CORPORATIONS REGULATIONS (AMENDMENT) 1994 NO. 430

CORPORATIONS REGULATIONS (AMENDMENT) 1994 NO. 430

STATUTORY RULES 1994 No. 430

Issued by the Authority of the Attorney-General

Corporations Act 1989

Corporations Regulations (Amendment)

Section 22 of the Corporations Act 1989 (the Act) empowers the Governor-General to make regulations, not inconsistent with the Act or the Corporations Law, prescribing, inter alia, matters which are required by the Corporations Law to be prescribed by regulations, or necessary or convenient to be prescribed by regulations for carrying out or giving effect to the Corporations Law.

In accordance with the Heads of Agreement and the draft Corporations Agreement between Commonwealth, State and Territory Ministers having responsibilities in relation to corporate regulation, the Attorney-General has consulted the relevant State and Territory Ministers about the regulations. Under the terms of the Heads of Agreement, the Attorney-General is required only to consult Ministers on legislative proposals relating to matters falling. within those Chapters of the Corporations Law regulating the securities and futures industries. The regulations are in this category.

The purposes of the regulations are:

(i)       to permit the New Zealand Futures & Options Exchange Ltd (NZFOE) to trade option contracts over New Zealand shares listed on the New Zealand Stock Exchange in Australia. The market in the option contracts will be conducted in conjunction with, and regulated in a similar manner to, the futures market declared by the Minister to be an exempt futures market by declaration published in the Gazette on 10 August 1993;

(ii)       to clarify, and correct certain technical deficiencies and inaccuracies in the language of, the regulations which were made to support the continuous disclosure requirements introduced by the Corporate Law Reform Act 1994 and which were gazetted on 2 September 1994; and

(iii)       to facilitate the development of retail stock markets for unquoted prescribed interests introduced by the Corporations Legislation Amendments Act 1994.

Details of the regulations are contained in the Attachment.

The Regulations commenced on 1 January 1995.

ATTACHMENT

Regulation 1

Commencement

The Regulations commenced on 1 January 1995.

Regulation 2

Regulation 2.1 provides that the Corporations Regulations are amended as set out in these Regulations.

Regulation 3

New Regulation 7.2.02 (Compliance monitoring - section 770A stock markets)

Regulation 3.1 inserts proposed regulation 7.2.02 into the Corporations Regulations.

Regulation 7.2.02 provides that for the purpose of approving a section 770A stock market the Minister must be satisfied that, amongst other things, the business rules of the management company of the section 770A stock market makes satisfactory provision for the fair and orderly conduct of the market, and for a suitably qualified person or partnership ('the supervisor') to monitor compliance with the business rules.

In determining an application for approval of a section 770A stock market section 770A(2)(b) requires the Minister to have regard to the independence and qualifications of the supervisor.

Regulation 7.2.02(a) provides, in effect, that a person or partnership is not considered to be independent if that person is an associate of the management company. The term "associate" is widely defined in Division 2 of Part 1.2 of the Corporations Law.

Regulation 7.2.02(b) provides, in effect, that a person or partnership is not qualified to be the supervisor under the business rules of the management company of a section 770A market if that person is not registered as an auditor under Part 9.2 of the Corporations Law. Qualifications for registration as an auditor include membership of The Institute of Chartered Accountants in Australia, the Australian Society of Certified Practising Accountants or any other prescribed body; recognised educational qualifications; or qualifications and experience considered by the Australian Securities Commission to be equivalent.

Regulation 4

New regulations 7.3.16 and 7.3.17 (Part 7.3)

Regulation 4.1 inserts new regulations 7.3.16 and 7.3.17.

Regulations 7.3.16 - Exemption from Chapter transactions in option contracts on the NZFOE market

Regulation 7.3.16 permits the New Zealand Futures & Options Exchange Ltd. (NZFOE) to trade option contracts over New Zealand shares listed on the New Zealand Stock Exchange on screen trading facilities in Australia.

The NZFOE conducts a market in futures and options contracts in New Zealand. In 1992 the NZFOE applied for an exempt futures market declaration under subsec 1127(1) of the Law so as to enable it to market the full range of its products in Australia through screen trading facilities located in futures brokers' offices in Australia. The declaration was granted and published in the Commonwealth of Australia Business Gazette No. B31 of 10 August 1993. The declaration was made subject to a range of conditions which have the effect of subjecting the market in Australia to a regulatory regime comparable to that imposed on an approved futures exchange.

