Introduction to Company Law 22 Introduction to Company Law © Oxford University Press, 2007. All rights reserved.

Intro to Company Law cont… Learning Objectives: Explain the different types of company structures; Understand the essential elements of incorporation; Understand the role of company regulation both internal and external, especially the obligations imposed upon company directors for corporate governance, insolvent trading and financial reporting; Explain the relationship that external stakeholders, company auditors and creditors have with the company; Understand the role, functions and powers of ASIC.

Intro to Company Law cont… Companies have evolved to become one of the primary types of business structures in the Western world. The popularity of the corporate entity as a primary choice for businesses to employ is testament to the many advantages offered by the companies.

Intro to Company Law cont… Types of Companies Dependent upon size and capital structure and include:- Limited liability (shares); Limited liability (guarantee); No-liability company. Small v Large Proprietary Companies

Intro to Company Law cont…

Intro to Company Law cont ... Essential Features of a Company Corporate entity structure v other forms of business structure. Separate legal entity; Separation of management from control. Students should be made aware of these essential features particularly how the two concepts interact with each other. See: Salomon v Salomon [1897] AC 22.

Intro to Company Law cont ... Appointment and Removal of Company Directors Part 2D.3 of the Corporations Act Rules relating to:- appointment, remuneration and removal of company directors.

Intro to Company Law cont ... Appointment and Removal of Company Directors Distinguish between:- proprietary and public companies, different rules apply for the removal of company directors regarding public v proprietary companies.

Intro to Company Law cont ... Financial Records and Reports Chapter 2M of the Corporations Act governs the requirements of companies to keep and prepare financial records and financial reports. contain a correct record and explanation of transactions, financial position and performance; enable true and fair financial statements to be prepared and audited Half-yearly reporting by listed companies Annual Directors’ Report Audit Report

Intro to Company Law cont ... Annual Reports The annual financial reports must contain the following information:- the financial statements for the year; the notes to the financial statements; and the directors’ declaration about the statement and notes.

Intro to Company Law cont ... Directors’ Declaration: s.295A Must be in writing; state that the financial records of the company have been properly maintained in accordance with s.286; state that the financial records and notes comply with relevant accounting standards in accordance with s.296; state that the financial records and notes provide a true and fair view of the financial position and performance of the company in accordance with s.297; specify the date on which the declaration is made; specify the capacity in which the person is making the declaration; be signed by the person making the declaration.

Intro to Company Law cont ... Half Yearly Reports Publicly listed entity must prepare half-year financial reports and a directors’ report Half-yearly reports in addition to annual reporting requirements Does not apply to proprietary companies

Intro to Company Law cont ... Annual Directors’ Report a review of operations and the results of those operations during the year; details of any significant changes in the entity’s state of affairs; state the entity’s principal activities for the year; provide details of any matter or circumstance that may have a significant effect on the company’s operations or results in future financial years; provide details of likely developments in the company’s operations in future years; provide details of any environmental legislation that may affect the company’s performance.

Intro to Company Law cont ... Audit Report Compliance with Corporations Act & relevant accounting standards. Provide a true and fair view of company’s performance. Company has sufficient financial records. Auditor has required information.

Intro to Company Law cont ... Contracting with a Company Formal Authority Agency: s.126; Direct: s.127 Execution with a seal: s.127(2) Execution without a seal: s.127(1)

Intro to Company Law cont ... Statutory v Common Law At Common Law three specific categories of authority: express actual, implied actual and apparent authority.

Intro to Company Law cont ... Statutory Assumptions Sections 126, 127 and 129 provide for additional safeguards to outsiders contracting with companies Section 129(2) ASIC Records Section 129(3) Holding Out

Intro to Company Law cont ... Advantages of Statutory Assumptions Broader Application c/f common law. Burden of proof on company for reasonable suspicion. Outsider entitled to rely on statutory assumptions. Assumptions are cumulative. Assumptions apply even if there is fraud by an agent. Outsider cannot rely if the agent “knew or suspected” breach.

