Corporate Governance and Directors' Duties Guide: Australia

Transcription

1 By in-house counsel, for in-house counsel. InfoPAK SM Corporate Governance and Directors' Duties Guide: Australia Sponsored by: Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC USA tel , fax

2 2 Corporate Governance and Directors Duties Guide: Australia Corporate Governance and Directors' Duties Guide: Australia January 2016 Provided by the Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC tel fax This InfoPAK SM provides a Q&A that gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors' duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals. To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool at The Q&A is part of the global guide to corporate governance law. For a full list of jurisdictional Q&As visit This material was developed by PLC. For more information about PLC, visit their website at The information in this InfoPAK SM should not be construed as legal advice or legal opinion on specific facts, and should not be considered representative of the views of Practical Law or of ACC or any of its lawyers, unless so stated. This InfoPAK SM is not intended as a definitive statement on the subject, but rather to serve as a resource providing practical information to the reader. Copyright 2016 Practical Law Company (PLC) & Association of Corporate Counsel

3 Contents I. Corporate Governance Trends... 6 A. What Are the Main Recent Corporate Governance Trends and Reform Proposals in Your Jurisdiction?... 6 II. Corporate Entities... 6 A. What Are the Main Forms of Corporate Entity Used in Your Jurisdiction?... 6 III. Legal Framework... 7 A. Outline the Main Corporate Governance Legislation and Authorities That Enforce It. How Influential Are Institutional Investors and Other Shareholder Groups in Monitoring and Enforcing Good Corporate Governance? List Any Such Groups with Significant Influence in This Area B. Has Your Jurisdiction Adopted a Corporate Governance Code?... 7 IV. Corporate Social Responsibility and Reporting... 8 A. Is It Common for Companies to Report on Social, Environmental and Ethical Issues? Highlight, Where Relevant, Any Legal Requirements or Non-Binding Guidance/Best Practice on Corporate Social Responsibility V. Board Composition and Restrictions... 9 A. What Is the Management/Board Structure of a Company?... 9 B. Are There Any General Restrictions or Requirements on the Identity of Directors? C. Are Non-Executive, Supervisory or Independent Directors Recognised or Required? D. Are the Roles of Individual Board Members Restricted? E. How Are Directors Appointed and Removed? Is Shareholder Approval Required? F. Are There Any Restrictions on a Director's Term of Appointment? VI. Directors' Remuneration A. Do Directors Have to Be Employees of the Company? Can Shareholders Inspect Directors' Service Contracts? B. Are Directors Allowed or Required to Own Shares in the Company? C. How Is Directors' Remuneration Determined? Is Its Disclosure Necessary? Is Shareholder Approval Required? VII. Management Rules and Authority A. How Is a Company's Internal Management Regulated? For Example, What Is the Length of Notice and Quorum for Board Meetings, and the Voting Requirements to Pass Resolutions at Them? B. Can Directors Exercise All the Powers of the Company or Are Some Powers Reserved to the Supervisory Board (if Any) or a General Meeting? Can the Powers of Directors Be Restricted and Are Such Restrictions Enforceable Against Third Parties?... 16

4 4 Corporate Governance and Directors Duties Guide: Australia C. Can the Board Delegate Responsibility for Specific Issues to Individual Directors or a Committee of Directors? Is the Board Required to Delegate Some Responsibilities, for Example for Audit, Appointment or Directors' Remuneration? VIII. Directors' Duties and Liabilities A. What Is the Scope of a Director's General Duties and Liability to the Company, Shareholders and Third Parties? B. Briefly Outline the Regulatory Framework for Theft, Fraud, and Bribery That Can Apply to Directors C. Briefly Outline the Potential Liability for Directors under Securities Laws D. What Is the Scope of a Director's Duties and Liability under Insolvency Laws? E. Briefly Outline the Potential Liability for Directors under Environment and Health and Safety Laws F. Briefly Outline the Potential Liability for Directors under Anti-Trust Laws G. Briefly Outline Any Other Liability That Directors Can Incur under Other Specific Laws H. Can a Director's Liability Be Restricted or Limited? Is It Possible for the Company to Indemnify a Director Against Liabilities? I. Can a Director Obtain Insurance Against Personal Liability? If So, Can the Company Pay the Insurance Premium? J. Can a Third Party (Such As a Parent Company or Controlling Shareholder) Be Liable As a De Facto Director (Even Though Such Person Has Not Been Formally Appointed As a Director)? IX. Transactions with Directors and Conflicts A. Are There General Rules Relating to Conflicts of Interest Between a Director and the Company? B. Are There Restrictions on Particular Transactions Between a Company and Its Directors? C. Are There Restrictions on the Purchase or Sale by a Director of the Shares and Other Securities of the Company He Is a Director of? X. Disclosure of Information A. Do Directors Have to Disclose Information about the Company to Shareholders, the Public or Regulatory Bodies? XI. Shareholder Rights A. Company Meetings B. Minority Shareholder Action XII. Internal Controls, Accounts and Audit A. Are There Any Formal Requirements or Guidelines Relating to the Internal Control of Business Risks? B. What Are the Responsibilities and Potential Liabilities of Directors in Relation to the Company's Accounts? Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

