I OVERVIEW OF GOVERNANCE REGIME
i Sources of law, regulation and best practice relating to the governance of listed companies
Listed companies in Australia are subject to common law and statutory corporate governance obligations and the Australian Securities Exchange (ASX) Corporate Governance Council (the Council) Corporate Governance Principles and Recommendations. The statutory obligations are set out in the Corporations Act 2001 (the Corporations Act) and the Australian Securities Exchange Listing Rules (the Listing Rules).
The Corporations Act imposes specific duties on directors and officers of companies. These duties include:
- a the duty to exercise their powers and duties with the care and diligence that a reasonable person would have; and
- b the duty to exercise their powers and duties in good faith in the best interests of the company and for a proper purpose.
Decisions made by directors must be made for proper purposes and in the best interests of the company as a whole. When the company is in an ‘insolvency context’, this will require that the interests of the company’s creditors be taken into account.
ASX Listing Rules
The Listing Rules govern disclosure and other aspects of a listed entity’s conduct. Compliance with the Listing Rules is a requirement for admission to the ASX’s official list. The Listing Rules are enforceable against listed entities and their associates under the Corporations Act.
Under the Corporations Act and Listing Rules, public companies must immediately disclose all material price-sensitive information unless there is a relevant exemption (such as where the information is confidential and forms part of an ‘incomplete proposal’).
Corporate Governance Principles and Recommendations
The ASX provides guidance on corporate governance practices that should be adopted by listed entities. The guidelines are encapsulated in eight principles and 29 recommendations under the Council’s Corporate Governance Principles and Recommendations (the Principles and Recommendations). The third edition of the Principles and Recommendations took effect from 1 July 2014, and was drafted following a comprehensive review of the previous edition.
The extent to which a listed company has followed the Principles and Recommendations in a given year must be disclosed in a ‘corporate governance statement’, which may either be included in its annual report or made available online. If it has not followed a recommendation, it must identify the reasons for not doing so. This is referred to as the ‘if not, why not’ rule. Compliance with this rule is required under both the Principles and Recommendations and the Listing Rules, ensuring the market receives an appropriate level of information about a particular company’s arrangements.
The Australian Securities and Investments Commission (ASIC) is Australia’s corporate, markets and financial services regulator. ASIC is an independent Commonwealth government body established to administer the Australian Securities and Investments Commission Act 2001 and the Corporations Act.
ASIC regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. ASIC also has responsibility for the supervision of trading on Australia’s domestic licensed equity, derivatives and futures markets.
The ASX is the primary body charged with administering the Listing Rules. However, the courts have the power to enforce the Listing Rules as a result of the contract between the listed entity and the ASX and from the recognition given to the Listing Rules under the Corporations Act. Additionally, ASIC is able to issue infringement notices and fine an entity for a breach of its continuous disclosure obligations without initiating court proceedings.
II CORPORATE LEADERSHIP
i Board structure and practices
Australia has a one-tier board structure. As discussed below, there are requirements on certain companies to establish an audit committee, while the Principles and Recommendations also recommend the establishment of separate board nomination and remuneration committees.
Management of Australian companies is left to the executives. The board’s role is to supervise, oversee and offer guidance, and the board will generally only be involved through meetings that are held up to 11 times a year in a large company. The chairperson is generally non-executive and mentors the CEO and chairs board meetings. The management team reports to the CEO, who may also be a board member. The CFO is sometimes also a board member.
To reduce the risk of a board becoming entrenched, the Listing Rules require that a director of an entity must not hold office (without re-election) past the third annual general meeting following the director’s appointment or three years, whichever is longer. Additionally, a director appointed to fill a casual vacancy or as an addition to the board must not hold office (without re-election) past the next annual general meeting of the entity. This rule does not apply to the managing director (but if there is more than one managing director, only one is entitled not to be subject to re-election).
