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.

Ten tips for AGM season

With the AGM season in full swing, we felt it was timely to highlight some key considerations in the lead up to, and when conducting, your AGM.

While for many, conducting an AGM is a straight-forward process, there are times when contentious issues arise.  Set out below are ten tips for managing an effective AGM, and strategies for dealing with anticipated and unexpected issues.

1. Be prepared

By now the location and timing of the meeting will be set (see our earlier post: Time to start thinking about your AGM), but the preparations for the AGM will be ongoing.  In addition to addresses from the chairman and CEO, this may include preparing a chairman’s script for the formal part of the meeting and considering responses to key questions that may be asked of directors and management, and potentially the auditor.  Hot topics this year include:

• board performance and review processes
• excessive remuneration
• independence of directors - including long standing directors, substantial shareholders or those who have commercial dealings with the company, and
• effective contribution of directors who hold multiple board roles.

2. Review your meeting procedures

In addition to a refresher on some of the relevant provisions of the constitution; it is worth reviewing some of the general commentaries on procedures for conducting the meeting.  For example, the ‘rules of debate’ or procedural motions (see Chapter 11 of The Chairman’s Red Book) can greatly assist in managing questions and discussion at the AGM.  

3. Get to the point

The ‘point of order’ is a particularly useful tool for alerting the chairman to a matter requiring their attention or correction during the AGM.  It takes precedence over the discussion taking place and must be ruled on by the chairman immediately.  For example, alerting the chairman to a reference to a special resolution which is actually an ordinary resolution.

4. Take the AGM notice as read

It is generally no longer necessary to ask a shareholder to move a resolution and ask another to second the motion.  At the beginning of the meeting the chairman should confirm their intention to ‘take the notice as read (unless shareholders object)’.  This assists to streamline the consideration of resolutions. 

5. Understand the voting exclusions

Understand the voting exclusions that apply to each resolution under the Corporations Act, the Listing Rules (if applicable) and, potentially, the company’s constitution.  This is likely to be particularly important for the remuneration report (for a listed company) and other remuneration-related resolutions.  The chairman should be advised and understand who are the ‘key management personnel’ in the room excluded from voting on such resolutions.

6. Plan for spills

The remuneration report – although now a familiar process for many in the listed environment, for companies that may face a ‘second strike’ at the AGM, processes should be in place for considering and voting on a spill resolution at the AGM.

7. Disclose proxies

Monitor and disclose proxies as an early warning signal of a potentially contentious item of business.  Disclosure of proxy results (e.g. on a PowerPoint) can also assist in reducing protracted debate in the room (e.g. if it is clear that the proxies are overwhelmingly in favour).  This may also include engagement with voters in the lead up to the AGM, such as if the usual participants have not returned their proxies.  At the same time, knowing who is in the room is also vital, with voting more commonly conducted on a show of hands at the AGM.

8. Be prepared for a poll

For listed companies and large unlisted companies, your share registry should be on hand to assist with a poll, but it is also good for the chairman to understand when it is best for a poll to be called and the key steps involved in the process (e.g. the requirement for an adjournment for the poll to be counted).  The timing of the poll is often essential to ensure that shareholder engagement is maintained.

9. Consider the timing of questions

This may include taking questions as each resolution is considered, during or after the addresses of the chairman and CEO, and/or deferring to the end of the meeting.  Although shareholders as a whole should be given a reasonable opportunity to participate and ask questions at the meeting, the chairman should be wary of a shareholder that seeks to dominate proceedings and know when to bring an end to discussions or limit the number of questions.  A useful method can be to refer a shareholder to appropriate board members or executives for further clarification following close of the meeting.

10. Consider your compliance requirements

For listed companies, ensure any presentations or addresses are released prior to the start of the meeting and the results of the AGM made available as soon as practicable following the close of the meeting.

Finally, this year has illustrated the ongoing importance of engaging with institutions and their proxy advisers.  This is often left too late and can result in adverse ‘strikes’ on the remuneration report or votes against director re-elections.  Post-AGM may be a good time to review any proxy patterns and the quieter time between AGM seasons more conducive to constructive discussion.

Time to start thinking about your AGM

Although it may seem that the AGM season is still some months away, for companies with a 30 June year end, the lead up to calling the AGM is fast approaching.

Set out below are some key considerations, tips and timeframes to think about when preparing for your AGM.

