Australia is a federation comprised of six states, two mainland territories and seven external territories and holds a population of approximately 25 million people. The federal government is based in the capital city of Canberra, however, the majority (over 70 per cent) of Australians live in the major cities on Australia’s coastline.
Australian company law provides many opportunities for investment in Australia. As a part of the Meritas Legal Guide for Business Investment and Expansion in Australia, the Australian Meritas firms have put together a list of ten primary aspects of Australian company law relevant to the foreign investor. Read the abridged version below for a concise understanding of the landscape of company law in Australia today.
1. Regulatory Scheme
The Corporations Act 2001 regulates companies and their incorporation, the acquisition of shares, securities and the derivatives industry.
The Corporations Act, together with other major pieces of legislation, form a uniform regulatory scheme for companies which applies in all Australian states and territories.
2. Australian Securities and Investments Commission (ASIC)
The Australian Securities and Investments Commission (ASIC) is a federal body responsible for administering the Corporations Act and has a broad range of powers and functions as the regulator and enforcer and is also the principal registry and information source for company matters.
ASIC has wide investigative powers under the Australian Securities and Investments Commissions Act in order to detect misconduct, gather evidence necessary to bring criminal proceedings, restrain unlawful conduct and initiate civil proceedings for offences under the Corporations Act.
3. Incorporation (or “registration”)
A company has a separate legal identity from its shareholders and directors and can own property, enter into contracts, and commence legal proceedings in its own name. It is the most common form of business organisation in Australia.
Companies are incorporated under the Corporations Act which involves appointing directors (one of whom must be resident in Australia), issuing shares, nominating a registered office in Australia and, lodging copies of the company’s constitution with ASIC (although, there is no requirement for a company to have a constitution, unless it is a publicly listed company or one that is created for a specific reason).
When registered by ASIC, each company receives a unique nine-digit Australian Company Number (ACN) which must appear on all the company’s public documents (unless the company has an Australian Business Number (ABN) that consists of the company’s ACN, in which case it can display it’s ABN in lieu of the ACN. Foreign companies and certain other bothers required to register under the Corporations Act also receive identification numbers known as the Australia Registered Body Number (ARBN).
4. Type of Companies
The two principal types of companies under the Corporations Act are public and proprietary companies limited by shares. Both types require a registered office in Australia where communication can be sent and where, in respect of a public company, the registered office must be open to the public. All companies must also have a “public officer” who is responsible for discharging obligations required by Australian taxation law. One of the directors of a company, the public officer of a company and the secretary of a public company must be ordinarily resident in Australia (however, the same person may fulfil these roles concurrently).
Public Company
A public company may offer its shares for sale or subscription to the public and there can be no restriction on the transfer of shares. It must have at least three directors, no fewer than two of whom must be ordinarily resident in Australia and it must have at least one shareholder. It is not necessary for a public company to be listed on the Australian Stock Exchange (ASX) but it must hold an Annual General Meeting (of its shareholders) at least once per calendar year and within five months of the close of the financial year in which the audited financial report of the company along with reports from the company’s directors must be presented.
Proprietary Company
Designed for a relatively small group of shareholders (not exceeding 50 non-employee shareholders), a proprietary company can place restrictions on the sale of its shares and is the most commonly used form of company in Australia.
It must have at least one director and one shareholder (who can be the same person) and have at least one director who ordinarily resides in Australia.
Proprietary companies are classified as either large or small proprietary companies, the latter of which qualifies for reduced financial reporting requirements if it satisfies at least two of the following criteria:
- The company and the entities it controls, if any, must have a consolidated gross operating revenue of less than $25 million for the financial year;
- The value of its consolidated gross assets and the assets of any entities it controls, if any, total less than $12.5 million at the end of the financial year;
- The company and any entities it controls, if any, have fewer than 50 employees at the end of the financial year.
