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Part 11 - Shareholder participation and information

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The role of shareholders is recognised as critical for good corporate governance practice. Shareholders do not assume responsibility for day-to-day management of a corporation. However, they can influence the behaviour of the corporation over the longer term through exercising influence on fundamental matters. These matters include the composition of the board, amendments to the corporation's rules, and approving extraordinary transactions. Shareholders exercise their influence primarily through voting at and/or attending the corporation's general meetings.

The OECD Principles of Corporate Governance1 have widespread acceptance as a framework for good corporate governance practices. The first of those principles refers to the basic shareholder rights to participate and vote in general meetings. In particular, the principle that shareholders should be given the opportunity to participate effectively and vote in general shareholder meetings is mentioned as a key component of a good corporate governance framework.

The practical opportunities for shareholders to effectively participate in general meetings are often limited due to a number of factors. This part contains proposals intended to enhance opportunities for effective participation by shareholders in Australian corporations, including proposals regarding:

  • notices of meetings;
    • short form notices
    • bundling resolutions, and
  • access to meetings;
    • web-casting
    • electronic proxy voting.

The proposals were developed by the Corporate Governance Roundtable ('CGR'), a forum which was convened by ASIC in 2001.2

Further proposals to facilitate the effective and informed participation by shareholders in the governance of companies considered in this part are proposals to:

  • require the disclosure by directors in annual reports of offices held;
  • facilitate the distribution of annual reports by electronic means; and
  • convene a group representing shareholder interests to act as a consultative body to consider relevant future reform proposals.

11.1 Shareholders and Investors Advisory Council

The concept of a shareholder reference group has been considered as a way of ensuring that the concerns of retail investors are appropriately considered in the context of policy issues affecting them. Such a group would act as an external advisory body reporting directly to the Government on issues of corporate law and governance affecting shareholders.

The Council would be chaired by the Parliamentary Secretary to the Treasurer. Members would be appointed by the Government and include individual retail investors as well as nominees from appropriate retail investor bodies.

It is envisaged the Shareholders and Investors Advisory Council would be requested to consider future proposals to change aspects of the corporate regulatory framework. The Council would make its comments directly to the Minister responsible and where possible the Council would be consulted at an early stage of the policy development process.

Proposal 36 - Shareholders and Investors Advisory Council

The Government will establish a Shareholders and Investors Advisory Council, to be chaired by the Parliamentary Secretary to the Treasurer, which it will consult on all disclosure-related reforms to ensure they meet the needs of retail investors.

 

11.2 Form of notices of meetings

The purpose of giving notices of meetings is to enable members to know what business will be conducted at the meeting so that they can decide whether or not to attend, as well as how to vote. Where notice is given that particular business will be transacted at a meeting, no other business can be proceeded with unless the whole body corporate is present and consents.3

Accordingly, notices of meeting serve an important function in the corporate governance framework. Without effective notices the only vehicle through which members may directly influence corporate behaviour - that is, attending and/or voting on resolutions at general meetings - will be rendered ineffective. Notices of meeting that fail to convey to members the nature of the proposed business of the meeting are not effective notices, even though they may meet legal requirements.

Against that background, the CGR considered ways to improve the effectiveness of notices of meetings.

11.2.1 Short form notices

Current legal requirements for notices

Division 3 of Part 2G.2 of the Corporations Act details the current method for calling meetings of members. Section 249L prescribes the requirements for the content of notices of meetings, detailing such aspects as: the place, date and time for the meeting; the general nature of the meeting's business; any proposed special resolutions; and the entitlement of members to appoint proxies and the method for doing so.

Directors have an obligation to ensure that the content of notices of meetings, as well as the accompanying explanatory documents sent to shareholders, are not misleading. They must present full and true disclosure of all relevant information. Where a notice of meeting is accompanied by information, that is false or misleading in a material respect, or has omitted information that makes it misleading, an officer who furnishes the information may be guilty of an offence under section 1309.

Concerns about the present framework

An issue of concern raised by the CGR is that corporate officers are worried about possible legal actions for defects in notices, and are providing large quantities of information such that it is often difficult to ascertain what the business of the meeting will be. There is anecdotal evidence that many shareholders are ignoring the notices altogether because it would take too much time to comprehend the information provided.

Clearly the desirability of making full and fair disclosure needs to be balanced against the need to avoid confusing the typical members to whom the notice is directed.