Legal responsibilities of the board
Australian corporate law does not impose any minimum business functions upon directors. To conduct the business, the board operates through the company’s executives. However, the functions of directors do go beyond general oversight because the Corporations Act and other statutes impose specific duties on directors, such as a statutory responsibility for the company’s financial statements.
Involvement of directors in takeovers
Directors of a public target must be careful to ensure that management and the directors do not breach their duties during a takeover process. The Corporations Act, Listing Rules, Takeovers Panel decisions and policy as well as the common law all limit the extent to which defensive tactics developed to deal with unwelcome takeover offers can be utilised by directors.
While there is no express duty on directors in Australia to actively conduct an auction process or otherwise seek the best price for a company in a change of control context, the directors must act in accordance with their general duties to act in the best interests of the company and avoid conflicts of interest. Furthermore, the Takeovers Panel has jurisdiction to ensure that actions taken during control transactions do not constitute ‘unacceptable circumstances’ (which may occur when a transaction is not conducted in an efficient, competitive and informed market) and has issued guidance on insider participation in control transactions. Some of the key considerations for the target’s management and directors are:
- a when to notify the board of an approach from a potential bidder;
- b when to disclose confidential due diligence information to a potential bidder;
- c whether to provide equal access to information to a rival bidder;
- d when executive directors should stand aside from negotiations; and
- e when information concerning an approach should be disclosed to shareholders and how much information should be disclosed.
Where there is potential participation from management or directors, the target board commonly adopts conflict protocols and establishes an independent committee to oversee the consideration of the transaction and will generally appoint an independent financial adviser to assist in determining recommendations.
Where a transaction involves a bidder that has a 30 per cent (or greater) stake in the target or where the target and bidder have common directors, the target board is required to obtain an independent expert’s report. Many target boards are reluctant to make a recommendation without such a report in all cases.
Target boards are not obliged to provide equal access to information to rival bidders. Accordingly, in a takeover context the target board may choose what information it discloses and to whom, provided that it acts in accordance with its fiduciary duties and in the best interests of the company.
Liability of directors
There are over 700 Commonwealth and state laws that impose liabilities upon directors. The Corporations Act provides, however, that a director or other officer of a corporation, who properly makes a valid ‘business judgement’, will be considered to have met the requirements of the statutory duty of care and diligence and its equivalent at common law. In applying the business judgement rule, Australian courts have expressed a reluctance to interfere with directors’ judgements in questions of business management.
A director must inform himself or herself to the extent he or she reasonably believes to be appropriate. This leaves it open to a director to take into account the time that is realistically available in deciding the extent to which he or she should be informed in relation to a particular decision. For example, a director could reasonably act on incomplete information if time constraints required an urgent decision and the risks of delaying that decision outweighed the risks of acting on incomplete information. Nevertheless, care and attention needs to be taken at all times. The Centro case,2 for example, considered the circumstances in which a director may rely on external advisers and an internal compliance function. In that case, non-executive directors, who did not necessarily have accounting backgrounds, were found to have breached their duties to take reasonable care and diligence in the exercise of their duties by failing to identify accounting errors missed by external auditors and the company’s internal compliance function. In another high-profile decision, James Hardie,3 it was found that the CEO (also a director) and the company secretary and general counsel had breached their duties of care and diligence as a result of the board approving the release of an inaccurate market announcement. The statement in question was found to be false and misleading, and the relevant officers were unsuccessful in arguing that they had reasonably relied on advice from external advisers.
To have the protection of the business judgement rule, the director must show that he or she rationally believed the judgement to be in the best interests of the corporation. The director’s belief that the judgement is in the best interests of the corporation is taken to be a rational one, unless the belief is one that no reasonable person in that position could hold. A belief will be rational if ‘it is supported by an arguable chain of reasoning’.
