The heat is now on Directors when it comes to climate change

In a recent ASIC liaison meeting, a number of corporate governance items were flagged as being a current focus of ASIC.  Of particular interest is the emerging focus on climate change risk management by directors and implications for directors’ duties.

The opinion ‘Climate change and directors’ duties’ published by the Centre for Policy Development in October 2016 (download here) promoted wide spread discussion about the implications of climate change risk for directors.  It argues that Australian company directors who fail to consider such risks now could be found liable for breaching their duty of care and diligence under section 180 of the Corporations Act in the future.

ASIC v Mariner Corporation Limited

Rare insights from the Federal Court on the business judgment rule

The ‘business judgment rule’ recognises the inherent risks associated with making business decisions and that bad outcomes do not necessarily mean that directors have breached their duty. Since it was incorporated into the Corporations Act 2001 (Cth) (Act) 15 years ago, it has been seldom invoked.  Nevertheless, while its practical relevance has arguably been limited, the business judgment rule has proven to be a successful defence in a recent decision of the Federal Court.

The business judgment rule

The business judgment rule means a director is taken to have met their duty of care and diligence if they:

• make the judgment in good faith, and for a proper purpose 
• do not have a material personal interest in the subject matter of the judgment
• inform themselves about the relevant subject matter to the extent they reasonably believe to be appropriate, and 
• rationally believe that the judgment is in the company’s best interests.¹

Key corporate reforms enacted as '100 member rule' finally abolished

On 2 March 2015, the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 (Cth) (Bill) was passed by the Senate and is now awaiting Royal Assent.

The Bill makes several significant changes to the Corporations Act 2001 (Cth) (Act) of which directors, shareholders and practitioners need to be aware. 

Abolition of the ‘100 member rule’

The Bill removes the ability for 100 or more of a company’s members to require directors to call and hold a general meeting at the company’s expense.

The so-called ‘100 member rule’ had previously been widely criticised on the basis that it allowed a very small proportion of a company’s members to disrupt management and impose significant transaction costs on the company even where the resolutions to be considered at a general meeting had little chance of being passed. 

The 100 member rule has not been abolished for managed investment schemes. 

Further, 100 or more of a company’s members are still able to:

• propose resolutions for inclusion on the agenda of general meetings, and
• require the distribution of statements, at the company’s expense, in relation to a proposed resolution or a matter that may be considered at a general meeting. 

The ability for members holding at least 5% of the votes that may be cast at a company’s general meeting to require directors to call and hold a general meeting also remains.

Reporting of executive remuneration

The Bill alters reporting requirements for executive remuneration in an effort to reduce compliance costs and red tape for companies. 

Unlisted disclosing entities no longer need to prepare a remuneration report.  While listed disclosing entities are still required to prepare a remuneration report, in relation to lapsed options, those entities are now only required to disclose the number of options granted to key management personnel as part of their remuneration that lapse during the financial year and the year in which the lapsed options were originally granted.

'Streamlining' amendments

Shortening the financial year

Under the Act, directors can reduce the ordinary 12 month financial year period for the company if the reduction is made in good faith in the best interests of the company, provided that the company’s financial year has not been shortened on that basis alone in any of the previous 5 financial years.

 

For the sake of clarity, the Bill states that, in determining whether a company’s financial year has been shortened in any of the previous 5 financial years, previous reductions of 7 days or less or that were required to synchronise the reporting period of controlled entities to provide consolidated financial reports (also allowed under the Act) are not to be considered.  

 

Auditors for companies limited by guarantee

The Bill clarifies that small companies limited by guarantee and companies limited by guarantee that elect to have their accounts reviewed rather than audited are not required to appoint or maintain an auditor.  This is a logical amendment consistent with provisions of the Act designed to reduce the regulatory burden on companies limited by guarantee.

 

Other amendments

The Bill also enables:

• the Remuneration Tribunal to determine the remuneration of the Chair and members of the Financial Reporting Council, the Australian Accounting Standards Board and the Auditing and Assurance Standards Board, and
• Takeovers Panel members to perform their functions while overseas.

