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

Harper Review Final Report recommends significant new changes

The Commonwealth Government has been conducting a review of Australia’s competition laws to see if they are fit for purpose. (Click here to see what we had to say about the draft recommendations in The Handshake last October). The Minister for Small Business released the Final Report of the Competition Policy Review Panel on Tuesday (31 March 2015). While a number of the draft recommendations have made it into the Final Report, there are also some significant new changes. Some will fundamentally change the competition law landscape in Australia…if they eventually get into the legislation.

Government procurement

The Panel has recommended that all Government Procurement processes should be subject to competition law and promote competition. At the moment, competition law only applies to Government when it carries on a business. The Panel wants competition law to apply to Government whenever they are undertaking activity in trade or commerce. This will capture one-off transactions, and in particular, Government buying practices. For example, a contract with Government that contained anti-competitive exclusivity clauses would expose the parties to huge penalties if this change were made to the law.

Technology and disruption

The Panel has acknowledged that technology has often done more than competition laws and regulators to bring about competition in industries. A new killer app or device can completely up-end the competitive landscape, even in industries with market leaders who until then have had substantial market power.

In relation to the taxi industry in particular, the Panel endorsed the disruption caused by companies like Uber and essentially called for more of the same, rather than industry protection from disruption.

Publish what you pay: Australia's proposed mandatory anti-corruption reporting standards

In an attempt to eradicate bribery and corruption in the extractives industry, governments around the world, including the United States, Canada and the United Kingdom are introducing mandatory reporting requirements to increase revenue transparency and accountability for resource extraction companies.

The Corporations Amendment (Publish What You Pay) Bill 2014 (Cth) (Bill) sets the stage for Australia to formally align its governance standards with those of its closest allies.  If passed, it will require Australian-based extractives companies to report payments they make to governments on a country-by-country, project-by-project basis. 

The introduction of the Bill is consistent with Australia’s pilot of the Extractive Industry Transparency Initiative (EITI), a global benchmark which supports improved governance in resource-rich countries through the full publication and verification of payments to governments.

Who is affected?

The proposed legislation creates new mandatory reporting requirements for all ASX-listed companies, unlisted public companies, large proprietary limited companies, and controlled joint venture companies that are engaged in a resource extraction activity.  For the purposes of the Bill, ‘resource extraction activities’ include the following activities in relation to oil, gas, mineral mining and native forest logging:

• exploration
• prospecting
• discovery
• development, and
• extraction or logging.

What must be reported?

If the Bill is introduced, affected companies will be required to report any payment, or series of payments, of more than AUD$100,000 made to a domestic or foreign government (including an authority of, or a company owned by, that government entity) in relation to a resource extraction activity.

‘Reportable payments’ (including payments in kind) are broadly defined by the Bill and capture production entitlements, taxes, royalties, dividends, signing, discovery or production bonuses, licence fees, infrastructure improvements, social payments (e.g. payments relating to or given for community projects) and payments for security services.

To avoid concealment of smaller payments, the proposed Bill treats a series of related payments that together meet the threshold of AUD$100,000 as a single payment.

To comply with the reporting requirements, companies will be required to lodge an annual report with ASIC for each resource extraction project that the company is engaged in and for each government entity that the company makes a reportable payment to.  The specific details and rules surrounding the reporting requirements, however, are yet to be finalised.

The proposed legislation requires ASIC to make the company report available, free of charge, on its website not longer than 28 days after receiving it.

Penalties

A failure to take all reasonable steps to comply with or to secure compliance with these new financial reporting requirements will constitute a breach of the Chapter 2M of the Corporations Act 2001 (Cth) and will be subject to the civil penalty provisions of the Act.

Key takeaway

As a result of the heightened scrutiny of payments to governments globally, including with the proposed introduction of the Bill, Australian extractives companies should take a closer look at their existing anti-corruption policies and procedures to review their effectiveness.

Tiffany McLean

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).

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

Foreign investment decisions lack consistency

Two controversial decisions were made regarding foreign investment in the lead up to the holidays – one was highly publicised by Treasurer Joe Hockey, including through a televised press conference.  The other was announced quietly via an emailed media release to a selected audience.

You may have missed the announcement on 11 December that China’s state-owned Yanzhou Coal Mining Company doesn’t need to cut its stake in local unit Yancoal Australia Ltd to below 70% and instead can move to 100% ownership.

By contrast the decision that “Australia’s national interest” will be protected by rejecting Archer Daniels Midland Company’s (ADM) proposed acquisition of GrainCorp Limited was highly publicised.

