BUSN7057

Restrictions on member decision making

Company Directors

Restrictions on members Voting rights

Members may exercise voting rights in their own self-interest (even if they are also directors)

Yet, restrictions are needed for two reasons: to stop unfair exploitation of minority

shareholders by majority not always possible for minority to sell

How does the law protect the minority? Equitable limitation on majority voting power

(including Gambotto) Procedural requirements – eg for holding meetings

or reducing share capital Voting restrictions – eg on aproavl of related party

transactions Protection of members’ personal rights – see text ch

16 Statutory protections -see ss 232 oppression remedy

and s 236 (statutory derivative action) text ch 16 Limits on power of the majority to ratify breaches of

directors’ duties – see text ch 15.

The equitable limitation Not a positive duty, not a fiduciary duty Rule: if majority passes a resolution

which no group of reasonable people would think is within majority’s power, with regard to the purpose of the company, a court can declare the resolution void (invalid)

Sometimes overlaps with oppression remedy

Cases other than amendment of constitution Taking the company’s property:

Breach of equitable limitation to use voting power so as to give themselves property, advantages or rights belonging to the company: Ngurli Ltd v McCann (1953)

Preventing the company taking action against them: Breach of equitable limitation to use their voting

power to prevent the company taking legal action against them where they have acted improperly: Biala Pty Ltd v Mallina Holdings Ltd (No 2)

Amendments to constitution

Even where s 136 is complied with, amendment may be invalid due to equitable limitation

The important case of Gambotto deals with: amendments that expropriate shares other amendments that give rise to

conflict

Members’ voting Gambotto v WCP Ltd

(1995) 13 ACLC 342 Majority passed a resolution for compulsory acquisition by IEL of other shares – in order to get tax advantages (of around $4 million) only available if it was a wholly owned subsidiary

Price to be paid was $1.80 above the valuation of $1.36

IEL did not vote Mr Gambotto did not

attend or vote

Mr G0.09%

Others0.21%

IEL 99.7%

WCP

Gambotto establishes different tests for different amendments

Category 1 amendments: Amendments to allow expropriation of minority’s shares; or valuable proprietary rights attached to

their shares (eg voting or dividend rights)

Category 2 amendments: Other amendments involving a conflict of interest

Category 1 amendments

Are only valid if: proper purpose, and no oppression of minority

shareholders Proper purpose test is very

restrictive – advancing company’s commercial interests is not enough

Category 1 amendments Note that statutory procedures have

been introduced since Gambotto to allow compulsory acquisition of shares by 90% shareholder – consistent with provision in post take-over context.

Category 1 (cont)

The only “proper purpose” recognised by the court is to prevent harm being done to company, eg: minority s/h is competing with

company removal of member is necessary to

allow company to continue in present business

Category 1 (cont)

Also must show that there was no oppression. This requires: procedural fairness – full disclosure

and independent valuation substantive fairness – price is fair

(may not always be market value)

Decision in Gambotto

Mr Gambotto was successful because the attempted expropriation of shares was not for a proper purpose even though there was procedural and substantive fairness.

He was not causing significant detriment or harm to the company.

Decision in Gambotto The court gave 2 examples of what would

be a proper purpose for the expropriation of shares:

The minority shareholder is competing with the company.

Where it is necessary for the company to comply with the law eg compulsory expropriation of shares owned by foreign shareholders in a media company where the law requires 100% Australian ownership.

Example of category 1 amendment Eg Bundaberg Sugar Ltd v Isis Central

Sugar Mill Co Ltd (2006) 24 ACLC 1,550. text 194

The company’s constitution required members to dispose of their shares if they no longer supplied sugar to Isis – purpose was to retain tax benefits available to it only if it retained its status as a co-operative. That was held to be a proper purpose.