A proposed development of the scope of directors’ liabilities in Australia concerns the requisite duties of a director when a company is in an ‘insolvency context’. Under the Corporations Act, a director currently has a positive duty to prevent insolvent trading or be subject to serious penalties, ranging from orders to pay the company’s creditors for the debts involved to full civil and criminal fines. Insolvent trading is said to occur if a company incurs a debt while it is unable to pay its debts as and when they fall due. In December 2015, one of the proposals announced by the Australian government as part of its National Science and Innovation Agenda was a ‘safe-harbour’ provision for company directors, protecting directors from possible breaches of the duty to prevent insolvent trading where they are seeking to restructure a business. Two possible safe harbour provisions have been proposed. The first option affords directors protection against insolvent trading claims where professional restructuring advisers were appointed during periods of financial difficulty to develop a turnaround plan for the company. The second option is a broader carveout from the insolvent trading provisions, protecting directors where the following three tests are satisfied:
- a the debt was incurred as part of reasonable steps to maintain (or return the company to) solvency;
- b the director held the honest and reasonable belief that incurring the debt was in the best interests of the company and its creditors as a whole; and
- c incurring the debt does not materially increase the risk of serious loss to creditors.
During 2016, the Australian government conducted a consultation process in respect of the two options. A preferred approach is expected to be confirmed and introduced in proposed legislation in early 2017.
The development of insolvent trading protections marks a shift in Australia’s current insolvency regime that would enable boards and directors to work towards better integration of strategy and risk rather than, for fear of personal liability, adopting the propensity to quickly put companies in financial distress into voluntary administration or liquidation.
Appointment, nomination, knowledge and diversity
The Principles and Recommendations provide that companies should have a board of an effective composition, size and commitment to adequately discharge the responsibilities and duties imposed by law on the directors, and that to this end the majority of the board should be independent directors.
An independent director is defined as a non-executive director who is free of any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the independent exercise of his or her judgement.
The Council identifies particular relationships that the board should consider when determining the independent status of a director, including whether that director is employed in an executive capacity.
In addition, the Principles and Recommendations state that the chairperson should be an independent director and that the roles of chairperson and CEO should not be exercised by the same individual.
The Listing Rules and the Principles and Recommendations contain additional requirements in relation to the appointment of directors, the composition of the board and diversity. Listed companies should, among other requirements:
- a use and disclose a ‘skills matrix’ that identifies the mixture of skills and diversity on the current board, and the mix that the board wishes to achieve in the future;
- b have and disclose a process for evaluating the performance of the board, its committees and the directors, in addition to reporting on whether a performance evaluation was undertaken during a reporting period;
- c establish a nomination committee of at least three members, the majority of whom are independent, to manage the appointment and re-appointment of directors, and a committee charter that is disclosed publicly; and
- d establish a diversity policy and disclose the policy or a summary of that policy, which should include requirements for the board to establish measurable objectives for achieving gender diversity. The measurable objectives, and the company’s progress in achieving them, should be assessed annually and disclosed in the annual report.
Listed companies should also establish a remuneration committee to bring transparency, focus and independent judgement to remuneration decisions. The remuneration committee should be structured so that it consists of a majority of independent directors, is chaired by an independent director and has at least three members. The Listing Rules require an S&P/ASX 300 company to have such a committee composed solely of non-executive directors.
Conflicts of interest of directors
A conflict exists where a director, in any matter falling within the scope of his or her office, has a duty or an interest that conflicts or may possibly conflict with his or her duty to the company. The courts will take a pragmatic, common-sense approach to the conflict of interest rule by requiring a real, sensible possibility of conflict before finding that a conflict of interest exists. The test for ascertaining a possible conflict is objective. It is not necessary to establish fraud, dishonesty or bad faith.
The law does not, other than in exceptional circumstances, regard it as objectionable for a director to accept or continue in a position creating duties to a third party, even if there is a real possibility that those duties may come into conflict with the director’s duty to the company. However, once there is an actual conflict between the duties owed in each relationship, the fiduciary principle is attracted. The High Court in R v. Byrnes (1995) 17 ACSR 551 at 562, stated:
A director of a company who is also a director of another company may owe conflicting duties. Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company’s interest to the first company and obtaining the first company’s consent.
