The social distancing measures introduced in response to the COVID-19 pandemic have disrupted much of our way of life in the last few months. In the corporate world, the regulation of fundamental company procedures, such as holdings meetings and executing documents, has been hastily modified to enable enterprises to continue to operate, with temporary measures introduced by the legislature. Many are now calling for these temporary changes to be made permanent, potentially accelerating the (in some circles) long-awaited modernisation of Australian corporate governance.
With effect from 6 May 2020, the federal government put in place amendments to the Corporations Act through the Corporations (Coronavirus Economic Response) Determination (No 1) 2020 (‘Corps Determination’).
In summary, the Corps Determination permits companies to:
These temporary changes were made pursuant to federal Treasurer Josh Frudenberg’s emergency powers under s 1362A of the Corporations Act and will exist until 6 November 2020. Public companies had already been granted leeway in March when ASIC pledged to take “no action” against entities holding virtual AGMs.[1]
Litigation concerning invalid general meetings is quite commonplace in Australia. To be valid, shareholder meetings, such as annual general meetings (‘AGMs’) have to be properly convened, constituted and conducted.
Section 250N of the Corporations Act requires public companies to hold an AGM within 18 months following registration, at least once every calendar year and within five months after the end of their financial year. As the language of the Corporations Act implies the requirement of a physical location, in a COVID-19 world this has created uncertainty regarding the authenticity of virtual meetings, where shareholders are not invited to physically attend a location. This uncertainty has arisen even though it has long been legally possible for shareholders to “dial in” to the physical location.[2]
However, the Corps Determination now confirms that meetings may legally be held virtually using ‘one or more technologies’. This means that persons participating in virtual meetings are taken to be present at meetings for the purposes of constituting a quorum. The Corps Determination also provides that votes are taken at virtual meetings using polls instead of a show of hands and proxies can still be appointed.
Regarding notices of meetings, the Corps Determination stipulates that they may be sent electronically on the basis that specific formalities are followed; this means including information on how eligible meeting participants can contribute to the meeting, such as speaking, appointing proxies and voting.[3]
The Corps Determination was introduced as a necessity, to facilitate the process of conducting meetings under social distancing rules introduced across Australia. It allows companies to continue to operate in a way which protects the important element of shareholder participation.
Section 127 of the Corporations Act allows companies to execute a document without a common seal if it is signed by:
This method of execution is typically regarded as the “gold standard” of execution, creating the presumption of legal validity without the need to further interrogate that the signatories have been duly authorised by the company.
In Australia, the use of e-signatures is governed by Federal and State legislation – the Electronic Transactions Act 1999 (Cth) is the federal law, whilst corresponding State and Territory Acts apply to their respective jurisdictions (together, ‘E-transactions Laws’). See our previous article for more information on the validity of e-signatures under Australian law.
Recent case law has indicated that documents executed pursuant to section 127 requires company officers to execute a single, static physical document, rather than two electronic signatures sequentially applied to an electronic document.[4] In practice this means that e-signatures, with signatories safely social distanced, cannot be used to satisfy the presumption under section 127 that a document, such as a deed, has been validly signed.
However, the Corps Determination temporarily provides that documents can currently be validly signed electronically for the purposes of the Corporations Act, on the condition that the method of electronic execution is reliable and appropriate for the purposes of identifying and indicating the person’s intention with respect to the contents of the document. Unlike the requirements under the E-transactions Laws, it is not necessary for the counterparty to the transaction to consent to the signature requirement being met by the electronic communication method used.
On 6 June 2020, the Governance Institute announced that ‘changes during the COVID-19 pandemic that allowed organisations to hold virtual AGMs and execute documents electronically should be made permanent’.[5] This idea reflects a growing sentiment that the Corporations Act is out of step with the digital age, clinging to old notions of the superior reliability of physical locations and paperwork compared to virtual locations and electronic documentation.
On the other hand, this is not a universal view. The Australian Shareholders Association has officially stated that it ‘does not support virtual AGMs and would prefer a hybrid AGM over a virtual AGM’.[6] This is despite the fact that large public companies can spend hundreds of thousands, even millions, of dollars convening and holding physical general meetings. Australian Shareholders Association Policy Manager, Fiona Balzer, has cited that amongst the advantages of physical meetings are that shareholders can see if boards are ignoring other dissatisfied investors, that some shareholders might lack the technology to attend virtual meetings, that online meetings may become unduly short and that physical AGMs can also be opportunities for showmanship or “eyeballing” boards.[7]
Historically, virtual meetings have been criticised for potentially creating access barriers, based on the argument that not all shareholders may have the necessary technology to participate, or on the basis that technological glitches are commonplace, even inevitable. Increasingly though, these criticisms are no longer sustainable, and, on the flipside, technology provides a number of advantages, having been found to increase accessibility, corporate accountability and cost efficiency.[8]
As stated by Australian Institute of Company Directors CEO Angus Armour, ‘the capacity for technology to improve accountability through visibility and accessibility, and to improve efficiency and manage costs at the same time has been demonstrated across the economy [during COVID-19]’.
Modern business is increasingly conducted via growingly sophisticated digital products and service, that provide features and benefits that leave in the shade the old world of mahogany clubrooms, parchment documents and feather quills. Whilst inevitable, COVID-19 and its responsive social distancing measures has accelerated the rate of digital disruption to corporate governance practices.
Legal and regulatory instruments like the Corporations Act are not immune from the need to adapt to a changing world. Whilst the Corps Determination has introduced temporary measures, the call for these changes to remain beyond November 2020 is growing, and may be a defining moment in the modernisation of corporate law and governance in Australia. More will be revealed later in 2020, so stay tuned.
If you require advice about corporate governance in a COVID-19 world and beyond, please do not hesitate to get in touch below.
[1] <https://www.governanceinstitute.com.au/news-media/media-releases/2020/jun/mired-in-the-19th-century-governance-institute-calls-for-covid-19-changes-to-corporations-act-to-be-made-permanent/>.
[2]https://www.australianshareholders.com.au/common/Uploaded%20files/MEDIA%20RELEASES/MR_25032020_Hybrid_Meetings.pdf>.
[3] As reported in the Australian Financial Review, 5 May 2020: <https://www.afr.com/companies/financial-services/legal-virus-reprieve-for-online-shareholder-meetings-20200505-p54q39>.
[4] <https://aicd.companydirectors.com.au/advocacy/governance-leadership-centre/practice-of-governance/hybrid-agms-welcome-but-the-future-is-virtual>.
[5] Bendigo and Adelaide Bank Limited v Pickard [2019] SASC 123 (Stanley J).
[6] Section 249S of the Corporations Act.
[7] Section 1322 (1) of the Corporations Act provides that a general meeting is not invalidated because of a procedural irregularity, unless the court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by an order of the court.
[8]As reported in the Australian Financial Review, 5 May 2020: <https://www.afr.com/companies/financial-services/legal-virus-reprieve-for-online-shareholder-meetings-20200505-p54q39>.
