Bulletin No 73, September 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
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The Australian Stock Exchange (http://www.asx.com.au)

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CONTENTS

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) Company directors' survey of ASX corporate governance guidelines
(B) Getting value from AGMs
(C) Release share register only for a proper purpose
(D) CEO turnover study
(E) Government's response to the recommendations of the HIH Royal Commission
(F) 2003 US board of directors governance and remuneration survey
(G) Rehabilitating large and complex enterprises in financial difficulties
(H) Dividend reinvestment plans continue to grow
(I) FSA proposals for cross-border financial services shopping from home
(J) Review of the Insurance Contracts Act
(K) Audit committee key to investor confidence
(L) Trends in corporate responsibility
(M) FSA proposes new financial rules for life insurers
(N) New fraud and planning auditing standards approved for exposure
(O) New Zealand Exchange releases final corporate governance submission
(P) New code of banking practice released

2. RECENT ASIC DEVELOPMENTS

(A) New policy on takeover relief
(B) Discretionary powers - wholesale foreign financial services providers
(C) Reporting requirements for AFS licensees who are individuals
(D) Court rules National Exchange offer is misleading and deceptive
(E) ASIC issues draft section 1013DA 'SRI' guidelines
(F) National wealth management company to pay 235,000 investors $67.2 million compensation

3. RECENT ASX DEVELOPMENTS

(A) ASX and Shenzhen Stock Exchange sign MOU
(B) ASIC releases first ASX assessment

4. RECENT TAKEOVERS PANEL MATTERS

(A) Panel refuses AuIron Energy application
(B) Medium neutral citation system
(C) Breakfree 02 - Panel affirms ASIC decision

5. RECENT CORPORATE LAW DECISIONS

(A) National Exchange offer misleading and deceptive
(B) Does the principle in Re Londonderry's Settlements apply to superannuation schemes?
(C) What is a demand arising otherwise than by a contract for the purposes of bankruptcy?
(D) Voidable transactions and section 588FF: "satisfaction" requires examination of FACTS
(E) Cheques - proper endorsement or conversion?
(F) The grant of relief under section 1322(4) of the Corporations Act
(G) Further guidance on statutory derivative actions
(H) Stamp duty payable on in specie distributions upon winding up
(I) Supervision of administrators
(J) Voidable preference payments
(K) Determining who is the appropriate person to carry out the winding up of an unregistered managed investment scheme
(L) The limits of shareholder power
(M) Privilege against exposure to a penalty

6. RECENT CORPORATE LAW JOURNAL ARTICLES

7. CONTRIBUTIONS

8. MEMBERSHIP AND SIGN-OFF

9. DISCLAIMER

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS

(A) COMPANY DIRECTORS' SURVEY OF ASX CORPORATE GOVERNANCE GUIDELINES

On 25 September 2003, the Australian Institute of Company Directors ("AICD") published the results of a survey of the directors of Australia's 1,500 publicly-listed companies. The survey reveals that boards are willing to adapt to the new world of corporate governance reporting introduced by the ASX Corporate Governance Council's Corporate Governance Guidelines and Best Practice Recommendations.

While accepting the guidelines, the survey highlights the concerns of directors over some elements. Firstly, there needs to be greater education for both companies and investors that it is totally acceptable for companies to explain why they do not follow some of the recommendations. Sixty-two per cent of respondents believe an explanation of "non-compliance" may discourage potential investors, so it is essential that investors understand that an explanation is compliance with the guidelines.

Secondly, directors believe the definition of "independence" found in the guidelines needs to be refined as only 27 per cent believe the definition "adds value" in its current form. Forty-three per cent of respondents currently comply with the recommendation of a majority of "independent" directors on the board, 11 per cent stated they will change the make up of their board while 46 per cent prefer to explain why they do not comply.

The survey highlights confusion among directors regarding what they specifically need to comply with, with many directors confused as to the difference between recommendations, commentary and guidance notes. Seventy-nine per cent of respondents are concerned that compliance with the commentary and guidance notes will be expected.

