Papers presented at the 2005 CLTA conference

These papers were eligible for the conference best paper prize.


Was Elliot rescued and will he recover? Rescue versus recovery in the Australian insolvency context.

Colin Anderson, University of Southern Queensland
Dr David Morrison, The University of Queensland

This paper examines two aspects articulated by commentators of Australian corporate insolvency law. One of these is the corporate rescue procedure aimed at encouraging a flexible approach to insolvency that gives maximum opportunity for the company’s business to survive. The second aspect is the duty placed upon directors to prevent insolvent trading introduced as a measure in 1993. Upon introducing the legislation it was suggested that the two sets of provisions would work together with the potential director liability providing the incentive for early resort to a formal insolvency regime. This paper suggests the reality is that directors’ liability is the dominant focus of the insolvency regime. It is argued that this clash is evidenced in the case Elliot v Australian Securities and Investments Commission [2004] VSCA 54. The outcome seems to be that director liability for insolvent trading has trumped the rescue culture. This paper will examine the potential conflict hypothesised and seek to evaluate the resolution of this difficulty following the Elliot decision.

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Sanctioned dobbing: whistle blowing under the Corporations Act, 2001 (Cth)

Vivienne Brand, Flinders University

This paper deals with the recent whistleblowing reforms to the Corporations Act, 2001 (Cth) that formed part of the CLERP 9 package. It considers the possible impact of the changes on corporate practice, particularly from the point of view of in-house and external legal counsel. The paper makes some reference to the wider literature on whistleblowing and questions whether the reforms are likely to be successful in encouraging disclosure.

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The non-binding vote on executive pay: a review of the CLERP 9 reform

Larelle Chapple, TC Beirne School of Law, The University of Queensland
Blake Christensen, UQ Business School, The University of Queensland

Executive remuneration, including levels of pay, accountability and transparency, is controversial. Section 250R of the CLERP (Audit Reform & Disclosure) Act 2004 which was not greatly anticipated, requires the holding of a non-binding resolution on board remuneration at companies’ Annual General Meetings. The provision has been criticized on the basis that, inter alia, it blurs the respective roles of shareholders and directors. This paper identifies possible motivations for the imposition of the non-binding resolution in Australia. These are evaluated with reference to sources of corporate governance policy and the current state of Australia’s relevant corporate governance structures. We speculate that the non-binding vote will not amount to a substantive addition to the corporate governance regime.

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High Court relegates strategic regulation and pyramidal enforcement to insignificance

Vicky Comino, TC Beirne School of Law, University of Queensland

In September 2000, Business Review Weekly published a cover story on the Australian Securities and Investments Commission (ASIC), describing it as “The Watchdog No One Fears”. Regrettably, following the High Court’s decision in Rich v ASIC (the Rich case) (2004) 78 ALJR 1354, the position may not have changed.

My paper will analyse the case and argue that the majority decision, that the privilege against exposure to penalties and forfeiture (the penalty privilege) was available in civil penalty proceedings ignored strategic regulation theory and the reasons for legislating the introduction of the civil penalty regime. (The civil penalty regime in Part 9.4B of the Corporations Act 2001 (Cth) was introduced by the Corporate Law Reform Act 1992(Cth) and became operative on 1 February 1993.) A consequence of this decision is that ASIC has been left with little chance of using the Part 9.4B pyramid of regulation to deal effectively with corporate misconduct.

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Shareholders & Stakeholders: Conflict or Convergence of Interest?

Anne Durie, UTS

The recent CLERP 9 amendments to the Corporations Act 2001 (Cth) included the new section 299A, which requires directors of listed companies, in the context of their annual reports, to include a narrative statement, termed a Review of Operations and Financial Condition.

This paper considers the extent of the new requirement, and argues that the legislative terms within which the disclosure provision is couched are too narrow. The OFR requirement scheduled to soon become a part of the disclosure regime of listed entities in the UK will be compared to the Australian section 299A.

As the disclosure is to be aimed at the restricted audience of “members of the company,” it thus does not necessarily include a greater range of matters such as information on issues relating to employees, and social, community and environmental aspects of the company’s business operations.

The writer suggests that a wider audience, which includes “other stakeholders,” would encourage directors to report in a way which would provide a more realistic overview of the company’s future prospects. Investors would reap the benefits from this enhanced disclosure, as well as those currently not involved as members of the company.

The James Hardie Industries situation will be utilised to highlight the conclusion that the interests of members and other stakeholders are more closely aligned than they are generally considered to be, and thus all should be targeted within the legislation as comprising the potential audience for the directors’ OFR disclosure.

