Competition Code and Corporate Governance Compliance Manual

Overview

The manual is in two parts.

  • The first part (The Competition Code) deals with obligations which are now imposed on the University and its staff under The Competition Code. It is relevant to and should be read by all University staff.
  • The second part deals with Corporate Governance. "Corporate Governance" is about the management of business enterprises organised in corporate form. This part is relevant to and should be read by all University staff who occupy a senior management position or who represent the University on the board of a corporation associated with the University.

Compliance officer

John Lambrick, University Solicitor is the University’s Compliance Officer and is able to assist with queries in respect of the manual and compliance issues in general.

Reporting

It is important that non-compliance with any of the matters set out in the manual be reported immediately to the Compliance Officer. Early reporting may avoid or significantly reduce any adverse consequences of non-compliance.

A non-compliance report should set out the following:

A brief description of the non-compliance

  1. A proposal for rectification
  2. A time-frame for rectification

The compliance officer will maintain a register of reports.

The Competition Code

Section 1: introduction

1.1 Background

National Competition Policy is an initiative of the Heads of Australian Governments. It expands the scope of the competitive conduct rules contained in Part IV of the Trade Practices Act 1974 (Cth). These rules now apply to all business activity in Australia, irrespective of by whom it is conduct – individuals, unincorporated associations and Government.

The expanded competitive conduct rules are referred to in this Manual as the Competition Code. This expansion took effect on 21 July 1996.

1.2 The Competition Code and Fair Trading Act

The Competition Code regulates or prohibits restrictive trade practices and the Fair Trading Act prohibits unfair trade practices, both with the aim of protecting consumers by encouraging free and fair competition.

The penalties are severe and include:

  • Fines up to $ 10 million for each offence for RMIT;
  • up to $500,000 for each offence for individual employees or officers;
  • Damages payable when legal action is taken by competitors, suppliers or customers who have suffered as a result of conduct in question;
  • Injunctions the Court may order RMIT to take or refrain from taking certain actions;
  • Corrective orders under the Fair Trading Act, requiring RMIT to correct a defective advertising campaign or marketing literature;

Section 2: Australian Competition and Consumer Commission

The Australian Competition and Consumer Commission ("Commission") administers and enforces the Competition Code. It has power to force RMIT to provide it with information and documents. It also has power to compel staff to answer specific questions.

Do’s and don’t’s

  • DO immediately refer all enquiries from the Commission to the Legal Services Group.
  • DO take careful notes of all conversations with Commission investigators.
  • DON'T allow investigators to inspect any premises unless:
    • you first obtain approval from the Commercial & Legal Service Group; or
    • the Commission has a warrant or a relevant notice issued wider the Competition Code.

The University Solicitor of Legal Services Group is RMIT’s compliance officer.

Section 3: restrictive trade practices

3.1 Important notes

The Competition Code prohibits educational institutions from engaging in various forms of restrictive trade practices.

There are two types of prohibitions. Those that are unlawful only where their purpose or likely effect is to substantially lessen competition. Other restrictive trade practices are strictly prohibited. This means that they are prohibited regardless of their effect on competition.

3.2 Agreements with competitors

(a)

Anti-competitive Agreements

The Competition Code prohibits an educational institution entering into, or giving effect to, any:

    • legal contract;
    • arrangement; or
    • informal understanding,

that may substantially affect competition. There is a risk with all arrangements between competitors. Caution should be used.

Arrangements or understandings do not need to be in writing, nor be legally enforceable. A "nod and a wink" is enough!

(b)

Strict Prohibitions

Strict prohibitions amount to one thing. Competitors must not act collectively in setting price or deciding with whom or where to trade. Decisions on these matters must be taken unilaterally.

Competitors are not allowed to agree on the following matters:

Price Fixing fixing, controlling or maintaining prices, rebates, discounts, allowances or credits.

Market Sharing dividing or allocating students or geographical markets.

Collective Boycotts refusing to deal with particular persons or class of persons.

Collusive Tendering agreeing with a competitor that you will not submit a tender for a specific contract.

Do's and don't's

  • DO seek advice on any proposed agreement, arrangement or
  • understanding with any competitor.
  • DO realise your anti-competitive purpose is enough; even if it has no actual effect on competition.
  • DO be aware that not all agreements with competitors are unlawful.
  • DO realise that your conduct is unlawful if its effect is:
    • to substantially lessen competition; or
    • it constitutes a strict prohibition,

even if your purpose is commercial.

