Corporate activity will often have a significant impact on the environment. In order to respond to the activities of corporations in so far as they impact on the environment, it is useful to understand corporate structure and the nature of key laws governing their conduct.
Laws that impose duties to report or put information before shareholders can make corporations more accountable or, on occasion, serve to embarrass them. Put another way, they can be used to strike at the heart of corporations, through challenging their prestige and public standing.
Corporate Structure
The corporation, or company, is a type of organisation which has been registered.Once registered, the law recognises the company as a distinct legal entity. This means that the company has its own rights and responsibilities, separate from those who own the company (the shareholders) and run the company (the directors).
How is a corporation governed?
A company is controlled by its directors and shareholders.
The board of directorsis responsible for the day-to-day management of the company. The board comprises executive and non-executive directors. Executive directors are employed to manage the company on a full time or part time basis. Non-executive directors attend board meetings, but do not ‘execute’ the decisions of the board. The board can sometimes delegate their powers. However, in many circumstances, the board remains responsible for the delegate’s actions.
The shareholders are not usually involved in the day-to-day affairs of the corporation and usually meet only once a year at the annual general meeting (AGM). However, shareholders or members have a great deal of power. Although the board runs the company, shareholders appoint and dismiss directors and make decisions that bind the company.
Duties of Directors and Company Officers
The law requires directors to comply with a number of duties. These include the duties:
- to act in good faith in the best interests of the corporation;
- to only act for a proper purpose;
- to not improperly use their position to gain an advantage for themselves or someone else or to cause detriment to the corporation;
- to not improperly use the information gained by their position to obtain an advantage for themselves or someone else or to cause detriment to the company;
- to disclose when a director has a material personal interest in a matter that relates to the affairs of the company; and
- to exercise the same degree of care and diligence that a reasonable person in their position would exercise.
These duties extend to company secretaries, senior management and others that control the company.
Who can enforce these duties?
The provisions regarding the enforcement of duties are complex. Depending on the circumstances and the remedy sought, a wide range of people can take action. These include:
- the Australian Securities and Investments Commission (ASIC);
- the company that employed the director or officer;
- any person whose ‘interests’ are affected; and
- a shareholder in the company’s name, with the leave of the court.
Criminal proceedings must be commenced within five years of the alleged breach, unless the Minister consents to a later date. Other proceedings must be commenced within six years of the alleged breach.
What penalties apply if these duties are breached?
If a person has breached these duties, they may be subject to the following civil or criminal penalties:
- penalties of up to $200,000 with provisions for continuing breaches;
- compensation for any damage suffered;
- imprisonment (where the person acted dishonestly or recklessly); or
- other orders.
Shareholder Action
Shareholders in a company can take a variety of actions to influence the conduct of the company in relation to environmental matters.
Shareholder Resolutions
Companies are required to hold meetings at which shareholders can vote on resolutions that affect the company’s business.
Generally, resolutions are prepared by the board. However, the law also permits shareholders to propose resolutions where at least 100 members who are entitled to vote, or members with at least 5% of the votes that may be cast, give the company written notice.
Provided certain requirements are met – such as not being defamatory – the company must circulate notice of the proposed resolution (and any supporting statement) to all shareholders.The company generally bears the cost of circulation. The proposed resolution must be addressed at the next general meeting.
Proposing such resolutions can allow small groups of shareholders to bring important issues to the attention of all shareholders. It forces the company to address these issues at a formal meeting of members. It may also reveal significant shareholder support for the proposed resolution.
General Meetings
A group of shareholders can require the board to call a general meeting of members in similar terms to the resolution provisions above.
In brief, 100 or more voting members, or members with 5% or more of the votes able to be cast at the meeting, may make a written request that directors call the meeting. The directors must call the meeting within 21 days, and the meeting must be held no later than two months from the date of the request.
Calling a general meeting may serve similar ends to a resolution. However, it is important to carefully consider the impact of calling a general meeting. General meetings are expensive and may well serve only to antagonise other shareholders. In this respect, it should be noted that the right of members to request a meeting must be exercised in good faith, and for a proper purpose.
Lobbying
As noted above, both the board and its shareholders have the ability to direct how the company operates. If you are lobbying a company to improve its environmental performance, you could consider writing to both.
The names of directors and shareholders, as well as the company’s principal place of business and other corporate information, can be obtained by purchasing a ‘company extract’ from ASIC. Free on-line searches of basic company information are available on ASIC’s website.
Corporate Liability for Environmental Offences
A number of environmental laws make directors and managers personally liable for their company’s breach of environmental laws.
Corporate Liability for Misleading and Deceptive Conduct
It is unlawful for corporationsto engage in misleading and deceptive conduct or make false or misleading representations.
Examples of such conduct in an environmental context could be:
- misleading statements in a director’s report, product disclosure statement or voluntary environmental report;
- misleading statements in a document supporting a proposal (such as an environmental impact statement); or
- misleading advertising or other statements about the environmental credentials of a product (often referred to as ‘greenwash’).
Misleading and deceptive conduct
It is unlawful to engage in conduct that is misleading or deceptive, or is likely to mislead or deceive, in the course of trade or commerce.
