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Version controlDate:8-May-23Time: 8:29 PM
Shareholder ratification and authorisation of
breaches of directors’ duties
PhD Thesis Progress Report
28 January 2015
Michael Anthony Robson
LLB (1st Class Hons) GDLP, BSc (Physics)
Faculty of Law, Monash University
Monash ID: 25002546
Supervisors
Associate Professor John Duns
Professor Bryan Horrigan
Contact details
Work: (08) 6181 0790Mobile: 0401 002 997Email: [email protected]: 4 Wintergreene Drive, Bennett Springs WA 6063Postal: PO Box 390 Beechboro WA 6063
Michael Anthony Robson Thesis Progress Report
ContentsI. Introduction..................................................................................................................3II. Research question........................................................................................................6
A. Subsidiary questions................................................................................................6III. Review of relevant research and theory...................................................................8IV. The procedure........................................................................................................11V. Thesis Chapter outline...............................................................................................12VI. Progress to date......................................................................................................12VII. Future research proposals......................................................................................13VIII. Current proposals for law reform to the Corporations Act 2001...........................18IX. Other law reform research.....................................................................................20X. Timetable for completing the thesis..........................................................................22XI. Bibliography..........................................................................................................23XII. Example of written work for the thesis..................................................................27
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Michael Anthony Robson Thesis Progress Report
I. INTRODUCTION
In Australia, in relation to a company incorporated under the Corporations Act 2001
(Cth) (‘Corporations Act’), a director who is also a shareholder may, subject to certain
exceptions, vote at a general meeting of shareholders to prospectively authorise or to
retrospectively ratify their own breach of fiduciary and/or statutory duties.1 In North-
West Transportation Co Ltd v Beatty2 it was considered that a shareholder’s proprietary
interest in their shares is the legal basis for permitting a shareholder to vote in their own
interests.
The doctrine of ratification remains relevant to companies incorporated under the
Corporations Act in relation to; (i) whether the company will be bound by an act of a
director under section 128,3 (ii) whether leave should be granted for a shareholder to
commence derivative proceedings under section 237, (iii) whether a director should be
granted relief from liability under section 1317S4 and (iv) whether a director should be
excused from liability under section 1318.
Separate to companies incorporated under the Corporations Act, the operation of the
doctrine of ratification is of significance to body corporates incorporated under State and
Territory legislation which include; strata companies,5 trade unions,6 co-operatives,7 not-
for-profit organisations and other incorporated associations.8 There are estimated to be
1 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23; Bamford v Bamford [1970] Ch 212.2 (1887) 12 App Cas 589.3 R P Austin, I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007), [8.375].4 See Forge v Australian Securities & Investments Commission [2004] NSWCA 448. This issue was left open in this case where the Court acknowledged that this may be the case although, on the facts before the Court, the opportunity to do this was not afforded to the primary judge (at [382]–[383]). See generally R P Austin, I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 2007, 13th ed), [8.375].5 See, eg, Strata Titles Act 1985 (WA).6 See, eg, Trade Unions Act 1958 (Vic).7 See, eg, Co-operatives National Law Application Act 2013 (Vic).8 See, eg, Associations Incorporations Act 1987 (WA); Associations Incorporation Act 2009 (NSW).
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Michael Anthony Robson Thesis Progress Report
over 276,000 strata companies9 and 200,000 incorporated associations across Australia.10
Further, approximately 18% of all employees were members of a trade union in 200811
and there were 13 million people who were members of a co-operative in 2011.12
In relation to the codification of officers’ duties of:
(i) strata companies, only Victoria13 and the Australian Capital Territory14 have
codified the duties;
(ii) incorporated associations, only Victoria15 and the Northern Territory16 have
codified the duties;
(iii) co-operatives, all jurisdictions have at least partially codified the duties, however,
only South Australia,17 New South Wales,18 Victoria19 and Western Australia20
have enacted the Co-operatives National Law21 to codify the duties to the same
extent as officer’s duties under the Corporations Act; and
(iv) trade unions, only Western Australia,22 Queensland23 and New South Wales24 have
codified the duties.
