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Review of R Tomasic, J Jackson and R Woellner: Corporations [:] Principles, Policies and Process
3rd ed (Sydney: Butterworths, 1996), lxvii, 991 pp
Author: |
Ralph Simmonds LL.B. Hons (UWA), LL.M. (U Toronto)
Professor of Law, School of Law, Murdoch University
|
Issue: |
Volume 4, Number 4 (December 1997)
|
- This is one of the three major sets of teaching materials on corporations
law for law students from commercial publishers in Australia [1].
Of the three, it lays the greatest initial emphasis, from its title and
opening chapter, on theory, policy and context. Of the three it provides
the highest proportion of text to extract from other materials, such as
cases, legislative material and periodical literature. It lacks a
sustained treatment of non-corporate business forms, most notably the
partnership,
of the sort the others provide. But it makes up for this by a particularly
useful, largely textual, account of re-ordering and winding up the company
in distress (in its three concluding Chapters, 13, 14 and 15). And in a fast
moving area of law, this book is the least out-of-date of the three.
- In short, there is much to like here. This is whether one is a law student,
a law teacher or a person with a research problem. However, there are aspects
of the book, some major, some minor, that will cause each of these types
of reader various forms of difficulty. Perhaps the most substantial overall
criticism that can be made of the work is, however, that it represents
a promise still some distance from being fulfilled.
- The book begins in an extremely challenging way that flows directly
from the title. Chapter One "The Context of Australian Corporations
Law" is nothing less than a sweep through social theory and the
corporation.
Ideas of legitimacy (of the corporate form), of private power, of
accountability,
and of economic and political theory are reviewed. The authors' aim is
to see to it that the reader tackling this book as a whole - that is, law
student and law teacher, at least - should be discouraged from seeing the
area of corporations law as something that is just technical, value-free
or objective. At the same time such a reader should be put in a position to see the law as relevant to its
context.
- This is an important point. Corporations law has a forbidding technical
aspect, bound up as it is in an intricate legislative scheme that is productive
of complex private documentation. For the person without experience
of the world of corporate administration, this is an area of law that is extremely difficult to relate
to. For such a person charged with learning such law, it might be tempting simply
to move into an enterprise of mastering the linguistic intricacies.
- Mastering the linguistic intricacies of corporations law is important,
of course. That law offers marvellous opportunities to practice statutory
method, and to further embed the lessons of learning the law of case [2]
and statute [3]. There is also the
role of an important public regulator, the Australian Securities Commission,
to be understood [4].
- However, even assuming it is possible to learn any law simply in such
a fashion - something the authors of this book and I would contest - this
is an inadequate response to the challenge of corporations law.
- Corporations law shows the limits of legal language, or rather, the
impossibility of specifying what one wants the law to achieve so as to
make it possible not to think about anything else except the language used.
Much, or perhaps all, of corporations law makes no sense without an
understanding
of the worlds of social fact against which it is projected and the worlds
of social ideas that it reflects. This is apart from narrower, more "technical"
matters that go to the ways in which corporations law represents some
distinctive
forms of solution of legal problems. One such problem, prominent in modern corporate law,
is the perennial tension between, on the one hand,
predictability and certainty in social ordering, and, on the other, proper
allowance for adaptation to change in the phenomena being regulated.
- These points can be illustrated across the whole range of the coverage
of a book like this one. Perhaps the nicest illustrations are from the
almost mystical area of corporate legal personality (Chapter 3), where
a thing becomes a legal person; the area of accounts and audit (Chapter
9), where technical law and the language of business most obviously intersect;
and the legal control of takeovers (Chapter 11), where the technical aspect
of corporations law is at its forbidding, but events are often at their
most exciting and highly charged.
- However, when one goes beyond Chapter
1 into the more detailed treatments in the remaining 14 chapters one finds
rather less policy and context than expected.
- Chapter 1 itself is a rather compressed account - so many ideas are
covered that the reader is left somewhat breathless, expecting that the
threads will be picked up in later chapters. Largely, this does not occur:
the later chapters seem mostly to be about the "Principles" in
the book's sub-title, and not at all or not as much as one would have hoped
about its "Policies" or "Process".