5 5 C. Do a Company's Accounts Have to Be Audited? D. How Are the Company's Auditors Appointed? Is There a Limit on the Length of Their Appointment? E. Are There Restrictions on Who Can Be the Company's Auditors? F. Are There Restrictions on Non-Audit Work That Auditors Can Do for the Company That They Audit Asccounts for? G. What Is the Potential Liability of Auditors to the Company, Its Shareholders and Third Parties if the Audited Accounts Are Inaccurate? Can Their Liability Be Limited or Excluded? H. What Is the Role of the Company Secretary (or Equivalent) in Corporate Governance? XIII. Online Resources A. Australian Government ComLaw B. Australian Securities Exchange XIV. About the Authors A. John Williamson-Noble, Partner B. Tim Gordon, Partner For more ACC InfoPAKs, please visit

6 6 Corporate Governance and Directors Duties Guide: Australia I. Corporate Governance Trends A. What Are the Main Recent Corporate Governance Trends and Reform Proposals in Your Jurisdiction? A notable recent reform in corporate governance has been the release of the third edition of the Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations). These principles and recommendations apply to companies listed on the ASX. The third edition places a greater emphasis on corporate social responsibility and includes some less significant changes to previous recommendations. The revised Principles and Recommendations came into effect on 1 July They are one of the main primary sources of authority for corporate governance. The other main sources of authority are: The Corporations Act 2001 (Cth) (Corporations Act). The Australian Securities Exchange (ASX) Listing Rules (Listing Rules), which apply to companies listed on the ASX. The Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 contains a provision that removes the ability for a group of 100 shareholders to force a meeting of the company. If passed, this measure would remove one possible avenue for shareholder activism, as in large companies a group of 100 shareholders may represent a very small proportion of the company's members. There have been a number of incidents in recent years that have demonstrated a regulatory focus on curbing selective disclosure of price sensitive information by listed companies. An example of selective disclosure is the release of confidential price-sensitive information to select third parties. Selective disclosure is contrary to a listed company's obligations under the Listing Rules. Companies face significant fines for contravening the Listing Rules. II. Corporate Entities A. What Are the Main Forms of Corporate Entity Used in Your Jurisdiction? The main forms of corporate entity used for business in Australia are private and public companies. Public companies may be listed or unlisted. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

7 7 III. Legal Framework A. Outline the Main Corporate Governance Legislation and Authorities That Enforce It. How Influential Are Institutional Investors and Other Shareholder Groups in Monitoring and Enforcing Good Corporate Governance? List Any Such Groups with Significant Influence in This Area. The Corporations Act is the primary legislation governing the activities of companies. Companies listed on the Australian Securities Exchange (ASX) must also comply with the Listing Rules and take into consideration the ASX Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations). The Australian Securities and Investment Commission (ASIC) enforces the Corporations Act. ASIC is established and empowered by the Australian Securities and Investment Commission Act 2001 (Cth). The Listing Rules and Principles and Recommendations are not statutory authority. They are rules set by the ASX and apply to listed entities through a contractual relationship. Compliance with the Listing Rules and the Principles and Regulations is monitored and enforced by both ASIC and the ASX. The ASX has limited enforcement powers that are based largely in contract. In contrast, ASIC is empowered under statute to impose civil and criminal penalties for breaches of the Listing Rules. Australia is considered a favourable regulatory jurisdiction for shareholder activism. As a result, increased shareholder activism is anticipated. Companies are therefore encouraged to continue to sharpen their focus on monitoring and improving their corporate governance practices. B. Has Your Jurisdiction Adopted a Corporate Governance Code? Companies listed on the Australian Securities Exchange (ASX) are required to consider the Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) published by ASX's Corporate Governance Council. Compliance with the Principles and Recommendations is on an "if not, why not" (similar to "comply or explain") basis. If a listed company does not comply with a recommendation, that company must explain why. For more ACC InfoPAKs, please visit