9 Strata Community Australia Ltd, Submission to Inquiry into residential strata title insurance (Unknown date) Strata Community Australia <http://www.stratacommunity.org.au/sites/default/files/stratainsuranceinquiry1.pdf>.10 Justice Connect, Which incorporated legal structure should we choose? (Unknown date) Not-for-profit Law Information Hub <http://www.nfplaw.org.au/sites/default/files/Which%20incorporated%20legal%20structure%20should%20we%20choose.pdf>.11 Australian Bureau of Statistics, Australian Social Trends 2008 (23 July 2008), Australian Bureau of Statistics <http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Chapter7202008 >. 12 Australian Bureau of Statistics, 1301.0 Year Book Australia 2012 (24 May 2012), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1301.0~2012~Main%20Features~Measuring%20the%20activity%20of%20co-operatives~289>.13 Owner Corporations Act 2006 (Vic) Part 5.14 Unit Titles (Management) Act 2011 (ACT) Schedule 1.15 Associations Incorporation Reform Act 2012 (VIC) Part 6 Division 3.16 Associations Act (NT) Part 4 Division 1.17 Co-operatives National Law (South Australia) Act 2013 (SA).18 Co-operatives (Adoption of National Law) Act 2012 (NSW).19 Co-operatives National Law Application Act 2013 (Vic).20 Co-operatives Act 2009 (WA).21 All jurisdictions have agreed under the Australian Uniform Co-operative Laws Agreement to enact legislation in the same form as the legislation enacted by New South Wales which was unanimously approved by the Ministerial Council on Consumer Affairs which is known as the Co-operatives National Law.22 Industrial Relations Act 1979 (WA) Part 2 Division 5.23 Industrial Relations Act 1999 (QLD) Chapter 12, Division 3.24 Industrial Relations Act 1996 (NSW) Part 4 Division 5.
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Michael Anthony Robson Thesis Progress Report
In the context of the statutory derivative action under the Corporations Act25 and more
generally for State and Territory body corporates, by reason that directors or officers may
also be shareholders or members of the same company or body corporate, there is an
inherent legal tension between the application of the following principles:
(i) a person shall not derive advantage from their own wrong;
(ii) a director/officer must act in the best interests of and avoid conflicts of interest to
the company/body corporate;
(iii) the right of a shareholder/member to vote in their own interests provided that the
conduct is not fraudulent, a fraud on the minority, oppressive conduct26 or to
expropriate the property of the company or body corporate;
(iv) a shareholder/member does not owe any fiduciary duties to the company/body
corporate, or to any other shareholder/member;
(v) equity follows the law;27 and
(vi) good corporate governance principles.
The doctrine of ratification is of continuing importance to corporate governance. Whilst
the principles of good corporate governance are generally consistent with the exercise of
the power of authorisation/ratification by the shareholders in general meeting, the failure
of the general law to recognise a director’s conflict of interest in voting to approve their
own breach of fiduciary or statutory duty is inconsistent with the principles of good
corporate governance, in particular the promotion of accountability and ethics by the
directors.
Corporate governance should be considered to be a cornerstone of modern company
regulation, however reforms to the Corporations Act have not kept pace with
recommendations from significant government reports, in particular, the
recommendations in the Companies and Securities Law Review Committee report in
199028 (‘CSLRC Report’) were not enacted by the Commonwealth parliament to remedy
25 Corporations Act 2001 (Cth) s 236(1).26 Statutory oppression is particular to companies incorporated under the Corporations Act.27 See generally Miller v Miller (1995) 16 ACSR 73.28 The Companies and Securities Law Review Committee, ‘Company Directors and Officers: Indemnification, Relief and Insurance’, (21 May 1990).
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Michael Anthony Robson Thesis Progress Report
significant deficiencies in the operation of the doctrine of ratification. Key corporate
collapses in Australia and internationally also adds weight to a need for reform to the
Corporations Act to protect minority shareholders.
In light of the principles of good corporate governance which have emerged since the
Cadbury Report (UK)29 in 1992, this thesis considers the significance of shareholders’
rights in the context of authorisation and ratification, with a focus upon what has emerged
from key reforms the Corporations Act in respect of (i) the regulation of corporate
governance, (ii) the codification of directors’ duties and (iii) the statutory derivative
action. This thesis will draw upon international jurisprudence in relation to the doctrine
of ratification and propose reforms to the Corporations Act and to State and Territory
legislation which concerns body corporates.
It is concluded by the author that the doctrine of ratification continues to have legal
significance to companies incorporated under the Corporations Act following the
introduction of the statutory derivative action from 13 March 2000 and moreover to body
corporates incorporated in the States and Territories. A re-examination of the doctrine of
ratification and the international jurisprudence is thus of important contemporary legal
significance to future law reforms to the Corporations Act, State and Territory legislation
and to the general law which affects the members of body corporates such as trade
unions, strata companies, co-operatives, not-for-profit organisations and other
incorporated associations.
II. RESEARCH QUESTION
Is the effect of the doctrine of ratification prejudicial to the interests of
shareholders/members and other stakeholders of companies and other body corporates in
Australia?
