An introduction to CLERP 9

An Introduction to CLERP 9, as its title suggests, is aimed at providing legal practitioners and students with an overview of Australia’s corporate governance reforms, but more than that, it also analyses the events that led to the reforms and provides practical examples of how the amendments will change corporate practices.

The book begins by defining what is generally meant by good corporate governance. It then outlines the relevant recent events that led to introduction and commencement of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9) on 1 July this year. The corporate failures of Enron and HIH – and subsequent Royal Commission – in 2001, and the failure of private auditing firms to warn of their client’s problems are well summarised.

As well as the Sarbanes Oxley Act of 2002, the US equivalent to CLERP 9, the establishment of the ASX Corporate Governance Council and the release of its Principles of Good Corporate Governance and Best Practice Recommendations are examined in detail.

The book covers all the chief changes, including the new rules for audit independence, financial disclosure, whistleblowing, remuneration for directors and executives and continuous disclosure.

Throughout, the book provides a comprehensive and easy to understand commentary on how the CLERP 9 Act alters the Corporations Act 2001 and the ASIC Act 2001, as well as highlighting important changes that affect present practice. For example, the author notes that under the auditor independence rules, when an audit firm contravenes an independence requirement, liability is placed on all members and directors of the audit firm, not just the lead auditor responsible for a particular audit. This, he says, is aimed at introducing a “culture of compliance”.

As well as providing a quick reference guide to how the CLERP 9 Act amends the Corporations and ASIC Acts at the beginning of the book, the table at the end of the book comparing the corporate governance reforms in the US, UK and Australia will be very useful for practitioners trying to make sense of how multinational clients might be liable across different jurisdictions.

The law of insider trading in Australia

This book provides a detailed and practical analysis of Australian insider trading laws. The work: examines all fundamental concepts relating to insider trading such as 'who is an insider', 'what is inside information' and 'when is information generally available', together with commentaries on proposed changes to the laws and an examination of the impact of the most recent decisions, including Hannes, and Rivkin; provides a very detailed examination of the defences and exceptions, with particular attention to the operation of Chinese Walls; analyses fully and systematically the provisions on insider trading in the Corporations Act and the Criminal Code (Cth) within the context of decided cases and relevant secondary materials; covers comprehensively the penalties and remedies for contravention of the insider trading regime (including the intricate civil compensation provisions, and an up-to-date analysis of the civil penalties regime in light of ASIC v Petsas); and discusses the operation and effectiveness of continuous disclosure as a means of preventing insider trading.

The role of internal audit in corporate governance and management

This research report is based on a study undertaken in Australia, and aims to evaluate the role of internal audit in corporate governance and management. It identifies the accountability structures and objectives of internal audit, considers the nature of internal audit functions and the extent of application of The Institute of Internal Auditors Standards of Professional Practice, reviews the relationships of the chief audit executives (CAEs) and assesses the nature of financial report risks and other issues covered by internal auditors. The research findings include a diversity of accountability structures for CAEs and a range of internal audit activities, with the application of the IIA Standards being in need of improvement. In conclusion, the researchers make recommendations for improvements in practice to be considered by The Institute of Internal Auditors and other regulating and governing bodies.