In some cases, disclosure may not be enough, and the common director may be obliged to abstain from taking part in the negotiations or voting on the transaction. Conversely, abstention without disclosure may be insufficient.
ASIC advises companies to nominate a senior officer to have responsibility for ensuring compliance with continuous disclosure requirements, overseeing disclosure of information to the ASX, analysts, brokers, shareholders, media and the public, and for educating directors and staff on the company’s disclosure policies and procedures and the principles underlying continuous disclosure. In practice, this person is often the company secretary, although most large companies engage a ‘chief risk officer’.
The ASX has provided clear guidance that compliance with periodic financial disclosure requirements does not extinguish an entity’s continuous disclosure obligations. Where structured disclosure of financial information – for example, the quarterly, half-year or preliminary final reports – is required by the Listing Rules, information that emerges in the preparation may be relevant to the achievement of forecasts or indications of profit or revenue previously released to the market. Companies must then consider whether this is information that should be immediately disclosed.
An entity may have obligations to immediately disclose information if it becomes aware that its earnings for the current period will materially differ from market expectations. The relevant ASX Listing Rules guidance note clarifies that while ‘immediately’ does not mean ‘instantaneously’, such information must be disclosed ‘as quickly as it can be done in the circumstances and not deferring, postponing or putting it off to a later time’. ASX’s guidance on continuous disclosure, which was updated again in July 2015, provides greater clarification to the issues surrounding analyst and investor briefings, analyst forecasts and consensus estimates. It also seeks to draw a distinction between ‘earnings surprises’ and ‘market sensitive earnings surprises’. Although following shortly off the back of amendments made in 2014, the 2015 update does not fundamentally change ASX’s existing position on continuous disclosure, but provides useful guidance in light of recent developments in this area. Recently, ASIC released a paper setting out its policy on selective briefing and the handling of confidential information, making clear that if price-sensitive information is provided to one party, it must be provided to all. The strict nature of a company’s disclosure obligations has been illustrated by a number of recent high-profile incidents where listed entities allegedly made disclosures to analysts through briefings that were not also released to the market generally. Of particular significance was the A$1.2 million penalty imposed by the Federal Court on Newcrest Mining for contravening its continuous disclosure obligations (being more than double Australia’s previous largest disclosure rules penalty).4
i Financial reporting and accountability
The Corporations Act requires all companies to keep written financial records, which record the transactions and financial position of the company and would enable financial statements to be prepared and audited. These financial records must be retained for seven years.
The Corporations Act requires most entities, other than Australian-controlled ‘small’ entities, to prepare a financial report and a directors’ report for each financial year and to lodge them with ASIC.
The content requirements of the annual financial report essentially include three elements; financial statements, notes to the financial statements and the directors’ declaration regarding the statements and notes. The annual directors’ report must include general information about operations and activities, and specific information on numerous aspects of the business. Reports must be lodged with ASIC within four months after the end of the financial year.
Annual financial reports of each financial year must be made available to shareholders either in hard copy, electronic copy (if a shareholder has elected to receive them in this form) or by making the reports readily accessible on a website. A breach of this requirement is a strict liability offence. Shareholders are also to be given the directors’ and auditor’s report or a concise report for the year.
Recent amendments to the Corporations Act have also sought to improve the system of remuneration reporting imposed on companies.5 Since March 2015, companies that are ‘disclosing entities’ for the purpose of the Corporations Act, but whose securities are not listed on a securities exchange, have not been required to prepare a remuneration report.
ii Auditors’ role and authority, and independence
There is a general requirement in the Corporations Act that an auditor be independent. It is a requirement that auditors make an annual declaration that the auditors have complied with the auditor independence requirements in the Corporations Act and any applicable code of professional conduct. There are also restrictions on specific employment and financial relationships between auditors and their clients and the imposition of mandatory waiting periods before partners of audit firms, directors of audit companies and audit personnel may join an audit client as a director or in a senior management position. Along with the other independence requirements, listed companies are required to disclose in the annual directors’ report the fees paid to auditors for each non-audit service as well as a description of each service. In addition, the annual directors’ report of each listed company must include a statement by directors whether they are satisfied that the provision of non-audit services does not compromise independence.