It could be assumed that public perception rather than issues of competition was the significant factor in the Treasurer’s decision.  The Graincorp acquisition had already obtained ACCC approval (indicating competition concerns were not determining factors), while the Yanzhou decision basically overturns restrictions on ownership and conditions set by the Foreign Investment Review Board (FIRB) four years ago.

The Government has continued to express its encouragement of foreign investment, but the GrainCorp decision is hard to understand in that context.  Interestingly, the issue of food security was not mentioned as a factor, while it was one of the main focuses of the recent Senate enquiry into foreign investment in the agribusiness sector.

In explaining his decision, the Treasurer referred to concerns expressed by grain growers in eastern Australia that the proposed acquisition by ADM could reduce competition, while acknowledging that a “more competitive network” is currently emerging.  The Government’s significant consideration was the “high level of concern from stakeholders and the broader community.”  It is unclear who these other stakeholders are but Hockey went on to say: “I therefore judged that allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally.  This would not be in our national interest.”

The Yanzhou decision raised a difficult problem for the Government.  In allowing this acquisition, there is a risk that the Government is seen as weak by not enforcing its own conditions.  The perception that foreign investors are dictating terms to the government could also undermine public support for the foreign investment regime and ongoing foreign investment more generally.  However, as the Treasurer points out, since the original conditions were imposed on Yanzhou, significant challenges have emerged for the Australian coal industry – changing the nature of play completely.

Changing circumstances require revision and flexible decision making.  In the case of the Yancoal takeover, it is now not so clear that allowing 100% holding is contrary to the national interest.

It will be interesting to observe the Government’s position evolve in 2014.

Media release: Foreign investment application: Archer Daniels Midland Company’s proposed acquisition of GrainCorp Limited
Media release: Foreign investment decision

Duncan Bedford
Duncan is a Partner at McCullough Robertson and an expert in business and transaction structuring and taxation.

Corruption Perceptions Index released – warning to Australian companies entering new markets

Transparency International has released its 2013 Corruption Perceptions Index (CPI), which is becoming a global benchmark for measuring perceived levels of public sector corruption in 177 countries.  For companies considering setting up operations in new jurisdictions, or undertaking cross-border M&A activities, the CPI provides a snapshot of the corruption risk posed in a particular country.

The CPI uses data from reputable independent institutions, specialising in governance and business climate analysis, who conducted international surveys with businesses and in-country experts over a 24 month period.

Countries are ranked on a scale from 0 (perceived to be highly corrupt) to 100 (perceived to be very clean).  Only a small number of countries rank on the CPI as ‘very clean’, while more than two-thirds of the 177 countries featured scored less than 50.  The index confirms that corruption remains prevalent at all levels of government, from issuing local permits to the enforcement of laws and regulations in a majority of countries worldwide.

Australia emerged as one of the year’s ‘decliners’, with its ranking falling from 85 to 81 this year, which could be attributed to the prosecution of Reserve Bank of Australia subsidiaries, Securency International and Note Printing Australia, for foreign bribery, and corruption in the NSW State Government with the recent findings of the NSW Independent Commission Against Corruption into the affairs of the Obeid family.

It is also worth noting the results of some of our trading partner countries in the Asia-Pacific region:

• Papua New Guinea was ranked 144th, with a score of 25 (consistent with its 2012 ranking)
• Indonesia was ranked 114th, with a score of 32 (consistent with its 2012 ranking)
• Laos was ranked 140th with its score improving from 21 to 26.
• Vietnam was ranked 116th with a score of 31 (consistent with its 2012 ranking).

Despite some improvement, corruption in the Asia-Pacific region remains an on-going issue which should not be overlooked.

As discussed in a previous post, corruption affecting corporate Australia is on the rise.  Australian companies looking to set up operations in new countries or seeking to grow organically through cross-border M&A transactions must be aware of the corruption risks posed, particularly in countries which appear in shades of red on this year’s CPI heat-map.

Conducting anti-corruption due diligence in cross-border M&A transactions is imperative, as systemic bribery and corrupt conduct can significantly affect the value of a target company or asset.  It is equally important to undertake an anti-corruption risk assessment before entering a new country to determine appropriate controls that should be put in place to minimise the risk of corruption.

With the regulatory environment ever increasing, Australian companies should focus on developing and embedding an effective anti-corruption compliance program tailored to the risks faced when operating in high-risk countries.  For some practical insights into the key elements of a compliance program, please refer to our previous post.

Tiffany McLean

Tiffany is a Senior Associate at McCullough Robertson

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.