Possible responses to concerns

Three responses to these concerns have been considered:

  • no change;
  • change the Corporations Act to introduce a 'comfort' provision; and
  • no statutory changes, but address the issue through a practice guide.
No change

One view is that the current legal requirements are appropriate and should not be feared by corporate officers. The courts have taken a reasonable interpretation of the requirements.4 The law already provides a good balance between safeguarding the interests of the shareholders in obtaining sufficient information to understand what will be discussed at meetings, and safeguarding the interests of the company which has in good faith provided information it considers sufficient for that purpose. Any winding back of the current requirements is unnecessary and will potentially adversely impact the rights of shareholders to be fully informed about the business to be conducted at meetings.

Introduce a 'comfort' provision

Another view is that in the absence of a clear statutory 'safe harbour' for corporate officers who provide information they consider sufficient in good faith, corporate officers will feel obliged to continue their practice of providing large quantities of information in notices of meetings to guard against any action.

To address this concern, a 'comfort' provision could be enacted to facilitate provision of 'short form' notices and to protect disclosures made in good faith.

It would be important to ensure that any such comfort provision did not have the effect of undermining the core el
ement of the obligation to present true and full disclosure of all relevant information. Accordingly, companies that choose to use a short form notice of meeting would still be expected to make complete information available to shareholders that seek it, and to make the information available through other means (for example, posting on a website or, in the case of listed companies, making it available to the Australian Stock Exchange).

Practice guidelines

A further means to address the issue may be the development of best practice guidelines that could outline the legislative requirements and the interpretations taken by courts. The aim of the guidelines would be to promote a common sense approach encouraging companies to include in their notices of meetings only information that is useful in the circumstances.

Best practice guidelines concerning notices of meetings could be of assistance in encouraging more comprehensible notices of meetings whether or not a legislative change were to be made.

Best practice guidelines would be expected to cover such matters as:

  • drafting style, use of jargon, font size, possible standard format for common types of business (such as elections of directors, related party transactions);
  • any matters (such as related party benefits or qualifications in an expert's report) that are of such significance that they ought to be included in any notice.

To be most effective, the best practice guidelines would need to be authoritative and acceptable to all relevant parties. An appropriate body to develop the guidelines would be the ASX's Corporate Governance Council. It would also be appropriate for ASIC to be consulted on the guidelines.

Proposal 37 - Shorter, more comprehensible notices of meetings

To encourage shorter, more comprehensible notices of meetings:

  • the Government will amend the law to introduce a 'comfort provision' to protect disclosures made in good faith in a short-form notice of meeting; and
  • best practice guidelines concerning notices of meetings should be developed by the ASX Corporate Governance Council in consultation with ASIC.

 

11.2.2 Bundled resolutions

Often a number of resolutions to be put before a company meeting relate to essentially the same proposal. For example, if a proposal to restructure a corporate group is being considered, there is likely to be a number of member resolutions required to give effect to that proposal. In most cases, shareholders will make up their minds to vote for or against the proposal considered as a whole - they are unlikely to cast different votes on the individual resolutions that form the proposal.

The CGR considered a practice that has been developed, mainly by listed public companies, of 'bundling' the related resolutions, so that a whole set of matters that would otherwise require a large number of individual resolutions at a general meeting are considered together. Most often, this will involve casting a resolution in a form that would, if passed, approve the proposal described generally, including the individual component actions referred to in another document (such as the explanatory statement). For example, a 'bundled' resolution for a merger of a large listed public company may read along the following lines:

'Subject to the passing of Resolution 2 below, the Company approves the merger between the Company and X Ltd, as described in the Explanatory Memorandum which accompanied the Notice of this Extraordinary General Meeting, including (without limitation):

  • the issue of Share A;
  • the authority to issue Share B; and
  • the execution of, and compliance by the Company with:
    • Agreement A;
    • Deed B; and
    • Deed Poll C,

    in each case substantially in the form submitted to the meeting and signed by the Chairman for the purpose of identification.'

The advantage from the company's perspective of 'bundling' resolutions in this way is that, where large transactions are involved, they are likely to be interdependent in such a way that any failure of members to approve a single component in the form envisaged would be likely to result in a series of consequences for other components of the proposal that would be difficult, if not impossible, to anticipate or explain. A large restructure, for example, may entail shareholder approval for dozens of individual transactions, all of which are linked to the others, to form the whole proposal. Similarly, from the shareholders' perspective, an explanation of the proposal and its impact when viewed as a whole is likely to be far more useful in forming a decision to vote in favour or against it than a detailed explanation for each of the composite resolutions. Accordingly, to 'bundle' together the component resolutions and their explanations is preferable so that the proposal as a whole can be more easily considered.

However, there are also potential disadvantages of bundling from a shareholders' viewpoint. Considering resolutions in a 'bundled' way restricts the opportunity to debate particular component parts. There is a concern that bundling resolutions might permit the 'hiding', deliberately or otherwise, of important details about individual resolutions that should be specifically drawn to the attention of shareholders - such as proposals concerning executive remuneration.