Dividend requirements

The original exposure draft of the Bill contained provisions which:

• introduced a pure solvency test for the declaration and payment of dividends, and
• clarified that a company could make a capital reduction by way of a dividend payment, without the need for shareholder approval, so long as there was an equal reduction to all shareholders. 

Although these provisions were omitted from the Bill as passed, they are likely to be revisited by the Government after further consultation in the future. 

 

For further details on changes under the Bill, please refer to the recent article by Dr Kai Luck.

Honest and reasonable…or irresponsible?

A proposed new defence for company directors

The Australian Institute of Company Directors (AICD) has recently proposed a new ‘honest and reasonable director defence’ for inclusion in the Corporations Act 2001 (Cth) (Corporations Act).  The new broad based defence would apply to all contraventions of the Corporations and ASIC Acts, significantly expanding the scope of protections currently afforded to directors. 

The proposal has been met with criticism from both ASIC and certain shareholder groups, concerned with a defence which they argue potentially goes too far in protecting directors that may not have been acting responsibly.

The impetus for change

The ‘business judgment rule’ defence in section 180(2) of the Corporations Act, introduced in 1998, has a relatively narrow scope.  Importantly, the defence only applies to a director’s statutory duty of care and diligence under section 180(1) and the equivalent common law and equitable duties.  It is not available, for example, to directors who are charged with insolvent trading or the duty to act in good faith and the best interests of the company.  The rule is also limited to positive business judgment decisions and so is not seen to cover a breach arising from an omission by a director, such as in the Centro litigation in 2011. 

The AICD proposal highlights what are, in its view, a number of negative consequences of the limited existing protections.  Its surveys have revealed significant concerns among directors about the risk of personal liability that has prompted an overly conservative approach to business decisions, creating a negative shift in the directors’ role away from governance and toward technical compliance.  Such an approach leads to problems in making forward looking statements and responding to corporate insolvency, the latter often causing directors to place potentially profitable companies too quickly into external administration. The AICD also identifies the lack of protection for directors as a key reason for the reluctance of strong candidates to take on directorships. 

The ‘honest and reasonable director defence’

The AICD’s proposed solution to the above issues is to introduce a new catch-all defence to liability where a director acts:

• honestly
• for a proper purpose, and
• with the degree of care and diligence that the director rationally believes to be reasonable in the circumstances.

The key features of the proposed defence are:

The defence would apply to all provisions of the Corporations and ASIC Acts (and their common law and equitable equivalents), not just the duty of care and diligence. 

The AICD has suggested that this would also apply to strict liability provisions.  This is potentially difficult to reconcile, as having regard to the subjective state of mind of the person that breached such a provision goes against the nature of strict liability (which ignores the director’s intention).  Some example strict liability provisions are the duty to disclose material personal interests (section 191), to not vote on resolutions in which a director has a material personal interest (section 195) and the duty to disclose directors’ remuneration (section 202B).  Any application to strict liability offences will need to be carefully considered.  A broader issue is the seemingly increasing tendency for strict liability to be applied to statutory drafting as a default.  

 

The defence extends to omissions as well as positive acts, which was considered by many to be a key failing of the existing business judgment rule.  

This aspect of the defence could potentially improve directors’ access to the protections in a manner consistent with the Corporations Act without overly compromising the position of shareholders. 

 

The defence includes a subjective test – that a director rationally believes their action (or inaction) was reasonable in the circumstances. 

By contrast, the business judgment rule provides that the director’s judgment must be rational ‘unless the belief is one that no reasonable person in their position would hold.’  This is an important distinction, allowing for a broad range of potential arguments based on the surrounding (potentially high pressure) commercial circumstances at the time the decision was made, rather than by reference to an objective standard.  Concerns with this subjective element are valid and it is this aspect of any new defence which is likely to be subject to the greatest scrutiny.

 

The AICD has raised important issues with the proposed new defence, which has been met by concerns from ASIC and certain shareholder groups.  As is always the case when dealing with directors’ duties and protecting shareholder (and other stakeholder) interests, it is a balancing act which, if a new defence is developed, will need to strike a mid-point between the views of each group.