Corporate Australia not immune to corruption

Corruption affecting Corporate Australia is on the rise.  This week, reports surfaced about alleged widespread bribery and corruption at one of Australia’s largest companies. Allegations of improper conduct by two subsidiaries of the Reserve Bank of Australia (RBA) that were previously charged in Australia’s first ever prosecution of foreign bribery laws in 2011 were also reported.

It has been alleged that an ASX 100 company, paid a $42 million kickback to Iraqi officials in order to secure a $750 million oil pipeline contract.  The Australian Federal Police are conducting an ongoing investigation into a matter that was voluntarily reported by the company.

Two RBA subsidiaries were prosecuted for foreign bribery in 2011 for alleged payments made to government officials in Indonesia, Malaysia and Vietnam between 1999 and 2005 to secure banknote contracts.  However, further allegations of attempts to do business with Iraqi officials were reported this week.

The message for Corporate Australia is clear - companies operating in high-risk countries and sectors must take accountability and ensure appropriate measures are put in place to prevent, detect and respond to all forms of bribery and corruption.  A commitment to the issue at board level is essential to driving and embedding a culture of compliance.

Bribery of foreign public officials is strictly prohibited under the Australian Criminal Code Act 1995 (Cth). Australia is under international pressure to increase enforcement of its foreign bribery laws following a review of its implementation of the OECD’s Anti-bribery Convention in October 2012, no Australian company is immune to an investigation.

Companies should consider the following key practical elements when developing an effective anti-bribery and corruption compliance program, proportionate to the risk faced, ensuring it goes beyond a mere ‘paper-policy’:

• recognised commitment from the board and senior management
• undertaking ongoing risk assessments
• performing risk-based due diligence on third parties and agents, joint venture partners and when conducting M&A activity
• raising awareness of anti-bribery and corruption issues through risk-based training and communication, and
• monitoring and reviewing of policies and procedures regularly to ensure their effectiveness.

The consequences of bribery and corruption are detrimental to any company’s business.  Even mere allegations can lead to significant reputational damage and a fall in a company’s share price.  Prosecution can result in significant fines and jail sentences for individuals.

Tiffany McLean

Tiffany is a Senior Associate at McCullough Robertson

UK Corporate Governance Reform Proposals and the Implications for Australia

Recently, the UK Business Secretary, Dr Vince Cable, launched a policy paper entitled Making companies more accountable to shareholders and the public containing some radical law reform proposals with major implications for corporate governance.  As corporate law developments in the UK often influence Australian law reform, it is worth considering some of the more dramatic proposals.

The role of British banks in the GFC and the consequential impacts upon public finances and the economy in the UK provided the setting and motivation for the release of the paper.  In particular, it drew on the considerations and recommendations set out in the final and major report of the Parliamentary Commission on Banking Standards (PCB) entitled Changing banking for good.

That report criticised the lack of regulatory body action against those who had presided over substantial failures within banks and found the existing regime provided an imbalance of incentives (i.e. permission to undertake aggressive risks but without sufficient accountability mechanisms to act as a counterbalance).  Further, it identified a combination of collective decision-making, complex decision-making structures and extensive delegation which made it difficult to hold particular senior banking officials responsible for even the most widespread and flagrant failures. Two measures in particular recommended that:

• all key responsibilities within a bank be assigned to a specific, senior individual who, regardless of any delegation or sharing of tasks, would remain legally responsible (Senior Persons Regime), and
• the Commission proposed the creation of a new criminal offence of reckless misconduct in the management of a bank which was subsequently supported by the Industry Secretary .  This offence would apply to those covered by the proposed Senior Persons Regime.  Regardless of the degree of difficulty in obtaining a conviction, such a specific regime would galvanise the attention of those who lead a bank which is over-leveraging its assets; creating high risk, complex products; or departing from reasonable standards of asset allocation.  The criminal offence proposal is accompanied by a recommendation that civil recovery action can be taken against those convicted of reckless management of a bank.  To increase the prospect of directors being personally liable for the consequences of fraudulent or wrongful trading (a term of potentially wide import) liquidators will have the right to sell or assign fraudulent or wrongful trading actions.

Other proposals put forward by Secretary Cable include:

• a regime to identify beneficial ownership of company shares to effectively identify the ultimate controllers of shares and companies
• limits on the use of bearer shares, and
• new directors’ duties and wider powers for the Court to assess directors’ duties.

The paper proposes some specific reforms for the banking and finance sectors and others of general applicability to directors.

