Corporate law bulletin bulletin No 59, July 2002



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CORPORATE LAW BULLETIN
Bulletin No 59, July 2002

Published by LAWLEX on behalf of


Centre for Corporate Law and Securities Regulation,
Faculty of Law, The University of Melbourne
(http://cclsr.law.unimelb.edu.au)

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

ACCESS TO BULLETIN

As a subscriber, you may view and print the latest Bulletin immediately from the archive site on the Internet at:



http://research.lawlex.com.au/cclsr/archive

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COPYRIGHT

Centre for Corporate Law and Securities Regulation 2002.

CONTENTS

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS


(A) US Congress passes Public Company Accounting Reform and Investor Protection Bill of 2002
(B) Nasdaq takes new actions on corporate governance reform
(C) UK review of audit and accounting issues
(D) ASIC Chairman speech on corporate governance
(E) Testimony of Chairman Alan Greenspan to Congress - stock option, CEOs and corporate governance
(F) SEC expands shareholder power to vote on equity compensation plans
(G) The world's largest companies
(H) The Coca-Cola Company and other companies to expense all stock options
(I) US President Bush's most recent initiatives on corporate responsibility
(J) The Business Roundtable statement on restoring investor trust
(K) UK review of savings products
(L) Adoption of international accounting standards by 2005
(M) Global Investor Opinion Survey 2002: Key findings
(N) Modernising Company Law in the United Kingdom - White Paper presented to Parliament by the UK Secretary of State for Trade and Industry
(O) SEC publishes list of companies whose officers are ordered to certify accuracy and completeness of recent annual reports
(P) Review of audit regulation and corporate disclosure
(Q) CLERP 8: cross-border insolvency laws to be reviewed

2. RECENT ASIC DEVELOPMENTS


(A) Court finds NRMA Limited President Nicholas Whitlam breached his duties as a director
(B) Accounting surveillance
(C) ASIC closes Ansett and Air NZ investigations
(D) ASIC guidance on the hawking prohibitions
(E) Review relating to managed discretionary accounts
(F) Discussion paper on disclosure for on-sale of financial products
(G) A guide to good disclosure of transaction banking fees

3. RECENT ASX DEVELOPMENTS


(A) Exposure Draft - Proposed ASX Listing Rule amendments - Enhanced Disclosure

4. RECENT TAKEOVERS PANEL MATTERS


(A) Takeovers Panel decision in relation to Isis Communications
(B) Takeovers Panel decision in relation to Ausdoc Group Ltd

5. RECENT CORPORATE LAW DECISIONS


(A) When is a company required to act on a requisition to call a general meeting?
(B) Extension of time to call meetings requested my members
(C) Leave for a liquidator to join multiple defendants in proceedings for the recovery of unfair preferences
(D) Whether a company may rely on a statutory offsetting claim where the proceeding to enforce it has been temporarily stayed
(E) Derivative actions: principles to be applied when seeking leave
(F) Attempt to remove liquidator - alleged lack of independence by liquidator
(G) At what point does a company become insolvent?
(H) Whether a director's liability for insolvent trading applies to the incurring of partnership debts
(I) Distribution of assets following winding up of unregistered managed investment scheme
(J) Court approval for a liquidator to enter into a litigation funding agreement - what are the criteria?
(K) Application for the winding up of a managed investment scheme - need for independent liquidator

6. NEW PUBLICATION


(A) The New Takeovers Panel - A Better Way?

7. RECENT CORPORATE LAW JOURNAL ARTICLES

8. CONTRIBUTIONS

9. MEMBERSHIP AND SIGN-OFF

10. DISCLAIMER

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS

(A) US CONGRESS PASSES PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002

On 25 July 2002 the US Congress approved the Public Company Accounting Reform and Investor Protection Act of 2002. The Act represents a substantial overhaul of the regulatory framework for the US accounting profession and aspects of US corporate law.

The Act was approved by a vote of 423 to 3 in the House of Representatives and 99 to 0 in the Senate. It now goes to US President George Bush for signature. The White House has said that President Bush will sign the legislation.

The key features of the Act are:

(1) Public Company Accounting Oversight

Board - Establishes the Public Company Accounting Oversight Board to: (1) oversee the audit of public companies that are subject to the securities laws; (2) establish audit report standards and rules; and (3) investigate, inspect, and enforce compliance relating to registered public accounting firms, associated persons, and the obligations and liabilities of accountants.

