Simmonds, Ralph --- "Legislative Note: Curbing Self-Dealing in Corporations" [1993] MurdochUeJlLaw 3; (1993) 1(1) Murdoch University Electronic Journal of Law

LEGISLATION NOTE - CURBING SELF-DEALING IN CORPORATIONS - AUSTRALIA'S NEW APPROACH

Author:	Ralph Simmonds LL.B. Hons (UWA), LL.M. (U Toronto) Professor of Law, School of Law, Murdoch University
Issue:	Volume 1, Number 1 (1993)

Author's Note: This is a revised version of a paper presented to a seminar of the Law Society of Western Australia, "Beneficial Instinct: Practical Advice on Related Party Transactions under the Corporations Law", on 3 August 1993. I benefited considerably in making these revisions from the advice from my fellow panellists, Laurie Shervington of Minter Ellison Northmore Hale, Perth and Geoff Rogers of Mallesons Stephen Jaques, Perth.

1 An Introduction to the Background to the New Law: the "Abuses of the 1980's"

The problem of finding adequate controls of self-dealing by a corporation's intimates is a long-standing one in corporate law. Recently, the Australian Corporations Law has given us an innovative set of provisions to deal with the matter.

The new regime is given to us by Corporations Law, Part 3.2A, which was introduced by the Corporate Law Reform Act 1992, and, although in force on 1 February 1993, is not binding on public companies until 1 February 1994.  This is subject to a most interesting provision permitting one to opt in to the new regime at any time before then. This odd arrangement is not the least of the innovations.

Where did this initiative come from? The ultimate source is the perception of the abuses of the 1980s of the sort described in Companies and Securities Advisory Committee, Report on Reform of the Law Governing Corporate Financial Transactions (1991) (CSAC Report):

"Following the corporate collapses of the 1980s, it has become evident that some corporate controllers abused their positions of trust by arranging for the shifting of assets around and away from companies and corporate groups, and into their own hands.

They achieved this by various means, including remuneration payments, asset transfers or loan arrangements, on terms highly advantageous to themselves but to the detriment of these companies. In other instances, substantial inter-corporate loans were entered into with the purpose or effect of disguising the true financial position of individual companies within a group. This was made easier by the lack of any general statutory requirement that shareholders either consent to, or be informed of, these transactions. These abuses generally involved significant losses of corporate funds, with adverse effects on investor and creditor returns and confidence. They also brought into question the integrity of Australian financial markets, with detrimental consequences for the Australian economy."

There are, of course, existing rules in this area, headed by the common law's fiduciary duties, particularly the duty to avoid a conflict between one's duty and one's personal interests.

There is also no apparent shortage of statutory and similar rules to deal with aspects of this area. The CSAC Report lists loans to directors and senior officers (currently s 234); loans to related and linked companies (currently s 205 in some instances); asset transfers between companies and associated persons (currently regulated by the Australian Stock Exchange ("ASX") Listing Rule 3J (3)); directors" interests in company transactions (currently s 231); and executive remuneration (currently s 239): Page 3.

And that is not all See e.g. Corporations Law s. 297 (1) and Corporations Regulations, Sched. 5, cll. 25 and 29 (disclosure of remuneration of directors and executive officers); and s. 309 (disclosure of other benefits).

The CSAC Report concluded, however, that more rules were needed. The ones they proposed have undergone a substantial further transformation, to form the rules now in Part 3.2A. Their purposes remain much the same as those underlying the Committee's proposals CSAC Report, at p. 3, sets out the Committee's view of their proposals.

The basic purpose of the new Part 3.2A is to complement the common law and other statutory rules, some of which themselves underwent some modification at the time the new Part was introduced. The Part 3.2A provisions complement these rules by in effect setting up a regime calling for prior disinterested shareholder approval of transactions, unless another exemption applies. They cover a wider class of company than ASX Rule 3J (3).

Understanding the new rules then requires an appreciation of the background law. Three particular aspects of that law are particularly important. The first is the common law's "conflict rule". The second is the statutory provisions on directors "interests in transactions with their companies". The third is ASX Listing Rule 3J (3).

2 Where the New Regime Fits: The Common Law's "Conflict Rule"

A serviceable short statement of this aspect of a director's fiduciary obligation runs (Paul Redmond, Companies and Securities Law: Commentary and Materials, 2nd ed. (1992), at p. 417.):

"[there is a duty] to avoid situations where, without the consent of the company, the director's interest (or that of another whom the director is bound to protect) conflicts or may possibly conflict with his or her duty to the company."

The common law rule's most straightforward application is to a director's transaction with the company. That application is, of course, that, absent provision in the articles or disclosure to and approval by the shareholders, the director's interest makes the contract voidable, and it is irrelevant the deal it represented was fair to the company: Aberdeen Rwy v Blaikie Bros - (1854) 1 Macq. 461; [1843 - 1860] All E.R.. Rep. 249 (H.L.). Absent provision in the articles, it would not matter if disclosure were made to fellow directors, as the company is entitled to the advice of all of its directors: The Liquidators of the Imperial Mercantile Credit Association v. Coleman (1871) L.R. Ch. App. 558 (C.A. in Ch.). Disclosure would then have to be made to the general meeting for absolution by it, assuming that was within its power: below. If there is an article permitting a director to retain a benefit if he or she discloses the interest to the board and abstains from voting there, then the director must make full disclosure to fellow directors: The Liquidators of the Imperial Mercantile Credit Association v. Coleman (1873) L.R. 6 H.L. 18 (a director had an interest as partner in broking firm which stood to make commission on placement of shares to his corporation, which apparently itself would replace them, albeit at lower commission; at the meeting, he simply declared he had an interest, without specifying it; HELD, liable for whole commission his partnership earned thereby, not just his share)

At common law, approval by the shareholders was effective even where the majority was made up of the directors who were interested, at least in the absence of fraud on the minority or "improper dealing with the company's property". See Northwest Transportation Co. Ltd. v. Beattie (1887) 17 App. Cas. 589, cited in H.A.J. Ford and R.P. Austin, Ford's Principles of Corporate Law, 6th ed., (1992) FORD & AUSTIN, 6TH, at 494 (source of quotation). Under the Corporations Law, of course, such approval, even if not within the fraud on the minority or improper dealings exception, might still be subject to attack under the section 260 "oppression" remedy, while other provisions, such as section 623, exclude the counting of votes by interested directors in certain circumstances. Also, for listed companies, the ASX Listing Rules, such as Rule 3J (3), may for certain situations be to the same effect as section 623.

