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December 30, 2013

Bridgecorp decision reversed: Directors’ insurance

in Steigrad v BFSL 2007 Ltd & Ors [2013] NZSC 156 ("Bridgecorp") the New Zealand Supreme Court decided that when a directors and officers insurance policy which contained a single limit of liability covering both liability and defence costs claims the third party claims have priority over defence costs if the limit is insufficient to satisfy both claims.

The Supreme Court reversed the Court of Appeal decision (discussed here).

Directors should seek to have their defence costs insurance in a separate policy.

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Posted 30th December 2013 by David Jacobson in Corporate Governance

November 29, 2013

Superannuation discussion paper released for comment

Treasury has released a discussion paper entitled 'Better regulation and governance, enhanced transparency and improved competition in superannuation' for public consultation .

The key issues raised in the paper are:

  • How best to ensure an appropriate provision for independent directors on superannuation trustee boards. Issues canvassed include how 'independence' could be defined and what could constitute optimal board composition.
  • How best to complete the outstanding aspects of the current regulatory regime, including:
    to what extent the choice product dashboard should reflect the MySuper product dashboard; and
    which model of portfolio holdings disclosure would best achieve an appropriate balance between improved transparency and compliance costs.
  • The best way to improve transparency and competition in the employee default superannuation funds market.

The paper also seeks views on a possible deferral of the commencement date of the MySuper transparency measures beyond 1 July 2014.

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Posted 29th November 2013 by David Jacobson in Corporate Governance, Financial Services, Superannuation

November 13, 2013

Corporate governance for sporting organisations

As stories about sporting bodies now appear on the front page of newspapers as well as the back pages, attention has focussed on their corporate governance.

The Australian Sports Commission (ASC) has published Sports Governance Principles which it applies to national sporting organisations to which the ASC provides taxpayer monies.

The principles cover:

  • Board composition, roles and powers
  • Board processes
  • Governance systems
  • Board reporting and performance
  • Stakeholder relationship and reporting
  • Ethical and responsible decision-making.

More: Dr. Ziggy Switkowski's report for the Essendon Football Club

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Posted 13th November 2013 by David Jacobson in Corporate Governance

September 12, 2013

Draft third edition Corporate Governance Principles released

The ASX Corporate Governance Council has released for public comment a
a consultation paper entitled Review of the Corporate Governance Principles and Recommendations and a draft of the proposed third edition of the Principles and Recommendations.

The draft third edition of the Principles and Recommendations maintains the 30 recommendations in the current second edition, but it has been revised and restructured to improve readability.

Substantive changes have also been made including:

  • introducing a new recommendation requiring listed entities to have a clawback policy for performance-based remuneration from its senior executives;
  • a new recommendation that listed entities establish a risk committee, either on a stand-alone basis or as part of the responsibilities of the audit committee;
  • expanding the categories of relationships that may indicate that a director may not be independent to include a person with "close family ties" with a shareholder, director or senior employee, a professional adviser or consultant, a material supplier or customer as well as a person who has been a director for more than 9 years;
  • allowing entities to treat the reporting of their "Gender Equality Indicators" under the Workplace Gender Equality Act 2012 as satisfying their obligations to report their gender statistics under the Principles and Recommendations;
  • giving greater flexibility to listed entities to make their governance disclosures on their website rather than in their annual report.

Some changes are needed to the ASX Listing Rules to give effect for listed entities to the reforms proposed in the third edition of the Principles and Recommendations.

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Posted 12th September 2013 by David Jacobson in Corporate Governance, Corporations Act

September 6, 2013

New risks for directors

Yesterday David Jacobson gave the opening keynote at the Mutuals Audit & Governance Professional Institute (MAGPI) conference in Brisbane on recent changes to director liability. Below are some of his slides.

Disclaimer: the slides were designed to accompany the presentation, not to be viewed as stand-alone slides or legal advice, but may still be of some interest to those who did not attend the presentation.

The presentation emphasised new risks for directors and how directors can manage those risks.

