1/196 Module 3 Case 1 In this case, there have some issues as below: 1.

What does the company want to do? It wants to set aside _____________ or claim compensation or damanges equal to the amount of ___________ 2. What is the best course of legal action that would benefit the company? Breach of a common law duty would enable a claim for ___________________________ Breach of statutory directors' duties will enable for ________________________ 3. Can claims for breach of common law duty and statutory duty be brought against ___________? 4. What is identification of ________________ in the company? Is he a director or officer? What kind of director he is? 5. Facts - Are directors acting bona fide in the best intersts of the company as a whole and for a propose purpose? 6. Facts - Did any director improperly use their position to disadvantage the company? 7. Facts - Did any director improperly use information belonging to the company? 8. Facts - Did any director breach the duty to avoid conflict of interest? 9. Facts - Did the company trade while insolvent? 10. Facts - Did the directors allow the company to trade while insolvent? 11. Have the directors breached their duty to retain their discretion? 12. ____________ is a nominee director, any obligation he owe to the company? Or any exception? This case relates to the Common Law and Statutory Law as below: 1. If common law remedies are to be sought against _______________, he must be able to be classified as a director at common law. - Director is defined in s.9 a. a person who is appointed - 'de jure' i to the position of a director ii to the position of an alternate director and is acting in that capacity b. a person who is not validly appointed but i they act in the position of a director - 'de facto' R v.Drysdale non re-elected director continued to act in that role Mistmorn Pty Ltd (in liquidation) v. Yasseen (1996) 14 ACLC 1387 Not appointed person acted with business card described as managing director, negotiated transactions on compnay's behalf - fund only to have attempted to avoid legal consequences but nevertheless a de facto director Deputy Commissioner of Taxation (DCT) V Austin (1998) 1034 FCA resigned director continued to help out friends as director. Court looked behind the formalities the directors of the company or body are accustomed to act in accordance with the person's ii instructions or wishes, regardless of the name: except those in a professional capacity / relationship 'shadow' Standard Chartered Bank of Australia Ltd v. Antico (1995) 12 ACLC 1381 (Antico's case) Nominee directors are at risk of breach of duty at common law if they act other than in the best interests of the company of which they are director. They could be in breach if their orders from their appointor are in conflict with the company's interests. s.187 - Nominee director of a wholly owned subsidiaries may also act in the best interests of subsidiaries if : a consitution of the subsidiary expressly authorises the director to act in the best interests of the holding company, and b director acts in good faith in the best interests of the holding company, and c the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act

2/196 2. If ____________ is a director, is he guilty of any breaches of common law duties and statutory duties? Breach of Company Law duties - to act bona fide in the best interests of the company In the action of __________________. Subjective test required - was the action down in good faith in the best interest of the company as a whole? Elements : honestly, integrity, best interests of company - to exercise powers for a proper purpose (1) for what purpose was the power granted to the directors? (2) for what purpose was the power actually exercised but for test' Where directors are motivated by a number of motives when exercising a power. If it can be shown that the directors would not have acted on the substantial proper purpose but for the presence of the improper minor motive, the impropriety of the minor motive contaminates the dominant motive and renders it also improper. Elements: exercise of power, proper purpose is defined as being in the best interest of the company to retain discretion a director cannot delegate the discretionary powers that they hav in their capacity as directors, unless they have the authority of the company to do so, and the power is one which is capable of delegation. Some powers cannot be delegated to avoid conflicts of interest prohibits a directors who stands to gain, or does gain, an advantage in a commercial or other relationship with the company, from exploiting their relationship with the company, whether there is a detriment to the company or not. duty of care and diligence the directors must not be negligent when making business decisions and must keep themselves informed, committed and to perform to a reasonable standard

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Statutory Law s.180(1) requires a director or an officer to exercise the care and diligence of a reasonable person i the corporation's circumstances ii. the officer's position and responsibilities within that corporation s.180(2) gives protection to a director who makes a business decision in accordance with the business judgement rule i acted in good faith for a proper purpose ii. did not have a material personal interest in the subject matter iii acted on what they consider to be an informed() basis iv rationally believed it to be in the best interst of the company s.181 requires a director or an officer to exercise their power and discharge their duties in good faith in the best interest of the company and for a proper purpose s.182 prohibits directors, officers and employees from making improper use of position for personal gain s.183 prohibits directors, officers and employees from making use of insider information for personal gain s.180-s.183re civil peralty provision a s.184 breach s.181, 182, 183 can also be criminal offence if the directors have intentionally or recklessly failed their duties and they have been dishonest s.189 protects a director if, after acting in good faith and making proper inquiries, they have reasonably relied on information and expert advice provided by others

3. If ___________ breached these common law duties, ______________ remedies will be available. 3/196 * Account for profits * Damages and compensation * Injunction * Declaration * Restoration(還原) of property * Rescission(撤銷) The remedies for breach of statutory duties also allow for damages and compensation under s.1317H # Civil penalty provision # s.206A - Disqualification order # s.1317G - Pecuniary penality of up to $200,000 # s.1317H - damages and compensation # Criminal penalty provisions # s.184 - the conduct was either dishonest or reckless The facts of the case: Conclusion The director appear to be in breach of the duty to act bona fide in the best interests of the company and for a proper purpose. They are also in breach of their duty to avoid a conflict of interest with the company. They have acted improperly by using their position for their own advantage and to the company's detriment The breach of the common law duties would allow the company to set aside the transaction, if that is still an option, or if it is not, allow the company to seek compensation and damages. Any breaches of statutory provision would enable action for compensation. All actions could be taken at the same time, in proceedings brought by the company before an appropriate court.

Case 2 In this case, there have some issues as below: 1 Facts - Did the company trade while insolvent? 2 Facts - Did the directors allow the company to trade while insolvent? 3 What cause of action would give rise to these remedies?

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This case relates to the Statutory Law s588G - Director has statutory duty under obligations to exercise care, skill and diligence to prevent the company from trading whilst insolvent pursuant, a as director at the time when the company incurs a debt b company was insolvent or became insolvent at the time by incurring the debts c at that time, there were reasonable grounds for suspecting that company was insolvent or would become insolvent by incurring the debt d the debts was incurred after the commencement of the Division - after June 1993 Tourprint International Pty Ltd v. Bott (1999) 17 ACLC 1543 - Directors should constantly keep on guard so as not to incur further debt when current financial instability could lead to the new debt not able to be met Directors are required to keep themselves informed about the financial position of the company s.588H sets out the defences available to directors who have been found to have breached s.588G. a s.588H(2) directors had reasonable grounds to expect that the company was solvent at the time when the debts was incurred and would remain solvent even if the debts was incurred b s.588H(3) directors had reasonable grounds to believe that another person who was competent and reliable and responsible for providing adequate information, supplied information that the company was solvent and the first mentioned person believed that information s.588H(4) because of illness or some good reason at the time when the debt was incurred, the person did not take part in the management of the company at that time s.588H(5) took all reasonable steps to prevent the company from incurring the debt such as review to appoint an administrator.

c d

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Compensation-s.588J, s.588K and s.588M and criminal offence for dishonest-under s.588G(3)

The facts of the case: Conclusion The director appear to be in breach of the duty to act bona fide in the best interests of the company and for a proper purpose. They are also in breach of their duty to avoid a conflict of interest with the company. They have acted improperly by using their position for their own advantage and to the company's detriment The breach of the common law duties would allow the company to set aside the transaction, if that is still an option, or if it is not, allow the company to seek compensation and damages. Any breaches of statutory provision would enable action for compensation. All actions could be taken at the same time, in proceedings brought by the company before an appropriate court.

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Introduction to corporate governance and accountability
- Contents 1. types of companies 2. need for and definition of corporate governance 3. global development of best practice 4. Australian regulators and governments' role - Important topices - ability to distinguish types of companies - familiarise with best practice statements - appreciate Australia's regulators' and government's role of corporate governance Types of Companies
Is an artificial legal entity Upon registration, company separate and distinct entity from its members/ shareholders, directors and officers Can sue and can be sued Property belongs to the company Exists in perpetuity until it is deregistered

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Limited

Shares * Limited Guarantee (public only) * Limited (can be public, proprietary, partnerships) (mining only) *NL

s.112 Liability

Unlimited No liability

Company

Public s.9 Proprietary s.113 Listed Small (s.45A(2)) Large (s.45A(3))

ASX Unlisted

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(s.112) Limited Liability Co "Ltd" or <liability "Limited" limited by shares> (s.9) (s.112) Public Co Limited Company <with veil of by incorporation> Guarantee <liability "Ltd" or limited by "Limited" agreed to pay the guarantee, no share Minimum capital> (s114) - 1 Maximum - Infinite No liability (mining & a "NL" or speculative "No character) Liability"

(s.9) Public Company

Unlimited (s.9) liability Public company No name Company (liability requirem <without veil without ent of limitation) incorporation> not essential of share cap

1. Raise funds from public 2. Own constitution optional but mandatory for "No Liability Co" 3. Replaceable Rules Optional. Some rules are mandatory s249X 4. Restriction on shae tansfers - Optional but not 1. Issue common (prohibited for disclosure listed co on the ASX by the Min document to ASX Listing Rules) <s201A(2)> - 3 public 5. Removal of directors by Max - Infinite 2. Financial members - A statutory right Reporting of members - s203D Resident in Mandatory s292 6. Transactions in which Australia3. Annual directors have an interest <s201A(2)> - 2 General Meeting Greater control s195, relted - Manadatory party transaction CH2E Age - Min 18, s250N(2) 7. Single member co re-election 4. Circulating resolution - s249B controls when Resolution of 8. Single director resolutions aged 72 or more members - Not possible, must have a (s102C) Actural meeting least 3 directors must be held 9. Appointment of Auditor Manadatory s327 10. Auditor Independence Manadatory s324 Registered Office - must be open to the public during specified hours s145 11. Registered office Signage - Required s144

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(s.113) Proprietary Co <1. cannot openly solicit investment (s.112) "Pty" or from public liability "Propriet 2. (s113(1)) limited ary" + no more than 50 by "Ltd" or non-employee shares "Limited" shareholdes> satisfy 2 or 3 of 3 Small s45A(2), otherwise - Large s45A(3) 1. Consolidated gross revenue less than $10M per year 2. Consolidated gross assets less than $5M at year end 3. less than 50 employees at year end

1. Issue disclosure 1. Own constitution document to optional. members or 2. Replaceable Rules employees only Optional s249X 2. Financial Min 3. Restriction on share Reporting - Small <s201A(1)> - 1 transfers - Optional, though - optional unless a Max - Infinite common Min- 1 disclosing entity 4. Removal of directors by <s113(1)> or foreign Resident in memebers - s203C - depends Max - 50 controlled; Large australia upon constitution or RR non- manadatory <s201A(1)> - 1 5. Transactions in which employees s292 directors have an interest 3. Annual Age - Min 18 , Generally allowed if full General Meeting no max disclosure under Ss191, 194 - Optional 6. Single member co 4. Circulating resolution - s249B Pty Resolution of s148 7. Single director resolutions unlimite Members "Pty" or - s248B d with Permitted s249A "Propriet share ary" capital

Types of orgainisations Organisation Sole trader Private company Public company Unicorporated association

Purpose Business Usually business Business Hobby, sport, recreation

Objective Profit

Ownership

Governance

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Owner-manager Self Limited Usually profit but could May be subject to number of be not for profit a board shareholders Large number Board of Profit of Directors shareholders Committee of Usually not for profit Members office bearers

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What is corporate governance? (Definition) 1.06 - A set of principles to ensure corporate direction, responsibility and accountability; affect all those who manage. Such principles may embodied in both statutory and common law rules - (OECD, 1999) - A set of relationships between management, its board, its shareholders and other stakeholders. It determines the direction and performance of the company - (CLERP 1997) - The rules and practices put it place to manage information and economic incentive problems inherent in the separation of ownership and control. It deals with how and to what extent the interest of various agents are reconciled, value of the organisation - (HIH Royal Commission 2003) - At is broadest, it comprehends a framework or rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. - (Wheelan & Hurger 2000) - The corporation is fundamentally governed by a board of directors overseeing top management with the concurrence of shareholders. Corporate Governance - Need for improvements - Market globalisation - Advance of technoloy - Competition of performance and investments funds - Accessibility of information - Sophistication(老練) of investors - Shareholder activism(實踐) (eg. Active retirement financing, etc) - Growth of small shareholder ownerships - Other factors such as the Asian economic rapid growth and crisis(危機) of 1997, corporate collapses and a general public demand for greater transparency and accountability Latest development in corporate governance - CLERP program in Australia with the latest CLERP 9 Bill (Act 2004) eleased - HIH Royal Commission - 3 volumes of recommendation on corporate governance, financial reporting and auditing functions - Corporate Governance in Asia - OECD White Paper - 1999 OECD guidelines (updated 2004) - Global focus on fraudulent financial reporting (earnings management), inadequate accountability, and lack of credibility in the audit functions. - Tradway, Sarbanes - Oxley, Cadbury, Hampel and Greenbury, OECD, Higgs and Smith, the Combined Code, etc 1.08

1.09

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Global focus on corporate governance - All of the committees and organisations Q1.4 - concerned with issues surrounding disclosure and accountability - in particular in the area of directors' remuneration and disclosure. Other aims and outcomes of these organisations include ther recommendation of reforms in general reporting and disclosure with a view to improving conditions and access to capital markets. - Asia Pacific Economic Cooperation (APEC) - Mexico, Australia, Korea, Philippines 1.13 - 1998 symposium(專題論文集) for sound corporated governance in APEC is the assurance that assets are managed in the best interests of owners and stakholders' - Principles : 1.14 timely and accurate disclosure of financial, and in some instances non-financial, performance records equitable treatment of all shareholders establishment of clear rights and responsibilities of shareholders, directors and managers establishment of effective and enforceabel accountability standards to help uphold sound management and decision-making processes - outcome of the symposium(討論會) revolved around the key statements that the Government has a 1.14 role to have role to play in achieving corporate governance reforms particularly in fostering leadership in business and professional communities with respect to this objective. have high priority to the estblishment of laws governing the sale of property, the design of contrcts and bankruptcies procedures legislate for good accounting, auditing and reporting standards. Once no local accounting standards, international accounting standards should be adopted create the public infrastructure(基礎 ) to assist in the effective application of corporate and commercial laws. improve the competitiveness of goods and capital markets - Business Roundtable (BRT) 1.13 - Association of chief executives of the top 250 American corporations - No ' one size fits all' board the board consist of 8-16 directors, the majority of which should be non-executive directors. - the public company board's paramount(最高統治者) duty - select and oversee the CEO and other senior management in the competent and ethical operation of the business management should never put personal interests ahead of or inconflict with the interests of the company - the responsibility of management, under the oversight of the board, is to produce financial statements which fairly present the financial condition and results of the company - the responsibility of the board and its audit committee includes the engagement of an independent accounting firm to audit the financial statemetns - the auditor should ensure its independence, avoid conflicts of interest, employ highly competent staff and carry out its duty with generally accepted auditing standards. - the corporation should deal with its employees fairly and equitably.

8696168.xls Module 1 (10%) - Bosch Committee - Australia Guide on corporate practices and conduct - the function of the board of directors - board structure and composition - executive versus non-executive directors - the chariman of the board - committees of the board - board memebership - appointment and retirement - remuneration - financial reporting and auditing - the management of risks and internal controls - codes of conduct

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- Cadbury Committee - UK basic for corporate governance standards concerning financial reporting issue 1.09 UK standard-setting body, representative of the accounting profession and the Financial Reporting Council 1.11 - boards should have checks and balances to ensure 'that no one individual has unfettered(自由的) powers of decision - a board should have at least three non-executives, of whom at least two should be fully independent - a board should have an audit committee composed exclusively of non-executive members. - a board should explain its corporate governance procedures - enhanced transparency in relation to directors' remuneration disclosure in the annual financial report - California Public Employees Retirement System (CalPERS) - USA - provides retirement and health benefirs - In 2003 it adopted a comprehensive action plan to address(講演) abusive(舞弊的 ) executive compensation plans in America - good corporate governance is accountable and transparent - principles addressed the issues of equity, voting method improvements, codes of best practice and long-term vision. - COSO Committee of Sponsoring Organisations of the Treadway Commission - set the scene for the need for proper internal control and leadership in organisations 1.12

1.09

- Combined Code and the Turnbull Report (1998 and 2000) 1.12 - Combine with Hample Committee and Cadbury Report to form Combined Code of 18 principles and 48 code provisions. - main change - no. of non-executive directors - at least 1/3 of the members of the board were to be nonexecutive directors, with a minimum of three - The turnbull report broadened the Combined Code with interanl control and risk management compliance. - Greenbury Committee - UK - enhanced transparency in relation to directors' remuneration disclosure in the annual financial report, remuneration committees to be formed 1.11

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- Hampel Committee - UK - Emphasised balance between accontability and prosperity - financial reporting and audit supercode adopted into the listing rules on the London Stock exchange - general principles for the board, directors' remuneration, shareholders, and accountability and audit. - review the implementation of the recommedations of the 1992 Cadbury Committee on the Financial Aspects of Corporate Governance and the 1995 Greenbury Committee on Directors' Remuneration - Higgs (2003) and Smith (2003) reports with Financial Reporting Council (FRC) endorsement - UK - Higgs - Role and Effectiveness of Non-executive directors Smith - Audit Committee Combined Code to supersede(取代) the 1998 Hampel Combined Code the chairman of the board can chair the nomination committee but should not be involved when the chairman's remuneration is to be discussed at least two independent non-executive directors if half of the board(excluding chairman) is impossible to comprise independent non-executive direcotrs. annual meetings of non-executive directors to be chaired by the senior independent director, and without the presence of the chairman of the board to appraise the chairman's performance.

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- International Accounting Standards Board (IASB) - Australia, Canada, Gemany, France, USA 1.15 - International standard setting body - International stock exchanges will allow multinational companies and foreign organisations to report in accordance with the international standards and disclosure - IASC Foundation is an independent organisation having two main bodies, the Trustees and the IASB, as well as a Standards Advisory Council and the International Financial Reporting Interpretations Committee. IASC Foundation Trustees appoint the IASB Members, exercise oversight and raise the funds needed IASB has sole responsibility for setting accounting standards. - IFAC - research report on Rebuilding Public Confidence in Financial Reporting - An International 1.09 Perspective - need for greater emphasis on the responsibilities of management and the board for the information and the financial management and internal controls necessary to produce trustworthy information. set out their ethical policies in a code that is widely distributed within the company and to shareholders. - recommendations on financial reporting, audit systems and monitoring mechanisms for corporate governance. - Organisationf for Economic Cooperation and Development (OECD) - International Assist governments to evaluate and improve legal, institutional and regulatory framework - the protection of shareholders' rights - the equitable treatment of shareholders - the role of stakeholders in corporate governance - disclosure and transparency - the responsibilities of the board - Professor Ian Ramsay Independence of Australian Company Auditors - Audit Committee Best Practice Guide 1.10

1.09

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- World Bank and the International Monetary Fund - World Bank - to aid(扶助 ) countries in their economic development like Russia - IMF - balance of payments and exchange rates - continuous development and improvement in the governance of corporations will ideally result in stronger, more sustainable economic conditions and therefore align with the aims of these two organisations. assist countries in developing their corporate governance systems was in response to the economic problems experienced by these countries

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The role of Australian regulators in corporate governance - Corporate Governance principles - Australian Standard AS8000 1.15 - Good Governnacne Principles - AS8000 this follows the broad principles of OECD, with the role and responsibility for the board, disclosure and transparency obligations, the rights and equitable treatment of shareholders, responsibilities of shareholders and stakeholders, etc - Fraud and Corruption Control - AS8001 1.15 - Orgainisational Codes of Conduct - AS8002 1.15 - Corporte Social Responsibility - AS8003 1.15 - Whistleblower Protection Programs - AS8004 1.15 - Australian Securities and Investments Commission (ASIC) 1.16 - As corporate regulator - administer laws and monitors compliance R1.1 - Definitions of Corporate governance is a reasonable consensus(共識) R1.1 1. the mechanisms by which corporations are directed and controlled 2. the mechanisms by which those who direct and control the corporation are monitored and supervised. About mechanisms that ensure those who are in control are accountable. Others' definition - to balancing the interests of different stakeholders in the corporation - employees, R1.1 creditors, suppliers, customers, local community, as well as the relationship between management, the board and shareholders. Role in corporate governance 1. contingent upon government policy and corporate governance legislation 2. Functions included - maintain, facilitate, and improve, the performance of the financial system, enhance commercial certaint, reduce business costs, efficiency and development of economy - promoted the confident and informed in the fiancial system - achieve uniformity throught Australia in how the Commission and its delegates perform those functions and exercise those power - receive, process and store, efficiently and quickly, the information given to, the Commission under the laws that confer functions and powers on it - administer the laws with minimum procedural requirements 3. R1.3 ASIC monitors, enforces and administers compliance with the broad range of corporate governance provisions in the Corporations Act - ASIC cannot actually bring criminal proceedings itself. It refers the matter to the Commonwealth Director of Public Prosecution 4. ASIC has a public education or advocacy role - fomger-wagging role R1.6 ASIC contributes to law reform(改革) in relation to corporate governance 5. R1.7 ASIC Reading Directors duties and corporate meetings R1.2 - Shareholders monitor and supervise the conduct of management and the board and to exercise some control in relation to the corporation. - At annual general meetings, shareholders can exercise their power to vote on the composition of the board. Financial reporting - Standards of financial reports and auditors fulfil a crucial(非常重要的) role in the monitoring and supervision of management and the board. - auditors must be truly independent and ensure the integrity of the financial reporting and audit process, ultimately, the accountablility of those that control and manage the corporation.