Example - price fixing

TAFE Institutes find themselves in vigorous competition to provide computer courses. One TAFE Institute regularly undercuts other institutes to attract more students. The prevailing fees become insufficient to justify conducting these courses.

Instead of discontinuing courses, RMIT and two other TAFE Institutes meet and agree to charge fees that will justify continuing. They agree to charge no less than $1,000 a course and not to undercut each other.

These three institutes have breached the Competition Code. It is an arrangement between competitors that fixes or controls price.

Example - market sharing

RMIT and the other universities are each funded to deliver foreign language courses. However, there is limited demand for these courses.

The universities meet to discuss the situation, concerned about the waste of resources. They agree not to compete. RMIT agrees to teach Greek and not French and Melbourne agrees to teach French and not Greek. This is a clear breach of the Competition Code; it is a market sharing arrangement

3.3 Dealings with suppliers, customers, and resellers

(a)

Anti-Competitive Exclusive Dealing

Exclusive dealing is only prohibited if it has the purpose or likely effect of substantially lessening competition. Exclusive dealing agreements include:

Exclusive purchasing providing a service to a customer on condition that the customer accepts a restriction (total or partial) from buying another service from your competitor.

Exclusive selling buying a product from a supplier on condition that the supplier accepts a restriction (total or partial) from selling another product in a particular area or to particular persons or classes of person (e.g. your competitors).

Tying selling a product to a customer on condition that the customer buys further products from you.

Resale restrictions selling a product to a customer on condition that the customer accepts a restriction from re-supplying products in particular areas or to particular persons.

It will also be exclusive dealing if:

  • you refuse to sell or buy a product because the other person will not accept a restriction described above; or
  • you offer a discount or rebate if the other person will accept a restriction described above.

RMIT believes that virtually all markets for providing educational services are highly competitive. However, the Commission may not agree. RMIT should therefore continue to use caution when entering into exclusive arrangements.

Do's and don't's

  • DON'T attempt to impose conditions on other people that limit or restrict their freedom to sell to, or buy from, third parties any products (including those that are supplied) without obtaining advice.

(b)

Third Line Forcing

The Competition Code strictly prohibits providing a product to a customer (including a student) on condition that the customer buys a further product from a third person.

It will also be third line forcing if

  • RMIT refuses to provide its service because the customer/student refuses to buy that other product from the third person; or
  • RMIT offers a discount or rebate if the customer/student buys another product from a third person.

It is lawful to recommend the product of a third person to a customer. It is unlawful to oblige customers to buy those other products.

Do's and don't's

  • DO recommend products of third party suppliers.
  • DON'T oblige or coerce a customer/student to buy goods or services from that third party supplier.

Example 1

RMIT negotiates a discount on all books purchased from a particular local bookseller. For RMIT's students to get the discount, it has to agree to ensure that its students buy books from no other supplier. RMIT therefore enrols students on the condition they buy their books from that bookseller.

This is third line forcing, even though RMIT did not initiate it. There is an obligation on students, and that obligation arises as part of their enrolment.

Example 2

Company A is a major equipment manufacturer. It sponsors RMIT's courses. As a quid pro quo, RMIT offers its 'non-core' courses at a discount if students buy equipment necessary for those courses from Company A. The equipment is available from numerous suppliers, and students are free to buy their equipment from any of those suppliers, but those purchases will not attract the enrolment discount.

This is unlawful third line forcing. Students are obliged to buy Company A's goods to receive the discount on its own services.

(c)

Resale Price Maintenance

Resellers must have autonomy to set their own retail prices. All requirements, threats or inducements to prevent discounting by resellers are strictly prohibited. This includes refusing to supply to a reseller who discounts.

A recommended price is acceptable but there must be no obligation to comply with the recommendation.

Do's and don't's

  • DON'T threaten to withhold supply if a customer (reseller) does not accept a minimum selling price of a product.
  • DON'T offer a special benefit or discount to a customer (reseller) to induce the customer not to discount a product.

3.4 Misuse of market power

Powerful corporations/entities must not use that power to:

(a)

eliminate or substantially damaging a competitor;

(b)

prevent market entry; or

(c)

deter or prevent a person from competing.

Educational bodies may have power in some discrete disciplines or activities. Accordingly, you must consider the law whenever you:

  • refuse to supply;
  • price below cost;
  • discriminate in price between customers.

