Centre for Corporate Law and Securities Regulation,
Faculty of Law, The University of Melbourne
with the support of
The Australian Securities and Investments Commission (http://www.asic.gov.au),
The Australian Stock Exchange (http://www.asx.com.au)
and the leading law firms:
Blake Dawson Waldron (http://www.bdw.com.au)
Clayton Utz (http://www.claytonutz.com)
Corrs Chambers Westgarth (http://www.corrs.com.au)
Mallesons Stephen Jaques (http://www.mallesons.com)
Phillips Fox (http://www.phillipsfox.com)
Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation
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Centre for Corporate Law and Securities Regulation 2002.
1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) US Senate Banking Committee approves audit improvement measures (B) SEC proposes framework of a public accountability board (C) Arthur Andersen conviction (D) SEC proposes requiring certification of quarterly and annual reports; proposes new Form 8-K Disclosures and Filing Deadlines (E) UK review of non-executive directors (F) NYSE board releases report of Corporate Accountability and Listing Standards Committee (G) Goldman Sachs Chairman Hank Paulson calls for action to restore investor confidence (H) Reform of New Zealand securities trading law (I) Accounting Exposure Draft 106 - Director, Executive and Related Party Disclosures (J) Audit & Assurance alert on auditor independence (K) Nasdaq approves rule changes to modify key corporate governance standards (L) Greenpeace policy on corporate environmental change (M) Clarity, consistency needed for Australia's regulatory watchdogs: Law Reform Commission (N) Applying performance conditions to stock options (O) Auditing: European Commission issues recommendation on independence of auditors (P) BRT CEOs issue 'Best Practices' roadmap for excellence in corporate governance guidelines (Q) US study on stock exchange listing standards and corporate governance
2. RECENT ASIC DEVELOPMENTS
(A) International cold calling investment scams report (B) ASIC findings support revision of accounting standard (C) ASIC streamlines reporting for liquidators, receivers and administrators (D) Court imposes penalties on former HIH directors Adler, Williams and Fodera
3. RECENT ASX DEVELOPMENTS
(A) ASX and IWL sign heads of agreement
4. RECENT TAKEOVERS PANEL MATTERS
(A) Application from ASIC concerning Ausdoc (B) Panel releases draft Guidance Note on conflicts of interest (C) Panel releases draft Guidance Note on Frustrating Action
5. RECENT CORPORATE LAW DECISIONS
(A) Orders for relief in the Adler case (B) Fair value and the compulsory acquisition of minority shares - Part 1 (C) Fair value and the compulsory acquisition of minority shares - Part 2 (D) Setting aside a deed of arrangement (E) Materially prejudicing creditors by change of company type (F) Summary judgment - assignment of contract (G) Payments made by an insolvent company to the Commissioner of Taxation held to be an unfair preference (H) External administration: scope of court's power to summon for examination (I) Poison pills are too hard to swallow
6. NEW PUBLICATIONS
(A) Key Developments in Corporate Law and Trusts Law: Essays in Honour of Professor Harold Ford (B) An Appraisal of Socially Responsible Investments and Implications for Trustees and Other Investment Fiduciaries
7. RECENT CORPORATE LAW JOURNAL ARTICLES
9. MEMBERSHIP AND SIGN-OFF
10. DISCLAIMER 1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS
(A) US SENATE BANKING COMMITTEE APROVES AUDIT IMPROVEMENT MEASURES
On 19 June 2002, the US Senate Banking Committee voted 17-4 to adopt legislation to improve the quality of audits. The measures create an independent oversight board to oversee the conduct of auditors of public companies; establish guidelines and procedures to assure that auditors of public companies do not engage in activities that could undermine the integrity of the audit; set standards for audit committees and for corporate executives, and impose penalties when standards are violated; establish additional criteria for financial statements and require enhanced disclosures regarding conflicts of interest; and provide a substantial increase in funding for the Securities and Exchange Commission.
The bill now goes before the full Senate for consideration at a time to be determined.
(B) SEC PROPOSES FRAMEWORK OF A PUBLIC ACCOUNTABILITY BOARD
On 20 June 2002, the United States Securities and Exchange Commission voted unanimously to propose rules to reform oversight and improve accountability of auditors of public companies.
The proposed rules establish the framework for a Public Accountability Board (PAB). The Commission describes it as a system of "private sector" (but not "self") regulation that would not be under the control of the accounting profession. The structure is intended to supplement the SEC's oversight and enforcement efforts by expanding the opportunities to detect and remedy ethical lapses or deficiencies in competence, thereby complementing the Commission's enforcement efforts.