8 8 Corporate Governance and Directors Duties Guide: Australia The Principles and Recommendations list eight overarching principles and 29 specific recommendations for corporate governance. Topics covered by the Principles and Recommendations include: Board composition, election processes and best practice in relation to the board. The establishment of board committees overseeing audit, risk, remuneration and nomination. Corporate reporting, risk management and officer remuneration. Diversity (at both a board level and a company-wide level). Continuous disclosure under the Listing Rules. Economic, social and environmental sustainability reporting and accountability. A listed company must report annually on its compliance with the Principles and Recommendations either in a company's annual report or at an online location described in the annual report. The latest edition of the Principles and Recommendations also requires the concurrent completion and submission of a prescribed form outlining whether the company has complied with a recommendation and if not, why not. There is no compulsory corporate governance code for unlisted companies. IV. Corporate Social Responsibility and Reporting A. Is It Common for Companies to Report on Social, Environmental and Ethical Issues? Highlight, Where Relevant, Any Legal Requirements or Non-Binding Guidance/Best Practice on Corporate Social Responsibility. Listed companies are encouraged under the Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) to make disclosures around economic, social and environmental sustainability. This disclosure requires companies to consider factors that are divorced from, and in some cases contrary to, the profit-making objectives of the business. An example is the effect of the company's business on the health of the ecosystems in which it operates. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

9 9 One of the principles underlying the Principles and Recommendations is that companies should act ethically and responsibly. This principle manifests itself in a code of conduct requirement that listed companies must adopt or provide reasons for not doing so. There is no requirement for unlisted companies to report on social, environmental or ethical issues under the Corporations Act. V. Board Composition and Restrictions A. What Is the Management/Board Structure of a Company? 1. Structure Australian companies use a one-tier board structure. 2. Management Companies are managed by their executives, for example the chief executive officer (CEO), chief financial officer (CFO) and chief operating officer (COO). 3. Board Members Companies may have a combination of executive and non-executive board members. The chairperson is generally a non-executive director, and mentors the executives. In listed companies, the Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) recommend that companies should have a sufficient number of nonexecutive directors to ensure that the best interests of the company motivate the board. Unlisted companies are not obliged to have non-executive directors. 4. Employees' Representation Employees do not have a right to representation on a company's board, unless the company's constitution provides for employee representation. For more ACC InfoPAKs, please visit

10 10 Corporate Governance and Directors Duties Guide: Australia 5. Number of Directors or Members A private company must have a minimum of one director. A public company must have at least three directors. Both public and private companies must have one or more members. B. Are There Any General Restrictions or Requirements on the Identity of Directors? 1. Age Company directors must be at least 18 years old. There is no upper limit on the age of a director. 2. Nationality The restrictions are that: In a private company, at least one director must ordinarily reside in Australia. In a public company, at least two directors must ordinarily reside in Australia. 3. Gender The Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) make several recommendations on gender diversity for listed companies. Recommendations include: Establishing a diversity policy and disclose progress towards meeting diversity objectives under the policy at the end of each reporting period. Employing and publish a "skills matrix" setting out the company's present and aspirational mixture of skills and diversity on the board. There is no minimum gender-related requirement for unlisted companies. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

11 11 C. Are Non-Executive, Supervisory or Independent Directors Recognised or Required? 1. Recognition The concept of non-executive directors is recognised and non-executive directors are common. Listed companies are required to have appropriate independent representation on the board. The Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) outline the criteria that determine whether a director is independent. 2. Board Composition Listed companies are encouraged by the Principles and Recommendations to have a majority of independent directors. There is no requirement that the board of an unlisted company have any independent directors. 3. Independence A director's independence is assessed on a case-by-case basis and is not subject to strict rules or qualifications. The test for the independence of a director is whether the director in question can and will bring independent judgement to matters brought before the board. The Principles and Recommendations provide examples of factors that may indicate that a director is not independent, including: The company has employed the director as an executive within three years of appointment as a director. The director is a substantial security holder in the company. The director has a material contractual relationship with the company. The director has been a director for such a time that their independence is compromised. For more ACC InfoPAKs, please visit

12 12 Corporate Governance and Directors Duties Guide: Australia D. Are the Roles of Individual Board Members Restricted? The Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) recommend: The chair of the board of a listed company should be an independent director. The same person does not occupy the roles of chair and chief executive officer. E. How Are Directors Appointed and Removed? Is Shareholder Approval Required? The method of appointment of a director depends on whether a company is private, public or listed. 1. Private Companies Directors of private companies can be elected by either: The shareholders at a general meeting. The directors. In each case, a simple majority of votes elects the nominee. If other directors elect the director, the shareholders at a general meeting must confirm the election within two months. The company's constitution may vary or exclude these rules. 2. Public Companies Public companies appoint directors in the same way as private companies. However, if the current directors elect the director, shareholders must confirm the election at the company's next annual general meeting. 3. Listed Companies A listed company must hold an election of directors each year in addition to complying with the requirements for the public companies. A director of a listed company must stand for re-election to hold office beyond the latest of the third annual meeting since their appointment or three years. This three year rule for does not apply to sole managing directors of the company, see Section V.F. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