If you can't see the slides above you can see them here

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Posted 6th September 2013 by David Jacobson in Corporate Governance, Corporations Act, Financial Services, Risk Management

August 27, 2013

Directors’ insurance defence costs: Australian case

In Chubb Insurance Company of Australia Limited v Moore [2013] NSWCA 212 the Supreme Court of NSW Court of Appeal decided that a charge by creditors under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRA) over directors’ and officers’ (D&O) insurance policies does not prevent an insurer from advancing defence costs to an insured party.

Although in this case the charge did not apply for jurisdiction reasons the Court made a number of important comments about section 6.

Following the collapse of Great Southern Limited (Great Southern) and its subsidiaries proceedings commenced in two states. The plaintiffs claimed damages from former directors and executives of Great Southern, alleging contraventions of the various Acts, and that section 6 of the LRA gave them priority over legal expenses incurred by the directors and executives of Great Southern in defending those proceedings.

All of the defendants in all of the Great Southern Proceedings are insured persons under contracts of insurance entered into between GSL, on the one hand, and the Insurers on the other. The Policies cover the liability that the Executives and GSMAL may be found to have in the Great Southern Proceedings. However, in addition, the Policies cover legal expenses incurred by the defendants in the Great Southern Proceedings in defending those proceedings. The essential question that gave rise to the present proceeding is whether s 6 affords priority to the GS Claimants over the defendants in the Great Southern Proceedings (the GS Defendants) in relation to moneys that may be payable under the Policies.

The court found that the statutory charge created by section 6 does not prevent an insurer from advancing defence costs to an insured party:

"Section 6 of the Reform Act was enacted to address a perceived unfairness that could arise where a person is insured against a liability, that liability arises, the insured obtains a sum from its insurer and then the insured either disappears or fritters away the sum or enters into a collusive arrangement with the insurer. In such situations, even if a claimant obtains a verdict against the insured wrongdoer, he or she may not recover any sum from the insured ...

The charge is concerned with moneys payable in respect of that liability, being the liability of the insured to pay damages or compensation to the claimant. The charge is not expressed to catch all moneys that might be payable under the contract of insurance....

Even if s 6 of the Reform Act imposed a charge on any insurance moneys that are or may become payable under the Policies in respect of the liability of an insured person to pay damages or compensation to any of the Transform Claimants or the PDS Claimants, such charge would not extend to insurance moneys payable in respect of defence costs, legal representation expenses or costs and expenses that are paid by the Insurers in accordance with the Policies before judgment is entered or settlement is agreed in respect of the claim for damages or compensation of the relevant Transform Claimant or PDS Claimant."

Background: NZ Bridgecorp decision

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Posted 27th August 2013 by David Jacobson in Corporate Governance, Insurance

June 11, 2013

Case note: compliance with company constitution

Company shareholder disputes can be protracted and bitter.

Two recent High Court decisions considered the effect of non-compliance with the company's Constitution and poor record management relating to the same proprietary limited company established by the parents of Mr Weinstock and his sister, Mrs Beck.

Both cases involved a consideration of the company's constitution, basic company law principles and the Corporations Act.

The first case considered the validity of the appointment of Mrs Weinstock as a director by her husband who himself was invalidly appointed.

The second case considered whether preference shares were validly issued and could be redeemed even though no ordinary shares were issued.

In Weinstock v Beck [2013] HCA 14 the High Court considered the scope of the power of the Court in section 1322(4)(a) of the Corporations Act 2001 (Cth) to validate any act which has been done in contravention of the Act. The High Court held that section 1322(4)(a) was a wide power which should not be circumscribed by implied limitations and was wide enough to be used to validate the appointment of a person as a director which had been made by another director who, themselves, had been invalidly appointed.

The High Court held that under s 1322(4)(a) Mrs Weinstock's appointment could be validated even though Mr Weinstock had not been properly appointed as a director when he purported to appoint her as an additional director.