What interest of a director engages the conflict rule? The nature and extent of that interest must be such as to give rise to a real or significant possibility of conflict, so that a small shareholding in a company with which the company is doing business would not do  Although older authorities like Transvaal Lands Ltd v New Belgium (Transvaal) Land and Development [1914] 2 Ch. 488 (CA) hold that any shareholding in company with which the company contracts will do, including holding as trustee, later authorities suggest only material shareholdings will do: FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at pp 492 - 93 and authorities cited there; and see Peninsular and Oriental Steam Navigation Co. Ltd. v. Johnson [1938] HCA 16; (1938) 60 C.L.R. 189 (two directors were also directors and, seemingly, also shareholders, of company appointed selling agents for colliery company; under agency selling agents responsible for commission of all overseas agents and subagents; colliery company resolved to pay commissions to London agents over one year, and did so; HELD, arguably this arrangement was to induce selling agents to do what they were not obliged to do, use overseas agents; in any event, rescission no longer possible). Thus, it is not disabling to be an employee of the other party, remunerated at a salary: FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at p. 493, citing Wilson v. London Midland and Scottish Railway [1940] Ch. 169, aff'd DIRECTORS REMUNERATION, and, possibly, a director not of the other party but of its parent  See FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at p. 493, and case they cite, Baker v. Palm Bay Island Resort Pty. Ltd. [1970] Qd. R. 210, at 221 - 222 (holding expectation, not being contractual one, that director of vendor company would be appointed director and would receive 25% holding in purchaser company not an "interest" that disabled; interest should not be remote or contingent; instancing as an insufficient interest where director of other company remunerated only a salary). Compare the result on these facts under Part 3.2A, below. But it would seem likely that an interest as a substantial creditor would be disabling. Accord, FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at p. 491.

Most importantly, the conflict rule is not restricted to dealings with the company by the director or an entity in which he or she is interested. The classic situations that illustrate this are often subsumed under what is formulated as the other major expression of the director's duty of loyalty, the "profit rule". The bifurcated approach is usually associated in Australia with Chan v. Zacharia (1984) 154 C.L.R.; it is trenchantly criticised in the judgment of Laskin J. in Canadian Aero Services Ltd. v. O'Malley (1973) 40 D.L.R. (3d) 371 (Supreme Court of Canada). That rule can be expressed in terms that the director must not "misuse the fiduciary position for personal advantage": FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at p. 504. It precludes a director from diverting to herself a business opportunity, which the company was pursuing, without the fully informed assent of the shareholders in general meeting: FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at 504. In fact either formulation of the fiduciary principle is usually capable of being used in these situations: FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at 504.

As we will soon see, this last set of points reveals both a wider and a narrower conception of a disabling interest than the new Part 3.2A.

3 The Conflict Rule's Statutory Analogues: the Statutory Duties Where There is a Dealing with Company

The Corporate Law Reform Act 1992 not only gave us it Part 3.2A, it also gave us new regimes to replace the one represented by the former Corporations Law section 231. We now have two separate regimes. One is based on the former section 231, and is for proprietary companies. The other is quite new, and could be called a "be absent" rule. It is in new section 232A and section 232B. All of this law has been fully in force since 1 February 1993.

3.1 The Regime for Proprietary Cmpanies

Section 231 is amended by substituting in subsections (1) and (6) the term "proprietary company" for "company". The effect is to restrict it to the familiar section 116 type.

Otherwise, the section remains exactly the same. It continues to require the declaration of any interest, direct or indirect, in any way arising, in a contract with the business to a board meeting, unless the interest is only that of a member or a creditor of a corporation interested in the contract, and the interest "may properly be regarded as not being a material interest", as subsection (2) puts it. The section 231 regime continues to be in addition to other law: subsection (9). The only express sanction continues to be the criminal one in Corporations Law, Schedule 3, of $1,000 fine or imprisonment for 3 months. There is still no resolution of the division of view on whether or not non-compliance has any effect on the validity of the contract concerned. Assuming that, as is normal, the articles provide that an interest does not require an assent of the company in general meeting: see FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at pp. 498 - 99, and Woolworths Ltd v Kelly (1991) 22 N.S.W.L.R. 189 (CA) (increase of pension entitlements of retired executive still on board; no formal disclosure; articles required disclosure in accordance with [CL s 231]; by majority, equity looked to substance, not form, and so here disclosure sufficient; Kirby P of view formal disclosure served cautionary and evidentiary functions for board; [s. 231 (7)] obligation to record statement is statutory support).:

3.2 The Regime for Public Companies

New section 232A and section 232B derive from the Companies and Securities Law Review Committee's Director's Statutory Duty to Disclose Interests and Loans to Directors (1989). As with the CSAC Report, the proposals in the CSLRC have undergone a transformation, although the basic thrust remains the same. In place of section 231's duty to disclose interests, section 232A imposes a duty on a director with a "material personal interest" in a matter before a meeting of the board of a "public company" not to vote and not to be present at the meeting while the matter is being considered: subsection (1). For the purposes of this section, there is a new definition of "public company" inserted into Corporations Law section 9 that includes bodies corporate that are incorporated or taken to be so "[public company] in this jurisdiction, but not under the Corporations Lw of this jurisdiction; and is included in the official list of a securities exchange"

However, "material personal interest" is not defined, other than by subsection (2)'s exclusion of an interest as a member of the company that is "in common with the other members of the company".  Its relationship to the common law, and to section 231's interest "in any way" (subject to subsection 231 (2)'s let-out for interest merely as member or creditor of company interested in contract that is "not ... a material interest"), is obscure. It seems, like both of those sources, to cover non-pecuniary interests ("material personal interest"). It seems narrower, to some extent at least, than the common law, which is spoken of in terms of a real or sensible possibility of a conflict as we have seen (that is, it is a "material personal interest"). Subsection 232A (1)'s interests are more clearly narrower than subsection 231 (1)'s, even after account is taken of subsection 231 (2).

Consider a director who has a directorship in another company with a corporate performance related remuneration package COMMON LAW ON PERFORMANCE. This package distinguishes the case from the position referred to in note DIRECTORS REMUNERATION, supra, making it arguable (if far from certain) that the common law would be engaged here, but one which would not result in a gain that would significantly affect the director's wealth. It would arguably be caught by the common law. See note COMMON LAW ON PERFORMANCE, supra; and it would clearly be caught by subsection 231 (1). It is less clear whether it would be caught under subsection 232A (1). The regime of section 232A does provide for an authorisation for the director concerned to vote. This may be derived following a resolution of directors specifying the director, the interest and the matter; and stating that directors are content: subsection (3). The problem here is that the director himself or herself cannot vote on this resolution, nor for one to authorise another director in respect of the same matter: subsection 232A (1), especially paragraph (a). Further, in addition to any constitutional provision as to quorum, subsection (4) specifies that there must be at least two directors present who are entitled to vote on any motion that may be moved in relation to the matter.

In cases where board authorisation is incompetent, the general meeting, regardless of the corporate constitution it seems, is given authority to deal with the matter. The directors may, notwithstanding quorum rules, craft the relevant resolutions for it to consider and call the meeting: subsections 232A (5) and (6). As this might pose a problem where a matter is urgent, and because the section seems to contemplate specific action for a specific matter, rather than general action in respect of all cases involving a director's otherwise disabling interest: See Minter Ellison Northmore Hale, The Corporations Law in 1993: A Review of Legal Developments and Proposals (1993) "MINTER ELLISON NORTHMORE HALE", at p. 39, there is provision for the Australian Securities Commission to make a dispensing order: section 232B.

