Corporate Governance Linda Greenleaf

Today in class Orientation Delivery and assessment guide How can students excel? What is Corporate Governance What is a Company Origins of companies Why is the company structure so important Companies in Australia The regulatory environment

Why is this course important? Who can guess how many companies are in Australia today? What is the largest listed company in the Australian market? What percentage of companies are listed on the ASX? 1.92 million companies only 2 200 are listed on the ASX (0.15% of all companies) with a market capitalisation of $1.299 trillion in October 2012 99% limited by shares BHP Billiton with a market capitalisation of US 175 billion

The Architecture of Companies How are they formed? How is a company’s capital structured? What is equity capital? What is a share? What does it mean to be a member of a company? What is debt capital?

What is a Company? A separate legal entity with all the legal capacity of individuals Must be registered with Australian and Securities Investment Commission (ASIC) and given Australian Company Number (CAN)Regulated by the Australian Corporations Act 2001. ASIC oversees and enforces the Act

Companies Advantages Separate legal entity Limited liability of members Continuous life Transferability of shares Taxation benefits Easier access to capital Disadvantages Significant set-up and maintenance costs Limited management role of members Control of the company can change Strict reporting and disclosure requirements Penalties imposed on defaulting officers More onerous legal compliance issues

Incorporation and the Corporate Veil On registration, a ‘corporate veil’ comes into existence which protects directors and shareholders from liability for company debts. See Salomon v Salomon & Co Ltd [1897] (p. 120) http://www.youtube.com/watch?v=FhbEMIsYkgs The principle that a company is separate from the individuals who run it means that directors can be employed by their own company even if it is a ‘one person’ company See Lee vs. Lee’s Air Farming Ltd (p. 120) http://www.youtube.com/watch?v=FhbEMIsYkgs

Lifting the Corporate Veil Under common law, the veil may be lifted and the conduct of the directors examined to see if the company was formed for fraudulent or improper purposes. If it has been the directors are not protected. See Gilford Motor Co v Horne (p 121) Under s 588G Corporations Act, the veil can be ‘lifted’ and the conduct of the directors examined to see if they allowed the company to trade while it was insolvent (unable to pay its debts) If insolvent trading is proven the directors involved become liable for the company’s debts

Types of Companies

Company Types - by Liability A company limited by shares: Most common type. Paid up shareholders not liable to creditors of company A company limited by guarantee: Members promise to contribute specific sum is company is wound up. Not common Unlimited Company: Not common No liability companies (mining only)

Proprietary Companies A proprietary company (Pty Ltd) must: Be limited by shares (or be an unlimited company with a share capital) Have at least one shareholder (but no more than 50 non- employee shareholders) and one director, who may be the same person Not do anything that would require disclosure to investors (except in limited circumstances)

Large vs. Small Proprietary Companies A Pty Ltd co is classified as ‘small’ and has reduced reporting requirements if it passes two out of three of following tests: Consolidated annual gross operating revenue less than $25 million? Consolidated annual gross assets less than $12.5 million? Fewer than 50 full time employees or equivalent?

Public Companies Defined in Corporations Act as ‘any company other than a proprietary company’ Must have ‘Limited’ or ‘Ltd’ at the end of its name Must have at least one shareholder and three directors May be listed (registered) Australian Stock Exchange (ASX) Listing allows the company to sell shares and debentures to the public Listing imposes higher disclosure requirements under ASCX rules and Corporations Act Non-listed public company also have right to sell to and borrow from the public

How is a company’s management structured? Who are the companies officers and what is their role Directors Board of directors What are a company’s key legal attributes?