Category 2 amendments

Are only valid if : done for a company purpose, and no oppression of minority

shareholders More “purposes” are valid here

compared with Category 1

Example of Category 2 amendment (pre-dates Gambotto)

Peter’s American Delicacy v Heath (1939) 61 CLR 457 Where the alteration does not involve an expropriation of shares it will be valid unless it is either beyond any purpose contemplated by the constitution or oppressive. Constitution was changed so that bonus shares were distributed according to the amount paid up on the shares rather than on the number of shares held. Reasonable opinions might differ.

Directors Must be a natural

person over 18 s 201B

s 201A Public companies –

min 3 drs (2 resident in Australia)

Pty company – min 1 dr resident in Australia

Directors

The role of director will vary depending on the size of the company

In larger companies directors will set the strategic direction and appoint managers to implement that.

Officer of a corporation S9 definition of officer (wider than defn of

director – focuses on function) Director or secretary Person

Who makes or participates in decision that affect a substantial part of the company’s business

Who has the capacity to affect the corporation’s financial standing

In accordance with whose instructions or wishes the directors are accustomed to act.

Company secretary Public co min 1

secretary resident in Australia s 204A(2)

Appointed by directors s 204D

Pty cos may have a secretary but not required by legislation

Company secretary Role of company secretary Responsible for record-keeping

within a company such as maintenance of registers (eg register of members) required to be kept by the Corporations Act

Responsible for keeping of minutes of meetings

Types of directors Definition of director s

9 Appointed to position of

director Appointed to position of

alternate director and is acting in that capacity

A person not validly appointed if

They act in the position of director (de facto) or

The directors are accustomed to act in accordance with the person’s instructions or wishes (shadow)

Types of directors De facto

Corporate Affairs Commission v Drysdale (1978) 141 CLR 236director appointed to fill casual vacancy until next AGM but continued to act in office after that date without being re-elected – charged with breach of directors’ duties – unsuccessfully argued he wasn’t a director

Types of directors Shadow

Standard Chartered Bank of Australia Ltd v Antico (1995) 13 ACLC 1381Pioneer International Ltd found to be a director of Giant Resources Ltd because in fact it exercised extensive management control even though it was not majority shareholder

Types of directors Executive – full-

time employee Non-executive –

part-time, not part of senior management

Independent – non-executive and no other relevant connection which would influence independence

Types of directors Managing director (CEO) ss201J and 198C(RR)

– Board member and full-time employee appointed by drs Usual function to deal with every day matters, to

supervise the other managers and be in charge of the company’s business Entwell’s Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424

Types of directors Chair of the board

ASIC v Rich [2003] NSWSC85Role of the chair

Leadership Agenda setting Monitoring management and company’s financial

position Provision of financial information Information to board about cash reserves Appointment of finance director public statements and compliance with Listing Rules

Types of directors Governing director – position

may be established in the constitution which gives that person very extensive powers of management – more common in pty companies

Alternate director s201K (RR) – gives power to director to appoint an alternate for a specified period (eg to cover absence or sickness)

Nominee director – represents a particular group (eg creditor or employees) but still has overriding duties to the company as a whole

Appointment of directors Director must be

an individual who is 18 s 201B and must give signed consent to appointment s 201D and not be disqualified.

Appointment of directors Members in general meeting pass an

ordinary resolution appointing directors s 201G (RR)

Appointment by directors s 201H (RR) Pty co – members must confirm within 2

months or appointment lapses Public co – must be confirmed by members

at next AGM

Resignation and removal of directors Resignation on giving written notice s 203A Removal

Pty co - s 203C - members in general meeting may remove a director but other provisions of the constitution may affect thatHopkins v Foster (2002) 20 ACLC 396 – removal of dr was restrained because then there would be less than the min no of independent drs required by the company’s constitution.

Public co – s 203D – members in general meeting may remove a director despite the constitution or other agreements but the procedure must be followed which gives the director a right to make a written statement and put his or her case to the meeting.

Disqualification – automatic s 206B Conviction of an indictable

offence concerning the making of decision affecting the business of the corporation or its financial position

Conviction of an offence Against the Corporations

Act > 12 mths prison Involving dishonesty > 3

mths prison Conviction of an offence

against law of foreign country > 12 months prison

Undischarged bankrupt or entry into Part X arrangement

Period of disqualification 5 years post

conviction or post release s 206B (2)

ASIC may apply to the court to extend the period up to an additional 15 years s 206BA(2).

