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A Proposal for a More Responsive Approach to the Regulation of Corporate Governance

Published online by Cambridge University Press:  24 January 2025

Angus Corbett
Angus Corbett*
Affiliation:
Faculty of Law, University of Sydney
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Extract

One of the primary consequences of the difficulties experienced by companies and by regulators in the decade of the 1980s has been a greater focus on corporate governance. The precise meaning and content of this expression is far from clear. It seems to be a term used to describe a number of related phenomena that are influencing the way in which companies are being managed, governed and regulated. The mode of governance of companies is being influenced by the growth in institutional investment, an increased focus on the role of the board of directors, increased levels of disclosure of financial information, as well as by the chal1ging and developing roles of regulatory bodies such as the Australian Stock Exchange (ASX), the Australian Securities Commission(ASC), and the Australian Competition and Consumer Commission (ACCC).

Type
Research Article
Information
Federal Law Review , Volume 23 , Issue 2 , June 1995 , pp. 277 - 321
Copyright
Copyright © 1995 The Australian National University

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References

1 American Law Institute, Principles of Corporate Governance: Analysis and Recommendations(1992); Committee on Financial Aspects of Corporate Governance, The Financial Aspects of Corporate Governance (Report of the Cadbury Committee) (1992); Working Group on Corporate Practices and Conduct, Corporate Practices and Conduct (3rd ed 1996) (cited as Corporate Practices and Conduct).

2 Eg, B DO Binder, Strengthening Corporate Governance (1994) at 3: “Corporate governance” is defined as “[t]he system by which companies are directed and controlled”. This is a broad definition and includes the processes for management of the company as well as matters relating to the role of the board of directors. This use of the term is so broad that it extends well beyond the realm of regulation through the Corporations Law. However, the term often seems to be used in a narrower sense to refer to “monitoring and control mechanisms that are put in place by companies with the objective of enhancing shareholder value”: Australian Stock Exchange, Discussion Paper Disclosure of Corporate Governance Practices By Listed Companies (1994) at 1, n 2 (cited as ASX Discussion Paper, Disclosure of Corporate Governance Practices). See also, eg, H Ford and R Austin, Ford and Austin's Principles of Corporations Law (7th ed 1995), ch 7. It is in this sense that the term is used throughout this article.

3 See M Blair and I Ramsay, “Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies” (1994) 19 MULR 153; J Hill and I Ramsay, “Institutional Investment in Australia: Theory and Evidence” in G Walker and B Fisse (eds), Securities Regulation in Australia and New Zealand (1994) 289 at 293-297; P Redmond, Companies and Securities Law Commentary and Materials(1992) at 89-90. There has been a widespread debate about the role of institutional investment. For an assessment of the role of institutional investors in improving corporate governance practices, see, eg, B Black, “Agents Watching Agents: The Promise of Institutional Investor Voice” (1992) 39 UCLA L Rev 813; R Gilson and R Kraakman, (ASX),6“Reinventing the Outside Director: An Agenda for Institutional Investors” (1991) 43 Stan L Rev 863; E Rock, “The Logic and (Uncertain) Significance of Institutional Shareholder Activism” (1991) 79 Georgia L Rev 445. For a comparative-law analysis of the role of institutional investors, see, eg, B Black and J Coffee, “Hail Brittania?: Investor Behaviour Under Limited Regulation” (1994) 92 Mich L Rev 1997; R Buxbaum, “New Owners and Old Managers: Lessons From the Socialist Camp” (1993) 18 Delaware Jof Corp Law 867. For an historical analysis of the limited role of activist shareholders in the United States, see, eg,M Roe, “A Political Theory of American Corporate Finance” (1991) 91 Co/um L Rev 10; A Boyer, “Activist Shareholders, Corporate Directors, and Institutional Investment: Some Lessons from the Robber Barons” (1993) 50 Wash and Lee L Rev 977. On the related issue of “relational investing”, see I Ayres and P Crampton, “Relational Investing and Agency Theory” (1994) 15 Cardozo L Rev 1033. They define “relational investing” to include the decision “to buy and hold significant blocks of a corporation's stock” where such investors “commit not to tender their shares to hostile bidders” (at 1034). See also E Rock, “Controlling the Dark Side of Relational Investing” (1994) 15 Cardozo L Rev 987. More generally, see “Conference on Relational Investing, Institutional Investor Project of Center for Law and Economic Studies, Columbia University School of Law, New York, NY, 6-7 May, 1993.

4 Above n 1, in particular, Corporate Practices and Conduct. See also, Daniels & Ors (formerly practising as Deloitte Haskins and Sells) v AWA (1995) 16 ACSR 607 at 652-658 per Clarke and Sheller JJA. The judgment of Rogers Jin AWA Ltd v Daniels (t/as Deloitte Haskins and Sells and Ors) (1991) 7 ACSR 759 at 864-869 had been the focus for discussion concerning the role of the Board of Directors. See also F Hillmer (Chair of Committee of the Sydney Institute), Strictly Boardroom Improving Governance to Enhance Company Performance (1993) at 3 (cited as Strictly Boardroom). This report focuses on “commercial best practice” in relation to the functions of a board of directors. See also R Tomasic and S Bottomley, “Corporate Governance and the Impact of Legal Obligations on Decision Making in Australia” (1991) 1 Aust J of Corp Law 56 at 62-84.

5 The Corporate Law Reform Act 1994 (Cth) introduced increased levels of disclosure for “disclosing entities”: Corporations Law, s lllAC. Disclosing entities are required to produce financial statements (Part 3.6) for each six-month period and are subject to a “continuous disclosure” regime: Corporations Law ss lllAO, lllAP, 1001A and 1001B. The Attorney-General in the Second Reading Speech for the Corporate Law Reform Act, stated: “Timely disclosure of relevant information is essential for investors to have confidence in the integrity of the marketplace and to make informed investment decisions. This must be the central feature of an efficient and fair securities market.” (H Reps Deb 1993, Vol 13 at 4084).

6 The role of the ASX has been affected by a number of provisions in the Corporations Law; see eg, s 1001A (special status of LR 3A as a result of operation of s 1001A), s 779 (qualified privilege allowed to ASX in some circumstances) and s 1114(8) (ASX seeking orders in relation to contravention of listing rules not required to given undertaking as to damages). The role of the ASX as a “co-regulator” has been enhanced by the adoption of LR 3C(3)(j) which requires companies to disclose “the main corporate governance practices that a company has had in place during the reporting period”. This listing rule was adopted as a result of the decision of the ASX “to take a leadership role in helping to promote corporate governance standards for listed companies”: Australian Stock Exchange, Discussion Paper Disclosure of Corporate Governance Practices By Listed Companies (1994) above n 1 at 1. The Discussion Paper states that the decision “to take a leadership role in helping to promote corporate governance standards for listed companies has been prompted mainly by the fairly poor response by some listed companies to guidelines developed by the Working Group on Corporate Practice and Conduct” (at 4). More generally, see R Schoer, “Self-Regulation and the Australian Stock Exchange” in P Grabosky and J Braithwaite (eds),Business Regulation and Australia's Future (1992) 107.

7 There has been an extensive debate whether the ASC should adopt a an enforcement

policy based upon civil litigation or criminal prosecutions; see, eg, A Hartnell, “Regulatory Enforcement by the Australian Securities Commission: An Inter-Relationship of Strategies “ in P Grabosky and J Braithwaite, above n 6, 25. In 1992 the Commonwealth Attorney-General sought to resolve this debate as to the appropriate enforcement policy for the ASC by issuing Guidelines to the ASC and the Director of Public Prosecutions which stated that: “[C]ivil proceedings, should not, as a general rule, be regarded as an alternative to criminal proceedings, but each should be seen as complementing the other”: Memo issued by the Attorney-General, Mr Michael Duffy, to the ASC and the Director of Public Prosecutions, “Serious Corporate Wrongdoing: Direction Relating to Investigation and Enforcement” (30 September 1992), reproduced in CCH Australian Securities Commission Releases '1195-109 at 160,133. More generally, see C Dellit and B Fisse, “Civil and Criminal Liability under Australian Securities Regulation: The Possibility of Strategic Enforcement” in G Walker and B Fisse, above n 3, 570. For a broad discussion of the role of the ASC, see I Ramsay, “Corporate Law in the Age of Statutes” (1992) 14 Syd L Rev 474 at 483-495. The author analyses the “respective merits of courts and the ASC in interpreting and implementing legislation” (at 486).