The Listing Rules require that the top 500 companies at the beginning of the financial year have an audit committee during that year. If the company is in the top 300 of that index, the company must comply with the recommendation relating to the composition of the audit committee.
Auditor appointment requirements for companies limited by guarantee have also been streamlined under the recent Corporations Act amendments. Under the amendments, small companies limited by guarantee, and most other companies limited by guarantee that have their financial reports reviewed, are no longer required to appoint or retain an auditor.
IV CORPORATE RESPONSIBILITY
In relation to corporate social responsibility (CSR), a director’s legal duty is to the ‘company as a whole’, which includes shareholders and, under certain circumstances, creditors, but not customers, employees, the environment or society as a whole. Despite this, the Principles and Recommendations encourage companies to act ethically and responsibly. This involves companies not only complying with their legal obligations, but also considering the ‘reasonable expectations’ of investors and the broader community, and acting as ‘good corporate citizens’.
The Principles and Recommendations state that listed companies should establish a code of conduct, with Council commentary that the code should ideally go further than merely ensuring compliance with legal obligations. The Principles and Recommendations provide suggestions as to how a listed company can use its code of conduct to encourage ethical and responsible corporate behaviour beyond the basic requirement of legal compliance. The code of conduct should be made publicly available, and should be a statement of the company’s core values. According to the most recent Annual Report released by the Australian Centre for Corporate Social Responsibility (ACCSR), stakeholder engagement remains the biggest priority for achieving strong CSR performance measures.6 According to ACCSR, building stronger and productive relationships with stakeholders remains the highest priority for organisations across all stages of a company’s CSR development.
Listed companies are also subject to express requirements relating to the company’s social and environmental impact. A listed company should disclose whether it has material exposure to economic, environmental and social sustainability risks, and how it manages or intends to manage those risks. Disclosure of these risks, in particular environmental and social sustainability risks, requires a company to consider factors that may often run counter to economic imperatives.
As a result of this enhanced focus on CSR, an increasing number of Australian companies impose CSR obligations in their commercial contracts. CSR clauses may state that the relevant goods or service supplier acknowledges that the engaging company has a commitment to corporate social responsibility, and that this commitment extends to its suppliers and that the company expects all of its suppliers to conduct their operations in an environmentally and socially responsible manner. Such clauses may require the supplier to consider ways of minimising the social and environmental impacts of its operations, including by identifying social and environmental effects and risks, and implementing appropriate controls to manage them.
i Shareholder rights and powers
Under the Corporations Act, a person will be considered a ‘shadow director’ of a company, and liable as a director, if the directors of the company ‘are accustomed to act in accordance with the person’s instructions or wishes’.
In exchanging information and views between the directors of the company and the significant shareholders, those shareholders may run the risk of inadvertently becoming a ‘shadow director’ of the company. For that reason, while obtaining the advice of the significant shareholders may often be of significant benefit to directors, it remains incumbent on those directors to bring an independent mind to any matter on which the significant shareholders’ views have been sought.
Decisions reserved to shareholders
The Corporations Act prescribes that certain matters must be decided by shareholder meetings. These include:
- a altering the constitution;
- b consolidating or subdividing share capital;
- c reducing the company’s issued share capital;
- d altering rights attached to shares;
- e altering the company’s status;
- f selective buy-backs of shares or a buy-back exceeding the prescribed ‘10 in 12’ limit; and
- g in the case of a public company, removing a director.