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The Illusive Goal of Analyst Independence

Professor Jill Fisch, Alpin J. Cameron Professor of Law, Fordham University, New York.

The role of the research analyst has come under extensive scrutiny. Analyst conflicts of interest have been blamed for distorting analyst reports and recommendations, and undermining the analyst’s role as an information conduit for investors and a gatekeeper of the integrity of the securities markets. The regulatory response has been a call for mandated analyst independence from conflicts of interest, particularly those relating to investment banking.

This Article challenges the regulatory goal of analyst independence. The Article questions the extent to which so-called analyst business relationships are inconsistent with their client obligations and the degree to which the supposed conflicts reduce the quality of analyst information. More importantly, the Article argues that, by removing viable sources of funding analyst research, mandated independence is likely to be counter-productive and to reduce market efficiency. As an alternative, the Article identifies several more limited regulatory changes that are likely to value of analyst research to the market while maintaining its financial viability.

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Lost in transition? The impact of voluntary administration on members’ rights when insolvent companies transition into a creditors’ voluntary liquidation.

Jason Harris and Bruce Gordon, School of Business Law and Taxation UNSW

This paper will examine the law regarding how insolvent companies move between voluntary administration and creditors’ voluntary liquidation. In particular, the role of s 447A will be critically assessed in light of recent conflicting decisions in the NSW Supreme Court and the Federal Court. It will be argued that membership rights should withstand the financial collapse of an insolvent company and that s 447A orders should not be granted in situations where membership rights would be reduced. As part of this analysis the paper will compare the impact of voluntary administration and creditors’ voluntary liquidation on membership rights.

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Regulating conflicts of interest and South African company law reform

Michele Havenga, Department of Mercantile Law, University of South Africa

The Consumer and Corporate Regulation Division of the South African Department of Trade and Industry (DTI) has embarked on a comprehensive review of national corporate laws. The process seeks to establish a comprehensive legislative and regulatory framework for the purpose of regulating companies.

A policy document was published for public comment in June 2004. It proposes that a corporation should aim to conduct its business activities with a view to enhancing the economic success of the corporation, taking into account as appropriate the legitimate interests of other stakeholder constituencies. Although the document is still in the discussion phase, it gives a sense of the direction the DTI seeks to take with the reform process.

The DTI sees the clarification and enforcement of the rules governing the conduct of directors as one of the most important challenges of the new law. It appears to favour a statutory standard for directors’ duties and suggests that current measures providing for directors’ indemnification and insurance against liability be reviewed. This paper will consider the proposals made by the DTI in South African context. New law(s) would not only have to bring South African law in line with international trends, but must also reflect the fundamental changes that occurred in the country since the last review of its company law. These include a new constitutional framework, a new political, social and economic environment after 1994 as well as developments in corporate governance (like the King Report on Corporate Governance for South Africa 2002) and legislation. The new company law(s) will have to be consistent with other laws that have been enacted, including the Black Economic Empowerment Act, competition law, environmental laws and access to information legislation.

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Regulation of insider trading in China

Hui Huang, UNSW

The purpose of this article is to critically examine Chinas insider trading regulation, and based upon the results of such examination, set out reform proposals for China. With the benefit of overseas experience, in a relatively short period of time, China has made a remarkable achievement in setting up its insider trading regulatory regime. There are, however, some serious problems with the Chinese law, due to the uncritical implantation of the ideas from foreign sources. This is strikingly illustrated by the loopholes in the definition of insiders which are inherently related to the confusion around the underlying theory of insider trading liability. The article first broadly describes the background of the regulation of insider trading in China, and then offers a detailed discussion of its content. Based on this, a critique of China’s insider trading regulation is carried out. It appears that China has hastily imported two conflicting insider trading theories, namely the equality of access theory and the fiduciary-duty-based theories which include the classical theory and the misappropriation theory. A careful analysis suggests that the equality of access theory is preferable to the fiduciary-duty-based theories, especially in the context of China. It is further submitted that the Australian information connection only approach to the definition of insiders is both theoretically justifiable and practically manageable, and thus should be introduced to reform China’s insider trading regulation.

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Changing Priorities in Corporate Insolvency Law

Trish Keeper, School of Accounting and Commercial Law, Victoria University of Wellington

Any discussion as to whether certain creditors, such as employees, should be entitled to preferential or priority rights to payment in the face of corporate insolvency will always involve consideration of the conflicting interests of different levels of claimants.