Finally, the survey points to the need for a longer transition period for small to medium-sized businesses, businesses which will experience the most difficulty in adopting the guidelines. Only 44 per cent of respondents intend to adopt the guidelines in the current reporting year.

Chief Executive Officer of AICD, John Hall, said it is encouraging that company directors are recognising the importance of the guidelines and have illustrated their commitment to them. The results of the survey will be provided to the Implementation Review Group, established by the ASX Corporate Governance Council to review and refine the guidelines.

A full copy of the survey results is available on the AICD's website at
http://www.companydirectors.com.au/index.html

(B) GETTING VALUE FROM AGMS

On 23 September 2003, the Business Council of Australia released a new Code of Conduct for annual general meetings. BCA President, Dr John Schubert, said the Code, developed by the BCA's Chairmen's Panel, is designed to increase the value of AGMs for shareholders, Boards and management.

"The annual general meeting is an important element of corporate governance and the main opportunity each year for ordinary shareholders to comment and question the Board and management of their companies.

"The new Code of Conduct will improve the efficiency of those meetings and increase the opportunity for all shareholders to speak, by providing a process to ensure that shareholders are considerate of each other's right to participate," he said.

The Code has been developed with initial input from BHP Billiton and in consultation with the Australian Shareholders' Association. The BCA has now written to the Chairmen of the top 50 companies in Australia, encouraging them to adopt the Code for their company AGMs.

"We believe that wide adoption of the Code will demonstrate business's commitment to the full participation of shareholders in effective and meaningful AGMs, while at the same time setting a standard for managing those that would seek to disrupt the meetings," said Dr Schubert.

The Code is available on the BCA website at http://www.bca.com.au

(C) RELEASE SHARE REGISTER ONLY FOR A PROPER PURPOSE

Chartered Secretaries Australia (CSA) has urged the government to amend current legislation so that it would require the request for a release of a company's share register to meet a proper purpose test.

Following successful proceedings recently brought by the Australian Securities and Investment Commission (ASIC) against National Exchange, Richard Jones, Chairman of Chartered Secretaries Australia's (CSA) National Legislation Review Committee, says issues of privacy within shareholder registries must be further tightened now to prevent anymore share market 'bottom feeders' preying on nervous shareholders.

"What we need is legislation that gets to the core of the problem. Significant concerns exist in relation to access to share registers and communication with shareholders. At the moment anyone can ask for the share register and a company has to supply it. That effectively denies shareholders the privacy rights they would have as a consumer," said Mr Jones.

The law as it stands requires companies to give anyone access to their share registers. The only control on the use of the information is that it be used for matters related to shareholders. Companies cannot refuse access even if they believe the use would be to support unethical or unfair practices. "This is a fundamental flaw, and it allows schemes such as those of National Exchange to continue. Companies have no alternative but to write to shareholders outlining the true position, often at considerable cost. The law needs to be changed to give companies the power to reject requests for access to their registers if those requesting access cannot satisfy the company that the request meets a proper purpose test."

ASIC needs to develop guidelines, or a definition, for a proper purpose test in this instance to assist companies.

For further information contact:
Mr Richard Jones
Chartered Secretaries Australia
Telephone: 03 8641 0296

The recent case between ASIC and National Exchange is reviewed in Item 5A of this Bulletin.

(D) CEO TURNOVER STUDY

New Australian findings in a study by international management consulting firm Booz Allen Hamilton, released on 17 September 2003, reveal that CEO turnover in Australia is higher than the global rate and the average tenure of Australian CEO's is almost half that of their global peers.

Booz Allen Hamilton conducted the Australian arm of the global study in a joint initiative with the Business Council of Australia (BCA) to analyse CEO turnover in Australia's largest enterprises.

The study found that the average tenure for CEO's leaving office forced or otherwise, in Australia in 2002 was 4.4 years, down from 5.8 years in 2001 and half the global average of 8.6 years. Australian CEO's have just two years to achieve results or face an increased risk of being fired within the next two years.

