How corporate transactions will become easier by law, pending reform
20 August 2021 06:34
Capital Monitor Editorial
Business as usual disruptions aside, the COVID-19 pandemic has thrown significant challenges in the face of Australian companies and their capacity for compliant corporate transactions and daily practices. Rolling lockdowns, stay-at-home orders, and social distancing measures make it difficult to execute documents that require ‘wet ink’ signatures, or to hold AGMs and other binding meetings in person. Last year, the Morrison Government moved to facilitate electronic signatures and virtual AGMs when the pandemic hit, but the measures lapsed on 21 March 2021, when extending legislation failed to pass the Australian Senate. Commonwealth, State and Territory Treasurers have since agreed to prioritise establishing a secure, electronic pathway for document execution, with the Australian Treasury recently publishing a consultation draft of legislation that would bring this into being, and establish national standards for virtual and hybrid AGMs.
The Electronic Transactions Act 1999 (Cth) and its state and territory counterparts provide that a transaction is not invalid because it took place wholly or partly by means of one or more electronic communications. These measures include the use of electronic signatures and the witnessing of documents via audio visual link. However, this does not extend to documents executed under s 127 of the Corporations Act 2001, which allows parties to rely on the execution without having to make any further enquiry. Documents signed with ‘wet ink’ signatures by two directors, or a director and the company secretary, can be assumed to have been validly executed and made legally binding. COVID-19 related difficulties in arranging face-to-face meetings have threatened to make document execution difficult, if not impossible. Similarly, social distancing requirements make it impossible to hold AGMs and other meetings in such a way that would allow all stakeholders to attend and participate. For these reasons, the Government passed legislation early in the pandemic, to allow the Treasurer to create new rules for business to keep the economy operating as smoothly as possible.
On 25 March 2020, the Coronavirus Economic Response Package Omnibus Act 2020 came into effect, Sch 8 of which allowed the Treasurer to make determinations to modify the operation of the Corporations Act, to facilitate continuation of business and mitigate the economic impact of the pandemic. Using the powers under the Act, on 5 May 2020, the Treasurer made the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020. The determination altered the operation of s 127 of the Corporations Act to give certainty that when company officers signed a document electronically (including an electronic document), the document would be validly executed. This also allowed for split execution, using a mix of ‘wet ink’ and electronic signatures. The determination also ensured that companies and other entities could hold AGMs and other meetings virtually, rather than face-to-face. It permitted information required for such meetings to be circulated electronically, and for quorum, votes, notices and the asking of questions to be facilitated via electronic technology. The determination was in effect for six months only.
The effect of the determination was extended on 21 September 2020 by the Corporations (Coronavirus Economic Response) Determination (No.3) 2020. While this was six weeks before the original determination was due to expire, the Treasurer’s power to make determinations under the Coronavirus Economic Response Package Omnibus Act 2020 was only valid for six months, and therefore set to expire on 25 September. The extension ran for a further six months, to 21 March 2021. To extend the measures beyond that date, further legislation is required.
To that end, the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 was introduced on 17 February 2021, with the intention of extending the temporary relief measures related to virtual meetings and electronic execution of documents until 16 September 2021. The provisions had bipartisan support and, had the Bill contained only those measures, it may have passed the Parliament without incident. However, the Bill also contains measures to reduce corporate obligations under the continuous disclosure regime. This raises the bar related to misleading and deceptive conduct provisions, where it would have to be proven that an entity or officer acted with 'knowledge, recklessness or negligence' in respect of an alleged contravention, which has proved highly controversial.
