Corporate Update – June 2006

• Directors’ and officers’ liabilities: a moveable feast

• ASIC: results of prospectus surveillance program

This article gives a brief summary of changes to directors’ and officers’ liabilities due to recent developments in environment, corporations and occupational health and safety laws.

Directors and managers face serious jail time – up to seven years’ imprisonment – under new laws that now apply. Financial penalties have also increased – up to $1m for directors and managers. The "no knowledge" defence has been abolished.

Directors now face increased risks of being personally prosecuted for environmental offences because the "no knowledge defence" has been abolished. This means that directors can no longer take a "head in the sand" approach and claim they were unaware of the polluting activities of their corporations.

The remaining defences are the "no control defence", available where the director or manager was not in a position to prevent the corporation’s contravention, and the "due diligence defence", available where the director or manager used all due diligence to prevent the contravention.

Directors should re-examine their environmental strategies, ensuring they are adequate and being implemented at all levels in the company.

The Federal Treasury has announced a string of proposals for reducing red tape in the corporate and finance sectors. Among them, it is proposed that, the business judgment rule be extended to create a general "safe harbour" provision for directors and officers, excusing them from liability under the Corporations Act.

High profile scandals such as the one surrounding James Hardie and its asbestos liabilities have kept directors’ duties in the spotlight. The proposed extension of the business judgment rule is part of a larger debate about how directors and officers should balance the interests of shareholders with those of other stakeholders, including employees, creditors, consumers and environmental groups.

Provided certain criteria are met, such as acting in good faith, the business judgment rule currently excuses directors and other officers from liability for not exercising their powers with sufficient care and diligence. The proposal provides directors with more general protection from liability under the Corporations Act if they act:

• in a bona fide manner

• within the scope of the corporation’s business

• reasonably and incidentally to the corporation’s business

• for the corporation’s benefit

The provision would extend the protection to any obligation the director or officer has under the Corporations Act, such as duties of good faith, use of position and use of information, the duty not to trade while insolvent, and the duty to keep books and records and declarations relating to financial statements.

Although the extension of the business judgment rule would seem to suggest greater protection for directors, finding the balance between addressing the interests of stakeholders (including third parties who deal with the company) and those of the company’s shareholders could be particularly problematic.

The Treasury’s Corporate and Financial Services Committee is currently receiving submissions on the proposal.

NSW occupational health & safety (OHS) laws are under review. A current draft bill, tabled but not yet before Parliament, proposes to make OHS compliance easier for both corporations and individual officers. It is expected that the bill will be debated in Parliament shortly, following consideration of public submissions.

Presently,each "director or person concerned in the management of the corporation" is deemed liable where corporations have breached OHS laws, subject to available defences. The bill attempts to clarify the uncertainty as to who a person "concerned in the management of the corporation" is, by instead making "officers" liable as defined in the Corporations Act. Potentially this definition may restrict the range of individuals automatically deemed liable. Nevertheless, the class of persons is broad and extends beyond directors.

Other changes

There are various other changes proposed in the draft bill that will obviously affect the liabilities of company officers. The most significant of these is the proposal to incorporate into the OHS general duties provisions the requirement to ensure health, safety and welfare as far as is "reasonably practicable". This shifts the onus from directors and officers to WorkCover as to whether ensuring health safety and welfare was reasonably practicable.
By Charles Cowper

ASIC: RESULTS OF PROSPECTUS SURVEILLANCE PROGRAM

ASIC has emphasised the importance of making disclosure documents intelligible to retail investors, suggesting that issuers should place more emphasis on explaining the commercial reality or effect of the issue, instead of focussing on legal complexities.

The regulator raised this concern during a Liaison Committee Meeting for equity raising in Sydney, which Gadens Lawyers attended.

ASIC shared the results of its recent prospectus surveillance program during the Liaison Committee Meeting. The particular areas of concern ASIC identified in its prospectus surveillance program, listed in the order of frequency, were as follows:

• information not presented in a clear, concise and effective manner

• inadequate financial information or information regarding a particular accounting issue (for example inadequate comparison to historical information)

• projections, including assumptions

• insufficient disclosure on the proposed use of funds

• insufficient disclosure on the activities of the business

ASIC revealed that it reviews between 13% and 15% of disclosure documents, although it reviews fewer disclosure documents in the financial services area. ASIC indicated that it is more likely to review long documents, and recommends that if a disclosure document is more than 120 pages long the issuer should contact ASIC before lodgment.

As mentioned in a previous update, earlier this year (to read this update click here...) ASIC released Better prospectus disclosure, a draft policy statement dealing with ASIC's approach to the Corporations Act 2001 requirement that prospectuses be worded and presented in a "clear, concise and effective" manner. ASIC indicated that it is likely that the final policy statement will be released in the third quarter of this year.
By Iris Dielmann

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.