholder from dealing with their assets other than PowerTel shares.
Rather than giving WilTel a benefit, the waiver in effect removed a detriment which TVG's original bid had sought to impose on WilTel, restoring equality between WilTel and all other shareholders in accessing the benefits under the bid.
(4) The price of the debt
The Panel also considered whether WilTel would receive a benefit in which other shareholders could not share if, as seems likely, the successful close of the bid would be followed by the repayment of the WilTel debt for $10 million. Roslyndale did not submit that the WilTel debt was worth less than $10 million, or that TVG had offered or agreed to give WilTel a benefit by arranging for PowerTel to buy the debt for $10 million. Other parties provided evidence that the value of the debt, in a transaction such as TVG's bid, is not less than $10 million.
In reliance on that evidence, the Panel decided that there was no basis for a conclusion that even if the WilTel debt was repaid for $10 million, WilTel would receive a net benefit in which other shareholders cannot share ie that the $10 million WilTel would receive for the debt would exceed the value of the debt accepted by the parties.
The sitting Panel was Teresa Handicott (sitting President), Chris Photakis (sitting Deputy President) and Carol Buys.
4. RECENT
CORPORATE LAW DECISIONS
(A) EXTENDING LIMITATION PERIOD FOR RECOVERY OF PREFERENCES
(By Charlie Grover, Mallesons Stephen Jaques)
Greig & Duff as Liquidators of Australian Building Industries P/L (in liq) v Australian Building Industries P/L (in liq); Greig & Duff as Liquidators of Australian Building Industries P/L (in liq) v Stramit Corporation P/L [2003] QCA 298, Supreme Court of Queensland, Court of Appeal, Williams and Jerrard JJA and Fryberg J, 18 July 2003
The full text of the judgment is available at http://cclsr.law.unimelb.edu.au/judgments/states/qld/2003/july/2003qca298.htm
(1) Introduction
Greig and Duff were liquidators of Australian Building Industries Pty Ltd (ABI). Stramit Corporation Pty Ltd (Stramit) was a significant supplier of ABI. The liquidators claimed that ABI had made preferential payments to Stramit in 1997, and sought to recover $1,426,655.72 from Stramit pursuant to section 558FF of the Corporations Law. However, the statutory limit of 3 years within which preferential payments could be recovered under section 588FF(3) had expired by the time the liquidators instituted the proceedings.
(2) Background
This case effectively concerned three appeals - one by the liquidators and two by Stramit.
On 7 September 2000, Mullins J granted the liquidators an ex-parte order to extend time within which application may be brought (to 11 September 2001). On Stramit's application, this order was set aside by Chesterman J on 16 May 2002 "in so far as it applies to Stramit Corporation Ltd" on the ground of denial of natural justice, since Stramit had not been given notice of the proceedings. The liquidators appealed to the full court, seeking to effectively reinstate Mullins J's order (Appeal 1).
The liquidators successfully sought orders joining Stramit to the proceedings which extended the time within which an application under section 588FF(1) could be brought, and a consequential order extending time for commencing proceedings against Stramit pursuant to section 588(3)(b). Stramit appealed to the full court (Appeal 2).
On 10 September 2001 the liquidators commenced an action pursuant to section 588FF(1) to recover ABI's alleged preference payments to Stramit. On 23 May 2002, Stramit applied to summarily dismiss the claim. Mullins J dismissed Stramit's application, from which Stramit appealed to the full court (Appeal 3).
(3) The decision
(a) Appeal 1
Failure to give notice - mere procedural irregularity?
The liquidators argued that
section 1322(2) of the Corporations Act (then the Corporations Law) cured the
procedural irregularity of failing to give notice. There was no substantial
injustice caused by the order extending time which could not be remedied by the
court. The full court held that:
"there is more than a mere procedural
irregularity where a party has been denied a hearing. But even if denying an
affected party a right to be heard does constitute a "procedural irregularity"
for the purposes of s1322, then the authorities referred to [Cameron v Cole and
Craig v Kanssen] would clearly establish that such irregularity had caused
"substantial injustice".
No loss of existing vested rights?
The liquidators also argued that Stramit did not lose any vested right (as a result of the order extending the limitation period) until an action was actually brought (therefore there was no denial of natural justice). The full court held that Stramit's existing right to rely on the limitation period defence was lost once the order extending time was effective.
Which creditors must be given notice?
The liquidators argued that it is inequitable to give notice only to creditors who have been sufficiently identified. If notice is required at all, it should be given to all creditors from whom recovery might be sought, which would be impracticable. Therefore, in fairness, no notice should be given to anyone. The full court held that any creditor sued outside the 3 year limitation period must have been made a party to the application for an order extending time.