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- Australian Stock Exchange (ASX) 1.17 - ASX provides three principal 1 Markets for trading equities 2 debt securities index derivatives(衍生物 ) 3 - Role of ASX 1 To conduct markets in which investors and enterprises come together with confidence to create prosperity through the sharing of risks and rewards. 2 Provides important conduit for overseas equity investment in Australia 3 Provides significant supervisory responsibilities over market participants and over listed company. 4 Sponsors research aimed at consistent global accounting standards. 5 maintain the integrity of the financial market 6 responsibilities to ensure transparent and adequately disclosed 7 to set disclosure standards, monitor compliance and refer serious deficiencies to ASIC for investigation and prosecution - ASX guidelines 1 requires listed companies to disclose the main corproate governance practices in annual reports 2 proposed continuous disclosure 3 support for the establishment of audit committees 4 propose disclosure of audit firm appointment, dates or rotation of audit engagement partners 5 increase disclosure of share option schemes and auditor fees - Corporate Governance Council 1.18 A high-level committee of the Austalian Stock exchange objective - identify and support best practices principles of corporate governance, legislative deficiencies to facilitate improved ASX Listing Rules strong support for the establishment of audit committee with appropriate expertise issue 10 Principles of Good Corporate Governance and Best Practice Recommendations 1 Lay solid foundations for management and oversight 2 Structure of the board to add value 3 Promote ethical and responsible decision-making 4 Safeguard intergrity in financial reporting 5 Make timely and balanced disclosure 6 Respect the rights of shareholders 7 Recognise and manage risk 8 Encourage enthanced performance 9 Remunerate fairly and responsibly 10 Recognise the legitimate interests of stakeholders - Australian Taxation Office (ATO) 1.18 - to promote awareness and adoption of improved corporate governance - provide tax-effect reconciliation that help the users to determine difference between accounting treatment of taxation and the actual liabilities Implementing major tax reforms handed down by the Federal Government which have significant overall economic effects - responsibility : to manage and control its resources effectively - Australian Competition and Consumer Commission (ACCC) -

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The role of government in corporate governance 1.19 - Makes laws re structure and liabilities of companies, administrative bodies, and policies re taxation systems - Require companies to behave responsibly and be accountable as good citizens - Enable new laws to be made from voting systems - Lobbying by organisations and groups may result in discussions and changes to the law - John Kenneth Galbraith 1.21 the groups were important to countermand(撤消) the power of companies - Economic theory of free market: businesses operating in a free market will ultimately allocate scarce resources efficiently = deregulation - Companies operating in competition will produce winners and losers and will exploit society = regulation - Arguments for regualtion versus deregulation - Milton Friedman 1.21 company object should be to make money for their shareholders

Figure 1.1 Industry and trade organisations Committees and working parties Local economic climate Government (Treasury) Political parties Interest groups Lobby groups World economy

1.20

Reforms( 修正 ) / initiatives( 首 倡) Legislation Recommendations ( 勸告 )

ATO Reading 1.1 The role of ASIC

ACCC

ASIC

IASC

ASX

AASB

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1.1 1.1

1.1

1.3

1.6 1.7

1.2

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1.3

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The costs and benefits of corporate governance
- Contents 1. Role of the board, shareholders and stakeholders 2. Principles of Corporate Governance 3. Structure of accountability 4. Agency theory and conflict of interest factors - Important topices - Agency costs and conflict minimisation - Role of participants of corporate governance and functions of committees Major participants in ensuring good corporate governance - The board - accountable to shareholders - delegate powers to management - different size and structure - delegate different power to management - oversees management on behalf of shareholders - stewardship function - responsibilities distinct from management: - formulate strategy - develop policy - appoint/supervise/remunerate management - ensure accountability - comprises executive and non-executive - Shareholders - owners of company - individual and institutional shareholders - Purpose of the firm - Milton Friedman only duty the board has is to its shareholders, maximiz shareholders' investment - Keasey, Thompson & Wright long term wellbeing - Stakeholders - The wider business and social community which have a stake in the efficient running of the company (direct and indirect) - Employees, customers, suppliers, trading partners, government and community - All stakeholders, companies must have a two-way relationship with government 2.03 2.03

2.03

2.04 2.04 2.04

8696168.xls Module 2 (15%) Nature of the corporation and stakeholder relationship StakeholdersRelationship Interest Investors Customers Owners Optimum return

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Table 2.1 2.05 Risk Poor return Negligible share value Loss of investment

Purchase their goods / services Suppliers Supply goods / services Employees Provide labour Lenders Supply funds Receive taxes, Impose regulations, Government Provides general infrastructure Consumes goods / services Society Provides operating norms

Ability to obtain what they Failure to deliver goods / want at a satisfactory price services Source of revenue Loss of custom Salary and wages/job security Unemployment Source of revenue Bad debt Loss of revenue Source of revenue Political costs Unemployment Undersirable social behaviour Good corporate citizen Degradation of environment

CACG - Commonwealth Association for Corporte Governance 2.06 - While the board is accountable to shareholders for achieving the corporate objective, may have impact on legitimate societal interest (stakeholders) and influence the reputation and long-term interests of business enterprise

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The principles of 'effective' corporate governance 2.06 - OECD principles of corporate governance R2.1 - Objectives of the OECD principles is to assist governments in evaluating and improving the 2.06 legal, institutional regulatiory framework, providing guidance and suggestions for stock exchanges, investors, corporations to develop good corporate governance. - Corporate governance gives the investor confidence to invest and remain loyal to the company - Control and ownership are separate - Keys OECD principles I. The rights of shareholders R2.2 Kendall & Kendall 1998 - Shareholders influence by voting at the AGM 2.07 - to sell stock - to vote by proxy - to bring suit for damages if directors / manager fail to meet their obligations - obatin certain information from the company - residual rights following the company's liquidation once creditors and other claimants are paid off - Hampel Report CCG 1998 2.07 Recognises individual and institutional shareholders have responsibilities to make use of vote 2.08 but short of a charter of rights and responsibility - Major shareholders should - engage in dialogue(對話) with the co. to establish mutual understanding of objectives - give due weight to all relevant factors brought to their attention - be more aware of the commercial consideration involved - AGM is used to communicate II. The equitable treatment of shareholders R2.4 - All shareholders of the same class should be treated equally. - Provision of timely and accurate information - Abolition(消滅) of insider trading - Disclosure of material interests by directors and officers, and abusive(濫用) self-dealing III Stakeholders 2.08 - interested parties such as employees, creditors, customers, suppliers, non-equity investors, regulators and government - Business Roundtable 2.08 the board's primary duty is to the shareholders, and should consider stakeholders' interests to the extent that the enhances shareholder value" (a derivative duty). Shareholder and stakeholder interest in the success of the corporation are compatible(兼容) in the long run - Hampel Report CCG 1998 2.08 Good governance ensure that constituencies (stakeholders) with a relevant interest in the company's business are fully taken into account. In addition, good governance can make a significant contribution to the prevention of malpractice(營私舞弊) and fraud, although it cannot prevent them absolutely - OECD 2.08 - The corporate governance fromework should assure that the rights of stakeholders that are R2.6 protected by law are respected. They have the opportunity to obtain effective redress(補償) for violation of their rights - The corporate goverance framwork should permit performance-enhancing mechanisms for stakeholder participation. Where stakholders participate in the corporate governance process, they should have access to relevant information

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IV Disclosure and transparency R2.7 - The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company V The board R2.10 - CACG - the responsibility of the board to ensure good corporate governance 2.09 - leadership - board appointment - strategy and values - company performance assessment - compliance - communication - accountability to shareholder - relationship with stakeholders - balance of powers - internal procedures - board performance assessment - management appointments and development - technology - risk management - insolvency review - Hampel - the board's responsibility 2.09 - supports the establishment of audit committee - comprising mainly of non-executive directors except where impractical.(不切實際) - audit independence (<10% total income) - mechanism to disclose, on request, voting practices - shareholders provided with timely papers befor AGM and resume of discussions at the AGM - role of executive v. independent non-executive - board performance assessment - specific criteria for nomination, appointment and training - remuneration committee by independent directors - training for new directors - OECD - ensure the strategic guidance of the co., effective monitoring of management by the board, 2.09 and the board's accountability to the co. and the shareholders - OECD framework specifies forms of guidance and oversight to management and accountability to shareholders and society at large : transparency and disclosure - Roles and responsibilities discussed in OECD, Hampel, BRT, AICD and the Commonwealth Association of Corporate Governance. Roles underpin(加強基礎) corporate governance - Wheelen and Hunger (2000) 2.12 Board's extent of involvement in the development of strategic direction debated. A continuum( 連續) from phantom (有名無實的)participation to being an active catalyst (change agent)

8696168.xls Module 2 (15%) - literature - board responsibilities - Conformance(符合) - with regulations and fiduciary duties - ensure integrity of reporting (accounting, financial reporting, auditing) - ensure appropriate controls in place to monitor risk, financial control and compliance - monitor effectiveness of governance process - oversees disclosure and communication processses - Performance - for business - corporate strategy, guiding, reviewing, setting overall direction, objectives, monitor implementation, oversee major expenditures / divestitiures - selecting, compensating, monitoring, key executives succession planning, etc - reviewing key executive and board remuneration, formal and transparent board nomination process. Manage overall relationships.

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- NYSE - enchane the accountability, integrity and transparency of listed company 2.12 1 Increase board independence (majority independent, certify accounts, 5-yr colling period for former employee, regular meeting, more effective checks) 2 Establish audit, compensation and nominating / corporate governance committees. Audit committee at least have 3 independent directors 3 Empower audit committees to hire and fire auditors, approval non-audit services, chair with financial management expertise. Audit committee member can only allow directors' compensation. 4 Require Listed companies to adopt and disclose a code of conduct for directors, employees, with guidelines on conflict of interest, opportunities, confidentiality, fair dealings and courage to report irregularities. The code must have an enforcement mechanism 5 Approval of shareholders required for all equity-compensation plans include stock options 6 Corporate Governance guidelines must be adopted and disclosed 7 CEO certifies accuracy and completeness of information to investors, reviewed procedures of compliance and awareness of violation - Sarbanes - Oxley Act 2002 USA 2.14 - Concerns on senior management compensation; earnings management and audit independence - Both CEO and CFO to certify fairly presented financial reports and other information in all material aspects of operations and financial conditions by - indicate personally reviewed quarterly and annual reports - stating report does not contain untrue statements to their knowledge - stating financial report fairly present in all materials aspects the financial condition and results of the company - stating that they are responsible for internal controls; have designed such controls to ensure all material information were made known to them; have evaluated the internal controls and have presneted their conclusions of the effectiveness of the internal controls in their report. - Dealing with a range of matters - accounting standards more widely - prohibit provisions of non-audit service to a company to be audited - personal responsibility of senior officers for a company's financial reports - forefeiture of the bonuses and profits where material non-compliance with regulations - freeze payment of extraordinary payment during the course of an investigation Committee Differ Hampel /OECD Hampel does not endorse a particular code of shareholders' right 2.14

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The treatment of stakholders - directors' primary duty enhance shareholder's 2.08 wealth, others are subservient(次要)

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- accountability and transaprency require companies to function with certain rules and regualtions - Board no longer just accountable to shareholders but to wider community - Formation of board committees is a means of strengthening the independence and accountability of the board - Board committees are subsets of the overall board 2.15 - The audit committee - required by Listing Rules to disclose IF there is audit committee, and the reasons for not having one. - oversight financial reporting and auditing process. - select and appoint the external auditors, performance of external auditor re independence - latest development on audit committee AICD Australian Institute of Company Directors 2.16 - the audit committee can play a key role in assisting the board of directors to fulfil its corporate governance and overseeing responsibilities in relation to an entity's financial reporting, internal control structure, risk management systems and the internal and external audit audit functions ASX Corporate Governnace Council 2.16 - published 10 Corporate Governance Principles and Recommended Best Practice. Principle 4 : Safeguard integrity in financial reporting. - Recommendations include CEO and CFO to certify accounts, requires the establishment of an audit committee the structure of which consists of only non-executive directors, a majority of independent directors, and independent chair (not the chair of the board) and at least 3 members. - Audit committee should include memebers who are financially literate, with at least one member who has financial expertise. Formal charter is also required. - The role of the audit committee should include: assessing external reporting and its process, selection and appointment of external auditors, performance of external auditor, re-independence assessment of the performance and objectivity of interanl auditors CLERP 2.16 - audit committee mandatory for Austraila's top 500 listed companies NSYE 2.16 - requires that listed companies must have a qualified and independent audit committee - its chair must have account expertise. - the member of committee can only allow director's compensation - independent directors meeting with management - The remuneration / compensation committee - Review and recommendation of remuneration for the CEO and senior management - Indepencent advice sought on current trends - Consideration of employee benefits, succession planning of senior management - Principally comprised of non-executive directors - The nomination committed 2.17 - Consider the processes of the board - Consider and recommend potential board appointments - Consider removal and retirement of board members, succession planning - May extend to consider the performance and processes of the board and remuneration of nonexecutive directors and management

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- Benefits of a committee structure 2.17 - utilise board experts - recognise geographic and time limitations - free up full board agenda to focus on strategic issues - Notes 2.17 - Delegation to committees does not relieve(解除的職務 ) that board's collective duties, or individual members' duties - Some argue that dilution of overall accountability may result in delegation or responsibility

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Potential conflict of interest - Agency theory 2.18 - Jensen & Meckling 1976 a contract under which one or more persons engage another person to perform some service on their behalf which involves delegating some decision-making authority to the agent - Two key assumptions - All individuals will act in their own self-interest - Agencts are in a unique position to further their own interests at the expense of the principals.. They better access to an control of information - information asymmetry - Explains management choices and actions - Separation of ownership and management - Shareholders have limited access to the information by which mangement is assessed - Agency costs - Agency costs equal to the reduction of wealth experience by the principal as a result of the selfinterested opportunistic behaviour of management and directors - Good corporate governance aligns directors' and shareholders' interest - 3 types of agency cost 1 bonding costs 2.19 - cost of bonding by agent to principal to self imposed disciplines such as internal audit, voluntary reporting, delegated authorities 2 monitoring costs 2.19 - cost of monitoring agents' actions, eg. External audit, management compensation plan 3 residual loss - residual loss of value to a firm when agents' interests will not align with principal's through 2.19 opportunistic behaviour - Implications of opportunistic behaviour of agents - Opportunistic behaviour include: 2.19 - Over-consumption of 'perks'(津貼) 2.19 - The level of incidental (次要)benefits such as company car that is above normal expected. That will reduce both profitability and cash flow for the shareholders. - Empire building - Increase ' empires' in order to increase salary level, perks or power and prestige(聲望), The new empires may reduce shareholder's wealth and outflow of cash. - Risks avoidance 2.20 - Manipulating differing time horizons between agents and principals - Increasing role of accounting: - main indicators of performance - driver of share price and shareholders' wealth - managers' ability to make decisions which result in accounting numbers and wealth creation - Opportunistic behaviour may result in wealth transferred from shareholders to agents. Contracting and engaging agents with good moral behaviour may constrain self-serving motivations - Rutledge and Karim 1999 not accept self-interest is the sole basis for economic decision. They suggest an alternative to bonding management with performance-based compensation is to employ managers with higher moral reasoning. ( CMD) 2.21

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Conflict minimisation factors Management compensation includes performance-based remuneration, stock options and bonus plans 1. Performance-based remuneration - Compensation plans are to reduce agency costs, maximise performance and subsequently shareholder value. - Shareholders' wealth in the form of share price and company profits are the measure of management performance. There are advantages and disadvantages. - Maximising share price - Advantages - Share price reflects future cash flows and risk of future - Overcome the time horizon problem than short-term profitability - Disadvantages - Reflect general market, outside the control of management - Maximising profitability - Advantages - More directly related to management effort - Not a strong market for the co's shares - Disadvantages - Not reflect cash flows and risk. - Subject to manipulation through accounting policy choices 2. Bonus plans - Commonly used with reported earnings but reported profit is a function of accounting numbers and accounting choices - Manager earn a bonus when they meet the target. But the report profit may also manipulate by accounting choices. So it may be real or cosmetic - Healy (1985) found 3 behaviour - Take a bath - when the report can not reach the lower bound during the year - Maximised Profit - reported earning between the lower and upper bounds - Reduce Profit - when exceed the upper bound 3. Stock options - Dr Greenspan, Federal Reserve Chairman Stock options, as currently structured, often provide only a loose link between compensation and successful management - Manager has a right but not the oblighation to purchase the share at discount to market price - Managers become shareholders and are remunerated, thereby maximising shareholder value - Value of option not recorded hence compensation to managers understated - Do no penalise the managers if price falls, hence do not eliminate opportunistic behaviour - Dilute the proportionate holdings of current shareholders - Stock options might encourage a short term focus on share price. Greenspan of the Federal Reserve in the US expressed concerns about the widening gap of a company's long term value and remuneration packages.

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- Accounting treatment of stock options - are debated upon because of its relationship with corporate collapses because the proportion of equity based remeuneration as a percentage of the total salary package for executives are on a rise. - an exclusion of the cost of options from the financial statements understate the salary costs and provide an opportunity to influence the results of the company. Opponents regard expensing treatment being comples. - Australian Accounting Standards Board 2.24 Expenses stock option will increase transparency and leading to reduce profits, and companies are more cautious in deciding how stock options should be structured and distributed AASB ED106 refferred - Disclosure of stock options - CA2001 2.24 - Not recorded as expenses, disclose the information in the notes to the financial statements - Guidelines on executive compensation 2.25 - A method of improving company performance through - motivating and retaining key employees - attracting quality management and - allowing executives to share in the rewards of the success - Basic Principles - reasonable remuneration and comparable to market - individual elements clearly identified and disclosed - incentive schemes reward superior future performance and linked to appropriate benchamarks - transparency, accountability and fairness essential in designing and disclosing incentive schemes - Performance-based compensation - An alternative view - Kohn 1993 2.25 Extrinsic rewards may induce temporary compliance and do not achieve overall objectives - Stifling(令人窒息的) innovation, focussing efforts on the short term at the expense of the long term - Discourage(使失去勇氣) risk taking - Explicit incentive plans result in employees only performing to the level required to achieve desired rewards - Healy 1985 2.25 May lead to active manipulation of the reported measures - May fail to understand what employees require for job satisfaction - Other conflict minimisation factors - Threat of takeovers - Effective corporate governance: reducing agency costs and enhancing shareholder value with effective relationships between management, the board and the shareholders - McKinsey 2.26 Investors are willing to pay up to 11% (27% in 2003) of premium for good corporate governance - ASX requires listed companies to provide a statement on corporate governance The statements of major companies on corporate governance Required by Australian Stock Exchange for listed companies to provide a Statemetn on Corporate Governance - Foster Brewing Group - CRS Ltd - Woolworths Ltd 2.26

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Summary of OECD Principles - Reading 2.1 - The OECD principles are intended to assist governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance, and to provide guidance and suggestions for stock exchanges, investors, corporations and other parties that have a role in the process of developing good corporate governance. - The principles deal with rights of shareholders, equitable treatment of shareholders, role of stakeholders, disclosure and transparency, and the responsibilities of the board. - Shareholders ; basic rights, participation, informed, voting, query, consider cost / benefits - Equitable treatment : equal treatment for same class, insider trading / abusive self-dealing, disclosure by directors and interest in transactions - Stakeholders' rights under law to be protected, effective redress for violation, participation via performance-enhancement mechanisms, and access to relevant information - Disclosure: financial, operating results, objectives, share ownerships, board and executives' remuneration, risk factors, employees' issues, and governance structure - Information audited and disclosed with high standard, fair, timely and cost-efficient access - Responsibility of the Board R2.10 - informed decision in the best interest of company - treat all shareholders fairly - compliance with laws - interests of stakeholders considered - Functions - review and guide corporate strategy, plans of actions, risk policy, annual budgets - set performance objectives - select, remunerate, monitor key executives - monitor conflicts - ensure integrity of systems - monitor effective governance - oversee disclosure and communications - exercise objective judgement

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Directors and Officers
- Contents 1. Overview of the role of directors 2. Definitions of executive, non-executive and nominee directors 3. Duties, responsibilities of directors 4. Accountability and enforcement procedures 5. Case Laws - Important topices - Familiaries with roles, duties and responsibilities of directors, including insolvent trading - Distinguish types of directors and their accountability The role of directors: an overview 3.03 - The process of good governance involves determining policies on directors' obligations, structure, role of auditors and audit committee, disclosure, transparency and procedures for appointment and succession - He should maximise wealth creationand return to the investors. - Corporate governance not only for the company but also for stakeholders. - Some of the corporate governance principles have been embodied(包含) in the law, while others are subject to the benchmark set by the organisation. - Primary obligation to comply with the law falls on the directors individually but corporate governance is an issue for management as a whole Three levels corporate governance principles apply to management 1. Enforceable obligations - statute and common law * Only enforceable obligations subject of legal action against the directors. These include ASX requirements, trade practices law and other mandator regulations 2. Company's own corporate governance statements and voluntary codes 3. Ethical Standards adopted, promoted and accepted 3.04

The role of directors 3.05 - Distance between directors and management; difference between large public company and small organisations - Directors, individually and as a board, bear the primary duty to carry out the corporate governance policies. - Officers may bear governance-type responsibilities - The court examines in detail whether the consequence of actions carried out by officers/directors are that of the company's - Company will be bound by actions where: constitution authorises to act on its behalf, when members vote and where company has delegated power to certain people, and who then act within that power - Issues for the court : examine authority, constitution, and specific legal obligation to impose(亂 用) authority on the person. - Justic Rogers in the AWA case: role of CEO to be informed, executive directors and nonexecutive directors' should bear the same standards of care, and should be subject to the same legal duty. - Company as a legal person and separate from the actions of natural persons - law recognises agency and trustee law but the director is the common element. - All companies must have at least one director. A proprietary company must have no less than one director ordinarily resident in Australia and a public company must have a least 3, 2 of which must ordinarily reside in Australia - Directors must sign in consent(一致 )to act as directors, and upon appointment, are subject to a range of obligations.