3.5 Mergers

The Competition Code prohibits any educational institution acquiring shares or assets if the acquisition is likely to substantially lessen competition.

Section 4: unfair trade practices

4.1 Important notes

The Fair Trading Act prohibits any educational institution engaging in various forms of unfair trade practices.

The penalties for breaching the Fair Trading Act are substantial:

  • up to $50,000 per offence for the educational institution;
  • up to $ 10,000 per offence for individual employees or officers.

In extreme cases, individuals may also face imprisonment. Damages may be payable to a customer, student, supplier or competitor who suffers as a result of the breach.

4.2 Misleading and deceptive conduct

RMIT must not make statements or engage in conduct likely to mislead or deceive. Misleading statements often arise in marketing material. They can also be made in sales discussions or negotiations.

If the statement is a prediction, it is regarded as misleading if there is 110 reasonable basis to support the statement.

Silence can also be misleading if you fail to correct misunderstandings you know exist.

Particular danger areas are:

Sales discussions or negotiations where statements made in sales discussions or negotiations are not absolutely correct, or if they relate to future matters, cannot be substantiated.

Product comparisons if a comparison is made with a competitor's course, the comparison must be fair and absolutely accurate in all circumstances. It is better to invite the customer to make the comparison.

Advertising although advertising often involves exaggeration, care must be taken to ensure that it is self-evident and the average person would not be misled.

Also be aware that you can use the Fair Trading Act against competitors to counter illegal conduct.

Do's and don't's

  • DO ensure that all advertisements mid other promotional materials are checked carefully before they are used.
  • DO realise that no intention to mislead or deceive is required to Breach the Act
  • DON’T say or write anything that you are not positive is true.
  • DON’T rely on ‘fine print’ to qualify exaggerated statement

Example

RMIT and other Universities compete for Asian students. RMIT's promotional material claims it is the most successful university in Australia. It cites statistics ostensibly supporting that claim. As a result, RMIT's enrolments increase.

University B feels aggrieved. It alleges that RMIT's claims are wrong. The statistics it quoted were selective. Other statistics demonstrate that University B achieves better undergraduate results.

RMIT’s claim may breach the Fair Trading Act.

4.3 False statements and representations

False or misleading statements or representations about the following are criminal offences:

  • the standard, quality, value, grade, composition, style or model of the courses or other services;
  • that a particular person has, for instance, enrolled in a course;
  • a service has sponsorship, approval, characteristics, or benefits that it does not have;
  • RMIT has a sponsorship, approval, or affiliation it does not have;
  • the price of the course or other service;
  • a course or other service is needed for a particular reason;
  • any guarantee, right or remedy in relation to the course or other service.

Do's and don’ts

  • DON'T make statements about courses or other services that cannot be fully substantiated.
  • DON'T make statements which you think are probably true - you must be sure.


Corporate governance

Section 1: introduction

The aim of this memorandum is to clarify in a practical and straightforward manner the duties owed by directors to the company. These duties can also apply to a person occupying a senior management position.

This booklet is not intended to provide exhaustive advice on particular situations which may confront a director. Its purpose is to alert directors to legal issues in a number of specific areas of concern. Directors should seek advice if specific problems arise.

Section 2: every day duties

Directors have a number of common law and statutory duties which apply to directors in every aspect of a company's business and to every transaction entered into by the company. Directors owe a fiduciary duty to the company, which means that a director has special obligations to the company and generally occupies a position of trust. That is, the director must act honestly, in good faith, and to the best of his or her ability in the interests of the company. The director must not allow conflicting interest or personal advantage to override the interests of the company. The company must always come first.

A director's everyday duties can be divided into three broad categories:

  • a duty to act in good faith;
  • a duty to avoid conflicts of interest; and
  • a duty to act with reasonable care and diligence

2.1 Good faith and honesty

All company directors and officers must act honestly at all times in the exercise of their powers and in the discharge of their duties of office.

However, the common law, as well as requiring the directors to act honestly, also requires directors to act in good faith and in the best interests of the company as a whole. Obviously directors may not act with an intent to deceive or defraud. But the requirement that directors act in good faith and with honesty requires them to exercise their powers and discretion consistently with the purpose for which the power or discretion is conferred. If a director's purpose is misguided and improper, the director will be in breach of the duty even though there is no question of personal gain to the director or any dishonesty in the generally understood sense.