ASX releases new Corporate Governance Principles

Yesterday, the ASX Corporate Governance Council released the third edition of its Corporate Governance Principles and Recommendations.  The new principles will take effect for a listed entity's first full financial year commencing on or after 1 July 2014.

The release marks the first major revision of key Australian corporate governance principles since the GFC and follows the issuing of draft principles and a consultation process examined in an earlier post last August.

The Corporate Governance Principles and Recommendations are available to view at:
http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf.

Whistleblower protection under the Corporations Act

Whistleblower protection has received a lot of media attention recently, following the Senate Inquiry into the performance of the Australian Securities and Investments Commission (ASIC) and its alleged failure to act promptly on information provided by whistleblowers in relation to serious misconduct in Commonwealth Bank’s financial planning arm.

Consistent with ASIC’s commitment to improve communication and handling of information brought to its attention by whistleblowers, it has released a new Information Sheet (Info Sheet 52) which provides guidance on the statutory protections available to those who report misconduct or provide evidence of a breach of the Corporations Act 2001 (Cth) (Corporations Act) to ASIC. 

The whistleblower provisions of the Corporations Act are designed to encourage people associated with a company to alert the company (through its officers) or ASIC, to illegal behaviour.  Information provided by whistleblowers is considered a protected disclosure (provided certain criteria are satisfied), and must be kept confidential.  Both the information provided and the identity of the whistleblower may not be disclosed, unless that disclosure is specifically authorised by law.

Generally speaking, for the purposes of the Corporations Act, a whistleblower is a person who is an employee, contractor or member of an organisation, who reports or ‘discloses’ misconduct or dishonest or illegal activity that has occurred within that same organisation.  The report must be made to either ASIC, the company’s auditor or member of the internal audit team, a director, secretary or senior manager, or a person authorised to receive whistleblower disclosures (such as a Whistleblower Protection Officer).

It is imperative that companies have a whistleblower policy in place to ensure employees know how to report issues, who to report them to, and how they will be dealt with when the company is alerted. 

The policy should also detail the rights of employees to disclose improper conduct on a confidential basis without fear of retaliation.

A whistleblower reporting tool (e.g. a hotline or online portal with analytical capabilities) is also a useful way to detect fraud within an organisation.  

Info Sheet 52 is a useful reference tool, to ensure your policy adequately details the protections available to whistleblowers.  It should, however, be noted that the protections under the Corporations Act only apply to whistleblowers who report breaches of the Act, as opposed to breaches of other laws, or the company’s internal policies.  

To afford the protections under the Corporations Act, the whistleblower must identify their name when making a disclosure, have reasonable grounds to suspect that the information being disclosed indicates that the company, company officer or employee may have breached the Corporations Act and must make the disclosure in good faith. 

Identifying the whistleblower is not typically required under other laws, nor is it under many internal policies.  Therefore, if a matter that would result in a breach of the Corporations Act is reported anonymously through internal channels, the whistleblower would need to be identified before the matter was referred to ASIC to benefit from the protections in the Corporations Act against civil and criminal litigation. 

Further, the provisions of the Corporations Act may be relied on by the whistleblower in their defence if they are the subject of an action for disclosing protected information.  It is important to note that no contractual or other remedy can be enforced against the person on the basis of the disclosure. 

Where a whistleblower’s employment is terminated because of a disclosure made under the Corporations Act, the whistleblower can apply to Court for an order to be reinstated in that position, or in another position at a comparable level. 

The publication of Info Sheet 52 is an important reminder that whistleblowers play a role in detecting serious misconduct within organisations and should be afforded adequate protections. Companies must ensure that procedures are in place so that matters of concern that are raised can be dealt with on a timely basis, either internally or, in the case of a serious breach, by escalating the matter to ASIC or the Australian Federal Police. 

Tiffany McLean, Andrew Poulton, Navina Vijaysegaran

The new Australian Privacy Principles – Is your organisation compliant?

