Minter Ellison Alert | Reducing the compliance burden for business: some welcome reforms on the horizon

17 April 2014

Treasury has recently released draft legislation for public comment, with the aim of significantly reducing compliance costs for business and improving business productivity generally. The proposals comprise:

  • removing the obligation on a public company to hold a general meeting on the request of 100 shareholders (the so-called '100 member rule');
  • introducing a new test for payment of dividends;
  • requiring companies to include a general description of their remuneration governance framework, to the extent that it is not included elsewhere in the annual report;
  • removing the requirement to disclose the value of options granted to key management personnel, replacing it with a requirement to disclose the number of lapsed options and the year in which they were granted;
  • relieving certain disclosing entities from the obligation to prepare a remuneration report;
  • transferring the remuneration setting responsibility for the offices of the Financial Reporting Council (FRC), Australian Accounting Standards Board (AASB), and the Auditing and Assurance Standards Board (AUASB) to the Remuneration Tribunal;
  • improving the efficiency of the Takeovers Panel, by allowing the Panel to perform Panel functions while overseas;
  • exempting certain companies limited by guarantee from the need to appoint or maintain an auditor; and
  • a minor technical amendment to clarify that companies may vary their financial year by up to 7 days, regardless of the length of previous years.

The Bill is expected to be introduced in the 2014 Autumn/Winter Sittings of Parliament. There is a five week consultation period, with submissions closing on 16 May 2014.

Accordingly, you should note the forthcoming changes and recognise that, as with any draft legislation, the proposed reforms are likely to undergo refinement as a result of the consultation process and then the parliamentary process.

Minter Ellison generally welcomes the proposed reforms as a positive step in reducing red tape. We will be making a submission relating to the proposed new dividend test, elaborating on the need to better accommodate dividends on preference shares (see discussion below).

If you have any queries in relation to how the proposed reforms may impact your business, please contact us.

If any of the proposed changes affect you directly and you consider that they need refinement, you may wish to make a submission.

Set out below are our observations on what we consider are the two key substantive reforms.

100 member rule

Under the current law, directors of a company must arrange to hold a general meeting, paid for by the company, at the request of members with a total of 5% of voting shares, or 100 members entitled to vote at the annual general meeting.

There have been repeated calls over the years from Australian business groups to abolish the '100 member rule' on the basis that it provides too low a hurdle for activists and other so-called pressure groups to pursue their own agendas. For example, in 2012 Woolworths received a request from a social activist group to hold an extraordinary general meeting to consider a resolution to limit maximum bets on electronic gaming machines to $1.00 per spin and restrict venue opening times to 18 hours a day. The request was supported by 257 shareholders. Woolworths took the matter to the Federal Court, arguing it would be too expensive to hold a separate meeting and that it should be allowed to hold the requested meeting on the same date as its annual general meeting in November. The Federal Court agreed, recognising that the cost to Woolworths of convening the requested meeting on a stand-alone basis would be over $500,000. The Court also noted that there was no timing imperative that necessitated the extraordinary general meeting being held before the annual general meeting. Those who support the abolition of the '100 member rule' point to such examples in support of their argument that the rule puts listed entities to unnecessary expense and that 'genuine' majority shareholders bear the direct and indirect costs just for the sake of a particular activist cause.

The draft Bill proposes to remove the 100 member rule. The stated rationale is that in large corporations, 100 members may hold a very small percentage of voting shares – often well below 1% . The 100 member rule therefore allows holders of an insignificant percentage of voting shares to force a company to incur the potentially significant costs of calling and holding a general meeting. As a successful vote at a general meeting will usually require the support of over 50% of the votes cast, it is typically unlikely that any resolution proposed by 100 members with an insignificant shareholding will receive the required support.

Those who advocate maintaining the '100 member rule' claim that it provides an important element of corporate accountability and that assertions of its misuse for fringe causes are overstated. However, as the Explanatory Memorandum accompanying the draft Bill notes, groups of small shareholders will continue to be able to require directors to hold a general meeting if they hold at least 5% of the total number of voting shares, and groups of 100 shareholders will also continue to be able to place matters on the agenda of general meetings that have been or are proposed to be called by the company. An example of the recent exercise of this latter right can be seen with Santos. In March this year, a group of environmental organisations presented the Santos board with a shareholder resolution supported by more than 100 individual shareholders calling for the company to abandon its Narrabri coal seam gas project in New South Wales. That resolution will form part of the business to be considered at Santos' forthcoming annual general meeting.

New dividend test

Section 254T of the Corporations Act currently provides that dividends may not be paid unless certain conditions are met, including: 

  • that a company has positive net assets following the payment of a dividend;
  • that the payment is fair and reasonable to the shareholders as a whole; and
  • that the payment does not materially prejudice the company’s ability to pay its creditors (collectively, the net assets test).

These additional tests were introduced in 2010 to address concerns that changes to the accounting standards impacted on the calculation of profits, limiting the company’s ability to pay dividends under the previous, profit based dividends test.

Stakeholders have highlighted that despite the stated intent of the 2010 amendments to 'repeal' the profits rule, the operation of Part 2J of the Corporations Act limits a company’s ability to make a distribution out of anything other than profits. Further, it has been suggested that ‘net assets’ is not an effective measure of company solvency. Chapter 2J of the Corporations Act restricts the payment of distributions from capital (rather than profit) by imposing additional conditions on such reductions (capital maintenance provisions). Additional conditions apply where a reduction in capital is 'selective' (affecting only certain shareholders) as opposed to 'equal' (where all ordinary shareholders participate equally).

Further, the current requirement for assets and liabilities to be calculated in accordance with the accounting standards places a compliance burden on companies that are not otherwise required to apply accounting standards.

The proposed amendments replace the net assets test with a pure solvency test. They also exempt dividend payments from the capital maintenance provisions to the extent that they are ‘equal reductions’ in capital (paid only to holders of ordinary, not preference, shares. This is opposed to ‘selective reductions’ which may benefit some shareholders more than others, or which involve preference shares, and require additional approvals under current law).

The proposed amendments mirror the provisions listed under section 256B of the Corporations Act. This is in order to clarify that the ‘equal reduction’ requirement is applied in a manner that is consistent with the policy objective of expanding the circumstances in which dividends may be paid to shareholders. For example, this ensures that shareholders who use dividend reinvestment plans remain within scope of the changes.

The proposed amendments further require directors to include details about the source of dividends paid and the company’s dividend policy in the Annual Director’s Report when paid out of sources other than profits. The additional reporting obligations are an important integrity measure and ensure that shareholders have the information they need about a company’s dividend policy to make informed investment decisions. These reporting obligations are expected to impose no net increase in company compliance burdens, as they replace the current requirement for companies to formally seek shareholder approval by a resolution at the Annual General Meeting in order to distribute share capital.

Author(s) Alberto Colla, Bart Oude-Vrielink