Fairfax Media Ltd’s constitution enables the board to allocate board places in addition to the existing directors up to the maximum number of directors allowed in the constitution - not more than 12 unless the company in general meeting determines otherwise.
Gina Rinehart has dropped her holding to just below 15%. This 15% threshold is relevant to the coverage of the company’s director’s and officer’s insurance policy. (Directors indemnity and insurance is dealt with in Clause 12 of the constitution.)
Protection under the policy is compromised if a director is also a shareholder, with a stake of 15% or more in the company. Given the climate of dispute swirling over Rinehart’s intentions so far, litigation following a transition of Rinehart associated interests to the board can’t be ruled out. With a range of shareholder rights under the Corporations Act, including those relating to the board or majority shareholders acting oppressively, the removal of uncertainty in relation to professional insurance cover would be critical to the incumbent directors. However, how far this reduction in shareholding goes in achieving Rinehart’s overall objectives is uncertain.
The Corporations Act places certain restrictions on director insurance. Sections 199A, 199B and 199C combine to prohibit companies paying or agreeing to pay for insurance that encompasses coverage for various matters including wilful misconduct or contravention of s 182 (misuse position for gain) or s 183 (misuse information for gain). The Fairfax Media Director’s Report, contained in the company’s annual report for 2011, contains information regarding the payment of premiums under contracts insuring the directors and officers of the company, to the extent allowed by the Corporations Act, against liability incurred by them in their respective capacities in successfully defending proceedings against them. This inclusion in the Directors Report is required by s 300 of the Corporations Act.
Regulation of corporate governance can be roughly divided into soft law and hard law. Soft law includes recommendations of the many reports on governance compiled for the last 20 years, whereas hard law includes the relevant sections of the Corporations Act (such as s 180: care and diligence), most of the other directors duties sections, as well as sections such as s 606 (providing for the regulation of control once acquisitions exceed the 20% threshold). The other relevant level of governance is a hybrid between these two divisions, and most importantly includes the ASX Corporate Governance Principles and Recommendations. Where listed companies don’t comply with the ASX Corporate Governance Principles, this departure - and any alternative approach - must be explained.
Fairfax Media’s annual report for 2011 indicates compliance with the ASX Corporate Governance Principles. Recently the company issued a media statement confirming its own board governance principles which include: “At Fairfax a key value is editorial independence. Day to day editorial direction and decisions on stories is a matter for the editors, not the board.” This, of course, has been the most widely publicised hurdle. As Hancock Prospecting is still the largest shareholder in the company, it seems Rinehart wants not only board presence but control that may encroach on editorial independence.
Of course, even if Rinehart secures the board seats sought, this does not mean that her interests necessarily control the company or the board. Companies are artificial and overall control is measured in shares; this is why the takeover provisions focus on shareholding and why election and removal of directors require a requisite percentage of shareholder votes.
Commentators have raised the concept of the “spirit” of the Corporations Act, which stipulates that if control in a company passes, it should do so by bringing the shareholders a premium on their shares. This usually happens during a takeover, but it is not a requirement of the sections regulating takeovers. It is a result of market forces. From a shareholder’s perspective, appropriate governance and investment security should co-exist and there is certainly protection during takeovers for target shareholders in the Act by way of the provision of information, and time, to make a decision.
But this regulation is only relevant where acquisitions exceed the threshold in s 606 and are not exempted from the formal requirements in some other way (such as in the creep provisions). If Rinehart wishes to gain a substantial control base in the company, she may very well have to initiate a takeover and offer a premium. But if she gains board seats, this will not be the case, because the company constitution allows for this to occur at the discretion of the board. The idea of a shareholder’s premium is perhaps not pertinent in this instance. Yet it still may be that shareholders do derive some benefit if board seats are offered: the conclusion of the turmoil may bring a rise in the share price.