CLERP 9 goes live

After a hectic dash to the wire, CLERP 9 became law on 30 June.

This update highlights some of the more pressing issues that companies and their officers will have to address as a result of the Bill. Some of these were inserted into the Bill at the last minute, and so may not have been widely publicised.

What are the big changes?

At the end of the day, CLERP 9's major changes can be summarised as:

• tough (but not crippling) new rules for auditor independence, focusing on disclosure of non-audit work, mandatory rotation of auditors (but not audit firms) and two-year quarantines for auditors who want to take up positions with former clients;
• statutory protection for corporate whistleblowers;
• shareholder approval will be required for an agreement to pay a prospective executive or directora retirement benefitgreater than final average salary times years ofservice (with an upper limit of seven years);
• increased disclosure of director and executive remuneration - including the infamous non-binding shareholder vote on the directors' report on remuneration.
• "on the spot fines" for continuous disclosure breaches by companies and personal liability for anyone involved in breaches;
• new "clear and concise" rules for the wording and presentation of prospectuses;
• electronic meeting notices and proxies (at last);
• shareholders will be able to give proxies to bodies corporate;
• new rules for the management of conflicts of interest in the financial services industry.

When does it all happen?

As with any legal question, the answer is that it depends:

• the auditor independence rules generally apply to annual and half-yearly reports for financial years beginning on or after 1 July 2004;
• the mandatory rotation of auditors doesn't apply until 1 July 2006;
• the whistleblower protections apply to disclosures made on and from 1 July 2004, including disclosures made about events that took place before that date;
• the cap on directors' and executives' retirement benefit contracts applies to any contracts entered into on or after 1 July 2004;
• greater disclosure of remuneration and the shareholder vote on remuneration will apply to reports for financial years beginning on or after 1 July 2004;
• the new continuous disclosure rules are effective now;
• the "clear & concise" prospectus rules are effective now;
• bodies corporate can be appointed as proxyholders now;
• the conflict of interest rules for the financial services industry don't start until 1 January 2005.

Some surprises

Most of the content of CLERP 9 has been in the public arena for months. However, a few surprises slipped in at the last moment, as a result of amendments made by the Government or the Opposition. Points worth noting include:

• if, in order to ensure that annual or half-yearly accounts provide a true and fair view, notes are provided above and beyond disclosures required by the regulations or by the accounting standards, the directors will be required to provide an explanation of why that information was necessary;
• for financial years beginning after 30 June 2004, listed company directors' reports will have to disclose -
  • information about (and justification for) performance conditions for remuneration,
  • if remuneration consists of the issue of securities and such issue is not dependent on performance conditions, an explanation as to why there is no link between that element of remuneration and the company's performance;
  • the value of options (in accordance with AASB 1046) granted to directors and the top 5 executives in the company and/or group (including the value of options that have been exercised or that have lapsed during the year),
  • in the discussion of the remuneration policy, information about the relationship between the company's performance and "shareholder wealth" for the reporting year and the previous four years,
  • details of the duration of a director's or a "top 5" executive's contract with the company, periods of notice required to terminate the contract and the value of termination payments provided for under the contract
  • the company’s business strategies and its prospects for future financial years (with a confidentiality carve-out);
• in addition, before the directors make their declaration on the annual accounts, the CEO and CFO of listed companies will have to sign off on the annual accounts, to the effect that the financial records have been properly maintained in accordance with the Act, that the financial statements comply with the accounting standards and give a true and fair view. This essentially codifies ASX Corporate Governance Council Guideline 4.1;
• a "due diligence" defence has been provided to balance the new imposition of personal liability on any persons involved in continuous disclosure breaches;
• from 1 January next year, listed companies and trusts will have to keep a register of any beneficial interests that are brought to light under the beneficial interest tracing provisions of the Corporations Act.

More information to come

We are currently preparing a more detailed explanation of CLERP 9's impact on companies. In the meantime, please feel free to contact one of the Clayton Utz partners listed below.