Among the study's findings:

· CEO turnover in Australia is higher than the global rate (Australia 16.8% versus 10.1% globally).
· In Australia CEO turnover related to mergers and acquisition is higher than the global average (Australia 21% versus 14% globally) influenced by the strength of the Australian economy.
· Succession from within the company continues to be the primary source of CEO talent in Australia and similar to global trends, Australia saw a number of high profile younger CEO's exit.
· CEO's hired from outside the company are more polarised in their performance, with returns to shareholders much stronger in the first half of the CEO's tenure than the second.
· Financial Services is the safest sector for CEO's in Australia - similar to global trends.

Some key messages emerged from the study:

· It is critical for CEO's to define their strategy quickly and base it on realistic performance targets and an appropriate horizon for delivery.
· It is sustaining change and persistently exceeding the market's expectations that will continue to be the hallmark of all enduring CEO's.
· Leadership style, individual skills and personality of a CEO remain central to the company's ability to achieve alignment and successfully drive change.
· CEO's need to actively engage boards and communicate their strategic plans, to ensure directors understand the complexities involved in executing change.
· CEO's need to reflect jointly with their boards how to create a success story, and learn how to monitor the effectiveness of their working relationship.

Mr John Schubert, President of the BCA, said that the study flagged important messages for Australian companies, investors and the market generally.

"The study underlines the fact that our top executives must meet a growing and increasingly complex range of performance expectations within the context of having a far shorter tenure than their global peers," he said.

"It also highlights a worrying trend that our markets have an increasingly focus on short-term outcomes from CEO's as opposed to their capacity to deliver longer-term strategies of value creation."

The study is available on the BCA website at http://www.bca.com.au

(E) GOVERNMENT'S RESPONSE TO THE RECOMMENDATIONS OF THE HIH ROYAL COMMISSION

The report of the HIH Royal Commission into the failure of the HIH Insurance Group was released on 16 April 2003. Since that time, the Government has implemented an enhanced governance structure for the Australian Prudential Regulation Authority (APRA) and appointed three new APRA members from 1 July 2003.

The Government has also referred 56 possible breaches of the law to the relevant agencies and committed funding of $42 million to ensure the efficient investigation and prosecution of any civil or criminal charges arising from the collapse of HIH.

On 12 September 2003, the Treasurer announced the Government's final response to the findings of the Royal Commission. The Royal Commissioner made 61 policy recommendations. A summary of Government's response to the recommendations is included here. Some of the recommendations fall under the responsibility of various independent bodies such as APRA, the Australian Stock Exchange and the Australian Accounting Standards Board.

The Treasurer has referred the relevant recommendations to those bodies and asked them to carefully consider Justice Owen's recommendations and advise him of their response. Justice Owen also made a number of recommendations that deal with State and Territory regulation and taxation of general insurance. The Treasurer has written to the States and Territories encouraging them to carefully consider the recommendations of the report and to take appropriate action.

Justice Owen recommended that the Commonwealth Government extend prudential regulation to all discretionary insurance-like products. In addition, Justice Owen referred to insurance cover underwritten offshore, although he made no specific recommendation in this respect. Some level of insurance cover in the Australian market is currently provided by discretionary mutual funds (DMFs) and direct offshore foreign insurers (DOFIs). However, these entities are not subject to the same level of prudential regulation by APRA as Australian authorised insurers.

To inform its consideration of the appropriate regulatory framework for DMFs and DOFIs, the Government is commissioning a review to examine the extent and nature of cover provided by DMFs and DOFIs.

The review will be headed by Mr Gary Potts, former Executive Director of Markets Group, Department of the Treasury. The review will be taking submissions and details of the review, including the terms of reference, are available on the Treasury website.

