Duffy, Michael J --- "Shareholder Democracy or Shareholder Plutocracy? Corporate Governance and the Plight of Small Shareholders" [2002] UNSWLawJl 28; (2002) 25(2) UNSW Law Journal 434
[*] B Com, LLB (Melb); Senior Associate, Maurice Blackburn Cashman Lawyers.
[1] George W Bush, ‘Remarks by the President on Corporate Responsibility’ (Speech delivered at the Regent Wall Street Hotel, New York, 9 July 2002), <http://www.whitehouse.gov/news/releases/2002/07/200[20709]-4.html> at 17 September 2002.
[2] Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (revised ed, 1967) 313.
[3] See Australian Stock Exchange (‘ASX’), Australian Shareownership Survey (2000), <www.asx.com.au/about/pdf/ShareownershipSurvey2000.pdf> at 17 September 2002; ASX, Shareownership Update (2000), <www.asx.com.au/about/pdf/Shareupdate150201.pdf> at 17 September 2002.
[4] ASX, Australian Shareownership Survey, above n 3, 8.
[5] One of the issues in the NRMA demutualisation was whether it was misleading to refer to members who surrendered their ownership rights as then receiving ‘free shares’: see Fraser v NRMA Holdings Ltd [1994] FCA 1397; (1994) 52 FCR 1; Fraser v NRMA Holdings Ltd (1995) 55 FCR 452.
[6] It is important to note that members have voted for demutualisation generally with the benefit of the recommendations of directors and detailed company reports which have set out the arguments in favour of — and also often against — demutualisation. Such arguments in favour have highlighted the greater benefits of shareholders’ rights compared with policy-holders’ membership rights. See, eg, AMP, Proposal to Demutualise, Explanatory Memorandum and Notice of General Meeting (1997).
[7] ASX, Shareownership Update, above n 3, 8. Since that time, however, the NRMA (now the Insurance Australia Group) has reduced its share register from 1.7 million shareholders to 1.25 million through a A$400 million share buy-back and on-market selling. In May 2002 it announced another A$300 million buy back in an effort to reduce the dispersal of its ownership further: see Anthony Hughes, ‘IAG Offers Second Share Buyback’, Business, The Age (Melbourne), 28 May 2002, 2.
[8] These include the Commonwealth Bank; Qantas Airways; Commonwealth Serum Laboratories; Telstra; state insurance corporations such as GIO; state banks such as the State Bank of South Australia; lotteries and gaming bodies such as Tabcorp; electricity commissions such as the State Electricity Commission of Victoria; and gas and other utilities.
[9] This process is continuing with the government’s avowed desire to sell its remaining shareholding in Telstra. The Australian Labor Party has also floated a wider holding of shares by ordinary Australians as part of a broader public policy agenda of ‘asset-based welfare’. See Mark Latham, ‘Stakeholder Welfare’ (Paper presented at the International Conference on Asset-Based Welfare, Institute for Public Policy Research and the Centre for Social Development, London, 11 January 2001).
[10] See especially Elizabeth Boros, ‘Corporations Online’ (2001) 19 Company and Securities Law Journal 492. See generally ‘Special Issue on Cybercorporation and Online Investing’ (2001) 19 Company and Securities Law Journal 485–554.
[11] A simple example would be a $2000 trade. Not long ago it would have incurred costs from a stockbroker of approximately $100 (5 per cent of the trade value). Today it can be traded on the Internet for less than $20 (1 per cent of the trade value). Unless the dividend and capital gain potential were excellent, such trades would have previously been uncommercial. Today they are an economic proposition.
[12] Ivor Ries, ‘One Card Trick’, The Bulletin (Sydney), 7 August 2001, 52.
[13] See generally Malcolm Edey and Luke Gower, ‘National Saving: Trends and Policy’ in Reserve Bank of Australia, The Australian Economy in the 1990s (2000) 277, <http://www.rba.gov.au/PublicationsAndResearch/Conferences/2000/> at 27 September 2002.
[14] Australian Prudential Regulation Authority (‘APRA’), Superannuation Trends (2001), <http://www.apra.gov.au/Statistics/Superannuation-Institutions-Statistics.cfm> at 17 September 2002.