8 There has been a broad-ranging debate about whether there is a need for the Trade Practices Commission to be given access to a broader range of remedies to seek compliance with the Trade Practices Act 1974 (Cth). See Australian Law Reform Commission, Compliance with the Trade Practices Act 1974 (Report No 68, 1994). While noting that the Trade Practices Commission had generally been seen as effective, the Australian Law Reform Commission identified the need for new mechanisms to deal with non-compliance with the Act (at 1-3). For an analysis of the changed role of the Trade Practices Commission in the context of amendments to s 50 of the Trade Practices Act, see L Pasternak, “New Merger Guidelines and Section 50 of the Trade Practices Act” (1994) 17 UNSWLJ 73 at 95-103. See also J Tamblyn, “Progress Towards a More Responsive Trade Practices Strategy” in P Grabosky and J Braithwaite, above n 6, 152; B Fisse and J Braithwaite, Corporations, Crimeand Accountability (1993) at 230-237. The Competition Policy Reform Act 1995 (Cth) created the Australian Competition and Consumer Commission which replaced the Trade Practices Commission on 6 November 1995.

9 I Ayres and J Braithwaite, Responsive Regulation Transcending the Deregulation Debate (1992)at 7-18; C Shearing, “ A Constitutive Conception of Regulation” in P Grabosky and J Braithwaite, above n 6, 67 at 68-72.

10 G Teubner, “Corporate Fiduciary Duties and Their Beneficiaries: A Functional Approach to the Legal Institutionalisation of Corporate Responsibility” in K Hopt and G Teubner (eds),Corporate Governance and Directors' Liabilities (1985) 149 at 159-160. Command and control regulation may be said to involve “defining standards of business conduct and production results in all details and enforcing those standards via negative or positive sanctions” (at 159). C Shearing above n 9 at 67, uses the phrase “command and control” regulation “in recognition of the centrality it accords to the idea that regulation involves an interference that seeks to control or impede the operation of market forces” (at 69).

11 C Shearing, above n 9 at 70.

12 I Ayres and J Braithwaite, above n 9 at 4-7.

13 C Shearing, above n 9 at 70.

14 I Ayres and J Braithwaite, above n 9 at 20-35; Australian Law Reform Commission, above

n 8 at 105-107; N Gunningham, “Beyond Compliance: Management of Environmental Risk” in B Boer, R Fowler and N Gunningham, Environmental Outlook Law and Policy (1994) 254 at 256-257; R Buxbaum, “Corporate Legitimacy, Economic Theory and Legal Doctrine” (1984) 45 Ohio St L J 515 at 522-525; G Teubner, above n 10 at 155-156 and 159-160, G Teubner, Law as an Autopoietic System (1993), ch 4 “Reflexive Law”.

15 I Ayres and J Braithwaite, above n 9 at 4-6; C Shearing, above n 9 at 74-77; G Teubner above n 10 at 160-167; N Gunningham, above n 14 at 272-278; C Dellit and B Fisse, above n 7 at 583-596.

16 Above n 6. For a further example of the adoption of a responsive approach to the regulation of corporate governance, see Australian Investment Managers' Association, “Corporate Governance: A Guide for Investment Managers and a Statement of Recommended Corporate Practice” Oune, 1995).

17 J Green, '"Fuzzy Law' A Better Way to Stop 'Snouts in the Trough"' (1991) 9 Co and Sec L J 144.

18 Eg, R Schoer, above n 6.

19 ASX Discussion Paper, above n6.

20 F Hillmer, Strictly Boardroom, above n 4, Preface at 1.

21 Ibid at 3.

22 Below, text accompanying nn 65-77.

23 Below, nn 66-72.

24 A Berle and G Means, The Modern Corporation and Private Property (1932). This project identified empirical analysis supporting the thesis that there was a separation of ownership and control in large American corporations. For an analysis of the evidence supporting the existence of separation of ownership and control in large Australian companies, see M Blair and I Ramsay, above n 3; P Redmond, above n 3 at 85-89. For a broad analysis of the historical context of the “separation of ownership and control”, see R Clark, “The Four Stages of Capitalism: Reflections on Investment Management Treatises” (1981) 94 Harv L Rev 561.

25 The “managerialist” thesis is that the discretion vested in managers, as a result of the “separation of ownership and control” has produced overall social benefits: A Berle, The 20th Centun; Capitalist Revolution (1954) discussed in P Redmond, above n 3 at 91-93. See also R Buxbaum, above n 14 at 517-520. Limitation of the discretion of managers and directors has been the rationale for the regulation of corporate governance; see eg, M Duffy, “Foreword” in special issue “Corporate Regulation and the New Corporations Law” (1992) 15 UNSWLJ vii. The Attorney-General stated that: “The problem in the past seems to have been one not only of lack of enforcement but also, in many respects, lack of appropriate regulation. In particular, directors of large public companies, because the law in some cases did not specifically prevent it, were able to manage companies as if they were extensions of their own private affairs” (at at vii-viii). The recognition of the “separation of ownership and control” has also given rise to the debate about “corporate social responsibility”; see eg, P Redmond, above n 3 at 93-94; J Tolmie, “Corporate Social Responsibility” (1992) 15 UNSWLJ 268; G Teubner, above n 10.

26 See eg, F Easterbrook and D Fischel, The Economic Structure of Corporate Law (1991) at 6.These authors argue that the separation of ownership and control produces efficient outcomes because “self-interested entrepreneurs and managers, just like other investors, are driven to find the devices most likely to maximise net profits.” See also P Redmond, above n 3 at 96-98; R Tomasic and S Bottomley, Corporations Law in Australia (1995) at 51-53. For a critical analysis of this economic analysis of the separation of ownership and control, see W Bratton, “The Economic Structure of the Post-Contractual Corporation” (1992) 87 Northwestern L Rev 180.

27 Salomon v Salomon and Co Ltd [1897] AC 22.

28 W Allen, “Our Schizophrenic Conception of the Business Corporation” (1992) 14 Cardozo L Rev 261 at 264-266, 270-272; W Bratton, “Economic Theory of the Firm: Critical Perspectives From History” (1989) 41 Stan L Rev 1471 at 1471-1476 and 1491-1498; M Horwitz, “Santa Clara Revisited: The Development of Corporate Theory” (1985) 88 W Virginia L Rev 173.ownership and control which also informed the debate about “corporate social responsibility”; see eg, P Redmond, above n 3 at 93-94.

29 Eg, Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co Ltd (1968) 121 CLR 483 at 493 per Barwick CJ: “Directors in whom are vested the right and the duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.” See also Commonwealth Parliament Senate Standing Committee Report, Social and Fiduciary Duties of Obligation of Company Directors (1989) at 3.35 (cited as the Cooney Committee Report), where the adoption of the “business judgement rule” is recommended.

30 Corporations Law, Table A, reg 66; Automatic Self-Cleansing Filter Syndicate Co Ltd vCuninghame [1906] 2 Ch 34 at 41-43 per Collins MR; 44-45 per Cozens-Hardy LJ. See also H Ford and R Austin, above n 2 at 205-207.

31 (1843) 2 Hare 461, 67 ER 189.

32 The second element to the rule in Foss v Harbottle is sometimes referred to as the “internal management” aspect of the rule. This part of the rule is that “a member cannot bring an action to complain of an irregularity in the operation of the company if the irregularity could be rectified by an ordinary resolution of members in general meeting”: H Ford and R Austin, above n 2 at 444. One rationale for this rule is that “courts should not interfere with the internal affairs” of a company: ibid at 444.