On 12 March 2014, fundamental changes to Australian privacy laws will take effect. The changes introduce new rules about how organisations collect and store personal information.  With penalties up to $1.7 million enforceable for serious breaches, organisations must act now to ensure compliance. 

As part of the privacy law reform process, the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Privacy Amendment Act) was introduced to Parliament in May 2012  marking significant changes to the Privacy Act 1988 (Cth) (Privacy Act).

The changes to the Privacy Act include a new set of harmonised privacy principles that regulate the collection and handling of personal information called the Australian Privacy Principles (APPs) applying to most organisations who turn over $3 million or more annually, and to Commonwealth Government agencies.  The APPs will replace the National Privacy Principles that apply to businesses and the Information Privacy Principles that apply to Government agencies.

To some extent, the APPs are based on the existing privacy principles but now impose additional obligations on organisations when dealing with personal information.  In particular, the APPs require organisations to provide additional discloses in their privacy documentation and internal procedures and policies ensuring the protection and ongoing quality of personal information that they use and store. 

APPs are legally binding principles and aim to be the cornerstone of the privacy protection framework in the Privacy Act, by setting out uniform standards for dealing with personal information.  The APPs are structured to reflect the personal information life cycle and are grouped into five parts, including:

• the consideration of personal information
• collection of personal information
• dealing with personal information
• integrity of personal information, and
• access to, and correction of personal information. 

Under the Privacy Amendment Act, the Information Commissioner receives new powers to seek civil penalties of up to $1.7 million from organisations who commit serious or repeated breaches of privacy. The Information Commissioner may also conduct ‘own motion’ privacy investigations on organisations without first receiving a privacy complaint from a member of the public.  

The Privacy Amendment Act also implements changes to credit reporting laws, including the introduction of more comprehensive reporting about an individual’s current credit commitments and repayment history information.  The credit reporting changes are also supplemented by a new credit reporting code. 

While the Office of the Australian Information Commissioner has released APP guidelines to assist organisations with the transition to the APPs (which must occur on or before 12 March 2014), it will be interesting to see how and when the Information Commissioner exercises its new powers in relation to privacy compliance.  Under the APPs, it will therefore be important for relevant organisations to consider their existing information policies, review and update their privacy documents and develop internal procedures to ensure compliance by 12 March 2014.

Alex Hutchens, Stephanie Parkin

Queensland complies with COAG on criminal liability of directors

The final draft of the Directors’ Liability Reform Amendment Bill 2012 (Qld) (Bill) has eased concerns the State had been recalcitrant in its corporate law reform obligations, agreed as part of the National Partnership Agreement to Deliver a Seamless National Economy.  The agreement, consented to by the Commonwealth and all State and Territories on 7 December 2010, intended to achieve a nationally consistent approach to the imposition of personal criminal liability for directors and other corporate officers for corporate fault.

At the time, the Council of Australian Governments (COAG), agreed that personal criminal liability for officers was generally inappropriate, except in certain circumstances.  According to agreed principles, a directors’ personal criminal liability for the misconduct of a corporation should be confined to situations where:

• there are compelling public policy reasons for doing so (such as the potential for significant public harm caused by the corporate offence)
• liability of the corporation is not likely on its own to sufficiently promote compliance, and
• it is reasonable in all the circumstances for the director to be liable considering:
• clarity of corporate obligations
• the director’s capacity to influence the conduct of the corporation, and
• the steps that a reasonable director might take to assure corporate compliance.

The guidelines to the agreed principles also specified that reversing the onus of proof should only occur if supported by rigorous and transparent analysis.

Queensland Developments

While New South Wales in particular was quick to implement the COAG recommendations, the Queensland Bill was initially far less effective in achieving compliance with the COAG principles and guidelines.  The Australian Institute of Company Directors (AICD) estimated that if the legislation passed as originally formulated, there would still be in excess of 100 instances where directors or officers remain criminally liable for a corporation’s fault unless their lack of involvement in the contravention was established.