What are the consequences for a director in breach of section 232A? Under Corporations Law section 103, as amended by the Corporations Law Reform Act 1992, breach does not itself invalidate a contract; but it is a criminal offence under section 1311 and Schedule 3, with a maximum penalty of $500.

4 ASX Listing Rules

The main one is Rule 3J (3). But there is also Rule 3L (5). This requires a listed company "[t]o advise the Home Exchange without delay of any material contract involving directors' interests. The advice should include, inter alia, the names of the parties to the contract, the name of the director (if not a party to the contract), particulars of the contract, and the director's interest in that contract."

"Contracts involving directors' interests" are defined broadly, in the Listing Rules definitions, to mean "any loans, contracts, agreements or arrangements with the company or a subsidiary or associate company in which a direct or indirect financial interest is held by a director of the company or of any of its subsidiaries or by any members of that director's family or by any company controlled directly or indirectly by that director or any member of his family or by a company in which that director or any member of his family has a material financial interest. Such contracts may be formal or informal, express or implied, and include an agreement not enforceable by legal proceedings whether or not it was intended to be so enforceable."

Rule 3J (3) is more like Part 3.2A in being a member approval regime. Its effect has been summarised in terms that: FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at p. 517; and see also pp. 432 - 33.

Rule 3J (3) in its most recent full text reads as follows: A listed company and/or any entities with which it is associated, shall not purchase, gain, obtain or otherwise acquire (whether by means of an agreement, transaction, subscription for securities or otherwise) any assets and/or securities where the consideration payable, the consideration deemed by the Exchange in its absolute discretion to be payable, or the value of the total assets and/or securities is in excess of 5% of the shareholders" funds of the listed company as at the date to which the last audited accounts were made up without the prior approval of its shareholders in general meeting if the vendor, disponer, or donor of such assets and/or securities is: any person who is or was at any time in the preceding 6 months a director or officer of the listed company or any entity with which it is associated; any person or company who is or was at any time in the preceding 6 months a substantial shareholder of the listed company; or any person or company who for the purposes of CL Pt 1.2 Div 2 would be regarded as a person or company associated with the listed company or its related corporations; or any other person or company whose association with any of the persons or companies referred to above is such that in the opinion of the Exchange the proposed acquisition should be referred to the shareholders of the listed company in general meeting. A listed company and/or any entities with which it is associated, shall not sell, give or otherwise dispose of (whether by means of an agreement, transaction, allotment of securities or otherwise) any assets and/or securities where the consideration receivable, the consideration deemed by the Exchange in its absolute discretion to be receivable or the value of the total assets and/or securities is in excess of 5% of the shareholders" funds of the listed company as at the date to which the last audited accounts were made up without the prior approval of its shareholders in general meeting if the purchaser, disponee or donee of such assets and/or securities is: any person who is or was at any time in the preceding 6 months a director or officer of the listed company or any entity with which it is associated; any person or company who is or was at any time in the preceding 6 months a substantial shareholder of the listed company; or any person or company who for the purposes of CL Pt 1.2 Div 2 would be regarded as a person or company associated with the listed company or its related corporations; or any other person or company whose association with any of the persons or companies referred to above is such that in the opinion of the Home Exchange the proposed disposal should be referred to the shareholders of the listed company in general meeting. For the purposes of Listing Rule 3J(3)(a) and (b) a purchase or sale of assets and the consideration payable shall include the issue price and the exercise price of such put or call options, as the case may be. When a company enters into such a put and/or call option it shall be a condition of that contract that it is subject to ratification by shareholders in general meeting. The provisions of Listing Rule 3J(3)(c)-(g) shall apply. Further approval of shareholders is not required on exercise of the options where approval has already been required and obtained pursuant to Listing Rule 3J(3)(c)(i). Notice of any meeting of shareholders to approve any transaction referred to in Listing Rule 3J(3)(a) and/or (b) shall be accompanied by a report from an independent qualified person. The independent qualified person shall state in the report his opinion as to whether the transaction is fair and reasonable to shareholders, other than those whose votes are to be disregarded. Where the independent qualified person expresses an opinion that the transaction is not fair and not reasonable or fair but not reasonable, that fact shall be prominently displayed in the notice of meeting and on the covering page of the accompanying documents. At any meeting of the shareholders of the listed company convened for the purpose of approving a transaction referred to in Listing Rule 3J(3)(a) or (b), the listed company shall disregard any votes cast (other than in respect of proxies given by other members of the company which contain clear instructions as to how such votes are to be exercised) by the vendor, disponer, donor, or purchaser, disponee or donee or any person who for the purposes of CL Pt 1.2 Div 2 would be regarded as a person associated with any of those persons, or any other person whose votes should be disregarded in the opinion of the Exchange. The Exchange may require that securities issued as consideration for the acquisition of assets are deemed to be vendor securities and subject to the provisions of Listing Rules 3T(1) and (2). To supply to the Home Exchange for examination at least 5 business days before being issued 2 copies of the draft notice of meeting and other documents proposed to be sent to shareholders in accordance with Listing Rule 3J(3). (Refer Listing Rule 3J(33).)

Where a listed company proposes a transaction and wishes to clarify whether or not the Exchange will form an opinion that an association exists such that the transaction should, pursuant to the Listing Rule 3J(3), be referred to the shareholders of the company in general meeting, full details shall be provided to the Home Exchange so that a determination by the Home Exchange may be made prior to the company entering into the transaction.

Where a listed company has not received written confirmation from the Home Exchange that a transaction need not, pursuant to Listing Rule 3J(3), be referred to the shareholders of the company in general meeting and the Home Exchange forms an opinion that the transaction should have been referred to shareholders in general meeting for approval, the company may be required either to cancel the transaction or convene a meeting of shareholders on such conditions as the Home Exchange may direct, to obtain the subsequent ratification of shareholders of the transaction.

"Associate" is defined as in Corporations Law s. 10 and following in Ch. 1, Part 1.2, Div. 2.

An amendment to the rule was made, effective July 1993, to make it clear that it did not apply to the listed company's issue of securities for cash only: see CCH Australian Companies and Securities Law Reporter, New Developments, para. 600-630.

"[i]t requires the approval of the company in general meeting to certain large transactions between a listed company or any of its 'satellites" (broadly defined) in the listing rules) and any associates, including directors. The rules requires that a report from an independent qualified person be placed before the shareholders, and interested parties and their associates cannot vote."

As we will see even from this short description, this means Rule 3J (3) applies to a differently described class of transaction involving a differently defined class of persons, with some differences in procedure, but with a substantial overlap, compared with Part 3.2A.