Secretary Cable supported the PCB's recommendations that directors of a bank be subject to a duty to prioritise the safety and stability of the bank over the interests of shareholders.  Further, it is proposed to widen the powers of the Court to disqualify directors by allowing a much more extensive range of matters to be considered including the scale of the loss and the impact on wider society.  This would require directors to balance a wider range of stakeholder interests when making decisions and keeping matters under review.  When combined with the Senior Persons' Regime, these proposals, if adopted, have significant implications for corporate governance, including the recruitment process and criteria for appointing senior executives of banks and members of boards.

As history shows, radical regulatory reform proposals often follow dramatic crashes.  This is entirely understandable, as is the desire of a government to respond to failures of market forces which result in, as has recently been the case, the public assumption of private debts and losses.  The Senior Persons Regime appears to be capable of eliminating some of the enforcement complexities and failures of the existing regime, but the wider director duty proposals may, upon closer scrutiny, be more problematic than practical.

For example, if the board in effect has to have regard to the national interest, how in practical terms, can it distill a decision from a wide range of possibly competing factors.  Equally, if there is a duty to advance safety and stability over other considerations, would it imply that all directors have to have extremely high, possibly actuarial, levels of financial literacy?  Without these, how would one be able to assess the potential impacts of complex instruments and algorithmically generated portfolios.

The proposals, which are open for public consideration, will be watched carefully for any signals they may send to Australian law reformers.

Professor Peter Little

Peter is a Professor of Business Law, Executive Dean of the QUT Business School and a Consultant to McCullough Robertson on Corporate Advisory issues.

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.

Will your email trails sink you in court?

Electronic communication, especially email, has grown exponentially and made a major contribution to business efficiency.  It has also changed behaviours, most notably through people being able to instantly issue instructions, converse and negotiate without the formalities of traditional written correspondence or face to face meetings.  Accompanying these changes has been a tendency for unguarded comment to be included in emails creating a permanent record of the person’s state of mind.  Frequently, and regrettably, these can incriminate the sender or the organisation they represent.  Emails of this nature can be referred to as VIPERS because they are viral, instantaneous, permanent, extraterritorial, regrettable and self-harming and are increasingly having a decisive effect in major cases. Such was the case in Norcast S.ár.L v Bradken Limited (No2) [2013] FCA 235.

In this case the plantiff, Norcast succeeded in recovering damages amounting to US$22.4 million representing the difference in price it received upon the sale of a subsidiary, NWS, and that which it would have received had the sale price not been reduced as a result of a bid rigging arrangement.  The original purchaser a Castle Harlan entity (CH) paid US$190 million and, immediately following settlement of the sale, sold NWS to a subsidiary of the defendant, Bradken for US$212.4 million.  It was found that the original and ultimate purchasers had entered into an arrangement whereby CH would bid and Bradken would not.

There are many interesting legal questions raised by this case which is subject to appeal, however the impact of extensive email correspondence between the parties is arguably the one which attracts the most interest.  The first point to be made is when a court is having to decide whether an arrangement has been made the intentions of the parties are crucial. Emails, a few of which are considered below, provided the Court with strong evidence from which to infer what the initial and ultimate purchasers were respectively thinking.

For example, the Judge infers from email correspondence in the early stages of the sale process: “For a company not interested in buying NWS, that was a lot of activity in one day directed to that end - the acquisition of NWS.”  Later, when Bradken asserted that it was considering the value of NWS with a view to making a direct bid Gordon J observes: “The form and content of the various communications are consistent only with an arrangement whereby CH would bid, and Bradken would not bid, for NWS…”

On another occasion, W, a Bradken employee emailed, P, an employee of CH a few days after CH had submitted its letter of intent to purchase NWS. In his Honour’s view, this was because W “could no longer stand the suspense” and wanted to know if there was any news or feedback on the bid.  His Honour’s view was that W “was not enquiring about the weather” and went on to reject W’s assertions that he was not aware that CH was actually making a bid of US$190 million.  These assertions were, he found, contrary to contemporary documentary record, in particular, contemporary emails.

It can be said in defence of emails that, in the circumstances of this case, they facilitated the negotiation of a complex international transaction involving a significant number of participants.  As is common, negotiations were fast moving, at times requiring swift responses to changing circumstances.  Electronic communication enabled this to happen efficiently.  However, it also created a rich transcript from which the court inferred the intentions of the parties from time to time notwithstanding evidence to the contrary from some very distinguished business people and organisations.

It was once said that the nature of an 'arrangement' is such that evidence of its existence will be hard to find as it may be arrived at as easily as by a wink or a nod.  Electronic communication, emails especially, may have changed all of that.

Professor Peter Little

Peter is a Professor of Business Law, Executive Dean of the QUT Business School and a Consultant to McCullough Robertson on Corporate Advisory issues.

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.