After further consultation with the AICD, the Queensland Attorney-General made numerous modifications to the Bill which was passed on 17 October 2013 (for implementation on 1 November 2013).  The modifications are based upon the Government’s decision that:

• director’s liability provisions should generally not be included in state legislation
• any case for an exemption to allow a director’s liability provision would need to be appropriately justified, and 
• any exception made would not reverse the onus of proof.

The 103 pages of amendments to the original Bill mean that from 1 November, executive officers will only be liable for corporate offences if the prosecution proves that they:

• did not take all reasonable steps to ensure the corporation not engage in conduct constituting on offence, or
• authorised or permitted the corporation’s conduct constituting the offence, or
• were, directly or indirectly, knowingly concerned in the corporation’s conduct.

While the liability provision applicable in any piece of legislation should be reviewed carefully, the changes implemented by this the new approach should be welcome.

Professor Paul von Nessen

A widely published corporate and commercial lawyer, Paul is a Consultant to McCullough Robertson on Corporate Advisory issues.

Directors entitled to defence cost coverage under D&O insurance

Company directors and officers can take some comfort that the Australian courts have recognised their entitlement to access insurance cover for defence costs in the event of a claim under Directors and Officers Liability (D&O) insurance policies. 

The Chairman’s Red Book (page 67) made reference to the New Zealand judgment in Bridgecorp which held that a charge could be brought by plaintiffs in class action proceedings to preserve the funds available under D&O insurance for their potential benefit.  The application of such a charge would deny the defendant directors and executives access to insurance cover for defence costs incurred in defending the class action proceedings.  This judgment was overturned on appeal with the NZ Court of Appeal recognising the two distinct limbs of cover applicable under D&O policies - being defence costs cover and the legal liability cover for damages, judgments or settlements.

These cases were relevant to directors and officers in Australia because the same legislative provisions applicable in New Zealand, to enable a charge to be imposed on the proceeds of an insurance policy, are applicable in New South Wales, Tasmania and the ACT.

On 11 July 2013, the NSW Court of Appeal considered the opportunity for class action plaintiffs to bring a charge over the proceeds of D&O insurance policies held by directors and executives of the now collapsed Great Southern Group.  Beneficially, the Court drew a clear distinction between the two separate covers under D&O insurance policies and recognised the importance of directors and officers accessing defence costs under D&O policies.

The Court did not entirely rule out the possibility for a charge to be imposed over the proceeds of a D&O policy.  However, it noted that any award of damages against a director or officer covered under a D&O policy would necessarily follow the incurring of defence costs to which a director or officer was entitled to cover in priority to the proceeds subject to a charge.  The Court also recognised that a director’s entitlement to insurance cover to mount a vigorous defence to legal proceedings, and potentially reduce or eliminate any ultimate award of damages against the director, was equally advantageous for insurers who advanced the defence costs coverage.

While this most recent judgment has provided clarity on the issue of directors and officers entitlement to defence costs under D&O policies, it has also highlighted the necessity for directors and officers to be aware of potential ‘internal’ competition to the limited amount of cover available under these policies.

D&O policies rarely contain a priority of payment or preservation provision to ensure cover is always available for directors and officers.  This is especially critical if the D&O policy also affords cover to the corporate entity, as well as the directors and officers, which is often the case.  Similarly, the D&O coverage may ‘compete’ for or be tied to a limit of liability which is also applicable to professional indemnity, crime or other classes of insurance.

For these reasons, directors and officers should investigate and have a clear understanding of the cover, placement and structure of their D&O insurance policy.

Diana Masen

Diana is a Senior Associate at McCullough Robertson

Update to ASX Corporate Governance Principles and Recommendations – overhaul of approach or maintaining the status quo?

On 16 August 2013, as has been anticipated, the ASX Corporate Governance Council (CGC) released a consultation paper for a draft third edition of its Corporate Governance Principles and Recommendations (Principles and Recommendations).  This was released together with a separate consultation paper on Proposed Changes to ASX Listing Rules and Guidance Note 9, to supplement the proposed new Principles and Recommendations.