The rule will be open to comment for 60 days after publication in the Federal Register.
Key provisions of the proposed rules include:
- Membership. To assure that the benefits of the new regulatory regime extend to investors in all public companies, the financial statements of SEC-registered companies would not be deemed to comply with Commission requirements unless the company's outside auditors were members of a PAB. To ensure that a PAB has access to diverse, non-discretionary, funding and full information about audits, an SEC-registered company's financial statements also would not comply with Commission requirements unless the company was an adjunct member of, and thereby bound to cooperate in any review or proceeding commenced by, the same PAB as its accountants.
- SEC Oversight. The Commission would recognize a PAB after reviewing, and being satisfied with, among other things, the entity's proposed structure, charter, by-laws, rules, stated practices, proposed budget, proposed board members, membership requirements, systems, and procedures. The SEC would also oversee selection or termination of PAB board members, and the authority to review, alter, modify or abrogate any PAB rule or disciplinary sanction.
- Independent PAB Board. To ensure independence from the accounting profession, a PAB would be dominated by persons not associated with the accounting profession. This requirement likely would be met by a board with nine members - no fewer than six of whom are independent public members, and no more than three of whom are practicing or retired members of the public accounting profession. The latter members would provide needed current expertise, but possible accounting profession members would expressly not have any vote in, or say about, a PAB's determinations regarding disciplinary actions or findings about, and sanctions to be imposed on, members.
- Independent PAB Funding. A PAB will have a dependable, uninterrupted, non-discretionary funding source, from both its accounting firm members and public company adjunct members, to ensure that its funding is not based on discretionary payments or on funding exclusively by the accounting profession.
- Strong Oversight by PAB. Accounting firms, individual accountants, public companies and their management would be required and obligated to cooperate with PAB quality control reviews and disciplinary proceedings, and a PAB would determine appropriate document retention guidelines for its member firms. Failure to cooperate could result in suspension of the right to conduct public audits. A PAB's efforts would be directed at enforcing ethical and competency standards respecting accounting firms and individual accountants. A PAB would not conduct any roving investigations of public companies.
- PAB Quality Control Reviews. A PAB will directly perform quality control reviews of audit procedures and practices, at least annually for large firms (those that audit approximately 80% of SEC-registered US public companies) and at least triennially for all other firms. Such reviews will be designed to ensure that audit firms have quality control policies and procedures regarding, among other things: (i) independence, integrity and objectivity of audits; (ii) personnel management; (iii) acceptance and continuation of audit clients; (iv) audit performance; (v) audit methodology; and (vi) consultation and resolution of differences of professional opinion during audits.
In addition to the above items, quality control reviews would address, among other things: (i) rotation of audit personnel; (ii) independent partner reviews of audits; (iii) consulting services; (iv) reporting termination of auditor engagements to the Commission; (v) assisting in audits by foreign associated firms; (vi) reporting litigation alleging violations of the securities laws; and (vii) partners and employees of auditors joining clients.
- PAB Disciplinary Powers. A PAB will be responsible for conducting public disciplinary proceedings and imposing a broad range of disciplinary sanctions against its accounting firm and individual accountant members, including fines, censures, removal from client engagements, limitations on activities and suspension from auditing either specific SEC clients, or all SEC clients for a time certain, or an unlimited time. A PAB may discipline individual accountants for unethical or incompetent conduct or other violations of professional standards. A PAB may discipline accounting firms for not having quality control systems that meet the highest professional standards or for not complying with such systems in a way that provides reasonable assurance that the firm meets or exceeds professional standards in its audit, review or attest engagements.
- Audit Standard Setting. A PAB will have the responsibility for assuring high ethics, auditing, and quality control standards, either by setting them directly or by relying on and overseeing designated private sector bodies as authoritative sources of such standards. (A PAB will not, however, establish GAAP, which would continue to be established by the FASB, subject to revitalized and revamped SEC oversight).
(C) ARTHUR ANDERSEN CONVICTION
On 15 June 2002, a jury in Houston, Texas, found accounting firm Arthur Andersen LLP guilty of obstruction of justice. The United States Securities and Exchange Commission issued the following statement regarding the conviction: "The Commission is deeply troubled by the underlying events that resulted in Andersen's conviction, especially insofar as the verdict reflects the jury's conclusion that Andersen engaged in conduct designed to obstruct SEC processes. In light of the jury verdict and the underlying events, Andersen has informed the Commission that it will cease practicing before the Commission by Aug. 31, 2002, unless the Commission determines another date is appropriate.