The tax treatment of employee stock options : generous to a fault

In the 2000 budgets, both the federal and Ontario governments introduced changes to the tax treatment of employee stock options for the explicit purpose of making their tax treatment in Canada similar to or more favourable than that in the United States. The federal budget added a deferral, similar to that currently applicable to options granted by Canadian-controlled private corporations, for up to $100,000 per year of public company stock options. The Ontario budget introduced an exemption from tax for employees involved in research and development on the first $100,000 per year of employee benefits arising on the exercise of qualified stock options or on eligible capital gains arising from the sale of shares acquired by the exercise of eligible stock options. These proposals reflect the apparent acceptance by the two governments that there is a “brain drain” from Canada to the United States of knowledge workers in the “new” economy and that reductions in Canadian taxes should stem this drain. In the author’s view, the tax treatment of employee stock options, even without these changes, is overly generous. Both the federal and provincial proposals ignore the fact that most employee stock options are taxed more favourably in Canada than in the United States in any event. In particular, most employee stock option benefits in Canada are taxed at capital gains tax rates, whereas in the United States most are taxed at full rates. While the US Internal Revenue Code does provide capital gains tax treatment for certain employee stock option benefits, a number of preconditions must be met. Most important, the shares acquired pursuant to the options must be held for a minimum of one year after the option is exercised. In addition, there are monetary limits on the amount of options that qualify for capital gains treatment. In Canada, there are generally no holding period requirements or monetary limits that apply in order for the option holder to benefit from capital gains tax rates. Empirical evidence indicates that the vast majority of employees in the United States exercise their options and immediately sell the shares acquired. These “cashless exercises” do not benefit from capital gains treatment in the United States, whereas similar cashless exercises in Canada generally do. This empirical evidence suggests not only that the 2000 budget proposals are unwarranted, but also that the existing treatment of employee stock options in Canada is already more generous than that in the United States. This article begins with a theoretical “benchmark” for the taxation of employee stock options. The author suggests that employee stock options should be treated in the same manner as other income from employment. In theory, the value of the benefit should be included in income when the option is granted or vests. However, owing to the practical difficulty of valuing employee stock options, the theoretical benchmark proposed is that the value of the benefit (the difference between the fair market value of the shares acquired and the strike price under the option) be taxed when the shares are acquired, and the employer be entitled to a corresponding deduction. The employee stock option rules in Canada and the United States are then compared and contrasted with each other and the benchmark treatment. The article then examines the arguments that have been made for favourable treatment of employee stock options. Included in this critique is a review of the recent empirical work on the Canadian brain drain. Empirical studies suggest that the brain drain—if it exists at all—is small and that, despite what many newspapers and right-wing think-tanks would have us believe, lower taxes in the United States are not the cause. One study, concluding that taxes do have an effect on migration, suggests that even if Canada adopted a tax system identical to that in the United States, the brain drain would be reduced by a mere 10 percent. Indeed, even if Canada eliminated income tax altogether, it would not stop the brain drain. If governments here want to spend money in order to stem the brain drain, they should focus on other areas. For example, Canada produces fewer university graduates in the fields of mathematics, sciences, and engineering than any other G7 country except Italy. The short supply of university graduates in these fields, the apparent loss of top-calibre academics to US
universities, and the consequent lower levels of university research in these areas (an important spawning ground for new ideas in the “new” knowledge-based economy) suggest that Canada may be better served by devoting more resources to its university institutions, particularly in post-graduate programs, rather than continuing the current trend of budget cuts that universities have endured and may further endure if taxes are reduced.
As far as employee stock options are concerned, if Canada does want to look to the United States for guidance on tax reform (which it seems to do with increasing frequency of late), it should adopt the US rules applicable to nonstatutory options, which are close to the proposed benchmark treatment. In the absence of preferential tax treatment, employee stock options would still be included in compensation packages provided that there were sound business reasons for their use. No persuasive evidence has been put forward that the use of stock options, in the absence of tax incentives, is suboptimal. Indeed, the US experience suggests quite the opposite.

A partnership model of corporate ethics

The stock market crash of 1987 had a profound effect on corporate Australia and the Australian community in general. The fall-out revealed that some of our most respected business figures had not been as ethical, or even as lawful, as we would have hoped. This impropriety produced in Australia an awakening to business ethics. Whilst many companies endeavoured to introduce ethical practices into their corporations, they perceived ethics as a way of minimising damage to the corporation and in some cases as a means of competitive advantage. What was lost was the reason that one should embark on business ethics; and that is to make the society and corporate Australia a more ethical place in which to exist.This paper proposes a model based on 2 factors: commitment and partnerships, as a means of enabling corporate Australia to refocus attention on the main purpose of being inherently ethical in all that we do. This ethical model requires a commitment to partnerships with all stakeholders both internal and external in an attempt to enhance the level of ethical business practices that are contemplated and pursued within corporate Australia. Whilst the research agenda and the information collected is Australian-based, it is hoped that the ideas contained within this paper will have a wider appeal to corporations in similar cultural settings.

Corporate liability for workplace deaths and injuries-reflecting on Victoria's laws in the light of the Esso Longford explosion

The purpose of this article is to consider some different legal models for the liability of corporations for the deaths and serious injuries of their employees, with particular emphasis on the law in Victoria.

Two recent developments in Victoria prompt this consideration. First, on 30 July 2001, the Victorian Supreme Court handed down its sentencing decision in the case arising from the explosion on 25 September 1998 at the Longford gas plant operated by Esso Australia Pty Ltd. The decision marked the end of the formal public consideration of a devastating event in Victorian industrial history, which began with the Royal Commission set up on 20 October 1998 to investigate the causes of an explosion in which two workers died and eight others were injured. Second, in early 2002, the Victorian Government failed in its attempt to introduce new criminal offences for corporate employers whose employees are killed or seriously injured at work. In spite of their failure to be passed by the Legislative Council in Victoria, these proposals warrant consideration. They represent a growing trend by policy makers in attempting to address more effectively the question of the liability for deaths and serious injuries of workers to employers who operate through the corporate form.

"Sexually transmitted debts":the scope of defences to directors' liability for insolvent trading

The recent demise of prominent Australian corporations, such as GIO Australia Holdings Ltd, One.Tel Ltd, HIH Insurance Ltd and Ansett Australia Ltd, have highlighted the relevance of, inter alia, the Australian insolvent trading provisions embodied in the Corporations Act 2001 (Cth) (formerly Corporations Law). What may not be appreciated, however, is that insolvent trading is not only concerned with large public companies. Many of the insolvent trading cases that come before the courts involve small proprietary companies. Moreover, in many cases these are small “family” companies where there may only be one active director. This gives rise to a difficult issue as to the appropriateness of imposing liability for insolvent trading on a spouse who is, factually, merely a dormant director. This article explores the issue of spousal liability for insolvent trading, particularly focusing on the scope of the current defences to insolvent
trading under s 588H.