- Chapter 2 "Constitutional Aspects and Administration" is
a nice framing of the basic constitutional issues in the construction and
operation of the National Scheme. But it is surprising in a book about
law in context that it does not review the budget of the ASC, its staffing
or its role as elaborator of the ideology of the National Scheme through
Policy Statement, Practice Note and less formal pronouncements.
- Chapter 3 "Corporate Personality" reviews the basic outline
of the grant of and limits to this most distinctive feature of the corporate
form. There is rather more theory reviewed here [5],
although it is not consistently tied into the subsequent accounts of the
legal rules, and some of the accounts of the theory are argumentative rather
than illuminating [6].
- Chapter 4 "The Incorporation Process" sets out the process
and its documentary constituents in nice detail, and most notably reviews
promoters and pre-incorporation contracts, the ultra vires doctrine and
the difficult area of control of the power to amend the corporate constitution.
But there is nothing here on such topics as the way the ultra vires idea
might be understood in policy terms, as control over corporate diversification
undertaken for reasons of risk minimisation or managerial empire building
[7]. Nor is there anything in this
chapter or elsewhere in the book on that matter of corporate
context, being approaches to the valuation of a membership of a corporation [8],
which is so important to a rich understanding of the principal High Court
authority on articles amendments [9].
- Chapter 5 "The Company's Dealings with Outsiders" is a review
of the liability, in tort, contract and criminal law, of the corporation
and its operatives. Its discussion of the principles of direct and vicarious
liability in tort and crime is surprisingly uninformed by the theories
that Chapter 3 "Corporate Personality" would have suggested and
that are critical of the application of notions of blame, intent or even
fault to the corporation. Here there is a rich Australian literature [10]
that grapples both with the question of that application and with an answer's
practical implications. Had some account of this been undertaken here,
it could fairly readily have been broadened into a wider discussion of
enterprise liability, which can connect the discussion of crime with that
of the areas of contract and tort [11].
- Chapter 6 "The Company and Its Members" has a serviceable
account of how one becomes a member of a company and of related matters.
This sets the stage for a review of Foss v Harbottle, the oppression
remedy, and other relief avenues, including a surprisingly long account
(in view of its reduced significance nowadays) of winding up on the just
and equitable ground. There is no review of theories of the role of litigation
in protecting members' interests, however [12].
And there is no indication of the controversy surrounding the proposals
for reform of Foss [13].
- Chapter 7 "Directors' Duties" is the longest chapter in the
book, not surprisingly for a work of this kind. It has accounts of
appointment to and loss of the office, the civil penalty
reforms (a surprisingly short account), the fiduciary duties, the duties
of care, diligence and skill (in which the somewhat misleading impression
is left that Daniels v Anderson [14]
has clearly set the new national standard[15]),
remedies, and ratification and exculpation. However, there are no references
to let alone discussion of the rich policy literature on the value (if any)
of regimes of legally enforceable directors' duties. This literature is important,
both on the role of the duties generally and on the role of the duty of care, especially after account
is taken of the possibilities for ratification, indemnification and insurance
[16].
- Chapter 8 "Meetings" covers both directors' and members'
meetings, but with greatest emphasis on the latter. It contains a most
useful map of the pressure points for attacks on meeting decisions, nicely
arraying the legal issues along this strategic axis. But there
is no reference to the problems of collective action in such meetings,
nor to the debate on whether or not institutional shareholders in fact represent
or ought to represent new hope for shareholder activism [17].
And missing too is an account of the related material on the value of the vote, well worth
a look in a book of this sort [18].
- Chapter 9 "Accounts and Audit" includes a basic account of
the records keeping and periodic reporting rules although the changes
made by the enhanced disclosure regime get only an elliptical mention [19].
There is a much fuller treatment of the role and liabilities of the auditor.
But neither here nor in the chapters on fundraising or securities regulation
later in the book is there any discussion of the modern challenge to the
disclosure philosophy of regulation represented by the Efficient Capital
Markets Hypothesis [20]. In
relation to the liability of the auditor to third parties, the area of
liability that this work like its competitors particularly highlights, there is
no grappling with (as opposed to repeated references to) the pragmatic
objection to such liability associated with Ultramares Corporation v
Touche [21].
