Welcome to the Melbourne Spring Racing Carnival Edition of Australia Watch. Melburnians take every opportunity at this time to dress up to the nines and part with their hard earned money on the latest “sure bet”.
This is also the first anniversary issue of Australia Watch. We look forward to publishing many more issues. Your feedback is appreciated.
After more than a year of negotiations with interest groups and Opposition parties, the Federal Government has secured the passage of the Trade Practices Legislation Amendment Bill (No 1) 2005.
The Bill picks up most recommendations made by the 2003 Review of the Competition Provisions of the Trade Practices Act (the Dawson Review).
The passage of the Bill will mean:
- refinements to the merger clearance process. Parties will now have three options – informal merger approval from the Australian Competition and Consumer Commission (ACCC) through its improved informal merger clearance process, formal merger clearance from the ACCC with a right of appeal to the Australian Competition Tribunal (ACT) and formal merger clearance directly from the ACT;
- an easier notification system for collective bargaining by small business;
- an expanded role for the ACCC in hearings before the ACT;
- increased powers for the ACCC to exercise search and seizure powers;
- higher penalties for contraventions of the Trade Practices Act (TPA) (corporations will now face a maximum pecuniary penalty of the greater of $10 million or three times the gain from the contravention or where the gain cannot be readily measured, 10 % of turnover of the corporate group;
- the per se prohibition against third line forcing will remain.
The Government has also agreed to review within the next six months the transaction thresholds for the collective bargaining rules for small business and to revisit immediately reforming the misuse of market power and unconscionable conduct provisions of the TPA.
The debate about reforming the misuse of market power provision (section 46) will be a lively one because “big business” believes it operates as it should (backed up by decisions of the High Court of Australia, which have narrowed the ambit of the section) while “small business” believes the opposite.
In September 2006, the Corporations and Markets Advisory Committee released its Report on Personal Liability for Corporate Fault. The report reviews the way directors and other people involved in companies may incur personal liability for corporate misconduct.
The Committee identified two major areas of concern:
- a marked tendency in Australian legislation to impose criminal sanctions on people for corporate breaches determined by the office they hold rather than their acts or omissions unless they can establish an available defence;
- a lack of uniformity in the wording of personal liability provisions resulting in complexity and confusion about requirements for compliance.
The Committee was critical of the practice of treating directors and other corporate officers personally liable for the misconduct of their company unless they can make out a relevant defence, especially where they could not reasonably have influenced or prevented the offending corporate conduct They described this practice as “objectionable in principle” and unfairly discriminatory against corporate personnel compared with the way other people are treated under the law.
The Committee stated that, as a general principle, individuals should only be punished for corporate misconduct where it can be shown they personally assisted or were privy to that misconduct. The Committee also called for a consistent approach across all corporate and non-corporate organizations regarding personal liability for organizational fault. People subject to the Corporations Act should not be exposed to penalties the Legislature does not impose in other contexts.
If the Committee’s recommendations are accepted, this will mean a significant sea change to the punishment regimes for individuals caught up in or connected with corporate misconduct. But this may take quite some time to achieve.
The Committee’s Report can be viewed at www.camac.gov.au.
In a previous edition of Australia Watch, we dealt with Centennial Coal Company Limited’s controversial takeover of Austral Coal Limited (Austral) and the spoiling tactics employed by Glencore International AG (Glencore). Glencore, together with an associated company, built up a small stake in Austral and then increased that stake to over 10 % by entering into cash settled equity swap agreements with two swap counterparties.
The Corporations Act requires a shareholder with a 5 % or more shareholding in a listed company to disclose that interest and to keep disclosing all increases or decreases of 1% or more in that interest over and above the 5% threshold. Glencore did not do this but argued it was not obliged to do so because it had no “relevant interest” in the shares that were the subject of the swap agreements.
The Takeovers Panel and the Takeovers Review Panel were asked on three occasions to consider the conduct of Glencore in acquiring a stake in Austral. On each occasion, the relevant Panel found Glencore’s conduct amounted to “unacceptable circumstances” (the key finding the Panel is authorised to make) and ordered variously that Glencoe make proper disclosure to the market about its shareholding in Austral and that it divest itself of certain shares in favour of the Australian Securities & Investments Commission and compensate shareholders who may have sold their shares in Austral in ignorance of Glencore’s involvement.
Glencore challenged each of the Panel’s findings in the Federal Court and was successful on each occasion. The Panel found Glencore had a substantial interest in Austral while agreeing it had no relevant interest in the swap arrangements shares, which it considered was sufficient to enable it to make a declaration of unacceptable circumstances. The Court held this was not a finding that was open to the Panel to make.
The Court also held the Panel did not take into account the prejudice that would be caused to Glencore in making its compensation and divestiture orders. Also the Panel did not target its orders for relief to shareholders who suffered actual loss (it did not properly investigate the effects of the unacceptable circumstances). As well, the Panel decided that the swap arrangements had an effect on control or potential control of Austral or on Centennial’s acquisition of a substantial interest in Austral.
The Court found, however, that the Panel’s powers were not judicial in nature and therefore not in breach of the Australian Constitution (another argument run by Glencore in the Federal Court).