[15] For a discussion of the present and potential role of institutional shareholders in improving corporate governance in Australia see Ian Ramsay, Geof Stapledon and Kenneth Fong, ‘Corporate Governance: The Perspective of Australian Institutional Shareholders’ (2000) 18 Companies and Securities Law Journal 110.
[16] Further, some corporations offer preference shares which generally carry no voting rights.
[17] See David Ratner, ‘The Government of Business Corporations: Critical Reflections on the Rule of “One Share, One Vote”’ (1970) 56 Cornell Law Review 1.
[18] See Saul Fridman, ‘The News Corporation Super Shares Proposal: Crime of the Century or Tempest in a Teapot’ (1994) 4 Australian Journal of Corporate Law 184.
[19] Henry Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73 Journal of Political Economy 110. See also Elaine Hutson ‘The Market for Corporate Control in Australia’ (1997) 16(2) Economic Papers 51.
[20] Such ‘super shares’ will trade at a premium but because they maintain the same dividend entitlements, the premium will be significantly less than proportional to the increased voting rights (ie a share with five votes attached will not trade at five times the price of ordinary shares with one vote). In the ‘market for corporate control’ such shares would enable existing large shareholders to face a lower marginal cost to acquire control depending upon how close they already are to doing so. This appears to enhance their market power within that market.
[21] The analogy with civil governance might suggest that shareholders are no more entitled to this right than are 5 per cent of voters to convene a sitting of Parliament. This criticism may not be apt because of the comparatively frequent sitting of Parliament. Certainly history is full of instances of struggles for self-determination, which is effected in practice through the creation of democratic legislatures which are expected to convene regularly. Further, where Parliaments have been shut down or prematurely dissolved the consequences have been severe The failure of King Charles I to convene a Parliament from 1628 to 1640 was one of the main causes of the English Civil War and of the execution of the monarch: see generally George M Trevelyan, A Shortened History Of England (1942). In Australia, the Governor-General’s dissolution of Parliament in 1975 precipitated a constitutional crisis: see, eg, Edward Gough Whitlam, The Truth of the Matter (1994).
[22] Foster’s Group Ltd, achieving, Concise Annual Report (2001) 51, <http://www.fostersgroup.com/corporate/investor/reports/docs/annual2001.pdf> at 17 September 2002.
[23] Companies and Securities Advisory Committee (‘CASAC’), Shareholder Participation in the Modern Listed Public Company (2000).
[24] Ibid [2.15], [2.17].
[25] Ibid [2.12].
[26] See Commonwealth, Parliamentary Debates, Senate, 28 June 2000, 15892–15902.
[27] See Joe Hockey, ‘Vigilante Bands Should Lose Their Votes’, Australian Financial Review (Sydney), 18 December 2000, 63.
[28] Joe Hockey (Speech delivered to the Australian Shareholders’ Association, Sydney, 16 August 2002).
[29] Berle and Means, above n 2, 309. They quoted the view of Walter Rathenau concerning the then German version of the corporation.
[30] This is a vast topic, with one of the more influential voices in recent years being Professor Mark Roe, who has analysed the historical, political and institutional reasons for the development of the American style of corporation as interpreted by Berle and Means with its comparatively widely dispersed ownership. See Mark Roe, Strong Owners, Weak Managers: The Political Roots of American Corporate Finance (1994); Mark Roe, Political Preconditions to Separating Ownership from Control: The Incompatibility of the American Public Firm with Social Democracy (1999).
[31] This issue is echoed in civil governance with the natural desire of individuals to exit economically unsuccessful nation states and seek citizenship in more economically successful nations. The terms and conditions of such movements are also matters within the province of law which, in the early 21st century, are receiving considerable legislative and judicial attention.
[32] There will of course be some exceptions to that general rule such as where a seller or sellers sold because they needed the cash immediately.
[33] See Henry Manne, ‘In Defence of Insider Trading’ (1966) 43 Harvard Law Review 113; Lori Semann, Mark Freeman and Michael Adams, ‘Is Insider Trading a Necessary Evil for Efficient Markets? An International Comparative Analysis’ (1999) 17 Companies and Securities Law Journal 220.
[34] Dennis W Carlton and Daniel R Fischel, ‘The Regulation of Insider Trading’ (1983) 35 Stanford Law Review 857.
[35] Semann, Freeman and Adams, above n 33, 221.
[36] [2001] NSWCCA 191; (2001) 51 NSWLR 548.
