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Time to axe the 50-shareholder threshold

Capital Markets, Corporate and M&A, Shareholder Activism
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In an opinion article published in today’s AFR, partner Jeremy Lanzer argues that with all the debate taking place around raising the wealth threshold for differentiating sophisticated from retail investors, “the next logical step would be to abolish the equally dated, arbitrary and investment-smothering ’50-member rule’”.

The rule, legislated under the Corporations Act 2001, determines that a company is classified as proprietary (meaning a private company) only for so long as it has no more than 50 non-employee shareholders. When this number is exceeded, the company is immediately required to convert to, or may be deemed by ASIC to be, a public company, triggering significant additional restrictions and obligations designed to protect “mum and dad” retail shareholders

“Time and time again in my practice, I find myself advising companies that have been forced into these public company shackles without having a single retail shareholder on their books,” Jeremy explains. “Plenty more waste precious founder time, money and energy carefully balancing their register to keep member numbers under 50 – again without a retail shareholder in sight. And on the flip side of this superfluous rule are all those companies with fewer than 50 shareholders (and therefore not subject to public company constraints), many of whom just happen to be retail shareholders. None of them are afforded enhanced legislative protections or rights.”

The issue was explored by a Parliamentary Joint Committee back in 2008 but ultimately no change was made by the government at the time.

“The market has welcomed the government’s recent moves to correct and simplify other outdated and ineffective provisions in the Corporations Act. Ditching the 50-member rule and better aligning public policy intent with real-world outcomes for companies with a retail versus sophisticated membership base represents another piece of low-hanging fruit.”

To read the full article, click here.

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