Where it is not possible to determine a purpose for which a power is conferred, directors remain under the overriding duty to act in the best interests of the company. For example, many court cases have considered the purpose for which directors may issue shares or register a transfer of shares. The cases arise out of actions taken by directors to affect the control of the company.

To whom is the duty owed?

Principally, the duty of good faith is owed to the existing members of the company. This may involve considering whether the short term or long term interests of members should be paramount. All that is expected of directors is to consider the balance in good faith, and with skill and diligence. Courts are reluctant to substitute their own judgement on a business question in place of the board, unless it is a decision which no reasonable board could have made having regard to the interests of the company.

Although directors are not required to consider the interests of any other person or body, it may often be appropriate for them to do so. A company's relationship with its employees, other businesses or public bodies may be a justifiable concern if the best interests of the company are to be advanced. Nevertheless, directors must be cautious in giving financial advantage to other persons as this would not usually be considered to be for the benefit of the company.

In certain circumstances directors also owe a duty to creditors of the company. This duty arises in circumstances of insolvency and is discussed below.

2.2 Duty to avoid a conflict of duty and interest

Conflicts of interest are of frequent concern to company directors.

The rules relating to the avoidance of a conflict of interest are not absolute. It is only where there is a 'real sensible possibility of conflict' that a director will be affected by the conflict of interest.

Consequently, when a director is determining whether he or she is affected by a conflict of interest, it is necessary to consider the extent of the adverse interest. For example, if a director of a company has a minor shareholding in a large public company, this would not prevent the director from contracting on behalf of the principal company with the public company.

In essence, the director must consider whether lie or she is in a position to bring an independent judgement to bear, or whether the conflicting interest or duty is such to divide his or her loyalties. Clearly, a director cannot make a decision on both sides of a transaction, or make a decision which also affects a material financial interest of the director.

Directors of proprietary companies must disclose, at the first possible meeting of the board of directors of the company, any Interest that they may hold in a contract or proposed contract or any property that may be linked to the company, or any position which they may have that may bring them into conflict.

A director of a public company who has a material personal interest in a contract or matter being considered by the board is prohibited from voting on that matter. The director should not be present at the board meeting at which the matter is considered unless the board has specifically resolved that it is appropriate for the director to be present.

2.3 Duty not to misuse the position of director

The rule against avoiding conflicts of interest provides that directors are not allowed to take advantage of business opportunities at the expense of the company. In particular:

  • a director may not apply company property either for the director's personal benefit or for the benefit of any other person without the authority of the company;
  • a director must not make unauthorised use of confidential information belonging to the company;
  • a director must not make improper use of information (whether confidential or not) acquired by virtue of his or her position to gain a personal advantage or an advantage for any other person or to cause detriment to the company; and
  • a director must not make improper use of his or her position to gain a personal advantage for any other person or to cause detriment to the company

A simple rule to be followed by directors to ensure that they comply with these requirements is to regard all company property and information which has come into the possession of the director as belonging solely to the company and unavailable for the director's use. Directors may only make use of the property or information if it does not belong to the company or is otherwise public.

Apart from the common law obligations, there may be a breach of the Corporations Law in which case civil penalties may be imposed. The company may seek to recover from the relevant director any damages that may have been sustained by the company as a result of the relevant contract being pursued and any gains that may have accrued to the director may also be ordered to be paid back. In this area the courts adopt an extremely strict test to ensure that there is no possibility of a conflict with the director's duty to maximise opportunities for the company.

2.4 Duty of care and diligence

The directors owe a duty of care mid diligence to the company. Cases have demonstrated that there are two aspects to this duty.

First, the director must exercise care when performing his or her duties. In the recent case Daniels v Anderson (also known as the AWA Case), the NSW Court of Appeal stated that a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience. That duty involves becoming familiar with the business and affairs of the company and how it is run and ensuring that the board has available means to audit the management of the company so that it can satisfy itself that the company is being properly run. The board may be assisted by subcommittees consisting of its members, including non-executive directors.

Information put before the directors and their review of financial statements and other materials, may give rise to a duty to enquire further about matters when they are put on notice. Directors cannot shut their eyes to what is going on around them.

On becoming aware of problems, directors should raise them before the board. This includes those directors serving on committees. A director must be proactive in bringing before the board issues to which he or she is alerted.

Directors must take reasonable steps to place themselves in a position to guide and monitor the management of the company. The board of directors should meet as often as it deems possible to carry out its functions properly and meet its responsibilities.

Directors should regularly attend Board meetings whenever it is reasonably possible to do so, and should be attentive when present.

