Recent amendments to the Corporations Act 2001 have omitted to address key issues relating to the voting of undirected proxies by company chairs

The changes introduced to the Corporations Act 2001 impacting voting on remuneration reports (see our news alert on 6 October 2011) do not specifically deal with the issue of whether a chairman is able to vote undirected proxies.

This issue is relevant to the 'board spill' provisions of the Corporations Act 2001 as a result of the 'two- strikes rule'. The 'two-strikes rule' applies where at least 25% of votes cast on a remuneration report resolution were against the adoption of the report at two (2) consecutive annual general meetings (AGM's). The recent amendments to the voting requirements for remuneration reports under the Corporations Act 2001 provide for an automatic vote on a board spill if the 'two-strikes rule' is invoked.

In order to resolve the uncertainty relating to voting undirected proxies, the Federal Government proposed to amend the new legislation to make clear that a company chairman is permitted to vote undirected proxies on remuneration report resolutions. It is unilkely that these amendments will be considered before the end of the current AGM season.

In the meantime, ASIC has indicated that companies will have four (4) options when considering how to address the problem at their upcoming AGM;

(1)  apply to ASIC for relief (which will be based on an individual case-by-case basis);

(2)  make no changes to the usual proxy form used by the company and take steps to ensure that the chairman does not vote any undirected proxies on the remuneration report resolutions;

(3)  communicate with shareholders to suggest that they should consider nominating a proxy other than a member of the company's key management personnel for the purposes of the remuneration report resolution; or

(4)  change the company's proxy form so as to ensure that there are more directed proxies which can be included in the vote on the remuneration report.

As the AGM season will shortly draw to a close, the options available to companies seeking to comply with the new laws will be limited to either making the necessary changes to proxy forms or communicating with shareholders to reduce the risks involved in receiving and acting on undirected proxies.

If you would like further information on director duties and/or corporate governance issues please contact the Legal Director and Chartered Company Secretary of Prestige Legal & Corporate Services, Robert Nicholls on 07 5519 3816 or by email to robert@prestigecorp.com.au

Recent changes to the Corporations Act 2001 will impact voting on remuneration report resolutions at AGM's

Changes introduced to the Corporations Act 2001 now restrict members of a company's key management personnel, their proxies and closely related parties from voting on remuneration report resolutions placed before shareholders for consideration at annual general meetings where the report includes details of the remuneration of the key management personnel. Key management personnel will include the chairman, other directors and generally senior management.

These new restrictions will not apply, however, where key management personnel are appointed in writing (by a shareholder who is not a member of the key management personnel of the company) as a proxy with specific instructions on the way in which the vote is to be cast on a resolution to adopt the remuneration report.

These changes will impact companies during this AGM season and a failure of key management personnel to comply with these voting restrictions is characterised as an offence and subject to the general penalty provisions of the Corporations Act.

Our next altert will deal with identified anamolies in the new legislation which could have potentially serious consequences for a chairman at a company's AGM if undetected.

Please contact the Legal Director & Governance Specialist, Robert Nicholls, at Prestige Legal & Corporate Services should you require any further information on the issues detailed in this alert.

In a recent decision of the Federal Court the directors of Centro Properties Limited (and related companies) were found to have breached the Corporations Act 2001 (Cth) in a number of key areas. This decision has significant and important implications for company directors.

In a recent decision of the Federal Court of Australia in ASIC v Healey [2011] FCA 717 it was determined that the directors of Centro Properties Limited had breached their obligations under the Corporations Act 2001 (Cth) (Corporations Act) in failing to notice significant errors contained in the 2007 consolidated financial statements of Centro Properties Limited, Centro Property Trust and Centro Retail Trust (CRT) (collectively Centro). 

The Facts 

In late 2007, Centro admitted that certain debt figures released in its 2007 Annual Reports were materially inaccurate. Specifically, Centro had incorrectly classified approximately $1.5 billion of current liabilities as non-current liabilities and had failed to disclose guarantees of short-term liabilities to an associated company of approximately US$1.75 billion. Further, CRT failed to disclose approximately $500 million of current liabilities; incorrectly classifying the debt as non-current. The Company’s Auditors, PricewaterhouseCoopers (PwC) also failed to detect the identified errors. 

ASIC initiated court proceedings against the Centro directors and in doing so sought declarations that the directors had contravened the Corporations Act.

The Court found that while there was no suggestion that the relevant directors had acted intentionally or dishonestly in failing to recognise and remediate the errors in the financial statements, the directors were aware of information that should have made brought the identified errors to their attention.

Key Issues 

Misclassification of current liabilities as non-current 
Company directors are obliged under the Corporations Act to review the financial statements and notes to these statements to declare that these give a true and fair view, in all material respects, of the financial position and performance of the company and, if relevant, the consolidated entity. 