Additionally, there are other corporate activities that require member consent – for example, the giving of financial benefits to directors. In the case of listed companies, the Listing Rules require certain transactions be approved by shareholders in general meetings; for example:
- a a disposal of the company’s main undertaking;
- b the company changing its activities in a significant way;
- c the issue of new share capital in excess of 15 per cent of its capital within 12 months (if the new issue is not pro rata to members); and
- d entry into a related-party transaction valued in excess of 5 per cent of shareholder funds.
Rights of dissenting shareholders
The Corporations Act allows relatively small shareholder groups to call meetings and to propose resolutions. However, recent amendments to the Corporations Act have seen a restriction on the rights of dissenting shareholders, protecting companies from unrepresentative activism. As a result of these changes, a group of 100 shareholders is no longer able to compel a company to convene a general meeting. The main consideration behind this repeal was that 100 members in large corporations may hold a very small percentage of voting shares. In light of the rising presence of shareholder activism in Australia, the 100 member rule was seen as allowing an unrepresentative stakeholder group force a company to incur the costs of holding a meeting in circumstances where it is unlikely any resolution proposed by those 100 members will be passed (as most resolutions require over 50 per cent). Accordingly, under the Corporations Act, the directors of a company must now only call a general meeting at the request of members with at least 5 per cent of the votes that may be cast at the general meeting.
Over the course of 2016, 29 ASX-listed companies received shareholder requisition notices to convene extraordinary general meetings. Of these, at least 11 notices were withdrawn, as the shareholder groups were successful in motivating the relevant directors to resign ahead of the extraordinary general meeting.
Groups of 100 shareholders are still able to place matters on the agendas of general meetings, and a resolution may be proposed to be moved at a general meeting by:
- a members with at least 5 per cent of the votes that may be cast on the resolution, or
- b at least 100 members who are entitled to vote at a general meeting.
The Full Federal Court in the Commonwealth Bank of Australia (CBA) case7 confirmed the circumstances where shareholders may propose resolutions to be moved at general meetings, effectively drawing a line between the powers of shareholders and the powers of directors in the management of companies. Broadly, the case involved a shareholder group that represented over 100 CBA shareholders, seeking to move advisory resolutions relating to the environmental impact of CBA’s lending at a CBA annual general meeting. The Full Federal Court held that shareholders may not control, usurp or exercise the powers of the directors (subject to provisions to the contrary in a company’s constitution) and that shareholders may only propose resolutions that have some constitutional or statutory basis. As a result, it was found that the CBA shareholder group had no power to propose advisory resolutions.
To protect minority interests, the Corporations Act gives the courts a discretionary power to grant relief on the basis of oppression or unfair conduct (among other powers).
A court may make an order if conduct is either:
- a contrary to the interests of the members as a whole; or
- b oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members, whether in that capacity or in any other capacity.
The courts have interpreted this power broadly and in a flexible manner to afford shareholders the maximum protection against commercially unfair conduct. If directors conduct a company’s affairs so as to advance their own interests or the interests of others of their choice to the detriment of the company or of the other shareholders, this conduct can be caught. For example, oppression would likely be found where shares are issued for the sole purpose of devaluing minority shareholders’ shares and diluting their voting power.
ii Shareholders’ duties and responsibilities
Controlling shareholders’ duties may at times be extended, but there are no superior duties. There are no facilities for long-term shareholders to receive special benefits, such as extra votes or extra dividends.
In 2011, the Australian federal government introduced legislation to implement a ‘two-strikes’ rule, which gives shareholders the opportunity to vote out a company’s directors if the company’s remuneration report is subject to a ‘no’ vote by 25 per cent or more of its shareholders at two consecutive annual general meetings. After these ‘two strikes’, a resolution approved by a simple majority of shareholders can force a ‘spill meeting’ to be held within 90 days, at which all current board members automatically cease to hold office immediately before the spill meeting closes. Shareholders must vote at the spill meeting to appoint persons to the board, and the applicants may or may not be directors affected by the spill resolution. If the shareholders re-elect a director who would otherwise have been required to vacate their position, that director’s term continues as if no spill meeting had taken place.