Internal Governance of Companies A company may rely on the replaceable rules in the Act or adopt its own constitution One director/one shareholder companies not required to have a constitution Board of directors have power to make management decisions Shareholders cannot overrule a board decision on management matters. Their main powers are to vote To change the governance of the company or To remove the directors

Company Constitution S 140 Replaceable rules (RR) or a constitution form a contract between: Company & members Members & members Company & officers (including directors) Constitution can be altered by special resolution (usually 75% majority) Alterations that are ‘oppressive’ or made ‘for improper purpose’ are invalid

Types of Directors Many types of directors. Some major ones are Executive Directors: Senior employees who mange company Non-Executive Directors: Independent non-employees who attend board meetings and decide major company matters De Facto or Shadow Directors: Although not appointed as directors they must obey directors duties

Company Secretaries All public companies must have a company secretary They are responsible for important administration and reporting functions, especially to ASIC

Common Law Duties of Directors and Senior Executives Main common law duties To act in good faith (honestly) in interests of the company To act for a proper purpose To retain discretions (maintain confidentiality) To avoid conflicts of interest To use care, skill and diligence

Statutory Duties of Directors and Senior Executives Main statutory duties To act with reasonable care and diligence (s 180 (1)) To act in good faith in best interests of the company and for a proper purpose (s 181) To not make improper use of position or information (ss 182, 183) To disclose any significant personal interest (s 191) To prevent insolvent trading (s 588G)

Civil Penalties Civil penalty orders must be proven on ‘balance of probabilities’ Fines of up to $200 000 per breach Compensation (damages) to company Disqualifications (bans) from holding senior positions See ASIC v Vizard (p. 125)

Criminal Penalties Criminal penalties must be proved ‘beyond reasonable doubt’ They apply for breaches of s 184 – for failing to act with honesty or for a proper purpose or dishonest breach of insolvent trading laws Fines of up to $220 000 per breach and/or Prison sentences of up to five years See ASIC v Adler (p.126)

Business Judgement Rule Main defence to an alleged breach not using reasonable care and diligence, s 180(1), is the ‘business judgment rule’, s 180 (2) Directors must prove that they: Made an honest judgment for a proper purpose; Did not have a material (relevant) personal interest; Reasonably gathered information about the decision; and Believed that the decision was in the company’s best interests Very difficult to prove because all four tests must be satisfied

Insider Trading Insider trading is prohibited It involves the use of ‘price-sensitive information’ which is not generally available to buy or sell shares (or other securities) See ASIC v Vizard (p. 125). A Telstra director who accepted liability for making improper use of his position as a director under s 183 could also have been charged with criminal offences of insider trading and s 184

Corporate Governance Is the board effectively managed and sufficiently independent? Is company’s financial integrity effectively maintained? Are the risk management and audit systems effective? Is the auditor independence (real and perceived) maintained?

Corporate Governance The ASX Corporate governance principles and recommendations apply to listed companies 8 key principles (see p. 134) ASXX CGC believes they would also benefit smaller organisations

Business Names A business name is any name under which a person or an organisation conducts a business Most business names must be registered The aims of the Business Names Act are to: To let customers know who runs the business To provide a public record To protect the public from being misled or deceived by similar names

Business Names A business must register its business name (or names if it has more than one) unless it is: A sole trader or a partnership that operates under the owner’s family name (surname & first name/initials); or Company does business with the public under its company name

Business Names A business name cannot be registered if it is identical to or closely resembles an existing registered name A National Business Names Register controlled by ASIC has consolidated all business names and company names and allows online registration across Australia

Additional Protection For Business Names Businesses can further protect their name and image through: Registration of trademarks Consumer protection laws (mainly s 18 Australian Consumer Law) and passing-off actions, to protect the goodwill an operator has built up in a well-established business name. See BM Auto Sales Pty Ltd v Budget Rent A Car System Pty Ltd (1977) Registration of an Internet Domain Name: Applicants usually must have a registered business name or company name that is identical or similar to the chosen domain name

Compliance The term refers to an organisation’s obligations to comply with relevant laws Compliance involves identifying laws that apply to its business and the areas of risk, and developing a compliance program There is no generic compliance program – each organisation’s circumstances are different Australian Standard AS 3806 has been developed to assist business in developing compliance programs

Compliance Regulatory compliance issues on starting a business include compulsory registrations (including taxation), recording keeping, business licences and permits, and local government approvals