This paper briefly summarises the rules granting priority to wages and salary claims in New Zealand as well as recent changes to such payments upon redundancy. It also analyses proposals to extend the existing employee priority rights to payments to employees in lieu of notice, including a proposal to extend the priority of wages and salary beyond the commencement of the liquidation. An extension that implicitly will conflict with the rights of other creditors, both in terms of orderly and efficient administration of a liquidation and in a reduction in funds available to unsecured creditors.As part of this discussion, it considers the role and agenda of government in this aspect of corporate insolvency.

As part of this discussion, it considers alternative mechanisms to provide protection to employees as well as whether the right to preferential treatment should be specifically excluded for executive employees.

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Insider Trading

John Kluver, CAMAC

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Unreasonable Expectations of the Independent Director

Suzanne Le Mire, Monash University.

In recent years the independent director has become the latest weapon in the regulatory arsenal. Deployed to reign in rogue management and ensure corporate governance improvements, the independent director has become a critical feature of corporate boards in Australia, the UK and the US.

The first part of this paper will consider the motivations behind this emphasis on the independent director. While the NED has received wide support, this has been granted for a number of differing, even contradictory reasons. It is clear that at least some of the support has come from those whose primary aim is to reduce the economic power of the corporation. For them, the independent director is a way to limit corporate power and reduce the impact of corporations on society. Those more interested in maintaining corporate power have also supported the independent director, partly as a way of avoiding more rigorous regulation. This paper argues that the conflict between these motivations makes the role of the independent director both difficult to define and complex to fulfil.

This background has left the independent director with a long list of tasks. The loading of the independent director with unreasonable expectations ensures their failure. The resulting concerns about the effectiveness of independent directors have led regulators to concentrate on independence as the vital quality for effective independent directors. This has the effect of sidestepping the questions raised about effectiveness. In addition, it ignores the vital contributions that independent directors can and should make to corporate governance in other areas. For example, by providing a touchstone for shareholder and non-shareholder constituencies, or improving the quality of deliberation on the corporate board.

Concentrating on the independent director as a corporate detective both overstates their potential and restricts their capacity to enhance the corporation.

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Remuneration of Directors: A South African Perspective

Stephanie Luiz, Department of Mercantile Law, University of South Africa

The conflicts of interest that can arise between management and shareholders when remuneration packages of executives are decided and the need for sound corporate governance in this context has resulted in attention being focused on this issue.

At present the Companies Act 61 of 1973 requires disclosure in the annual financial statements of directors’ emoluments, pensions payable to directors, the amount of any compensation paid to directors and past directors in respect of loss of office and details of directors’ service contracts. Payment of compensation for loss of office is prohibited unless the full particulars of the proposed payment are disclosed to members of the company and approved by a special resolution.

The Code of Corporate Practices and Conduct in the King Report on Corporate Governance for South Africa 2002 made recommendations in the context of remuneration of directors. It recommended the appointment of remuneration committees, the disclosure of director remuneration on an individual basis and the development of a policy on executive and director remuneration to be supported by a Statement of Remuneration Philosophy. The Listings Requirements of the JSE Securities Exchange, South Africa require each listed company to disclose how it applies the principles set out in the King Code and to explain the extent of the company’s compliance and give reasons for non-compliance. Further, the Listings Requirements contain specific rules requiring companies to disclose individual directors’ emoluments in the annual financial statement.

This paper will briefly consider the approach adopted in the regulation mentioned above. It will be pointed out that it relies mainly on disclosure to ensure corporate governance and does not allow shareholders a real say in the amount and structure of remuneration of directors. Although shareholders are required to approve compensation payable to directors for loss of office, the approach adopted in Peens and Swart v MKTV Beleggings Beherend BK [2003] 3 All SA 426(T) has limited the extent to which shareholders may exert any influence.

Recently concern has been expressed in the Press and other forums about the high levels of remuneration, the lack of any relationship between remuneration and performance and the lack of shareholder control. The functioning of remuneration committees has also been criticised. It will be considered whether the review of South African Company Law that is presently being undertaken will recommend an approach that will see shareholders playing a more active role in determining the remuneration of directors.

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The Limits of Law: Governance Reform in Malaysia

Rizal Salim, Lancaster University, U.K

This paper discusses corporate governance and development with focus on Malaysia. An overview is given to the events following the economic crisis in 1997. It is shown that while reforms on corporate governance have been pursued, public governance has suffered. This paper asks whether there could be full corporate transparency and accountability without the corresponding public transparency and accountability. It is argued that for comprehensive reform in corporate governance to take place, the need for good public governance must be factored in. This includes the rule of law, democratic space for citizens, and independent and competent regulators and judiciary.