The primary issue in these court proceedings was, therefore, the level to which a director is required to critically appraise proposed financial statements in order to determine whether they are not only consistent with the director’s own knowledge of the company’s financial position and performance but that they also do not omit material matters. 

The Centro directors relied upon advice received from financial managers and PwC. While this reliance was not considered unreasonable, the Court found that such assurances from Centro management and the company auditors did not absolve the directors in having to bring an enquiring mind to a review of applicable financial statements.

Critically, the Court held that directors of companies must have sufficient financial literacy to understand financial statements together with the knowledge of accounting standards to be aware of requisite inclusions. The Corporations Act requires directors to form an opinion about the accuracy of financial reports and, therefore, it is not considered possible for a director to form such an opinion in the absence of such knowledge. In keeping with this requirement, the Court found that it is not permissible for a director to delegate this responsibility to management or company auditors. 

ASIC further alleged that the conduct of the Centro directors contravened requirements of the Corporations Act requiring a director to exercise his or her powers and discharge his or her duties with the degree of care and diligence that a reasonable person would exercise if that person was a director of a corporation in similar circumstances. Whilst there was no suggestion that the directors had acted dishonestly in carrying out their responsibilities (and to the contrary were clearly intelligent, experienced and conscientious people), the Court determined that the directors had nonetheless contravened the relevant provisions of the Corporations Act in failing to take all reasonable steps to ensure compliance with the Corporations Act regarding the financial statements and, in addition, had failed to exercise the degree of care and diligence required when reviewing the financial statements.

Post balance date events 
Accounting standards and the Corporations Act require that companies disclose material facts and events that arise after the reporting date which have or may have a significant impact upon the operations of the company or consolidated entity, the results of those operations or the state of affairs of the entity in subsequent years.

Accordingly, the Court found that Centro should have disclosed approximately US$1.75 billion in guarantees provided to a related business entity; these were due to mature within 12 months of the balance date and in light of the magnitude of the guarantees and their impact on the financial position of the entity dictated that these were events warranting disclosure as material events arising after the reporting date. 

Section 295A Declaration
The Corporations Act provides that a director can only make a declaration that the financial reports comply with legal standards and requirements in representing a true and fair view of the financial position and performance of the entity following receipt of a declaration by the people performing the functions of CEO and CFO within the entity. In this case, the Court found that the disclosure letter issued to the Centro Board by the chief executive and chief financial officers did not (in form or substance) comply with the requirements of the Corporations Act. Further, a simple reading of the relevant provision would have made it clear to the directors that the requirements had not been satisfied. As a consequence, the directors were found to have failed to take all reasonable steps to secure compliance with the reporting provisions of the Corporations Act. 

Implications for Directors 
The Centro Case has highlighted that the task of reviewing company accounts demands critical and detailed attention and cannot be satisfied by merely ‘going through the motions’ or placing sole reliance on others regardless of the level of competence demonstrated by these advisers. Directors need to critically examine all financial statements and report and to evaluate these based on their own accumulated knowledge of an entities affairs and activities. In addition, directors must also be sufficiently familiar with fundamental and critical accounting standards in order to determine what should be included in financial statements and whether there are any material omissions or misstatements.

If directors are aware that compliance with certain provisions of any legislation or regulatory requirements is required it will be incumbent upon the director to inform him or herself of the relevant requirements; ignorance of these will not be a defence in an action for a failure to comply with the applicable requirement. Consideration should be given as to whether directors are being presented with the most useful and meaningful information. The provision of too much information may mean that directors are unable to focus on what is truly important thereby potentially overlooking vital information and possible warning signs. Conversely, the adoption of a minimalist approach to information provided to boards may mean that the directors are not in a position to fully understand and interpret in sufficient detail the material affairs and operations of the entity. 

If you would like further information on director duties and/or corporate governance issues please contact the Legal Director and Chartered Company Secretary of Prestige Legal & Corporate Services, Robert Nicholls on 07 5519 3816 or by email to robert@prestigecorp.com.au

New legislation establishing a national regime of product stewardship in Australia commenced on 8 August 2011 and is expected to have significant consequences for business.

The new law establishes a national framework to manage the environmental, health and safety impacts of products across their lifecycle from production, handling, purchase, use and disposal. The framewowk is designed to encourage manufacturers, importers, distributors and other involved participants in a products lifecycle to take responsibility for these products.

The Product Stewardship Act 2011 (Act) prescribes a national framework to support voluntary, co-regulatory and regulatory (mandatory) product stewardship and extended producer responsibility schemes. Under the Act, a product stewardship framework is established and will comprise 3 levels of product stewardship, namely: (1) voluntary; (2) co-regulatory; and (3) mandatory. The voluntary scheme is intended to encourage product stewardship without the need for regulatory intervention. There will be audit and reporting obligations to promote transparency and accountability under this scheme. Industry will be responsible for compliance with the outcomes and fundamental operational requirements to be specified in the regulations to the new laws under the co-regulatory scheme. Finally, the regulatory or mandatory scheme will impose set obligations for parties to take certain actions in relation to their product which may include, for instance, product labelling, the return of products to producers at the end of the product life cycle or refunds and deposits being applied to products.