It would not seem desirable to attempt to make laws about this matter. To draft a rule that would yield an appropriate result in all (or even most) cases would not be practicable. Rather, it is suggested that the best practice guidelines on notices of meeting, mentioned above, would be an appropriate vehicle to address bundling of resolutions.

Proposal 38 - Bundled resolutions

The proposed best practice guidelines on notices of meetings will include a section dealing with the explanatory material for 'bundled resolutions'. The guidelines will include material on best practice for:

  • explaining 'bundled resolutions', including the primary purpose, impact and material implications;
  • providing access to fuller information on the component resolutions for those shareholders who seek it (for example, through company websites);
  • describing categories of resolution that should not be bundled but always dealt with as a separate item, with a separate explanation provided (for example, transactions affecting executive remuneration).

 

11.3 Access to general meetings

A potential hurdle to greater shareholder participation in general meetings is the time and cost involved in attending them. Relatively few shareholders in large companies have an interest sufficient to warrant physical attendance at a general meeting, particularly if the meeting is held some distance away. Therefore, a potentially large proportion of shareholders do not have a realistic opportunity to personally attend general meetings due to those factors.

11.3.1 Web-casting general meetings

One mechanism that has the potential to greatly expand the opportunity for shareholders to participate in meetings is the broadcast of the meeting over the internet ('web-casting'). Web-casting a general meeting allows shareholders who are unable to attend the physical meeting to witness the meeting proceedings in real-time from any location.

Many foreign and domestic companies have successfully broadcast their annual general meetings over the internet5. There would not seem to be any legal impediments to doing so.

However, the broadcast of meetings over the internet is only a part of the access to meetings
issue. For participation over the internet to be equivalent to physical presence, shareholders viewing the meeting on the internet would need to be able to provide real-time input, by asking questions and participating in debate, as well as voting. Providing that kind of shareholder access presents greater challenges than one-way web-casting, both legally and technically. Issues include the authentication of internet participants, the legal ramifications if the internet broadcast fails, and (if questions can be submitted to the chairman by email) the risk of very lengthy meetings. Options being explored in overseas jurisdictions for providing two-way access, including through e-mail and bulletin boards, were canvassed in a discussion paper by Professor Elizabeth Boros6, which, among other sources, was considered by the CGR.

11.3.2 Use of proxies

Traditionally, shareholders unable to physically attend a meeting have used proxies. This device permits shareholders to nominate someone who is attending the meeting to act generally (including speaking) and vote on their behalf, by lodging a proxy form with the company prior to the meeting. Proxies may be given a discretion to vote how they see fit, or the shareholder may choose to direct a proxy to vote in a particular way. If the shareholder does not know someone who is attending, the shareholder can nominate the chair to act as their proxy.

Electronic proxy voting

Electronic proxy voting ('EPV'), is currently being used in the United States and in the United Kingdom. It usually involves an intermediary that accepts electronic proxy votes for a number of corporate clients, although some individual companies operate an EPV service.

EPV dispenses with the requirement to send in a signed paper proxy form. EPV proxy directions may be lodged by telephone or over the internet. Shareholders are authenticated by various means.

Some benefits of EPV over traditional paper-based proxy forms are:

  • speed of responses: electronic votes can be accepted much later than the 48 hours prior to the meeting usually required for paper proxy forms;
  • shareholder satisfaction: the convenience of EPV has made it very popular in the United States because votes can be cast at any time;
  • cost savings: EPV combined with electronic delivery of notices can save money compared with a paper-based system;
  • ease of processing: an electronic proxy vote can potentially be more easily processed by the recipient than a paper proxy.

However, issues such as authentication of shareholders and of proxies might be problematic. As with two-way meeting participation, these issues involve both technical and legal aspects.7

Bodies corporate as proxies

The current law requires an individual person to be a proxy holder - it does not allow bodies corporate to be a proxy holder.

The Government indicated in its response to the Parliamentary Joint Statutory Committee report on the Company Law Review Act 1998 (Cth) that it supported the Committee's recommendations that bodies corporate be enabled to act as proxies. This proposal is currently being progressed.

Allowing bodies corporate to accept proxies will facilitate shareholder participation in two possible ways:

  • it will facilitate organisations such as the Australian Shareholders' Association seeking out and collecting proxies from shareholders and voting them; and
  • it will also assist persons wishing to operate an EPV business through a corporate vehicle (as most do in the United States and the United Kingdom).

11.3.3 Conclusions

There are obvious benefits of electronic communication in increasing shareholder access to meetings. There are some outstanding questions about whether the requirement for a physical meeting could ever be abandoned altogether.8 However, overseas trends indicate that use of technologies at least as a supplement to the physical meeting (rather than a replacement) is likely to increase around the world and it would be desirable for Australia to follow those developments.