This came relatively shortly after the introduction of stricter limitations on ‘golden handshakes’ to corporate executives.
The Corporations Act was also amended in 2011 to prohibit directors, senior executives and related parties from hedging their remuneration packages voting on their own remuneration packages, including through the use of undirected proxies. This was implemented in an attempt to ensure that executive remuneration remains linked to company performance.
In 2016, over 100 ASX-listed companies received a first strike in relation to the company’s remuneration report, including AGL Energy, Woodside Petroleum and CBA.
iii Shareholder activism
Australia has seen an increase in shareholder activism in recent years, including through the emergence of specialist activist funds that are beginning to target Australian companies.
As noted above, recent amendments to the Corporations Act seek to protect companies from unrepresentative activism, now only enabling shareholders collectively holding 5 per cent of votes to call meetings, but Australian shareholders remain empowered however to appoint or remove directors at a general meeting with a simple majority vote. The growing trend in shareholder activism is encouraging a shift in Australia from director-centric governance to more shareholder-centric governance, with shareholders having a much more active say on a company’s strategic issues (such as asset sales and takeover bids). Shareholder activism in the past few years has involved such motions for director removal and appointment, as well as shareholders agitating for the sale of certain company assets, applying pressure on boards to permit a suitor to conduct due diligence, and voting against the remuneration reports, which has become a particular focal point of shareholder activism and an outlet for shareholder dissatisfaction with board performance.
Commentators expect the level of activism to only increase in the coming years, although there is some wariness as to the mixed benefits shareholder activism can bring to the corporate governance regime in Australia. While an important mechanism in encouraging directors to discharge their duties efficiently and effectively as well as ensuring better compliance with the company’s CSR obligations, there is a risk that short-term activists can undermine a company’s long-term strategic planning.
iv Takeover defences
In Australia there are strong limits placed on the defensive tactics that can be employed by directors who have the intention of thwarting a hostile takeover on a listed entity. By virtue of being a public company, there is an accepted risk of the company being open to takeover bids. Accordingly, takeover defences focus on maximising shareholder value and ensuring control does not pass at an inadequate price.
A company and its shareholders may decide to adopt a form of proactive defence, which operate as a pre-emptive deterrent to make a target company unattractive from the outset to prospective bidders. Such defences include the following measures:
- a ensuring placement of shares with those likely to support the company;
- b use of inter-company shareholdings between associated companies;
- c amendment of the company’s constitution to introduce provisions making takeovers more difficult or less attractive (provisions of this kind include the requirement of shareholder approval for partial bids or, in very limited cases, maximum levels of shareholding); and
- d use of share buy-back provisions under the Corporations Act to enable the company to repurchase some blocks of shares.
However, the Listing Rules effectively preclude a number of the above defensive strategies being employed. A target is prevented from issuing shares without shareholder approval for a period of three months after it is notified a person is making, or proposes to make, a takeover for securities in the target company. Even prior to the announcement of a bid, the issue of new securities by the target is subject to a general prohibition that prevents a listed company issuing new securities exceeding 15 per cent of that class within a period of 12 months. As a result of Listing Rules provisions that prescribe a one-vote one-share rule, defensive voting right restrictions are also not permissible in Australian listed companies. A company is further restricted in its ability to pay termination benefits to directors or employees that would be actioned on a change of control.
The Corporations Act does not facilitate the use of staggered or ‘classified’ board structures as an anti-takeover mechanism. Shareholders of a public company in Australia can at any time vote to remove a director from office, the effect being that a new owner can use this provision to remove all incumbent directors and replace them with directors or his or her choosing.
In an alternative scenario, a company and its shareholders may only choose to undertake defensive strategies once a takeover offer has actually been made, or has been proposed. Such reactive defences include:
- a criticism of the bidder and the bid, to dissuade shareholders from accepting it;
- b seeking a white knight to make a rival bid or to acquire a large shareholding; and
- c asset redeployment or corporate restructuring.