29 The Committee on the Financial Aspects of Corporate Governance and Gee and Co Ltd, The Report of the Committee on the financial aspects of corporate governance (1992).
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Michael Anthony Robson Thesis Progress Report
A. Subsidiary questionsThis thesis poses the following 11 important questions concerning the state of the
common law doctrine of ratification in Australia:
1. Is there uncertainty in the operation of the doctrine of ratification?
2. Is there uncertainty in the legal effect of a ratification?
3. Which theory of the corporation underlies the doctrine of ratification?
4. What is the legal basis for the adoption of the doctrine of ratification into the
common law from customary Roman law?
5. Are the legal principles underlying the doctrine of ratification consistent?
6. Is Australian corporate law and its jurisprudence consistent with the jurisprudence
in other common law jurisdictions?
7. Did the introduction of the statutory derivative action into the Corporations Act
resolve the lacuna in the protection of the rights of minority shareholders?
8. Are the principles of good corporate governance consistent with the
shareholders/members in general meeting having the exclusive power to ratify or
authorise a breach of a director’s or officer’s fiduciary or statutory duties?
9. Are the principles of good corporate governance consistent with the principles
underlying the doctrine of ratification?
10. Arising from the above subsidiary questions, is the doctrine of ratification in need
of reform?; and
11. If the doctrine is in need of reform, what law reform may be necessary to the
Corporations Act or State and Territory legislation to strengthen members’
remedies?
The following additional subsidiary questions arise from the question whether the legal
principles underlying the doctrine of ratification are consistent:
(a) Is ratification a residual power?
(b) What is the legal basis for the extinguishment of a right to commence
proceedings?
(c) What is the legal basis for the exclusion of honesty and good faith from the
requirement for ratification?
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Michael Anthony Robson Thesis Progress Report
(d) Whether there is an inherent problem with the shareholders in general meeting
taking a decision to extinguish a company’s cause of action in light of the fact
there is no requirement for an independent vote of the shareholders when
considering a ratification or authorisation resolution?
(e) Whether the best interests of the company is the predominant or sole interest, as
distinct from the directors and the shareholders, in the context of the
extinguishment of a cause of action arising from a breach of fiduciary duties?
(f) Whether the best interests of the company may be determined by an unanimous
vote of the shareholders?
(g) Should the doctrine of ratification be relevant to proceedings under section 236
(the statutory derivative action)?
III. REVIEW OF RELEVANT RESEARCH AND THEORY
There have been a plethora of journal articles and parliamentary reports written in
Australia and internationally concerning the doctrine of ratification. A brief summary of
the most significant literature is set out below.
The seminal Australian paper written by Professor Robert Baxt published in 1978 titled
‘Judges in their own cause: The ratification of directors’ breaches of duty’30 considered
the state of the law in Australia following the decision in Winthrop Investments Ltd v
Winns Ltd.31 Professor Baxt raised important questions about whether the principles of
law were consistent and how the doctrine of ratification could work in practice. Journal
articles in the United Kingdom have similarly considered the principles and application
of the doctrine of ratification.32
Academic writing in the United States of America has considered the doctrine of
ratification as it has developed independently from the law in the United Kingdom. An
30 R Baxt, ‘Judges in their own cause: The ratification of directors’ breaches of duty’ (1978) 5 Monash University Law Review 16.31 [1975] 2 NSWLR 666.32 See eg. S Worthington, ‘Corporate Governance: remedying and ratifying directors’ breaches’ (2000) Law Quarterly Review 116.
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Michael Anthony Robson Thesis Progress Report
important paper written by Professor Earl Sneed titled ‘The stockholder may vote as he
pleases: Theory and Fact’33 considered the legal and equitable rights of shareholders to
vote on an authorisation/ratification resolution in the context of the law in the United
States of America.
The CSLRC Report recommended an amendment to the Corporations Act to allow a
company by resolution of a properly informed and disinterested general meeting, to
release a director or officer from liability to pay damages or compensation to the
company in respect of wrongdoing that did not involve intent to deceive or defraud. Such
a reform to the Corporations Act would be similar to the current legislation in the United
Kingdom,34 United States of America35 and Canada.36 These recommended reforms were
never enacted by the Commonwealth parliament.
The published literature does not consider the doctrine of ratification in the context of
strata companies, trade unions, co-operatives and incorporated associations (including
not-for-profit organisations), nor does it consider in any systematic way:
(i) the legal basis for the adoption of the doctrine into the common law from
customary Roman law;
(ii) whether the doctrine is consistent with the principles of good corporate
governance;
(iii) the theory of the corporation which is applied by the doctrine; or
(iv) is the best interests of the company a better test for determining whether a breach
can be ratified?