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Who is a director? - The company will only be bound by the actions of these persons 1. Company's constitution authorise 2. members vote in general meeting 3. company has delegated power to certain person H.L. Bolton (Engineering) Co. Ltd. V T.J. Graham & Sons Lord Denning - directors and managers who represent the directing mind and will of the company and control what is does. The state of mind of these mangers is the state of mind of the company and is treated by the law - Role of directors changes with types and sizes of companies, and also with definitions by Statute - Director is defined in s.9 a. a person who is appointed - 'de jure' i to the position of a director ii to the position of an alternate director and is acting in that capacity b. a person who is not validly appointed but i they act in the position of a director - 'de facto' R v.Drysdale - non re-elected director continued to act in that role Mistmorn Pty Ltd (in liquidation) v. Yasseen (1996) 14 ACLC 1387 - Not appointed person acted with business card described as managing director, negotiated transactions on company's behalf - fund only to have attempted to avoid legal consequences but nevertheless a de facto director Deputy Commissioner of Taxation (DCT) V Austin (1998) 1034 FCA - resigned director continued to help out friends as director. Court looked behind the formalities the directors of the company or body are accustomed to act in accordance with the person's ii instructions or wishes, regardless of the name: except those in a professional capacity / relationship - 'shadow' Standard Chartered Bank of Australia Ltd v. Antico (1995) 12 ACLC 1381 (Antico's case) - Parent company liable as director where insolvent subsidiary continued to trade. Court extended shadow director to include a company. - An officer is defined in s.9 a. a director or secretary b. a person who makes, or participates in making decisions, which affect the whole or a substantial part of the corp. i a person who has the capacity to affect significantly the corporation's financial standing ii whose instructions are acted upon by directors c. receiver or manager of the property of the corporation d/ean administrator or administrator of a deed executed f a liquidator g a trustee - A shadow officer is someone not appointed but acts as in b.

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- An alternate director cannot act under a power of attorney as a director since a directorship is a personal obligation Mancini v Mancini (1999) NSWSC 799 3.10 - A director being disqualified on the basis on conflict of interest, the alternate director is not affected by the conflict Anaray Pty Ltd v Sydney Futures Exchange Ltd (1988) 6 ACLC271 3.10 - Recommendation - Listed company should not appoint alternate directors because the job is too big for those not continuously in the role 2. Executive directors and non-executive directors 3.10 - Both of them are bound by the same duties and obligations - Executive directors are full-time employees and owe contractural common law and statutory obligations to the company - Non-executive directors/ independent director are objectivity to the operations and with different management experience to the board - They are better monitors of management - Internal control and accountability is delegated to committees headed by non-executives - Underpin by the principles of accountability and indenpenence - Greenbury Committee - Remuneration committee should be comprised entirely of non-executive directors - Hampel Report - at least half of audit committee should be non-executives - Advantage and disadvantage of non-executive director - International developmetns on executive / non-executive directors - Combined Code UK applies "principles-based" recommendations. There should be strong representation of non-executive directors on the board generally and on the audit committee 3.10 3.11 R3.1 Q3.1 3.11

- Sarbanes Oxley Act 2002 3.11 - USA is more a black letter law regime. It defines "independence" and requires all members of the audit committee to be independent, thus requiring them to be nonexecutive - The expected growth of demand of non-executvie directors may be seen to be a significant step towards better corporate governance

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3. Nominee directors - Appointed to represent the interests of a particular class or classes of shareholders - Nominee director of non-wholly owned subsidiaries may act in the best interests of appointors provided they honestly believe the interest of appointor and company are identical Broadcasting Station 2BG Pty Ltd (1964-65) NSWR 1648) 3.12 - Australia and UK require nominee director should act in the best interests of the company as a whole - Conflict of interest arise when nominee director possess information and have to disclose to the appointed, especially when the company, the director or appointer do not agree Scottish Co-operative Wholesale Society Ltd v Meyer (1959) AC 324 3.12 - Society appointed nominee director to the board of a subsidiary. Society stopped supply of materials to the subsidiary when it no longer required the licence, creating a conflict for the nominee director. Lord Denning - when the conflict arose, nominee director should take the side of the subsidiary. It was found that the agreement between the appointer and the nominee does not take precedence over the subsidiary directors' duties - s.187 - Nominee director of a wholly owned subsidiaries may also act in the best interests of subsidiaries if : a constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company, and b director acts in good faith in the best interests of the holding company, and c the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act Example Q3.2

8696168.xls Module 3 (15%) Duties and responsibilities of directors - Trustee - "deed-of-settlement" company for investing combined investment funds - "trustee" who manage the deed-of-settlement company - duties of trustee are represented in the obligations of directors - the duties were collectively called fiduciary(受信託的) duties - The legislation was the "Bubble Companies" Act of 1825 that has been the foundation of the current Corporations Act 2001 - General law duties for directors (Common law and equitable duties) - Company Law is from trust law and contract law - Commnon Law - only apply to directors Statutory Duty - extended to include officers 1. to act bona fide in the best interests of the company -subjective test - based on the director's opinion of what was reasonable Smith & Fawcett Ltd (1942) Ch 304 - director only owe the duty to the shareholders as a 'general body' Greenhalgh v. Arderne Cinemas Ltd (1964) 1 All ER 512 - director only owe the duty to the company not to individual shareholder, but when small number of shareholders, the director may owe a duty to the other shareholder Brunninghausen v. Glavanics (1999) NSWCA 199 - director only owe the duty to both of future and present shareholders Darvall v. North Sydney Brick and Tile Co. Ltd (1989) NSWLR 260 - failure to disclose information - special circumstance - duty of a fiduciary nature to individual shareholders and not just the company as a whole Coleman v. Meyers - directors should take greater obligation to the creditor instead of shareholders when the company become either insolvent or close to insolvency - Nominee directors should owe duty to the individual company of which they are a director and not to the holding company or any other related company Walker v. Wimborne (1976) 137 CLR 1 - director not owe a fiduciary duty to the employee Parke v. daily News Ltd - Statutory duty of good faith s181(1) - requires a director or an officer to exercise their power and discharge their duties in good faith in the best interests of the corporatation and for a proper purpose (based on what a reasonable person would consider appropriate) - Civil penalty - breach of this provision - Criminal penalty - breach s184 - was intentionally dishonest or reckless - fines up to $200,000 and up to 5 years imprisonment 2. to exercise powers for their proper purposes - The powers are restricted in origins in the Corporations Act 2001 or memorandum or articles of association of the company (inc. RR) a purporting(目的 ) to exercise a power they never had b the action was prima facie within power but was an invalid exercise because of the abuse arising from the improper purpose Howard Smith v. Ampol Petroleum Ltd (1974) AC 821 Hogg v. Cramphorn (1967) Chg 254 - Substantial purpose 'but for' test Mills v. Mills

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- Statutory duty of good faith s181(1) - requires a director or an officer to exercise their power and discharge their duties in good faith in the best interests of the corporatation and for a proper purpose - Civil penalty - breach of this provision - Criminal penalty - breach s184 - was intentionally dishonest or reckless - fines up to $200,000 and up to 5 years imprisonment - Impropose purpose - takeovers Advance Bank Australia Ltd v. FAI Insurances Ltd (1987) 5 ACLC 725 - Impropose purpose - creating or destroying majority voting power Whitehouse v. Carlton Hotel Pty Ltd (1987) 5 ACLC 421 - The director will not breach of the duty if his action can be ratified by the general meeting. But fraudulently or dishonestly can not be ratified - Defence : correct interpretion the purpose of power, honest belief the action fulfill the purpose, and be in the best interest of the company 3. to retain their discretionary (謹慎) powers - Board must not delegate discretion without express authority nor can they simply accept the direction of others in voting - Discretion means that obligation not to bind or fetter (限制) their vote on matters at some future time. This is because powers are held in trust for the company. Directors should not delegate such power even there is no improper pupose - This does not involve the board acting with authority to accept a business proposition(事 情) which requires the commitment to pass - Contracts to fetter (限制) the voting rights at a board meeting are invalid except for nominee directors - s.187 allows nominee directors of a wholly owned subsidiary company, acting on behalf of the parent company, to vote according to the appointeor's request - Delegation is allowed,but not delegation out of the hands of the board and must be recorded in minutes Thorby v. Goldberg - s198D The directors can delegate any of their power to a. a director, b. a committee of directors, c. employee of the company, d. any other person - s198C permits the directors to confer(商議) on a managing director any of the powers that the directors may exercise, with the power to revoke(撤銷) or vary the delegation - s.190 Responsibility lies with the director who delegates, except where the director believes that the delegate would exercise the power in conformity with the duties under the CA2001 or Constitution; and the director believed on reasonbale grounds and in good faith and after enquiry, that the delegate is competent and reliable in relations to the power delegated Gould v. Mt Oxide Mines Ltd (in Liq) (1916) 22 CLR 490 - s190 Responsibility for actions of delegate s190(1) delegation by director s190(2) director not responsible in certain circumstances - s189 - defend Director can rely on delegates - a director can rely in good faith and after making independent assessment with employee , professional advisor or expert, or another director or committee - Breach usually be found when the company gets into financial difficulties

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4. to avoid conflicts of interest a. contracts with the company - No necessary of fraud or dishonesty or loss to the company, there to be a breach of director's duty. Director must not place himself in a position where his duty and personal interest may be in conflict or potential conflict Aberdeen Ry v. Blaikie (1854) 2 Eq Rep 3.21 - Interest is indirect such as create a debenture to secure the loan Victors Ltd v. Linguard (1927) 1 Ch 323 3.22 - s191(1) Directors ' duty to notify other directors of material personal interest where conflict arises unless subsection s.191 (2) Either by directors' meeting or individually to every director in writing s192 - s.191 - does not apply to proprietary companies with one director, but Common law does not make distinction between directors of public and proprietary company - s.192 - standing notice may be given : in writing, with details of the nature and extent of the interest and the relation of the interest to the company - The other directors have resolved that the director may vote or s.196 - ASIC may declare the director be entitled to vote. b. personal profit or secret profits 3.23 - duty is not to profit from office, not only to act in good faith, but to be seen to act in good faith - does not matter if the company suffers no loss, as long as the directors receive personal gains while in management role - bribes, undisclosed benefits - Commission etc Furs Ltd v. Tomkies (1936) 54 CLR 583 3.23 - misue of company funds - can not mix the trust's money with their own money Paul A. Davies (Aust) Pty Ltd v. Davies (1983) 1 ACLC 1091 3.23 - taking up corporation opportunities Regal (Hastings) Limited v Gulliver (1942) 1 All ER 378 3.23 Cooke v Deeks (1916) AC 554 3.24 - Full disclosure to the board and members Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 3.24 - use of confidential information - information - trade secrets, insider information, company's future plan, information not readily available outside - s.183 use of confidential information Director or any officer must not improperly use the information to a gain an advantage for themselves or someone else b cause detriment to the corporation Civil penalty unders s1317G or disqualification under s.206C, if intentional or reckless - criminal penality s184 - Improper use of the information that the company was in financial difficulties, 3.25 directors transfer the assets to avoid current or future creditors McNamara v. Flavel (1988) 6 ACLC 802 3.25 Jeffree v. NCSC (1989) 7 ACLC 556 3.25

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- improper use of position in the company - s.182 improper use of position in the company Director or any officer must not improperly use their position too a gain an advantage for themselves or someone else b cause detriment to the corporation Civil penalty unders s1317G or disqualification under s.206C, if intentional or reckless - criminal penality s184 Cook v Deeks - Improperly used his position in the company to his own advantage and to detriment of the co. Furs Ltd v. Tomkies (1936) 54 CLR 583 c. competing with the company - Fiduciaries are not allowed to enter into competition with those who are dependent upon them - Non-exective directors are not resticted from joing the board of a rival company, subject to them complying with all fiduciary duties Bell v Lever Bros (1932) AC 161 3.25 - A director cannot use any information belonging to the company to their own advantage, executive and non-exective - A service agreement is entered into by executive directors for exclusive service Green v Bestobell Industries Pty Ltd (1982) WAR 1 3.25 - Others 3.26 - Payments to directors - is not entitled to paid by a company except a) authorised by law, b) provided in company's constitution, c) approved in general meeting - Disclosure of remuneration - Related party transactions Public co => s.228 - Related Party? => s.229 Financial benefit => s.207 to preceed transaction requires member approval (1. Resolution within 15 monthes, 2. fully informed memebers / ASIC, 3. Related parties do not vote) unless arm's lengthe transaction, reasonable remun, insurance, small amount to $2000 5. duty of care and diligence - the directors must not be negligent when making business decisions and must keep themselves informed, committed and to perform to a reasonable standard - s.180 to act with care, skill and diligence Director or any officers must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they a were a director or officer of a corporation in the corporation's circumstances, and b occupied the office held by, and had the same responsibilities within the corporation as, the director or officer City Equitable Fire Insurance Ltd (1925) Ch 407 3.27 - not greater skill required, reasonable skill and knowledge - not to give continuous attention to the affairs and not required to attend all meetings but as often as they reasonably can - justified in trusting officers in performing their duties, not liable for officer's misdeeds( 罪行) AWA Ltd v Daniels 3.27

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- now imposed much higher expectations Overend & Gurney Co. v. Gibb 3.27 Statewide Tobacco Services Ltd v Morley (1990) 2ASCR 405 3.28 - minimum to obligate financial affairs for the opinion of solvency - This is not a fiduciary duty. It is the duty of a trustee. Director is expected to run a business aimed at making profit and can take risks - Civil penalty unders s1317G or disqualification under s.206C, if intentional or reckless criminal penality s184 - s588G The duty to prevent insolvent trading - Director's duties origins in trust law so that fiduciary duty Q3.6 - Director has statutory duty under obligations to exercise care, skill and diligence to prevent the company from trading whilst insolvent pursuant, a as director at the time when the company incurs a debt b company was insolvent or became insolvent at the time by incurring the debts c at that time, there were reasonable grounds for suspecting that company was insolvent or would become insolvent by incurring the debt d the debts was incurred after the commencement of the Division - after June 1993 Tourprint International Pty Ltd v. Bott (1999) 17 ACLC 1543 3.30 - Directors should constantly keep on guard so as not to incur further debt when current financial instability could lead to the new debt not able to be met - Directors are required to keep themselves informed about the financial position of the company - s.588G(1A) a table of debts incurrred and when such debt is deemed to have been incurred - s.588H sets out the defences a s.588H(2) directors had reasonable grounds to expect that the company was solvent at the time when the debts was incurred and would remain solvent even if the debts was incurred b s.588H(3) directors had reasonable grounds to believe that another person who was competent and reliable and responsible for providing adequate information, supplied information that the company was solvent and the first mentioned person believed that information c s.588H(4) because of illness or some good reason at the time when the debt was incurred, the person did not take part in the management of the company at that time d s.588H(5) took all reasonable steps to prevent the company from incurring the debt such as review to appoint an administrator. - Normally pursued by liquidators on company's behalf - Compensation-s.588J, s.588K and s.588M and criminal offence for dishonest-under s.588G(3)

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Accountability 3.30 - Cornestone of corporate governance - Ability of board to deliver a clear picture of position of the company to stakeholders not only financial state but also wide range of issues which may be of valid concern to stakeholders - Who may seek the information - Shareholders, lendes, employees, creditors and regulators - Voluntary disclosure 3.31 It is not under the law, it is under the pressure of public opinion or disenchanted(不抱幻 想) investors for public information and manage risks - Improving disclosure: new technology offers opportunities for increased disclosure. Accessibility, frequency and content of information will improve individual shareholders' access, evaluation of performance, etc - Non-financial informaton is forward looking and may bear higher risks because of less vertifiable than tradition historical cost-accounting information - International standards increase with globalisation and competition for capital Enforcement 3.32 - Common law remedies - Account for profits - profit made by reason of breach can be claimed from the director and repaid to the company - Paul A.Davies (Australia ) Pty Ltd v Davies 1983 3.32 - Damages and compensation - company may claim loss from the fiduciary or third party if participated knowingly - Injunction - an order to restrain from acting or forces a party to act, only company has the power to obtain an injunction - Declaration - declaratory order to do something to remedy the breach eg. Director to do an act or restore or become custodian - Restoration(還原) of property - company to take back the property, recovery may be from the hands of a third party - Rescission(撤銷) - a contract is to be rescinded - Statutory derivative(引申出的 ) actions Q3.7 Common law derivative action is difficult for the smaller shareholders or minority directors. The statutory derivative action gives them the right to bring action - s.236 - enables a member to take action in the name of the company, to redress(平反) against delinquent(違法的) directors or others. Must be sued where are grounds for an action and where the company chooses not to sue - s.237(1) - Leave(准許 ) (Permission) of court to bring proceedings in the name of the company is required - s.237(2) - lists matters: company itself will not act, applicant in good faith, in the best interests of the company, and there is a serious question to be tried (prevent abuse); and company has had 14 days notice of application or if no notice, that it is appropriate no notice is given

8696168.xls Module 3 (15%) - s.241 - powers of court - to order the company or its directors to do things - to order independent persons to investigate and report to the court - to investigate the books of the company and to order costs, costs orders can be made against the person who applied for the orders, the company or other party - s.239 - approval of the conduct complained of by the general meeting will not necessarily prevent the claim nor deprive(剝奪) the applicant of a remedy - Removal of a director - shareholder may vote a director off the board at a general meeting - s.203C for proprietary company - s.203D for public company - s.203E for director from public company prevent removal - Civil penalty provision - The penelties will be imposed by a court - ASIC has ability to serve infringement(違反) notices on listed company - ASIC has right to apply to the court to extend the period of disqualification of the director to 15 years - s.206A - Disqualification order - s.1317G - Pecuniary penality of up to $200,000 - s.1317H - Compensation order - Criminal penalty provisions - s.184 - the conduct was either dishonest or reckless Relief from breach of duty Director can be exonerated(宣佈無罪) or relieved from civil liability arising from breach of general law - Members in a general meeting may ratify a decision - But can not involve any fraud, decit or where the company is insolvent or near insolvency - Breach statutory duty cannot be excuse(申辯 ) - Can not absolve(赦免) - oppressive s.232 - Ratification will not prevent under statutory derivative action provision - The provisions of the company's constitution (its internal rules) may permit ratification - it is possible for a company's internal rules to allow directors to be excused(赦免) from liability for actions of breach of duty or improper use of powers, provided no dishonesty was involved and their own vote is not required to carry the resolution - s.199A - provides that the company may not indemnify(免除(某人)的法律責任) an officer or auditor against liability to the company where - the liability is owed to the company - there is liability for apecuniary penalty order or compensation order - liability is owed to a third party which did not arise(產生) out of conduct in good faith - s.1318(1) - The court may relieve(免除) a person from liability - honestly

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3.35

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8696168.xls Module 3 (15%) Defences: Statutory business judgment rule s.180(2) - This can be used as a defence by the directors which involve the execise of business judgement on the basis that it was not the court's task to second guess board decisions taken in good faith - Safe harbour from liability can be applied IF the directors / officers made - judgement in good faith for a proper purpose - did not have material interest in the subject matter - informed themselves about the subject matter to the etent reasonably appropriate - rationally believed judgement in the best interests of company Statutory Law s.180(1) s.180(2)

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requires a director or an officer to exercise the care and diligence of a reasonable person

gives protection to a director who makes a business decision in accordance with the business judgement rule s.181 requires a director or an officer to exercise their power and discharge their duties in good faith and for a proper purpose prohibits officers and employees form making improper use of position for personal s.182 gain s.183 prohibits current and former officers and employees from making use of insider information for person gain s.180-s.183 are civil peralty provision s.184 breach s.181, 182, 183 can also be criminal offence if the directors have intentionally or recklessly failed their duties and they have been dishonest s.189 protects a director if, after acting in good faith and making proper inquiries, they have reasonably relied on information and expert advice provided by others Company Law - to act bona fide in the best interests of the company Elements : honestly, integrity, best iterests of company - to exercise powers for a proper purpose Elements: exercise of power, proper purpose is defined as being in the best interest of the company - to retain discretion - to avoid conflicts of interest

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Managing the company
- Contents 1. Aligning responsibilities of Manager (CEO), the board and investors 2. Reporting (annual reports, corporate governance statements and listed public companies requirements 3. Corporate social Responsibility and Reporting (Enivornmental reporting, social accounting, Risk Management) 4. Technology (usage, benefits, Obligations, concerns) 5 Remuneration, nomination and performance (Greenbury Committees, Board evaluation and training) - Important topices - all of the above Aligning director and shareholder interests 4.04 Directors and shareholders want to maximise the value of investment and good corporate governance - The board - Role of the board carry out the strategic aims to oversee the management by CEO, executives Q4.1 and employee - They are collective agents with individual responsibility to the company - Corporate governance best practice regarding to the conduct of boards - Reflect a range of values such as transparency and accountability, stewardship and security of funds - Role include compliance and ensuring adequate resources to meet company's duties - Board agenda and timetable R1 - Management objectives 4.05 Objective - enhance the value of the shareholders' investment in the company. Parallel the costefficient way to achieve financial stability , long-term sustainability(承接力) with acceptable level of risks - The factors influence the implementation 1. engage in trading or providing services 2. types of companies 3. style of management 4. legal requirement 5. How be financed 6. the competition 7. availability of information - The duty of management 1. obtain relevant information, analyse, interpret and report to the board 2. provide adequate material to make decision 3. monitor any data that impact on the business of the company - The role of the CEO 4.06 - responsible to the board and manage business, controls management Q4.1 - recommend policy and strategic direction to the boards - act as spokesperson for the company - as the most senior executinve - may occupy a board position - identify compliance issue, address them and report to board - kee the board informed

8696168.xls Module 4 - 16% - Directors' interest - maximisation of the profitability of the company and meeting interests of shareholders - task - building investor confidence - position - enchance the performance, profitability and wealth of the corporation on behalf of the stakholders - Dunlop 1999 - companies take responsibility for adopting governance practices best suited to their circumstance, bilt around sound principles - AICD comments on draft OECD guidelines on corporate governance

