Corporate governance

Foreign companies

Companies registered outside of Australia can carry on business within Australia, provided that they are registered to do so with ASIC. ASIC regulates both Australian companies and foreign companies operating in Australia.

The Corporations Act 2001 (Cth) (Corporations Act) includes a series of requirements for registration of a foreign company, including the use of an application form prescribed by ASIC. A foreign company must have a registered office in Australia for the purposes of communication, as well as an appointed local agent.

Australian companies

A foreign company may also choose to acquire an Australian company or establish an Australian subsidiary. There are a number of ways to structure your Australian business, however, the most common is the incorporation of a proprietary or public company. Incorporation gives a company a separate legal status along with its own powers, rights, and liability, distinct from its owners and employees. A proprietary (or private) company must have at least one shareholder and is limited in size to a maximum of 50 non-employee shareholders. A public company must have a minimum of one shareholder but is not limited in its number of shareholders.

There are some key differences between public and private companies, but generally private companies are more appropriate for small to medium-sized businesses. In both instances, the company is owned by its shareholders and managed by its directors.

For more information about establishing a business, click here.

Corporations Act

The corporate standing and governance of Australian companies are broadly governed by three instruments:

• the Corporations Act;
• their constitution; and
• common law.

The primary source of legal governance is the Corporations Act. Administered by ASIC, the Corporations Act provides the overarching rules of compliance for Australian companies.

Amongst other things, the Corporations Act includes provisions that govern:

• administration of companies;
• financial reporting requirements;
• mergers and acquisitions;
• shareholders’ disclosure;
• financial services licensing; and
• fundraising.

Constitution

Most Australian companies are also required to adopt a constitution either on or after registration. The constitution (formally known as a memorandum and articles of association) is a document that includes more specific rules for how the company will be governed internally. The Corporations Act provides a default set of internal rules known as the replaceable rules, which will form part of the company unless displaced or modified by the constitution.

The constitution — and therefore the rules of the company which are not law — can be amended. These amendments require a special resolution to be passed by the shareholders of the company.

A company’s constitution and replaceable rules will have the legal effect of a statutory contract between each of the members, and between the company and its directors, company secretaries, and members.

ASX Listing Rules

In addition to the requirements under the Corporations Act, entities listed on the ASX must comply with the ASX Listing Rules. The ASX Listing Rules govern the quotation of securities and their admission to or removal from the official list of the ASX.

Any breach of the ASX Listing Rules may result in a company’s suspension from quotation or removal from the official list of the ASX.

Amongst other things, the ASX Listing Rules provide guidance on admission to the list, quotations, continuous and periodic disclosure, securities, meetings, trading suspensions, and on-going listing requirements. Under the ASX Listing Rules, ASX listed entities are also required to include a corporate governance statement in their annual report.

In 2003, the ASX introduced the ASX Corporate Governance Council Principles and Recommendations (Principles and Recommendations). The 4th edition was published in 2019. The eight Principles and Recommendations are as follows:

• lay solid foundations for management and oversight;
• structure the board to add value;
• act ethically and responsibly;
• safeguard integrity in corporate reporting;
• make timely and balanced disclosure;
• respect the rights of security holders;
• recognise and manage risk; and
• remunerate fairly and responsibly.

Although these Principles and Recommendations are aimed at ASX listed entities, they also provide good guidance for the structure of non-listed corporations.

Board of directors

Proprietary companies are required to have at least one director, who must be an Australian resident. Public companies are required to have a minimum of three directors, two of whom must be Australian residents.

The directors are responsible for overseeing the management of the company. The board of directors is often described as the corporate organ, and is comprised of directors elected by the shareholders of the company.

The role of the board of directors is distinct from the role of the executives. The board of directors will generally be split between non-executive and executive directors. Executive directors will participate in the day-to-day management of the company, whereas non-executive directors will remain independent from management.

Although a company’s constitution may delegate some function to the board of directors, there are certain circumstances where the Corporations Act will require the board of directors to seek approval of the company by way of general meeting. These include key decisions such as changing the constitution, or deciding to wind up the company. Additionally, for listed entities, the ASX Listing Rules may require certain transactions to be approved by the shareholders in a general meeting prior to the exercise of power by the board of directors.

The Chief Executive Officer of the company is the highest ranking executive responsible for the management of the company. The Chief Executive Officer will serve the board of directors and act in accordance with their instructions.

Directors’ duties

Directors’ duties in Australia are prescribed by the Corporations Act and common law.

A director has a duty:

• to exercise their powers with care and diligence;
• to exercise their powers in good faith in the best interest of the company and for a proper purpose;
• not to improperly use their position or information obtained through their position to gain an advantage or cause detriment to the company;
• not to cause detriment to the company; and
• not trade whilst insolvent.

Where the Australian company is part of a group, it may also be written into the company constitution that the directors can have regard to the interests of the ultimate holding company.

Disclosure obligations

Under the ASX Listing Rules and the Corporations Act, a listed entity has a duty of continuous disclosure. With exception, “once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information”.

The continuous disclosure regime aims to improve timely release of information, equal access to information, commercial interests, and confidentiality of information withheld from disclosure.

A failure to comply with a company’s duty of continuous disclosure is both a criminal and civil offence which may attract large fines against the corporation and responsible officers.

In circumstances where a company becomes aware of market sensitive information and is not in a position to release the information, the company may need to request a trading halt with the ASX.

Disclosure is not required where a reasonable person would not expect the information to be disclosed. The reasonable person is equipped with the qualities of a person who commonly invests in securities.

Reporting and auditors

A listed entity is required to lodge annual and half-yearly audited financial reports with ASIC. These reports must comply with account standards set by the Australian Accounting Standards Board.

A proprietary company is required to prepare a financial report for the financial year if there is a direction from shareholders, with at least 5% of the votes, or by ASIC.

If a financial report is prepared without direction from shareholders or ASIC, then the proprietary company is not required to obtain an audit of the financial report.

A company must retain its financial records for a minimum of seven years after the transactions covered by those financial records are completed.

An auditor is required to be independent from the company that is to be audited. Independence is necessary to avoid conflicts of interest. Independence and quality are regulated by various instruments including the Corporations Act, the Code of Ethics for Professional Accounts, and the Auditing Standards.