Australia’s institutional shareholders are notoriously passive and the failure to move against the NAB is just another example.

Shareholders have previously used these provisions where there is reasonable suspicion that directors have breached their duties, according to Professor Ian Ramsay of Melbourne University’s Centre for Corporate Law and Securities Regulation, and co-author of the leading standard text on corporations law.

Shareholders can obtain information about a company by various means, including questions at general meetings, inspection of company registers and the information lodged with the Australian Securities and Investments Commission.

They do not normally have access to a company’s books of account and other confidential records, but section 247 of the Corporations Act 2001 allows a shareholder to apply for a court order to inspect such records.

“Legislators anticipated that situations may arise when shareholders need information beyond that normally available to them,” says Professor Ramsay.

“The original predecessor to section 247 first introduced in 1985 was drafted so the courts could arbitrate between directors and shareholders about the company information a shareholder should have access to.”

The provisions have a similar intent to those in state and federal FOI legislation, except the burden of justification is different, according to Professor Ramsay.

Unlike an FOI request, where government departments have to show a reason to withhold the information, section 247 requires a shareholder to show the court why the information should be released.

There are no minimum shareholding requirements to make an application, but it must be in good faith and for a proper purpose.

Shareholders do not need to inspect the records themselves, but may appoint a representative, such as an auditor, solicitor or other professional consultant, to conduct the examination.

Precedents also exist for shareholders in a parent company to inspect the records of a subsidiary company; for example, allowing NAB shareholders to inspect books and records of its HomeSide subsidiary.

NAB’s sale of HomeSide’s operating platform in December last year involved subcontracting its mortgage servicing to Washington Mutual, but the HomeSide entity remains a wholly owned subsidiary of the bank.

Documents and correspondence between lawyers Wachtell, Lipton, Rosen & Katz and their bank client may be privileged, but the underlying records of NAB and HomeSide are not.

However, the option to inspect the subsidiary’s records may not exist after it is sold, says Professor Ramsay.

“At the very least, enforcement of an Australian court order on an independent overseas company may prove difficult,” he says.

The Australian Shareholders Association is among those concerned about the explanations so far provided about the HomeSide losses.

ASA Victorian chairman Stan Mather says that little information was provided at December’s annual general meeting because the board’s internal investigation was incomplete.

“NAB chairman Charles Allen couldn’t provide answers to any of the key questions and told shareholders to wait for the final report. That report is now both privileged and sub-judice and the information we have been given is far from adequate.

“It was the board that took NAB into the US mortgage market and they should have understood and properly managed the associated risks. We don’t know, from the information provided, if senior management or the directors should be held accountable for the losses,” he says.

Allen has met privately with the ASA and several fund managers since the results of the investigation were released, but Mather describes his meeting as unsatisfactory.

“Charles Allen wasn’t happy about the questions we put to him and we weren’t happy with the answers he gave us,” says Mather.

“He couldn’t give us any more information than had already been made public because of the ASX’s continuous disclosure requirements.”

Allen did agree to write to shareholders and did so on 7 February. Mather was not expecting any new information to be forthcoming and he was right – Allen’s letter merely regurgitates information already provided via the media.

Mather says the ASA has considered all options available to shareholders under the corporations’ law, but any process that involves the courts is likely to run up large legal bills.

“We are an association of private shareholders, with limited funds and could not afford a protracted legal battle with a large company like NAB,” says Mather.

Institutional shareholders, notably Peter Morgan of Perpetual Investments, have complained about the lack of information provided HomeSide, despite having the means to get more.

“Given the amount of money that’s been lost, shareholders have got a right to information,” Morgan says.

“I just don’t like the way shareholders are being treated.”

He was quoted as being “under whelmed” by his private meeting with Charles Allen.

However, the lack of information, and considerable suspicion about possible breach of duty by directors, didn’t prevent institutional shareholders from re-electing three out of the four members of the board audit committee, including its chairman Catherine Walter, at the bank’s December annual general meeting.

The failure of institutional shareholders to use the powers available to them is a weakness in the overall system of corporate regulation.

In a free market economy the regulation of corporate activity is a delicate balance of legislation and self-regulation.

The regulatory regime will usually represent the minimum constraints on business activity consistent with good governance, but this approach pre-supposes that the powers and remedies built into the rules are used as intended.

Shareholders, especially the institutions, are vociferous in their criticism when regulators such as the ASIC and the Australia Prudential Regulatory Authority fail to properly police corporate activity.

But, those same shareholders are themselves part of the regulatory regime and are given powers to act by the corporations law.

There is a presumption by legislators that shareholders will use their available powers in appropriate circumstances and their failure to do so represents another breakdown of corporate regulation in this country.

Peter Fray

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