Legislative changes may be required to remove hurdles to two-way internet communication in meetings and EPV. The forthcoming legislative changes permitting bodies corporate to act as proxies will facilitate EPV but there are other potential obstacles.

It is not appropriate at this stage to require companies to offer these facilities. Rather, web-casting (including 2-way participation) and EPV should be encouraged through best practice guidelines developed by the ASX's CGC in consultation with ASIC.

Proposal 39 - Shareholder participation using new technologies

The Government will facilitate improved shareholder participation by electronic means (including electronic proxy voting, internet broadcasting and related technologies) by:

  • removing unnecessary legislative hurdles to the use of the technologies, subject to the need to maintain the rights of shareholders who are not internet users; and
  • requesting the ASX's Corporate Governance Council, in consultation with ASIC, to prepare guidelines for their use.

 

11.4 Disclosure of directorships in annual reports

The Corporations Act currently specifies a number of details about directors that must be included in the annual directors' report to shareholders. There are special requirements for public and listed companies.9

In the case of public companies, the details required include the number of board meetings directors attended during the year, qualifications and special responsibilities. In the case of listed companies, there are requirements concerning disclosure of interests in the company and related bodies corporate.

Directors are not required to disclose details of offices that a director holds in other companies. It has been suggested that this information may be relevant to shareholders in assessing the directors' performance, especially when considered in conjunction with the other information required in the annual report. The information may also assist shareholders to make judgements about potential conflicts of interest and relationships with other directors.

Proposal 40 - Disclosure of other directorships

The Government will amend the law to require the annual directors' report for listed companies to disclose, with respect to each director holding office during the reporting period, details of all other directorship positions held currently and held over the past two reporting periods.

 

11.5 Electronic distribution of annual reports and notices

The distribution of annual reports to members can be costly and time consuming, notwithstanding that recent amendments to the Corporations Act allow members to elect not to receive them, or only receive a 'concise' version.10 Similar considerations apply in relation to member notices.

There are likely to be considerable benefits, in terms of costs and timeliness of distribution, if members could opt to receive annual reports and notices through electronic means.

To safeguard the integrity of the information in electronic versions, and to ensure that all members who elect to receive them electronically do in fact receive them, corporations would need to establish appropriate internal processes and technology. It might be helpful for some guidance on those practicalities to be developed.

A facility permitting members to elect to receive r
eports and notices through electronic distribution would not prejudice the rights of members to continue receiving full printed versions of the documents. Further, even members who elect to receive electronic versions would be entitled to request a printed copy free of charge. Under the proposed amended requirements, failure to distribute electronically in accordance with valid instructions would be an offence.

Proposal 41 - Electronic distribution

The Government will:

  • amend the law to permit members to elect to receive annual reports and notices electronically; and
  • support best practice guidelines concerning electronic distribution of annual reports being developed by the ASX's Corporate Governance Council in consultation with ASIC.

 


1 OECD Principles of Corporate Governance 1999, available for download from www.oecd.org.

2 The CGR met on three occasions in 2001 and two occasions in 2002. Its subcommittees also met on several occasions. The focus of the CGR was to promote better corporate governance by looking at ways of encouraging retail investors to become more active in the companies in which they invest, particularly through raising issues at annual company meetings and exercising their voting rights. Participants included representatives from government, regulators and leading stakeholder groups.

3 In general, a genuine amendment that comes within the scope of the business stated in the notice may be properly considered: Efstathis v Greek Orthodox Community of St George (1988) 6 ACLC 706.

4 For example, in Fraser v NRMA Holdings Ltd (1995) 13 ACLC 132, a complex proposal about which there were difficult questions of commercial judgment was put to a large number of members. The Full Federal Court considered that it was appropriate for the information provided to be selective and confined to matters that were realistically useful in the circumstances.

5 See, for example, Ben Wilmot. 'Gather round the terminal, the AGM's beginning', Australian Financial Review 14 August 2002, p.53.

6 Dr Elizabeth Boros, The Online Corporation: Electronic Corporate Communications, December 1999, available for download at www.asic.gov.au.

7 For a description of some of the possible legal aspects, see Professor Elizabeth Boros, 'Corporations Online', Vol 19 Company and Securities Law Journal, at page 492.

8 See, for example, Professor Ralph Simmonds, 'Why must we meet? Thinking about why shareholders meetings are required', Vol 19 Company and Securities Law Journal, at page 506.

9 See subsections 300(10) and (11) of the Corporations Act.

10 See section 316 of the Corporations Act.