33 Ibid at 445, for an analysis of the four exceptions to the rule in Foss v Harbottle, including infringement of personal rights of shareholders and the fraud on the minority exception. In Dempster v Mallina Holdings Ltd (Supreme Court of Western Australia, Pidgeon, Rowland and Seaman JJ 17 March 1994, unreported) a fifth exception, “in the interests of justice” was considered. Each of the exceptions is narrowly drawn and limits the circumstances in which shareholders will be given standing to commence an action. Once given standing under any of the exceptions, there is some uncertainty as to who is responsible for costs,but any remedy will be given in favour of the company: see J Kluver, “Derivative Actions

and the Rule in Foss v Harbottle: Do We Need a Statutory Remedy?” (1993) 11 C and SLJ 7; I Ramsay, “Prospects for a Statutory Derivative Action” (1992) 15 UNSWLJ 149 at 162-164. The Companies and Securities Advisory Committee (CASAC) recommended that a statutory derivative suit be introduced: Report on a Statutory Derivative Action (1993) at 12 (cited as CASAC, Report on Statutory Derivative Suit). CASAC acknowledged the relatively limited role of the statutory derivative suit when it recommended that the right of a shareholder to initiate such a suit should be subject to some important restrictions. In particular, it recommended that a court should not grant leave to a shareholder to commence proceedings unless it was satisfied that it was probable that the corporation would not take proceedings, that the applicant was acting in good faith with a view to the best interests of the corporation, that it appeared to be in the best interests of the corporation that proceedings be taken and that there was a serious question to be tried (ibid at 15-16).

34 Eg, R Tomasic and S Bottomley, above n 26 at 292-298; P Redmond, above n 3 at 293-299;F Hillmer, Strictly Boardroom, above n 4 at 3-7.

35 R Tomasic and S Bottomley, above n 26 at 296. See also F Hillmer, Strictly Boardroom, above n 4 (at 33), where the function of the board is described in the following terms: “The Board's key role is to ensure that corporate management is continuously and effectively striving for above-average performance, taking account of risk. This is not to deny the board's additional role with respect to shareholder protection”.

36 Corporations Law, Table A Articles of Association, reg 57-61.

37 Ibid at s 228; Table A Articles of Association, reg 62.

38 Eg, ibid ss 246-247. These sections define the extent of the limited capacity of shareholders to convene general meetings.

39 Eg, B Black, “Shareholder Passivity Reexamined” (1990) 89 Mich L Rev 520 at 526-530.

40 Eg, use of Corporations Law, s 246 by Kerry Stokes to convene an extraordinary general meeting of Seven Network to remove two nominated directors: D Brewster, “Two seats for Stokes in Seven trade-off', Australian 31 May 1995; B Frith, “Stokes gains the table, but chair still eludes him”, Australian 31 May 1995.

41 The term “securities markets” is used in a broad sense in this article to encompass both formal and informal trading in securities. Although trading through “stock exchanges” accounts for the bulk of trading in securities, there is a significant level of “off-market” trading in securities. The focus in this article is on the process by which a company's securities are valued as a result of trading in those securities. In this broad sense, both on-market and off-market trading play a role in the process even though trading on the formal “stock exchanges” is the primary mechanism by which a company's securities are valued. The ASX is recognised as a “stock exchange” in s 9 of the Corporations Law. There are many provisions which define the overall legal structure within which stock exchanges function; eg, Corporations Law, s 761; “Listing Rules” of ASX, rules defining securities which may be listed on the ASX; Corporations Law Pt 7.3, regulation of securities dealers and investment advisers; Corporations Law Pt 7.11, regulation of conduct in relation to securities, eg, s 1002G, prohibition on insider trading; Corporations Law Pt 7.12, regulation of new issues of securities; Corporations Law Pt 2.4, rights attaching to membership and regulation of issue of shares; Corporations Law Ch 5, winding up and voluntary administrations, eg, Corporations Law, Part 5.6, Subdivision D dealing with priorities of claims and debts on the winding up of a company; Corporations Law Pt 3.5, registration of charges. This is a brief summary of the direct laws relevant to the establishment of securities markets. Such markets rely also on the operation of general laws, such as the law of property, equity, contract and tort, the Trade Practices Act 1974 (Cth) and the Fair Trading Acts of each of the States, as well a range of other statutory provisions of general application.

42 Eg, P Latimer, “Securities Regulation Laws - What are They Trying to Achieve?” in G Walker and B Fisse, above n 3 at 165: “A securities market is said to be a 'market for information'. Accordingly, securities regulation laws seek the maintenance of an informed market, both when the security is being issued and continuously afterwards. The regulation of such markets, therefore, lies at the intersection of economics and law.” Our understanding of the securities market as a “market for information” has been heavily influenced by the Efficient Capital Markets Hypothesis, eg, R Gilson and R Kraakman, “The Mechanisms of Market Efficiency” (1984) 70 Virginia L Rev 549 at 549. A definition of ECMH is: “The common definition of market efficiency, that 'prices at any time fully reflect all available information' is really a shorthand for the empirical claim that 'available information' does not support profitable trading strategies or arbitrage opportunities.” (ibid at 554-555). The standard definition of the ECMH has been modified by studies which have shown movements in share prices which are not consistent with expectations based on the ECMH. These studies have shown “excessive volatility of share prices relative to asset values” and other anomalous patterns in the movement of prices: D Langevoort, “Theories, Assumptions, and Securities Regulation: Market Efficiency Revisited” (1992) 140 U of Pennsylvania L Rev 851 at 863-864. It has been argued that the “excessive volatility of share prices” has been produced by “noise trading”, that is “trading based on information unrelated to fundamental asset values”: L Cunningham, “From Random Walks to Chaotic Crashes: The Linear Genealogy of the Efficient Capital Markets Hypothesis” (1994) 62 Geo Wash L Rev 546 at 565. The ECMH has been modified to take account of “noise trading” with the hypothesis that “uninfoPmed trading” is the mechanism by which the market assimilates uncertain information into prices in a relatively efficient way; see eg D Langevoort at 866-872; R Gilson and R Kraakman at 560-564, 579-588. Some recent work has challenged the basis of the ECMH further by arguing that over time share prices do not respond to new pieces of information in a proportionate, or linear, way. It is argued that movements in share prices follow “non-linear” patterns; see L Cunningham at 596; see also below nn 148-151.

43 F Easterbrook and D Fischel, above n 26, ch 5. This chapter discusses the role of corporat control transactions in reducing agency costs, that is the costs generated as a result of the divergent interests of managers and owners.

44 Disclosure of financial information by companies has been an important form of regulation of corporate governance; see P Redmond, above n 3 at 47-49; R Tomasic and S Bottomley, above n 26 at 141-142. For recent changes relating to disclosure of information by companies, see above n 5.

45 P Redmond, above n 3 at 347-348; P Finn, “The Fiduciary Principle” in T Youdan (ed),Equity, Fiduciaries and Trusts (1989) at 24-26 and 31-35.

46 The powers of a board of directors are specified in the Articles of Association, eg,Corporations Law Table A, rr 2 and 66 which specify the power of directors to issue shares and to “manage the business of the company”. There are equitable restrictions on the exercise of this broad discretion in the form of the duty of directors to act “bona fide in the best interests of the company”; eg, Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285.

47 Sometimes referred to as “negative” duty to avoid conflicts of interest: H Ford and R Austin, above n 2 at 301. See also Chan v Zacharia (1984) 154 CLR 178 at 198-199 per Deane J. The duty to avoid the pursuit of personal interest where there is a significant possibility of conflict between the director's personal interest and the director's fiduciary

duty to the company includes a prohibition on the taking of “corporate opportunities”; see H Ford and R Austin, above n 2 at 302.

48 There is a statutory duty to act honestly: Corporations Law s 232(2). For a discussion of the nature of this duty; see V Mitchell, “The Concept of 'Honesty' under Section 232(2) of theCorporations Law” (1994) 12 C and SLJ 231; R Carroll, “The Test of Honesty in Civil Proceedings under s 232(2) Corporations Law (1995)” 5 Australian J of Corporate Law 214. Other statutory duties include the prohibition on the improper use of office, s 232(6); and the improper use of information, s 232(5). There are duties imposed on the directors of both public·and private companies to disclose conflicts of interest to the board of directors:ss 231, 232A. Part 3.2A regulates the giving of financial benefits to related parties, that is, in general terms, Part 3.2A regulates the giving of financial benefits to a person where there may be a conflict of interest.