13 13 The Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) also include recommendations on the appointment of directors and the structure of the board. 4. Removal of Directors The board or the shareholders of a private company may remove a director by resolution. The company's constitution may alter or exclude this rule. Directors of public companies can only be removed by a resolution of the members. They cannot be removed by the other directors. F. Are There Any Restrictions on a Director's Term of Appointment? There are no restrictions on the term of a director's appointment for unlisted companies. Directors of listed companies cannot hold office without standing for re-election after the later of: The third annual meeting since their appointment. Three years. An exception exists for managing directors, who are not required to retire unless there is more than one managing director. In that case, one of the managing directors must rotate or retire on the same terms as the other directors. VI. Directors' Remuneration A. Do Directors Have to Be Employees of the Company? Can Shareholders Inspect Directors' Service Contracts? Directors are officers of the company. The company does not need to engage a director under an employment contract. However, the director's role may be subject to written terms of appointment. Shareholder access to a director's service contract or appointment terms may be provided for in the company's constitution, shareholders' agreement or other contractual document. For more ACC InfoPAKs, please visit

14 14 Corporate Governance and Directors Duties Guide: Australia There is no statutory requirement to provide shareholders with access to contractual documents relating to the engagement of directors. A company must disclose information about the directors' remuneration if directed to do so by a group of 100 shareholders or by shareholders holding 5% or more of the votes in the company. B. Are Directors Allowed or Required to Own Shares in the Company? Directors may own shares in the company. There is no requirement for directors to own shares, unless company's constitution imposes a shareholding requirement. C. How Is Directors' Remuneration Determined? Is Its Disclosure Necessary? Is Shareholder Approval Required? 1. Determination of Directors' Remuneration Unlisted companies. The remuneration of directors of unlisted companies is set by a resolution of the shareholders. This rule may be amended or varied by the company's constitution. Listed companies. The shareholders of the company set the total pool of remuneration paid to non-executive directors. The non-executive director remuneration pool agreed by the shareholders does not restrict the pay of executive directors. However, their remuneration must be reasonable and not include a commission or percentage of operating revenue. The Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) recommend that listed entities establish a remuneration committee to review and direct board policy in relation to director and executive remuneration. 2. Disclosure The directors of listed companies are required to provide information about directors' remuneration in the directors' report for each financial year. The Corporations Act also provides that if a group of at least 100 shareholders, or shareholders holding 5% of more of the voting rights in the company request details of the directors' remuneration, the directors must furnish that information. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

15 15 3. General Issues and Trends Recent amendments to the Corporations Act have imposed measures to increase directors' and management accountability in relation to their remuneration. These are: A two strikes rule applies in respect of the remuneration report of a listed company. If 25% of members in attendance and entitled to vote on the report vote against its adoption in two consecutive years, a motion to hold a "spill meeting" must be put to the meeting. At a spill meeting, each director of the company is removed from office and shareholders must vote on the composition of a new board. If the meeting resolves by ordinary resolution to hold the spill meeting, the spill meeting must be held within 90 days. Members may vote to reelect members of the board that were removed at the spill meeting, or may nominate new directors to take their place. A prohibition on hedging directors' risk associated with equity-based remuneration that has not vested or is subject to a holding lock. The intent behind the prohibition was to ensure that directors' financial gain is closely linked to the company's success. VII. Management Rules and Authority A. How Is a Company's Internal Management Regulated? For Example, What Is the Length of Notice and Quorum for Board Meetings, and the Voting Requirements to Pass Resolutions at Them? A company's internal management is governed by both statutory rules and the company's constitution. Companies have some freedom in respect of internal management. For example, a company's constitution may set the quorum for board meetings, create its own constitutional rules for passing resolutions without a meeting, impose its own notice requirements for board meetings and determine the mechanism for passing board resolutions. For more ACC InfoPAKs, please visit

