Australian Corporate Governance: What investors need to be aware of and what applies to them

The Australian Government welcomes productive foreign direct investment, but a good understanding of the Australian corporate governance rules is the key to success when investing in Australia.

Main legislation and regulatory sources

The Corporations Act 2001 (Cth) (the Act) is the principal legislation regulating companies in Australia, while the Australian Securities and Investment Commission (ASIC) is the principal corporate regulatory agency which registers companies and enforces compliance with the Act.

The Takeovers Panel (Panel) is a peer review body and forum for resolving disputes about a takeover bid and other control transactions, while the Australian Securities Exchange (ASX) is a co-regulator with ASIC which prescribes standards for publicly-listed companies and reserves power to police those standards – the ASX Listing Rules.

ASX Corporate Governance Council (Council) has issued a guide entitled Corporate Governance Principles and Recommendations and the ASX listing rules require that publicly-listed companies disclose in their annual report the extent to which they have followed these principles. Proprietary companies may follow the principles voluntarily.

The Australian Foreign Investment Review Board (FIRB) reviews certain foreign acquisitions of Australian shares and assets to ensure they support Australia’s interests, while the Australian Competition and Consumer Commission (ACCC) reviews certain foreign acquisitions under competition and consumer law, where the acquisition could have the effect of substantially lessening competition in the Australian market.

Corporate governance standards

Investors should pay particular attention to the following rules:

SHAREHOLDERS

• Shareholders do not per se have any responsibilities in regards to the corporate governance of the companies in which they invest.
• If companies are limited by shares, the liability of shareholders is limited to the amount paid for their shares.
• Shareholders’ meetings (AGMs and EGMs) are governed by the Act as well as by the individual company’s constitution and any applicable rules (e.g. ASX Listing Rules).
• The Act requires certain types of decisions to be passed by a special resolution, (at least 75 per cent of votes), as compared to an ordinary resolution (simple majority vote).
• Shareholders have no fiduciary duty to the company but they are subject to the statutory oppression prohibitions in the Act.

DIRECTORS

• The board of directors (Board) manages the company and is responsible for the overall governance and strategic direction of the company.
• Shareholders appoint directors at incorporation. Subsequent appointments may occur at Board level with shareholder approval. The Board may not remove a director of a public company.
• Only natural persons (not companies) of 18 years or over, who have not been disqualified from holding office, may serve as directors.
• The Board is comprised of both executive and non-executive directors.
• A proprietary company must have at least one director that lives in Australia. If the company has crowd-sourced funded shareholders, it must have at least two directors and a majority of these directors must live in Australia. A proprietary company is not required to have a secretary but if it does, they must live in Australia.
• A public company must have at least three directors and one secretary. At least two of the directors and at least one secretary must live in Australia.
• The ASX Listing Rules require that directors be re-elected at least every three years.
• The Board is responsible for appointing senior executives to management positions.
• Directors owe fiduciary duties to the company and its members.
• Directors may be personally liable for breach of their duties, e.g. allowing the company to trade whilst insolvent.

FINANCIAL REPORTS

• The Act requires the following entities to prepare financial reports:
◦◦ All disclosing entities
◦◦ Public companies
◦◦ Companies limited by guarantee (except small companies limited by guarantee)
◦◦ All large proprietary companies that are not disclosing entities
◦◦ All registered managed investment schemes
◦◦ Small proprietary companies that are foreign-controlled
◦◦ Small proprietary companies that have one or more crowd-sourced funding shareholders at any time during the year
• Financial reports prepared must comply with Australian Accounting Standards which are in line with the International Financial Reporting Standards (IFRS).

ASIC ANNUAL REVIEWS

• ASIC runs annual reviews of all companies. For most companies and schemes, their annual review date is the anniversary of their date of registration or incorporation.

For more information about Australian Corporate Governance and the recent and new developments please visit www.koffels.com.au/corporate-governance-rules.