5 The New Part 3.2A: Basic Purpose and Basic Prohibitions

The basic purpose of the new Part is explained by the Corporate Law Reform Bill 1992 Explanatory Memorandum in this way:

"One cannot prevent dishonesty by legislation. What can be done, though, is to establish an environment which makes dishonesty less likely to result in losses for the investor. Better enforcement is a key aspect of this, but the content of the law can also help, by establishing simple rules with a bias in favour of disclosure. Proposed Part 3.2A accordingly seeks to establish such a set of simple rules. It says to the honest director, "If the related party transaction which is proposed is on ordinary commercial terms, it can be approved by the Board. But if it is an uncommercial transaction, it must be referred to shareholders, and shareholders must be fully informed of the details". If all directors are aware of these rules, inappropriate transactions should not slip through unchallenged as they often did during the 1980s."

Sadly, the rules are not simple. In fact, it is hard to see how the legislative intent could have been effected, using standard Commonwealth drafting techniques, in any other way.

To understand what the legislature has wrought, it is necessary to start with the simplest part of the Part, its basic prohibition. This prohibition then takes one into the definitions of the basic terms it uses.

From there one goes to the exceptions, which are of two types. One is for shareholder approval, which turns out to be a complex and error-prone process. The other type of exception is for particular types of transaction: for all but one of these, uncertainties in practical application make them somewhat less helpful than they might otherwise appear to be.

The consequences of contravention must also be considered - which takes one into another innovation of the Corporate Law Reform Act 1992, its Civil Penalty regime.

Armed with an understanding of the new regime, it will then be possible to see why it will not become mandatory until 1 February 1994, but also why there is provision for opting into it before then. This is the way the remainder of this note will proceed.

Start with the basic prohibitions, the simplest part of the whole scheme. There are in fact two prohibitions. One is of a "public company" giving a "financial benefit" to "a related party": subsection 243H (1). The other is of a "child entity" of such a company giving such a benefit to "a related party of the public company": subsection 243H (2). Simple in statement these may be. Much lies in the definitions, however.

6 Part 3.2A's Basic Concepts

These are "public company"; "giving a financial benefit"; "related party"; a subset of that term, 'sibling entity"; and "child entity".

6.1 "Public Company"

This is defined in the new version of Corporations Law - section 9 already referred to, to cover the companies to which section 232A applies, and to exclude companies licensed by the ASC under section 383.

As Minter Ellison Northmore Hale, supra note MINTER ELLISON NORTHMORE HALE 18 , at p. 27 indicate, it is not clear how it applies to unit trusts, which must under Corporations Law s. 1064 be managed by a public company. If a financial benefit out of trust assets is given to a related party of the management company, and Part 3.2A applies, then absent another exception the shareholders of the management company, not the unitholders, must give their assent. This does not seem to be sensible. The new scheme thus does not apply to giving financial benefits to persons who are intimates of proprietary companies. Nor, as we will see, does section 234, on loans to directors, as amended by Corporate Law Reform Act 1992.

6.2 "Giving a Financial Benefit"

This is elaborated upon in new section 243G. The effect of subsection 243G (1) is to tell us to read the expression "broadly", and as including a reference to giving a financial benefit "indirectly", as through one or more interposed entities, or by making or giving effect to a "relevant agreement" within section 9. The effect of subsection 243G (2) is to tell us that the "economic and commercial substance and effect" is to "prevail" over the "legal form", while any consideration given for the financial benefit is to be "disregarded", even if that consideration is "full or adequate". In subsection 243G (3) it tells us that a benefit need not be monetary to be a financial benefit, if "for example" it confers a "financial advantage". And subsection 243G (4) gives us examples of "giving a financial benefit", such as loans, guarantees, providing security, and forgiving, releasing, neglecting to enforce or assuming an obligation.  It also includes providing property, securities or services.

Consider the effect of all of this.

6.2.1 Indirect Benefits

The Explanatory Memorandum tells us that this would cover benefits conferred on an interposed entity acting as principal "in the expectation that that entity will pass the financial benefit to a related party of the public company": Para. 264

The Explanatory Memorandum in the same paragraph contrasts this with the approach of Lockhart J of the Federal Court in Trade Practices Commission v. Australian Iron & Steel Pty. Ltd. [1990] FCA 23; (1989) 22 F.C.R. 305. He was dealing with the concept, in subsection 50 (1) of the Trade Practices Act 1974 (Commonwealth), of "acquire, ... indirectly" an interest in or assets of a body corporate so as to acquire a dominant market position. He concluded that such an acquisition is one (1984) 22 F.C.R. at 316 "by someone on behalf of the corporation acting as agent, trustee or nominee". How much further does this go? At the very least it is arguable that the same financial benefit does not have to be passed along. An expectation of any financial benefit which will flow out of the one provided directly should do.

What of provision of financial benefits to a company in which a related party has a significant although non-controlling interest. If the interest were a controlling one, the company itself might be a 'sibling entity", under the definition to be considered shortly. If so, it would itself be a related party interest? Here the benefit has changed in form, from an addition to assets to an enhancement in the value of an asset. That might not to be telling, however: See Minter Ellison Northmore Hale, supra note MINTER ELLISON NORTHMORE HALE 18 at 29 (raising the question in respect of a 51% subsidiary of a related party). Perhaps it is the case that the related party's benefit must be in the contemplation of the provider. If not, then Part 3.2A might have a scope approaching that of the common law's disabling condition for contracts in which a director has an interest. Unlike the common law, however, Part 3.2A cannot be varied by the constitution of the company; and the shareholder approval conditions, which must be met if no other exception is applicable, are rather more onerous than the common law standard, as we will see.

6.2.2 Financial Benefit

It is worth reiterating the lessons of subsection 243G (2), (3) and (4). A benefit need not be monetary, despite the word "financial". The provision of property or services is included. Nor need the deal be one of gift or at a bargain price. A deal favourable to the provider is apparently included. In the last case in particular, however, as one might expect there is likely to be an exception.

6.3 "Related Party"

This is the most complex of the basic concepts. There are four classes of such parties, as set out in subsection 243F (1). They are controllers, directors, intimates, and corporate relations of the designated sorts. This list is based in part on section 234, with the major extension being to the corporate relations: Minter Ellison Northmore Hale, supra note MINTER ELLISON NORTHMORE HALE 18, at p. 29.

There are then extensions of these classes, in subsection 243F (2), to include an "entity" who was such at any time in the previous 6 months, and, in subsection 243F (3), to an "entity" who believed or who had reasonable grounds to believe it would become a related party "at some future time".

In subsection 243F(5), there is a further extension, to an "associate", with whom a related party has acted or proposes to act in concert in respect of the giving of a financial benefit by the public company or a child entity to the associate.  This is where at least part of the reason for the related party so acting is that a financial benefit has been or is expected will be given to a related party.

There are thus spatial and temporal extensions of the basic idea.

6.3.1 Controllers: the "Parent Entity"

Paragraphs 243F (1) (c) and (g) refer to one of the persons "constituting ... [a non corporate] ... parent entity", and to a "parent entity" simpliciter. "Parent entity" is defined in subsection 243D (1) as a "holding company", or an "entity" that has "control" of the relevant entity.