The majority judgment said:

"Section 1322(4)(a) of the Act was cast in very broad terms. It dealt with "any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken", whether done, instituted or taken under the Act or in relation to a corporation. The power given to the Court was to declare the act, matter or thing, or the proceeding, not invalid. The Court could do that either unconditionally or subject to such conditions as the Court imposed. The Court was given power to "make such consequential or ancillary orders as the Court thinks fit". Section 1322(6) prescribed pre-conditions to making an order under s 1322(4)(a) but the detail of those pre-conditions need not be examined.

Mr A D Weinstock purported to appoint Mrs Helen Weinstock as a director. That appointment was not made by a continuing director for the purpose of increasing the number of directors to the number fixed as the quorum for a meeting of directors. It was, therefore, not made in accordance with the requirements of the company's articles. Because the appointment was not made in accordance with those requirements, it was made in contravention of the company's constitution. Observing that Mr A D Weinstock did not have power to make the appointment reveals how the contravention came about. That Mr A D Weinstock not only did not have power but could not have validly been given the power to make the appointment neither adds to nor subtracts from the conclusion that Mrs Helen Weinstock's appointment was not made in accordance with the company's constitution. The appointment was invalid and it was invalid by reason of a contravention of the company's constitution.

Only if s 1322(4)(a) is to be read otherwise than according to its terms could it be said that the Court did not have power in these proceedings to make an order under that provision. But the power given to the Court by s 1322(4)(a) is not to be hedged about by any implied limitation."

In Beck v Weinstock [2013] HCA 15 the High Court decided that shares in LW Furniture Consolidated (Aust) Pty Ltd, described as "C" Redeemable Preference Shares (the "C class shares"), were able to be redeemed under the Corporations Act 2001 (Cth).

The Court rejected Mrs Beck's argument that the C class shares were not preference shares (and could not be redeemable preference shares) because no ordinary shares or other shares with lesser rights were issued.

The High Court held that the C class shares were preference shares and the redemption of shares was valid. The C class shares were preference shares, as they had rights attached that preferred the holder of those shares to the holder of any ordinary shares in the company on issue when the relevant right was to be examined.

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Posted 11th June 2013 by David Jacobson in Corporate Governance, Corporations Act

Case study: HBOS, a manual for bad banking

The UK Parliamentary Commission on Banking Standards' Fourth Report - entitled 'An accident waiting to happen', the failure of HBOS is the latest report from the Commission asked to consider and report on professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process, lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy.

HBOS had to be rescued by the UK Treasury in 2008. It was ultimately taken over by Lloyds Banking Group but the market value of the Treasury holding in LBG is still £5 billion below the £20.5 billion invested.

In blunt language the report concludes "It was a case of a bank pursuing traditional banking activities and pursuing them badly."

HBOS was created in 2001 from the merger of the Bank of Scotland (BoS) and Halifax. The Halifax had been the UK's largest building society and was one of the last of the major societies to demutualise and float in 1997. Despite pursuing a strategy of high growth with commensurate risk, HBOS preserved the self-image of a conservative institution.

The Report observes: "HBOS set a strategy for aggressive, asset-led growth across divisions over a sustained period. This involved accepting more risk across all divisions of the Group. Although many of the strengths of the two brands within HBOS largely persisted at branch level, the strategy created a new culture in the higher echelons of the bank. This culture was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked. The effects of the culture were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation, enabling the bank's leaders to persist in the belief, in some cases to this day, that HBOS was a conservative institution when in fact it was the very opposite."

The Report attributes blame principally to a failure of internal control:

"The HBOS Group operated a federal model, with considerable independence given to the divisions. Central challenge to the divisions from senior executive management appears to have been inadequate in the case of the three divisions that ultimately caused the most significant losses (Corporate, International and Treasury). HBOS senior management derived from Halifax and the Retail Division. Accordingly, their understanding of retail banking was stronger, and their relative weakness in other areas meant that their reliance on divisional management in the corporate banking areas was greater. The key role of assessing exposure to future credit risks was dominated by the executives of the individual divisions. These weaknesses in senior management were instrumental in the pursuit by these three divisions of the policies and practices that led to devastating losses.