- Chapter 10 "Financing the Corporation" is probably the least
satisfying chapter in technical as well as policy terms. It begins promisingly
by drawing attention to the difficulty of drawing sharp distinctions between
equity and debt, but it does not draw out the implications of this insight.
The basics of corporate finance as covered
by the Corporations Law are reviewed, but with a mystifyingly long treatment
of authorised capital, mystifying because the institution of par value
gets little treatment by comparison, and without a hint that there is a
current move to do away with both [22].
Debentures and floating charge law are reviewed, but with some surprising
omissions, of which the most notable is the lack of a reference to the
rule for invalidation of late registered charges in Corporations Law s
265 [23]. Collective investments
are discussed, but at a number of points as if they were simply a mechanism
for financing a corporation [24].
There is an account of fundraising controls through the prospectus requirement
in Corporations Law Chapter 7 which would have benefited from some more
thorough updating, perhaps most importantly to remove the indications
that the scheme applies to secondary market transactions as it used to
[25]. And the otherwise serviceable
treatment of the maintenance of capital area is marred by a lack of account
of the changes proposed for this area at the time of the book [26]. This is surprising given that elsewhere
it discusses other proposed changes from the same source.
- At the level of policy, it would have been highly appropriate for the
book to have included
a discussion in Chapter 10 of the 'Efficient Capital Market Hypothesis'
for the light it casts on recent changes to the form prospectuses for some
issuers must take [27]. And the
review of the theories of the floating charge would be much improved by
an account of the problem of why security is taken, particularly security
of the whole undertaking kind, and whether the legal system should accommodate
these creditor preferences [28].
Both of these represent excellent opportunities to deploy policy analysis
in aid both of understanding the technicalities of the law and of illuminating
its socially contingent character.
- Chapter 11 "The Legal Control of Takeovers" highlights the
"legalism" of an area with an extremely involved regulatory scheme
capped by a regulator in embryo, in the form of the Corporations and Securities
Panel. The book does a good job of providing a way through the thicket
of definitions and exceptions that support the basic acquisition prohibition and
its ancillary provisions. But there is surprisingly little about
the issues the Panel raises, of regulation by discretionary judgment [29].
More seriously, there is only a very short account of the policies that
regulation of the market for corporate control engages. The policy debates
here have been among the most heated in the literature on what Australians
call corporations law. Those debates have a great deal to contribute
to understanding both why such markets exist with their major premia to trading
market values, and why these markets for control are regulated as they are [30].
- Chapter 12 "Securities Regulation" is about Corporations
Law Chapter 7, apart from the fundraising, debenture and collective investment
controls. In some ways this is the best chapter. It is largely text, and
includes much material beyond case and statute, including well chosen material
from the financial press. It gives some of the flavour of what it is to
regulate such fast-moving and high stakes operations as securities markets.
But the policy material is weak. It is not enough in this area to repeat
the concern about distortion of markets by unfair practices without going
into how the public interest might be seen to dictate this sort of regulation.
The material in the chapter on insider trading highlights this. The basic
arguments about why the area should be regulated a debate on which
continues to rage in the literature are canvassed almost entirely through an extract
from the principal recent government report on the area [31]. In the chapter itself there is
a nice illustration of the continuing difficulty of rationalising
the regulation we have gained as a result of that report
[32].
There is rather more to the debate than that report suggests, and as
that case may be indicating. Further, that debate indicates the potential
for a different approach to the civil remedy for insider trading that proceeds
from Corporations Law s 1005 than is commonly supposed. This is an approach that
would focus on the distortion of the market that flows from non-disclosure
rather than on defects in the plaintiff's
trading calculus [33].
- Chapters 13 "Receivers and Controllers of Property", 14
"Arrangements
Reconstructions and Voluntary Administration" and 15 "Winding
Up" cover areas that the other corporations law teaching materials
do not or to anything like the same extent. These chapters are mostly text,
take good account of recent changes in the law, and represent highly serviceable
introductions [34]. While they
spend very little time on policy [35]
this is more understandable than elsewhere in the book, given the relatively
limited coverage to be expected of these areas in a basic set of materials.
- In sum then, this book has much to offer. The authors are to be commended
for their ambition, much of the text they have provided, and the coverage
they have managed. However, the work falls short of its promise. Given
the history of this publication, a new edition is to be expected soon.