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- primary focus in enhancing performance, profitability and wealth on behalf of stakeholders balance role for shareholders between right and obligations such as bote support reasonable expression of shareholders' opinions disclosure and transparency to achieve company objectives primary objective of board to promote performance-based objectives not prescriptive(慣例的 ) role company to take responsibilities on the appropriate Corporate Governance an disclose as it sees fit - AICD's response to CLERP - minimisation of costs including establishment, compliance transaction costs - cost-benefit analysis for all legal amendments - genuine consultation with users of legislation at all stages - less black letter law, more enabling and default legislation - stated aims should be wealth creation, improved employment and investment, security, equity and social and environmental standards - private enterprise recognised as primary wealth creating engine of economy - the position of the AICD on the role of the board - Investors' interest - Investors' interests - active participation - differing needs and objectives (long and short term) - Investors' confidence and involvement in share trading have been the result of market floats, privatisations, increased access to information and services - increased involvements of fund managers and institutional investors in capital raisings - increased interests in dissemination of information about share ownership has stimulated interest in corporate governance and codes of best practice - individual investors represent 57% of all australians, median age 55 - investors can be individuals or institutiona; - different aspirations(渴望) of individual and institutional investors - individual investors wants - company efficiently and profitably run - honesty from directos, officers and managers - best possible performance from the most efficient management - compliance with legislation - transparency, communication, accountability - represented by Australian Shareholders' Association ASA- issue blacklist of poor performance - Companies and Securities Advisory Councile (CASAC) Report of June 2000 Shareholder Participation in the Modern Listed Public Company" which recommend general meeting requisition, resolution threshold, notice of AGM, proxy arrangments, disclosure of proxy, directors' election -

R4.2

Q4.2 4.08

4.08

R4.3 R4.4

Companies and Securities Advisory Councile (CASAC) Report of June 2000 8696168.xls Shareholder Participation in the Modern Listed Public Company" which recommend 83/196 Module 4 - 16% general meeting requisition, resolution threshold, notice of AGM, proxy arrangments, disclosure of proxy, directors' election

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- institutional investors - institutional investors includes insurance companies, pension funds, investment trusts and professional investment fund managers - the growth of institutional investors is due to changes in government policies and compulsory superannuation - institutional investors' interest are similar to individual investors - accountability, transparenecy, efficient management ) - The ways institutional investor can use to express their views on performance and corporate governance to the boards of the companies in which they invest. - there are limitations on the degree to which insitutional investors can affect company conduct by using voting power - one reason for institutional investors' failure to use their voting power to adopt good corporate governance is the difficulty associated with obtaining consent and directions from beneficiaries on how to vote and what issue to respond to - Hampel recommended dialogue between companies and institutional investors - institutional investors can act idividually and collectively to achieve greater transparency and accountability because of its share ownership and media interests. - In Australia - IFAC and USA - CalPERS are particularly vocal(表達意見的) in the corporate governance debates - CalPERS claims its right as a corporate owner and encourages others to do the same. It advocates that a company's long term sustainable value depends on the board's accountability to owners, the quality of managemet, and the strength of relationships with employee, suppliers and lenders - international investors - International investors' needs arise from globalisation - compliance with international standards so the investments can be ranked by interenational ranking agents such as Moody's and Standard and Poor's is essential for financing - areas agreed include accountability, transparency, directors' obligations such as independence, voting method, codes of best practices and dialogue - Businses Roundtable is an association of CEOs and has has published their Statement on Corporate Governance in 1997 - Businses Roundtable regards formal statements do not change attiutdes but soft factors like the quality and personalities of directors can effect change - Businses Roundtable aims are benchmarking corporate governance for large, samll, public and private companies, recommends consultations and sets our proposals for practical implementation - ASA listing the companies that have poorly performce - ASA takes actions to bring their members' point of view to the attention of corporations CASAC recommend in relation to access to information and the role of a listed public company - meeting - Achieving goals of good corporate governance - achieving goals of good corporate governance is a way to align interests of the board, management and the shareholders - there is no agreement on the enforceability required for good corporate governance. Effective supervision, for eg, does not require legislation. But areas such as financial reporting can lend itself to regulation - OECD protects shareholders' right. But protection of stakeholders, employee participation, consultation over extraordinary matters are yet to be developed. - Hampel referred to people, teamwork, leadership and skills produce prosperity, but accountability requires regulations

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4.11

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- best option is for co-operation between the board and stakeholders to achieve common ground Reporting issues 4.13 - Annual report - Corporate goverance statements and policies R4.5 - Corporate governance statements became part of ASX rules form 1 July 1995 - ASX require the publicy listed company to show corporate governance statement, disclosure, board composition, remuneration, appointments and ethics in annual report - ASX require top 500 listed companies have a board audit committee - proprietary companies, unlisted public companies are required to prepare annual reports (no need for corporate governance statements) - little available data indicating voluntary provisions of corporate governance matters to shareholders or stakeholders - ASX Listing Rule require a company specify whether it has audit committee, if not, to explain why. - Listed Public companies are required to set out: - in a statement disclosing the extent to which 4.15 the entity has followed the best practice recommendations during the reporting period. If the entity has not followed any of the recommendations that have not been followed, and give reasons. ASX Guildance Note Rule 4.10.3 - ASX require the corporate governance statement may address 1 independent directors 2 nomination and remuneration procedures for dirctors and auditors 3 independent advice 4 risk management 5 policy on ethical standard - Listing Rule 4.3D requires a listed company to notify the market immediately it becomes aware of information that is likely to have a material effect on its share price - continuous and periodic disclosure requirements - No plan to impose statutory obligations on unlisted or proprietary companies to have a corporate governance statement or to adopt a specific policy on corporate governance - ASX suggest 10 principles for a bench mark for corporate governance 4.14 1 Lay(給予) solid foundations for management and oversight 2 Structure of the board to add value 3 Promote ethical and responsible decision-making 4 Safeguard intergrity in financial reporting 5 Make timely and balanced disclosure 6 Respect the rights of shareholders 7 Recognise and manage risk 8 Encourage enthanced performance 9 Remunerate fairly and responsibly 10 Recognise the legitimate interests of stakeholders - ASX Listing Rules to safeguad the efficiency and integrity of financial market and focus on 4.16 disclosure The ASX operates on regime of continuous and periodic disclosure embodied in Listing Rule 4.16 3.1 - Proposal to amend Listing Rules in 3 ways: 4.16 - companies to provide information necessary to avoid a false market in securities - ASX must be satisfied that confidentiality is maintained - improve periodic disclosure by eliminating Appendix 4B Examine the corporate governance statements of Santos Ltd and Coles Myer Ltd to OECD Q4.7 Principles

8696168.xls Module 4 - 16% - Corporate governance statement of Santos Ltd - Corporate governance statement of Coles Myer - Legislative obligations come from CA and ASX Listing Rules to address the issues in CGS - CA - oblighations of continuous disclosure of financial matters and appointment of directors, shareholders' rights and rights of action, directors duties - ASX listing Rules deal with the independence of directors, appoinment , remuneration, audit, ethical standards, auditors and board composition

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Corporate Social responsibility 4.17 John Elkington - Triple bottom line - bases of reporting are environmental, social and financial reporting - The origin of the expression ' triple bottom line ' acconting and it means Q4.11 - Environmental reporting - Definition - is the financial value determined for assets, liabilities, revenues and expenses related to environmental activities and natural resources - Environmental accounting assumes the existence of costs aattached to the depletion of not only a company's assets but also the community's assets which have global implications - Environmental accounting show true costs of the resources - waste treatment and disposal costs, the cost of poor environmental reputation and identification and cost of environmental risks. - ASX has not required publicly listed companies to comply with triple bottom line principles. - Difficulties of traditional accounting in providing for the contingent liabilities and compliance costs, and in establishing which costs to be tracked - Environmental Accounting cannot trace every cost, hence corporate governance principles should be used to establish working guidelines - Corporations Act 2001 added the need for the directors' report to make provision about details of the company's performance in relation to environmental regulations where appropriate - Companies must comply environment issues which are subject to regulatory authority at both the State and Federal levels - Environment accounting enables companies to improve data collection to support better Q4.9 management decision making EMS must be in place. It can benefit the company - Increased awareness by public sector - System of nevironment Economic Accounts (SEEA) 4.19 common approach by governments - Social accounting 4.20 - Corporate Social Responsibility deals with the reporting of the impact of corporation's activities on a range of stakeholders - Stakeholders included: investors, lenders, employees, customers, regulators, government, communities and society. - focus in examining policies and practices on issues which include human rights, community involvement, environmental impact and sustainability - Company should provide future proposales and progress and address(建議) shortfalls(缺少) in compliance - Aiming at practice of social responsibility - OECD promotes protection of human rights and ensure effective redress(補償) for violation of these rights - Business Council of Australia. - advocates policies of responsible attitude to CSR issues 4.20 - Sweeney et al. - 4 steps for CSR - denial(拒絕) of the problem or the need for CSR reporting

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- (虛誇)phetoric and unimplemented policies - attempts to make policies work but in defensive(防禦性) mode - change of attitude and desire(渴望) to make the policy work - Internationally the wide acceptance of the philosophy of the need for CSR can be seen from the increasing number of organisations indicating their involvement.

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- The World Business Council - for Sustainable Development(資源等能再生的 ) publishes papers and policies, codes of conduct on CSR - FTSE established its FTSE4 - Good index as index using a series of benchmark and tradeable induces failitating investment in companies with good records of corporate social responsibility - Greg Bourne emphasises the need for company to manage their relationship with all members of society - three three pilars of sustainable development - Lord Holm deals with the idea of corporate social responsibility which will enhance the long-term interest of shareholders - Body shop's environmental policy - John Presbo - growing interest in CSR - Dow Jones - What is involved when a company decides to adopt CSR? What does adoptionn of the concept require of them? - Risk Management - Risk management defined as the culture, processes and structures which come together to optimise the management of potential opportunities and adverse effects - Risk management is a process designed to serve a number of goals such as to identify, analyse, evaluate, treat, monitor and communicate the information gathered for the benefit of the company

R4.8 R4.9 R4.10 4.21 Q4.12 4.22 Q4.12

- Risks may be associated with any activity, function or process - ASX requires disclosure of approaches to identifying areas of significant business risk and arrangements in place - no requirement to adopt any particular standards - Rise is a specialised area, may be assigned to a committee, with careful supervision Standards Australia has developed a Risk Management standard AS/NZS4360, release in 1999 - Risk management is about identify opportunities, avoiding or mitigating loss, improve safety, quality and performance - Insurance cover is assessed - Risk management process should be used 4.23 - current obligations for accountability - the increased significance of corporate governance - increase communication with the community, consumers and shareholders - the growing issue of ethics in the boardroom

8696168.xls Module 4 - 16% Technology - Information management - Use of IT by corporations - IT change the way of company to collect, store, apply and protect a company's information. - It also change the way shareholders and stakerholders interact with the company - Usage of IT - centralised database - internet and intranet communication - bar coding - videoconferencing - communication - fax, e-mails - timely financial information - Benefits - the board continuously and easily assess the financial health of the company that reduce the surprise in crucial areas such as risk management - Videoconferencing will save time and money - monitoring efficiently - global reach - Obligations - maintain the latest hardware and software to enhance efficiency and productivity has never been cheaper or easier. - Obligations - privacy, security, IT personne; - Causes of concern - risk management, reliability, integrity and security of data, breakdowns - old or computer illiterate board members may leave the company thus losing important corporate memory and history. - less attentive directors have trouble excusing non-attention to duties - more reliance on the advice of IT professional will have AWA-type problems - Possible causes for concern - computer data can be tampered(干預) with or lost - Misue and theft - vandalism(恣意破壞) and sabotage(陰謀破壞) due to hacker-launched viruses - system audits must be reliable that giving rise to higher auditor liability and increased cost of audits - Use of IT by the regulators - ASIC, ASX, ACCC, ATO presents an increase opportunity to track compliance - Implications of technology on corporate governance - Implications of technology on corporate governance

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R4.11 R4.12

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Remuneration, nomination and performance - Greenbury Code - to avoid conflict of interest - exclusively(獨占地) independent members of remuneration committee - annual compliance with Greenbury, explain if they don comply - remuneration committee disclose all pay details for - all executive directors, with pension, incentive pay, options, performance measurements, severance agreements, and comparisons - executive pay should not be excessive and include basic salary, benefits in kind, annual bonuses, long term incentives, share options and pension, revealed in the name of directors - employment contracts < or = 1 year to rule out golden handshake - new long-term incentive plans to replace existing - performance related pay to align interest, criteria relevant, stretching - executive stock option awards should be phased rather than given all at once and options should never be awarded at a discount - board to determine remuneration of non-executive, with expert advice - publish a report annually - Summary of the recommendations of Greenbury report - ASX does not require nomination or remuneration committee but if ther is on, the following is required - main procedures for membership, reviewing, nominating - procedure for obtaining independent advice - procedure for reviewing compensation arrangemetns

R4.13 4.26

- Remuneration committees - attract and retain good directors - upward trend of disclosure - stock options in remuneration packages improve - Nomination committees - Bosch 1995 4.27 - recommended remuneration and nomination committees be set up with majority of nonexecutive directors to enable them to act independently - Hampel 1998 4.27 - recommned all independent directors - nominating candidates and assessing performance - clear terms of reference - maintain independence for independent directors - Evaluating board performance - peer review - profitability - return on inested funds - Training - not required by law to provide training for directors, but recommendy by AICD and Bosch

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Engineering Co. Ltd v T.J. Graham & Sons (1957) The state of mind of these managers is the state of mind of the company 3.05 s180(1) Breach the duty of care, skill and deiligence The court held that the auditors were negligent by not following their concersn up, but the AWA and the manging director had contributed to the neglignece. - Directors must familiarise with the co's business and satisfy the standard - business judgement rule will not be a defence against negligent behaviour - Director's duty of care not subject to and limited by lack of knowledge, experience, ignorance or inaction -Non-executive and executive director has the same standard of care - Sleeping, passive director can not avoid responsibility 3.06/ AWA v Daniels / Carem skill and deiligence * Employee caused foreign exchange transaction losses by unsuccessful trading and borrowing 3.27/ Daniels v Anderson ( appeal from auditor) * Auditors were sued for negligence in failing to detect the illegal activities and auditors claimed 6-11 company to be blamed for inadequate internal controls * CJ Rogers found: 1. CEO failed to respond - personally liable 2. Board had little knowledge of the operations 3. Board failed to ensure policies observed 4. Internal auditors/mangers failed to adequately inform board 5. Standards to be imposed on directors, whether executive or non-executive 6. Directors can be sued for negligence Director s9(b)(i) de facto. 3.08/ R. v Drysdale (1978) 131 CLR 236 de facto s9(b)(i) The court held thatDrysdale was a director ash he had continued to act in the role of director. A3.03 s9(b)(i) de facto. Director Mistmorn Pty Ltd (in liquidation) v. Yasseen (1996) 3.09/ The court held that the Yasseen's activities were indicative of the type of conduct of a person acting as a de facto s9(b)(i) 14 ACLC 1387 A3.06 director in the same circumstance. s232 Mistmorn Pty Ltd (in liquidation) v. Yasseen (1996) 3.09/ Related to alleged breaches of statutory duties to act honestly, to not gain an advantage by improper use 14 ACLC 1387 A3.06 of position and also to exercise reasonable care and skill as an officer of the company s589 Mistmorn Pty Ltd (in liquidation) v. Yasseen (1996) Yasseen was guilty of 'fraud, negligence, default, brach of trust or beach of duty in relation to a 14 ACLC 1387 corporation' Deputy Commissioner of Taxation (DCT) v Austin The court held that Austin acts in the postion of a director because of the single-handedly on behalf of (1998) 1034 FCA the company to negotiate the settlement with DCT Standard Chartered Bank of Australia Ltd v. Antico Parent company liabale as a director (shadow director) which exercised considerable control through (1995) 12 ACLC 1381 (Antico's case) the directors it appointed to the board Standard Chartered Bank of Australia Ltd v. Antico Only an individual who is at least 18 may be appointed as director. (1995) 12 ACLC 1381 (Antico's case) In Antico's case - this led(首位) to the situation that the corporation is a director Stratj,pre Grpi[ v. Fraser (1991) 9 ACLC 3140 Alternate director who had never been call upon to act and had never atteded a board meeting or management meeting Playcorp Pty Ltd v Shaw (1993) 11 ACLC 641 was held to be not liable as a director under insolvent trading legislation Mancini v. Mancici (1999) NSWSC 799 An alternate director cannot act under a power of attorney as as director since a directorship is a personal obligation 3.09/ A3.06 3.09/ A3.08 3.09 3.09 3.10 3.10/ A3.06 3.10

Managing the corporation

Director de facto s9(b)(i) Directors shadow s9(b)(ii) Directors who is a director s201B Directors - Alternate Directors Alternate Directors Alternate

Directors Alternate Directors Nominee

Anaray Pty Ltd v Sydney Futures Exchange Ltd (1988) 6 ACLC271 Scottish Co-operative Wholesale Society Ltd v Meyer (1959) AC324

Bona fide

Smith & Fawcett Ltd (1942) Ch 304

Fiduciary duties

Parke v Daily News Ltd (1962) Ch 927

Greenhalgh v. Arderne Cimemas Ltd (1946) 1 All ER 512

Alternate director In the event of a director being disqualified on the basis of conflict of interest, the alternate director is 3.10 not affected by the conflict Nominee directors 3.12 He should be act in the best interests of the company as a whole. Bona fide The directors execise the power to refuse any registeration for shareholder which was gave by constitution of the company. 3.15 The court held that the refusal to register was bona fide and could only be attacked where it was shown to be in bad faith Director do not owe a fiduciary duty to act in the interest of the employee The court uphold the validity of such gratuitous (無必要的)payments only where it was seen to be 3.15/ reasonably incidental to the carrying on of business, that it was a bona fide transaction and was done for A3.02/ the benefit and to promote the prosperity of the company. This case was not so the director had not 5-8 done so. Company as a whole 3.15/ The court held that a special resolution can be invalidated if its effect is to discriminate between the A3.02/ majority shareholders and the minority shareholders. 5-6 3.16/ A3.9/ 5-7

Fiduciary duties

Director's fiduciary duties are owed to the company and not to the shareholders But in this case, there has 2 shareholders only. One shareholder would like to sell his shares less Brunninghausen v. Glavanics (1999) NSWCA 199 involved the business. At the same time, third party would like to buy the company shares. The majority shareholders has to disclose the negoitation with third party and information to the minority shareholder before he sold. Darvall v North Sydney Brick and Tile Co Ltd (1989) NSWLR 260

Fiduciary duties

Director's fiduciary duties are owed to the company There is a greater obligation to take into account the interests of the creditors where the company is 3.16 either insolvent or close to insolvency. The short-term interests of shareholders may be less importance than the company as a commercial concern Director's fiduciary duties Failure to disclose information within the knowledge of one director may amount to 'special 3.16 circumstances' which can give rise to a duty of fiduciary nature to individual shareholders and not just the company as a whole Nominee directors The directors should be concerned first for their shareholders and creditors before the other companies 3.16 in the group. 3.18/ A3.15 5-12 3.18 3.19/ A3.4

Fiduciary duties Directors Nominee Impropose purpose manipulate control Impropose purpose Impropose purpose Takeover

Coleman v meyers (1977) 2 NZLR 225

Walker v Wimborne (1976) 137 CLR 1 Whitehouse v. Carlton Hotel Pty Ltd (1987) 5 ACLC 421

Impropose purpose - creating or destroying majority voting power The directors would like to dilute his wife's voting right. So the court held the new allotment for his son was invalid Mills v Mills (1938) Substantial purpose Impropose purpose - Takeover Advance Bank Australia Ltd v FAI Insurances Ltd The court decided that although the directors acted honestly and in good faith they exceeded their (1987) 5 ACLC 725 power and used their power for an improper purpose

Impropose purpose -

Howard Smith v Ampol Petroleum Ltd (1974) AC 821 Hogg v Cramphorn (1967) Ch 254

Impropose purpose The court decided that although the directors acted honestly and in good faith but they had also acted with improper purpose

3.19

Impropose purpose -

Retain discretion Conflict of interest Conflict of interest Conflict of interest secret profit

Gould v Mt Oxide Mines Ltd (in liq) (1916) 22 CLR 490 Thorby v Goldberg (1964) 112 CLR 597 Aberdeen Ry v. Blaikie (1854) 2 Eq Rep Victors Ltd v Linguard (1927) 1 Ch 323 Regal (Hastings) Ltd v Gulliver (1942) 1 All ER 378 Furs Ltd v Tomkies (1936) 54 CLR 583 Paul A. Davies (Australia) Pty Ltd (in Liq) v. Davies (1983) ACLC 1091 Paul A. Davies (Australia) Pty Ltd (in Liq) v. Davies (1983) ACLC 1091

Impropose purpose The court decided that although the directors acted honestly and in good faith but they had also acted 3.19 with improper purpose Duty to retain discretion The High Court held the director to be liable to the company for the amount of the loss as a result of the 3.20 unauthorised payments s.187 Nominee Directors 3.20 Conflict of interest 3.21 The court held that the interest was indirect but still caused a braceh of duty by the director as he would 3.22 benefit from the company securing the loan. Personal or secret profits 3.23 The duty is not only to act in good faith but to be seem to be acting in good faith Undisclosed benefits The High Court held that the managing director of the company who set up a subsidiary to run a part of 3.23 the business and then left the company to work for the subsidiary had to repay any profit he had made when he left the company Misuse of company funds Account for profit The breach of duty can be claimed form the director and repaid to the company Conflict of interest - taking up corporate opportunities The court held that the erring(犯錯) directors could not retain the benefit of the contract and Toronot was to take back the contract 3.23 3.32 3.24