49 Above nn 9-10.

50 Corporations Law, s 1311 and Schedule 3 (contravention amounting to criminal offences);s 1317FA (when contravention of civil penalty provisions is a criminal offence); Part 9.4B, Div 2 (civil penalty orders).

51 This pattern was established by the extension of the civil liability provisions, in Part 7.11 and 7.12 (in particular the insertion of s 995 and s 1005) of the Corporations Law, which was one of the important reforms that was part of the national scheme introduced in 1991. See, Corporations Act 1989 (Cth), Explanatory Memorandum at par 2960 where there is a discussion of the rationale for the insertion of s 995 into the Corporations Law; ibid at par 2989-2990 for a discussion of the rationale for the inclusion of s 1005 into the Corporations Law. The Corporate Law Reform Act 1992 (Cth) continued this pattern with the insertion of Part 9.4B into the Corporations Law. Part 9.4B introduced a regime of civil penalties and restricted the use of criminal sanctions to those circumstances where there was actual dishonesty: ss 1317EA, 1317FA. Part 9.4B also introduced new provisions which allow a company to seek compensation for losses caused by breaches of duty by corporate officers: ss 1317HA, 1317HB and 1317HD. In this way Part 9.4B implemented some of the recommendations of the Cooney Committee, above n 29, see Corporate Law Reform Act 1992, Explanatory Memorandum at par 114. The Cooney Committee Report recommended the Corporations Law should limit criminal liability to instances where conduct is “genuinely criminal in nature” (at par 13.12). The Report also recommended that a system of civil penalties should be introduced and that, where appropriate, “people suffering loss as a result of a breach be enabled to bring a claim for damages in the proceedings taken the recover the penalty” (at par 13.15). One rationale for civil penalties is that civil penalties are a form of surrogate compensation in circumstances where it is difficult, or impossible, to assess the damages caused by the breach of duty: J Coffee, “Paradigms Lost: The Blurring of the Civil and Criminal Law Models - And What Can Be Done About It'' 101 Yale L J 1875 at 1882-3. This may be the rationale for the inclusion of s 1317HB(l), which provides that a court may order payment of compensation to a corporation as a substitute for imposing a civil penalty under s 1317EA: Corporate Law Reform Act 1992 (Cth), Explanatory Memorandum at par 39, 181. The Corporate Law Reform Act 1994 (Cth) further continued this pattern by introducing “continuous disclosure” for disclosing entities (s 1001A) and by creating a right to recover losses caused by breaches of the continuous disclosure requirements (s 1005). The ASC has given a high priority to the civil enforcement strategies: A Hartnell, “Regulatory Enforcement by the Australian Securities Commission: An Inter-Relationship of Strategies” in P Grabosky and J Braithwaite, above n 6, 25 at 29-31 and 35. The use of these strategies has been assisted by the range of powers given to the ASC. These include the power to initiate actions in the name of a company (ASC Law s 50) to assist other litigants (s 25) and to intervene in any proceedings arising under the Corporations Law (Corporations Law s 1330). The primacy of the “civil enforcement strategy” has been qualified by the Attorney-General by requiring that the ASC “shall, before taking civil enforcement action in any case where criminal proceedings may also be available, consult with the DPP regarding the appropriateness of taking civil proceedings”: Guidelines issued pursuant to s 12 of the Australian Securities Commission Law and s 8 of the Director of Public Prosecutions Act (Cth) by the Attorney-General, above n7. For an extensive discussion of the advantages of “pyramidal enforcement” and of the use of settlements, see CDellit and B Fisse, above n 7 at 601-611.

52 For a discussion of the use of civil liability to deter unsafe conduct, see W Landes and R Posner, Economic Structure of Tort Law (1987) at 54-58. For a general discussion of the role of the law of tort in eliminating “externalities” and in having decision-makers bear the actual costs associated with specific decisions, see H Luntz and D Hambly, Torts Cases and Commentary (4th ed 1995) at 91-93. For an example of the application of this reasoning to assessment of damages, see Todovoric v Waller (1981) 150 CLR 402 at 453-454 per Murphy J. For an application of this approach to the use of civil liability in the context of the regulation of securities markets, see F Easterbrook and D Fischel, above n 26 at 315 and ch 12 “Optimal Damages”. For a further example of the application of this approach to those disclosing information as part of the process of raising capital, see D Langevoort, above n 42 at 877-878. It is argued that the imposition of strict liability for losses caused by material misstatements made in the process of raising capital is a form of “certification” or “verification” as to quality of the information being released by those seeking to raise the capital. A similar rationale applies to the imposition of liability on underwriters, stockbrokers and directors for “misleading and deceptive conduct” in relation to the information supplied in a prospectus; see below n 64.

53 “Director” is defined in Corporations Law s 60. This definition includes persons formally appointed as directors as well as “de facto” directors. Some provisions (such as Corporations Law s 232) apply to a range of responsible persons in corporations including those holding the office of “director, secretary and executive officer” of the corporation (s 232(1)). Other sections, including s 318(1) ands 588G, apply only to directors.

54 H Ford and R Austin, above n 2 at 253-254. Section 232(2) of the Corporations Law

reinforces the “positive duties of loyalty”, while s 232(5) and (6) supplement the “negative” duties to avoid conflicts between interest and duty. Section 232(4) provides that directors are subject to a duty of due care and diligence which is concurrent with equitable and common law duties of care: Daniels and Ors v AWA Ltd (1995) 16 ACSR 607, at 656 and 668, per Clarke and Sheller JJA. See also Vrisakis v Australian Securities Commission (1993) 11 ACSR 162 at 182 per Malcolm CJ, at 200 per Rowland J (dissenting), at 210-213 per Ipp J;and Permanent Building Society v Wheeler (1994) 14 ACSR 109 at 154-158 per lpp J, at 168 per Malcolm CJ and Seaman J. More generally, see H Ford and R Austin, above n 2 at 284-287.

55 A “related party” who receives “financial benefit"' in breach of the prohibition in Corporations Law, s 243H(l) or 243H(2) contravenes s 243ZE(2). Section 243ZE(3) extends the range of those who contravene to those “involved” in the contravention: s 79.

56 Corporations Law, Part 3.6 Div 2-6, imposes a range of requirements on directors which includes the duty to prepare financial statements each “accounting period”. These financial statements include profit and loss statements and balance sheets (Div 4), consolidated accounts (Div 4A), directors' statements (Div 5), and directors' reports (Div 6).

57 There is now a considerable body of law dealing with the application of Corporations Law s 588G. See H Ford and R Austin, above n 2 at 763-771. This provision is of central importance where companies are buying back shares: Corporations Law s 206K.

58 Only the ASC, a delegate of the Commission or a person authorised by the Minister may apply for a civil penalty order: Corporations Law, s 1317EA(3). In a proceeding to obtain a civil penalty order the standard of proof used in order to establish whether there has been a contravention is the civil standard of proof: s 1317ED.

59 Corporations Law, s 1317FA. For a discussion of some of the problems of defining the elements of the criminal offences created by the interaction between ss 232 and 1317FA, seeJ Kluver, “Improper use of corporate position: how relevant is a director's state of mind tocriminal liability” (1994) 20 Butterworths Company L Bull [515].

60 In addition to the remedies provided for in Part 9.4B of the Corporations Law, s 1324 xprovides that a court may grant an injunction restraining a person from acting where that person's conduct would amount to a contravention of the Corporations Law. Section 1324(10) provides that a court may award damages in addition to, or instead of, an injunction where the court has power to grant an injunction.