(2) Auditor Independence - Amends the Securities Exchange Act of 1934 to prohibit a registered public accounting firm from performing specified non-audit services contemporaneously with a mandatory audit. Requires preapproval for non-audit services not expressly forbidden by statute. It also mandates: (1) audit partner rotation on a five-year basis; and (2) auditor reports to audit committees of the issuer. The Act prohibits a registered public accounting firm from performing statutorily mandated audit services for an issuer if the issuer's senior management officials had been employed by such firm and participated in the audit of that issuer during the one-year period preceding the audit initiation date.

(3) Corporate Responsibility - Vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. Requires committee members to be a member of the board of directors of the issuer, and to be otherwise independent. The Act requires the chief executive officer and chief financial officer of an issuer to: (1) certify that periodic financial statements filed with the United States Securities and Exchange Commission (SEC) fairly present, in all material respects, the operations and financial condition of the issuer; and (2) forfeit certain bonuses and compensation received following an issuer's accounting restatement owing to non-compliance with securities laws.

(4) Enhanced Financial Disclosures - Instructs the SEC to require by rule: (1) disclosure of all material off-balance sheet transactions and relationships that may have a material effect upon the financial status of an issuer; and (2) the presentation of pro forma financial information in a manner that is not misleading, and which reconciles it with the financial condition of the issuer under generally accepted accounting principles.

The Act also (1) prohibits a corporation from making personal loans to its corporate executives (with some limited exceptions); (2) reduces the mandatory period for senior executives and principal stockholders to disclosure changes in ownership of securities (or security-based swap agreements) to two business days after changes were executed; and (3) directs the SEC to issue rules requiring a code of ethics for senior financial officers of an issuer.

(5) Analyst Conflicts of Interest - Mandates adoption by the SEC of rules designed to address conflicts of interest in securities research.

(6) SEC Resources and Authority - Authorises appropriations for the financial year 2003 to the SEC for: (1) additional compensation, salaries and benefits; (2) enhanced oversight of auditors and audit services; and (3) additional staff for fraud prevention, risk management, market regulation, and investment management.

(7) Studies and Reports - Mandates studies and reports to Congress by: (1) the Comptroller General regarding the consolidation of public accounting firms, and its impact upon the capital formation and securities markets; and (2) the SEC regarding the role and function of credit rating agencies in the operation of the securities market.

(8) Corporate and Criminal Fraud Accountability - Introduces new criminal offences such as knowingly destroying, altering, concealing or falsifying records with intent to obstruct or influence an investigation in a Federal matter or in bankruptcy.

(9) White-Collar Crime Penalty Enhancements - Amends Federal criminal law to (1) increase criminal penalties for (a) conspiracy to commit an offence or to defaud the United States, including its agencies; and (b) mail and wire fraud; (2) require senior corporate officers to certify in writing that financial statements and the disclosures therein fairly present in all material aspects the operations and financial condition of the issuer.

(B) NASDAQ TAKES NEW ACTIONS ON CORPORATE GOVERNANCE REFORM

On 25 July 2002 the Nasdaq Stock Market, Inc announced that its Board of Directors approved more than 25 new corporate governance reform proposals designed to increase accountability and transparency in relation to companies listed on Nasdaq. Nasdaq is the world's largest stock market with more than 4,000 companies listed on it.

Actions taken by the Nasdaq board include the following:

(1) Increase board independence

(a) Majority of board members will be independent

(b) Regular meetings of independent directors in executive session

(c) Further tightening of definition of "independence"

- Excludes large shareholders, relatives of executives, and employees of outside auditor
- Establishes a three-year cooling off period for all non-independent directors before they can be considered independent

(2) Empower audit committees

(a) Sole authority to hire and fire independent auditors

(b) Sole authority to approve all non-audit related services

(c) Authority to retain legal, accounting and other experts

(3) Strengthen the role of independent directors in compensation and nomination decisions

(a) Executive officer compensation must be approved by an independent compensation committee or by a majority of the independent directors

(b) All director nominations must be approved by an independent nominations committee or by a majority of the independent directors

(c) Allow one non-independent director to serve on compensation or nomination committees under certain disclosed circumstances

(4) Mandate director continuing education

(a) The Nasdaq Board indicated the desire for companies to require continuing education for all directors. The board has asked the Nasdaq Listing and Hearing Review Council to develop appropriate rules.