Conflict of interest

Cooke v Deeks (1916) AC554 Queensland Mines Ltd v Hudson (1978) 52 ALJR 399

Conflict of interest - with full disclosure to the board and members The court held that he had obtained the opportunity as a result of his position as the managing director but he had done what was necessary to disclose his intention to the board. s.183 Improper use of the information Improper use of informationMcNamara v Flavel (1988) 6 ACLC 802 Improper use of position Jeffree v. NCSC (1989( 7 aclc 556 s.183 Improper use of his position Competing with the company - non-executive directors Conflict of interest Bell v Lever Bros (1932) AC 161 Whether they are in executive or non-executive directors that cannot use any information belonging to competing with company the company to their own advantage. Conflict of interest Competing with the company Green v Bestobell Industries Pty Ltd (1982) WAR 1 competing with company He was found to have breached his fiduciary duty and had to account for the profit he had obtained Duty of care, skill and City Equitable Fire Insurance Ltd (1925) Ch 407 Duty of care, skill and diligence diligence Duty of care, skill and Overend & Gurney Co. v. Gobb Duty of care, skill and diligence diligence Duty of care, skill and Statewide Tobacco Services Ltd v. Morley (1990) Duty of care, skill and diligence diligence 2ASCR 405 Conflict of interest Insolvent trading Tourprint International Pty Ltd v. Bott (1999) 17 ACLC 1543

3.24 3.25 3.25 3.25 3.25 3.27 3.27 3.28

s.588G Insolvent trading - Defences s.588H(4) The court found that he was liable for the monies as claimed, his defence under s.588H(4) was rejected 3.30 on the grounds that he had not made adequate inquires and had showed insufficient concern about the company's finances

Insolvent trading

ACLC 1543

on the grounds that he had not made adequate inquires and had showed insufficient concern about the company's finances

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Ethics in and out of the boardroom
- Contents 1. Director's legal attitudes and ethical conduct 2. law and ethics in - securities, takovers, insider trading - market manipulation, secret commissions - misapporpriation, phonix companies - disqualification of directors - directors' code of conduct - Important topices - all of the above Ethical conduct and company directors 5.02 - Ethics and corporate collapses - corporate scandals(醜聞) and accountants - AA misbehaviour call for major reforms in corporate governance and ethics - Good reputation Index (October 2002) include a criterion of ethics and corporate governance as one of the key issues that directors and officers have to regain(奪回) credibility - The index indicate(作出指示) that government organisations and automobile companies outperformed(性能比…好) others in governance issues Strict(徹底的 ) accountability and compliance were recognised as important part of organisations - Cohen 2002 5.03 - Ethics is judgement , not rules. It is however not sufficient to have corporate governance legislation and other principles and regulations put in place - The reasons that the importance of ethics in the culture of a corporation cannot be underestimated - The development of codes of conduct by good leadership (right tone at the top) and adhering( 遵守) to corporate governance principles to maintenance of ethical standards as an orgainisational culture be more important as a foundation for a well-governed company - Best practice placed customer loyalty and staff satisfaction. The company will distinguish themselves from their competitors and instil(灌輸) corporate values into the culture the orgainisation - Society's expectations of ethical standards - a corporate culture of ethical conduct may reduce the company and its senior managemet to both civil and criminal liability under the law - What is meant by 'ethical conduct'? Peter Brokensha 5.04 Ethical conduct and principles - An ethic is generally defined as a moral principle or a set of moral values held by an individual or group, and ethics as the study of these principles and values. Ethical behaviour has come to mean behaviour that is considered correct or good - Corporate ethics - the study of what constitiutes right and wrong behaviour by people in an organisation context. - Ethics in relation to directors of a company - the study of right and wrong behaviour by people acting in their capacity as directors of corporations - There has no distinction of substance(質地 ) between directors of small or larges corporations. The difference is one of scale of organisation rather than responsibility - The conduct expected of directors and corporations may vary depending on the factors as - the community perception(理解) of the nature of the company - the size of the organisation

8696168.xls Module 5 (16%) - Ethical principles Brokensha - identifies a numable of theories to explain the concept of ethical behaviour 1 John Stuart Mill

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Utilitarianism - based on outcomes that promoteing the greatest happiness among all stakeholers weighing costs/benefit the primary legal duty of a company director is to the company and its shareholers, not other stakeholders 2 Egoism - in the best long-term interests of the individual, also based on outcome (for corporations or the directors), ignore other legal obligations to society at large 3 The Kantian(世界大同) ethic - moral laws which are capable of being universally applied by everyone. The motivation is what makes it moral, including not harming others. Kantian ethic appears to accord most closely with modern managerial thinking, a more humanistic apporach to management, and is becoming more concerned with values and motives. Eg. Triple bottom line benchmarks John Stuart Mill - Absolute identification of conduct which is morally right or wrong is an impossible task. - Should directors be concerned with ethical conduct within an orgainisation? Adraian Cadbury - corporate governance - boards should set out a code of conduct, a code of business eithics for the company, and set the example. - the board duties in applying not only the letter of the law but also the spirit of the law Milton Friedman - there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition without deception(欺騙) or fraud Thomas Mulligan - criticised(挑戰) Friedman's paradigm Modern managerial thinking view the organisation ethics from the board level down , improve both culture and performance. The reasons 1 Ethical issues are a major factor in attacting and retaining a good corporate reputation and quality employees eg. - insurance industry 2 Failure of corporations to ensure that they adopt ethical practices may in some cases prompt government intervention eg. Franchising industry Failure of corporations to ensure compliance with ethical standards of behaviour may in 3 some case lead to a culture of disregard(不顧) for the law and morality in corporate conduct. Mckinsey & Co - research - highlighted that investors put corporate governance on a par with financial indicators when evaluating investment diecision

5.04 5.05 5.06

5.05

5.06

5.06

8696168.xls Module 5 (16%) Interaction of ethics and black-letter law Many laws are based on concepts of ethics and morality in our society Ethical considerations clearly flow into the civil law

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- How does the law approach the desirability of ethical conduct? 5.07 - Rationale(根本原因) - agency theory - code of conduct are proactive in seeking to foster high standards of behaviour - Law is reactive(反應的) to conduct perceived as prohibitions against that conduct - Ethical values - self-regulatory mechanisms, voluntary basis - Law may be less effective than voluntary codes of conduct at regulating undesirable behaiour Q5.4 - CLERP 9, the Financial Services Reform Act 2001, and the ASX Corporte Governance principles and best practice guides, reform on financial planing and investment companies, are indicative of the law's reform agenda - Financial Services Reform Act 2001 5.08 - aims to introduce one comprehensive licensing regime that applies to all participants in the financial services industry, including securities dealers, investment advisers, life and other insurance companies and superannuation funds - Corporate securities now come under s.764 - financial products - Revised disclosure obligations and minimum standards of conduct will apply to the expanded definition of financial service industry ASIC v Adler (2002) NSWSC 171 Misleading or deceptive conduct in relation to corporate securities 5.08 - Directors are obliged to ensure the company not engage in misleading or deceptive conduct, and become liable as result of such conduct. - S.764A - definition : financial products - s.52 of the Trade Practices Act - applies to misleading and deceptive conduct by corporations - Corporations Act - 1041H - prohibits misleading or deceptive conduct in dealing with financial products, which includes securities and financial services. (1) a person must not engage in conduct, in relation to a financial product or a financial service, that is misleading or deciptive or is likely to mislead or deceive (2) Conduct includes, but not limited to, any of the following: (a) dealing in a financial product (b) without limiting prargraph (a) (i) issuing a financial product (ii)publishing a notice in relation to financial product (iii)or making, or making an evaluation of, an offer under a takeover bid or a recommendation relating to such an offer (x) carrying on negotiations, or making arrangements, or doing any other act, preparatory to, or in any way related to, an activity covered by any of the above items - Yates v. Whitlam (2000) 18 ACLC 55 5.09 - breach s.1041H - civilly liable Q5.5

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- Part 6D.3 - s.728 - misleading or deceptive conduct in relation to fundraising documents prospectuses (1) a person must not offer securities under a disclosure document if there is (a) a misleading or deceptive statement in a (i) disclosure document or ( any application form that accompanies(附帶) the disclosure document ii) ( iii any document that contains the offer if the offer is not in the disclosure document or ) the application form (b) an omission from the disclosure document of material required by s.710 - s.715 ( c) a new circumstance that (i) has arisen since the document was lodged and ( ii) would have been required by s.710, s.711, s.712, s.713, s.714 or s.715 to be included in the disclosure document if it had arised before the disclosure document was lodged - breach s.728- civilly liable may also be liable to parties who suffer loss Personal liability of directors - s.729(1) - Directors may be personally liable for losses experienced by investors who acquire shares in reliance on the prospectus - s.731 - defense - the director will not be liable if reasonable inquiries prior to the issue of the prospecturs and reasonable belief in the accuracy and completenessof the contents s.710 - the officers and corporation judge the information that is necessary to allow investors and their advisers to make an informed assessment of the nature of the investment no vetting(審核) of prospecturses legislation shifts responsibility form the regulator ASIC to the individual company and its officers Fraser v NRM Holdings Ltd (1995) 13 ACLC 132 5.10

-

5.11

Company takeovers - s.606(1), s.611 5.11 - Important ethical considerations for the reasons for takeovers of public companies - Majority shareholders may have little ability to control or influence management or strategic direction to a company. Directors may have self-interests either to promote or prevent the takover occurring - All shareholders are affected by the process and the result. The shareholder will either sold or remain the share. The decision not only impact own personal but also on the future direction of the company. The determined(決定) by the information disclosed and recommendations by the directors. So ensure the directors are not acting their own interest at the expense of the interest of shareholders when processing. - The conduct of the takeover - the whole process should be opened and transparent without secret or non-disclosure of issues. - Takeovers legislation - Chapter 6 of the Corporation Act 2001 5.12 - acquisition of control - take place in an efficient, competitive and informed market - not apply to proprietary companies < 50 members - change of control of public companies - maximum protection to other shareholders in targe co - directors and other shareholders should know the identity of any person who proposes to take over the company - directors and other shareholders have reasonable opportunity to consider any proposal to take over the company that provided with enough information

8696168.xls Module 5 (16%) - directors and other shareholders have reasonable and equal opportunity to participate in any benefits of a takeover proposal

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- Lipton and Herzberg - Key points of the fundamental characteristics of company takeover law - s.606(1) prohibits acquisition of interests in voting shares through transaction (by or on behalf of a person) in listed (or unlisted >50 members) companies, via a transaction in securities, and results in increase of voting power to > 20% or < 90% breach of s.606(1) - example 5.2 (1) A person must not acquire a relevant interest in issued voting shares in a company if (a) the company is (i) a listed company ( an unlisted company with more than 50 members ii) (b) the person acquiring the interest does so through a transaction in relation to securities entered into by or on behalf of the person (c) because of the transaction, that person's or someone else's voting power in the company increases (i) from 20% or below to more than 20% ( from a starting point that is above 20% and below 90% ii) (1A) However, ther person may acquire that relevant interest under one of the exceptions set out in s.611 without contravening - Lawful takeovers - formal process - lawful takeovers can be off-market or no-market - Corporation Act - Chapter 6 and s636 provide detailed rules for making takeover offer. - A bidder who makes an offer in accordance with the legislation is not subject to s.606(1) - that is, they are lawfully entitiled to acquire more than 20% of the shares in the target company - both sides of story - reasons for selling or not selling their shares to bidder, - Other forms of lawful takeover - s611 - acquisition creep - a person at or above 20% threshold may acquire additional 3% every 6 months. Example 5.1 - s611 - resolution in a general meeting to the takeover - no need for formal takeover bid - No vote may be cast at the meeting by the person offering to buy the shares or anyone associated with that person - the resolution was invalid when the company was oppressive - Gambotto v WCP Ltd (1995) 142 CLR 342 - Relevant interest means a person is either a holder of the voting shares, or has power to exercise, or controls a right to vote, or has power to dispose of the shares. Control include those through trust, agreement or practice Example 5.2 - s.609(9) - clearing statement : the operator don not have a relevant interest

5.13

5.13

5.13

5.13 5.14

Q5.11 5.14

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Insider trading - s.1043A, s.1042A, s.183 5.14 - Policy behind insider-trading legislation - s.1043A prohibits insider trading - the person use the not available to the public information but with material effect on price or value of securities if available to public. That is, using price sensitive information to benefit a person who possesses the knowledge, and to the corresponding detriment of others - s.183, Part 2D.1 - prohibit a director from improperly using such informtion to gain an advantage. - breach the insider-trading - criminal offence ( insider trading as conduct necessitating specific treatment by legislation - Legislation goes beyond(除…以外) directors and officers to third parties - Reasons for the policy of the legislation to prevent insider trading 1. fairness in the market price 2. fiduciary duties for the directors and officers not to abuse their position 3. preventing from damaging market integrity and confidence 4. preventing injury to the company, shareholders and investors - Application of the legislation - s.1042A - inside information (a) information not generally available (b) if information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Division 3 - s.1042A financial products - s.1042A - Division 3 - financial products (a) securities (b) derivative (c) managed investment products (d) superannuation products (e) any other financial products that are able to be traded on a financial market - s.1043A 5.16 (1) insider trading prohibited (a) a person possesses(持有) inside information (b) the insider knows, or ought reasonable to know, that the matters specified in 1042A para (a) and (b) are satisfied in relation to the information insider must not (c) apply for , acquire, or dispose of relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products (d) procure another person to apply for, acquire, or dispose of relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products - third party use the information also liable - example 5.3 (2) Communicating information to another prohibited (a) a person possesses inside information (b) the insider knows, or ought reasonable to know, that the matters specified in 1042A para (a) and (b) are satisfied in relation to the information
(c) relevant Division 3 financial products are able to be traded on a financial market

5.17 5.16

operated in this jurisdiction

8696168.xls Module 5 (16%) the insider must not, directly or indirectly, communicate the information, or cause the information to be communicated, to another person if the insider knows, or ought reasonably to know, that the other person would or would be likely to

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(d) apply for , acquire, or dispose of relevant Division 3 financial products (e) enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products (f) procure another person to apply for, acquire, or dispose of relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products - example 5.4 - the reason why insider-trading legislation extends beyond the officers to any third party using the information - Information - not only includes facts(事實 ), but also - a matters of supposition(假設) and other matter that are insufficiently definite to warrant being made known to the public - matters relating to the intentions, or likely intentions, of a person (s.1042A) - not generally available which has a material effect on the price - information consider to be generally available a it consists of readily observable matter b that it has been known in a manner likely to bring the attention of investors or reasonable time has elapsed since it was known - reasonable time has not elapsed - example 5.6 (breach insider trading) c it consists of deduction, conclusion of inference(推論出的結果) made or drawn from readily observable matter - announcement to the ASX - not sufficient for available - inform a small group of institutional investors - the information is material - material is decided based on that the information would, or would be likely to, influence persons who commonly acquire securities, whether or not to acquire or dispose of the securities - not material information - example 5.7 - material information - R v. Evans and Doyle - s.1042G - Company deems(判斷) to possess(持有) information where an officer knows the inforamtion as part of duties - s.1043F - Corporations Act 2001 allows Chinese walls within companies, and permits the company to enter into transactions in the absence of information communicated by the officer behind the Chiness wall. - Because of Chinese Wall - not breach s.1043A - example 5.8 - The practical problems related to Chinese Walls - Underwriters and dealers with information acting for clients can deal in securities w/o breaching the law 5.17 Q5.13 5.18

5.19

5.19

5.19 5.19

5.20 Q5.15

8696168.xls Module 5 (16%) Mainpulation of the market by conduct and statements - Part 7.10 ss.1041A, B, C, E and F - protect both the community and the integrity of the market that the price of securities is artificaially affected by transactions of otherwise to the benefit of the person or entity maninpulating the price on the market

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- directors may create a false impression(影響) of trading to enhance the perceived(抓住) value of the shares - a common characteristic of the laws is its abhorrence(憎惡;) of conduct in disguise(掩蓋) of the true position in relation to the securities - breach - criminal liablility as well as civil - North v Marra Developments Ltd (1981) 148 CLR 42) 5.20 - Fenwick v. Jeffries Industries Ltd 5.20 - s.1041A 5.21 - prohibits 'market manipulation' -that is, conduct which results in, or is likely to result in, creating an artificial trading price for securities or maintenance of an artificial trading price. To fall within this prohibition, such conduct may one or more transactions which give a false impress of the value of shares by artificially affecting the price - s.997 - intention to manipulator s.1041A - the effect of the conduct rather than the intention - North v Marra Developments Ltd (1981) 148 CLR 42 5.21 - Endresz v. Whitehouse (1998) 3 VR 461 - inflate the share price 5.21 - The court held that intention of clearing the market of shares under 14 cents - The Court of Appeal held that the transaction had the effect of putting a value on the shares which was artificially high - The defendant was charged and convicted under ss.997 and 998 - Buyback - Part 2J.1 - regulation for buybacks of shares - s.257A - permit to buyback does not materially prejudice the company's ability to pay its creditors and procedures laid down in the legislation including lodgment of documents with ASIC and obtaining approval from the shareholder - s.1041B, s.1041C, s.1041E and s.1041F - create a false impression of the true position in relation to securities in a company - s.1041B - breach - criminal liablility as well as civil - deals with conduct which is, or is likely to, have the effect of creating a false or misleading appearance of active trading in any securitites on a financial market or a false or misleading apperarance with respect to the market for, or price of, securities eg.churning(一次攪製成) - placing of buying and selling for shares with object of artificially increasing the market turnover and price - Australian Securities Commission v. Nomura International PLC (1999) 17 ACLC 55 - distinguishing between legitimate(合法的) commercial conduct and breach s.1041B - North v. Marra Developments Ltd 1981 - s.998 - intention to maninupulator s.1041B - the effect of the conduct rather than the intention - Fenwick v. Jeffries Industies Limited - breach s.998 5.22 Q5.18 5.23

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- s.1041C 5.22 - breach - criminal liablility as well as civil - deals with conduct whereby fictitious(虛偽的) or artificial transactions are entered into which results in the price of securities being maintained, inflated or depressed or which causes fluctuations in the price of securities - s.1041E - prohibits a person making a statement or disseminating(散佈) information if (a) false material information or statement , materially misleading (b) the statement or information is likely (i) to induce persons to apply for financial products (ii) to induce persons to dispose of or acquire financial products (iii) to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market (c) when the person makes the statement, or disseminates the information (i) the person does not care whether the statement or informations is true or false (ii) the person knows, or ought reasonabley to have known, that the statement or information is false in a mataerial particular or is materially misleading - Three essentially elements (i) the fact that the statement or information is materially false or misleading (ii)the likely effect of the statement or information - Australian Securities Commission v McLeod (2000) 34 ACSR 135) 5.25 - breach s999 (iii)the state of mind of the person making the statement or disseminating the information - strikes(打擊) at negligent conduct - careless to make a false statement - which will not apparent in s.1041A, B, C - breach - criminal liablility as well as civil - s.1041F - breach - criminal liablility as well as civil - fraudulently inducing persons to deal in securities (a) by making or publishing a statement, promise or forecast if the person knows, or is reckless( 魯莽)as to whether, the statement is misleading, false, or deceptive R v. Mackinnon (1959) 1 QB 150 5.25 Ex.5.9 5.26 Reckless can connote(包涵 ) dishonest where a person makes statemetns with careless Q5.21 disregard(輕視) for the truth of the statement (b) by a dishonest concealment(隱瞞) of material factor (c) by recording or storing information that the person knows to be false or misleading in a material particular or materially misleading if (i) the information is recorded or stored in, or by means of, a mechanical, electronic or other device (ii) when the information was so recorded or stored, the person had reasonable grounds for expecting that it would be available to the other person, or a class or persons that includes the other person -

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Secret commissions - s.182, s1317E - The agent has a fiduciary duty not to profit from its postion - s.182 a director, secretary, other officer or employee of a corporation must not improperly use their position (a) gain an advantage for themselves or someone else (b) cause detriment to the corporation - breach - civil penalty - s.1317S - ethical dilemma - relief(免除 ) when honestly - Where the court is of the view that the person has acted honestly will be relieved from liability for the contravention - Regal (Hastings) Ltd v Gulliver - Bribe bribe means a payment of a secret commission, which only means that the person making the payment makes it to the agent of the other person with whom he is (1) dealing (2) he makes it to that person knowing that person is acting as the agent of the person with whom he is dealing (3) he fails to disclose to the other person with whom he is dealing that he had made that payment to the person whom he knows to be the other person's agent - the intention to induce the agent to act favourably to the payer, and unfavouraly to the principal - Industries and General Mortgage Co. Ltd v Lewis (1942) 2 All ER 573 - breached its duty not depend on whether the company had suffered any detriment - Furs Ltd v Tomkies - breach - civil penalty or criminal (a) civil consequences - the directors is required to account to the company. - Boston Deep Sea Fishing & Ice Co. v. Ansell (1888) 39 Ch D 339 - Petrotrade Inc v. Smith (2000) 1 Lloyds Rep 486) - the director may be a constructive trustee of either the profit made or any property into which the bribe has been converted Attorney - General for Hong Kong v Reid (1994) 1 AC 324 a public servant accepted cash bribes with which he purchased 2 properties in NZ. The Privy Council held that the public servant held the properties on trust for this employer, the Crown

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(b) criminal consequences - Crimes Act -s.176 - a fine or up to 10 years imprisonment or both - R v. Kendrick 5.30 Kendrick instruct G to give him commission otherwise the business elsewhere - Victims(受害者) - both the company and the third party who gives the bribe - Directors offering bribes - breach - corportion - level 5 fine, other person - level 5 fine and 5 imprisonment - re Addstone Pty Ltd (in liquidation )(1997) 25 ACSR 357 5.30 - R v. Jamieson (1988) VR 879 5.30 - a goal sentence is more likely to act as a deterrent(威懾的) to others than in may cases offences are hard to detect because of the evidence not easy to obtain Q5.23

8696168.xls Module 5 (16%) - Custom(慣例 ) no defence to an action under criminal law - Simcock v. R, unreported, Western Australian Court of Criminal Appeal, 27 May 1997 Misappropriation of corporate funds - fuduciary duty - directors must not misuse corporte funds. Eg. By mixing company's money with their own (abuse of power) - directors should avoid conflicts of personal interest - ethical perspective - misue of corporate funds is a form of abuse of power in that the director is exploiting opportunities afforded by his position by using property belonging to another for his benefit - s.181 - requires directors to act in good faith in the best interests of the corporation - breach - civil liability and civil penalty - Totex-aDon Pty Ltd - mixed the funds of company with his own company - Court assistance - granted 'Mareva injunctions' against the directors freezing their assets - Lurgi (Australia) Pty Ltd v. Gratz - Criminal law - if the action related to theft with proof of dishonest intent of the accused(指控) - R v. Reid