I hope the authors take that opportunity to address more fully the promise
of their title.
Notes
[1] The other two are P Redmond,
Companies and Securities Law Commentary and Materials, 2nd ed (Sydney:
Law Book Company, 1992) and Supplement to Companies and securities law
: commentary and materials (Sydney: Law Book Company, 1996); and Robert
Baxt, Keith Fletcher & Saul Fridman, Afterman and Baxt's Cases and
Materials on Corporations and Business Associations, 7th ed (Sydney:
Butterworths, 1996). I reviewed the latter in an earlier issue of this
journal: see R Simmonds, Review (1997) 4 E Law (No 1).
[2] A favourite in corporations
law courses in this country is to review just where the law now is on the
matter of directors' standard of care as revealed by the recent Australian
cases, a matter I return to for this book below.
[3] Corporations law, as represented
by the National Scheme statutes, offers many outstanding examples. For
me the best is probably Corporations Law Part 3.2A "Financial
benefits to related parties of public companies": see R Simmonds,
"Curbing self-dealing in corporations: Australia's new approach",
(1993) 1 E-law (No. 1).
[4] Corporations law offers the
student of Australian law much here: for the sort of reflections to which
consideration of that role can give rise, see R Simmonds, "Insider
Trading, Criminal Law and Public Policy: the Canadian Memotec Prosecutions
and Their Lessons" in M D Pendleton and R Simmonds, eds, Occasional
Papers [of the Murdoch University Law Programme], Vol 2 (Perth: the
Programme, 1990), at 85 - 89 ("Insider Trading and the Securities
Commissions") and 89 - 92 ("Conclusion: the Importance of the
Administrative Process").
[5] Although some of it would
be mystifying for the neophyte, such as the reference to Teubner's
"autopoietic"
theory (at 93).
[6] As where the authors say that
"[s]ome, like the members of the contemporary law and economics movement,
would seek to reintroduce simplistic contractual principles to deal with
complex social policy and organisational dimensions of the legal regulation
of business". While I have some sympathy with this critique for
reductionism
(see R Simmonds, "Juridical Personality in Canada: The Case of the
Corporation" in Canadian Comparative Law Association, Contemporary
Law/Droit contemporain (Cowansville (Quebec): Yvon Blais, 1990), 60,
at 62 - 64), I think it identifies a unity in the law and economics movement
that is not there, and does not account for the subtlety of what for the members
so identified counts as a contract.
[7] A potentially very fruitful
way of reinvigorating a critical understanding of this area of law: for
a review of the use of ideas from organisation and management theory in
corporate law, see Carl Landauer, "Book Review: Beyond the Law and
Economics Style: Advancing Corporate Law in an Era of Downsizing and Corporate
Reengineering" (1996) 84 Calif L Rev 1693.
[8] For a short introduction
to this aspect of the case, see Michael J Whincop, "An Economic Analysis
of Gambotto" in Ian Ramsay, ed Gambotto v WCP Ltd: Its
Implications
for Corporate Regulation (Melbourne: Centre for Corporate Law and Securities
Regulation, Faculty of Law, University of Melbourne, 1996), 102, at 112
- 113.
[9] Gambotto & Anor v WCP
& Anor (1995) 182 CLR 432.
[10] Best represented I think
by the work of Professors Fisse and Braithwaite: see B Fisse and J Braithwaite,
Corporations, Crime and Accountability (Cambridge: CUP, 1993).
[11] For an early account, see
D H Hetherington, "Trends in Enterprise Liability: Law and the Unauthorised
Agent" (1966-67) 19 Stanf L Rev 76. See now Corporate Tort
Liability Symposium (1996) 69 S Cal L Rev 1679 (series of articles).
[12] For the flavour of the
law and economics literature in this area J Macey and G Miller, "The
Plaintiffs' Attorneys' Role in Class Actions and Derivative Litigation:
Economic Analysis and Proposals for Reform" (1991) 58 U Chi L Rev
1.
[13] See R Baxt, "Do We
Really Need a Statutory Exception to the Rule in Foss v Harbottle?"
(1994) 22 Aust Bus L Rev 298; for another perspective on the issues
flowing from such reform, see J Macintosh, "The Oppression Remedy:
Personal or Derivative" (1991) 70 Can Bar Rev 29.