16 16 Corporate Governance and Directors Duties Guide: Australia B. Can Directors Exercise All the Powers of the Company or Are Some Powers Reserved to the Supervisory Board (if Any) or a General Meeting? Can the Powers of Directors Be Restricted and Are Such Restrictions Enforceable Against Third Parties? 1. Directors' Powers The division of powers between the board and the members of a company is generally governed by the company's constitution within the limits set by statute. In default of a specific rule, the Corporations Act provides that the directors of a company can exercise all of the company's powers except those restricted by the Corporations Act or the company's constitution. 2. Restrictions A shareholder resolution is required to exercise some powers. A company's constitution cannot displace or amend these restrictions on the power of directors. Examples of powers reserved for the members are: Amending or replacing the company's constitution. Approval of certain types of share buyback. Approval of certain types of capital reduction. Reduction of share capital. Removing and approving the election of the directors of a public company. C. Can the Board Delegate Responsibility for Specific Issues to Individual Directors or a Committee of Directors? Is the Board Required to Delegate Some Responsibilities, for Example for Audit, Appointment or Directors' Remuneration? The directors of a company may delegate their powers to a committee, individual directors, employees of the company, or any other person (Corporations Act). Delegation does not absolve the directors for responsibility for the exercise of their powers. The director is responsible for the exercise of that power by a delegate as if the director had exercised it himself. However, if the delegating director has a reasonable belief in the legal compliance and competence of the delegate, the delegating director may not be held responsible. The Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

17 17 recommend that listed companies establish audit, remuneration, risk and nomination committees. The board is not required to delegate to committees the power to act on their portfolios. The board can decide whether a committee has an advisory role or whether the committee is empowered to exercise the relevant powers. VIII. Directors' Duties and Liabilities A. What Is the Scope of a Director's General Duties and Liability to the Company, Shareholders and Third Parties? Directors' duties are imposed by statute, at equity and at common law. Directors' duties stem from fiduciary principles and the requirements for a director's loyalty to the company. Duties include the duty to act in good faith in the interests of the company, avoid conflicts and to act for a proper corporate purpose. The statutory duties enshrined in the Corporations Act exist alongside common law duties and do not displace them. These duties are: To act with due care and diligence. To act for a proper purpose. To exercise powers and discharge duties with care and diligence. Not to use the director's position for personal gain or to the detriment of the company. Not to use information obtained as a director for personal gain or to the detriment of the company. The business judgment rule provides a defence to directors for breaches of the duty to act with due care and diligence. A director's actions will be considered to have met the relevant standard if they were made as the result of sound business judgment made by the director. For conduct to fall within the business judgment rule, the director must: Make the judgement in good faith for a proper purpose. Not have a material personal interest in the subject matter of the judgment. Inform themselves about the subject matter of the judgment to the extent they reasonably believe is appropriate. Rationally believe that the judgment is in the best interests of the company. For more ACC InfoPAKs, please visit

18 18 Corporate Governance and Directors Duties Guide: Australia A director's duty is to company as a whole but does not extend to individual shareholders. In insolvency situations, directors may also owe a duty to act in the interests of the company's creditors. B. Briefly Outline the Regulatory Framework for Theft, Fraud, and Bribery That Can Apply to Directors. Companies are subject to bribery prohibitions under the Criminal Code Act 1995 (Cth). These prohibitions apply to the bribery of Australian federal and foreign government officials. A director's conduct may fall under the anti-bribery provisions if the director causes the relevant action. There are additional laws that prohibit bribery at a state and territory level. C. Briefly Outline the Potential Liability for Directors under Securities Laws. Directors may be liable for a range of offences related to the issue and transfer of securities. In addition to the directors' duties that may be breached by a director's improper dealings with securities, a number of transaction-specific offences exist. For example: Criminal and civil liability for defective disclosure documents in relation to the issue of securities by a company. Criminal and civil liability for insider trading. D. What Is the Scope of a Director's Duties and Liability under Insolvency Laws? The Corporations Act sets out the legislative framework for insolvency, including the rights of creditors and the consequences of insolvent trading. Directors have a duty to prevent their company from incurring debts while insolvent. A director is personally liable if she fails to prevent the company from incurring a debt when she has reasonable grounds for suspecting that either: The company is insolvent. The company will become insolvent because of incurring that debt (or in addition to other debts). Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

19 19 E. Briefly Outline the Potential Liability for Directors under Environment and Health and Safety Laws. Each state and territory has introduced legislation imposing liability on directors for environmental offences committed by their company. The general principle is that if a corporation commits an environmental offence each director of the corporation is liable for the same offence and is at risk of criminal prosecution. A director may be able to avoid liability if he can rely on a statutory defence, such as the defence of due diligence. The test for prosecution of a criminal offence is one of culpability. However, this is general policy and not enshrined in statute. The link between the director and the company's action does not require intent to be proven and could arise out of negligence. F. Briefly Outline the Potential Liability for Directors under Anti- Trust Laws. The Competition and Consumer Act 2010 (Cth) imposes liability for anti-competitive conduct on corporate entities. Although the liability attaches to the conduct of companies, directors of companies may attract both criminal and civil liability by virtue of their position in the company and the particular anti-competitive conduct involved. Criminal penalties introduced in 2009 may result in directors serving prison sentences for breaches involving making or giving effect to cartel provisions. The types of serious cartel conduct that may attract criminal liability are price fixing, restricting outputs, allocating markets and bid rigging. The law also prohibits a company from indemnifying a director for entering into or procuring a contract that contains an exclusionary provision, defined as either: The provision of a contract, arrangement or understanding between competitors with the purpose of preventing, restricting or limiting the supply or acquisition of goods or services to particular persons or classes of persons. The provision of a contract, arrangement or understanding that has the purpose or effect or likely effect of substantially lessening competition. Whether liability attaches to the director depends on the director's level of involvement in the matter. For example, a director who procured the breach of anti-trust law or was knowingly concerned in the breach is likely to be liable. For more ACC InfoPAKs, please visit