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Phoenix companies 5.32 - s.588G - Since the corporation is separate legal entity, the company has limited liability as a result that there has corporate veil to trade into insolvency leaving creditors unpaid - the directors should personally liable for debts incurred at a time when the directors should have reasonable suspected that that company could not pay its debts - phoenix company is a company - is unable to pay its debts - acts intentionally to deny(不給予) unsecured creditors equal access to the company's assets in order to meet its debts - commence another business within 12 months which uses some or all of the former corporation's business assets, and is controlled by either management / directors of the previous entity or parties related to them - Newman (1997) 5.33 - Most phoenix companies are small (2 directs) and did not report - Both Federal and State have been the suject of investigations - 3 reports of Curbing(設路緣) the Phoenix Company from Law Reform Committee of Victorian Government June 1994 - ASIC - Federal Government - increase the scope of ASIC - what does phoenix trading look like? - Deputy Commissioner of Taxation v. Woodings (1995) 13 ACLC 469 5.34 - Morris involved 2 businesses became insolvent. He appointed a administrator as vehicle for phoenix trading. He will continue to do so in future. The court held the company winding-up under s.447A - Problems with current legislation in dealing with phoenix 5.34 - continued recognition(承認) of corporate veil - failure of creditors to report phoenic activity to ASIC - administrator rather than a liquidator is appointed - ie. Company reaches a compromise(妥協) with creditors and continues to trade - cost of initiating enquiries into activities of directors - possible for a phoenix manager of a small business which is not incorporated as a company to offend repeatedly - One option is to disqualify directors who repeatedly uses phoenix company to manage a corporate

8696168.xls Module 5 (16%) Disqualification of directors from 'managing corporations' - s.206A, s.206B, s.206C, s.206D, s.206E, s206F Managing corporation - s.206A - a person defined as managing a corporation, if (a) make, or participate in making, decision that affect the whole, or a substantial part, of the business of the corporation (b) exercise the capacity to affect significantly the corporation's financial standing (c) communicate instruction or wishes to the directors of the corporation

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(i) knowing that the directors are accustomed to act in accordance with the person's instructions or wish ( intending that the directors will act in accordance with those instructions or wishes ii) - Includes directors and those who control a company irrespective(不考慮的 ) of their positions - Brick and Pipe Industries Ltd v. Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253 5.35 - a person in a corporation not exercising management powers - Cullen v CAC (1989) 7 ACLC 121 5.35 Part 2D.6 - directors can be disqualified from managing corporation because of their unethical conduct - three categories of circumstance in which a person may be disqualified (1) s.206B - automatic disqualification from managing a corporation 5.36 (a) is convicted(有罪) on indictment(控告) of an offence(犯法) that (i) concerns the making, or participation in making, of decisions that affect the whole or a substantial part of the business of the corporation - example 5.12 5.37 (ii) concerns an act that has the capacity to affect significantly the corporation's financial standing (b) is convicted of an offence (i) is a contravention of this Act and is punishable by imprisonment for a period greater than 12 months (ii) involves dishonesty and is punishable by imprisonment for a least 3 months (c) s.206B(1) - is convicted of an offence against the law of a foreign country that is punishable by imprisonment for a period greater than 12 months - example 5.11 5.37 - the period of disqualification starts on the day the person is convicted and last for 5.36 (a) if the person is not imprisoned - 5 years after the day on which they are convicted (b) if the person serves a term of imprisonment - 5 years after the day on which they are releasd from prison - the ethics of automatic disqualification 5.36 - commercial morality of the conduct - commercial morality does not precluded(排除) persons for other criminal offence from managing the company such as a person has committed murder or assault(突擊) is not automatically disqualified from acting as a director - disqualification is not a second punishment - s.206G - the court is empowered to grant leave to a person 5.37 - Example 5.12 - Chew v. NCSC (No.2) (1985) 3 ACLC 212 5.37 - Although Chew breach s.206A, he applied to the court for leave to act as manager. The court granted him leave to do so.

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(2) s.206C, s.206D and s.206E - disqualification by the court 5.37 - The court may only make an order disqualifying a person from manageing a corporation on the application of ASIC - The power of the court to disqualify a person under three headings a. s.206C - declaration(聲明) that the person has contravened a civil penalty on dishonesty b. s.206D - within 7 years 2 or more corporations which have failed - disqualify up to 10 years - either dishonesty or incompetence can cause failure of corporations - the court will justify disqualification based on - the peson's conduct in relation to the management of any co. - any other matters that the court considers appropriate - failure context extend to receivership(破產管理 ) and voluntary receivership c. s.206E - the person has at least twice been an officer of a co. which contravened the Corporation Act and each time did nothing to prevent / himself has at least 2 contravened the Corporation Act - Example 5.13 5.38 - Ethical considerations - not only with notions of honesty, but also competence (3) s.206F - disqualification by ASIC up to 5 years 5.39 (a) within 7 years immediately before ASIC give a notice under paragraph (b)(i) (i) the person has been an officer of 2 or more corporations (ii) within 12 months after the person ceased to be an officer, each of the corporations was wound up and a liquidator lodged a report under s533(1) about the corporation's inability to pay its debts > 50% (b) ASIC has given the person (i) a notice in the prescribed for requiring them to demonstrate why they should not be disqualified (ii) an opportunity to be heard on the question (c) s.206F - ASIC is satisfied that the disqualification is justified - Example 5.14 5.40 - Different between ASIC and court - ASIC may only act if the person has managed corporation which have entered liquidation - the court may disqualify the person if the person has managed corporations which have failed - ASIC and ethical considerations 5.40 - Nicholas v Commissioner for Corporate Affairs (1987) 5 ACLC 673 5.40 - ASIC maintains a public register of banned directors > 700 - issue of commercial morality and standards of competence which the community expects directors to reach - Friend v. Corporate Affairs Commission (1989) 7 ACLC 106 5.40 - Example 5.15 - ASIC v Keech 5.41 - Example 5.15 - Delonga v Australian Securities Commission (1995) 12 ACLC 246 5.41 Summary 5.41 - Interaction of ethics and black-letter law is dishonesty

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Codes of conduct applicable to directors 5.42 - Self-regulation as a form or regulation - self-regulation of industry has promoted fair trading, ethical conduct and compliance with product labelling and identification - form of regulation in Australian include customer service charters and codes of conduct Taskforce on Industry Self-regulation - Effective in circumstances - active industry association / industry cohesiveness(凝聚性的) will administer effective selfregulation. Industry participants are more likely to commit financial resources, consult with stakholders and monitor the effectivesness of self-regulation - the industry is mature - sufficient resources and more committed - recognise future viability - not only on their relationship with their current customers, but the wider community - Self-regulation is attractive alternative to direct governmental regualation - that the state does not have adequate resource - flexible Ayres & Braithwaite 5.42 - disadvantage of codes of conduct 5.42 - inherent voluntary nature, subsequent difficulties in enforcement - potential harm to the community from the actions of rogue players, the government may take action through one of the regulators such as mandated code for franchising industry - ACCC - ASIC - Australian Prudential Regulatory Authority - Australian Broadcasting Authority ACCC Chairman - Professor Allan Fels 5.43 - introduction of the mandatory code for franchise - frachisees had lost significant sums of money as result of the acts of unscrupulous(肆無忌憚的) franchisors and the previous voluntary systeme was perceived as inadequate to address these market failures Gardini (1994) - less than total coverage of the franchising sector Allan Fels (1998) - push came to shove(亂塞), voluntary scheme lacked teeth - Self-regualtion and ethics - provided the environment is conducive(有助於) to promoting self-regulation - Institute of Director in New Zealand 1999 Annual Conference - speech 5.43 - Warburton 1999 - Taskforce on Industry Self-Regulation 2000 codes of conduct are often drafted in position language, emphasising standards to which the adherents(擁護者) should aspire(渴望), rather than conduct which they should avoid

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- The Australian Institute of Company Directors' Code of Conduct - AICD - Code of Conduct for directors 1 honesty, in good faith and in the best interest of co 2 duty to use due care and diligence 3 use powers for a proper purpose and in the best interests 4 primary responsibility to the co's shareholders as a whole but should, where appropriate, have regard to stakeholders' interests 5 must not make improper use of information 6 must not take improper advantage of the position 7 must not allow personal interest or interest of any person to conflict with co' interest 8 obligation to be independent to judgement and actions take all steps to satisfy the soundness of decisions 9 observe confidentiality of information unless by law 10 should not engage in conduct likely to bring discredit to co. 11 has obligations at all times to comply with both the spirit and the letter of the law and the principles of the code - The AICD code of conduct - expanision on legal obligations eg. Triple bottom line - Codes of conduct for individual companies - the companies can obtain serval benefits - reputation enhancement - maintain high standards of behaviour - give employees a clear idea of what the co sets out to do and how to do it - help develop pride among staff and a focus to the orgainsation as whole - Code to include CEO statement, responsibilities statemetns, relations with customers and suppliers, employment practices, responsibility to community, personal conduct, conflicts of interest, monitoring and compliance - Aspects of the AAMI Customer Charter - Review - Nicholas Way - Richard Warburton (1999)

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Misleading or deceptive on financial products Breach - TPA-s.52, CA-s.1041H s.764A - definition of financial products Breach - Part 6D3-s.728 Misleading or deceptive on fundraising document - prospectuses s.710-s.715 - required documents Directors's liability - s.729(1) Directors's defense - s.731 Breach - s.606(1) Takeover s.636 - bidder's statement s.611 - exception Breach - s.1043A, s.183 Insider trading s.1042A - insider, product s.1042G - co. possess information s.1043F - Chinese walls Breach - Part 7.10 - ss.1041A, s.997 Mainpulation of the market by conduct and statemetns Part2J1, s.257 for buyback Breach - s.1041B, s.998 Breach - s.1041C, s.999 - fictitious or artificial transaction Breach - s.1041E - disseminating information Breach - s.1041F - neckless Breach - s.182 Secret commission s.1317S - relief(免除 ) Crimes Act -s.176 Breach - s.181 Misappropriation of corporate funds Fiduciary duties - to avoid conflicts of interest s.206A - defined a person managing a co. Disqualification of directors from 'managing corporations' s.206B - automatic disqualification s.206C - by court - dishonesty on civil s.206D - by court - fail 2 co. within 7 years s.206E - by court - fail for law twice s.206F - by ASIC s.206G - the court grant leave to a person

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Competition and compliance in trade practices
- Contents 1. Legal compliance 2. Competition and Regulating Anti-competitive(弄斷) laws 3. Part IV Trade Practics Act on Corporate Controls and restrictive practices (collusion, pricing, distribution and competitive activities) 4. Part V on Consumer Protection, misleading conduct and misrepresentation PART IV s.45

collusion controls -contract with effect to lessen substantially competition - be party to a collective boycott - fix maintain or control price Except price fixing - joint venture agreements Except price fixing - joint buying and advertising agreements Misuse of market power - if a company possess a substantial degree of market power, it must not take advantage of the market power for the purpose to 1.) substantially damage a competitor; 2.) prevent entry of a person to the market; 3.) deterring a person from engaging in competitive conduct exclusive dealing is deemed anti-competitive i.e. a vetical restraint by a trader at one level on traders at other levels resale price maintencance - unlawful for a supplier of goods or services to induce or to insist(堅持) on the minimum prices at which a reseller should sell or advertise those goods or servicewithholding substantial reason for Inducement - exception - if price worded receommended price, statement in invoice to the effect of its recommendation nautre only withholding supply not illegal when reseller discounts below costs, supplier is allowed to withhold supplies to protect reh reputation of the product Mergers and takeover - preventing accumulations of power by acquisition, which have the effect of substantially lessening competition an accessory(同謀) is one who has aided, induced, directrly or indirectly, knowingly concerned in or party of, or has conspired(密謀) with others to effect the penalty - pecuniary(金錢) penalties penalty - injuctions penalty - in the case of mergers, divestiture(解除權利) of the shares or asses illegally acquired penalty - damages non-punitive order penalty - various ancillary(輔助的) order any conduct engaged in by an employee acting within the scope of actural or apparent authority is deemed to be the conduct of the corporation authorisations are issued by ACCC are on a case-by-case basis. The authorisation is to allow business to reach collective agreements

s.45A(2) s.45A(4) s.46

s.47

s.48 s.4F s.97 s.98(2)

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s.75 s.76 s.80 s.81 s.82 s.86 s.87 s.84 s.88

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Unconscionable conduct - prevents corportions in trde from engaging in unconscionable conduct in connection with commercial transactions Unconscionable conduct - prohibit unconscionable conduct by corporations which are party to consumer-type transactions (in connection with the supply of goods to a person), but excludes goods supplied for the purpose of resupply or using them up, transforming them in trade Unconscionable conduct - prevents unconscionable conduct in business contracts for supply of goods or services not exceeding $3 million misleading and deceptive conduct on 1.) advertising; 2.) role of auditors; 3.) intellectual(知識產權) property false or misleading - quality, value, standard, style, history, sponsorship, approval, performance, characteristics, accessories, uses, benefits, repair services, place of origin, rights of consumer etc. Bait(誘惑) advertising provides that a person shall not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nautre, the manaufacturing process, the characteristics, the suitability for their purpose or the quantity of any goods. 6.03

s.52 s.53 s.56 s.55

Trade Practices Act covers: 1 restrictive trade practices 2 unfair practices 3 unconscionable(不公正) conduct 4 quality and safety of goods and services ACCC v Australian Safeway Stores Pty Ltd - Compliance system in two aspects - whether there was a substantial compliance program in place which was actually implemented and whether implementation was successful ACCC v Nissan Motor Company (Australia) Pty Ltd

Legal compliance 6.04 - ACCC administers the Trade Practices Act - ACCC now also has the power to bring a class action on behalf of consumers for a breach of the restrictive trade practices provisions of the Act, such as price fixing, resale price maintenance, misues of market power and exclusive dealing - Sound legal compliance program will reduce corporate risk - Trade Practices Act 1974 ( Commonwealth) Part IV on various types of restrictive trade practices - Trade Practices Act 1974 ( Commonwealth) Part V on consumer protection are relevant - An increased power of the Court means that now it can make punitive and non-punitive orders - The penalties for breaching Breaching Corporation Individuals s.76(1A)(b) s.76(1B) Trade Practice Act - behave anti-competitively up to 10 million up to 0.5 million Unfair practices up to 1 million up to $200,000

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- What is a compliance program? 6.04 - An intergrated management support system designed to reduce an organisation's risk of breaking the law - The procedures to ensure compliance with the law and must be audited an reviewed regularly - Australian Standard - AS3806-1998 Compliance Programs establish objective benchmarks to determine effectiveness - The program should be based on identified trade practices' risk with a corporation based on audited business units - The conduct of all business units and employees must be considered - s.84 - any conduct engaged in by an employee acting within the scope of actural or apparent authority is deemed to be the conduct of the corporation - Benefits of compliance programs for companies and their stakeholders R6.1 - What makes a compliance program effective? 6.05 - An necessary elements of a compliance program - demonstration of company's commitment - understanding of TPA risk areas by company's management - involvement of staff - allocation of responsibility and resources - implementation of procedures - establishment of a complaints handling system - staff accountability - continuous updating and assessment of compliance arrangements - keeping of records of compliance and related issues - a mehtodologial approach - A compliance program is a set of measure to assist a business to manage its trade practices risks. - Start from audit of various business units to assessing the trade practices risks - Clearly understanding the content and work of the Trade Practices Act - Understand the type of conduct carried on within a business unit - Identify staff who most likely to commit a breach of trade practices laws - Why adopt a trade practices compliance program? - Rationale(基本理由) and Objectives - As good governance - an opportunity to improve corporate performance - an incentive to make positive business decision, rather than risky and reactive decision - a means of saving time, money and trauma(創傷) - all consequences of breaking the law - promote ethical behaviour - help identify risks - improve communication and reporting to upper management 6.05

8696168.xls Module 6 (16%) - Benefits - generate a corporate culture of compliance and improvement - a sound complaints handling system foster goodwill - can identify problem units, processes of products - knowledge may help identify breaches by third parties - avoid penalties and costs - good evidence considered by court - the self-analysis result in efficiency - benefit to stakeholders - customers (protection) - competitors (compliance) - employees (compliance with occupational matters) - shareholders (compliance with securities law) - environment (compliance with community norms) - Recently a number of amendemtns have been made to the Act to improve protection to business and consumers by - improving the enforcement powers of the ACCC - lengthening the period of limitation of actions - increasing penalties for breaches of the consumer protection provisions - ACCC may now make application on behalf of persons who suffered loss from a contravention of Part IV - Court has the discretionary power to allow the ACCC to intervene(介入) in private proceedings brought under the Act, provided it is in the public interest - These amendments were made to engender(引起) compliance

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Competition in the marketplace 6.07 - Hilmer Report - points to the role of competition as a respond to change with lower prices and improved choice for consumers and greater efficiency, higher economic growth and increased employment opportunities for the economy as a whole. - Sir Daryl Dawson - On 15 October, 2001, the Prime Minister of Australia announced that there would be an independent review of the competition provisions of the Trade Practices Act and their administration. The formal terms of the review was announced in May, 2002 and the committee is led by Sir Daryl Dawson - Competition policy - Corones (1999) - Competition in a free-market economy can efficient to produce the lowest average cost and the most value of service and goods - Objective of competition policies is to protect and preserve competition and limiting anticompetitive conduct by firms, restringing monopoly pricing behaviour and providing thirdparty access to certain facilities - Monopolistic structure leads to misallocation of resources, lower output and higher prices - Not all competition promote economic efficiency. Sometimes large scale production may be encouraged to promote economies of scale and low prices - Hilmer Report 6.08 - Competition policy is not about pursuit(從事) of competition for its own sake(利益). Rather, is seeks to facilitate effective competition in the interests of economic efficiency while accommodating(樂於助人) situations where competition does not achieve economic efficiency or conflicts with other social objectives - Competition policies includes objectives of policies which - restrict anti-competitive practices - restructure public monopolies - provide fair access - influencing prices - fostering competitive neutrality(中立) - Workable/effective competition 6.08 - Office of Economic Planning Advisory Council 1989 - The aim of restrictive practices legislation is to maintain workable or effective competition, that is "no one seller or no group of sellers acting in concert, has the power to choose its level of profits by giving less and charging more" - requirements of workable competition 6.08 - sufficient no. of suppliers and buyers - no individual trader has the power to dictate(強行規定) - all traders respond to market and not outside influences - new traders able to enter the market without artificial barriers - no collusion on prices or customers or trading policies - free choices available to suppliers and customers - no legal or politically generated advantages

8696168.xls Module 6 (16%) - Goals of competition law - Competition law is base on workable competition because it is the most practical way of achieving our microeconomic objective - The action should be done to perform well competitive markets - produce efficient allocation of resources - produce productive or technical efficiency - make effective use of economies of scale and scope - produce dynamic efficiency - encourage investment in innovation

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- Regulating anti-competitive behaviour 6.10 The ACCC regulates through the Trade Practics Act, adjudicate(判決) authorisation applications, apply national consumer protection law, access regimes(政體) and price surveillance(監督) - The ACCC is not a policy advisory body, it is a law enforcement body which has a combined role of consumer protection and competition protection. - Part IV - restrictive trade practices - ensure a competitive environment exists in the marketplace, in the interest of both business and consumer. It is designed to achieve workable or effective competition - 2 categories of prohibition 6.11 i absolute probhitions provide guidance to community re self-regulatory concept, and only require identifying and proving the conduct occurrend - collusive(勾結) price fixing - boycotts(抵制) or exclusionary(排斥) provision - third-line forcing - resale price maintenance - misuse of market power ii substantial lessening or competition prohibitions - conduct are prohibited if it has either the purpose or effect of substantially lessening competition or likely to have such effect. - agreements between competitors (other than price fixing and exclusionary provision) - exclusive(獨佔) dealing - mergers(合併) - 4 headings are dealt with: they are controls over - collusion, pricing, distribution and compeitive activities - Part V - consumer protection - ethical trader protection - breach - criminal conviction, except Part VC - civil offences - how widespread and severed penalties can be R6.2 - Authorisation 6.11 is available as a dispensation(特許) because any public benefits arising from the conduct outweighs(比較重要) the detriment to competition. It can be sought for conducts such as agreements, collective boycotts, collective pricing, exclusive dealing, resale price maintenance and mergers - s.88 - authorisations are issued by ACCC are on a case-by-case basis. The authorisation is to allow business to reach collective agreements - the government may introduce a fast track system to allow small businesses, rural doctors and farmers to join forces in negotiating prices and other key trade arrangements. This is part of the government's policy to reduce the cost and complexity of the authorisation system to help small businesses

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- Penalties of contravention of prohibitions are 6.12 - breach - civil penalties for Part IV and Part VC 6.12 - s.76 - pecuniary(金錢) penalties - s.80 - injunctions - s.82 - damages - s.81 - in the case of mergers, divestiture(解除權利) of the shares or asses illegally acquired - s.87 - various ancillary(輔助的) order - ACCC has power to bring a court action on TPA Part IV and the case heard by the Federal 6.12 Court of Australia - The court may make either punitive or non-punitive orders against parties who breach the Act besides awarding injunctions, etc - punitive orders include an adverse publicity order, requiring a person to disclose, at their own expense, information about the contravention - non-punitive order may include s.86C - community service orders - probation orders </= 3 years to restrict behaviour - information disclosure order to publish information in relation to the breach - advertisement order to publish a corrective advertisement - Agents and accessories(同謀) are included for liability 6.13 (a) has aided(援助), abetted(慫恿), counselled(建議) or procured the contravention (b) has induced(勸誘), whether by threats or promises or otherwise, the contravention (c) directly or indirectly, knowingly concerned in, or party to, the contravention (d) s.75B - has conspired(密謀) with others to effect the contravention - setting the level of penalty based on some factors 6.13 TPC v CSR Ltd (1991) ATPR 41-076 6.13 - nature and extent of contraventing conduct - amount of loss or damage - circumstances in which the action took place - size of the contravening company - degree of power the company has in market - deliberateness(深思熟慮) and the period over which the contravention took place - whether the contravention arose out of the conduct of senior management or a lower level - corporate culture of the company (conducive(有助的) to compliance?) - company has shown a disposition to cooperate with the authorities?