6.3.1.1 "Holding Company"

The first limb, "holding company", is the familiar concept which Corporations Law section 9 defines in terms of whether the other body is a "subsidiary" within section 46 and the following sections. These provisions focus on control of the composition of the board, on being in a position to cast or control the casting of more than one-half of the votes entitled to be cast at a general meeting, and on holding more than one-half of the participating shares.

6.3.1.2 "Entity" with "Control"

The second limb, "entity" with "control", is rather less familiar.  The expression is not restricted to corporations, and the definition of "entity" in subsection 243C (3), read with the previous two, subsection 243C (1) and subsection 243C (2), drives this point home. Subsection (3) refers us to any section 9 "accounting standard" that deals with disclosure in financial statements about related parties, was in force at the relevant time, and defines "entity".

The current such accounting standard is Australian Accounting Standards Board 1017 (AASB 1017), "Related Party Disclosures"

Australian Accounting Standards Board, Accounting Standard AASB 1017: Related Party Disclosures (as revised to May 1993) AASB 1017

Its purpose is stated as follows: "The purpose of this Standard is to require disclosure in the accounts and consolidated accounts of information relating to the relationships of the reporting entity with related parties and transactions with related parties, including the remuneration and retirement benefits of directors, loans received by directors and other director-related transactions."

The term "related party" for the purposes of AASB 1017 is defined in item 9 in terms similar to, but not identical with, the definition used for the purposes of Corporations Law Part 3.2A: see on the latter the discussion below. It defines "entity" as follows: AASB 1017, supra note AASB 1017 26, item 9 "entity". There is the same definition used for the purpose of AASB 1024, to do with consolidated financial reporting, which is also imported under the Corporations Law for its purposes: see R.P. Austin, "Problems for Directors within Corporate Groups", in M. Gillooly, ed., Corporate Groups (1993) GILLOOLY, at pp. 152 - 55.

" ... any legal, administrative, or fiduciary arrangement, organisation structure or other party (including a person) having the capacity to deploy scarce resources in order to achieve objectives".

This opens up an array of possibilities. It is not necessary, however, to resort to the generality of the term to cover the likes of a partnership, an "unincorporated body", and trusts, including ones with two or more trustees. That is because these are all specifically enumerated as entities in subsection 243C (1) and subsection 243C (2).

It is clear, from the specific provision for prosecution of such entities in section 243ZG, that an entity need not be a legal body. This is provided at least that it can be decomposed into legal persons. So a joint venture could be an "entity", each of whose constituents could then be prosecuted for contravention of section 243H.

It is entities that have "control" of another entity that are parent entities. The term "control" is, like entity, defined by reference to any "accounting standard" that deals with disclosure in financial statements about related parties, was in force at the relevant time, and defines the term.

This again takes us to AASB 1017. It defines "control" as follows: AASB 1017, supra note AASB 1017 26, item 9 "control". The same definition is also used in AASB 1024, on which see note GILLOOLY 27, supra

" ... the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity".

The commentary on this definition in the Standard sets out a list of factors that would "normally indicate the existence of control". These are:

"the capacity to dominate the composition of the board of directors or governing board of another entity; the capacity to appoint or remove all or a majority of the directors or governing members of another entity; the capacity to control the casting of a majority of the votes cast a meeting of the board of directors or governing board of another entity; the capacity to cast, or regulate the casting of, a majority of the votes that are likely to be cast at a general meeting of another entity, irrespective of whether the capacity is held through shares or options; and the existence of a statute, agreement, or trust deed, or any other scheme or device which, in substance, gives an entity the capacity to enjoy the majority of the benefits and to be exposed to the majority of the risks of that entity, notwithstanding that control may appear to be vested in another party".

Since the holding of an ownership interest usually entitles the investor to an equivalent percentage interest in the voting rights of the investee, a majority ownership interest would normally, though not necessarily, be accompanied by the existence of control. However, it is the voting rights rather than the ownership interest that provide the potential for control. AASB 1017 (5/93), section 9, Control

COMMENTARY, (xiii).

So far as I can tell there has been no case-law on 1017's concept of "control" as yet. The list, and other parts of the commentary, employ the idea of majority control or the dominance of board composition familiar from the Corporations Law concept of the holding company already referred to.

It is far from clear, however, that "control" in the Standard, unlike the corresponding idea in the Corporations Law, is exhausted by these indications. In particular, it is quite arguable that the Standard's concept could cover, where the Corporations Law would not, a person who has no control over votes at the general meeting, who holds no participating shares and who has no dominance of board composition. That person could still arguably meet the Standard's functional test, such as by dictation of financial and operating policies through a credit relationship with the company: See R.L. Simmonds, "A Summing Up and Search for Solutions" SIMMONDS IN GILLOOLY, in Gillooly, supra note GILLOOLY 27, at p. 234.

6.3.2 Directors Paragraphs 243F (1) (a) and (b) include as a "related party" a "director" of the public company, or of a body corporate that is a parent entity of the public company.

"Director" is presumably to be understood in the extended sense in Corporations Law section 60 See Mallesons Stephen Jaques, Corporate Law Reform: A brave new world (February 1993), at p. 4. On that extended sense, see FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at pp. 486 - 87. This would cover persons formally so appointed. It also covers persons acting in that capacity, regardless of title or the invalidity of their appointments, and, under paragraph 60 (1) (b), persons "in accordance with whose directions or instructions the directors of the body are accustomed to act", which can include corporations.

This last extension of "director", when read with "entity" with "control", suggests two different types of control relationship which will make one a related party of a public company so controlled.

Control that is in the interests of another entity is within the "entity" type of control. This is the sort of control one would expect to encounter in well integrated corporate groups: See Simmonds, supra note SIMMONDS IN GILLOOLY 30, at p.235.

The other type of control is in the interests of the entity itself, which is within the control of the shadow director type. This is the sort of control one might expect to encounter in family company situations. Consider the founding family member, retired from the enterprise, who continues to direct policy and operations, because he or she "knows best".

6.3.3 Intimates

Under paragraphs 243F (1) (d) and (e) a spouse or de facto spouse of a "related party" director or parent entity, or a parent, son, or daughter of such a director, such an entity, such a spouse or such a de facto spouse is included as a "related party", himself or herself. Interestingly, the same legislation that gave us Part 3.2A has added a definition of "de facto spouse" to Corporations Law s 9, as:

"an individual of the opposite sex to that person who is living with that person as his or her spouse on a genuine domestic basis although not legally married to that person"; The restriction to persons "of the opposite sex" seems, from a policy standpoint, unnecessarily restrictive.

This is an obviously somewhat arbitrary line-drawing exercise, like section 234's before this. Giving financial benefits to slightly more distant relations - such as brothers or sisters - would then escape Part 3.2A, on the face of it.

It would not, as we have seen necessarily escape the common law obligations. And if the brother or sister were a conduit for the benefit to get back to the "related party", Part 3.2A would catch this provision, as an indirect benefit to that party.

A major complication added by this extension to intimates is revealed when corporate relations are considered, as they are next.