20 20 Corporate Governance and Directors Duties Guide: Australia G. Briefly Outline Any Other Liability That Directors Can Incur under Other Specific Laws. There are over 700 Commonwealth and state laws that impose duties and potential liability on directors in Australia. H. Can a Director's Liability Be Restricted or Limited? Is It Possible for the Company to Indemnify a Director Against Liabilities? A company cannot exempt a director or officer from liability to the company incurred in the performance of their role. A company may indemnify its officers for liability incurred in the performance of their roles. However, there are exceptions that limit the indemnities the company can offer. Examples include: A company cannot indemnify an officer for liabilities owed to the company or other related bodies corporate for certain pecuniary and compensation orders. A company cannot indemnify an officer for liability owed to someone other than the company that arose out of conduct lacking in good faith. I. Can a Director Obtain Insurance Against Personal Liability? If So, Can the Company Pay the Insurance Premium? A director may obtain insurance against personal liability. The company may pay the insurance premium for a director's insurance, except in relation to: Liabilities arising out of conduct involving a wilful breach of duty in relation to the company. Liability arising from a breach of the director's duties relating to the director's position. Use of information obtained by virtue of their position. J. Can a Third Party (Such As a Parent Company or Controlling Shareholder) Be Liable As a De Facto Director (Even Though Such Person Has Not Been Formally Appointed As a Director)? A third party may be liable as a de facto director when acting in the capacity of a director despite not being formally recognised as such. For example, a person who was invalidly appointed as a director or acts as a shadow director can be liable as a de facto director. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

21 21 An individual acts as a shadow director if the directors of the company are accustomed to acting in accordance with that individual's instructions or wishes. Individuals acting in the capacity of de facto director or shadow director fall within the definition of director under the Corporations Act. This means de facto directors attract directors' duties and are subject to many of liabilities that apply to company directors. IX. Transactions with Directors and Conflicts A. Are There General Rules Relating to Conflicts of Interest Between a Director and the Company? Directors have a duty to avoid putting themselves in a position where their personal interests are in conflict with their duty to the company. Conflicts may also arise where the director has conflicting duties that require the director to take diametrically opposed courses of action. The courts have tended to take a practical approach in assessing the existence of a conflict. The courts require a "real sensible possibility of conflict", not a mere theoretical conflict before finding that a director has breached the duty to avoid a conflict. Directors may act despite the existence of a conflict if that conflict is fully disclosed and the company provides its fully informed consent. In the case of public companies, the conflict rule is reinforced by prohibiting directors from voting at or attending meetings if they have a material personal interest in a matter being considered. The other directors can waive this prohibition if they are satisfied the potential conflict is not sufficient to affect the judgement of the director and they resolve to allow the director to participate. B. Are There Restrictions on Particular Transactions Between a Company and Its Directors? Shareholders of public companies must approve financial benefits conferred on related parties, unless the arrangements are on arms-length terms or the benefit falls within certain exceptions relating to the employment and remuneration of employees and officers (Chapter 2E, Corporations Act). For more ACC InfoPAKs, please visit

22 22 Corporate Governance and Directors Duties Guide: Australia Related parties include: A parent company. Directors of the public company. Directors of the parent company. Persons controlling the company. The spouses of any individuals falling within the categories in the bullets above. Australian Securities Exchange (ASX) Listing Rule 10 regulates a listed company's transactions with persons in a position of influence. It requires shareholder approval for: The acquisition or disposal of substantial assets. The acquisition of securities in the company (with limited exceptions). Remuneration of non-executive directors. Termination benefits for company officers. C. Are There Restrictions on the Purchase or Sale by a Director of the Shares and Other Securities of the Company He Is a Director of? Listed public companies cannot issue equity securities to related parties, including directors, without the approval of holders of ordinary securities in that company. There are a number of exceptions to this rule including: Pro-rata share issues. The issue of shares under an employee incentive scheme that has been approved by shareholders. Shares issued pursuant to a Listing Rule-compliant agreement. In contrast, the office of director does not generally attract additional restrictions on an individual's ability to purchase securities in the market. However, directors should take special care to ensure the transaction does not breach insider trading provisions and the general duties not to use the director's position or information for improper purposes. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