[37] House of Representatives Standing Committee on Constitutional and Legal Affairs, Parliament of Australia, Fair Shares for All: Insider Trading in Australia (1989).
[38] R v Firns [2001] NSWCCA 191; (2001) 51 NSWLR 548, 556–7.
[39] R v Firns [2001] NSWCCA 191; (2001) 51 NSWLR 548, 557 (Mason P).
[40] Thomas Newkirk and Melissa Robertson, ‘Insider Trading: A US Perspective’ (Paper presented at the International Symposium on Economic Crime, Cambridge, England, 19 September 1998).
[41] See below Part IV(B) for a discussion of possible stronger disclosure laws.
[42] As well as the earlier Securities Industry Act 1970 (NSW).
[43] ‘Financial products’ now include securities (shares), derivatives, managed investment products, superannuation products (unless excluded by the regulations) and any other financial product which may be traded on a financial market generally: Corporations Act 2001 (Cth), pt 7.10 div 3. The new provisions are effective from 11 March 2002.
[44] See R v Hannes [2000] NSWCCA 503; (2000) 158 FLR 359; R v Firns [2001] NSWCCA 191; (2001) 51 NSWLR 548. Note that retrial of the former matter has recently again returned a guilty verdict: see, eg, Ashley Crossland, ‘Hannes Guilty … Again’, Australian Financial Review (Sydney), 12 September 2002, 1. At the time of writing, sentencing had not been determined.
[45] Corporations Act 2001 (Cth) s 1308A.
[46] Corporations Act 2001 (Cth) s 1042D.
[47] See Roman Tomasic, Casino Capitalism? Insider Trading in Australia (1991).
[48] Corporations Act 2001 (Cth) s 1317L.
[49] Corporations Act 2001 (Cth) ss 1043L(7), 1042C(1)(b)(i).
[50] The provisions were redrafted and relocated by the Financial Services Reform Act 2001 (Cth). Prior to 11 March 2002 the relevant provisions were ss 1001A–1001D.
[51] ASX, Guidance Note 8, Continuous Disclosure: Listing Rule 3.1 (2002).
[52] Jan Eakin, ‘Executives Upset Over Fuzzy Rule 3.1’, Business, The Age (Melbourne), 10 April 2002, 5.
[53] ASX, Exposure Draft, Proposed ASX Listing Rule Amendments Enhanced Disclosure (2002), <http://www.asx.com.au/about/pdf/ExposureDraftJuly2002EnhancedDisclosure.pdf> at 1 October 2002.
[54] Ibid 45 ff.
[55] A recent well-publicised case saw ASIC investigating AMP in relation to selective briefings. The latter denied that any unfair advantage was given, though it accepted that such a perception could have been created. It subsequently conducted an internal review resulting in an expansion of its disclosure policies and practices: See Australian Securities and Investment Commission, ‘ASIC Commences Investigation into Disclosure by AMP Limited’ (Press Release 01/285, 14 August 2001), <http://www.asic.gov.au> at 17 September 2002; AMP Ltd, ‘AMP Strengthens Approach to Disclosure’ (Company Announcement to the Australian Stock Exchange, 23 August 2001); AMP Ltd, ‘Review of Disclosure Policies & Practices’ (Company Announcement to the Australian Stock Exchange, 30 July 2001).
[56] A recent example of a response to an ASX query where share price movements were taking place was in relation to Western Mining Corporation (‘WMC’) shares on 12 October 2001 where no announcement to the ASX had been made. An announcement was later made on 17 October 2001 that WMC was in discussion with various parties about a takeover or reconstruction: WMC Ltd, ‘Company in Discussions’ (Company Announcement to the Australian Stock Exchange, 17 October 2001). ASIC noted that it had been advised by senior counsel that although there was a good arguable case that WMC breached ASX continuous disclosure rules in the period prior to 17 October 2001, there was considerable doubt that any effective remedy was available to ASIC under the Corporations Act: ASIC, ‘ASIC Concludes Investigation into WMC Ltd’ (Press Release 02/79, 7 March 2002), <http://www.asic.gov.au> at 17 September 2002.
[57] Tom Ravlic, ‘Market Will Ensure Companies Toe Line’, Business, The Age (Melbourne), 21 January 2002, 2.