"In the interim, the orders and rules the Commission announced on March 14 and released on March 18, 2002, following the indictment of Andersen remain in effect, and Andersen may continue to make required filings on behalf of its clients in compliance with those rules and orders, which contain provisions ensuring continuing Andersen quality control procedures. The Commission hopes this action will minimize any potential disruption to the capital markets and the affected issuers while those issuers complete certain pending or future filings, offerings and other activities. This relief is procedural in nature, is of finite duration and is intended solely to address temporary disruptions that the affected issuers may face as a result of Andersen's conviction."
(D) SEC PROPOSES REQUIRING CERTIFICATION OF QUARTERLY AND ANNUAL REPORTS; PROPOSES NEW FORM 8-K DISCLOSURES AND FILING DEADLINES
On 12 June 2002 the United States Securities and Exchange Commission proposed rules that would require a company's principal executive officer and principal financial officer to certify the contents of the company's quarterly and annual reports. The proposed rules are intended to enhance investor confidence in the quality of companies' periodic reports.
The Commission also proposed that several new items or events be reported on Form 8-K in an effort to improve the quality, amount and timeliness of public disclosure of extraordinary corporate events. In addition, the Commission proposed that Form 8-K reports, also known as current reports, be filed within two business days instead of the current five to 15 days.
(1) Certification of quarterly and annual reports
The proposed certification rules are consistent with a key provision of US President George Bush's 10-point "Plan to Improve Corporate Responsibility and Protect America's Shareholders," announced on 7 March 2002. The plan states that CEOs should personally vouch for the veracity, timeliness and fairness of their companies' public disclosures, including financial statements.
As proposed, new Exchange Act Rule 13a-14 would require the principal executive officer and principal financial officer of a company each to certify, with respect to the company's quarterly and annual reports, that:
- he or she has read the report;
- to his or her knowledge, the information in the report is true in all important respects as of the last day of the period covered by the report; and
- the report contains all information about the company of which he or she is aware that he or she believes is important to a reasonable investor as of the last day of the period covered by the report.
For purposes of the proposed certification, information is considered "important to a reasonable investor" if:
- there is a substantial likelihood that a reasonable investor would view the information as significantly altering the total mix of information in the report; and
- the report would be misleading to a reasonable investor if the information was omitted from the report.
In addition, proposed new Exchange Act Rule 13a-15 would require a company to maintain procedures to provide reasonable assurance that the company is able to collect, process and disclose the information required in the company's periodic and current reports pursuant to the Exchange Act, and also require a periodic review and evaluation of these procedures. This annual evaluation would need to be presented to the company's principal executive officer and principal financial officer, and these individuals would be required to certify in the company's annual report that they have reviewed the results of the evaluation.
The proposed rules would apply to any US domestic company that is subject to the reporting requirements of the Securities Exchange Act of 1934.
The Commission invites public comment on the proposed rules. Comments should be received within 60 days of publication of the proposed rules in the Federal Register.
(2) New Form 8-K Disclosure Requirements and Deadlines
The proposals would require current reports on Form 8-K of 11 new items or events:
- entry into a material agreement not made in the ordinary course of business;
- termination of a material agreement not made in the ordinary course of business;
- termination or reduction of a business relationship with a customer that constitutes a specified amount of the company's revenues;
- creation of a direct or contingent financial obligation that is material to the company;
- events triggering a direct or contingent financial obligation that is material to the company, including any default or acceleration of an obligation;
- exit activities including any material write-off or restructuring;
- any material impairment;
- a change in a rating agency decision, issuance of a credit watch or change in a company outlook;
- movement of the company's securities from one national securities exchange or inter-dealer quotation system of a registered national securities association to another, delisting of the company's securities from an exchange or quotation system, or a notice that a company does not comply with a listing standard;
- notice to the company from its currently or previously engaged independent accountant that the independent accountant is withdrawing a previously issued audit report or that the company may not rely on a previously issued audit report; and
- any material limitation, restriction or prohibition, including the beginning and end of lock-out periods, regarding the company's employee benefit, retirement and stock ownership plans.
The proposals would move two disclosure items that currently are required in companies' annual and quarterly reports to Form 8-K:
- unregistered sales of equity securities by the company;
- material modifications to rights of holders of the company's securities.