In assessing the nature of the conduct, there is no need to prove that the corporation intended to mislead. Nor is it necessary to show that anyone was actually misled.
The essential question is whether, in all the circumstances, the conduct was misleading or deceptive, or likely to mislead or deceive. It is worth noting that silence, or failing to give the whole picture, can also be misleading.
Any person can take legal action to address misleading or deceptive conduct. If a corporation is found to have engaged in misleading or deceptive conduct the court can:
- make a declaration that a breach has been committed;
- grant an injunction to stop the misleading or deceptive conduct;
- award damages for loss suffered; and
- order corrective advertising.
False and misleading representations
It is unlawful for companies to make false or misleading representations about goods or services in the course of trade or commerce.
This could potentially have application where false or misleading representations are made about the environmental credentials of a product. For example, if a company represents that a wood product does not contain any rainforest timber, and these representations are false, then the conduct could be unlawful.
As with the misleading and deceptive conduct provisions, there is no need to demonstrate that the corporation intentionally made a false or misleading representation. It is enough to show that the representation was wrong.
The remedies available to the court are the same as for breaches of the misleading and deceptive conduct provisions (see above). In addition, the court can fine the company up to $1.1 million for each breach of the false and misleading representations provisions.
Case Study: BOC Gases
The Australian Competition and Consumer Commission (ACCC) is tasked with investigating and prosecuting breaches of Competition and Consumer laws.
BOC Gases used the image of a frog, the words ‘green’, ‘green air conditioning’; ‘environmentally preferred’ and the logo ‘Ozone CareT’ in association with FR 12T in its technical and promotional materials to air conditioning installers.
The ACCC advises that the use of such terms as ‘environmentally friendly’ or ‘environmentally safe’ should be avoided, as few, if any products could justify a claim that they are totally free of adverse effects.
If a product has environmental benefits they should be specifically spelt out. Generally a claim should refer to the specific part of the product or process it is referring to; use language which the average member of the public can understand; explain the significance of the benefit and be able to substantiate the claim.
Any benefit claimed should also be real or relevant, for example, if a product is promoted as being ‘phosphate free’ when the product has never contained phosphate, then such a claim would risk contravention of the law.
In certain cases, enhancing the environmental benefits of a product may involve a trade-off that results in some loss of performance compared to that offered by a previous formulation. If a consumer can attain equivalent performance only by using substantially more of a product, then the environmental benefit may be slight or illusory. In any event, a consumer should not be misled into believing that a product’s performance is unimpaired if this is not so.
BOC Gases have agreed to clarify the environmental and performance comparisons, cease using general terms such as ‘environmentally preferred’ or general ‘green’ claims with respect to FR 12T.
Corporate Environmental Reporting
There are only limited requirements for environmental reporting by corporations under the law.
Disclosures by directors in the company’s annual report
Some types of companies are required to produce an annual report. The annual report is required to include a ‘directors report’ that must comply with the following provision:
If the entity’s operations are subject to any particular and significant environmental regulation under a law of the Commonwealth or of a State or Territory – give details of the entity’s performance in relation to environmental regulation.
If you believe that a company has not made a disclosure to this effect in its annual director’s report, contact ASIC with details. Copies of directors’ reports can be obtained from the company itself, from ASIC (by paying a fee) or, in many cases, on the internet.
Disclosures by superannuation and certain other managed investment funds
Some entities (such as superannuation funds) must provide a ‘product disclosure statement’ to clients, setting out certain information about the investment product being sold.
This statement is required to disclose ‘the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment’.
Importantly, if a fund does not take any of these matters into account, the product disclosure statement must contain a statement to this effect.
One of the purposes of this requirement is to enable consumers to differentiate between competing funds on the basis of their ethical investment credentials.
Duties to disclose in a prospectus
When a company issues shares in itself to the public, or ‘floats’, it is usually required to prepare a public disclosure document called a prospectus. This document is required to contain ‘all information [about the company] that investors and their professional advisors would reasonably require to make an informed assessment’ of the prospects of the company.
In particular, the prospectus must include details of any material risks associated with investing in the company. These may include a company’s poor environmental record or the possibility of new legislation (such as laws limiting greenhouse gas emissions or imposing a charge on such emissions).
If you are aware that a corporation proposes to float, and you believe it should make disclosures relevant to its environmental performance or prospects in the prospectus, then you could write to the company to suggest this.
Any person can make a complaint to ASIC, if they believe that a prospectus is misleading or omits material information. In its role as the government’s corporate watchdog, ASIC has the power to issue a ‘stop order’ or to take other action. A stop order prevents offers, issues, sales or transfers of the shares in question, while the order is in force.
A person who suffers loss as a result of misstatements or omissions in a prospectus may be entitled to recover the loss from directors of the company making the offer or, in certain circumstances, from other persons involved in preparing the prospectus.
Additional reporting obligations for listed companies
A listed entity must provide a corporate governance statement in its Annual Report, detailing its compliance with the ASX Corporate Governance Principles and Recommendations.
The statement should address material business risks’ which includes matters relating to the environment and sustainability.
If a company does not adhere to these obligations, the company is required to provide an explanation in the corporate governance statement as to why it did not adhere to them.