Although there have been some amendments to the second edition of the Principles and Recommendations (e.g. in relation to diversity initiatives), the draft third edition represents the first comprehensive review of the Principles and Recommendations since 2007 and, importantly, represents the first major redraft of key Australian corporate governance principles since the GFC.

The impact of the GFC is clearly seen in the new draft Principles and Recommendations, with an overarching focus by CGC on risk management and the importance of the board of directors having a greater degree of involvement and oversight in the adoption and implementation of corporate governance policies and procedures.  There is also a focus on encouraging the availability of corporate governance materials on a company’s website, rather than as a prescriptive requirement for the annual report.

The eight key principles enshrined in the Principles and Recommendations, together with the ‘if not, why not’ approach to reporting on corporate governance practices, have been retained in the draft third edition.  The overarching approach to corporate governance issues is therefore unlikely to alter.  However, the amendments to certain key principles and the approach to disclosure of corporate governance practices have received detailed attention, and it is worth reviewing the respective consultation papers to get a feel for these changes.

Some of the key proposed and/or interesting changes are:

To the Corporate Governance Principles and Recommendations:

• A new recommendation 1.2(a) requiring a listed entity to undertake appropriate checks for an incoming director and to provide shareholders with all material information relevant to that person’s appointment.  This will act to supplement the relatively new admission requirement that a listed entity must show each director or proposed director is of ‘good fame and character’.

• The diversity-related recommendations have been moved from principle 3 to principle 1 (relating to laying foundations for management and oversight), as CGC considers that the previous location of these recommendations resulted in confusion.  This is to be supplemented with a requirement that an entity report on the proportion of female employees in the whole organisation, in senior executive positions and on the board of directors.

• More extensive guidance in relation to the ‘independence’ of directors has been included, to specifically include close family ties and service on the board for more than 9 years as indicators that a director may not be independent. 

• Wording has been included in principle 3 on the importance of an entity promoting decision-making that creates ‘long-term value’ for security holders.  Combined with a new recommendation 7.3, relating to a listed entity disclosing how it has regard to environmental and social sustainability risks, there is a clear focus by the CGC on a move towards integrated financial reporting, as has recently been a focus of ASIC (see our comments in the blog dated 2 July 2013).

• Principle 4 has been updated to provide for ‘formal and rigorous’ processes for financial reporting (which we expect is derived from recent cases such as the Centro decision). 

• In relation to remuneration, CGC has provided a new recommendation for implementation of a ‘clawback policy’, which sets out when an entity may clawback performance-based remuneration for its senior executives (e.g. if there is a material misstatement of financial results).  This reflects relatively recent legislation proposed by the Australian Government.  The approach by CGC, that this is a matter best dealt with through an ‘if not, why not’ regime, rather than specifically through legislation, seems sensible – particularly in light of the complexities that have been faced by listed entities through the advent of the ‘two-strikes’ rule and other remuneration-related provisions of the Corporations Act.

To the ASX Listing Rules and Guidance Note 9:

• Listing Rule 4.10.3 is to be amended to give greater flexibility for listed entities to make their corporate governance disclosures either in the annual report or on their website, and to make clear that an entity should disclose if it has not followed a recommendation for any part of the reporting period.  There is also an added requirement for an entity to state that the corporate governance statement has been approved by the board of directors, to ensure it receives appropriate focus at board level.

• Perhaps the most significant change from an administrative viewpoint, is the proposed introduction of a new ASX form (Appendix 4G) to be completed and lodged with ASX each year (at the same time as the annual report).  This is intended to provide a key to assist investors and other stakeholders in locating an entity’s various corporate governance disclosures, recognising the flexibility being given by the amendments so that an entity’s corporate governance statements may not be in a single location on the company’s website or dealt with exclusively in the company’s annual report.  ASX has also indicated its hope that the Appendix 4G will act as a verification tool and reduce concerns in relation to standardised boilerplate documents.  We question whether the new Appendix 4G will achieve this outcome or simply become an additional administrative burden for entities during an already busy reporting period.