Disqualification on application of ASIC to the court

Contravention of civil penalty provision s 206C ( see s 1317E – includes directors’ duties)

court has discretion about whether to disqualify and the period of disqualification

Disqualification on application of ASIC to the court Failed companies -

Insolvency and non-payment of debts s 206D

Within last 7 years person has been an officer of at least 2 corporations which have failed

Management was at least partly responsible for the failure and

Disqualification is justified

Disqualification for up to 20 years

Disqualification on application of ASIC to the court Repeated contraventions of the

Corporations Act s 206E At least twice been an officer of a

corporation that has contravened the Corporations Act and the person failed to take reasonable steps to prevent the contravention

At least twice contravened the Corporations Act while being an officer of the corporation

Disqualification on application of ASIC to the court

Repeated contraventions cont

Court has discretion whether to disqualify and in relation to the period of disqualification

Disqualification on application of ASIC to the court Factors to be taken into account

ASIC v Adler [2002] NSWSC 483Adler was found to have breached his statutory duties in ss 180 – 182 he was disqualified from being a director for 20 years. The court looked at the following factors when determining period of disqualification:

Protection of public from harmful use of corporate structure Safeguarding public interest in transparency and

accountability of companies and in the suitability of drs to hold office

Personal and general deterrence but not punitive In assessing fitness to manage a co it is necessary that

directors understand proper role of director and duty of due diligence

Seriousness of contravention and risk of reoffending Personal hardship to be balanced against public interest

Disqualification on application of ASIC to the court

ASIC v Adler [2002] NSWSC 483 Longer periods of disqualification

justified in circumstances including: Large financial losses dishonesty

Disqualification on application of ASIC to the court ASIC v Vizard (2005)

FCA 1037Steve Vizard admitted misusing his position on the board of Telstra by insider trading in shares of companies dealing with Telstra. The trading was deliberately concealed by use of a company and accountant. The insider trading actually resulted in a net loss due to a general fall in the stock market for tech cos.

ASIC v Vizard (2005) FCA 1037 per Finkelstein J “This brings me to the issue of disqualification. It

is my view that a disqualification for five years as suggested by ASIC is not sufficient. Although specific deterrence is generally not in issue here, general deterrence is of primary importance in cases of this kind. A message must be sent to the business community that for white collar offences "the game is not worth the candle". That is, the period of disqualification should reflect the need to protect society from the kind of unlawful conduct engaged in by the defendant. In my view the appropriate period of disqualification is ten years.”

ASIC’s own power of disqualification s 206F Within last 7 years the person has been

an officer of at least 2 corporations and while an officer or within 12 months of ceasing to be an officer, a liquidator’s report is lodged under s 533 regarding the corporation’s inability to pay its debts

ASIC has given notice Disqualification justified Disqualification up to 5 years

Breaching a disqualification order S 206A a person who is disqualified from managing a

corporation commits an offence if They make or participate in decision that affect at

least a substantial part of the corporations’ business They exercise the capacity to affect significantly the

corporations’ financial standing They communicate instructions (other than in a

professional capacity) or wishes to the directors knowing or intending that the directors will act in accordance with those instructions.

Contravention may result in a fine of up to $5,500 or imprisonment for up to 1 year or both.

Proceedings of the board Directors’ meetings

ss248C, 248F (RR) – called by director – quorum is 2

Informal decisions s 248A - resolution signed by all directors effective without a meeting

Vrisakis v ASC (1993) 11 ACSR 162A dr is expected to attend all meetings unless exceptional circumstances such as illness or absence from the State prevent him or her from doing so

Proceedings of the board

Delegation of powers ss 198D, 190 – permissible but responsibility rests with drs unless believed on reasonable grounds that person would act in compliance with law and was reliable and competent