Flashcards in Week 4 Deck (25)
What is corporate governance?
No single definition of the term
“… the frame work of rules, relationships, systems and processes within and by which authority is exercised and controlled in a corporation.” Justice Owen, The failure of HIH Insurance Volume 1: A corporate Collapse and Its Lessons
The underlying purpose is to provide a structured and binding framework for the resolution of disputes and conflicts involving members, company officers and third parties.
It lays down rules about ensuring accountability from company officers and to promote the objectives of transparency and enhanced shareholder value.
Features of corporate governance include:
Improving directors’ ethical standards and disclosure of their interests in their companies
Protection of shareholders’ rights
Greater disclosure of off balance sheet items
Board composition ie non executive chairman and majority of non executive directors
Composition and disclosure of director’s remuneration
Effectiveness of Board committees
Independence of auditors
Conduct of shareholder meetings
The role of institutional investors who represent many individual shareholders
Compliance with the Corporations Act
Equal treatment of all shareholders
Effective monitoring of management by the Board
Board’s accountability to the company and shareholders
Timely and accurate disclosure
4 key principles about the management of a company
The board of directors and the members in general meeting is each an organ of the company.
Each organ has the power to make particular decisions. Neither needs to follow the decisions of the other and neither can over ride the decision making power of the other
The powers of each organ are determined by the law and the company’s internal rules (replaceable rules or constitution)
The power is a power to act as the company and therefore bind the company or to delegate the power.
Two organs: the Board v the Members
What can the Board of directors do?
What can the members do?
What if the members disagree with a decision of the Board?
What can the Board of Directors do?
S 198A – Powers of directors (replaceable rule)
(1) The business of a company is to be managed by or under the direction of the directors.
(2) The directors may exercise all the powers of the company except any powers that this Act or the company's constitution (if any) requires the company to exercise in general meeting.
This involves issues of:
setting strategies and directions
determining policies and creating corporate culture
Members can not give directions to the board about how to exercise its powers of management
The members can not overrule any action of the board relating to management of the company
The doctrine of the separation/division of powers
Features of this doctrine:
Decision-making powers divided between the board of directors and the members at a general meeting
Directors: Enterprise and Capital decisions
Members: Constitutional decisions
No overriding of decisions by the other
Decisions of each valid and binding on the company
Powers of shareholders over directors. E.g.:
remove directors (but note type of company).
Board of directors and members at general meeting cannot override the decision of the other.
What if members disagree with a decision of the Board?
Members can remove the directors
Alter the internal rules
Apply to wind up the company because of oppression of the rights of the members
Note: This is explored further in the members’ remedies topic.
"director" of a company or other body means:
(a) a person who:
(i) is appointed to the position of a director; or
(ii) is appointed to the position of an alternate director and is acting in that capacity;
regardless of the name that is given to their position; and
(b) unless the contrary intention appears, a person who is no validly appointed as a director if:
(i) they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.
Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body.
Types of directors
De facto directors
A person who acts in the position but is called something else or who has not been validly appointed.
A person who is not appointed as a director but where the other directors of the company are accustomed to act in accordance with the person’s instructions or wishes.
Chairman of directors
Appointed by directors to chair meeting, signs minutes, has casting votes. Main purpose is to exercise control over meeting.
A person to whom the Board of directors may delegate its functions, normally an executive
A person who is on the board and also a full time employee of the company
Non executive director
A person who is a part time director of the company and not an employee
A person appointed by a director to act in their place for a period of time (s 201K)
A person appointed in the understanding that they will represent the interest of a particular person or group
s 201A(1) 1 for a proprietary company
S 201A(2) 3 for a public company
Residential requirements: directors must ordinarily reside in Australia (2/3 for a public company).
S 204A(1) nil for a proprietary company
S 204A(2) 1 for a public company
"officer" of a corporation means:
(a) a director or secretary of the corporation; or
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation's financial standing; or
(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation);
(a) in relation to a corporation--means a person (other than a director or secretary of the corporation) who:
(i) makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) has the capacity to affect significantly the corporation's financial standing;
The company secretary – an officer
Functions and responsibilities outlined in s 188.
Responsibility of company secretaries
(1) A secretary of a company contravenes this subsection if the company contravenes:
(a) section 142 (requirement for companies to have registered office); or
(b) section 145 (requirement for registered office of public company to be open to public); or
(c) section 346C (requirement to respond to extract of particulars); or
(ca) section 348D (requirement to respond to return of particulars); or
(d) section 205B (lodgement of notices with ASIC); or
(e) section 146 (notice of change of principal place of business); or
(f) section 178A (notice of change to member register (proprietary companies only)); or
(g) section 178C (notice of change to share structure (proprietary companies only)); or
(h) section 254X (notice of issue of shares); or
(i) subsection 319(1) (lodgement of financial reports); or
(j) section 349A (notice of changes to ultimate holding company (proprietary companies only)).
How are directors appointed?