The proposals would amend several existing Form 8-K disclosure items to include:
- disclosure regarding the departure of a director for reasons other than a disagreement or removal for cause;
- the appointment or departure of a principal officer, and the election of new directors; and
- disclosure regarding any material amendment to a company's certificate of incorporation or bylaws.
The proposals would also accelerate the current five business day deadline for disclosure about changes in a company's independent accountant and resignations of directors, and 15 calendar day deadline for other required disclosures, to two business days, so that there would be a uniform filing period for all of the mandated Form 8-K disclosure items.
The Commission invites public comment on the proposed rules. Comments should be received within 60 days of publication of the proposed rules in the Federal Register.
(E) UK REVIEW OF NON-EXECUTIVE DIRECTORS
On 7 June 2002 a consultation document was issued by Derek Higgs, who is leading the UK Review on the role and effectiveness of non-executive directors.
Mr Higgs, who was appointed to head the review into the role of non-executive directors by the Chancellor Gordon Brown and Trade and Industry Secretary Patricia Hewitt in April.
The key issues on which Derek Higgs is inviting views are:
- What role should non-executive directors perform and how does this compare to the present position?
- What knowledge, skills and attributes are needed and what can be done to attract, recruit and appoint the best people to non-executive roles?
- Do existing structures and procedures facilitate effective performance by non-executive directors?
- Do existing relationships with shareholders or others need to be strengthened?
- How can non-executive directors best be supported to perform their role?
and in relation to all of the above:
- In what ways is the position different for smaller listed companies?
- What can we learn from international experience?
The consultation document can be obtained from http://www.dti.gov.uk/cld/non_exec_review. Responses to the consultation are requested by 6 September 2002. Derek Higgs will report to the Secretary of State for Trade and Industry and the Chancellor of the Exchequer by around the turn of the year.
The Review was launched on 15th April and is assessing:
- the population of non-executive directors in the UK - who they are, how they are appointed and how they can be drawn from a wider pool of talent;
- the independence and effectiveness of non-executives;
- the actual and potential relationship between non-executives and institutional investors; and
- what could be done to strengthen the quality, independence and effectiveness of UK non-executive directors.
(F) NYSE BOARD RELEASES REPORT OF CORPORATE ACCOUNTABILITY AND LISTING STANDARDS COMMITTEE
On 6 June 2002 the New York Stock Exchange released recommendations from its Corporate Accountability and Listing Standards Committee, which proposes new standards and changes in corporate governance and disclosure practices of NYSE-listed companies. The committee report, presented to the NYSE Board of Directors, also makes recommendations to Congress and the Securities and Exchange Commission on various policy and regulatory matters.
- increasing the role and authority of independent directors;
- tightening the definition of "independent" director and adding new audit committee qualification requirements;
- encouraging a focus on good corporate governance;
- giving shareholders more opportunity to monitor and participate in the governance of their companies;
- establishing new control and enforcement mechanisms; and
- improving the education and training of directors.
The committee will now solicit public comment on its recommendations, then seek approval of the report at the NYSE Board of Directors' 1 August meeting. Committee co-chairs are NYSE Board members Gerald M Levin, CEO (retired) of AOL Time Warner Inc; H Carl McCall, Comptroller of the State of New York and Sole Trustee, Common Retirement Fund of the State of New York; and Leon E Panetta, director of the Panetta Institute for Public Policy.
Central to the report is a provision that boards of NYSE-listed companies have a majority of independent directors; listed companies would have a two-year transition period to satisfy this requirement. In addition to an expanded role and greater authority of independent directors, the committee report calls for:
- increasing the responsibilities of board audit committees;
- mandating that shareholders vote on all equity-based compensation plans, including stock option plans;
- requiring audit, nominating and compensation committees to consist solely of independent directors, with a requirement that the chair of the audit committee have accounting or financial management experience;
- tightening the definition of an independent director, including a five-year cooling-off period for former employees;
- mandating that director compensation represent the sole remuneration from the listed company for audit-committee members;
- granting the audit committee sole authority to hire and fire auditors and to approve any significant non-audit work by the auditors;
- requiring the CEO of NYSE-listed companies to attest to the accuracy, completeness and understandability of information provided to investors;
- mandating that listed companies adopt and publish corporate governance guidelines and a code of business conduct and ethics;
- establishing a Directors' Education Institute to assist directors in their responsibilities;