The Federal Government has reacted quickly to overcome the effect of the Glencore decisions. They have proposed remedial legislation that will:
- broaden the definition of substantial interest to make it clear it is not tied to the concept of relevant interest;
- empower the Panel to take into account past, present or future effects of circumstances; it will not be required to wait for the “effects” to occur;
- empower the Panel to declare circumstances unacceptable having regard to the takeovers provisions of the Corporations Act;
- give the Panel broader powers to make orders to redress any harm caused by unacceptable circumstances.
Since the draft Bill was released, the Federal Court has delivered its decision in the challenge by Alinta Limited to a declaration of unacceptable circumstances and divesture orders made against it by the Panel with respect to its acquisition of certain relevant interests in units in the Australian Pipeline Trust. While the Federal Court found that the Panel was wrong in concluding that Alinta Limited had breached the takeover threshold provision of the Corporations Act (section 606) with respect to the acquisition, it was satisfied that the Panel’s declaration and orders made were not wrongly and again rejected the argument that the Panel was exercising judicial power and therefore unconstitutional. Interestingly, Alinta Limited relied on several successful arguments made in the Glencore decisions to challenge the Panel’s findings but on this occasion they did not find favour with the Court.
Alinta Limited intends to appeal the Court’s finding that the declaration of unacceptable circumstances should stand.
Representative or Group proceedings (class actions) are on the rise in Australia in both product liability and securities claims.
These proceedings are expensive and complicated to run. As Australian lawyers cannot charge contingency fees, few are prepared to fund such actions themselves. In part, this vacuum has been filled by litigation funding groups - the biggest and most active is listed on the Australian Stock Exchange.
Yet the activities of the litigation funders have been hampered by the common law and the (understandably) defensive tactics of corporations sued in a representative or group proceeding.
The common law produced the laws of maintenance (unlawful encouragement of others to bring actions or to raise defences which they had no right to raise) and champerty (a form of maintenance which enables the maintainer to share a portion of the spoils of litigation). Some Australian States and Territories have abolished laws that made maintenance and champerty crimes and torts but they remain on the statute books of others.
The courts, when faced with funded proceedings that have been challenged by defendants, have been keen to ensure they were fair and reasonable and not an abuse of process or against public policy.
The High Court of Australia has now given its opinion on the use of litigation funding in proceedings commenced in a State where maintenance and champerty are no longer torts or crimes. The decision is Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41.
By a majority of five to two, the Court held that there was no reason for the law to have an overarching public policy against litigation funding simply because there may be a fear that the court process may be distorted by it or the bargain between a funder and client may be unfair. Such contingencies could be dealt with satisfactorily by other means, particularly court supervision of its own processes.
The High Court’s decision is a “green light” for litigation funding but will not remove court supervision of these arrangements. The Standing Committee of Attorneys General (of the States and Territories) is reviewing the use of litigation funding, including whether litigation funders should be subject to a licensing regime. It is expected to deliver a report before the end of the year. Legislative intervention to achieve supervision of the industry and uniformity of laws is the most likely outcome of this review.
The decision in McCabe v British American Tobacco Australia Services Limited brought into sharp relief the effect a corporation’s document retention policy could have on a plaintiff’s ability to establish a claim against the corporation via its own documents. Mrs McCabe sued British Tobacco for damages claiming she contracted lung cancer through smoking their cigarettes.
While the trial judge was disposed to strike out the defence of British Tobacco in the proceeding because of its perceived shortcomings in conduct on the preservation and discovery of key documents (which allowed Mrs McCabe to secure the first verdict against a tobacco company in Australia), the Victorian Court of Appeal overturned the decision and the High Court declined to grant leave to appeal. Mrs McCabe died before she could press her claim.
The Victorian Government was unhappy with the reasoning of the Court of Appeal regarding the impact document destruction should have on pending litigation and sought an expert independent review on how to deal with it.
The result of the review is the Crimes (Document Destruction) Act 2006 and the Evidence (Document Unavailability) Act 2006. Both Acts commenced on 1 September 2006.
The first Act makes it an offence for an individual or corporation acting alone or through a third party to destroy or conceal documents or other things reasonably likely to be required in evidence with the intention of preventing them from being used in evidence. The Maximum penalty for this offence is serious gaol time, a fine or both.
In determining guilt or innocence, the Act provides that the acts of associates, the board of directors, officers and the corporate culture must be taken into account and attributed to the corporation.
Where an officer of the corporation contravenes the Act, the corporation also is taken to have contravened the Act and can be proceeded against regardless of whether the officer is proceeded against or found guilty of an offence.
The Act also provides that a corporation may defend itself successfully if it can establish it exercised due diligence to prevent the officer’s contravention.
The second Act defines when a document is to be considered unavailable in a civil proceeding and empowers the Court to make any ruling or order to ensure fairness to all parties, including that all or part of a claim or defence be struck out, that certain evidence not be adduced and the making of an adverse inference from the unavailability of the document.
Given the important consequences this Act has for corporations, all document retention or destruction policies need urgent review to ensure they comply with the new Acts and provide the requisite protection for the corporation against a wayward officer.