In their dissenting report to the Economics Legislation Committee, Labor Senators noted that stakeholders had raised concerns that the legislation threatened to reduce shareholder rights to accountability and transparency, and the ability to effectively participate, if virtual-only AGMs were normalised without shareholder opt-in/out election. Furthermore, Labor conveyed the concerns of shareholders and legal practitioners that the changes to the continuous disclosure and misleading and deceptive conduct provisions would undermine market integrity, and cause significant disadvantage and financial loss where directors failed to disclose information, and consequently deceived individuals or groups including shareholders and the general public. Unsatisfied with the haste of the Economics Legislation Committee’s process, Labor passed a motion in the Senate on 16 March 2021, referring the Bill to the Economics References Committee and deferring any further debate in the Senate until 3 August. The Senate Economics References Committee tabled its report on the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 on 30 June.
The failure to pass the Bill has left the temporary relief measures contained in the Corporations (Coronavirus Economic Response Determination (No.3) 2020 that expired on 21 March 2021 in a state of lapse, raising uncertainty for business, shareholders, and the legal profession.
On 29 March 2021, ASIC adopted a temporary ‘no‐action’ position in relation to the convening and holding of virtual meetings. To give the market certainty, ASIC’s position supports the holding of meetings using appropriate technology, facilitates electronic notice of meetings including supplementary notices, and allows more public companies an additional two months to hold their AGMs. The position applies to meetings held between 21 March 2021 and the earlier of 31 October 2021, or the date Parliament passes further legislation related to the use of virtual technology in meetings of companies or managed investment schemes.
"It is important that business has certainty in the current environment,” ASIC Commissioner Cathy Armour said. “ASIC’s position is intended to facilitate businesses to hold their meetings effectively during the ongoing pandemic where there is still uncertainty around restrictions on gatherings and travel. ASIC understands the benefit of hybrid and virtual AGMs in the current circumstances but recognises that appropriate conduct of meetings is important to safeguard the rights of members to participate. Accordingly, ASIC reissued its guidelines for investor meetings using virtual technology which lapsed with the expiry of the determination. These guidelines have been updated to reflect the current no-action position.”
On 11 June 2021, the Commonwealth, State and Territory Treasurers agreed to prioritise collaboration on a common approach for document execution. Attorney-General Michaelia Cash welcomed the decision, noting that there were over 4.5 million deeds and 3.8 million statutory declarations completed in Australia each year by small and medium enterprises, and consumers. Ms Cash said that the ‘wet ink’ requirement and need for witnesses made execution of deeds and statutory declarations “complicated and time consuming”, and that establishing a secure, electronic pathway for document execution could save over $400 million in direct costs and wasted time per year, according to modelling by Accenture (commissioned by the Government’s Deregulation Taskforce).
The Law Council of Australia also welcomed the move towards a common approach for electronic document execution. “During the COVID-19 pandemic, the electronic execution of documents was a game changer, especially in the commercial law space,” Law Council President, Dr Jacoba Brasch QC said. “It will remain a game changer by offering real potential for trade and commerce to flow in a more efficient and cost-effective way. The Law Council looks forward to working with the government to ensure that fidelity and veracity of the process for the execution of electronic documents is maintained. The Law Council supports further investigation into what additional permanent improvements can be made as a result of technology which may further improve the flow of commerce in this country, efficient service delivery and cost effectiveness for clients.”
On Friday, 25 June, the Treasury released a consultation draft of a Treasury Laws Amendment (Measures for Consultation) Bill 2021, which would make permanent the previous temporary measures related to electronic execution of documents, sending notifications of company meetings, and to facilitate the use of technology in meetings. The proposed legislation would expand reforms to facilitate the use of technology in meetings. Companies will be permitted to hold hybrid meetings, to allow stakeholders the choice to attend and participate either physically or virtually. These reforms are designed to give shareholders greater opportunities to participate in and scrutinise company meetings. Interested parties are invited to comment on the consultation draft, and can submit responses until 16 July 2021. Treasurer Josh Frydenberg celebrated the passage of the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 in early August, which finally became and Act on Friday 13 August nearly six months after introduction.
To access original media releases, text of legislation, and details around measures used as examples in this article, log into Capital Monitor at: www.capitalmonitor.com.au.