[58] Department of the Treasury, Corporate Disclosure: Strengthening the Financial Reporting Framework (2002) (‘CLERP 9’), <http://www.treasury.gov.au/contentitem.asp?pageId=035 & ContentID=403> at 30 September 2002.
[59] Ibid 157.
[60] Ibid 179, Proposal 35.
[61] Ibid 156, Proposal 24.
[62] See Explanatory Memorandum, Corporations Bill 1988 (Cth).
[63] See Trade Practices Act 1974 (Cth) s 5 1AF. In relation to the definition of ‘financial services’ see Trade Practices Act 1974 (Cth) s 4(1); Australian Securities and Investments Commission Act 2001 (Cth) s 12BA.
[64] See Corporations Act 2001 (Cth) ss 670D, 731, 732, 733.
[65] Though in relation to predictions that do not materialise, having reasonable grounds for those predictions has always been a defence. See, eg, Trade Practices Act 1974 (Cth) s 5 1A.
[66] Corporate Law Economic Reform Program Act 1999 (Cth).
[67] Vanessa Mitchell, ‘Has the Tyranny of the Majority Become Further Entrenched?’ (2002) 20 Company and Securities Law Journal 74.
[68] [1995] HCA 12; (1995) 182 CLR 432.
[69] Mitchell, above n 67, 75.
[70] [2001] QSC 67; (2001) 19 ACLC 959.
[71] [2002] VSC 105; (2002) 41 ACSR 376.
[72] See also Kelly-Springfield Australia Pty Ltd v Green [2002] NSWSC 53; (2002) 20 ACLC 983 (Santow J).
[73] [2001] QSC 67; (2001) 19 ACLC 959.
[74] See also Katherine Morgan-Wicks ‘The New General Compulsory Acquisition Power: Re-establishing the Minority’s Right to an Independent Expert’ (2001) 19 Company and Securities Law Journal 349.
[75] Companies and Securities Advisory Committee, Compulsory Acquisitions (1996).
[76] Companies and Securities Advisory Committee, Compulsory Acquisitions and Buy-Outs (1999).
[77] Mitchell, above n 67, 77.
[78] Corporations Act 2001 (Cth) pt 2J.1.
[79] It should be noted that the court’s automatic involvement under the old law did not mean that minority opposition would not be overridden if the price was fair: Nicron Resources Ltd v Catto (1992) 8 ACSR 219.
[80] Ian Ramsay, Independence of Australian Company Auditors: Review of Current Australian Requirements and Proposals for Reform — Report to the Minister for Financial Services and Regulation (2001) (‘Ramsay report’), <http://www.treasury.gov.au/contentlist.asp?classification=14 & titl=Publications> at 23 July 2002.
[81] Ibid 18, paraphrasing the Independent Standards Board, Discussion Memorandum, A Conceptual Framework for Auditor Independence (2000).
[82] Corporations Act 2001 (Cth) s 327.
[83] Ramsay, above n 80, 14.
[84] CLERP 9, above n 58.
[85] This point is partially acknowledged in CLERP 9, above n 58, 38, though it is asserted (without proper explanation) that some level of competition on audit quality still operates through audit firm reputation.
[86] In that regard, attempts to reform the role of state Auditors-General based on the National Competition Principles in the late 1990s were conceptually flawed.
[87] See Toni Makkai and John Braithwaite, ‘In and Out of the Revolving Door: Making Sense of Regulatory Capture’ (1995) 1 Journal of Public Policy 61 in Robert Baldwin, Colin Scott and Christopher Hood (eds), A Reader on Regulation (1998) 173.
[88] Ramsay, above n 80, 14.
[89] CLERP 9, above n 58, 83, Proposal 9.
[90] Given the questionable application of competition theory to the process, a tendering process would not be necessary for such rotation. Rather, ASIC could establish and maintain an appropriate panel of qualified audit firms appointing appropriate firms on a sequential basis.
[91] Ramsay, above n 80, 9.
[92] CLERP 9, above n 58, 69, Proposal 7.
[93] Sarbanes-Oxley Act of 2002, Pub L No 107–204, § 201, 116 Stat 745 (2002). See also Tom Ravlic, ‘Regulator Slams “Soft” Audit Reforms’, Business, The Age (Melbourne), 23 September 2002, 1.