Corporations Act changes

This year has seen comparatively less regulatory change.  Accepted market practices have now developed around disclosure of chairman, ‘key management personnel’ and proxy voting restrictions.  However, practices for meeting procedures continue to evolve (including polling on the ‘remuneration report’ and in some cases, all resolutions).  You should consider your preferred approach for your AGM. 

New ASX Corporate Governance Principles

The Third Edition of the Corporate Governance Principles and Recommendations were recently released by the ASX Corporate Governance Council as referenced in our earlier post.
 

Although the new Principles and Recommendations are effective from the financial year ending 30 June 2015 (for companies with a 30 June balance date), some companies are seeking to adopt the Principles and Recommendations at an earlier date. 

For early adopters, this may have repercussions for the AGM.  For example, there is now a requirement that background checks be completed on new directors with the outcome of those checks to be disclosed in the notice of meeting.  If applicable, you should allow sufficient time for these checks (which may include police checks) to be completed.

Key steps and timeframes

The time required for preparing a notice of meeting and coordinating the mail out to shareholders is often underestimated. 

The following timeline may assist as a quick reference for the relevant steps (set out in further detail below):  



AGM timeframes - click to view larger image

1. Preparing the notice
   Depending on the number of resolutions that are expected, a prudent approach is to allow 3 to 4 weeks to prepare the notice of meeting.  Some possible resolutions to consider are summarised further below.
    
2. Meeting venue
   Many public companies tend to convene their AGM toward the end of November each year, which means adequate venues can be in short supply, particularly where large numbers of shareholders are expected to attend.  Brisbane based companies should also be aware that the G20 Summit in November will place additional demands on venues and accommodation.  You should ensure to book an appropriate venue well in advance of the preferred meeting date to avoid disappointment. 
    
3. Auditor
   A company’s auditor needs to be present at the AGM and available for a reasonable time for questions from the shareholders.  This means auditors will be attending a number of AGMs for other public companies in October and November.  You should make arrangements with your auditor early to avoid conflicts.
    
4. ASX review
   For a listed company, it is likely that the notice will need to be lodged with ASX for review before it is finalised and posted to shareholders.  ASX requires a minimum of five business days for its review.
   
   ASX becomes particularly busy toward the final five to six weeks of the AGM season and lodging documents early will ensure that sufficient time is provided for the ASX review.
    
5. ASIC review
   Certain matters of special business, including proposed related party benefit and/or financial assistance transactions, may require the notice and other documents to be given to ASIC for review.  ASIC generally has 14 days for its review. 
   
   For listed companies, an additional complicating factor is ASIC’s insistence on ‘final’ signed documents being lodged, which requires ASX’s review (5 business days) to occur before lodgment with ASIC.
    
6. Printing and postage
   Sufficient time also needs to be given for printing (e.g. 3 to 5 days) and postage (e.g. 2 to 3 days) and you should make appropriate arrangements with your share registry, public relations firm or printers (as required) at an early stage.
    
7. Notice period
   For a listed company, 28 clear days notice is required.  For an unlisted company it is 21 clear days.  For clear days you do not count the day of the mail out or the last day of the notice period (so, for example, 21 clear days is actually 23 days).

Resolutions

In addition to the usual resolutions (financial statements and reports, and retirement, appointment and/or re-election of directors), some other possible resolutions are: 

• related party benefit and/or financial assistance approvals
• increasing the directors’ fee pool, and
• pre-approval for any termination benefits for directors or key management personnel (e.g. the issue of performance rights, where such a benefit might trigger on termination in excess limits allowed by the Corporations Act).

 

For listed companies, also consider resolutions for:

• adoption of the remuneration report – this resolution will vary depending on whether the company has received a strike on its remuneration report at the prior AGM
• any issue of securities above the company’s 15% placement capacity (Listing Rule 7.1) or the ratification of previous allotments to refresh this capacity (Listing Rule 7.4)
• for companies outside the S&P/ASX 300 that also have a market capitalisation of $300 million or less, whether approval is sought for the additional 10% placement capacity (Listing Rule 7.1A) -  this requires a special resolution, which can only be obtained at the AGM, and
• any issue of securities to directors, which requires the approval of shareholders (Listing Rule 10.11, Listing Rule 10.14 and/or related party provisions of the Corporations Act).