Shareholder Rights Get Snipped in Australia: Government Restricts Rarely Used Rule – just in case

Flag of AustraliaThe Australian Government is set to repeal an existing provision in the Corporations Act that allows 100 shareholders the flexibility to require a company to convene an extraordinary general meeting (EGM) to consider a resolution outside of the annual meeting process.

Business lobbyists including the Business Council of Australia (BCA) and the Australia Institute of Company Directors (AICD) support the move.

PIRCKnown as the ‘100 Member Rule’, repeal of Section 249D (1) (b) of the Act, has long been a priority for many in corporate Australia who fear shareholder engagement and influence on governance.

The other provisions in the Act requiring 5% of shareholders to requisition a meeting will stay in place and the ‘100 member rule’ will still apply for shareholders wanting to put an item on the agenda of an existing AGM or EGM that has already been called by the company.

Reform of shareholder ability to convene a meeting in Australia began with Companies Act of 1981 which replaced an original 1961 requirement for 10% of voting rights with a much lower threshold of 5% or 200 shareholders. The numerical threshold was subsequently relaxed further in the Corporations Act of 1989 and again in 1998 amendments to establish the current 100 rule, with 5% remaining constant as an alternative option.

According to the Australian Shareholders Association (ASA) submission to the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 the lesser rule has been utilised very sparingly since its introduction outside one demutualised company that has been repeatedly been rent by internal board driven power struggles.

As the ASA helpfully points out in this Chart on their website of the 31 times since 1998 that the ‘100 Member Rule’ has been used to put a communication or resolution to shareholders, it has primarily coincided with an AGM or the EGM has been convened on the same day.

Only once in twenty years has a company been required by shareholders to call a standalone meeting. Also noted is that more EGMs have been convened by companies to approve share packages for CEOs than any alternatively sourced resolutions.

Fear of shareholder rights has a long history in Australia with the hysterical opposition to shareholder influence on executive remuneration being a case in point.

As far back as 1996 the respective industry associations for chartered secretaries and company directors where putting concerns to government over the threat posed by the member based threshold.

A 1999 Parliamentary Committee Report concluded that: ‘the present provision for 100 members to requisition a meeting of the company is inappropriate and open to abuse.’ An attempt was made to cull the rule by way of regulation in 2000 but this was blocked in the Senate. Another Parliamentary Committee in 2005 found that while there was little history of the rule being abused its ‘potential for abuse’ remained clear but was split on its findings with minority reports calling for the status quo to remain.

A coalition of corporate interests launched a further push for repeal in 2006 referencing union and environmental organisations support for the existing clause, again citing the potential for vexatious actions by ‘special interest groups’ to influence corporate policies.

Despite the absence of multiple meetings and disruptive imposts on business, the spectre of ‘interference’ was again being raised.

Legislation in response was mooted through 2005 and 2006 but was not successful. A change of government in 2007 saw the issue on the backburner.

Fast forward to 2014 and most of the same business voices have reiterated the same arguments, urging the newly elected administration -authors of the failed 2000 based repeal attempt -to restrict shareholder rights, for fear they just might use them.

Despite it hardly ever having been invoked, repeal would change the existing balance of accountability at the biggest companies in Australia, primary mining, energy and banking stocks.

The Shareholders Association estimates that outside of the Top 20 in the ASX 200, to call a GM under the 5% rule in future will require around $A130million worth of shares to be held by requisitionists. For the ASX Top 10, requisitionists under the 5% rule will require garnering support to the value of between $A1.5 to $A6.5 billion in shares.

The latest justification for repeal given by Government points to cutting ‘red tape’ and business costs, though the puny A$14.2M per annum cited is marginal at best.

Parliamentary Secretary Josh Frydenburg defended the change in the The Australian Financial Review saying ’If we are going to increase productivity and employment, we have to get the balance right between risk and costs and these changes do that.’

There may be other more ‘real’ concerns behind the repeal to be found in the increasingly shrill fears that have been expressed by domestic mining and energy interests around the prospect of shareholder resolutions on ESG and carbon crisis issues arising from growing public and private investor concerns.

Despite Australia entering its 24th year of uninterrupted economic growth the Australian Financial Review apparently remains eternally vigilant to the threat that shareholder democracy poses to national prosperity, applauding the move with a laudatory editorial.

Closing this particular avenue can be seen as a pre-emptive strike against the ability of small shareholders and activist groups to directly leverage a company. Elements in business are very nervous at the international rise of shareholder resolutions particularly around assessment and disclosure of climate and carbon risks. Australia’s biggest bank already has one on its forthcoming AGM agenda.

Repeal also fits neatly with other business calls to the new government for advocacy and campaigns around consumer boycotts to be made illegal.

Paradoxically it may now lead some groups to engage more closely with institutional shareholders, the superannuation and pension funds, fund managers and university endowments that have larger holdings and lean more towards influencing corporate behaviour within structured and less flexible fiduciary and ESG frameworks.

Direct action and community campaigns have been the traditionally favoured external means to pressure business in Australia and more recently, divestment is having a high profile impact as an outside game.

Corporate Australia should be worrying that the ‘special interest groups’ don’t lift their level of sophistication and start playing harder on the inside track.

Guest Post: Andrew Whiley, Head of Communications, PIRC Ltd. Pensions & Investment Research Consultants Ltd (PIRC) is Europe’s largest independent corporate governance and shareholder advisory consultancy with over 25 years experience in providing proxy research services to institutional investors on governance and other ESG issues. PIRC is independently-owned and only works for investors, believing that any commercial relationship with the companies it analyses would present a fundamental conflict of interest. This post is reproduced with permission from PIRC Alerts, October 21, 2014, Shareholder Rights Get Snipped in Australia. The graphic and ads were added by CorpGov.net.

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