1. Corporate Governance
Linda Greenleaf

2. 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

3. 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 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

4. 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?

5. 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

6. 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

7. 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)
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)

8. 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

9. Types of Companies

10. 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)

11. 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)

12. 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?

13. 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

14. 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?

15. 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

16. 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

17. 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

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

19. 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

20. 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)

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

22. 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 $ per breach and/or
Prison sentences of up to five years
See ASIC v Adler (p.126)

23. 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

24. 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

25. 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?

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

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