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Controls over collusion(勾結 ) in the marketplace 6.14 - s.45 of the Trade Practices Act 1994 - unlawful to enter into contract, arrangement or understanding if it has the purpose or effect of substantially lessening competition Clarke v Dunravin (1987) AC 59 - unlawful to be party to a collective boycott, irrespective of ties effect upon competition - Fixing, maintaining or controlling prices between competitors is deemed to substantially lessen competition and is prohibited outright (with two exceptions) - Except price fixing - joint venture agreements s.45A(2) 6.17 - Except price fixing - joint buying and advertising agreements s.45A(4) 6.18 - Refers to a contract (legally binding), arrangement or understanding (without legal enforceability ) = a meeting of the minds ie. Communication and an expectation to act - Price fixing agreements Trade Practices Commission v. David Jones Pty Ltd (1986) ATPR 40-671 - Price controlling - meeting at coffee shop Trade Practices Commission v. Nicholas Enterprises (1979( ATPR 40-126 - Price fixing - ss45(2)(a)(ii) and 45(2)(b)(ii) - lunch meeting to announce his will - S.45A deems anti-competitive purpose or effect to exist where price fixing between competitors is engaged in. - Three steps in determining whether price fixing in breach of s.45 - Is there a contract, arrangement or understanding? - Is there an agreement between competitors - Does the agreement have the purpose or effect (or likely effect) of fixing prices? Case Study 6.1 ACCC v Pioneer Concrete (Qld) Pty Ltd & ors (1996) ATPR 41-457 6.16 6.15 6.15

6.16 6.17

- Collective boycotts(抵制 ) - s.45 of Trade Practices Act 6.18 - Three steps in determining whether boycotts in breach of s.45 - Is there a contract, arrangement or understanding? - Is the a contract, arrangement or understanding between competitors - Does the contract, arrangement or understanding have a boycott purpose? - The purpose of collective boycott agreement are preventing, restricting or limiting - the supply of goods or services to particular persons or classes of persons - the supply of goods or services to particular persons or classes of persons unless particular circumstance exist or certain conditions are met or agreed to - the acquisition of goods or services from particular persons or classes of persons - the acquisition of goods or services from particular persons or classes of persons unless particular circumstance exist or certain conditions are met or agreed to Case Study 6.2 Collective boycotts are prohibited irrespective of effect upon competition. Eg, Market sharing arrangements

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- Other anti-competitive agreements 6.19 - All other contracts, arrangements or understanding are only illegal if they have the purpose of effect of substantially lessening competition in the market - Agreements 'lessening competition' - When will an agreement 'lessen competition? - Only when competition in the market place is or is likely to be adversely affected that s.45(2) of the Trade Practices Act may be invoked - Is the lessening of competition ' substantial'? - Only if the lessening of competition in a market is substantial. If there is a considerable or real difference in the level of competition between the two, then breach s.45(2) - combined and individual strength of the parties 6.20 - porportion of trade or commerce affected - duration of restiction - barriers to entry in the relevant market if heightened by it. Ah Toy J Pty Ltd v Thiess Toyota Pty Ltd (1980) - Hardly be said to be substantially lessening competition - Approach with care the following for potential breaches: - strategic alliance(聯盟) (not public benefits for authorisation) - information exchange agreemetns - trade assoications Retail Tobacco Sellers Association of Victoria (1982) 6.21

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Controls over pricing in the marketplace 6.21 - Resale price maintenance - s.48 of the Trade Practices Act - unlawful for a supplier of goods or services to induce or to insist(堅持) on the minimum prices at which a reseller should sell or advertise those goods or service - Three steps in determining whether the practice of resale price maintenance - Has the supplier specified a price? - Is the price specified or used by the supplier a minimum price? - Has the supplier taken action to ensure that the stipulated(規定) resale price is maintained? - Inducement - s.97 of the Trade Practices Act - will not consider a supplier to have attempted to induce if - If a supplier applies a recommended price to a product, the price must be proceeded by the words "recommended price" - "The price set out or referred to herein is a recommended price only and there is no obligation to comply with the recommendation" show on invoice or other correspondence if there has a recommend price. - Failure to follow - not automatically breach of s.48. If the supplier not take advantage of the defence and all documents are not an attempt to induce the buyer not to sell below the specified price. - Trade Practices Commission v Madad Pty Ltd (1979) 49 FLR 453 6.23 - Withholding supplies 6.24 - breach s.48 - withholding supply if the purpose is maintenance resales price - ACCC v. Australian Safeway Stores Pty Ltd & George Weston Foods Ltd (1997) ATPR 41-562 6.24 - What is meant by 'withholding supply'? - refuses to supply - supplies on disadvantageous term - treats the buyer less favourably that others in respect of time, method or place of delivery, or otherwise procures another person to withhold supply. - Case 6.3 6.22 - Trade Practices Commission v. Bata Shoe Co. of Australia Pty Ltd (1980) 44 FLR 45 6.25 - the resale price maintenance has to be one substantial reason for a refusal - When is withholding supply not illegal? - withholding supply by reason of reseller ' discounting' (貼現) may be permissilbe - s.98(2) - if reseller discounts below cost, the supplier is allowed to withhold supplies to protect the reputation of the product - selling below cost may be interpreted to mean below net invoice price. - s.98(3)- the only exception to this rule are when the reseller can establish that it was selling below cost with the permission of the supplier, or that it was done during a genuine clearance sale to reduce excess stock. - therefore: if resale below cost, legal to withhold in order to protect reputation, but if the resale is in a genuine, wihtholding supplies is illegal - withhold supplies for legitimate commercial reasons - Peter Williamson Pty Ltd v. Capitol Motors Ltd (1982) 61 FLR 257 6.26 - s.4F - substantial reason for withholding 6.25 - resale price maintencanc only has to be one of the reasons for a refusal to deal although it still must be a substantial reason, the action will be unlawful - Penalties - Fined up to $10 million - ACCC v. Ampol Petroleum (Victoria) Pty Ltd (1996) ATPR 41-469 6.26 - Remedies - suppliers are liable for damages at the suit of a trade injured by such behaviour

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Controls over distribution in the marketplace 6.27 - Exclusive dealing - Case Study 6.4 6.28 - s.47 The Trade Practices Act prohibits conduct - exclusive dealing is deemed anti-competitive i.e. a vetical restraint by a trader at one level on traders at other levels - vertical restraint - 5 categories 1 Conditions imposed by suppliers limiting their customers' freedom to obtain supplies from competitors of the suppliers 2 Conditions imposed by suppliers limiting their customers' freedom to resupply the suppliers' goods or services to particular persons or particular place 3 Conditions imposed by customers limiting the suppliers' freedom to supply others 4 Third-line forcing - Condition imposed by suppliers requiring customers to acquire additional goods or services from others - is a type of exclusive dealing prohibited outright without the need to prove a substantial lessening of competition - 3 parties (customer, supplier, and a third party beneficiary) - 2 products - requirement that a second product be taken from a third party as a condition to supply the first product - Re Ku-ring-gai Co-operative Building Society Ltd (1978) ATPR 40-094 6.30 - breach s.47(6) - third line forcing - nominating the insurance company 5 Restrictions like those above imposed or enforced in connection with leases of licences involving land and buildings - Outboard Marine Australia Pty Ltd v. Hecar Investments (1982) ATPR 40-327 6.28 - without breach s.47 - since OMA refused to supply Hecar, at the same time appointed a new distributor in the area - O'Brien Glass Industries Pty Ltd v. Cool & Sons Pty Ltd (1983) 48 ALR 625 6.28 breach s.47 - the effect of 10% wholesale price differential as result that it lost sales that was to put some retailers our of business, thus having the effect of substantially lessening competition - exclusive dealing must be widespread and engaged by market leader and excludes conduct which merely changes the balance between competing entities - franchising must comply with a mandatory code and parties must also comply with s.47 (exclusive dealing), s.45 (collusion and price fixing) and s.48 (resale price maintenance) of TPA - Authorisation and notification - Exclusive dealing conduct can be authorised on public benefit grounds - Notification applies to all types of exclusive dealing conduct only included third-line forcing conduct, which can also be subject to notification to ACCC and protected under s.47 6.30

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Controls over competitive activities in the marketplace 6.31 - Misuse of market power - s.46 - if a company possess a substantial degree of market power, it must not take advantage of the market power for the purpose to 1.) substantially damage a competitor; 2.) prevent entry of a person to the market; 3.) deterring a person from engaging in competitive conduct - Case study 6.5 - Three steps to analyse when determining whether a breach of s.46 1. Does the firm has a substantial degree of power in the relevant market? i what is the relevant market? - a relevant market includes a market with all close substitutes - Singapore Airlines v. Taprobane Tours (1990)ATPR 41-054; (1992) atpr 41-159(appeal) 6.32 - first instance - substantial power - narrow relevant market - providing wholesale tours to Maldives - full court - not substantial power - wider relevant market - all substitutes market included. ii does the corporation have a substantial degree of power in that market? - a substantial market power means large or considerable when compare to other firms (may not be controlling) - taking advantages of market power means simply using the power to do something that powerless competitor cannot do could the firm have acted in the same manner if it did not have a substantial degree of market power? prohibited purpose of eliminating or substantially damaging a competitor; preventing a person from enter, and deterring a person from engaging in competitive conduct. proof needed only for substantial purpose, or state of mind may involve predatory(掠奪) pricing - Mark Lyons Pty Ltd v. Bursill Sportsgear Pty Ltd (1987) ATPR 40-809 6.33 - S.4F - substantial purpose breach s.46 - the withholding of the boots is for the purpose of deterring or preventing Mark Lyons form engaging competitive conduct breach s.47 - by refusing supply unless Mark Lyons stopped selling at town hall and warehouse sales 2. Has the firm taken advantage of that market power? - Queensland Wire Industries v BHP (1989) 167 CL 177 6.33 - Market power can be defined as the ability of a firm to reaise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product - the power to raise price by resticting output in a sustainable manner. 3. Did the firm have one of the three unlawful purposes i substantially damaging a competitor - predatory(掠奪) pricing is to cut prices so low for a period, once the competitors are driven out of the market, prices can go back up again ii preventing entry of a person into the market iii deterring a person from engaging in competitive conduct - Melway Publishing Pty Ltd v.Robert Hicks Pty Ltd (2001) HCA 13 6.35 - Federal Court - without breach s.47 - exclusive distribution system was maintained by Melway as legitimate business decisions. Full court - overruled the first decision and regarded an exclusive distribution system, by its very nature, involves preventing competition. High cour - overruled the Full Court's decision which held that the Melway's conduct was in accordance with legitimate reasons. When the ACCC intervened, the High Court

Federal Court - without breach s.47 - exclusive distribution system was maintained by 8696168.xls 156/196 Melway as legitimate business decisions. 6 (16%) Module Full court - overruled the first decision and regarded an exclusive distribution system, by its very nature, involves preventing competition. High cour - overruled the Full Court's decision which held that the Melway's conduct was in accordance with legitimate reasons. When the ACCC intervened, the High Court dismissed the ACCC ACCC V. Boral Ltd (2001) 106 FCR 238 6.36 - Boral was held by the High Court that it did not breach the misuse of the market power provisions of the Act. Boral was found not to have substantial market power

- Mergers 5.37 - s.50 of the Trade Practices Act preventing accumulations of power by acquisition, which have the effect of substantially lessening competition - Two steps in determining whether a merger is unlawful - Has there been a direct or indirect acquisition of shares or assets? - Will the merger have the effect of substantially lessening competition? - compare the state of competition without and likely state after the merger. If there is a substantial difference between the two, merger will be in breach of s.50 - height of barriers to entry - level of concertation - degree of counterveiling(抵銷) power - likelihood of significantly and substainably increase prices - dynamic nature of market - likelihood of removing an effective competitor - nature and extent of vertical integration - breach - injunctions and if necessary , divestiture (剝奪權利) - Authorisation 6.38 - Authorisation is available, that based on public benefit in significant increase in real value of exports and significant substitution of domestic products for imported good

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Trade Practices Act - Part V 6.39 - Bosch (1995) - Statements of Business Principles that the board holds a position of trust, the directors owe a fundamental duty not only to the organisation, its shareholders, but also the stakholders with whom the company has relationships - dealing with various stakeholders, there will have conflicts between various interest groups when choices. It should be reliable and fair but practical will benefits to one group rather than another. So legislation will control the management to lay down minimum standards in some area. Beyond law, competitive pressures and social conventions exerts strong influences - the directors or employees may be liable under TPA 1974 if they engage in misleading and deceptive conduct. - Part V - protect consumers in different ways - Division 1 - sets out a list of commercial practices which are regarded as being unfair and therefore prohibited - Division 1A - sets out certain powers the Minister has with respect to setting product standards and ordering product recalls - Division 2 - sets our certain terms which are to be implied into customer contracts - Division 2A - sets out certain oblightations which are imposed on manufacturers of consumer goods - Breaches of Part V - Penalties - individual - $220,000 - corporation - $1.1 million - s.53 - criminal penalties applicable to where breaches attract criminal conviction - s.82(2) - extends the limitation period within which actions may be brought through contraventions of Parts IV, IVA, IVB and V from 3 years to 6 years after the date upon which the cause of the action accrues - Misleading and deceptive conduct in business s.52 6.40 s.52 contains a general prohibition on misleading and deceptive conduct - Division 1 - s.52 - is a catch-all provision which provides a private civil right to anyone involved in trade or commerce whether as a consumer or trader - Swanson Committee s.52 is an attempt to prescribe a minimum level of probity(誠實) and fairness to which it is in the public interest that commercial behaviour conform - Breaches of s.52 - civil remedies such injunctive relief and damages but a firm cannot be fined

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- Focus on three major areas of s.52 1. advertising - Cadbury 6.40 a. Truth in advertising it is not enough if the advertise is true, it has to convey a truthful impression - Case study 6.6 - Tobacco Institute v. AFCO (1993) ATPR 41-199 C.6.6 - the court decided that the advertisement was misleading and deceptive - Hornsby building Information Centre v. Sydney Building Information Centre (1978) 6.41 - the announcement would be literally true but nonetheless(仍然) deceptive, because it conveyed to others something more that the literal meaning which the words spelled out b. effect of the conduct can be unintentional - if the advertisement is misleading by unintentional conduct or due to inadvertence(疏 忽) also breach s.52 - Case study 6.7 - breached s.52 - advertising agency make a mistake but the company failed to correct the errors. - Parkdale Custom Build Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CXLR 1919 at 1976.42 - Eva v. Mazda Motors (1977) ATPR 40-020 6.42 - breached s.52 - advertising agency make a mistake but the company failed to correct the errors. c. Standards by which misleading conduct is judged based on the public - it has to concern the gullible(易受騙) or credulous(易受騙), intelligent or no so intelligent consumer rather than reasonable or knowledgeable person (not the reasonable person under common law) - who comes within the description of 'consumer' - what standard of intelligence ought to be attributed to the consumer - Case study 6.8 - breached s.52 - althought already shown a readable word " margarine" but the the picture of cow would mislead credulous(易受騙) consumers - Ciba-Geigy Canada Ltd v. Apotex Inc. (1992) 24 1 PR 652 6.43 - Annand & Thompson Pty Ltd v. TPC (1979) ATPR 40-116 6.43 - World Series Cricket v. Parish (1977) 17 ALR 181 6.43 - breached s.52 - the defendant's conduct was not to be judged according to is effect on knowledgable cricket followers opposite - McWilliam's Wines v. McDonald's (1980) 38 ALR 394 6.43 - no breached s.52 - sufficiently different of wine and hamburgers of MaDonald, so the public would not be misled. d. Puffery(誇大) advertising can be legal under TPA which does not prohibit imaginative advertising, provided it is not misleading - Case study 6.9 - no breached s.52 - althought that statement is not literally true, but probably falls into the category of acceptable exaggeration(誇張). "stone's throw" suggest reasonably close which is true - Stuart Alexander & Co. v. Blenders Pty Ltd (1981) 37 ALR 161 6.44 - Barnes & Blakeney 1982 6.44 - Dewhirst & Kay Rent-A-Car Pty Ltd v. Budget Rent-A-Car Sysems Pty Ltd (1984) ATPR 40-485 6.45 - breached s.52 - the advertisment is puffery and incorrect

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e. Comparative advertising s.52 - does not prohibit comparative advertising and the Commission acknowledges the value of comparative advertising if it is factual(事實) and informative - Case study 6.10 - Colgate-Palmolive Pty Ltd v. Rexona Pty Ltd (1981) ATPR 40-242 - even competitor's name not identified, still breach s.52 - breached s.52 -it is not a commonsense, Rexona consisted of unpublished reprots and test which had not been subjected to independent scientific clinical trials.And 'citraden' was not the new innovation. Sufficient evidence that unproved or unsubstantiated. The court granted an interim injunction. - Country Road Clothing Pty Ltd v. Najee Nominees Pty Ltd (1991) ATPR 40-106 - no breached s.52 - the advertisment shows different brands suits with their prices, the advertisement was factually correct and did no more than invitie customers to make their own comparisons - Makita v. Black & Decker (1990) ATPR 41-0302 - breached s.52 - Black & Decker didn't make clear from the advertisement for the whole process of comparsion. It only shows the satisfactory tests. The court stated that comparisons should be between like products, and that tests should not be conducted or depicted in such a way as to give a false impression of the results. f. Use of small print in advertising - small printe like 'up to' or 'conditions apply' cannot be just literally true, they must not create a misleading overall impression - Case study 6.11 - breached s.52 - Although "up to 10 times", the normal only 2 times, it concerned with the overall impression that an advertisement creates, rather than its truth or falsity. - The reference to conditions or * was in considerablely smaller print than the rest of the advertisement. - Nationwide News Pty Ltd v. ACCC (1997) ATOR 41-543 - breached s.52 - free to have a mobile, but actually with condition. It is a false representation about the effect. g. Bait(誘惑) advertising s.56 - prevent two conduct i deliberate intention not to offer in reasonable quantities for a reasonable period if limit the purchase of advertised goods "3 per customer" should be printed at the advertisment, otherwise, considerate as unreasonable quantity. "whilst stocks last" or "limited offer" not suffice unless indicated quantity of stock held and length of likely availablity. if supplier intends to offer goods only for a limited time, or in limited quantities, he must disclose these limits reasonable quantities should relate to the situation where undisclosed conditions are imposed - Case study 6.12 - breached s.56 - " whilst stocks last" will not protec the defendant. Marcus attended the defendant's store early the next day of advertising without stock. Defendant did not meet its obligation to have reasonable qty of stock available for reasonable period. - Collis v. Coles Myer Ltd, 17 February 1988, Court of Petty Sessions, Perth - breached s.56 - the stock out 2 days earlier than the expiry date. Coles did not meet its obligation to have reasonable qty of stock available for reasonable period. ii the seller does not supply the advertised goods in reasonable quantities for a reasonable period. Legitimate defence available for suppliers in uncontrollable circumstance

6.45

6.46

6.46

6.47

6.48

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2. the role of auditors 6.49 - auditors do not ordinarily owe a duty of care to third parties unless the auditor intendeds to induce that third party to act upon the audit report - Esanda Finance Corportion v. Peat Marwick 6.49 - as there is no need to prove carelessness or the existence of the duty of care, s.52 can be used in cases against the auditor on the basis of misleading or deceptive conduct - problems with applying misleading or deceptive conduct to auditors R6.3 i a reasonably held opinion does not consititute misleading or deceptive conduct ii the applicant must prove that the conduct caused the loss complained of - breached the prohibition, is required in order to recover damages under s.82(1) iii cases 3. intellectual property 6.49 - intellectural property rights will be of key significance as assets on the balance sheet i patent ii copyright iii registered design iv trademark - Corones 1999 - the pro-competitive nature of intellectual property laws is recognised and a partial exemption is granted under s.51(3) - Hornsby building Information Centre v. Sydney Building Information Centre (1978) 6.41 - imitation of names, logos, packaging and labelling i brand names and logos, even if not registered as trademarks, can be protected if they are copied and imitated with result the consumers will be misled or deceived ii too close or too similarities for the packaging and labelling can be regarded as misleading or deceptive - Case study 6.13 6.50 - breached s.52 - conscious(蓄意) attempt to imitate the plaintiff's bottle and labelling - Apand Pty Ltd v. The Kettle Chip Co. Pty Ltd (1994) ATPR-287 6.50 - breached s.52 - too closely imitated the defendant's name, symbols and get-up - protection of business reputation - s.52 - business name or reputation even has not been registered as trademark will be protected if such name has become distinctive - Australian Society of Accountants v. Federation of Australian Accountants Ind. (1987) 6.51 - breached s.52 - members of the public would be led to believe that there was a connection between the plaintiff and defendant, but actually it has not. - Dr Martens Australia Pty LTd v. Windsor Smith Pty Ltd (2000) Appeal 6.51 - ss.53 and 55 also prohibit corporations from making false and misleading representation in its supply, promotion and use of goods. A breach may result in monetary penalty if action is raised by the ACCC. No monetary penalty is allowed by s.52 - Defences to be relied on under TPA Par V. D1 (except for s.52) - that the contravention was due to - a reasonable mistake - reasonable reliance on information supplied by another - the act of another person, or an accident is beyond the defendant's control reasonable precautions had been taken and due diligence exercised to avoid contraventions

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- False and misleading representation 6.52 - s.53 a falsely represent that goods are of particular standard, quality, value, grade, composition, style or model or have had a particular histroy or particular previous use. - Macfarlane v. John Martin & Co. Ltd (1977) ATPR 40-034 6.42 - breach s.53(a) since the shoes were slight flawed(瑕疵) without inform the customers - quality - Case study 6.14 - Eva v. Southern Motors Box Hill (1977) ATPR 40-026 6.53 - breach s.53(a) misrepresents the history or previous use of the vehicle - Gardam v. George Wills & Co (1988) atpr 40-884 6.53 - breach s.53(a) - Making " styled to reduce fire danger" should be marked "high fire danger, keep away from fire" - Doolan v. Waltons Ltd (1982) ATPR 40-276 6.53 - breach s.53(a) misrepresents the particle board of pine - Wilkinson v. Katies Fashions (Aust.) Pty Ltd (1986) ATPR 40-721 6.53 - breach s.53(a) misrepresents the % of component of wool (aa)falsely represent that services are a particular standard, quality, value or grade - Kiley v. Lysfar Pty Ltd (1985) ATPR 40-614 6.53 - breach s.53(aa) misrepresents the standard of services (c) represent that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits they do not have - Case study 6.15 - Hartnell v. Sharp Corporation (1975) 5 ALR 493 6.54 - breach s.53(c) only comply with SAA without obtain the pproval from SAA represent that the corporation has a sponsorship, approval or affiliation(聯盟) it does not (d) have (e) make a false or misleading representation with respect to the price of goods or services - Case study 6.16 - Sest v. Copperart Pty Ltd (1989) 11 ATPR 40-945 6.54 - breach s.53(e) the regular price is artificially - Table 6.2 - excemples of false representations as to price 6.55 - Trade Practices Commission v. Cue Design Pty Ltd (1996) ATPR 41-475 6.55 - breach s.53(e) the original price has not offered before (eb)make a false or misleading representation concerning the place of origin of goods - Case study 6.17 - re Trade Mark Wee McGlen 6.55 - breach s.53(aa) picture of Scotsman misrepresents the product made in Scotland - Made in a. the goods must have been substantially transformed in the claimed country of origin b. at least 50% of the costs of production or manaufacture must have been incured in that country (s.65AB) - Product of each significant ingredient or component of the goods must originate from that a. country b. all, or virtuall all, of the process of production or manufacture must take place in that country (s.65AC) (g) made a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy - Case study 6.18 - Miller v. Fiona's Clothes Horse of Centrpoirnt Pty Ltd (1989( ATPR 40-963 6.56 - breach s.53(g) consumers has right to return goods in certain circumstance. Although there has some signs that non-refundable or with condition to refund, they misstate the law.