6.3.4 Corporate Relations

Under paragraph 243F (1) (f) an "entity", of which a person or two or more persons of any of the kinds previously referred to has "control", is included as a "related party". This is with the exceptions of "a child entity" of the public company, and a corporate parent entity. Under paragraph 243F (1) (g) a "sibling entity" is included as a "related party". Effectively, what this seems to mean is that upstream and cross- stream financial benefits are caught; but downstream benefits are not, unless the "child entity" is a related party by virtue of another limb of the definition. For example, one such would be where a person is a biological parent of a director of the public company, and the parent's sole proprietorship business is controlled by the public company.

6.3.4.1 The Exception for a "Child Entity"

The parent in the previous example would be a "child entity" because subsection 243D (2) defines "child entity" as one that has a parent entity. A child entity can be in corporate or non-corporate form. It can also have more than one parent. The term child entity has particular significance, as we will see when section 243T is discussed below, because of the basic prohibition's extension to such an entity with a public company parent that gives a financial benefit to a related party of that parent.

6.3.4.2 The Inclusion of a "Sibling Entity"

The terms of subsection 243D (3) define "sibling entity" as one that shares a parent with another entity, where neither entity is a parent of the other. Hence, subsidiaries in direct line of descent would not be siblings.

6.3.5 Spatial and Temporal Extensions

The subsection 243F (2) temporal extension to previous related parties who were such at any time in the previous six months is meant to cover persons who have "recently ceased" to be related parties, as the Explanatory Memorandum, paragraph 259 puts it. Paragraph 260 tells us that the subsection 243F (3) temporal extension to an entity who is given a benefit believing or having reasonable grounds to believe that it is likely to become one of the types of entity previously listed is meant to "prevent a person or entity from receiving a financial benefit and then becoming a related party".

Perhaps of greatest practical significance, however, is the spatial extension under paragraph 243F (5) to an "associate" of a related party, being one who acts in concert with a related party in respect of the giving of a financial benefit by a public company or a child entity of that company to the associate, for the reason in part at least that a financial benefit has been or is expected to be given to a related party of the public company. The Explanatory Memorandum paragraphs 261, 268 and 269 confirm that it is not necessary that the second benefit be the same as the first, and it need not be given to the related party with whom the associate acted in concert.

6.3.6 What All of this Amounts to

This suggests a need for great caution in even moderately elaborate business settings. Financial benefits to entities that were at any time in the previous six months controlled in fact by parents of a director of a parent entity of the donor are caught by the scheme, for example.

Further, it can be seen, in the case of child entities that are not public companies - the likeliest case is proprietary companies - that Part 3.2A may well be binding now. This is because the provision that speaks of delayed application of section 243H, the basic prohibition, subsection 1376 (1), refers only to cases of a "public" company. It is not clear what policy sense it makes to have this immediate application to the giving of a financial benefit by a non-public-company child entity, as opposed to a public company one. It is not easy to see a constructional way out of such an application pattern, however.

That is, as one commentary on the provisions puts it: Minter Ellison Northmore Hale, supra note MINTER ELLISON NORTHMORE HALE 18, at p. 29.

"At a practical level, it will be necessary to review every proposed transaction between parties which are unrelated, to ascertain whether there is any linkage higher up in the corporate chain which might create a "related party" relationship and an indirect benefit to attract s. 243H. It will not be enough to assess the relationship between the direct parties to the transaction".  To which it might be added, this needs to be done laterally also, prospectively as well as retrospectively, and needs to be done now, before 1 February 1994 or any opting in, if a child entity that is not a public company is giving the benefit..

Of course, there may well be a saving exception, to which this note now turns.

7 The All Important Exceptions

As has been noted, the basic purpose of the provisions in Part 3.2A is to have the disinterested shareholders, under Division 5, decide on the giving of a financial benefit to a related party by a public company or by one of its child entities. This is unless one of the other, more particularised exceptions in Part 3.2A Division 4 (rather misleadingly styled "General Exceptions") applies. Consider the shareholder approval exception first.

7.1 Disinterested Shareholder Approval

There is section 243Q, for giving a benefit, and section 243R, for contracts to give one. Part 3.2A Division 5 Subdivision B sets out the conditions that must be met. As the Explanatory Memorandum paragraph 303 puts it, failure to comply with any of the conditions renders the basic prohibition in section 243H applicable. This is subject only to the possibility of another exception being applicable, or a judicial declaration of substantial compliance under section 243ZD.

The conditions make the approval process complex, and create the risk of error.

7.2 Shareholder Approval Part 3.2A Division 5, Subdivision B, comprises section 243U to section 243ZD. These, when read with section 243ZF and section 243ZH, set out requirements for a four stage process. In the first, before the notice calling the meeting is issued, the significant documents to be used must be lodged with the ASC. These documents include a prescribed "explanatory statement". The ASC is thereby provided with an opportunity to comment on the matter.

The notice convening the meeting is then issued, with the lodged documents and any comments the ASC has been moved to make. The meeting follows, for which certain voting rules are set.

Finally, notice of the resolution passed must be lodged with the ASC, and certain records must be kept for a period of 7 years.

Consider these in more detail.

7.2.1 Material to be Lodged with the ASC

The terms of subsection 243U (1) say that, at least 14 days before the notice convening the meeting is given, the company has to lodge the proposed notice, the proposed explanatory statement, and certain other accompanying documents, including any proposed to be given to members by the company, the related party or an associate of that party or of the company. The term "associate" in the case of associate of the company is presumably being used in the sense of Corporations Law - s. 10 and following sections that "can reasonably be expected to be material to a member".

The effect of this is, by section 243X, section 243Y and section 243ZA, to restrict the material documents that can then be put before the members at the meeting to documents which are the same in all material respects as these documents, and to restrict the resolution put to members to the same one as the one contained in the proposed notice so lodged.

7.2.2 The "Explanatory Statement"

The terms of subsection 243V (1) require that this set out the related party or parties and the financial benefit or benefits, for each director his or her recommendation or reason for making none, as well his or her interest if any in the outcome, and any other matter "reasonably required by members in order to decide whether or not it is in the company's interests to pass the proposed resolution".

The breadth of this is emphasised by subsection 243V (2)'s illustrations of the sorts of information this requires. It instances "the true potential costs and detriments" of the financial benefits, including "opportunity costs" and taxation consequences. This would appear to go beyond anything the general law of notice of meetings required, at least for unlisted companies: On the informational requirements of general law, see FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at 651 - 52. It would also appear to impose a significant burden on the company to make the disclosure intelligible: FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at p. 652 note that the trend in the modern Australian cases is to call for intelligibility to ordinary shareholders who are "not versed in matters of business".

7.2.3 The Notice Convening The Meeting and Accompanying Material

The terms of section 243X provide for the notice and accompanying documents to go out to the members to include any comments given by the ASC under section 243W. That section allows the ASC to consult widely before doing so, but subsection 243W (1) says that the Commission is not to comment on whether or not the proposed resolution "is in the company's best interests". The terms of subsection 243W (5) say that the Commission is not restricted by these comments so far as the exercise of its enforcement powers are concerned.