Takeovers Panel policy operates as a significant restriction on the actions target directors may take in direct response to an unwelcome takeover bid. As noted above, the Takeovers Panel has jurisdiction to ensure that actions taken during control transactions do not constitute ‘unacceptable circumstances’. The Takeover Panel’s guidance on frustrating actions is extremely broad in scope, prohibiting any action by a target (taken or proposed) by reason of which a bid may be withdrawn or lapse, or where a genuine potential bid is not proceeded with. Undertaking a frustrating action may give rise to unacceptable circumstances regardless of whether it is consistent with, or a breach of, already existing directors’ duties.
Prior independent shareholder approval is also required if a listed company or its associates propose to acquire or dispose of assets valued at more than 5 per cent of the company’s paid up capital, reserves and accumulated profits and losses where the vendor or purchaser is associated with the company. Asset redeployment may also be constrained, with the Corporations Act requiring shareholder approval for disposal of the company’s main undertaking.
Ultimately the key weapon at a target’s disposal is the directors’ recommendation (which is particularly critical if the bidder needs to acquire 100 per cent of the target). It is important for the directors not to wait too long to issue their recommendation, as it may be of limited use if the bidder is already approaching a controlling stake.
v Contact with shareholders
Continuous disclosure obligations
ASIC advises that the chief risk officer be aware of information disclosures in advance of investor briefings, including information to be presented at private briefings to minimise the risk of a company breaching its continuous disclosure requirements. ASIC’s policy is that information used in such briefings should be given to the ASX for immediate release to the market and also be posted on the company’s website.
Companies must not make a disclosure to a significant shareholder of any of its price-sensitive information that has not otherwise been released to the ASX. If such a disclosure was made, it would trigger an obligation under the Listing Rules for the company to disclose that information to the market generally. Differential disclosure of such information between shareholders is not permitted.
Notice of meetings and proxy solicitation
Shareholders of listed companies must receive notices of meetings, containing the technical information requirements prescribed by the Corporations Act, at least 28 days before the relevant meeting.
In contentious matters, proxy solicitation is practised, with companies engaging proxy solicitation and public relations firms to mobilise shareholders. Shareholders may also provide their views on a proposed resolution in advance.
The recent changes in the Australian corporate governance framework have focused on driving Australian businesses to be more innovative, dynamic and competitive on the global stage. Australian businesses would welcome the continued implementation of changes designed to allow boards to embrace sensible risk-taking and innovation, such as the expected protections from insolvent trading offences (discussed above).
However, 2016 has seen a building mood across Western economies, with questions being asked of corporate governance. Communities are wanting evidence that companies exist for more than simply generating short-term profits for current shareholders. Increased shareholder activism in the Australian market echoes this discontent.
As noted above, the fiduciary duty to act in the best interests of the company arguably constrains the actions available to Australian boards in respect of these broader issues. With that being said, Australian boards are open to adopting the position that taking into consideration long-term, non-financial issues is in the best interest of the company.
Unlike other Western governments, Australia’s has not yet pursued regulatory action to address this rising temper. Given the absence of regulatory action, Australian boards have an opportunity to autonomously ensure their remuneration and disclosure practices reflect the views of shareholders and the broader community. In doing so, they will need to navigate the requirements of their fiduciary duties.
1 John Williamson-Noble and Tim Gordon are partners at Gilbert + Tobin.
2 ASIC v. Healey & Ors  FCA 717.
3 ASIC v. Hellicar  HCA 17.
4 ASIC v. Newcrest Mining Limited  FCA 698.
5 Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015 (Cth).
6 ‘The State of CSR in Australia and New Zealand’ (Annual Review 2015, Australian Centre for Corporate Social Responsibility, May 2015), http://accsr.com.au/wp-content/uploads/2015/03/ACCSR_StateOfCSR_20151.pdf.
7 Australasian Centre for Corporate Responsibility v. Commonwealth Bank of Australia  FCAFC 80.