The exempt futures market declaration did not extend to the option contracts traded by the NZFOE as these contracts are 'option contracts' as defined in section 9 of the Law and fall within the definition of 'securities' in subsec 92(1). They are not 'futures contracts' as defined in subsec 72(1). As such the NZFOE's option products would fall to be regulated under Chapter 7 of the Law.

In order to enable these products to be traded in Australia under an appropriate regulatory regime regulation 7.3.16 disapplies Chapter 7 of the Law on condition that certain parts of Chapter 8 apply to the market as if the option contracts were futures contracts (in particular 'eligible exchange-traded options'). The parts of Chapter 8 that apply closely parallel those applicable to the NZFOE's market in future contracts. In this way the market in option contracts can be conducted in conjunction with, and regulated in a similar manner to, the futures market declared by the Minister to be an exempt futures market by declaration published in the Gazette on 10 August 1993.

The option contracts which will be able to be traded on the proposed market will be option contracts relating to securities in which options may be traded under the By-laws of the NZFOE relating to exchange traded equity options contracts. These will essentially be options over leading New Zealand shares listed on the New Zealand Stock Exchange.

New sub-regulation 7.3.16.(1) defines key terms used in the regulation, in particular 'exempt futures market', 'NZFOE', 'NZFOE market' and 'option contract. 'Exempt futures market' is the futures market declared by the Minister to be an exempt futures market by declaration published in the Gazette on 10 August 1993. 'NZFOE' is the New Zealand Futures & Options Exchange Ltd. 'NZFOE market' is the stock market in option contracts operated by NZFOE in Australia. 'Option contract' is an option contract in relation to securities which may be traded on the NZFOE market.

Sub-regulation 7.3.16. (2) disapplies Chapter 7 of the Corporations Law insofar as it applies to option contracts. This is necessary as it is intended that the market in option contracts be regulated in the same way that the NZFOE's exempt futures market is regulated , i.e. primarily under a Chapter 8 regime and as if the option contracts were futures contracts, in particular eligible exchange-traded options. Part 8.6 of Chapter 8 is specifically excluded as under the conditions for approval of the exempt futures market NZFOE is required to maintain a fidelity fund under its own business rules in sufficient compliance with Part 8.6. Subregulation 7.3.16. (2) in effect duplicates the regulatory framework that applies to NZFOE's exempt futures market and subjects the proposed market in option contracts to that framework and to the penalties that apply in the event of a contravention of a provision of Chapter 8.

Regulation 7.3.17 (Application of certain provisions of the Law to section 770A stock markets)

Regulation 7.3.17 modifies sections 774, 775, 776, 777 and 1114 of the Corporations Law to extend certain of the regulatory requirements which currently apply to a securities exchange to the management company of a section 770A stock market. The extension of these provisions facilitates the supervision of such markets by the Australian Securities Commission ('the Commission').

Regulation 7.3.17(1) provides that for the purposes of this regulation the reference to a 'section 770A stock market' means a stock market that is approved by the Minister under section 770A(1) of the Corporations Law.

Regulation 7.3.17(2) will extend the operation of sections 774, 775, 776, 777 and 1114 of the Corporations Law to the management company of a section 770A stock market. Those sections provide for:

-       the notification of amendments to business rules (section 774);

-       the power of the Commission to prohibit trading in particular securities (section 775);

-       securities exchanges to provide assistance to the Commission (section 776);

-       the power of the Court to order compliance with, or enforcement of, business rules or listing rules of a securities exchange (section 777);

-       the power of the Court to make certain orders (section 1114).

Each of those provisions has effect as if the term 'securities exchange' had been replaced by reference to 'a management company in relation to unquoted prescribed interests for the purposes of section 770A'. This in effect extends the requirements for notification of amendments to business rules, the power of the Commission to prohibit trading on an approved market, the requirement for a management company of a section 770A stock market to assist the ASC in its supervision, and will permit a court order to enforce compliance with business rules.

Regulations 7.3.17(3) has the effect of enabling the Commission to disallow proposed amendments to the business rules of a management company in relation to a section 170A stock market. Any such decision is subject to administrative review.

Regulation 5

Regulation 7.4.07 (Exemption of sale of exchange-traded options)

Regulation 5 amends regulation 7.4.07 which ensures that the short selling restrictions of section 846 do not apply in relation to the giving or writing of options that are registered with the Options Clearing House Proprietary Limited. The amendment to regulation 7.4.07 ensures that the short selling restrictions of section 846 do not apply in relation to the giving or writing of options that are registered with the Sydney Futures Exchange Clearing House (which will clear option contracts traded on the NZFOE market).