• Although not directly governance-related, ASX is proposing to introduce a new Listing Rule 3.19B requiring specific disclosure of on-market purchases of securities (i.e. through a trustee structure) on behalf of employees, directors or their related parties within 5 business days.  ASX has indicated that, although it does not consider security holder approval is required, it is appropriate for disclosure to be made to the market, for such transactions.

• Additional guidance has also been provided to highlight how the Principles and Recommendations apply differently to externally managed listed entities.

The majority of the changes are intended to become effective on 1 July 2014, with some of the amendments to the ASX Listing Rules to come in earlier (on 1 January 2014).  ASX and the CGC have asked for comments by 15 November 2013.  We will be collating any responses received from our clients on the consultation papers and considering appropriate submissions to make to ASX and CGC.  We will also continue to monitor and comment on the developments in this area, which will result in a revised Chapter 4 of The Chairman’s Red Book in due course. 

Integrated financial reporting and key issues arising from ASIC’s new Regulatory Guide 247

The concept of integrated financial reporting has received greater attention from ASIC recently.  It is a process that involves a listed entity reporting on a wider set of ‘non-financial’ matters to the more usual financial disclosures included in the annual report (e.g. a company’s ‘social’ and ‘relationship’ capital).

Developments in this area have included the recent release of ASIC Regulatory Guide 247: Effective disclosure in an operating and financial review (RG 247), aimed at improving disclosure in the annual reports of listed entities via the operating and financial review (OFR).

The changes have been introduced to bring Australia in line with international accounting standards and are aimed at creating a ‘level playing field’ for companies that are proactive in their disclosure obligations with those that may be less transparent.  In doing so, it is hoped that investors will ultimately benefit.

ASIC has stated that its aim with RG 247 is to lift the standard of disclosure by:

• promoting better communication of useful and meaningful information to shareholders, and
• assisting directors to understand the requirements for an OFR (which is a requirement derived from section 299A Corporations Act).

ASIC has taken a generally sensible approach to RG 247, having taken on submissions provided during the consultation process.  ASIC has provided reasonable examples and, importantly, has clarified that OFRs are not intended to include ‘prospectus level’ disclosure. 

RG 247 emphasises the need for directors to take into account and include statements in the OFR on a company’s future prospects.  This has been done in an attempt to alleviate concerns that traditional financial reporting promotes short-term analyst reports, rather than setting a long-term strategy.  This has, understandably, raised concerns that an increased level of disclosure may provide more material to be reviewed against the “misleading and deceptive” statement provisions of the Corporations Act.

As with all public disclosure statements, we recommend that a verification process is undertaken as a means of limiting the risk that an incorrect disclosure is made (in the OFR or otherwise) and, of course, forward looking statements must be founded on a reasonable basis.

Unlike many other jurisdictions, such as the United States, there is no ’safe harbour’ defence against claims for forward looking statements which are ultimately found to be incorrect (e.g. where those statements are made in good faith).  As the potential liability regime has been extended via ASIC guidance, rather than through a legislative process, many directors are likely to approach the OFR disclosure obligations with caution, particularly in the absence of a safe harbour defence.

Care should be taken with use of section 299A(3) Corporations Act, which provides an exemption from disclosing information about business strategies and prospects for future years if disclosure of that information is likely to result in ’unreasonable prejudice‘ to the entity.  ASIC has previously interpreted such provisions sparingly and in RG 247 recommends that directors document their reasons ahead of publication if they are seeking to rely on this exemption.

RG 247 should also stand as a warning from ASIC on its intention to scrutinise the use of non-standard financial reporting to mask problems or show the company’s financial situation in a more favourable light.

An OFR is not required to be audited.  However, as it is part of the annual report, the auditor may draw out any inconsistencies.  ASIC has also indicated that it will undertake an active surveillance campaign for annual reports.  Companies should engage with their auditors early as to any additional scope of work that may be required.

Additional time should also be allowed for management and boards to prepare, review and settle the OFR and future financial prospects commentary.

For a full copy of RG 247, click here.