Group senior management and central risk functions had greater understanding of the Retail business and several of them had direct expertise of working on the Retail side. There was therefore greater involvement by senior management and central functions in Retail and greater willingness to accept that on the part of the Division. By contrast, there was much more limited challenge and ability to challenge Corporate, International and Treasury activities and also, on the part of Corporate at least, willingness to accept it.

The risk function in HBOS was a cardinal area of weakness in the bank. The status of the Group risk functions was low relative to the operating divisions. Successive Group Risk Directors were fatally weakened in carrying out their duties by their lack of expertise and experience in carrying out a risk function, by the fact that the centre of gravity lay with the divisions themselves rather than the group risk function, and by the knowledge that their hopes for career progression lay elsewhere in the bank. The degradation of the risk function was an important factor in explaining why the high-risk activities of the Corporate, International and Treasury Divisions were not properly analysed or checked at the highest levels within the bank.

The weaknesses of group risk in HBOS were a matter of design, not accident. Responsibility for this lies with Sir James Crosby, who as Chief Executive until 2005 was responsible for that design, with Andy Hornby, who failed to address the matter, and particularly with Lord Stevenson as Chairman throughout the period in question."

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Posted 11th June 2013 by David Jacobson in Compliance, Corporate Governance, Financial Services, Risk Management

June 3, 2013

Administration of charitable trusts

CAMAC has released its report Administration of charitable trusts which deals with administrative arrangements for charitable trusts managed by licensed trustee companies.

CAMAC has recommended that:

  • the Australian Charities and Not-for-profits Commission conduct, or coordinate, Stewardship audits of a cross-section of charitable trusts administered by LTCs. The purpose of these audits would be overcome the present deficit of relevant and indisputable information on the state of administration of charitable trusts, including the extent to which each trustee has assumed its responsibilities and exercised its powers for the purpose of achieving the primary intent of the donor. These Stewardship audits could be initiated without delay, as they do not require legislative intervention.
  • the introduction of a statutory ‘fair and reasonable’ requirement for all fees and costs charged against a charitable trust. The proposed obligation on LTCs to file statements of compliance with this requirement would be consistent with promoting the primary intent of the donor .
  • changes to the judicial dispute resolution procedures to enhance access to the court, and to broaden the court’s remedial powers, including in regard to whether fees and costs charged against a particular charitable trust are excessive or whether an LTC should be replaced as the trustee of a particular charitable trust.

Depending upon the information obtained from the Stewardship audits, and any preliminary indications from the enhanced judicial dispute resolution process, CAMAC has recommended that consideration should be given to whether further regulatory or other initiatives are warranted.

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Posted 3rd June 2013 by David Jacobson in Charities, Corporate Governance, Corporations Act

April 10, 2013

ADI disclosure of capital and remuneration

APRA has released for comment a consultation paper and draft amended prudential standard APS 330 relating to Basel Pillar 3 disclosures on the composition of capital and on remuneration by authorised deposit-taking institutions (ADIs) incorporated in Australia.

ADIs will be required to publish a reconciliation between their regulatory capital and financial statements. They will also need to disclose full details of the terms and conditions of each regulatory capital instrument and a summary of those instruments in a standard form. They are intended to be referenced or included in full in published financial statements and on an ADI’s website, unless APRA agrees otherwise.

In addition, APRA will be consulting on its proposed implementation of the Basel Committee’s requirements for ADIs to disclose qualitative and quantitative information about their remuneration practices and aggregate remuneration data for senior managers and material risk-takers. This is wider disclosure than that required under the Corporations Act.

APRA is proposing that it be open to a listed ADI to incorporate the APS 330 remuneration disclosure requirements into its Remuneration Report, provided that the disclosures made in relation to ‘key management personnel’ under the Corporations Act are clearly distinguished from the disclosures made under APS 330 for ‘senior managers’ and ‘material risk-takers’.

APRA is proposing that the requirements commence for the first reporting period on or after 30 June 2013.

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Posted 10th April 2013 by David Jacobson in Corporate Governance, Financial Services
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