Regulation 6

Regulation 7.4.08 (Exemption of short sale covered by exchange traded options)

Regulation 6 amends regulation 7.4.08 which. exempts short sales from the prohibitions on short selling in section 846 where such sales are covered by exchange traded options registered with the Options Clearing House Proprietary Limited. Amendments to regulation 7.4.08 extend this exemption to short sales covered by exchange traded options registered with the Sydney Futures Exchange Clearing House.

Regulation 7

Regulation 7.12.08A (Information required in section 1043B notice-limitation)

Section 1043B of the Corporations Law provides that a person must not offer unquoted securities of a corporation for purchase, or invite offers to buy such securities, unless the person has lodged with the ASC a notice that complies with whichever of sections 1043C or 1043D applies.

A seller entitled to 30% of the unquoted voting shares in a company or to 30% of the unquoted voting shares in a class of voting shares in the company who is making an offer or invitation relating to those shares is required to comply with the requirements of new section 1043C.

Subsection 1043C(2) provides that, subject to subsection (3), the notice must contain such information as investors and their professional advisers would reasonably require, and reasonably expect to find in the notice, for the purposes of making an informed assessment of:

(a)       the assets and liabilities, financial position, profits and losses, and prospects of the company; and

(b)       the rights attaching to the shares.

Subsection 1043C(3) provides that the Regulations may limit the information required by subsection 1043C(2) to be in the notice.

The intention behind this provision is to allow the Regulations to contain qualifications along the lines of those contained in subsections 1022(2) and (3) of the Law in the case of prospectuses. Regulation 7.12.08A gives effect to this intention by limiting the information required to be in a section 1043C notice in terms similar to subsections 1022(2) and (3).

Regulation 7.12.08A(2)(g) provides that the information required to be included in a 1043C notice includes information known to, or that could reasonably be expected to be obtained by enquiry by, 'a person who authorised or issued the notice'. This may be compared with paragraph 1022(2)(b) of the Corporations Law on which the regulation is based which refers to enquiry by 'a person who authorised or caused the issue of the prospectus'. A person who issues a section 1043C notice will not necessarily be the same as the person who causes the issue of the notice.

Regulation 7 makes the language of regulation 7.12.08A(2)(g) consistent with that of paragraph 1022(2)(b) in this regard.

Regulation 8

Regulation 7.12.08C (Section 1043B notice-other sales)

As indicated above, section 1043B of the Law provides that a person must not offer unquoted securities of a corporation for purchase, or invite offers to buy such securities, unless the person has lodged with the ASC a notice that complies with whichever of sections 1043C or 1043D applies.

Section 1043D will apply to the vast majority of secondary sales of unquoted securities. Subsection 1043D(2) provides that a section 1043D notice must contain the information that the regulations require about:

(a)       the securities to which the offer or invitation relates; and

(b)       the seller; and

(c)       the corporation; and

(d)       the directors of the corporation; and

(e)       if the securities concerned are prescribed interests - the undertaking to which the prescribed interests relate and the trustee or representative in relation to the interests.

For the purposes of subsection 1043D(2), regulation 7.12.08C prescribes the relevant requirements.

Regulation 7.12.08C(1)(c) requires a section 1043D notice to contain a statement that the seller of the securities is acting as principal or as agent of the corporation whose securities are the subject of the notice, as the case may be. The language of regulation 7.12.08C(1)(c) is restricted to a situation where the seller is acting as principal or as agent of a corporation. the seller may also be acting as agent of a natural person.

Regulation 8 modifies the language of regulation 7.12.08C(1) to take account of this possibility.

Regulation 9

Schedule 9A (Modifications of Corporations Law)

Part 2 of Schedule 9A of the Corporations Regulations applies, with relevant modifications, various provisions of Part 7.11 of the Corporations Law dealing with prohibited conduct in relation to securities, the provisions of Divisions 2 and 3 of Part 7.12 relating to prospectuses and imposing restrictions on sale of securities to:

(a)       a section 1043C notice (relating to the sale of 30% of the unquoted voting shares of a company) as if it were a prospectus; and

(b)       the offer or invitation made by the notice, as if it were an offer or invitation in relation to which section 1018 required a prospectus to he lodged.