(5) Stock options

(a) Consistent with the recommendations of US President George Bush, Nasdaq will require shareholder approval for all stock option plans

(b) Existing exemptions for ESOP and inducement options will be retained

(6) Codes of conduct

(a) All companies must have codes of conduct

(b) Each code must address conflicts of interest and compliance with applicable laws

(c) Must have enforcement mechanisms

(d) Must disclose waivers to officers/directors

(e) Must be publicly available

(7) Mandate accelerated disclosure of insider transactions

(a) Mandate that companies disclose insider transactions in company stock within two business days for transactions exceeding $100,000

(8) Non-US Companies

(a) Must disclose all exemptions to corporate governance listing standards due to contrary home country practice

(b) Must file with the SEC and Nasdaq semi-annual and interim reports, including statement of operations and balance sheet, prepared in accordance with rules of home country marketplace

For more information http://www.nasdaq.com

(C) UK REVIEW OF AUDIT AND ACCOUNTING ISSUES

On 24 July 2002 the United Kingdom Secretary of State for Trade and Industry published the interim report of the Coordinating Group on Audit and Accounting Issues. The Coordinating Group was set up by the Chancellor of the Exchequer and the Secretary of State for Trade and Industry to review the UK's current regulatory arrangements for audit and financial reporting. The interim report draws upon a number of international reports and studies including the report of Professor Ian Ramsay on auditor independence commissioned by the Australian Government last year.

A summary of the key recommendations contained in the interim report follows:

(1) Audit committees

The role and membership of audit committees must be strengthened and it must be clear that they act on behalf of and report to the shareholders, particularly in relation to appointment and remuneration of auditors, upholding auditor independence and monitoring audit quality. In particular, the report proposes that the audit committee should approve the purchase of non-audit services and the audit committee should have the principal responsibility for making recommendations on auditor appointment to the shareholders. The report invites the Financial Reporting Council to set up a group to develop guidance for audit committees. The report also states that the Government should carefully consider underpinning the role and responsibilities of audit committees through company law.

(2) Auditor independence

The report requests further work to identify the types of non-audit services which are incompatible with the principles underlying auditor independence. There should be improved disclosure of the nature and value of non-audit work.

The requirement for rotation of the audit engagement partner should be for at least every five years rather than every seven years as at present. Rotation should extend beyond the lead audit partner.

(3) Transparency of accounting firms

The major accountancy firms should improve their own openness and transparency, by providing better information on their processes and practices, publishing full financial statements and accounts, and making more information publicly available on the structure of their international networks.

(4) Financial reporting

The report endorses a continuing emphasis on accounting standards which stress the need for "substance over form". The report emphasises the importance of having in place for 2005 a robust set of international standards which promote transparency in company accounts and address issues such as accounting for share-based payments and revenue recognition. There should be more proactive and wide-ranging enforcement of accounting standards in financial statements made by companies.

(5) Other aspects

The Department of Trade and Industry and the Treasury should discuss with the Office of Fair Trading whether there are any competition implications of the high concentration in the market for audit and accountancy services and whether any of the proposals in the report have competition implications.

Also on 24 July 2002, the UK Secretary of State for Trade and Industry announced the Government's response which is broadly supportive of the recommendations in the interim report. In particular, the Government agrees that the role of audit committees must be strengthened and enhanced. They should be made up entirely of independent non-executive directors. The Government also agrees that the principle of audit partner rotation should be extended to other senior members of the audit team and that the time-scale for rotation of the audit partner should be reduced from seven to five years. The Government would also investigate the need for further tightening of the rules governing the extent to which auditors can provide non-audit services to audit clients.

Both the interim report and the UK Government's response are on the website of the UK Department of Trade and Industry at www.dti.gov.uk/cld/post_enron.htm

(D) ASIC CHAIRMAN SPEECH ON CORPORATE GOVERNANCE

On 16 July 2002, Australian Securities and Investments Commission Chairman Mr David Knott delivered a speech titled "Corporate Governance - Principles, Promotion and Practice". The speech was the inaugural lecture for the Monash Governance Research Unit. In his speech, Mr Knott made a number of points, including:

(1) Many years of sustained economic growth, and Australia's survival of the financial crisis in Asia, had led to a period of complacency about corporate governance. Over time, it became institutionalised and compliance focused, more driven by process and legal liability management for corporate officers than by notions of shareholder protection and wealth creation.

(2) What was underestimated were "some quite pernicious and endemic factors at play - a new outbreak of management greed, the failure of Boards to put a brake on excessive and structurally unsound remuneration practices, and the many commercial pressures that influence management and Boards to focus on short-term payoffs".