Presumably the ASC will proceed cautiously in making comments, given the potential for litigation challenging comments as disguised evaluative ones.

7.2.4 Voting at the Meeting

The terms of subsection 243ZF (1) provide that votes on the resolution must not be cast by, or on behalf of, in any capacity, the related party or an associate. Contravention is an offence which under Corporations Law Schedule 3 attracts a fine of $20,000 or imprisonment for 3 years or both. If the resolution would have passed without such votes, however, subsection 243ZF (1) permits the resolution to stand. By subsection 243ZF (6) a contravention has still occurred, however.

The terms of subsection 243ZF (4) say that the ASC may make an order dispensing from the disinterestedness requirement; but the Explanatory Memorandum, paragraph 306 indicates that it is "anticipated" that the ASC "would not usually" make any such order.

By subsection 243ZB (3) and subsection 243ZB (4) the recording of voting details member by member is required where a poll has been demanded. As we will see, these records must be retained by the company for 7 years thereafter.

7.2.5 Post-Meeting Procedures

The terms of section 243ZC require that, within 14 days after the resolution is passed, notice of it must be lodged with the ASC. Further, section 243ZH requires the company to keep, for 7 years, the records of voting on a poll just referred to.

This last requirement would seem to be particularly likely to lead to error. It is useful, however, that compliance with the record-keeping obligation is not one of the conditions to the availability of the exclusion: subsection 243Q (c). This is doubly fortunate, as this requirement is also one with respect to which the power of the court under section 243ZD to order that substantial compliance is sufficient is inapplicable. Contravention of the requirement is, however, an offence, which under Corporations Law Schedule 3, attracts a fine of $2,500 or imprisonment for 6 months or both. 7.2.6 Multiple Shareholder Meetings

By the operation of section 243T, a resolution does not except any other application of the basic section 243H prohibitions. This will often make for a requirement to obtain shareholder resolutions from a series of companies in a group.

Consider the example given in section 243T. There, X is a director of A Ltd., which is a parent of B Ltd., which is a parent of C. Ltd. C Ltd. proposes to give a financial benefit to X. Unless another exception applies, C Ltd. must see to it that general meetings of all of C Ltd., B Ltd. and A Ltd. are held to approve the giving of the benefit. This because there are three applications of section 243H to the giving of the financial benefit by C Ltd.

One application is of subsection 243H (2), to C Ltd. as a child entity giving a benefit to a related party of parent B Ltd.

Another application of subsection 243H (2) is to C Ltd. as a child entity giving a benefit to a related party of its parent A Ltd.

The third application of section 243H, this time of subsection 243H (1), is to C Ltd. as a public company giving a benefit to a related party.

Further, what is the position if C Ltd. is wholly owned by B Ltd? This would seem to make it impossible to have approval by a general meeting of B Ltd. It might be argued that Corporations Law subsection 249 (7), permitting the holding company in such a case to sign a resolution, could be used, relying on subsection 243ZI (2). That subsection makes sections 243J to 243R inclusive "subject" to the operation of the provisions of the rest of the Corporations Law outside Part 3.2A. The difficulty with the argument, however, is that subsection 243ZI (1) says that section 243ZF, the requirement for disinterested shareholder approval, has effect "despite anything else in this Law".

More complex corporate structures could be readily imagined, creating the need for still more layers of approval, if this is possible. Might matters be saved by another exception?

7.3 More Particularised Exceptions

These are in section 243J to section 243PB, numbering no less than 7. Start with the ones likely to be of greatest immediate interest, for the remuneration of officers, and transactions on commercial terms.

7.3.1 Reasonable Remuneration Arrangements

The provisions of section 243K allow for remuneration to a person in that person's capacity as an "officer". Presumably, the definition in Corporations Law s. 82A, as amended by Corporate Law Reform Act 1992, is meant to apply here. of a body corporate, by direct provision or contract, by the body corporate or another entity, if the provision or contract was "reasonable in the body corporate's circumstances" and "in the person's circumstances".  As one commentary indicates, it is not altogether clear what the "person's" circumstances directs attention to. Is it just the position occupied, or the work done, or might it include such things as recent adventitious changes in wealth?:

Minter Ellison Northmore Hale, supra note MINTER ELLISON NORTHMORE HALE 18, at p. 33 (instancing lottery win).

Remuneration is very widely defined by subsection 243K (4), subsection 243K (5), subsection 243K (6) and section 243K (7) to include allowances for expenses, fringe benefits, employer's superannuation contributions and payment on cessation of office (remember the retrospective related party idea, in subsection 243F(2)).

Yet some payments might not be covered: one such, it has been suggested, is an indemnity paid under Corporations Law section 241: P. Wines, "3.2A Related Party Transactions" in Butterworths, Australian Corporate Law: Principles and Practice, vol. 1 (Service 24: 2/93) WINES, at p. 32,719. And in the area of remuneration generally, there are a number of other provisions in the Corporations Law and the ASX Listing Rules that may be applicable: See Wines, supra note WINES 40 , at p. 32,719 (instancing s. 237). See also FORD & AUSTIN, 6th ed., supra note FORD & AUSTIN, 6TH, at pp. 516 - 17 (on s. 239 and ASX Listing Rules 3L (7), 3E (8) and 3J (16)).

7.3.2 Arrangements on Commercial (Arm's Length) Terms

The provisions of subsection 243N (1) permit a public company or a child entity to give a financial benefit on terms that are n more favourable to the related party than "those on which it is reasonable to expect that the company or entity, as the case may be, would give the benefit directly if dealing with the related party at arm's length in the same circumstances".

The provisions of subsection 243N (2) enumerate relevant matter to be considered, in the case of loans or other "financial accommodation", including servicing cost, schedule of repayments and credit risk.

The Explanatory Memorandum tells us, in paragraph 283, that this exception is not restricted to ordinary course transactions, although in out-of-the-ordinary-course ones, in particular, the directors may want to obtain "an independent expert's report on the transaction".

Paragraph 284 instances as transactions that might be brought under section 243N management services arrangements provided by companies controlled by the public company's directors, and investments in it by them.

While obtaining an independent outside report may be a suitable refuge in many cases, it is hardly foolproof. Thus, in cases of erroneous reports, a reliant director who is the related party in question would likely invoke the defence to a subsection 243ZE (2) contravention in subsection 243ZE (6). The latter subsection makes it a defence that the person was unaware of a fact or circumstance essential to the contravention of the basic prohibition in section 243H. The director may still know too much, however; and this might also mean that section 1318 would be of no use: See Wines, supra note WINES 40, at pp. 32,717 - 18.

This would, absent another exception, turn attention back to shareholder approval, whose requirements, as we have seen, need to be carefully respected. What other exceptions are there?