Regulations 9.1 and 9.2

Item 6 in Part 2 of Schedule 9A modifies the application of subsection 996(1) to a section 1043C notice. The effect of this modification is to make it an offence for a person to authorise or cause the issue of a section 1043C notice if the notice has been, or is required to be, lodged with the ASC and either a material statement in the notice is false or misleading or there is a material omission from the notice.

No modification has been made to subsections 996(2) and (3), which provide for defences to a prosecution for a contravention of subsection 996(1). To rectify this, Regulations 9.1 and 9.2 make appropriate modifications to the opening words of item 6 in Part 2 of Schedule 9A of the Regulations and to subsections 996(2) and (3) of the Law.

As a result of the modification to subsection 996(2), it will be a defence to a prosecution for a contravention of subsection 996(1) if it is proved:

(a)       that the defendant, after making such inquiries (if any) as were reasonable, had reasonable grounds to believe, and did believe until the time of the issue of the section 1043C notice:

(i)       that a material statement in the notice was not false or misleading or that an omission from the notice was not material; or

(b)       if there was a material omission from the notice - that the omission was inadvertent.

As a result of the modification to subsection 996(3), a person will not contravene section 996 as modified merely by giving a consent required by Chapter 7 of the Corporations Law to the inclusion in the section 1043C notice of a statement purporting to be made by the person as an expert.

Regulations 9.3 and 9.4

Item 9 in Part 2 of Schedule 9A modifies the operation of subsections 1008A(1) and (2) of the Corporations Law. The effect of this modification is to provide certain defences to directors in a civil action in relation to defective expert statements contained in a section 1043C notice.

Subsection 1008A(3) applies on its face to secondary offers and therefore does not require modification. Subsection 1008A(4) does, however, require modification to enable it to be applicable to a section 1043C notice. Without a modification to this provision, the directors of a seller company would have no defence in relation to false statements or omissions other than those which rely on experts or official documents. As this provision refers to subsection 1008A(3), it is necessary to restate the terms of this subsection in the modifying regulation.

Regulations 9.3 and 9.4 make appropriate modifications to the opening words of item 9 in Part 2 of Schedule 9A of the Regulations, restate the terms of subsection 1008A(3) of the Law and modify the operation of subsection 1008A(4) of the Law.

The effect of regulations 9.3 and 9.4 is that if a defective statement in a section 1043C notice purports to be a statement made by an official person or is contained in what purports to be a copy of, or extract from, a public official document, a director will not be liable if it is proved that the defective statement fairly represented the statement made by the official person or that the purported copy or extract was a correct and fair copy of, or extract from, the public official document, as the case may be. In relation to defective statements in a section 1043C notice which are not based on expert or official documents, a director will also have a defence if it is proved that he or she, after making reasonable inquiries, believed on reasonable grounds until the time of the sale of the securities in question that the defective statement was not false or misleading or that there were no material omissions from the defective statement.

Regulations 9.5 to 9.7

Item 10 in Part 2 of Schedule 9A inserts a modified section 1011 of the Corporations Law which provides that there will be no liability for mistakes in a notice to which section 1043C applies if reasonable precautions are taken.

The reference in subsection 10 11 (1), as modified, to paragraph 1006(2)(a) is superfluous and will be omitted by Regulation 9.5. It repeats the reference to the, seller which already appears in the subsection.

Regulation 9.6 corrects a typographical error.

Paragraph (b) of the definition of 'another person' in subsection 1011(2), as modified, contains a superfluous reference to the seller which needs to be removed. Regulation 9.7 effects the necessary change. The effect will be that, where the defendant seller is a body corporate, 'another person' will not include a person who, when the section 1043C notice was issued, was a director, servant or agent of the defendant.

Regulation 9.8

Item 13 in Part 2 of Schedule 9A provides that:

'Sections 1023A, 1023B, 1024, 1024A, 1024B, 1024C, 1024D, 1024E and 1025 of the Corporations Law are modified as follows:...'

The reference to section 1024E is incorrect. The reference should be to section 1024F. Regulation 91 makes the necessary correction.

Regulations 9.9 and 9.10

For the purposes of a section 1043C notice, the Corporations Regulations modify the operation of sections 1025, 1026 and 1027 of the Corporations Law. Sections 1025 and 1026 impose advertising restrictions in relation to prospectuses relating to primary issues. Section 1027 contains evidentiary provisions for the purposes of sections 1025 and 1026.

The modifications made by the Regulations are not appropriate in the case of a section 1043C notice relating to secondary trading. Accordingly, Regulations 9.2 and 9.10 remove sections 1025, 1026 and 1027, as modified, from the Corporations Regulations.