(3) It is not necessarily the case that the excesses evident in the US capital markets are as serious in Australia and Mr Knott stated that he has no reason to believe that the types of accounting abuses uncovered in the US such as improper capitalisation of expenses, wrongful recognition of revenue, and non-consolidation of controlled entities, are widespread in Australia.

(4) Mr Knott raised for consideration whether the traditional approach of leaving responsibility for corporate governance and compliance with Boards, shareholders and auditors is still valid. He asked whether we should be thinking about extending the scope of prudential supervision more pervasively throughout the business community so that the corporate regulator could, for example, have rights to enter, inspect and even seize records without cause. He noted that these would be radical notions for a corporate regulator and would represent a major shift in managing governance responsibilities.

(5) Mr Knott spoke about the role of the Australian Stock Exchange in corporate governance. He stated that the ASX "has specifically disavowed any intention to endorse best corporate governance practices". He also stated that "we should be mindful that, unlike the NYSE, ASX is a "for profit" corporation; and regulatory responsibility often sits uncomfortably alongside the profit motif". He stated that time will tell whether the current Australian arrangements are sustainable or whether the ASX will accept extended responsibility in the area of corporate governance. He noted that it is always possible that additional governance obligations will be legislated or that ASIC will be charged with increased responsibilities in the corporate governance area.

(6) Mr Knott also commented upon executive remuneration. He stated that "the disproportionate inclusion of options in a CEO's remuneration package is an affront to the general body of shareholders and to principles of good governance. All developed countries should support urgent adoption of international accounting standards to expense such options in company accounts. The commitment of national leaders to tackle the structural causes of poor governance should be judged by their willingness to support not only this initiative, but other urgent reforms to our accounting standards".

(7) Mr Knott stated that Boards need to do more to improve their own accountability. "It is incongruous that we accept the need for sophisticated performance management techniques across most staffing levels of our corporations - but seldom extend the same disciplines to Board level".

(8) Finally, Mr Knott commented upon the continuous disclosure regime. He stated that there are genuine concerns about the ambiguity of the continuous disclosure obligations under the listing rules. He stated that ASIC believes " that the rules should be redrafted to clarify the existing exclusions, shifting the balance in favour of disclosure in all but very limited circumstances. We also believe that the previous obligation for a company to respond to market rumour in certain circumstances should be restored. We accept this is a vexed question. We understand the frustration of company managers about the non-accountability of the financial press who report false rumours. Nevertheless, I have to say that I have experienced more cases of press rumours having a sound factual basis than those which have not. If the publication of a story starts to move the share price, creating a disorderly and uninformed market in the stock, then in my view the company should do all within its power to improve the market's state of knowledge".

The full text of Mr Knott's speech is available on the ASIC website at www.asic.gov.au

(E) TESTIMONY OF CHAIRMAN ALAN GREESPAN TO CONGRESS - STOCK OPTIONS, CEOs AND CORPORAGE GOVERNANCE

On 16 July 2002 Mr Alan Greenspan, Chairman of the US Federal Reserve Board, presented the FRB's semi-annual monetary policy report to the Congress in the US Senate. Following is an extract from his report:

"Given the key role of perceptions of subdued profitability in the current period, it is ironic that the practice of not expensing stock-option grants, which contributed to the surge in earnings reported to shareholders from 1997 to 2000, has imparted a deceptive weakness to the growth of earnings reported to shareholders in recent quarters…

"The difficulties of judging earnings trends have been intensified by revelations of misleading accounting practices at some prominent businesses. The resulting investor skepticism about earnings reports has not only depressed the valuation of equity shares, but it also has been reportedly a factor in the rising risk spreads on corporate debt issued by the lower rung of investment-grade and below-investment grade firms, further elevating the cost of capital for these borrowers. Businesses concerned about the impact of possible adverse publicity regarding their accounting practices on their access to finance could revert to a much heavier emphasis on cash generation and accumulation. Such an emphasis could slow new capital investment initiatives…

"Our market system depends critically on trust--trust in the word of our colleagues and trust in the word of those with whom we do business. Falsification and fraud are highly destructive to free-market capitalism and, more broadly, to the underpinnings of our society.

"In recent years, shareholders and potential investors would have been protected from widespread misinformation if any one of the many bulwarks safeguarding appropriate corporate evaluation had held. In too many cases, none did. Lawyers, internal and external auditors, corporate boards, Wall Street security analysts, rating agencies, and large institutional holders of stock all failed for one reason or another to detect and blow the whistle on those who breached the level of trust essential to well-functioning markets.



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