The Commonwealth Government, having added to the regulatory burden on business for some years now, is finally reversing the trend. The Corporations Legislation (Simpler Regulatory System) Act has just received Royal Assent. This article outlines a number of the main changes, many of which will be welcomed by business people. Partner, Michael Hodgson has written a paper on a number of FSR changes. The main areas covered by this summary are:
1) Reporting relief:
2) Fundraising Relief
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The threshold for Offer Information Statements has been increased to $10million
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Prospectus relief has been extended, for example to rights issues by listed companies
3) Changes affecting auditors and audit processes:
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Some of the conflict of interest provisions have been narrowed, some broadened;
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The time to deal with a conflict of interest can be extended;The cooling off period between leaving an audit firm or company, and joining an audited body, has been relaxed somewhat
4) Changes to approval requirements for related party transactions:
5) Changes to various dealings with ASIC:
- It will be easier to comply with annual review provisions
- Charges can be lodged electronically
- Some approval processes relating to company names have been streamlined
Reporting Relief -- Relief from sending annual reports to all members (effective for financial years ending on or after 28 June 2007)
Until now, companies which must send annual reports to members have had to send out a hard copy unless the member had specifically elected to receive it electronically, or not to receive it at all. Now, companies can simply make their reports accessible via a website unless a member has specifically requested that a full report or a concise report be sent to them in hard copy or electronic copy.
In order to avail themselves of this relief, companies must notify each member in writing that:
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the member can choose to receive free of charge a copy of the full report or concise report for each financial year; and
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if they do not make that election they can access the reports via a specified website; and
(if the company wishes to offer the option of electronic delivery) if the member wants to receive the report they can elect to receive it electronically.
Once the election has been made it is a standing election for each subsequent financial year until the member changes their election.
These amendments apply to the financial year just ended. To take advantage of the new arrangements, companies whose financial year ended 30 June 2007 should communicate with their members in the near future. Note - the notification can only be made electronically if the member has previously elected to receive communication in that manner.
Reporting Relief -- Increased threshold for small proprietary companies (effective for financial years ending on or after 28 June 2007 )
The Corporations Act distinguishes between "large" and "small" proprietary companies. "Small" proprietary companies are not required to lodge accounts with ASIC, unless ASIC have specifically directed them to do so. Nor are they required to have their accounts audited.
The difference between a "large" and "small" proprietary company depends on whether the company meets 2 out of 3 benchmarks, relating to gross revenue, gross assets and number of employees. These have been increased:
- from $10 million to $25 million consolidated gross revenue; and
- from $5 million to $12.5 million gross consolidated assets.
In each case the thresholds can be further amended by regulation.
The threshold of number of employees is still at 50 but the Act now allows for changes by regulation.
This will be welcome news for growing private companies. However subsidiaries of foreign parents should note that the exemptions for small proprietary companies still do not apply to them unless they meet certain other criteria.
Fundraising relief – increased threshold for offer information statement (relevant to offers made or after 28 June 2007)
The Corporations Act has allowed companies to use a simplified disclosure document – an offer information statement rather than a full prospectus – for offers of securities for a total of $5 million or less. This threshold has now been increased to $10 million.
Fundraising relief – prospectus relief for rights issues (relevant to offers made on or after 28 June 2007
Rights issues of quoted securities will no longer require a prospectus or offer information statement. There are a number of pre conditions:
- the class of securities are quoted at the time of the offer;
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trading in that class has not been suspended for more than a total of 5 days during the previous 12 months, (or the period during which the class was quoted if that was shorter);
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there is no exemption under the regulations or from ASIC for the body concerned, or any director or auditor of the body exempting them from chapter 2M [1] and section 674 and 675 [2]
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there is no exemption from ASIC or under a class order from any of parts 2M.2, 2M.3 and 2M.4 (other then division 4) [3]
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the body gives the relevant market operator a notice with the required content within the 24 hour period before the offer is made.