61 Above nn 46-48 and 53.

62 There is a right to recover equitable compensation for losses caused by a breach of fiduciary duty: Nocton v Lord Ashburton [1914] AC 932 at 956-957 per Viscount Haldane LC. A breach of fiduciary duty will also provide the company with the right to seek an account of profit: Chan v Zacharia (1984) 154 CLR 178 at 198-199 per Deane J. Deane J identifies the for profits. For an analysis of the account of profits remedy, see War an v International & Anor v Dwyer & Ors (1995) 128 ALR 201 at 208-214 per Mason CJ, Bre an, Deane, Dawson and Gaudron JJ. Directors are also subject to an equitable duty of care hich is concurrent with the duty imposed bythe common law and by s 232(4) of the C rporations Law. A breach of the equitable duty of care will give a company the right to claim equitablecompensation: Permanent Building Societyv Wheeler (1994) 14 ACSR 109 t 162-167 per Ipp J, at 168 per Malcolm CJ and Seaman J.

63 Eg, Warman v International & Anor v Dwyer & Ors (1995) 128 ALR 201 at 209 per Mason CJ,Brennan, Deane, Dawson and Gaudron JJ; Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 at 384 per Laskin J.

64 Eg, Corporations Law, ss 190 and 195 provide for criminal penalties for unauthorised reductions of capital and for unauthorised issue of shares at a discount. Section 205(1)(a) prohibits a company from giving financial assistance to a person for the purpose of assisting that person to purchase shares in that company. Section 205(5) makes a contravention of this prohibition a criminal offence, while ss 205(6) and 206(4) give the company the right to recover compensation for any loss caused by the contravention. Section 205(1)(b) makes it a criminal offence for a company to buy back its own shares without complying with Div 4B of Part 2.4B. As with the giving of “financial assistance”, under ss 205(5) and 206(4), the company is entitled to recover compensation from those responsible for the unauthorised buy-back of the company's shares. Other examples includes 1001A, which in conjunction with ASX Listing Rule 3A(l), requires a listed public company to immediately disclose to the ASX any information which could have a material impact on the price of a company's shares. Breach of s 1001A is a criminal offence and s 1005 provides that any person who suffers loss by reason of the failure to comply with s 1001A may recover damages from any person “involved” in the breach. The circumstances in which a person is “involved in a contravention” are defined in s 79. In addition to these provisions dealing with “continuous disclosure”, s 1002G prohibits “insider trading”. A person in breach of s 1002G is subject to a fine of $200,000 and may, under s 1013, be subject to claim for damages for losses resulting from such a breach. Part7.12

65 For a further analysis of this approach to the definition of the “damage”, see A Corbett, “The Rationale for the Recovery of Economic Loss in Negligence and the Problem of Auditors' Liability” (1994) 19 MULR 814.

66 Eg,Sutherland Shire Council vHeyman (1985) 157 CLR 424 at 503 per Deane J: “Indeed, in a competitive society, the infliction of pure economic loss upon another will commonly be a concomitant of the successful pursuit of personal advantage by way of lawful conduct in that there can be discerned, in many commercial and financial transactions, a correlation between the attainment of personal gain for one's self and the sustainment of economic loss by another”. See also Moorgate Tobacco Co Ltd v Phillip Morris Ltd and Anor (1983-84) 156 CLR 414 at 445. Deane J rejected arguments for the development of a tort of “unfair competition” on the grounds that: “[T]he boundary between the area of legal or equitable restraint and protection and the area of untrammelled competition, increasingly reflects what the responsible Parliament or Parliaments have determined to be the appropriate balance between competing claims and policies”.

67 Burnie Port Authorityv General Jones Pty Ltd (1994) 179 CLR 520 at 542-543 per Mason CJ,Deane, Dawson, Toohey and Gaudron JJ.

68 Bryanv Maloney (1995) 128 ALR 163 at 166 per Mason CJ, Deane and Gaudron JJ, at 196 per Toohey J, at 190-193 per Brennan J (dissenting).

69 Ibid at 166 per Mason CJ, Deane and Gaudron JJ.

70 Bryan v Maloney (1995) 128 ALR 163.

71 Ibid at 171-172 per Mason CJ, Deane and Gaudron JJ, at 197-199 per Toohey J. Brennan J found that there was no duty of care with respect to latent defects in goods or property because those defects are excluded from “any category of damage for which damages in negligence might be awarded” (at 185).

72 Ibid at 164. The plaintiff was not entitled to recover the profits which would have been made had the plaintiff wished to sell the property and been prevented from doing so because of the negligence of the builder in building the house with faulty foundations. For a similar approach to assessing damages, see Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad (1976) 136 CLR 529 at 531. In Hungerfords v Walker (1989) 171 CLR 125 at 145-146 and 150-151 per Mason CJ, at 152 per Brennan and Deane JJ, the plaintiff was entitled to recover only those “opportunity costs” which were directly related to the defendant's negligence. For a broader definition of the kind of profits which a plaintiff may recover in the tort of negligence, see Kyogle Shire Council v Francis (1988) 13 NSWLR 396 at 406 per Kirby A-CJ; at 417 per Clarke J. In this case it was suggested that the plaintiff would have been able to recover the profits which would have been earned on the transaction which the plaintiff would have entered into but for the negligence of the defendant. For a further analysis of the assessment of damages in cases involving claims to recover pure economic loss, see A Corbett, above n 65 at 834-839.

73 (1995) 128 ALR 163 at 169 (emphasis added); see also at 197-199 per Toohey J. By contrast Brennan J concluded that it would be “wrong in principle to confer on remote purchasers a cause of action in tort for latent defects caused by negligence in construction of a building or manufacture of a chattel when that negligence merely affects the quality of the building or chattel” (at 187).

74 Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514 at 527 per Mason CJ, Dawson, Gaudron and McHugh JJ. The reference is to Hawkins v Clayton (1987-88) 164 CLR 539 at 600-601 per Gaudron J.

75 Above n 66. An example of a broader right to recover pure economic loss which does allow a plaintiff to recover losses associated with general economic risks is the “fraud on the market theory” which was developed in Basic Inc v Levinson 485 US 224 (1988 US Sup Ct). This case dealt with the application of Rule lOb-5 made under s 10b of the Securities Exchange Act of 1934. In Basic Inc v Levinson it was decided that there could be recovery under rule lOb-5 for material misrepresentations in information disclosed by corporations without the investor having to establish that there was actual reliance on the misrepresentation on the ground that the investor relied on the “integrity of the market”: D Langevoort, above n 42 at 889-903. The lack of a requirement to establish reliance by the investor on the material misrepresentation means that the investor is able to recover compensation for the benefits which the market would have provided had there been no material misrepresentation. For this reason the acceptance of this theory has been interpreted as recognition of the Efficient Capital Markets Hypothesis: J Macey and G Miller, “Good Finance, Bad Economics: An Analysis of Fraud on the Market Theory” (1990) 42 Stan L Rev 1059.

76 See above n 66.

77 Ziel Nominees Pty Ltd v VACC Insurance Co Ltd (1975) 7 ALR 67; discussed in M Neave C Rossiter and M Stone, Sackville and Neave Property Law Cases and Materials (5th ed, 1994) at 253.

78 Vrisakis v ASC (1993) 11 ACSR 162 at 211-212 per Ipp J, at 183 per Malcolm CJ.

79 Corporations Law, s 243A.

80 Eg, Daniels and Ors v AWA Ltd 16 ACSR 607. Clarke and Sheller JJA state that: “However we are of the opinion that in accepting the office directors assume the responsibility of exercising a reasonable degree of care and diligence in the performance of the office ... We see no reason why the relationship of director to a company should not, in accordance with the law as it has been developed since Hedley Byrne and Co Ltd v Heller and Partners Ltd[1964] AC 465, satisfy the proximity test” (at 656).

81 Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514. Under s 82 of the Trade Practices Act 1974 (Cth) the plaintiffs cause of action accrues when the plaintiff suffers loss or damage “by” a contravention. Mason CJ, Dawson, Gaudron and McHugh JJ stated that the use of “by” imported the “common law or practical concept of causation” (at 525) which was discussed in March v Stramare (E and M H) Pty Ltd (1991) 171 CLR 506.use of the terms “as a result of” would also seem to attract the common law concept of causation.