Intro to Company Law cont ... Company Regulation Internal Regulation v External Regulation Constitution v Replaceable Rules or Both External Regulation by ASIC & Corporations Act 2001 (Cth)

Intro to Company Law cont ... Company’s Constitution v Replaceable Rules

Intro to Company Law cont ... Amending a Company’s Constitution Can be modified by special resolution Special Resolution must be lodged with ASIC within 14 days

Intro to Company Law cont ... Replaceable Rules: s.135 Pre 1 July 1998 Coy can have Constitution or Replaceable Rules or both. After 1 July 1998 can adopt Replaceable Rules.

Intro to Company Law cont ... External Regulation Corporations Act ASIC Corporate Crime & Corporate Governance See: R v Rivkin (2003) 198 ALR 400.

Intro to Company Law cont ... Corporate Criminals 2001-2004 CRIMINALS JAILED BY ASIC 2001-2004 5 10 15 20 25 30 35 1 2001-2004 No of Criminals 2001-02 2002-03 2003-04

Intro to Company Law cont ... Civil Penalty Orders Applied for contraventions of the Corporations Act including:- Insider Trading:-s.1043A(1) & (2); False Trading & Market Rigging:- ss.1041B(1) and C(1); Market Manipulation:-s.1041A; Insolvent Trading:-s.588G(2); Failure to comply with Financial Reporting Requirements:-s.344(1); Duties of Officers of the Company:-s.601FD(3).

Intro to Company Law cont ... Civil Penalty Orders ASIC 2001-2004 CIVIL PENALTY ORDERS BY ASIC 2001-2004 140 151 118 2001-02 2002-03 2003-04

Intro to Company Law cont ... Investigation & Enforcement ASIC

Intro to Company Law cont ... MEETINGS Generally, there are three broad classes of meetings that may be convened:- Board Meetings; Shareholder meetings which may include:- Annual General Meetings (AGM); Class Meetings and Extraordinary General Meetings (EGM); Court Ordered Meetings.

Intro to Company Law cont ... Quorum & Proxy At least 2 members in a quorum Must be present at vote Proxy can be appointed by a member Proxy can be an entity or individual Proxy has same rights as the member including:- to speak at the meeting; to vote; and to join in a demand for a poll.

Intro to Company Law cont ... Notice Procedures Member’s must be notified at least 21 days before the meeting is held in the following ways:- personally; or by sending in post to the members address as it appears on the register of members; by sending by fax or email; by notifying the member by other electronic means nominated by the member; by any other means provided by the company’s constitution.

Intro to Company Law cont ... Contents of notice A notice of a meeting of shareholders must provide the following information:- set out the place, date and time for the meeting; state the general nature of the shareholders’ meeting; if a special resolution is to be proposed at the meeting- set out the intention to propose the special resolution and provide details of the resolution; if a member is entitled to appoint a proxy- provide a statement setting out proxy’s rights and entitlement to vote at the meeting.

Intro to Company Law cont ... Types of Meetings Annual General Meeting (AGM) Extraordinary General Meeting (EGM) Boardroom Meetings Class Meetings Court Intervention

Intro to Company Law cont ... Share Transactions Affecting Share Capital Issuing New Shares Payment of dividends Share buy-backs

Intro to Company Law cont ... Issue Shares bonus shares preference shares partly-paid shares

Intro to Company Law cont ... Payment of Dividends Only out of profits Capital Maintenance Requirement Declaring a Dividend v Payment of Dividend

Intro to Company Law cont ... Maintenance of Share Capital dividends can only be paid out of ‘profits’, not capital; redeemable preference shares must be redeemed out of profits, or the proceeds of a new issue of shares; and general prohibition against a co dealing in its own shares (Part 2J.2). Doctrine modified by Corporations Act.

Intro to Company Law cont ... Share Buy-Backs Company may undertake a buy-back of its shares in the following ways:- employee share scheme; on-market; equal access scheme and selective buy-back.

Intro to Company Law cont ... CORPORATE GOVERNANCE CLERP 9 Recommendations CLERP (Audit Reform & Corporate Disclosure) Act 2004 (Cth). Independence of the company auditor Corporate disclosures requirements International Accounting Standards & Australian Equivalents United States has enacted similar legislation in the form of Sarbanes-Oxley Act.