5. Directors and Officers
Management and control of the company are vested in the board of directors, who are appointed by the members. Directors and others acting as directors, such as managers, owe the company itself and the shareholders certain which arise under the general law, the Corporations Act and other legislation. It is important to note that even if a person is not validly appointed as a director, they may be considered one if they act is they were a director or if the board generally acts in accordance with their instructions. The duties to which directors and officers are required to comply under the Corporations Act are:
- To act with the care and diligence of a reasonable person;
- To act in good faith and for a proper purpose;
- To avoid conflicts of interest;
- To avoid improper use of position;
- To avoid improper use of information;
- To avoid insolvent trading; and
- To provide or disclose certain information, including financial information, to its shareholders.
Breaching these duties can have severe consequences, including subjecting directors to criminal or personal financial liability or, in some instances, to both.
6. Reporting Requirements and Records
The extent of the reporting obligations depends on the size and activities of the company and whether it is a reporting entity. Companies conducting business in Australia are under various obligations to:
- Keep various records and maintain various registers in respect of their activities
- Maintain their accounts in accordance with generally accepted accounting principles consistently applied in Australia
- Prepare annual financial statements and reports and distribute copies to their shareholders
- Lodge copies of those statements with ASIC and, if applicable, the Australian Stock Exchange (ASX)
- In some cases, prepare consolidated financial statements covering financial aspects of a group of companies
- Procure the preparation of reports by the directors on the company’s performance
- For some companies, have their accounts audited regularly by an independent auditor who is a resident in Australia
- Disclose significant matters affecting their performance or prospects to ASIC and, if applicable, the ASX.
7. Australian Stock Exchange (ASX)
Public companies may seek to raise funds from the public by listing on the ASX; an option that is also available in certain circumstances to companies incorporated overseas. The ASX quotes the shares of public companies and enables the trading of those shares.
Listing can be an expensive process and companies must meet various stringent financial criteria set out in the ASX Listing Rules, as well as satisfying comprehensive ongoing reporting requirements and further requirements under the Corporations Act. A detailed prospectus must also be issued to potential investors describing the company’s status and prospects.
The company must have a minimum of 300 non-affiliated security holders with holdings valued at a minimum of $2,000 each, and a free float of not less than 20%. The Company must also satisfy either the:
- Profit test ($1 million aggregated profit from continuing operations over the past three years and $500,000 consolidated profit from continuing operations over the last 12 months
or
- The assets test ($4 million net tangible assets or a market capitalisation of $15 million)
8. Crowd-Sourced Funding
Australia has recently introduced legislation that allows (eligible) start-up and small business companies to raise capital by offering securities to a large number of investors without a prospectus.
9. Managed Investment Schemes
Managed investment schemes regulated by the Corporations Act are defined to include any arrangement where an operator manages an investment made by one or more passive investors other than through the issue of shares or other securities in a company.
To register a managed investment scheme, the operator or manager must be an Australian public company that has an Australian financial services licence, authorising it to operate the registered scheme. There is a substantial cost involved in setting up, registering and running a licensed managed investment scheme and the operator’s constitution must make adequate provisions for matters prescribed in the Corporations Act and have a compliance plan setting out the measures that need to be applied to ensure compliance. There are some exemptions from the scheme rules for small-scale schemes or schemes that only have sophisticated investors, however, these exemptions have strict limits to their application.
10. Acquisition of Businesses
A business may be acquired in one of two principal ways (each of which has its own advantages):
- Its assets can be acquired (in which case the company itself is not acquired); or
- The shares of the company which owns the business can be acquired.
Complex rules apply in relation to public companies. For instance, special take-over laws apply once a party has acquired a 20 per cent interest in:
- A listed company; or
- An unlisted company with more than fifty members.
In addition, taxation and stamp duty consequences must be carefully considered, not in some jurisdictions, stamp duty (which is a state tax) is simply called duty.
If you’re considering investing in Australia, or simply looking to learn more about Australia’s business landscape, find more information by downloading the full guide below.
Please be aware that the information on legal, tax and other matters contained in this booklet is merely descriptive and therefore not exhaustive. As a result of changes in legislation and regulations as well as new interpretations of those currently existing, the situations as described in this publication are subject to change. Meritas cannot, and does not, guarantee the accuracy or the completeness of information given, nor the application and execution of laws as stated.
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