82 The duty of care imposed on auditors is founded on the statutory duties to which auditors are subjected: Daniels and Ors v AWA Ltd (1995) 16 ACSR 607. Clarke and Sheller JJA stated that: “In accordance with their own audit manual, the standard practices and procedures of the auditing profession and common prudence, DHS [the firm of auditors] were under a duty to report the acknowledged absence of proper records and the weakness in internal controls to management and then, in the absence of appropriate and timely action by management, to the board” (at 650). The source of the auditor's duty of care in this passage is the firm's audit manual and standard practices and procedures. The content of the manual and of the standard practices is, however, based on the statutory duties imposed on auditors by the Corporations Law.

83 Ibid at 717. Clarke and Sheller JJA stated that: “[T]he value of the [lost] opportunity is ascertained by reference to the degree of possibilities and probabilities (Sellars v Adelaide Petroleum NL (1994) 179 CLR 332)” (at 699). The use of probabilities in this way affects the valuation of the opportunity lost by the plaintiff, but the plaintiff is still required to establish that, on the balance of probabilities, the particular opportunity was lost because of the defendant's negligence. The principle that the defendant is liable for all the losses caused by the defendant's negligence is, therefore, not affected by the use of “probabilities and possibilities” to quantify the value of the lost opportunity.

84 For a more extensive discussion of this aspect of the system of liability for auditors, see A Corbett, above n 65 at 841-862. This approach to the assessment of damages has focused attention on the importance of the doctrine of solidary liability and has led to consideration of the adoption of a system of “proportionate liability”; see Inquiry into the Law of Joint and Several Liability, Report of Stage Two (1995), established by Hon Attorney-General Michael Lavarch and NSW Attorney-General John Hannaford in February 1994.

85 Above nn 41-43.

86 C Shearing, above n 9 at 76; I Ayres and J Braithwaite, above n 9 at 12-14.

87 Eg, D Langevoort, above n 42 at 901: “Noticeably absent from the Basic decision (above n 75) is a careful consideration of the costs associated with a broad liability rule, in terms of damage awards that are disproportionate to the level of misconduct or in terms of its chilling effect on voluntary publicity, harming investors rather than helping them”.

88 C Shearing, above n 9 at 69.

89 Ibid at 72.

90 Ibid at 73.

91 Ibid at 73, quoting from L Hancher and M Moran, “Organising Regulatory Space” in L Hancher and M Moran (eds) Capitalism, Culture and Economic Regulation (1989) at 275.

92 For a discussion of the criticisms of the proposal to amends 232(4), see P Redmond, “The Reform of Directors' Duties” (1992) 15 UNSWLJ 86 at 105-110. The Corporate Law Reform Act 1992 (Cth) removed many of the specific changes to s 232 which had been designed to provide a clearer statement of director's duty of care. The Explanatory Memorandum attached to the Corporate Law Reform Act 1992 (Cth) explained that: “[T]he provisions which set out a list of factors to be taken into account by a court in determining whether a director had complied with the duty of care provisions (proposed s 232(4AA) in the draft exposure Bill) have been deleted, having regard to the number of submissions which suggested that the guidance intended to be provided by those provisions was not necessary and could be counterproductive” (at par 39).

93 Eg, J Green, above n 17 at 148-150; P Hanrahan, “Transactions with Related Parties By Public Companies and their 'Child Entities' under Part 3.2A of the Corporations Law” (1994) 12 C and SLJ 138 at 138-143. A further, now notorious, example was Div 4B of Part 2.4 which was inserted into the Corporations Law in 1990 to regulate the circumstances in which a company could buy-back its shares. Schedules 1 and 2 of the First Corporate Law Simplification Act 1995 (proclaimed on 9 December 1995 and commencing operation on that date) inserted a new Div 4B into the Corporations Law. The Explanatory Memorandum stated that one of the reasons for the reform of this part of the law was that: “The current rules on share buy-backs are a good example. They run to over 40 pages and are so elaborate and demanding that many companies refrain from carrying out buy-backs because of the cost and time involved in understanding and complying with the rules” (at par 3.6). There is some evidence to support these claims: I Ramsay and T Harris, “An Empirical Investigation of Australian Share Buy-backs” (1995) 4 Aust J of Corp Law 393. The authors state that: “Few companies have announced buy-backs since the prohibition against buy-backs was removed in 1989” (at 414).

94 The Explanatory Memorandum for Corporate Law Reform Act 1992 acknowledged the strength of the criticism that the original proposal was too complex when it stated that: “A number of techniques have been applied in the development of the new provisions. Where appropriate, reliance has been placed on statements of general principle, supported by examples, rather than long and detailed “black-letter” prescriptions” (at par 42).

95 Section 243H(2) states that: “A child entity of a public company must not give a financial benefit to a related party of the public company except as permitted by Division 4 or 5”. The problem with this prohibition is that Part 3.2A only applies to public companies which means that the prohibition has an inconsistent impact in corporate groups where some of the child entities are proprietary companies: P Hanrahan, above n 93 at 156-157.

96 J Green above n 17 at 146-147. The author argues that a wide discretion should be given to the courts in interpreting provisions in the Corporations Law. In addition the Corporations Law should be drafted so that its provisions contain less detail, are less “proscriptive”, and are more “conceptual”.

97 Eg, the Explanatory Memorandum attached to the First Corporate Law Simplification Act 1995 states that: ''The Government announced in 1993 that it would simplify the Law. The aim is to simplify policy and clarify wording so that users can understand and act on their rights and obligations under the Law” (at par 3.3). The Act removes “unnecessarily complicated rules” (par 3.5), makes the Law more “accessible” (par 3.9), ensures that the content of the Law “is as easy as possible to comply with” (par 3.12), caters to small business (par 3.15), and eliminates “irrelevant requirements” (par 3.16).

98 B Fisse and J Braithwaite, Corporations, Crime and Accountability (1993) at 131.

99 For analysis of the limited capacity of monetary penalties, including compensatory remedies, to deter identified conduct, see Australian Law Reform Commission, above n 8 at 105-106; B Fisse and J Braithwaite, above n 98 at 82-83; I Ayres and J Braithwaite, above n 9 at 51-53 (limited effectiveness of “static” enforcement strategies); J Coffee, “No Soul to Damn: No Body to Kick: An Unscandalized Inquiry into the Problem of Corporate Punishment” (1981) 79 Mich L Rev 386. On the use of “compensation” as a penalty or sanction, see R Kraakman, “Corporate Liability Strategies and the Costs of Legal Controls” (1984) 93 Yale L J 857 at 867-868. For a more general analysis of the limited capacity of compensatory remedies provided by tort law to deter unsafe conduct and practices, see D Dewees and M Trebilcock, “The Efficacy of the Tort System and its Alternatives: A Review of the Empirical Evidence” (1992) 30 Osgoode Hall L J 57 at 79-83 (medical malpractice), 95- 99 (product liability), 108-112 (environmental injuries) and 122-125 (workplace injuries).For an argument developing the view that compensatory remedies in tort can deter unsafe conduct, see S Croley and J Hanson, “Rescuing the Revolution: The Revived Case for Enterprise Liability” (1993) 91 Mich L Rev 683 at 786-795.

100 For example, otherwise qualified people may choose not to accept offers to become directors. This may be particularly relevant for companies seeking to appoint “non-executive directors”: V Finch, “Personal Accountability and Corporate Control: The Role of Directors' and Officers' Liability Insurance” (1994) 57 MLR 881 at 885; Cooney Committee Report (1989) above n 29 at par 13.4. Directors may become risk-averse by avoiding making decisions which involve commercially justifiable risks or by delegating decision-making which involves risk assessment elsewhere in the organisation: V Finch, ibid at 885-886; Hillmer, Strictly Boardroom, above n 4 at 1-7. The problem of over-deterrence reflects one of the primary difficulties with imposing a scheme of personal liability on a group of persons who are “undiversified risk bearers”, that is any loss will have a substantial and disproportionate impact on those persons' individual wealth, see R Kraakman, above n 99 at 862-867 and 883-884.