Each of these issues is considered as a part of the thesis.
In relation to strata titles legislation, the value of real property which is under the control
of officers of strata companies across Australia is not regularly reported by the States and
33 E Sneed, ‘The stockholder may vote as he pleases: Theory and fact’, (1960) 22 University of Pittsburgh Law Review 23.34 Companies Act 2006 (UK) s 239.35 Delaware General Corporations Law (US) s 144.36 Canada Business Corporations Act (Canada) s 120(5).
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Michael Anthony Robson Thesis Progress Report
Territories, however, as at September 2014, the Australian Bureau of Statistics
determined that the total value of all residential dwellings and land in Australia was
$5,296 billion.37 The estimated value of strata properties in Western Australia in 2010
was $96 billion and was projected to increase to $467 billion by 2020.38 The increase in
Western Australia is stated to be driven by an increase in the population from 2.5
million39 to 3.5 million by 2031 and an increase in demand for affordable and sustainable
housing.40 The Government of New South Wales has reported an increase of 14.8% for
the 2013-2014 year from the previous year for new strata lots.41
The total value of residential and commercial property which is subject to strata
legislation in Australia is unclear, however it is evident that the value of land which is
under the control of officers of a strata company may be around $923 billion (based on
population estimates)42 and is expected to significantly increase. If a majority of
members of a strata company lawfully ratified an officer’s breach of fiduciary duty,
subject to interpretation of the resolution, the minority of members would be unable to
recover any of their economic losses43 unless the loss was otherwise within the coverage
of an insurance policy maintained by each member of the strata company.
37 Australian Bureau of Statistics, 6416.0 - Residential Property Price Indexes: Eight Capital Cities, Sep 2014 (11 November 2014), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/mf/6416.0 >. 38 Department of Commerce (Western Australia), Licensing of Strata Managers in Western Australia (October 2011), Department of Commerce <http://www.commerce.wa.gov.au/sites/default/files/atoms/files/thestratamgrsconregpaperoct2011.pdf > , 4; Western Australian Government, Report of Legislative Council Standing Committee on Public Administration into Western Australian Strata Manager (September 2011).39 Australian Bureau of Statistics, 3101.0 - Australian Demographic Statistics, Mar 2014 (18 December 2014), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/mf/3101.0 > .40 Landgate, Strata Titles Act Reform Consultation Paper, (31 October 2014), 1.41 Office of Finance & Services (NSW), Office of Finance & Services Annual Report 2013/14 (Unknown date), Office of Finance & Services <http://www.finance.nsw.gov.au/sites/default/files/pdfs/OSF_Annual_Report_2013-14_section_1.pdf > , 24. 42 According to the 2011 Census data available from the Australian Bureau of Statistics, the population of Western Australia in 2011 was 2,239,171 and the population of Australia was 21,507,717. Accordingly, the population of Western Australia represents 10.4% of the total Australian population.43 See, eg, Quarante Pty Ltd v The Owners Strata Plan No. 67212 [2008] NSWCA 258.
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Michael Anthony Robson Thesis Progress Report
Other common law jurisdictions have amended legislation to reform the way in which the
doctrine of ratification operates in relation to companies. These reforms include:
1. a requirement for an independent majority of shareholders to approve a
ratification resolution;44
2. a requirement for a formal meeting to avoid implied approval or waivers;45
3. imposing fiduciary duties upon controlling shareholders;46 and
4. in relation to derivative proceedings, the approval of a ratification resolution by
shareholders (including the directors) may carry little evidential weight when
considering whether leave ought to be granted to a shareholder to commence
proceedings.47
Since the introduction in Australia of the statutory derivative action in March 2000, there
has not been a significant further contribution made to considering the doctrine of
ratification.
IV. THE PROCEDURE
This thesis undertakes a doctrinal analysis by considering the jurisprudence of ratification
in Australia and the United Kingdom which emerged from customary Roman law and
was applied broadly to fiduciary relationships in relation to the law of agency, trusts,
contract and torts. This thesis will then consider international jurisprudence on the
doctrine of ratification from common law countries and compare and contrast that
jurisprudence with the applicable principles of law in Australia. A significant aspect of
the doctrinal analysis is the consideration of the independent development of the
principles of corporate law in the United States of America.
The majority of the published literature is widely available from libraries and electronic
journal databases and has been cited in government reports. Legislative reforms have 44 See Companies Act 2006 (UK) s 239(3); Delaware General Corporations Law (US) s 144; Canada Business Corporations Act (Canada) s 120(5).45 Companies Act 2006 (UK) s 239(2).46 The doctrine arises in general law in the United States of America. The scope of the duty depends upon the circumstances. Where there is ‘self-dealing’ an ‘intrinsic fairness’ test is applied. A ‘controlling shareholder’ need not have a majority interest but must exercise control over a de facto majority.47 See R Dickerson et al, Proposals for a New Business Corporations Law for Canada (1971) (‘Dickerson Report’).