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Independent Directors in Asia

Margaret Wang, Victoria University, Australia

Following the Asian financial crisis and the Asian countries’ desire to attract further foreign investments, many Asian countries have adopted Western standards of corporate governance principles. One of the most important principles is the requirement of having independent directors on the board of directors, as a mean of providing supervision over the conduct of other directors.

This paper examines the requirements of independent directors in selected Asian countries, including, China, Korea, Japan and Singapore. Each country’s implementation efforts will be looked at and the difficulties with full enforcement will be analyzed. Finally, suggestions will be made on how the challenges with implementation may be overcome.

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The “best interests of the company” and corporate responsibility

Therese Wilson, Griffith University

This paper will explore the concept of corporate social responsibility in terms of relational responsibility, whereby companies are required to consider the welfare of groups impacted upon by their activities, when making business decisions. Stakeholder theory will be drawn upon as part of this discussion.

One important obstacle to the exercise of corporate social responsibility is the Corporations Act 2001 (Cth), and in particular, the requirement under section 181 that the directors have a duty to act in the best interests of the company. This has been defined in case law as requiring companies to act in the best interests of the shareholders as a whole, or, where a company is in financial difficulty or actually insolvent, the creditors. In either case it is the financial interests of those groups, as linked to the company’s financial interests, which are regarded as relevant. The question arises as to what extent directors would breach the conflict rule in considering the interests of a broader stakeholder group. Possible legislative change to address this issue will be discussed.

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Is the Market for CEO’s Rational?

Charles Yablon, Professor of Law and Director, Samuel and Ronnie Heyman Center for Corporate Governance, Benjamin N. Cardozo School of Law, Yeshiva University, New York, New York.

A Review Essay Discussing the New Book by Professors Lucian Bebchuk and Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Harvard 2004 forthcoming)

Despite recent corporate scandals, the prevailing academic view of CEO pay has been one of arms-length bargaining, with directors seeking in good faith to align the interests of CEOs with shareholders through performance-based pay. The new book by Bebchuk and Fried, Pay Without Performance, provides a powerful critique of that view. They convincingly demonstrate that much performance-based pay is a sham, and that managers exercise a great deal of power over the directors who ostensibly determine their pay. Yet Bebchuk and Fried’s managerial power model has problems of its own. It cannot adequately account for the enormous recent increases in CEO pay or the fact that CEOs hired from outside get paid even more than incumbents. This essay shows that by recognizing potential irrationality in the pay-setting process, such as the heuristics found in behavioral and social theory, phenomena such as the contemporary “cult of the CEO,” and thick descriptions of actual board decision making processes, these criticisms can be answered more fully and effectively, and a more complete and complex picture of the compensation-setting process can be achieved. The essay goes on to show that the problems with that process are deeply embedded in the relationships of boards and CEOs, and that correcting them will be difficult, if not impossible in many cases. It goes on to consider a question rarely asked by most commentators in this area, whether the costs of performance-based pay may outweigh its benefits.

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The Notion of Regulating Conflicts of Interest:
Segregation, Dilemma or Superficial Exercise

Angus Young, UTS

The notion of conflicts of interest has been instilled in recent amendments to both Corporations Act and Financial Services Reform Act. While the notion might appear unambiguous with regards to the equitable principles of fiduciary duty, its application can be characterised as impracticable and somewhat contentious for a numbers of reasons. Even though the objectives of regulating conflicts of interest is to avoid legal action arising from inappropriate conduct or any suggestion of impropriety from those acting as agents or trustees, in practise, the notion of regulating and enforcing the issue can cause confusion, and impose additional cost for the principal and beneficiaries. The crux of the problem lies in two levels. First the drafting of rules can be problematic, since prescribing exemplars and predicting behavioural tendencies can highly imprecise. Thus rules can be under or over inclusive. In addition, the two popular regulatory strategies of ‘command-control type’ and ‘enforced self regulation’ exhibit certain inherent vulnerabilities. Much of the limitations are associated the behavioural assumptions of targeted recipients. Second notion of managing conflicts of interest in the context of corporate environment can be confusing, because the term suggests inadequate or poorly structured executive remuneration package. This is an adaptation of agency theory of a firm referring the alignment of agents’ interests with the principal’s so as to achieve certain mutual outcome. Hence the complex nature of both regulatory construct and the subject matter insinuate such legislation could steer companies towards a ‘box ticking’ exercise so as to avoid legal action from ASIC or, and shareholders, rather than a great deal of substance.

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