101 For example, enforcement may be insufficient so that directors and other decision-makers are not deterred by the threat of imposition of penalties: V Finch, above n 100 at 885; I Ayres and J Braithwaite, above n 9 at 36-37, R Kraakman, above n 99 at 888-892;P Redmond, above n 92 at 86-88 and 118-120. There may either be a mis-match between the losses to which the individual is exposed as against the catastrophic losses to which the company is exposed, or the size of the gains to be made may be such that some directors and managers will take the risk of being subjected to substantial penalties: R Kraakman, above n 99 at 888.

102 V Finch, above n 100 at 886.

103 Ibid at 892-897.

104 G Teubner, Law as an Autopoietic System, above n 14 at 66, asks the question: “[G]iven the high degree of legal and social autonomy, is the legal regulation of society still possible, however indirect, complicated, paradoxical, circular or contradictory it may be?”.

105 Eg, I Ayres and J Braithwaite, above n 9 ch 2-4; J Braithwaite, “Responsive Regulation for Australia” in P Grabosky and J Braithwaite, above n 6 at 92-96; R Schoer, above n 6; C Shearing, above n 9 at 74-77.

106 Eg, I Ayres and J Braithwaite, above n 9 at 38-51. C Shearing, above n 9.

107 G Teubner, Law as an Autopoietic System, above n 14, ch 4 “Reflexive Law”; G Teubner, above n 10 at 166.

108 R Buxbaum, above n 14 at 522-525.

109 G Teubner, Law as an Autopoietic System, above n 14 at 66. The list includes: “post-modern law”, “post-interventionist law”, “proceduralized law”, “neo-corporatist law”, “ecological law” and “mediating law”.

110 I Ayres and J Braithwaite, above n 9 at 18.

111 G Teubner, Law as an Autopoietic System, above n 14 at 13-24. Chapter 2 is entitled: “The New Self-Referentiality”. This chapter uses systems theory as the basis for developing an understanding of “Autopoiesis”. An understanding of law as an “autopoietic system” underpins Teubner's development of the concept of “reflexive law”. Reflexive law provides the basis for an indirect form of regulation which is the product of the interaction between closed social systems, for example, the law and the economy.

112 I Ayres and J Braithwaite, above n 9 at 4.

113 Ibid at 35-38. See also B Fisse and J Braithwaite, above n 98 at 133-145. The authors list the “desiderata” or principles underlying the use of the enforcement pyramid. '

114 I Ayres and J Braithwaite, above n 9 at 35-36.

115 Ibid.

116 Ibid at 40-41, 91-97 and 110-116.

117 Ibid at 93. This statement deals specifically with “tripartism”, that is, the introduction of public interest groups into the regulatory process in order to prevent the co-operation between the regulatory agency and the industry turning into a relationship of capture. The statement of general principle is, however, equally applicable to other strategies for regulation.

118 Ibid: “[P]unitive enforcement engenders a game of regulatory cat-and-mouse whereby firms defy the spirit of the law by exploiting loopholes, and the state writes more and more specific rules to cover the loopholes” (at 26). See also R Schoer, above n 6 at 110; J Green, aboven 17.

119 I Ayres and J Braithwaite, above n 9 at 106.

120 Ibid at 116.

121 Aboven44.

122 Corporations Law, ss 283 and 289 require all companies to keep “books”. “Books” are broadly defined to include, amongst other things, “any record of information” and “accounts or accounting records”.

123 Ibid at Part 1.5, par 9.2.

124 The significance of this requirement is reflected in the provision which makes the failure to keep accounting records a criminal offence punishable by a fine of $2,500 or imprisonment for six months: Corporations Law, s 289 and Schedule 3. For a more general discussion of the importance of this requirement in a similar context, see The King v Federal Court of Bankruptcy; Ex parte Lowenstein (1937-38) 59 CLR 556 at 571-572 per Dixon J.The context for this discussion concerned the power of the Commonwealth Parliament to include in the Bankruptcy Act 1966 (Cth) a provision, similar to s 270, which made it an offence not to keep “books”.

126 Eg, a public company must disclose the following information: a profit and loss statement (s 292), a balance sheet (s 293), a directors' statement (s 301), directors' reports (s 304-305) and an attached auditor's report (ss 296 and 331A). There are separate reporting requirements for “prescribed interest undertakings” (Pt 3.6, Div 10).

127 Relevant financial statements must be sent to shareholders (s 315), be laid before the general meeting (ss 316 and 283C), and where relevant, be lodged with the ASC (ss 317, 317A, 317B and 335). There are separate provisions dealing with “prescribed interest undertakings”.

128 Ibid at s 11lAO. A “disclosing entity” is defined to include, amongst others, public companies that are listed on the Australian Stock Exchange: s lllAC.

129 Ibid at ss 283C and 317. A “small proprietary company” is defined in s 45A. Small proprietary companies must, however keep, “accounting records”: ss 283C and 289.

130 Ibid at ss 11lAP, 1001A, and 10018.

131 For a company listed on the ASX the duty to disclose information on a continuous basis arises out of the combined operation of Corporations Law (ss 1001A and 1001C) and ASX Listing Rule 3A(l).

132 Corporations Law, s 297 and Corporations Regulations, Sched 5.

133 In preparing a company's financial statements directors must comply with relevant “accounting standards”: Corporations Law, s 298.

134 Ibid at ss 296 and 331A. A disclosing entity may choose not to have an auditor's report attached to a half yearly statement: ibid s 332AA(2). A small proprietary company is not required to appoint an auditor except in circumstances defined in s 325. The auditor's report must be attached to the financial statements: s 296(2). The content of the auditor's report is set out in Pt 3.7, Div 2.

135 For an example of a critique of mandatory regulation of disclosure, see J Macey,“Administrative Agency Obsolescence and Interest Group Formation: A Case Study of the SEC at Sixty” (1994) 15 Cardozo L Rev 909. The basis of this argument is that investors do not rely on mandated disclosure but on efficient markets. For a definition of the “efficient capital markets hypothesis”, see above n 42. Arguments, which on balance, tend to justify the continued use of mandatory regulation identify the tentative benefits associated with the use of this form of regulation: see M Blair and I Ramsay, “Mandatory Corporate Disclosure Rules and Securities Regulation” in G Walker and B Fisse, above n 3 at 265-266; F Easterbrook and D Fischel, above n 26 at 296-302; D Langevoort, above n 42 at 880-881. For an example of an argument strongly supportive of mandatory regulation which is based on the rejection of the efficient capital markets hypothesis, see L Cunningham, above n 42 at 602-604.

136 For a definition of the “Efficient Capital Markets Hypothesis”, see R Gilson andR Kraakman, above n 42.

137 Eg, L Cunningham, above 42 at 602-604. See also T Headrick, “The A to B of Our Two Stockmarkets” (1992) 1 J of Sec Inst of Aust 2. Headrick argues that the market for shares in small to medium companies may be less informationally efficient than those in large companies which may justify more rigorous regulation of disclosure of information.inefficiency sometimes teaches that exactly the same form of regulation is unhelpful or irrelevant” (at 881).

138 Eg, M Blair and I Ramsay, above n 135 at 277; F Easterbrook and D Fischel, above n 26 at 300-303; R Gilson and R Kraakman, above n 42 at 635-641.

139 C Shearing, above n 9 at 70.

140 Above text accompanying nn 113-121.

141 F Easterbrook and D Fischel, above n 26 at 276-283; J Macey, above n 135 at 927-929.

142 Below nn 144-146.

143 M Blair and I Ramsay, above n 135 at 265 (footnotes omitted).

144 Ibid at 272; F Easterbrook and D Fischel, above n 26 at 286-290 and 300-303.

145 M Blair and I Ramsay, above n 135 at 272-274; F Easterbrook and D Fischel, above n 26 at 300-303.

146 Although mandatory regulation of disclosure may reduce the total cost of acquiring, processing and verifying information there may be a re-distribution of the costs of carrying out each of these functions. In particular, it is argued that the costs are shifted from intermediaries (who would, without mandatory regulation, bear a greater proportion of the costs of acquiring, processing and verifying information) to individual companies, with the result that intermediaries may reap additional returns from the introduction of mandatory regulation: R Gilson and R Kraakman, above n 43 at 635-641; F Easterbrook and D Fischel, above n 26 at 309-314. This rationale for disclosure is not the same as that developed by Judge F Easterbrook in Wielgos vCommonwealth Edison Co 892 F.2d 509 (7th Cir, 1989) that the duty to disclose information is imposed on the “least cost provider” of that information. For a discussion of this case and of the “least cost provider” rule, see L Cunningham, '"Firm Specific' Information and the Federal Securities Laws: A Doctrinal, Etymological, and Theoretical Critique” (1994) 68 Tulane L Rev 1409 at 1445-1446. The “least cost provider” rationale focuses on the costs incurred by the firm in disclosing information without comparing this cost with the costs that would be incurred by all users in compiling the information from other sources.