Undue delay?
The liquidators argued that the court should not exercise its discretion to set aside Mullins J's order extending time because Stramit had unduly delayed its application. The full court held that delay is not a bar to setting aside an order in the absence of due notice, or where the person affected by the order was not given a reasonable opportunity to appear and present his case.
Other exemption pursuant to section 588FF(3)?
Williams JA (in dicta) and Jerrard JA found that section 588FF(3) does not authorise ex parte applications without any identification of persons against whom an application may ultimately be made for an order in section 588FF(1)(a)-(j). Therefore, at least as a general rule, the court has no power to grant a blanket exemption of time pursuant to section 588FF(3) on an ex parte application.
(b) Second Appeal
Section 81 of the Supreme Court of Queensland Act 1991 No. 68 (Qld) provides that a new party may be added to the proceedings despite the expired limitation period. The full court distinguished between an application to amend an existing cause of action commenced within the time limit, by adding new causes of action against an existing defendant, and an application to amend an application for an extension of time to add a new party outside of three year time period. The latter type of amendment (as in the present case) was held to be outside the scope of section 81. The full court also held that there is no general power to make an order extending time limit under section 588FF(3) relying on section 1322(4)(d) of the Corporations Act.
(c) Third appeal
Since the liquidators ultimately were unable to extend the time, Stramit had a valid (limitation period) defence to recovery of preferential payments and was given a judgment in its favour.
(B) EFFECT ON TRUSTS OF LIQUIDATION OF TRUSTEE COMPANIES AND CLAIMS BY PERSONS CLAIMING TO BE TRUSTEES
(By David Felman, Freehills)
Chalker v Barwon Coast Committee of Management Incorporated and the State of Victoria [2003] VSC 286, Supreme Court of Victoria, Gillard, J, 7 August 2003
The full text of the judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/vic/2003/august/2003vsc286.htm or http://cclsr.law.unimelb.edu.au/judgments/
(1) Introduction
This was an appeal from a Master of the Court, who on 2 April 2003, ordered that the proceeding be forever stayed on the ground that the proceeding was brought by plaintiffs who had no authority or capacity to bring the proceeding.
(2) Facts
In 1994, the plaintiffs, Messrs Chalker, were interested in leasing premises from Barwon Coast Committee of Management (the "first defendant") and the State of Victoria (the "second defendant") to conduct a restaurant on the foreshore at Ocean Grove.
Mr Chalker Senior established a unit trust as the vehicle to lease the premises and operate the business. On 26 August 1994, a deed was executed by a company called Chalky's on the Dunes Pty Ltd ("Unit Trust Trustee") as trustee of the Chalky's in the Dunes Unit Trust ("Unit Trust"). Caveron Pty Ltd also executed the deed in its capacity as trustee of the Chalker Family Trust. Caveron Pty Ltd, in its capacity as trustee of the Chalker Family Trust, held all the units in the Unit Trust. The Chalker Family Trust was a typical discretionary family trust. The plaintiffs were discretionary beneficiaries.
The Unit Trust Trustee executed the lease. However, by April 1996, there was a dispute with the landlord and rent was in arrears. In April 1996, a notice to quit was served on the Unit Trust Trustee and the lease was terminated. On 22 July 1996, an administrator was appointed to the Unit Trust Trustee and on 22 August 1996, a liquidator was appointed. The company was de-registered on 22 November 2000 pursuant to the Corporations Law.
On 29 January 2001, the plaintiffs, Messrs Chalker, instituted proceedings against the defendants. They purported to bring the proceedings on their own behalf and also as trustees on behalf of the Unit Trust. Subsequently, they abandoned the claim in their own name. It was common ground between the parties that Messrs Chalker were not the trustees of the Unit Trust on 29 January 2001.
On 23 December 2002, a meeting was held of Caveron Pty Ltd which claimed to be the sole unit holder and beneficiary of the unit trust. It resolved to appoint the two plaintiffs as trustees of the Unit Trust. In addition, the plaintiffs in their capacity as the new trustees of the Unit Trust purported to ratify the proceedings.
(3) The defendants' contention
The defendants contended that at the time when the proceeding was instituted, the plaintiffs were not trustees of the Unit Trust, were not authorised by the Unit Trust or its trustees to bring the proceeding and therefore lacked capacity to do so. Accordingly, the defendants argued that the proceeding was a nullity and any purported ratification was ineffective.
(4) Who was the trustee of the Unit Trust?