Directors' duties to creditors in Australia after spies v the Queen

In August 2000, the High Court handed down its decision in Spies v The Queen . According to most commentators, the decision ended a "quiet revolution" which had been underway since Walker v Wimborne by rejecting the suggestion that directors owe an independent duty to creditors. In this article, the writer responds to this commentary in two ways. First, by contending that the High Court's comments in Spies concerning directors' duties to creditors were merely obiter, thereby leaving open the possibility that an independent duty to creditors will be confirmed in a subsequent case. Secondly, by suggesting that if the commentary to date is correct, then the Spies decision has minimal impact in terms of creditor protection as directors' duties under the Corporations Act 2001 already provide sufficient protection for creditors.

Administering the global trap : the role of educational leaders

This article begins with an analysis of Martin and Schumann’s thesis that globalization is (a) enhancing the power of corporations and undermining the sovereignty of nation states and (b) in the process consuming social capital at an alarming rate, thus producing a loss of social cohesion. Globalization is then discussed in terms of the transformations of technology, finance, production and culture, and Gray’s account of differing relationships between markets and cultures in differing forms of capitalism is introduced. The Third Way is then analysed as a specific attempt to resolve cultural contradictions and its limitations are set out. As a possible way forward Amartya Sen’s account of ‘development as freedom’ is outlined and the implications for the role of educational leaders are discussed.

The desirability of criminal penalties for breaches of part IV of the trade practices act

Following the introduction of criminal sanction, including jail terms, for hard core cartelisation in the United Kingdom, the Dawson Review has recently recommended that criminal penalties be introduced in Australia for individuals and corporations found to have engaged in hard core cartels. A number of reasons have been advanced to justify the introduction of criminal sanctions for this type of conduct, the most common of which are that it would bring Australia in line with other competition regimes and that criminal sanctions are more likely to provide an effective deterrent. This article evaluates those reasons, and others, to determine whether there is any adequate justification for the proposed criminal regime.

Players, clubs, events and the Trade Practices Act : a primer for sporting clubs

The Trade Practices Act (TPA) has had an enormous impact on how corporations in Australia may conduct their business. In relation to sporting clubs, it limits the freedom of clubs to deal with players, each other and the public. While previously many clubs may have escaped the ambit of the TPA because they were not “corporations”, state equivalent Fair Trading legislation and the introduction of the national competition policy in 1995 have effectively expanded the scope of consumer and competition regulation to include individuals and associations. Consequently, an understanding of the nature and scope of trade practices regulation is now important for any sporting organisation—regardless of size or structure. This paper identifies the legislative provisions most likely to impact upon sporting clubs and examines some possible circumstances in which clubs might find themselves exposed to liability.

Expanding criminal sanctions for corporate crimes-deprivation of right to work and cancellation of education qualifications

Fines are the standard sanctions employed by most Western countries when a corporation has been convicted of a crime. However, some offences committed by corporations are too serious to be dealt with by way of a fine. There is a need to consider other sanctions that can be invoked in order to deter corporate crime. In this article, it is suggested that the focus should be on criminal sanctions against the natural persons who can potentially commit crimes on behalf of a corporation. New sentencing options against those who can potentially commit crimes on behalf of a corporation should include the annulment or suspension of an offender's academic  qualifications and the making of orders preventing an offender from working or being enrolled in an educational or vocational pursuit.

Reverberations after the HIH and other recent Australian corporate collapses: the role of ASIC

This article focuses on some of the litigation and other developments following the recent spate of corporate collapses in Australia. It gives a basic background to abuses of the 1980s, followed by a short description of some of ASIC's statutory powers. The remaining parts of the article focus on the role ASIC played in instituting actions against the directors of some of the collapsed corporations and in particular what ASIC seeks to achieve with high profile litigation. The article concludes that there is no doubt that in the aftermath of these massive corporate collapses ASIC fulfilled its role as the primary Australian corporate regulator with assiduousness. However, it also draws attention to the fact that the challenges for ASIC now will be to play a far more active role in assuring that signs of corporate collapses are detected at the earliest possible juncture. This will probably mean that ASIC's focus will have to be more and more on monitoring companies, rather than on its role as regulator and enforcer in the strict sense of the word.

Removal of company directors in a climate of corporate collapses

The string of high-profile corporate collapses recently has provided a fresh insight into many important topics and issues in Australian corporations law. Notwithstanding this, one topic that continues to receive inadequate attention both in Australia and in foreign jurisdictions is the statutory removal of  directors. In an earlier article published in this journal, one of the present authors contributed towards addressing this lack of commentary on the topic by highlighting a number of peculiarities with the provisions under the then Corporations Law regulating the removal of directors in public and proprietary companies. Since that time, the CLERP amendments to the Corporations Law (now Corporations Act 2001) in 2000 introduced some interesting changes to the provisions dealing with the removal of directors in public and proprietary companies. In this article, the authors provide an explanation and critical analysis of these changes, and consider the recent Western Australian Supreme Court decision of Allied & Mining Process Ltd v Boldbow Pty Ltd [2002] WASC 195, which deals with some of the issues raised by the authors in relation to the CLERP amendments. According to the authors, whilst some of the peculiarities raised in the earlier article no longer exist post-CLERP, the current removal provisions still raise some important questions of interpretation.