147 Aboven 137.

148 L Cunningham, above n 42 at 571-572. Cunningham argues (at 571) that: “Linearity means proportionality: a change in one variable produces a proportionate change in another specified variable” (emphasis in original). A linear structure between stock prices and the availability of information would be one in which new pieces of information produced proportionate changes in stock prices. “In contrast, nonlinearity means the absence of proportionality - changes in one variable will produce a change in another variable but exponentially rather than proportionally” (at 572).

149 Ibid at 592-598. Cunningham argues that: “[T]his nonlinear perspective not only subverts the ECMH but also neutralises the value of noise theory by pointing to factors beyond behavioral economics to account for market prices deviating materially from underlying asset values. In other words, although noise theory correctly admits that irrational trading exists, the nonlinear/ chaotic perspective implies the need to search for other structural factors in addition to irrational trading” (at 593). For a discussion of the “noise trading” and the efficient capital markets hypothesis, see above n 42.

150 Ibid at 596.

151 Ibid at 604.

152 Above text accompanying nn 116-119.

153 First Corporate Law Simplification Act 1995 inserted Div lA of Part 3.6 into the Corporations Law. This new Divisions limits the reporting requirements of small proprietary companies.

154 Eg, Exposure Draft Second Corporate Law Simplification Bill 1995 at proposed s 300. In the Commentary attached to the Bill it is argued that: “It has been suggested that directors' reports do not always give shareholders useful information relating to the company's performance and outlook. This view has been reinforced by provisions which require a number of detailed disclosures, but which do not promote focused or clear reporting” (Exposure Draft, Second Corporate Law Simplification Bill, Commentary, Vol 2 at 40). The change to directors' reports embodied in the proposed s 300 will require directors to report on general changes in the company's business including trends or developments which may affect the business. The Commentary states that the enhanced form of disclosure found in the proposed s 300 “is intended to benefit members by requiring that they be given information about the business which they can understand, even if they are unaccustomed to reading financial statements” (at 41).

155 I Ayres and J Braithwaite, above n 9 at 109.

156 The ASC has sought to make use of the penalties included in the Corporations Law by implementing surveillance programs. An example is the Financial Disclosure Surveillance Program, which will “see the accounts of a variety of companies subjected to detailed examination by the ASC's specialist accounting staff”: R Cockburn, “The ASC - Post Transactions and Annual Accounts Audits” Address given at Twilight Seminar, Clayton Utz 26 August 1992, in Australian Corporations Law, ASC Releases (1993) MS 1 at 11,003. In 1994 it was reported that 463 sets of company financial statements were examined: “Financial Reporting Surveillance Program” ASC Media Release 94/184, in Australian Corporation Law, ASC Releases (1994) at A 2094-2095. For a detailed discussion of a pyramidal approach involving the strategic use of penalties, see C Dellit and B Fisse, above n 7 at 570-571. An example of the failure to develop a pyramidal approach to regulation may be found ins 1001A of the Corporations Law. This section deals with the duty of a listed public company to immediately disclose non-confidential information to the ASX. A contravention of this section carries a maximum penalty of 5 years imprisonment. Dellit and Fisse argue that a “strategy of pyramidal enforcement exerts a downward pressure towards settlements and away from litigation and court-ordered sanctions or remedies” (at 596). In relation to s 1001A this would require development of strategies to encourage compliance without relying primarily on the criminal penalty specified in s 1001A.

157 Unless a user sustains “damage” as a result of use of financial statements there is no general right for users to seek further information or clarification about the way in which the company's financial statements were prepared. The ASC has a Financial Disclosure Surveillance Program which examines companies' financial statements: see above n 156.

158 A company's “financial statements” are defined in s 9 of the Corporations Law to include the accounts which the company is required to prepare in compliance with Part 3.6 of the Law; see above n 126. In preparing these accounts directors must comply with ss 297 and 298; see above nn 132-133.

159 “Decision” in this context is framed with reference to its use in the Administrative Appeals Tribunal Act 1975 (Cth), s 28.

160 The Corporations and Securities Panel was created by s 171 of the Australian Securities Commission Law. Members of the Panel were first appointed in 1991: G Williams, “The Corporations and Securities Panel - What Future?” (1994) 12 Comp and Sec L J 164 at 166.For a review of the Panel's functions, see ibid at 166-168. The Panel's current functions are limited to takeover regulation but, at the time of its establishment, it was envisaged that the Panel would be given a wider jurisdiction: ibid at 166.

161 Administrative Appeals Tribunal Act 1975, s 43.

162 The proposed power to review a particular decision of directors in the preparation of a company's financial statements would be similar to the Panel's powers under Corporations Law s 733 in that the Panel would not adopt a “black letter” law approach to interpreting Accounting Standards or relevant provisions of the Corporations Law. Rather the Panel would adopt a “broad policy based approach”: G Williams, above n 160 at 168. However the proposed power to review specific decisions of directors would be quite unlike the power exercised by the Panel under s 733 in one important respect. The power granted to the Panel under s 733 extends to any conduct, or acquisition of shares, which is unacceptable with reference to the “Eggleston” principles which are set out in s 731. By contrast, under this proposal the Panel would only be able to consider the relevant decision of the directors, that is the directors' interpretation of the particular provision of the Corporations Law which was the subject of the dispute between and the shareholder bringing the action and the directors of the company.

163 C Dellit and B Fisse, above n 7 at 585-587.

164 See above, text accompanying nn 120-121.

165 Corporations Law, s 1324 provides that a person whose “interests have been affected” by conduct that would constitute, amongst other things, a “contravention of the Law” can apply to the court for an interim or a final injunction. In addition to the problem of establishing that there has been a contravention of the Law, the person applying for an injunction may be required to give an undertaking as to damages. Under s 1323 a person may also apply for a wide range of protective remedies, eg, to freeze a person's assets. Other remedies are provided for ins 260, see eg, Jenkins v Enterprise Gold Mines NL (1991) 6 ACSR539.

166 Eg, Corporations Law, s 1317HD. For an analysis of the costs associated with building the risk of a later payment of damages into a planned transaction, see F Easterbrook and D Fischel, above n 26 at 302.

167 The introduction of this remedy for shareholders would have some of the characteristics of “tit for tat” regulation, see I Ayres and J Braithwaite, above n 9 at 21.

168 Eg, M Blair and I Ramsay, above n 135.

169 The theme of regulation of others through self-regulation is the basis of Teubner's notion of “reflexive law”, see G Teubner, Law as an Autopoietic System, above n 14 at 65. Teubner uses the following quotation as part of a general discussion of reflexive law and “Autopoiesis”: “Autopoiesis does not mean simply letting things run their course. What autopoietic control in fact means is arranging the interaction and the systems which are to be controlled and developed in such a way that they can more or less regulate themselves and control each other.” (Ibid at 68, quoting W Buhl, “Grenzen der Autopoiesis” (1987) 39 Zeitschrift fur Politik 225 at 247). In this sense this proposal, which is based on a self-regulating system of regulation, may be an example of the use of reflexive law.

170 See above, text accompanying nn 73-75.

171 I Ayres and J Braithwaite, above n 9 at 5.

172 Eg, ASX Listing Rule 3C(3)Q); see C Dellit and B Fisse, above n 7.