A second element of the duty requires the director to exercise diligence. A director owes the company a duty to take reasonable care in the performance of the office. It is no longer the case that the director's duty of care is merely subjective and limited by the director's knowledge and experience or ignorance or inaction. A director should acquire at least some understanding of the business of the corporation. Accordingly, a director should become familiar with the fundamentals of the business in which the company is engaged. If a director feels that he or she has not had sufficient business experience to qualify him or her to perform the duties of a director the director should either acquire the knowledge by enquiry or refuse to act.

Section 3: creditors and insolvent trading

A director's primary duty is to the interests of the members of the company. However, where directors are making a decision when there may be a risk of insolvency, directors have a duty to protect the interests of creditors. For example, directors will breach their duty if, just prior to insolvency, they pay out certain related creditors to the detriment of other creditors.

Under the Corporations Law, directors must not allow the company to trade while insolvent or allow a company to become insolvent. The aim of these provisions is to make a director liable personally for the debts incurred by a company which is insolvent or which lead to insolvency.

A director commits a breach of the Corporations Law if, being a director at the time the company incurs a debt, the company is either insolvent at that time, or becomes insolvent as a result of incurring that debt or debts and there were reasonable grounds for suspecting that the company was insolvent or would become insolvent at the time the debt was incurred.

A defence exists if:

  • the director expected on reasonable grounds that the company would be able to repay its debts;
  • at the time the debt was incurred, the director believed on reasonable grounds that a competent and reliable person was responsible for providing information to the director concerning the company's solvency, such a person was actually fulfilling the responsibility, and the director expected that the company would be able to repay its debts;
  • the director was ill at the time of the action or for some other good reason the director did not take part in the management of the company; and
  • the director took all reasonable steps to prevent the company from incurring the debt

It is clear that a sleeping or passive director is no longer a recognised feature of our company law. Directors who fail to regularly review delegation to other parties to ensure that it is properly in place run the risk of incurring liability. The Victorian Supreme Court has decided that:

  • lack of involvement in the affairs of the company may indicate implied consent for another director to incur the debt; and
  • a director cannot be heard to say that he or she did not have reasonable grounds to expect the debt could not be repaid if no inquiries were made

Directors' liability is not just criminal liability but civil liability to members and creditors as well. If an action by a director in breach of duty causes loss to the company, the company may sue the director to recover that loss. If the director has made a personal gain by virtue of the breach of duty, a court may require the director to account to the company for that gain.

Section 4: possible precautions

One of the best precautions directors can take against mistakes or breaches of duty is to seek advice from qualified people if they are in any doubt. Other precautions can be taken by directors as well.

4.1 Indemnities and insurance

A company cannot indemnify its directors against liability for a breach of duty owed to the company. However, in certain circumstances a company may provide an indemnity against liability to third parties, unless the liability arises out of conduct involving a lack of good faith on the part of the director.

A company is also able to indemnify a director against costs incurred by the director where the director successfully defends civil or criminal proceedings against liability, or in connection with any application concerning any such proceedings in which relief is granted to the director by the court.

Most company articles of association contain a provision providing this indemnity, but if not, director should ensure that an indemnity is given by contract.

A director is permitted to obtain insurance in respect of his or her duties. Companies are no longer prohibited from paying the premiums for insurance of directors, except where the insurance is for liability relating to:

  • wilful breaches of duty to the Company;
  • improper use of company information; or
  • obtaining improper advantage as a result of the office held

Directors should note that many insurance policies exclude liability cover for many types of possible claims against the director. Directors should also note that directors' liability insurance policies are typically 'claims made' rather than 'events based' policies. Accordingly, the cover only relates to claims made during the term of the policy. Directors should ensure that they have appropriate run off insurance after they cease being a director of the company.

4.2 Ratification

If directors are concerned or if there is an allegation that a decision was in breach of duty, they may approach the members of the company in general meeting to ratify their decision. Although members are often able to ratify a breach of duty, it is difficult to apply general rules. Ratification is not available in all cases, and even where it is available, ratification is subject to limitations. If in any doubt, directors should seek specific advice.

4.3 Resignation

A director may resign at any time and his or her resignation is effective from the moment it is communicated to the company. It need not be approved by the company and a purported rejection by the company has no effect.

If a director is unhappy with the manner in which the company is being run resignation is always a possible option. Directors should note though that resignation will not protect the director from any action taken or decision made during the period which the directorship was held.