The notice must:
- confirm that as at the date of the notice the body has complied with its accounting and continuous disclosure obligations;
- include any information that had previously been excluded from a continuous disclosure notice under the Listing Rules (in other words, although price sensitive, it had been withheld from the market because an exemption applied) which is information that investors and their professional advisers would reasonably require in order to make an informed assessment of the body's financial position and the rights and liabilities attaching to the relevant securities. However the notice only has to contain previously excluded information to the extent which is reasonable for investors and professional advisers to expect to find in a disclosure document for an offer of securities.
If the body becomes aware within 12 months of issuing the securities that the notice was defective, the body must give the relevant market operator a notice correcting the defect.
The rationale behind this change is to encourage listed entities to use rights issues instead of placements to institutional investors, to allow participation by all shareholders.
Fundraising relief – some other issues
Among other things, the Amending Act also:
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extends prospectus relief for secondary sales of securities. Until now the Act had not allowed prospectus relief for secondary sales of securities that were initially transferred by a controller of the entity without an OIS/prospectus and for the purpose of onsale. Relief has now been extended to this scenario on the same basis as for other secondary sales of quoted securities. The requirements include compliance with the continuous disclosure rules, as well as providing an updating notice to ensure the market is completely up to date at the time of the secondary sale. The minimum period of quotation for all exempt secondary sales has also been reduced from 12 months to 3 months.
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streamlines disclosure requirements between prospectuses and product disclosure statements where a stapled security is offered; and
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extends relief from FSR licensing and share hawking restrictions of the Corporations Act to employee share schemes for unlisted companies, provided the employee share scheme is made under a disclosure document such as an offer information statement or prospectus.
Remuneration report changes – content (effective for financial years beginning on or after 28 June 2007)
The provisions of the Corporations Act dealing with remuneration reports, which must be included in annual reports of listed companies, have been amended to bring them into line with the accounting standards requirements. Instead of dealing with the remuneration of "directors, secretaries or senior managers" the report must now refer to "key management personnel" which will be defined in the Accounting Standards so that if the standard changes the Act need not be changed. AASB 124 on related party disclosures currently defines "key management personnel" as people with "authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly including any director ….".
There are also some new requirements:
Companies whose financial year has just ended (30 June 2007) do not have to implement the changes for the annual report for that financial year.
Remuneration report changes – Auditor comment (effective for financial years beginning on or after 28 June 2007)
Where companies provide a remuneration report, the auditor must report to members on whether they are of the opinion that the report complies with the Corporations Act and, if not, why they are not of that opinion. This adds to the existing requirement for the auditors' report to describe any defect or irregularity in the financial report in general because, going forward, remuneration issues will be dealt with in the directors' report instead of the financial report.
Changes for auditors – timing of independence declarations (effective for financial years ending on or after 28 June 2007)
The Corporations Act already requires auditors to make a declaration that to the best of their knowledge there have been no contraventions of the auditor independence requirements of the Corporations Act or any applicable code of professional conduct. Previously those declarations had to be given when the audit report was given to the directors of the entity, but an ASIC Class Order had allowed for different timing. Now, the Act confirms that the declaration can be given before the directors pass their resolution under section 298(2) or 306(3) (the resolution approving the form of the directors' report). If the declaration is provided at this earlier stage:
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a director must sign the directors' report within 7 days of the declaration being given; and
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the auditors' report must be made within 7 days of the directors' report; and
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the auditors' report must include either a statement that the declaration would have been given on the same terms if it had been given on the date of the auditors' report or a statement setting out how circumstances have changed since the declaration was made.
Another change, reflecting what had also previously been dealt with in a Class Order, is that the declaration need not disclose contraventions of the independence requirements where the contravention did not amount to an offence because the relevant individual or company or firm had reasonable grounds to believe that a quality control system was in place that provided a reasonable assurance that the individual, firm or company and their employees complied with the auditor independence provisions of the Corporations Act.