[94] Non-audit services (unlike the audit function) could then be competitively marketed and tendered for rather than relying on the audit role as a ‘foot in the door’. Competition theory suggests that corporations would then benefit from price competition in relation to such services. For a short summary of the theory see Trade Practices Commission, Submission to the National Competition Policy Review (1993) Appendix B.
[95] This model has been complicated by the fact that the corporate regulator, ASIC, has recently shown a tendency to rely on civil penalties rather than traditional criminal penalties. There are various reasons for this, including a generally lower standard of proof required in civil cases and a view about the nature of some breaches of the corporations legislation and the appropriateness of attaching the moral opprobrium of criminality. See Senate Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Company Directors’ Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors (1989).
[96] For a discussion of the traditional purposes of the criminal law, see James W Harris, Legal Philosophies (1980) ch 5.
[97] Australian Securities and Investments Commission Act 2001 (Cth) s 50. As to evaluating what is the public interest see Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 70 FCR 93.
[98] Note, however, that Australian courts have been generally reluctant to order punitive damages.
[99] See also ASIC, Policy Statement 4, Intervention (1991).
[101] Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461; 67 ER 189.
[103] Ibid 214.
[104] Mitchell, above n 67, 81.
[105] Corporations Act 2001 (Cth) s 180(2).
[106] Mitchell, above n 67, 74.
[107] Australian Shareholders’ Association, Institutions Need to Show Leadership (2001) Australian Shareholders’ Association, <http://www.asa.asn.au/Archive.asp?ArchiveID=147> at 17 September 2002.
[108] Harold Ford, Justice Robert Austin and Ian Ramsay, An Introduction to the CLERP Act 1999 — Australia’s New Company Law (2000) [2.55].
[109] See Corporations Act 2001 (Cth) ss 200A, 200B, 200E, 208–27.
[110] See generally Lang Thai, ‘How Popular are Statutory Derivative Actions In Australia? Comparisons with United States, Canada and New Zealand’ (2002) 30 Australian Business Law Review 118.
[111] See Karam v ANZ Banking Group Ltd [2000] NSWSC 596; (2000) 34 ACSR 545; Advent Investors Pty Ltd v Goldhirsch [2001] VSC 59; (2001) 37 ACSR 529; Jeans v Deangrove Pty Ltd [2001] NSWSC 84 (Unreported, Santow J, 23 February 2001); Talisman Technologies Inc v Qld Electronic Switching Pty Ltd [2001] QSC 324 (Unreported, Mullins J, 7 September 2002). Cf Keyrate Pty Ltd v Hamarc Pty Ltd [2001] NSWSC 491; (2001) 38 ACSR 396.
[112] Note that pt 4A of the Supreme Court Act 1986 (Vic) substantially mirrors the federal class action provisions.
[113] Australian Law Reform Commission, Grouped Proceedings in the Federal Court, Report No 46 (1988).
[114] Ibid 33.
[115] [1988] USSC 36; 485 US 224 (1988).
[116] Ibid 223–32.
[117] Ibid 232.
[118] See generally Pamela Hanrahan, ‘Distinguishing Corporate and Personal Claims in Australian Company Litigation’ (1997) 15 Companies and Securities Law Journal 21.
[119] CLERP 9, above n 58, 93.
[120] Ibid 96.
[121] See especially Peta Spender, ‘Securities Class Actions: A View from the Land of the Great White Shareholder’ (2002) 31 Common Law World Review 123. See also Julian Donnan, ‘Class Actions in Securities Fraud in Australia’ (2000) 18 Companies and Securities Law Journal 82.
[122] Donnan, above n 121, 90. See also Peter Cashman, ‘Private Enforcement of Competition and Consumer Protection Laws: The Need for Financial Incentives to Achieve Corrective Justice’ (Paper presented at the Competition and Consumer Protection Law Enforcement Conference, Sydney 4–5 July 2002), <http://www.accc.gov.au/docs/conference/enforcement/papers.html> at 27 September 2002.
[123] See King v GIO Australia Holdings Ltd [2000] FCA 617; (2000) 100 FCR 209; King v GIO Australia Holdings Ltd [2000] FCA 1543 (Unreported, Wilcox, Lehane and Merkel JJ, 1 November 2000).
[124] Corporations Act 2001 (Cth) s 708(8).
[125] Above n 1.