When company is created the initial members appoint the first directors (s 117)
Shareholders at a general meeting s 201G (RR), most common company may appoint a person as a director by resolution passed in general meeting (by majority)
Directors under s 201H (RR) (directors can appoint directors but need to be confirmed within 2 months for pty company), for public company person appointed by directors must confirm by members at next AGM
S 201K (RR) (alternate director)
S 201J (RR) (appoint a managing director)
Restrictions on appointment as director
Age – Must be over 18 (s 201B)
Consent must be given by person wanting to be director to company (s 201D)
Must not have not been disqualified from acting as a director e.g. bankrupt s 206B(3) , convicted of offence within the last 5 years in relation to a company or for fraud in relation to a company or by court order or by ASIC
Period of disqualification is 5 years after conviction or if imprisoned 5 years after release
ASIC can ask court to extend 5 years to 15 years
Person can ask court for to let them manage company
Offence must relate to company issues. What if convicted for drink driving? If guilty of other bad behaviour on application by ASIC can also be disqualified.
Involved in failure of 2 or more companies within the last 7 years
Lodgement of Form 484 with ASIC
A person can be automatically disqualified as a director for:
Certain offences under s 206B(1) (see next slide)
Bankruptcy or personal insolvency agreement (worldwide, not just within Australia)
Disqualified from being a director or involved in managing companies under a foreign court order
Section 206B - Automatic disqualification
(1) A person becomes disqualified from managing corporations if the person:
(a) is convicted on indictment of an offence that:
(i) concerns the making, or participation in making, of decisions that affect the whole or a substantial part of the business of the corporation; or
(ii) concerns an act that has the capacity to affect significantly the corporation's financial standing; or
(b) is convicted of an offence that:
(i) is a contravention of this Act and is punishable by imprisonment for a period greater than 12 months; or
(ii) involves dishonesty and is punishable by imprisonment for at least 3 months; or
(c) is convicted of an offence against the law of a foreign country that is punishable by imprisonment for a period greater than 12 months.
The offences covered by paragraph (a) and subparagraph (b)(ii) include offences against the law of a foreign country.
Discretionary Disqualification (not automatic)
By court order s 206C
Breach of civil penalty provisions of the Corporations Act
By court order s 206D
Involved in 2 or more failed companies within last 7 years (up to 20 years)
By court order s 206E
Repeated breaches of Corporations Act (at least twice)
By ASIC under s 206F
Involved in 2 or more failed companies within last 7 years (up to 5 years)
Court can allow person to continue despite disqualification under s 206G
ASIC keeps a register of disqualified directors
Purpose of disqualification is to:
punish directors who act improperly;
deter improper behaviour by others.
Where do the powers of a director come from?
They come from the internal rules of the company (constitution or the RR)
S 198A (RR)
Powers of directors
S 198B (RR)
Any 2 directors can draw a negotiable instrument
S 198C (RR)
Directors can confer on managing directors powers of director
Delegate management powers to committee, a director, employee or any other person and must be recorded
Single director/shareholder company can exercise all powers unless excluded by Act or constitution
can inspect company books whilst a director
Management of companies
Proceedings of the board
See rule book (internal rules or constitution)
Notice of meetings
All directors to receive notice in terms of rules in constitution
Must contain details of issues (agenda)
Make decisions and pass resolutions
Board meeting v informal meeting
Directors must be aware that that the meeting is a directors meeting
Minimum numbers of directors for a meeting (normally 2) unless single director company or different rule in constitution and must be present for whole meeting
Passing of resolutions at meetings;
S 248G RR by a majority, chair has casting vote (check constitution)
Can pass resolution without meeting called a circulating resolution all directors sign and when last signs the resolution is passed
Delegation of powers – see s 198D(1), s 190
Directors’ remuneration: practical and legal issues
Who determines remuneration?
Remuneration can only be paid to directors of company (in fiduciary relationship) if specifically provided for in rules of company
Internal rules usually give members power to fix remuneration of directors (see s 202A). In many cases, the Board (or a sub-committee of the Board) decides the type and level of remuneration for directors and senior managers
Disclosure requirements relating to remuneration differ for listed and unlisted companies:
Unlisted companies – financial statement disclosure
Listed companies – annual report to contain a remuneration report s 300A
Forms of remuneration:
Cash incentives e.g. directors fees, bonuses
Shares / share options
Resignation and vacation of office
Voluntary, where director chooses to retire
Notice of resignation to company – s 203A.
Notice to ASIC – s 205A, s 205B(4)&(5)
By operation of the company rules
The rules of the company may provide for vacation of office – by retirement, rotation, or automatically (e.g. upon reaching a certain age).
In public companies, the rotation period is normally every three years. Directors are usually permitted to offer themselves for reappointment.
Same reporting requirements apply.
Removal of directors by other directors
Directors can remove another if provided in the internal rules i.e. the constitution (Nibaldi v RM Fitzroy & Associates Pty Ltd)
Removal of director by other directors not allowed – s 203E