Gillard J analysed who was the trustee of the Unit Trust at the following relevant dates.
(a) At the inception of the lease
His Honour found that Chalky's on the Dunes Pty Ltd was trustee of the trust from its inception and it entered into the lease.
(b) Upon appointment of the liquidator
Gillard J then analysed what effect, if any, the appointments of the administrator and subsequently the liquidator, had upon the trustee. In particular, the Court was concerned with the effect on the legal estate held by the trustee on behalf of the Unit Trust.
Clause 19.2 of the Trust Deed provided that:
"If the Trustee goes into liquidation or ceases to carry on business… the Trustee shall forthwith give notice in writing to all Unit holders of that entry into liquidation… and shall convene a meeting of unit holders. The Trustee shall be deemed to have resigned effective on that date of such liquidation… and by Special Resolution at a meeting of Unit holders a new Trustee shall be appointed."
The plaintiffs argued, based on clause 19.2 of the Trust Deed, that the Trustee was deemed to have resigned upon the appointment of the liquidator. Gillard J rejected this argument. His Honour held that clause 19.2 "provides the machinery whereby a trustee is deemed to have resigned but only after notice is given and a meeting of unit holders by special resolution has appointed a new trustee". On the facts, the Unit Trust Trustee had not given notice to the unit holder, nor did it convene a meeting of unit holders. Accordingly, the Unit Trust Trustee was not removed and no new trustee was appointed upon the appointment of the liquidator. Gillard J concluded that the Unit Trust Trustee remained the owner of the legal estate which it held for the benefit of the Unit Trust.
(c) On de-registration of the Unit Trust Trustee
ASIC de-registered the company on 22 November 2000 pursuant to section 509 of the Corporations Law. By reason of section 601AD of the Corporations Law, on de-registration all the company's property vests in the Australian Securities and Investments Commission (ASIC). Under sub-section (3), ASIC takes only the same property rights that the company itself held. If the company held particular property subject to a security or other interest or claim, ASIC takes the property subject to that interest or claim.
Gillard J therefore concluded that the legal estate held by the Unit Trust Trustee company prior to its de-registration was held thereafter by ASIC. No application was made to the court to appoint a new trustee and no steps were taken pursuant to the Unit Trust Deed to appoint a new trustee. Accordingly, at the date of issue of the writ, being 21 January 2001, ASIC held the legal estate of the Unit Trust for the benefit of the beneficiary under the Unit Trust Deed. The only property comprised in the legal estate was the cause of action (if any) which the Unit Trust Trustee had on behalf of the Unit Trust against the defendants.
Gillard J concluded that neither plaintiff was the trustee of the Unit Trust when the proceeding was commenced. They had no right to bring the proceeding. In short, two persons who were neither a beneficiary nor a trustee of the Unit Trust had purported to bring a proceeding in their own name as trustees when there was a trustee who held the legal estate.
His Honour distinguished this case from cases involving a proceeding brought in the name of a trustee without authority. In addition, his Honour felt that the present case was not one where the trustee refuses to bring the proceeding.
(5) Was ratification available?
The plaintiff relied upon the principles of ratification. However, Gillard J rejected this argument. His Honour noted that the principle applies where a writ is issued without authority and the nominal plaintiff adopts the writ or ratifies its issue. Here, the nominal plaintiffs did not have a cause of action. The proceeding was brought by persons alleging they were the holders of the legal estate. However, on no view were the plaintiffs the holder of the legal estate. The trustee at the time, ASIC, was not a party, was unaware of the proceeding and did not ratify anything.
In conclusion, Gillard J was of the view that the plaintiffs never had any authority or capacity to bring the proceeding against the defendants either in their personal capacity or as trustees of the Unit Trust. The proceeding was a nullity from the beginning and could not be cured.
(C) DIRECTORS' DUTIES - FIDUCIARY DUTIES AND DERIVATIVE PROCEEDINGS
(By Ann Blake, Articled Clerk, Freehills)
Charlton v Baber [2003] NSWSC 745, New South Wales Supreme Court, Barrett J, 15 August 2003
The full text of the judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2003/august/2003nswsc745.htm or http://cclsr.law.unimelb.edu.au/judgments/
(1) Facts
Mr Charlton and Mr Baber were founding directors of Newcastle Auto Air Pty Limited ("NAA"). Each held 50% of the issued share capital. Mr Charlton later ceased to be a director but remained a shareholder while Mr Baber continued as the sole director of the company. NAA encountered financial difficulties and entered into voluntary administration under Part 5.3A of the Corporations Ac