23 23 X. Disclosure of Information A. Do Directors Have to Disclose Information about the Company to Shareholders, the Public or Regulatory Bodies? The Corporations Act imposes information disclosure requirements in relation to certain offers of securities. Companies may be required to produce a range of documents depending on the size of the offer. The Corporations Act contains specific requirements for each different type of disclosure document. The Corporations Act imposes liability on persons who: Make a relevant offer of securities without a disclosure document. Produce a disclosure document that contains a misstatement or omits information required under the Corporations Act. Do not comply with other disclosure requirements. Liability attaches to directors and other persons involved in preparing the defective disclosure document. Once listed, continuous disclosure requirements apply to companies involving the disclosure of price sensitive information to shareholders and the market in accordance with the Listing Rules. The Listing Rules require that listed companies disclose to the market information that a reasonable person would expect to have a material effect on the price or value of the company's securities. There are a number of limited exceptions. These requirements are reinforced by the Corporations Act, which makes it a civil offence for any person involved in a listed entity contravening the continuous disclosure requirements. For more ACC InfoPAKs, please visit

24 24 Corporate Governance and Directors Duties Guide: Australia XI. Shareholder Rights A. Company Meetings 1. Does a Company Have to Hold an Annual Shareholders' Meeting? If So, When? What Issues Must Be Discussed and Approved? Public companies with more than one member must hold an annual general meeting once in each calendar year and within five months after the end of its financial year. There is no such requirement for private companies. At the annual general meeting public companies are required to present the financial report, directors' report and the auditor's report for a financial year. Listed companies must also put to the members a resolution approving the year's remuneration report, see Section VI.C. 2. What Are the Notice, Quorum and Voting Requirements for Holding Meetings and Passing Resolutions? Meetings of members must be convened with sufficient notice. The Corporations Act requires that written notice is given: At least 21 days before the meeting for unlisted companies. At least 28 days before the meeting for listed companies. The members of unlisted companies may consent to the meeting being held on short notice if either: Shareholders commanding 95% of the votes that may be cast at the meeting provide their consent beforehand. All shareholders agree in the case of an annual general meeting. There are limited exceptions to this rule. Notice must be given to each member entitled to vote at the meeting and each director. Auditors are also entitled to notice of the meeting. The notice must set out: The place, date and time for the meeting. The meeting's business. Any intention to propose a special resolution (and its contents). Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

25 25 The members' right to nominate a proxy. The notice of meeting for the annual general meeting of a listed company must also state that the remuneration resolution will be moved. A company may hold general meetings at two or more venues using any technology that gives members an opportunity to participate. If technology will be used to facilitate the meeting, this should be stated in the notice of meeting. The quorum of a meeting may be set by a company's constitution. If the constitution is silent on this point, the Corporations Act provides for a quorum of two members. Typically, votes are cast at company meetings by: Show of hands where each attending shareholder has one vote. By poll where each member has a number of votes equal to their voting shares. Members who are unable to attend the meeting can nominate a proxy to attend meetings on their behalf and who may speak, vote and demand a poll. It is a matter for the company's constitution whether a proxy may vote by show of hands. Resolutions can be passed without holding a meeting if the requirements for written resolutions are met. To pass a written resolution without meeting, each shareholder entitled to vote on a matter must sign the document in favour of the resolution. 3. Are Specific Voting Majorities Required by Statute for Certain Corporate Actions? Specific voting majorities are required for certain corporate actions. Typically, resolutions may be passed by a majority vote; however, certain actions require a special resolution of 75% of votes or more to pass. Examples include: The adoption of a company constitution. The amendment of the company's constitution. The selective buyback of a company's shares. A selective capital reduction. Changing a company's name. 4. Can Shareholders Call a Meeting or Propose a Specific Resolution for a Meeting? If So, What Level of Shareholding Is Required to Do This? Shareholders may compel the directors of a company to call a general meeting on the request of either: For more ACC InfoPAKs, please visit