The Act contains provisions for a range of sanctions for non-compliance with the new obligations including civil and criminal penalties, enforceable undertakings and infringement notices. The monetary penalty regime under the Act will apply to individuals and corporations.

Televisions and computer products will be the first series of products covered and a related scheme for these products is planned for introduction in late 2011. Under this scheme, manufacturers, importers and suppliers of televisions, computers and computer peripherals will be required to fund and implement national collection and recycling systems. Regulations will be released to support and provide guidance for those covered by the scheme.

The introduction of the new laws and regulations is expected to provide significant and on-going implications for most businesses particularly, manufacturers, producers, importers, financiers and banking institutions.

Further information on the Act and impending regulations will be provided by Prestige Legal & Corporate Services as it is made available for circulation.  Please contact our Legal Director & Principal Consultant, Robert Nicholls, for more information or further enquiries regarding this publication.

The commencement of the Personal Property Securities Act 2009 outlined by Prestige Legal & Corporate Services on 28 January 2011 has been deferred from May 2011 to October 2011 to allow more time to prepare for the changes.

Having the right structure can save your business time and money

There are four commonly used business structures in Australia, namely:

• Sole traders
• Partnerships
• Companies
• Trusts

There are real and potentially significant advantages in choosing the structure best suited to the way you want to operate your business.

As a business owner or potential proprietor of a business, it is important to understand these advantages and the responsibilities as they may affect:

• the way tax applies to your business;
• protection of your assets;
• your operating costs; and
• how other businesses deal with you.

You should use the information concerning business structures as a guide only.

Prestige Legal & Corporate Services recommends you talk to an accountant, tax professional, solicitor or other adviser before deciding which business structure to use.

The Body Corporate and Community Management and Other Legislation Amendment Act 2010 (Qld) received royal assent on 14 April 2011. 

The changes to the disclosure regime under the Body Corporate and Community Management Act 1997 (Qld) for registered and unregistered community titled properties apply both to contracts issued from 14 April 2011 and also to contracts given to a proposed buyer before this date but not yet signed by both buyer and seller by 14 April 2011.

The changes to contribution and interest lot entitlement principles also take effect from 14 April 2011, while aspects relating to the two-lot schemes will commence on a later date yet to be fixed.

The new Form 14 Body Corporate Information Sheet (which must be attached to contracts for community titled properties) has not yet been prescribed, but we have been advised to expect its release at the end of April. Until it is released the current Form 14 (Version 9) must be used.

In February 2011, the Federal Government introduced the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 into Parliament. The Bill introduces the “two strikes” test and makes changes to executive remuneration, obligations on directors, interactions with remuneration consultants, and the conduct of company meetings. It is one of the most significant pieces of new legislation impacting corporate Australia following the global financial crisis. 

It is expected that the Bill will come into effect on 1 July 2011. Prestige Legal & Corporate Services provides practical assistance to companies to prepare for this important new legislation, including: 

• what company secretaries need to know;
• how Boards will/should react to changes both in remuneration practice and the conduct of meetings; 
• what companies should be doing to manage remuneration risk and the likelihood of a two strikes vote;
• what areas of remuneration strategy need to change to accommodate the Bill; and
• what further changes are predicted for the future.

The Queensland Parliament has passed legislation to prohibit the use of ratchet clauses in retail shop leases. The Criminal Code and Other Legislation Amendment Bill 2010 (Qld) was passed by Parliament on 24 March 2011, received royal assent and commenced on 4 April 2011.

The new legislation has been passed to close a 'loophole' created by the Court of Appeal decision in Connor Hunter (A Firm) v Keencrest Pty Ltd [2009] QCA 156, which upheld the validity of certain ratchet clauses in a retail shop lease that prevented a rent decrease. This decision ran contrary to the widely held view that all ratchet clauses in retail shop leases were prohibited. 

The new laws provide that any 'ratchet rent provision' in a retail shop lease is void. The types of 'ratchet rent provisions' that will be caught are provisions that:

• prevent the rent from decreasing under a rent review
• limit or specify the amount by which rent may decrease under a rent review, or
• prevent or allow the avoidance of a rent review, for the purpose of preventing or limiting the amount of a rent decrease.

The changes do not apply retrospectively; the changes will, therefore, apply to retail shop leases entered into after the commencement of the changes. Prestige Legal & Corporate Services recommends that landlords of retail shopping centres in Queensland review the rent review provisions in their standard leases to ensure that these comply with the new legal provisions.