Section 5 of Doing Business in Australia
The Corporations Act, and regulations made under the Corporations Act, are the core of regulation of companies in Australia. The Corporations Act and regulations are administered by ASIC. ASIC has issued a large number of policies, or regulatory guides, to help companies, directors and their advisers interpret and comply with the Corporations Act and regulations. These are available on the ASIC website.
The Corporations Act governs:
- the structures by which a foreign company can conduct business in Australia (see section 3 - Guide to Establishing a Business Presence in Australia);
- the procedure for acquiring a significant stake in public companies (see section 4 - Guide for Foreign Investors to Acquisitions in Australia);
- director duties, shareholder protections, reporting and other corporate governance matters (discussed in the remainder of this section);
- fundraising (see section 6 - Guide to Raising Capital in Australia) and the conduct of the financial services industry (see section 7 - Guide to Financial Services in Australia); and
Directors Duties in Australia
Directors (and other statutory officers) in Australia have duties imposed upon them by the Corporations Act, the common law and particular statutes. Although there is overlap among these duties in some cases, the consequences of breaching a duty under the common law may be different to the consequences for breaching a statutory duty. Directors should always seek advice prior to joining the board of an Australian corporation, or any time when they are unsure as to their duties.
The table below provides a snapshot of these duties:
Other statutes may impose personal liability on directors, notably laws governing tax, competition, occupational health and safety and protection of the environment.
Protection of minority shareholders
The Corporations Act contains some provisions to protect minority shareholders. These statutory rights include:
- being able to bring legal proceedings in the name of the company (e.g. against directors) with the court’s permission;
- being able to inspect the company’s books, with the court’s permission;
- being able to seek court orders (including orders to wind up the company or for a sale of a shareholder’s shares) where the company has been run in a way which is unfairly prejudicial to a member or not in the interest of all members as a whole;
- the right to approve some transactions between public companies and their related parties (such as majority shareholders and directors); and
- being able to call shareholder meetings or require the company to put a resolution (e.g. to appoint or remove a director) to shareholders for approval.
Minority shareholder rights
A minority shareholder in an Australian company may have rights to require the directors to call a meeting of shareholders. These rights need to be exercised in accordance with strict legal requirements, so if you wish to use these rights, make sure you understand the steps required.
Financial reporting and access to information
Reporting obligations differ depending on whether a company is a small proprietary company, a large proprietary company
or a public company. A large proprietary company and a public company will be subject to reporting obligations. A small proprietary company may also be subject to reporting obligations. A company will be a small proprietary company if it is a proprietary company (i.e. its name includes “Pty Ltd”) and satisfies two of the following tests:
- its consolidated revenue for the financial year is less than $50 million;
- its consolidated gross assets are less than $25 million at the end of the financial year; and
- it and its controlled entities have less than 100 employees at the end of the financial year; and
- the company has one or more crowd-sourced funding shareholders.
If a company is a “small proprietary company”, it does not have to lodge accounts unless:
- the company is directed by shareholders with 5% or more of the voting shares to prepare and lodge accounts;
- ASIC directs the company to prepare and lodge accounts; or
- the company is controlled by a foreign company and its financial results are not consolidated into financial statements that another company or a registered foreign company has lodged with ASIC.
Once a company has lodged accounts, the accounts are available to the public through ASIC information brokers (for a fee). ASIC also makes available basic information about the shareholders, share structure, directors and company secretary. This can provide a way of getting information about counterparties to contracts or potential investors as part of a due diligence exercise.
Dividends and capital management
Australian companies are not limited by law to paying dividends from the profits of the company – they can pay any amount as a dividend, provided the company has a sufficient surplus of assets over liabilities, the payment is fair and reasonable to the shareholders as a whole and the payment does not prejudice the company’s ability to pay its creditors.
Even though this provides substantial flexibility around the amount of permitted dividend payments, a company may also wish to return capital to its shareholders, which may result in a different tax outcome. Franking credits (which broadly represent corporate tax paid by the company) may be able to be passed to shareholders in certain circumstances.
Avoid the pitfalls
The Corporations Act allows a company to return capital to its shareholders in a variety of ways.
Different approval, filing and timing requirements and tax treatments apply to the different methods, so you should get advice to make sure the Australian company is returning capital in the most tax efficient and compliant way.
The Corporations Act creates a number of offences which are relevant to anyone offering financial products, trading in financial products or advising others on financial products (formally or informally). These include prohibitions on:
- insider trading (which includes dealing, arranging for someone else to deal or providing price-sensitive, non-public information to a third party who could be expected to deal in the relevant financial products);
- carrying out transactions which create an artificial trading price or maintain the price at an artificial level;
- causing a false or misleading appearance of active trading of financial products on a financial market or of the trading price of financial products;
- undertaking fictitious or artificial transactions which manipulate the trading price;
- making statements that are false or misleading and which may induce someone to trade or have the effect of increasing, reducing or stabilising the market price;
- inducing someone to trade by making statements that are misleading, false or deceptive; and
- engaging in dishonest conduct in relation to financial products or services.
There can be criminal and civil consequences of breaching these provisions.
ASIC has extensive powers to compel companies and individuals to provide information to ASIC, for the purposes of an investigation into any of these (or other) offences. Any such requests from ASIC need to be responded to carefully and thoroughly after seeking legal advice.
ASIC has powers to grant waivers from some obligations under the Corporations Act, or modify the operation of the Corporations Act, where there are compelling reasons to do so, or to correct an anomaly in the law. Waivers or modifications can be conditional or unconditional. Waivers and modifications can be granted in respect of:
- the obligations relating to fundraising and disclosure documents;
- the provisions relating to takeovers of listed companies and trusts;
- the obligation to prepare and lodge audited accounts; and
- the regulation of the financial services industry.
If an application for a waiver or modification raises novel issues, it may take some weeks for ASIC to consider and respond to the application. This needs to be taken into account in undertaking any transaction which needs an ASIC waiver or modification to be effected.
This guide is current as of April 2021.