26 26 Corporate Governance and Directors Duties Guide: Australia Members holding at least 5% of votes that can be cast at the meeting. A group of 100 members entitled to vote at the general meeting. Members or groups of members meeting one of the two tests above may also elect to call and hold a general meeting themselves. However, those members will be required to pay the costs of the meeting. B. Minority Shareholder Action 1. What Action, if Any, Can a Minority Shareholder Take if It Believes the Company Is Being Mismanaged and What Level of Shareholding Is Required to Do This? The Corporations Act makes provision for the calling of meetings and the moving of resolutions by shareholders. This allows shareholders to have a direct influence on the company. Shareholders proposing a resolution are entitled to require the company to circulate a statement to other members about the resolution, provided the statement is less than 1,000 words long and not defamatory. Shareholders can bring legal proceedings in the name of the company with the approval of the court. Actions can be brought against directors and managers for breaches of the Corporations Act including breaches of directors' duties. Shareholders can also seek court orders to wind up the company if the company has been run in a manner that is unfairly prejudicial to a member or contrary to the interests of the company. Oppressive and unfairly prejudicial conduct can give rise to a number of remedies, such as winding up, modification of the company's constitution of the implementation of controls on the company's conduct. XII. Internal Controls, Accounts and Audit A. Are There Any Formal Requirements or Guidelines Relating to the Internal Control of Business Risks? The Australian Securities Exchange (ASX) Corporate Governance Council Corporate Governance Principles and Recommendations (Principles and Recommendations) recommend that listed companies establish a risk management framework and support the framework with a risk committee. The risk committee is tasked with reviewing areas of risk and making recommendations to the board. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel

27 27 The Principles and Recommendations also recommended that listed companies have an internal audit function for evaluating and improving risk management strategies, and that the entity disclose its exposure to economic, environmental or social sustainability risks. The Corporations Act itself does not impose direct formal requirements in relation to business risks. However, the directors' duties and provisions relating to director accountability have a role in ensuring that company directors do not take unacceptable risks against the best interests of the company, the members and, in insolvency situations, the creditors. B. What Are the Responsibilities and Potential Liabilities of Directors in Relation to the Company's Accounts? The Corporations Act imposes requirements to prepare and maintain written financial records and to make annual and half-year financial reports. The requirements vary depending on the type and size of the company The directors are responsible for ensuring that their company complies with the financial reporting and recording keeping requirements imposed by the Corporations Act. If directors do not take all reasonable steps to comply with these requirements, or fails to procure compliance, they may be subject to civil liability. C. Do a Company's Accounts Have to Be Audited? Companies are required to have their financial reports for the year audited unless an exception applies. Companies whose accounts do not need to be audited are: Small private companies. Small companies limited by guarantee. Certain other companies limited by guarantee. The auditor must produce an auditor's report stating whether the company's financial report is in accordance with the requirements of the Corporations Act. The Corporations Act contains a series of additional requirements for the content of the report. Disclosing entities that prepare half-yearly reports must also have these reports audited and the auditor must furnish an auditor's report for that half-yearly report. For more ACC InfoPAKs, please visit

28 28 Corporate Governance and Directors Duties Guide: Australia D. How Are the Company's Auditors Appointed? Is There a Limit on the Length of Their Appointment? The directors of a private company may appoint an auditor if the company has not already done so in an ordinary meeting. The directors of a public company must appoint the company's first auditor within one month of registration, unless the company has already appointed one in a general meeting. The directors' appointed auditor holds office until the first annual general after registration, at which time the company appoints the auditor. The company must ensure that the position of auditor is filled at all subsequent annual general meetings. The directors must fill any casual vacancy of the role of auditor within one month. If a public company's auditor is removed at a meeting of members, the Corporations Act provides that a new auditor may be appointed at the same meeting by special resolution if the replacement auditor has been nominated in accordance with the Corporations Act. If the replacement auditor has not received sufficient notice of its nomination, the meeting may be adjourned, notice provided to the nominee, and the nominee appointed by ordinary resolution when the meeting is reconvened. Listed companies are required to rotate their auditors. A person who plays a significant role in the audit of a listed company for five successive financial years is ineligible to play a significant role in a later financial year unless the auditor does not play a significant role for at least two successive financial years. The board of directors or the Australian Securities and Investment Commission (ASIC) may extend the eligibility term if certain circumstances are met. E. Are There Restrictions on Who Can Be the Company's Auditors? A company may appoint an individual, an audit firm or an audit company as auditor. Public companies must appoint a registered auditor, while private companies are exempt from the rule if the Australian Securities and Investment Commission (ASIC) approve the individual appointed as auditor. There are general requirements that auditors be independent of the company they audit. Auditors are not permitted to act if there is an unresolved conflict of interest as defined in the Corporations Act. It is a defence that the auditor has in place a quality control system that provides reasonable assurance that the auditor is not in breach of its independence obligations. The Corporations Act sets out a series of relationships that should be considered when assessing whether a conflict exists. Examples include the relationship between the auditor and the company, current or former directors and current or former members of management. There are also specific requirements imposed for the independence of individuals, audit companies and audit firms. Copyright 2015 Practical Law Company (PLC) & Association of Corporate Counsel