Recommendation 61 of the report proposed that the Commonwealth Government introduce a scheme to support policyholders of insurance companies in the event of the failure of any such company. The appropriateness of government intervention following financial institution collapses should be considered in terms of its possible financial system-wide impacts and consequences for the design of the regulatory framework. These are complex matters. Moreover, the precise design of any guarantee, its incentive properties and its associated financial costs warrant close consideration.

With this in mind, the Government is commissioning a comprehensive study to examine these issues. Professor Kevin Davis, Professor of Finance at The University of Melbourne, has agreed to lead the study. Following the completion of the study, Treasury will undertake a public consultation process on possible policy options. The details of the study, including the proposed process and terms of reference are available on the Treasury website.

The Commission made a number of recommendations relating to corporate governance and financial reporting. Some of these recommendations will be implemented in the CLERP 9 draft legislation which is intended to be released for public comment in October this year.

The terms of reference for the review of discretionary mutual funds and direct offshore foreign insurers and further information about the review are available at http://dmfreview.treasury.gov.au

The terms of reference for the study of financial system guarantees and further information about the study are available at http://fsgstudy.treasury.gov.au/content/default.asp

(F) 2003 US BOARD OF DIRECTORS GOVERNANCE AND REMUNERATION SURVEY

A new survey has examined trends in operational and remuneration practices of boards of directors of large US companies. Buck Consultants has released its survey of 166 US companies with median revenue of US$1.1 billion.

In relation to board and committee practices, the survey found: 46% had recently restructured their committee membership with another 16% considering doing this; 42% had recently sought new board members with specific expertise with another 24% considering doing this; 43% had recently hired outside/independent consultants to assist the board with another 11% considering doing this; 39% had recently increased the number of meetings for committees of the board with another 11% considering doing this; 33% had recently implemented holding meetings without management present with another 14% considered doing this; 18% had recently implemented providing director education with another 17% considering doing this; and 8% had recently implemented increasing the number of meetings for full board with another 9% considering doing this.

Interlocking boards (where an executive of A serves on the board of company B, and an executive of B serves on the board of company A) have declined significantly, with only 10% of the companies surveyed indicating any remaining interlocks.

The combined role of Chairman of the Board and CEO remains common in US companies. Only 28% of the companies surveyed have a non-employee chairman although this is a reduction.

While a formal evaluation of non-executive board members is considered good practice, only 17% of the companies surveyed conducted them and, of those, only 7% actually tie pay to the performance evaluation's results.

In relation to 2003 remuneration practices, payment of cash retainers for directors remains the most prevalent form of compensation, with 91% of respondents paying them. Of the companies that pay retainers, 76% pay the entire retainer in cash, while others pay retainers in varying combinations of cash, equity and stock options. In relation to the median annual cash retainer, for companies with annual revenues greater than $US10 billion the median annual cash retainer was $US50,000, for companies with annual revenues between $1 billion and $10 billion, the retainer was $35,000, for companies with annual revenues between $500 million and $1 billion, the retainer was $30,000, for companies with annual revenues between $100 million and $500 million, the retainer was $20,000 and for companies with annual revenues less than $100 million, the retainer was $17,500. 69% of companies pay directors a per-meeting fee on top of the annual retainer (typically in the range of $1,000 to $1,500 per meeting).

The use of stock options remains a popular form of remuneration with the number of stock options granted to directors upon their initial election to the board tending to be inversely proportional to the company's size. The smallest companies in the study granted a median of 25,000 options while the largest companies granted 15,000 options. The number of stock options granted annually to directors ranged from 3,000 to 10,000 (with smaller companies offering more options).

A key finding is that equity remuneration, even during a weak stock market, still provides at least half of most directors' total remuneration. The value of annual grants ranges from $43,000 to $65,500 (using the Black-Scholes valuation model).

In relation to total remuneration, the median total remuneration paid to directors in 2003 ranges from $72,500 for companies with revenues between $100 million and $500 million to $127,900 for companies with revenues of more than $10 billion.