Changes for auditors –independence requirements (relevant to financial years beginning on or after 28 June 2007)
The changes have extended the definition of "professional members of the audit team" beyond the persons participating in the conduct of the audit or in a position to directly influence the outcome because of their role in the design, planning, management, supervision or oversight of the audit to:
Section 324CE, 324CF, 324CG and 324CH of the Act currently work in combination to outlaw certain connections between the auditor and the audited body. Some of these have been expanded and therefore need to be carefully worked through by auditors and audited bodies. Others have been reduced. For example it will not be a breach of the independence requirements if:
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a partner in an audit firm is only "connected" with the audited body through holding an asset that is an investment in the audited body
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auditors, audit firms or companies or various named persons owe debts in the ordinary course of business to an audited body (eg acquiring goods or services on credit terms from an audit client).
On the other hand, a professional member of the audit team [and note the expanded definition of that concept] will now breach the Corporations Act if they hold certain direct or indirect investments in the audited body.
Changes for auditors - Timing for dealing with auditor conflicts (relevant on and from 28 June 2007)
The Corporations Act requires auditors who become aware of a contravention of the auditor independence requirements to notify ASIC. If the contravention has not been rectified within a certain period, the audit engagement is to be terminated. The amendments now allow that period (21 days) to be extended with the approval of ASIC.
Changes for auditors – restrictions on former auditors (relevant regardless of time of severing connection with audit firm or company)
The 2 year "cooling off" period before a former partner or director of an audit firm or company, who had been on the audit team, can join an audited company will now be calculated from the time that they ceased to be in the audit team, rather than the time they left the company or firm.
The restriction on multiple former partners or directors of audit firms or companies joining an audited company has now changed so that it does not apply to ex-partners or directors who had departed more than 5 years before the date in question.
Changes to related party approval thresholds
Part 2E.1 of the Corporations Act requires public companies to have member approval before giving any financial benefit to a related party (such as a director, a directors' spouse, a controlling entity or entities controlled by mutual entities) unless the benefit falls within an exclusion. The Act now provides that approval is not required for a financial benefit at or before a prescribed amount, aggregated over a financial year. The amount will be prescribed in the regulations and it is expected that it will initially be $5,000.
Dealing with ASIC – Lodgment requirements
The Corporations Act has required companies to notify ASIC of all changes in directors, alternate directors or company secretaries, except where an alternate director ceased to be a director in accordance with the terms of their appointment (for example if they have been appointed for a specific term). The amended Act excuses the company from notifying ASIC if the officeholder themselves has notice to ASIC. Note that it is up to the company to prove, if it is ever called into question, that the person actually gave the notice.
Companies may now nominate a contact address for communications and notices from ASIC. This will be recorded on ASIC's register, and ASIC may send documents to that address. However the amendment does not appear to force ASIC to use the contract address, it simply recognises it as an alternative to the registered office address.
From 1 July 2007 ASIC will allow for the electronic registration of charges.
Dealing with ASIC - Annual review obligations
Currently companies have to keep paying annual review fees and complying with the obligations up until the point of deregistration. Now companies will be excused if the review date falls within 2 months before or after the publication of the gazette notice in which ASIC notifies its intention to deregister the company.
The Act has also been amended to allow the companies to make payment in advance for annual review fees over a number of years.
Dealing with ASIC - Changes relating to company names
Decisions as to whether a company applying for a name could use a name that was identical to an existing company or otherwise unacceptable had been made by the Treasury Department. The changes allow this function to be delegated to ASIC, which should allow for a more efficient approval process.
Companies which hold a licence to omit the word "limited" from their name no longer have to seek formal approval to changes of their Constitution, if that was a condition of the licence. Instead, they simply need to notify ASIC of changes to their Constitutions.
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[1] the obligations to prepare financial statements, have them audited and lodged with ASIC and circulate them to members
[2] the provisions which give the Listing Rules on continuous disclosure the force of law
[3] these relate to keeping financial records, financial reporting and appointment and removal of auditors.