Assessing criminal liability of directors – the State application of COAG guidelines

Extensive reform of Commonwealth and State legislation conducted over the past 3 years has not achieved any consistency on the matter of personal criminal liability of company directors.  Both NSW and Queensland have audited, reviewed and introduced amendments to relevant legislation, but with differing results – leaving directors and officers of corporations in Queensland with continued cause for concern about potential criminal liability.

This is despite all State and Territories, along with the Commonwealth, signing up to the National Partnership Agreement to Deliver a Seamless National Economy, on 7 December 2010.  The partnership agreement aimed to achieve a nationally consistent approach to the imposition of personal criminal liability for directors and other corporate officers for corporate fault.

At the time, the Council of Australian Governments (COAG), agreed to a set of six principles, along with detailed guidelines.  The principles indicated that personal criminal liability for officers was generally considered inappropriate, except in certain circumstances. 

According to these principles, personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:

• there are compelling public policy reasons for doing so (such as the potential for significant public harm caused by the particular corporate offence)
• liability of the corporation is not likely on its own to sufficiently promote compliance, and
• it is reasonable in all the circumstances for the director to be liable considering:
• clarity of corporate obligations
• the director’s capacity to influence the conduct of the corporation, and
• the steps that a reasonable director might take to assure corporate compliance.

The principles further indicated that liability should occur where the director or officer encouraged or assisted in the offence or was negligent or reckless in relation to the corporation’s offending.  The guidelines specified that reversing the onus of proof should only occur if supported by rigorous and transparent analysis.

Results of the review

In New South Wales, the Miscellaneous Acts Amendment (Directors' Liability) Act No. 2 2011 (NSW) and the Miscellaneous Acts Amendment (Directors' Liability) Act 2012 (NSW) have resulted in the number of provisions imposing personal liability on company directors in NSW legislation being reduced from more than 1,000 to about 150.  NSW now only retains six statutes which require directors or officers to establish that they have not been involved in the contravention which may result in criminal conviction (reversing the onus of proof).

By contrast, the Directors’ Liability Reform Amendment Bill 2012 (Qld) is far less effective in achieving compliance with the COAG principles and guidelines.  The Australian Institute of Company Directors, in response to the Queensland Bill, estimated that after the legislation was passed there would still be in excess of 100 instances where directors or officers would remain criminally liable for a corporation’s fault unless they established their lack of involvement in the contravention.

Clearly, further reform in Queensland is required to address the ongoing situation of company directors and officers being potentially criminal liable in circumstances where their own culpability need not be established by regulatory authorities.

We will keep you posted as changes to Queensland state legislation progress.

Professor Paul von Nessen

A widely published corporate and commercial lawyer, Paul is a Consultant to McCullough Robertson on Corporate Advisory issues.

Directors' duties

Shareholders have pooled their funds for a common purpose - to conduct an enterprise that they presumably could not afford to conduct on their own. The role of public company directors is to guide and grow business, observing the duties described below.

Chairman have a particular role to lead the board and to establish an environment in which executive management can successfully execute the strategy set for the company by the board.

As those ultimately responsible for the company's actions and the shareholders' funds invested in the company, directors are subject to a strict set of duties, reflecting the position of trust they hold.

An ability to fulfill these duties while successfully growing the business is the mark of a good company director; a clear understanding of risk versus reward is essential.

In simple terms, being a custodian of other people's money is a duty of the highest order and occasionally directors lose sight of this.

Summary of key duties

Directors must:

• act in good faith in the best interests of the company
• act for a proper purpose
• act with care and diligence
• not misuse information they receive in their role, or misuse their position, for their own or someone else's personal gain
• avoid conflicts of interest, and
• prevent insolvent trading.

Directors' duties have evolved over time. These are now set out in statutes (primarily the Corporations Act), however, a body of case law expands upon the underlying legal and equitable principles. A company's constitution generally also sets out additional duties and obligations of the directors of the company.

As a general rule, directors owe their duties to the company, not the shareholders or creditors of the company. However, there are provisions in the Corporations Act under which a director can be liable to these stakeholders (e.g. liability for insolvent trading).

A brief overview of each duty is set out in the the Chairman's Red Book. Click here to request a copy.