[14] (1995) 16 ACSR 107 (NSW
CA).
[15] On the difficulties in
so saying, see HAJ Ford, RP Austin, and IM Ramsay, Ford's Principles
of Corporations Law, 8th ed (Sydney: Butterworths, 1997), [8.330].
[16] A highly accessible introduction
to the issues is in William A Klein and John C Coffee, Jr, Business
Organisation and Finance: Legal and Economic Principles, 6th ed (Westbury,
NY: Foundation, 1996), 148 - 153.
[17] See now the review in G
Stapledon, Institutional Shareholders and Corporate Governance (New
York: Clarendon, 1996).
[18] These issues provide a
valuable entry to consideration of such as the role of voteless
shares and cumulative voting arrangements, as well as a richer appreciation
of proxy voting: there is little on the first two in this book. See Klein
& Coffee, supra note 16, at 119 125.
[19] Thus, the concept of the
"disclosing entity" in Corporations Law Part 1.2A gets only an
introductory treatment.
[20] For a highly readable introduction,
see Klein & Coffee, supra note 16, at 392 97.
[21] 255 NY 170 (1931): the
point I am making here derives particular piquancy from the extensive (for
an Australian court) review of the policies that that objection instantiates
in Esanda Finance Corporation Limited v Peat Marwick Hungerfords (Reg)
(1997) 71 ALJR 448, especially per McHugh and Gummow JJ.
[22] At the time of their book,
the Second Corporate Law Simplification Bill 1996 (June 1996); see
now Company Law Review Bill 1997 (December 1997), Schedule 5 read
with Explanatory Memorandum para 1.9 (requirement for authorised capital
and possibility for par value shares to be abolished when proposed consequential
amendments to income tax legislation commence).
[23] A less substantial point,
but an important one, is the clear understanding this chapter conveys that
only corporations can grant floating charges. For how misleading that impression
is, see John Chandler, "The Modern Floating Charge" in Michael
Gillooly, ed, Securities over Personalty (Sydney: Federation, 1994),
1, at 4 6 (discussing practical implications).
[24] To see most clearly how
they are not, consider Corporations Law s 92 (1) ( c ) read with s 9
"prescribed
interest" and "participation interest", especially para
(g) of the latter.
[25] See now Part 7.12 Divison
3A: the only reference to this change I could find in the book was in the
chapter on takeover regulation.
[26] See the proposed legislation
referred to in note 22, supra.
[27] See text at and reference
in supra note 20; and see Corporations Law s 1022AA.
[28] Perhaps the best current
account of the empirical question, with references to the normative one,
is Ronald J Mann, "Explaining the Pattern of Secured Debt" (1997)
110 Harvard Law Review 625.
[29] This is a challenging area
to explore, not least because it evokes such strong rule of law objections.
For my own views on this sort of regulatory technique in the area of securities
regulation, see the references supra note 5.
[30] Perhaps the best collection
of essays (if now somewhat out of date) covering the field here is John
C Coffee, Jr, Louis Lowenstein and Susan Rose-Ackerman, eds, Knights,
Raiders and Targets: The Impact of the Hostile Takeover (New York:
Oxford, 1988). For one particularly useful essay (for understanding what
is at stake in the partial bid rules in Corporations Law ss 635 (b) and
671) see Lucian Arye Bebchuk, "The Pressure to Tender: An Analysis
and a Proposed Remedy" in ibid, 371.
[31] Fair Shares for All:
Insider Trading in Australia, Report of the House of Representatives
Standing Committee on Legal and Consitutional Affairs (Canberra, AGPS,
1989), paras 3.1 ff.
[32] Exicom Pty Ltd v Futuris
Corporation (1995) 18 ACSR 404 (SC NSW).
[33] See Klein & Coffee,
supra note 16, at 159 - 162 on the general issues, and 155 - 157 on the
fraud on the market theory, which has even more potential for application
to claims through s 1005 under the continuous disclosure rules in ss 1001A
and 1001B.
[34] Although the Table of Contents
for Chapter 15 appears to be that from the previous edition!
[35] For the sorts of policy
discussion that these chapters could have drawn upon, see Thomas Jackson,
The Logic and Limits of Bankruptcy (Cambridge: Harvard, 1986).