7.3.3 Other Particularised Exceptions: for Benefits before the Basic Prohibition Applies; Advances up to Prescribed Amounts; Non- Discriminatory Benefits; and Benefits Pursuant to Court Order

The terms of section 243J apply to benefits given before section 243H began to apply to the company. It should be noted, however, that section 234 might well apply in such a case.

The terms of section 243L apply to advances by a body corporate to a director or a spouse or de facto spouse, up to $2,000 or such larger amount as is prescribed by the regulations. No such regulation has yet been made. All advances not otherwise covered by another exception to the related party in question by the body corporate, a parent entity, child entity, or sibling entity are to be counted toward the amount in question. The Explanatory Memorandum, paragraph 279, makes it plain that this exception is for functionally de minimis amounts.

The terms of section 243PA applies to financial benefits given by a public company or a body corporate that is a child entity of it to "its own" members as such, on a basis that does not "discriminate unfairly, directly or indirectly", in favour of one or more related parties of the public companies. The Explanatory Memorandum paragraph 286 indicates that this could cover not only dividends but also such things as discounts for goods or services provided by the company. The exception would not, however, apply to such things as the creation and issue of a special class of shares for directors, to serve as a "performance incentive" to them: Wines, supra note WINES 40 , at p. 32,731 (source of quotation).

The terms of section 243PB apply to financial benefits paid in accordance with the order of a court. Presumably the court in exercising its discretion will have regard to the broad purposes of Part 3.2A. It is also possible that this section will be frequently resorted to in cases of large benefits. In such cases, however, it is to be expected that the court would want to know why the shareholder approval route could not be followed. One case where it might be satisfied is the one in the earlier discussion, of a wholly owned child entity giving a benefit to a related party of a public company parent of its public company parent. The court could sensibly dispense with the need for shareholder approval in the case of the intermediate corporation.

7.3.4 The Restructuring Exception: Financial Benefit Given to or By a Wholly Owned Subsidiary

The terms of section 243M provide for an exception where a body corporate gives financial benefits to a "closely held subsidiary", while the latter may give such a benefit to that body corporate or one of its child entities. The term "closely held subsidiary" is defined in subsection 243M (3), when read with subsection 243M (4), to mean a body all of whose voting shares are held by or on behalf of the body corporate.

The dramatic simplicity of the section commends it. It has plainly created an incentive for corporate groups to consider restructuring which would remove minority shareholders in at least some downstream bodies.

8 Consequences of Contravention of the Basic Prohibition

At least, as section 103 as amended by the Corporations Law Reform Act 1992 tells us, contravention of section 243H does not invalidate the transaction. The main contravener is the "related party". This emerges from a consideration of section 243ZE. The public company or child entity providing the benefit is, subsection 243ZE (4), not guilty of an offence. This is sensible in view of Part 3.2A's object expressed in Explanatory Memorandum, paragraph 282, as "the protection of a public company's resources by requiring that transactions with related parties that could diminish or endanger those resources be disclosed and approved by the members at a general meeting of the company."

The related party, by subsection 243ZE (2), is made a contravener when the public company or child entity contravenes section 243H, and the related party receives the benefit. Also, persons involved (in the Corporations Law section 79 sense) in the contravention of section 243H or the related party's contravention, as well as those directly or indirectly concerned in, or party to either sort of contravention, are by subsection 243ZE (3) made contraveners. There is, by subsection 243ZE (4), an exclusion of the public company or child entity providing the benefit in the latter case.

The related party, and those involved, concerned or party to the relevant contravention, are all then, by subsection 243ZE (5), subjected to the Civil Penalty regime in Part 9.4B of the Corporations Law. This was added by the Corporations Law Reform Act 1992, and came into force on 1 February 1993. The liability of the related party is, as we have seen, subject to the defence in subsection 243ZE (6), for unawareness of a fact or circumstance essential to the contravention of section 243H.

The Civil Penalty regime has much wider application of course, most notably to the recast director's duty of care in new Corporations Law subsection 232 (4). The regime permits courts to make "civil penalty orders", under section 1317EA, to prohibit a director from managing a corporation, or, in "serious" cases, imposing a "civil penalty", payable to the Commonwealth, of up to $200,000. Proof in such proceedings is, by section 1317ED, at the civil standard.

The regime also allows a corporation in relation to which there was a contravention to recover the profit thereby made, or for the harm thereby caused, in a free-standing action, under section 1317HD. Or the corporation may recover an amount by way of compensation in civil penalty proceedings as section 1317HA provides.

All of this is subject to the power of the court, in terms similar to Corporations Law section 1318, to relieve a person in whole in part from liability under the regime.

The regime does not completely decriminalise contraventions of the provisions to which it speaks, however. Where the provision was contravened "knowingly, intentionally or recklessly", and the contravener intended either dishonestly to gain an advantage, or to deceive or defraud some one, then subsection 1317FA (1) makes contravention an offence. Under Corporations Law Schedule 3, the penalty is a fine of $200,000 or imprisonment for 5 years or both.

9 Conclusion: Why There is a Delayed Mandatory Effect for Part 3.2A

Section 243H, the basic prohibition, and section 243ZE, the consequences of contravention, by virtue of subsection 1376 (1), as we have seen, only apply to public companies from 1 February 1994. This is unless, by subsections 1376 (2) and (3), a majority of the directors of the company elect, in writing and with irrevocable effect, that the sections should apply earlier.

I have already noted the argument that the effect of Part 3.2A may be applicable to cases of child entities that are not public companies giving financial benefits to related parties of a public company.

Why the delayed effect for any benefit giving? One of the reasons for delayed effect should by now be apparent. It is to allow time for corporations to take account of the new rules, and in particular to engage in the sorts of restructuring that were previously referred to.

Why is there provision for earlier opting in to the new regime? The Explanatory Memorandum in paragraph 217 explains that the answer lies in the effect of opting in on the application of Corporations Law section 234, as amended by the Corporations Law Reform Act 1992.

Section 234 will be repealed on 1 February 1994, by subsection 26 (2) of the latter Act. Since 1 February 1993, as we have seen, it has ceased to apply to proprietary companies. Until then, and as a result of paragraph 234 (3) (aa), it only applies to public companies to which section 243H and section 243ZE apply by virtue of section 1376.

Paragraph 217 indicates that there are some transactions to which section 234 applies to which Part 3.2A does not, without specifying any. The main example seems to be loans, other than in the ordinary course of the public company's ordinary business, to directors, on arms length terms within section 243N. Under section 234 these require shareholder approval; but under Part 3.2A, on the assumption made, they do not: Minter Ellison Northmore Hale, supra note MINTER ELLISON NORTHMORE HALE 18, at p. 36.

That having been said, on the basis of the analysis of Part 3.2A in this note, it does not seem likely that there are many other circumstances where early application of this difficult law is likely to be preferred Accord, Minter Ellison Northmore Hale, supra note MINTER ELLISON NORTHMORE HALE 18, at p. 36.

And in any event, the new law seems to have compulsory effect now, regardless of any opting in, in certain cases.

This is an innovative way of providing for self-dealing indeed.