Further details of the study are on the Buck Consultants website at http://www.buckconsultants.com/

(G) REHABILITATING LARGE AND COMPLEX ENTERPRISES IN FINANCIAL DIFFICULTIES

On 12 September 2003, the Corporations and Markets Advisory Committee published a Discussion Paper on rehabilitating large and complex enterprises in financial difficulties.

This Paper was developed in response to a request from the Parliamentary Secretary to the Treasurer, Senator the Hon Ian Campbell, to consider whether the Australian voluntary administration (VA) provisions, in force since 1993, are suitable for handling the rehabilitation of large and complex enterprises. The issues the Senator asked the Committee to consider include:

· possible changes to the VA provisions to better accommodate large corporate recovery cases;
· possible changes to the scheme of arrangement provisions to accommodate these cases; and
· whether a new system for corporate recovery, along the lines of Chapter 11 of the United States Bankruptcy Code, should be adopted.

In releasing the Paper, the Convenor of the Advisory Committee, Richard St John, said:

"The financial failure of any company can have severe repercussions for its creditors, employees, suppliers, customers and shareholders. Processes that allow the prospects of recovery to be fully explored stand to benefit all these parties and the economy generally. This is especially the case with large and complex enterprises, where the rehabilitation challenges may be magnified."

The Discussion Paper looks at key areas that affect the likelihood of corporate recovery:

· Early remedial action. The earlier a financially distressed company responds to its financial difficulties, and enters into discussions with its major creditors; the better may be its prospects of successful rehabilitation.
· Ongoing financing. A company may have a better chance of successful recovery if it can obtain new loan or equity finance during the rehabilitation period.
· Flexible timetable. The recovery procedure timetable needs to be sufficiently flexible to adjust to the needs of particular companies.

The Paper compares the debtor?driven US Chapter 11 with the more creditor?oriented Australian VA procedure in each of these areas. Some of the key differences are:

· the US system leaves the board of directors in control while, under VA, the company is run by an external administrator.
· the rights of all creditors are frozen under the US system, whereas some creditors in Australia can enforce their rights regardless of a VA.
· the US system has special priority rules aimed at encouraging ongoing funding of a company in rehabilitation. The VA procedure is more protective of the rights of existing creditors.

The Paper also:

· Discusses recent changes in the UK that greatly restrict the rights of holders of floating charges to bypass the administration procedure by appointing a receiver over the company's assets. There is no equivalent restriction in Australia.
· Looks at issues under the current VA provisions, including:
   · whether to retain voting of creditors by number as well as by value and, if so, whether the administrator should continue to have the casting vote in the event of any deadlock between number and value;
   · whether to exempt equity?for?debt swaps from the prospectus disclosure requirements and the takeover provisions; and
   · whether there should be further provision for dealing collectively with companies in a corporate group.
· Identifies problems with using creditors' schemes of arrangement as an alternative form of corporate revival. A key problem with schemes is the continuing liability of directors for insolvent trading.

Copies of the Discussion Paper are available on the CAMAC website at http://www.camac.gov.au

The Advisory Committee invites submissions by Friday 28 November 2003.

For further information contact:
John Kluver
Executive Director
Telephone: 02 9911 2950

(H) DIVIDEND REINVESTMENT PLANS CONTINUE TO GROW

On 11 September 2003, KPMG Corporate Finance released a study showing that dividend reinvestment plans (DRPs) continued to grow in popularity in 2002-03 in Australia, raising almost 30% more capital for listed companies than the total of all Initial Public Offers.
The study found that listed companies raised $4.3 billion from dividend reinvestment plans in the year to 30 June 2003. This was 30% more than the total of $3.2 billion raised by all IPOs over the same period. Lower share prices meant the total amount raised by dividend reinvestment plans decreased slightly in 2002-03 compared to the previous year. However, DRPs grew in popularity with investors, with the number of DRP share issues increasing by 11% from 314 in 2001-02 to 350 in 2002-03.

Five year history of capital raised - DRPs versus IPOs