CLERP 9

• Practical implications
• What does the Act cover?
• How can you ensure CLERP 9 compliance?
• Directors' duties in the light of CLERP and recent legal developments
• CLERP 9 proposal

Over the past five years, the Federal Government has embarked on a comprehensive program of corporate law reform, known as the Corporate Law Economic Reform Program (CLERP).

The CLERP 9 draft legislation released on 8 October provides an important step in clarifying some of the key corporate governance issues affecting publicly-listed companies in Australia.
CLERP 9 proposes that reforms in executive remuneration, shareholder involvement and continuous disclosure be supported by law, bringing Australia up to date with global developments.

The enactment of the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act on 30 June 2004 includes a number of reforms to the Corporations Act 2001 (Cth) and is based on the reform proposals contained in the CLERP 9 Discussion Paper: Corporate Disclosure - Strengthening the financial reporting framework which was released by the Government in September 2002.

The CLERP 9 Act also contains a number of reforms flowing from the Federal Government's September 2003 response to the recommendations contained in the Report of the HIH Royal Commission released in April 2003.

Practical implications

Given that a number of provisions only apply to financial years beginning on or after 1 July 2004 (for example there is no need for a shareholder vote on the remuneration report at AGMs considering the 30 June 2004 reports), the most important thing is to take time to understand the new provisions and set up or improve compliance systems accordingly. These are a few suggestions, but each organisation will have different requirements.

All companies should ensure that:

• the organisation has policies assisting ‘whistleblowers’ wishing to raise genuine concerns about compliance
• the documents that they issue, such as notices of meeting, are as “user friendly” as possible
• they understand the additional requirements on their auditors
• there will be systems in place to provide notices of meeting to shareholders electronically
• their members are aware of the new proxy provisions and
• there are systems in place to capture the additional information required in financial reports for the coming financial year.

Listed companies should ensure that:

• the company has robust systems for complying with continuous disclosure requirements;
• they are prepared for the increased disclosure regime for directors and officers’ remuneration;
• they are prepared for the additional requirements for shareholder and auditor participation in future years’ AGMs; and
• their CEO and CFO are prepared for the mandatory sign-off for the coming financial year’s reports.

What does the Act cover?

The CLERP 9 Act contains a number of important reforms to the existing corporate governance provisions in the Corporations Act, including:

• continuous disclosure - changes to continuous disclosure offence provisions including the controversial power given to ASIC to issue infringement notices for;
• changes to financial reporting, including the CEO/CFO sign-off, Management Discussion & Analysis (MD&A) disclosure in the Annual Report;
• executive remuneration - the introduction of a non-binding vote on remuneration reports and expanded executive remuneration
• shareholder participation

The CLERP 9 Act also contains the following:

• new provisions pertaining to auditor independence, and also amendments affecting the audit function and audit oversight;
• licensing obligations for financial services licensees to manage conflicts of interest and address analysts independence;
• amendments to the fundraising provisions in Chapters 6D and 7 of the Corporations Act

How can you ensure CLERP 9 compliance?

This legislative package represents a concerted effort by the Government to strengthen the corporate governance framework in Australia following the numerous international and domestic corporate failures. The immediate challenge for companies is to ensure that their corporate governance policies comply with and take into account the CLERP 9 amendments. This necessitates a thorough understanding of the impact of the different aspects of the CLERP 9 amendments, and involves an evaluation of how these are relevant to your particular business.

There are also a number of important decisions expected to be handed down by the courts in 2004 and 2005 on director's duties, which may affect how statutory and common law duties are interpreted.

Directors' duties after CLERP 9

The CLERP reforms distil the major duties of directors to four crisp commandments in the exercise of powers and discharge of duties.

Directors must:

• Use the care and diligence of a reasonable director in the corporation's circumstances occupying the same office and with the same responsibilities (section 180)
• Act in good faith in the best interests of the corporation and for a proper purpose (section 181)
• Not use their position improperly to gain an advantage for themselves or any person or cause detriment to the corporation (section 182)
• Not use improperly information obtained because of being a director to gain advantage for themselves or someone else or cause detriment to the corporation (section 183)

CLERP 9 Proposal