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- Ballard v. Sperry Rand Australia Ltd (1975) 6.57 - breach s.53(g) 12-month warranty on advertisement for calculators but only 90 days warranty inside the box - s.55 6.57 - s.55 - provides that a person shall not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nautre, the manaufacturing process, the characteristics, the suitability for their purpose or the quantity of any goods. - Case study 6.19 6.57 - breach s.55 - slack filling(鬆散包裝) misled the credulous(因輕信而產生) consumer believe the contain was 500 gm instead of 250 gm althought there has shown 250 gm on the box. Unconscionable conduct 6.57 - Equity can set aside unconscionable bargains where one party is in a position to exploit a particular weakness of the other, such as where one party is ignorant or mentally deficient - Downsett v. Reid (1912) 15 CLR 695 6.57 - High Court refused to enforce an agreement between a real estate agent and an illiterate(文盲) farmer who was not represented by a solicitor - Commercial Bank of Australia v. Amadio (1983) 59 ALJR 358 6.57 - Court held the agreement to be non-enforceable. The plaintiffs were under special disability because of the age and language difficulties - Trade Practices Act - Part IVA - When is conduct 'unconscionable'? s.51AB 1 relative strength of the bargaining powers of the corporation and the consumer 2 reasonably necessary conditions imposed to protect legitimate interests of the corporation? 3 ability to understand the documents by consumer 4 any undue influence, pressure, unfair tactics used against the consumer? 5 amount paid higher or the circumstances under which they could be acquired more onerous when compare to the terms offered by other suppliers - Can standard form contracts be unconscionable? 6.59 - it may be an instrument of unconscionable conduct if, 1 the terms of the contract are onerous(麻煩) and their onerous nature is disguised(偽裝) by using fine print, unnecessarily difficult language or deceptive layout 2 the customers is asked to sign the form without being given an opportunity to consider or to object to such terms, or is given an explanation in summary form which omits mentions of onerous provision

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- Business consumer transactions 6.59 - s.51AC - prohibiting unconscionable conduct in relation to business contracts for the supply of goods or services limit from $1million to $3million - publicly listed companies excluded - additional considerations as per amendments to include business contracts and commericl transactions: 1 consistency of the extent of supplier's conduct towards the consumer as compared with others 2 requirements of any applicable industry code 3 extent of willingness on the supplier to negotiate the terms and conditions for the supply with the consumer 4 extent to which the supplier and the consumer acted in good faith - breach s.51AC, 51AA and 51AB - s.82 - damages - s.80 and s.87 - injunctive relief and other ancillary orders - The amendments broaden the concept of unconscionable conduct to protect business 6.60 consumers, owing to the incresing complaints of - commercial tenancy agreements - loan guarantees - financial institutions dealing with small business - relationships between building contractors and sub-contractors - smalll business loans - franchising - Griggs 1998 6.60 - ACCC recognises the requirements of 3 high risks situations - knowledge by the stronger party about the inability of the weaker party re understanding - lack of opportunity to bargain - one-sidedness of the contract - Some lessons on unconscionability 6.60 - Amadio case - ensure other party obtains independt advice - TPA amendments incorporating changes to the Commonwealth Criminal Code Division a and 1A of Part V - criminal prosecution (s.79(1)) or civial pursuant (ss80 and 82) - Division 3 of Part VC - criminal offence of strict liability for a corporation to - supply consumer goods that do not comply with a relevant consumer product safety standard - export goods which are prohibited in Australia - supply consumer goods that do not comply with a relevant consumer product information standard - fail to comply with a ministerial notice (s.65F) ordering for a specific action to be undertaken in relation to the goods - supply goods of a type to which a ministerial notice under s.65F relates Review Need for a corporation to adopt a compliance program 6.61 - promote ethical behaviour - help identify risks - improve communications and reporting to upper managemetn and to government from time to time

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- a self analysis is required to devise an appropriate compliance program, as a positive aid to business Review question 6.65

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International Corporate Governance - North America, Europe and Asia
- Contents 1. Internationalisation of corporate governance 2. Market-based systems 3. Relationship-based systems - European / Asia-Pacific 4. Convergence and diversity - Important topices - Rationale for the international drive of corporate governance - Models: market-based, relationship-based and family-based - Strengths and weaknesses of different models - Significance of transparency and accountability - Issues of convergence(聚合) and diversity(多樣性) Internationalisation of corporate governance 7.03 - dramatic increase in public interest due to: - trend in society towards openness - scale and activity of corporations affecting society - increase in individual wealth and growth in equity funds - effective monitoring and improved standards - International capital markets - quality of corporate governance is importance when attracting capital suppliers - investment capital making use of the wider investment opportunities - capital providers rely on the corporate governance - Mckinsey surveys on corporate governance - 3/4 investors considered the board practices to R7.1 be at lease as important as financial performance when evaluating companies for investment - fail to reform their governance, competitive disadvantage when try to obtain capital to finance growth - Impact of corporate governance on economic growth and performance - different corporate governance regimes(政體) in different countries provide competitive advantage - Outsider systems of market-based economies - USA, UK Insider systems of relationship-based economies - Europen, Asian Market-based systems of corporate governance 7.04 - Nestor & Thompson 2000 In economies that have adopted this model of corporate governance, equity is widely distributed among individual and institutional investors - The outsider systems such as that of the US, UK and Australia and New Zealand - Widespread(分佈廣的) equity ownership - Institutions have large shareholdings - Shareholders' interests being the primary focus of corporations law - Emphasis on minority shareholder protection in securities law and regulation - Stringent(嚴厲及迫切) disclosure requirements - Disclosure based, dispersed investots require reliable and adequate information for decision making. So regulations intended to ensure fully informed markets to prevent insider trading. - Bank finance is short term and the role of banks is less central. 7.06 - Shareholders have right to vote but capacity to discipline management is greater only in their ability to buy or sell shares

8696168.xls Module 7 (12%) Portfolio composition of institutional investor Bonds and Loans Shares Germany, France, Japan USA, UK, Australia

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7.06

Products Countries

- USA 7.07 - board of directors is entrusted(交託) with an important responsibility - Lorsch and Maclver 1989 - achieve greater accountability by introducing majority of non-executive directors but they have limited time, knowledge and expertise in the companies and lack any group cohesion(凝聚) of their own - Lipton and Lorsch 1991 - a series of proposal to enhance the oversight functions of boards and limit the powers of CEO, committees for critical tasks a board maximum of 10 directors, with 2 independent directors for every inside director - an outside director to be nominated as the lead director where the CEO is also the chairman - boards to meet several times a year with the major shareholders - independent directors to describe remedial(矯正) action in the annual report if the company underperforms for 3 out of 5 years massive increase in the assets of insurance companies, pension funds and investment 7.08 companies - UK 7.09 - 1st country to fully develop the Anglo-Saxon model of corporate governance - has largest investment institutions which are more dependent upon the equity market - more general concerns - Cadbury 1992 - standards of audit and accountancy professions - Monks & Minow 1991 - lack of accountability, disclosure and transparency of boards to shareholders - Lorsch & Maclver 1989 - converns over the adequacy of board structures and processes - the quality of directoral competencies - apparenet lack of corporate social responsibility - Pound 1992 - destabilising impact of the growth of merger and acquisition activities - Gregg et al. 1993 - short term basis of corporate performance - the spate(大量 ) of business fraud - the evident weakness of corporate self-regulation - Hopt 1984 7.10 - these problems were exacerbated(惡化) by the development of more complex corporate structures, so modern company law was unable to keep pace with modern corporate reality - Cadbury Code of Best Practice - Greenbury Report - guidelines for director remuneration - Hamper Report - focusing on disclosure and best practice - Comined Code - mandatory disclosure framework - Turnbull Report - on compliance with mandatory disclosure

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- Australia and New Zealand 7.11 - follow Anglo-Saxon model - Australia 7.11 - Ford 2001 - well-established stock market and greater no. of listed companies per million people than USA and UK - Cheffins 2001 - distinctive features from USA and UK - only a minority of the top 500 companies have shares traded on the stock exchange - ownership structure is more concentrate in Australia - Stapledon 1998 - neither large nor small companies could be claimed "widely-held" - because collapse of corporate encouraged majority of independent non-executive directors - lower participation of institutional investors in voting at the company AGMs - CLERP continuous improvement of standards of diclosure and corporate governance in the Australian market. - New Zealand 7.12 - Healey 2003 - problems of New Zealand's public equity market - small size of firms face problems in financial system that is globally integrated - dividend philosophy - stock market not enjoy a strong reputation. - New Zealand Government approved stringent(嚴格的) rules on shareholder protection - Takeover Code - buy >20%, make a bid at least 50% and offer the same price to all equity owner - Pension fund managers mandated to report on the governance standards - Shareholder value orientation(定位 ) 7.13 - 1990 - Anglo-Saxon - shareholder value-based approach became reinvigorated(恢復生氣) in USA, UK, Australia, New Zealand - primary objective of releasing shareholder value - not only for international business success, but for corporate survival itself - Monks and Minow 2001 - shareholder theory - Michael Porter 1992 fluid(流動) capital investment system (short-term performance) of the USA with the dedicated(奉獻) capital investment system of Germany and Japan (long-term performance)

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- Corporate failue and the reform of corporate governance - Reform and the regulation of corporate governance in US - Millstein 2001 - encouragement of self-regulation to achieve the highest level of efficiency and competitiveness - Soros 1998 - 1929-1933 Wall Street crash - loss 86% market capitalisation because of market mainpulation - during recession(經濟衰退 ), market failure and corporate collapse - evident weaknesses in corporte governance, however, expansion(擴張) and economic confidence, corporate governance concerns neglected - Millstein 2001 - 1970 series of corporate failures - not only concerns the ability of managers, but the capacity of boards of directors - 1977 - NYSE required all listed companies establish audit committee composed entirely of independent directors - fail to take sufficient notice for growing competitive threat of foreign imports corporation became tradeable commodities(商品 ) rather than essential engines of wealth - manager focus on short-term stock market performance at expenses of long-term. Japanese and German industry ascendancy(優勢) - New economy - Weinstein 1997 - Silicon Valley - Paul Krugman warning - sudden burst(爆發) of productivity could be cyclical(循環) rather than permanent - Metcalfe's law - A new knowledge and information-based networked economy was becoming established, with the potential to capitalise on Metcalfe's Law - that as the scale of a network expends linearly. - Shiller 2000 Alan Greenspan dismissed as irrational(不合理) exuberance(繁茂) - belief was suspended(暫緩) in the scramble(爭奪) to make serious money overnight in the dot.com revolution - The Enron shock - Gordon - Enron - transactions with off-the-book partnership - WorldCom - wrongly listed expenses as capital - Adelphia Communications - fraudulent bonuses, unauthorised loans - Sarbanes-Oxley Act - change the corporate governance and reporting requirements applicable - including any non-US company that is required to file reports with the SEC,

7.15

7.16 7.16

7.17

7.17 R7.2

7.18

8696168.xls Module 7 (12%) - Wider implications of Enron and the Sarbanes - Oxley Act - change auditing control and compliance procedures - more fully accounting policies in annual report - focused on compliance to the detriment of essential entrepreneurship and risk-taking - increase audit committee meeting - Shearman & Sterling - House Committee on Financial Services - accounting policies affecting contingent liabilities, goodwill, pension benefits and income taxes are among the most ciritical - Business Roundtable - independent chairman, independent lead director or a presiding outside director - Gordon

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7.19

- Reform and the regulation of corporate governance in UK 7.19 - recommend the boards foster inclusive relationships with employees, customers, suppliers and the community - the report finally recommended that a shareholder-oriented, but inclusively framed - OECD - aims - enhance non-exective directors' monitoring obligation, proportion, appointment methods, tighten director independence and strengthen the independence of company chairperson - London Stock Exchange Combined Code 7.20 - separation position of board chairman and CEO - 10-part test to determine independence of board member - avoiding the re-pricing of executive share options in situations of underperformance - annual shareholder bot on the report of each company's remuneration committee - pension and life insurance over half the total equity market, increasing influence with corporations - Higgs Review - non-executive directors and boards 7.20 - Reform and the regulation of corporate governance in Australia - The one-Tel and HIH collapse - Justice Neville Owen - made 61 policy recommendations with goal of more stable and robust(結實的) financial system - rediscovery of fiduciary duty will be the most effective way of restoring trust in corporate governance - CLERP 9 - to ensure the independence of the auditor - to ensure continuous disclosure - to improve the conduct of shareholders meetings - annual reports were to included disclosure of directors other disctorships - whistleblowing(告密) - ASX corporate governance principles - the strengths and weaknesses of market-based outsider system of corporate governance as practiced in USA, UK and Australia 7.21

Q7.5

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Relationship-based systems of corporate governance - European approaches 7.22 Nestor & Thompson - Europeans emphasise cooperative relationships and reaching consensus(一致) while the AngloSaxon tradition emphasises competition and market processes - The insider model relies on the representation of interests on the board of directors - More diverse groups of stakeholders are actively recognised - The discipline(紀律) of managemnet by the securities is not strong - stable investment and crossshareholdings - Shareholder value market-based system - The market for corporate control is weak and rare(罕有) hostile(惡意) takeovers occur - Long term large shareholders protect the company from the stockmarket and threat of takeover - A supervisory board oversees the management, banks play an active role, inter-corporate shareholdings are widespread. - companies have close ties to political elites(精英) 7.23 La Porta - Ownership and control are held by cohesive(凝聚力) groups of insiders who have long-term stable relationships with the company Nestor & Thompson 2000 - agency problem of the outsider system is much less of a problem in this context 7.23 - Insiders exercise control by majority ownership of voting shares or by owning significant minority holders and employing a combination of devices(謀略) to increase their control - Redistributing(重新分配) control devices include: - arrangeing pyramid corporate structures - shareholder agreements - discriminatory(差別對待) voting rights and - procedures intended to reduce the participation or influence of other minority investors - Different political and regulatory structures Weil, Gotshal & Manges 2002 - Developments in corporate governance in Europe suggested further integration including: privatisation of state-owned companies begin to operate internationally; the growth and diffusion(普及) of shareholding within and between countries' and increased merger and takeover activities to create global player - Features of distinctions - Company law - Employee representation - Stakeholder issues - Shareholder rights and participation mechanics - Board structures(unitary and two-tier boards) and roles, committees - Supervisory body independence - Disclosure 7.24

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- Germany 7.25 - German business sector - a relatively strong concentration of ownership of individual enterprises - the importance of small and medium-sized unincorporated companies - a close correspondence between owners and managers - a limited role played by the stock market - central characteristics is the insider nature in which all interested stakeholders are able to monitor corporate performance - >500 employees are required by law to have a dual board structure - two tier board structure - prohibite - overlap membership between 2 boards within the same firm - prohibite - symmetric(整齊的 ) cross-overlaps between 2 firms a tax reform abolishing(廢止) the 50% capital gains tax on corporate sales of shares in other companies, paving(鋪設) the way to unwinding(展開) the vast blocks of crossshareholdings - France - with the smallest ownership of company shares by financial institutions - majority shares owned by non-financial enterprises - elaborate(精巧) structure of cross and circular ownership - half the firms are controlled by one single investor who owns the absolute majority of capital. - combines the functions of the chairman and chief executive 7.26

- The reform of corporate governance institutions and practices in Europe 7.26 - European Commission is committed - good company law, good corporate governance practices throughout the EU will enhance the real economy - well-manged companies, with strong corporated governance records, sensitive social and environmental performance - strengthen shareholders rights and third parties protection - Winter Committee on a Moder Regulatory Framework for Company Law in Europe 7.27 - effective protection of shareholders and third parties to achieve a high degree of confidence in business relationships - distinction between categories of companies, with more stringent(嚴厲) framework for list company - development of measure aimed at combating(戰鬥) fraud and abuse - Both Winter Committee and FEE - emphasise wider aspects of internal control and related 7.28 processes of risk management - FEE Federation des Experts Compatables Europeens report on European corporate governance - a representative body for the accountancy professions in Europe - financial report and auditing aspects of corporate governance - Advantage and disadvantages of the European relationship-based insider system of corporate governance Q7.6 7.27

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Relationship-based systems of corporate governance - Asia-Pacific approaches 7.28 - Rich cultural diversity with differnet political and legal structures and social traditions - Many countires in Asia engage in institutional development processes - Systems are based on close relationships, family control and an ongoing relationships with stakeholders, regulators and governments - Relationship based - Prowse 1998 7.29 - Concentration of ownership of companies with a majority of shareholders within a tightly-knit group of minority shareholders Directors often serve a nominal(名義上) or a perfunctory(馬虎) role, with no clear role for nonexecutive directos, and little knowledge of the formal obligations and functions of company officers - Boards are effectively dominated by majority shareholders with minimal transparency and disclosure - Institutional investors and fund manages are underdeveloped - Clarke 2002 Major reforms followed from the Financial crisis of 1997 - ensuring clear and effective financial control structures within firms - developing external monitoring and control with improvements in the legal framework, regulatory agencies and the disclosure environment - advancing training and development program to encourage understanding of corporate governance procedures and issues 7.30

- Securities Commissions ensuring compliance important elements of corporate governance codes: 7.30 - decision-making structures and roles within firms to ensure effective governance and financial controls, including representation by non-executive directors clearer definition of duties and responsibilities, with clear procedures for exercising these duties - more rigorous monitoring and reporting requirements to ensure the transparency of management's actions and the company's performance Conclusion, corporate governance development in East Asia requires action on three related fronts - activating the mechanisms in firms for more accountable and transparent operations - ensuring more effective control and regulation of firms by external agencies extending eduction and training to develop understanding of sound corporate governance practices

7.31

- Japan 7.31 - financial institutions have remained weak and unreformed - Corporate law in Japan was modelled on the German system - a significant number private-limited corporation - Yasui 1999 - board members are insiders leading management - lifetime employment pattern - vertical reporting lines between the president and senior and junior members of the board - role of Japanese boards is superficial(表面) both in terms of supervising the executive management and in terms of responsibility for the company - banks - cross-shareholding pattern of Japanese corporations that preventing hostile takeover 7.33 - the concentrated pattern of shareholding has created considerable stability 7.33

8696168.xls Module 7 (12%) - the concentrated ownership structure gives key shareholders considerable influence over management, but these shareholders are usually affiliated(相關) companies in the same corporate group or keiretsu

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8696168.xls Module 7 (12%) - the position of main banks is central to the Japanese corporate governance structure and functioning - Ex ante - Interim - Ex post - Aoki & Okuno - deregulation - strengthened the bargaining power of firms and weakened the main bank - overseas investor look for economic return and press for greater accountability to shareholders from Japanese corporations. - based on management hierarchy for remuneration, less incentive and stock option - now introduce incentive and stock option - Learmont 2002

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7.34

- China and Family-controlled companies 7.35 - Five types of enterprises: - State-owned enterprises - negotiated system of central planning - Town and village enterprises - community-based enterprises - Joint ventures - foregin owned enterprises - Chinese listed public companies - 3 classes - A shares, B shares and H shares 7.36 - Tenev, Zhang & Brefort 2002 7.36 - weaknesses in the financial institutions of China - 2/3 of listed companies in Asia are family run, with flexibility and dynamism(物力論) - The OECD White Paper work towards full convergence(會合) with interantional standards and practices for accounting, auditing, and non-financial disclosures - Independence of boards and review of transactions involving managers, controlling shareholders and other insiders was established. - Increased capacity of regulators to monitor companies for compliance with substantial penalties for wrongdoings - benefits and cost of the family-based insider system of corporate governance practiced in AsiaQ7.7 Convergency and diersity - International development of corporate governance standard OECD - World Bank's findings of a memu of choice - Evolving(發展) complexity may result in both convergence and diversity to occur simultaneously(同時). - each countries with different cultures, legal systems and economic prioritites 7.39

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