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Michael Anthony Robson Thesis Progress Report
generally been undertaken in the past 20 years which is expected to enable access to
second reading speeches and explanatory memoranda which concerned any statutory
reforms. The international case law in common law countries is also widely available
through case citators and electronic legal databases including Worldlii.org.
V. THESIS CHAPTER OUTLINE
The following is an outline of the Chapters for the thesis:
Chapter title and key matters addressed Estimated word limit
Chapter 1 - Introduction 5,000Chapter 2 - The doctrine of ratification(i) The meaning of ratification(ii) The legal requirements for ratification(iii) Conduct which gives rise to ratification(iv) Retrospective operation of ratification(v) Conduct which cannot be ratified, or ratification not necessary(vi) The legal effect of ratification
10,000
Chapter 3 - The origins of the doctrine of ratification and its application to companies(i) Legal origins and basis of the doctrine of ratification(ii) Application of ratification to companies(iii) The continuing relevance of the doctrine to the statutory derivative
action(iv) Relevance of ratification to body corporates(v) Theory of the corporation applied by the doctrine(vi) Criticisms and uncertainty in the operation of the doctrine
15,000
Chapter 4 – Reworking the principles of ratification(i) A principles based reassessment of the requirements for ratification
15,000
Chapter 5 – The significance of the regulation of corporate governance and the importance of the role of shareholders in the context of ratification(i) Significance of the regulation of corporate governance(ii) Importance of the role of shareholders in the context of ratification(iii) Are the principles underlying the doctrine of ratification consistent
with the principles of good corporate governance?
12,000
Chapter 6 – Proposals for law reform(i) Reforms to the Replaceable Rules of the Corporations Act(ii) Reforms concerning strata companies and incorporated associations
15,000
Chapter 7 - Conclusion 8,000Thesis total 80,000
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Michael Anthony Robson Thesis Progress Report
VI. PROGRESS TO DATE
This thesis was commenced in January 2013 on a part-time basis.
The following 2 tables provide an overview of the progress to date with respect to the research which has been conducted and the drafting of chapters for the thesis.
Table 1: Chapters which have been drafted for review following research into the topics.
Chapter number and title Date for completion of current draft for review
Current draft word limit
Chapter 1 – Introduction November 2014(first draft comments received April 2013)
4,500
Chapter 2 - The doctrine of ratification November 2014(first draft comments received March 2014)
10,000
Chapter 3 - The origins of the doctrine of ratification and its application to companies
March 2015(some aspects were previously a part of Chapter 2 and were commented on in March 2014)
14,500
Chapter 5 - The significance of the regulation of corporate governance and the importance of the role of shareholders in the context of ratification
November 2014(initially drafted September 2013)
11,000
Total 40,000
Table 2: Chapters which are part researched and/or part written
Chapter number and title CommentChapter 4 - Reworking the principles of ratification
Commenced research and writing the summary of international jurisprudence for USA, Canada, UK, NZ and Singapore (circa 2,500 words)
Detailed notes on the comparison of Australian and US law including case authorities (circa 6,000 words)
Chapter 6 - Proposals for law reform
Draft law reform proposals (1,000 words in summary form)
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Michael Anthony Robson Thesis Progress Report
VII. FUTURE RESEARCH PROPOSALS
Arising from the current scope of the research which has been undertaken in respect of
Chapters 4 to 6, the following are the current proposals for future research for these
Chapters of the thesis:
Chapter 4 – Reworking the principles of ratification
1. Was the development of the law of agency under customary Roman law
influenced by the extent of trade undertaken by slaves? A satisfactory answer to
this question may be impossible to determine because the law developed in
Roman law prior to 449 BC and from current research records of the development
of the law which are in existence are insufficiently detailed.
2. The legal basis of the doctrine
(a) What is the legal basis for the adoption of ratification into the common law;
agency law, fiduciary law, or the equitable doctrine of release?
(b) If more than one basis is correct, are the legal bases all consistent with one
another?
3. Can the principles of the doctrine be supported on the basis of the legal maxim
‘Equity follows the law’?
4. Whether authorisation potentially extinguishes a company’s cause of action in
certain circumstances, a matter specifically left open by the High Court in Angas
Law Services Pty Ltd (in liq) v Carabelas?48
5. Void and voidable transactions and effect on the scope of the doctrine of the fraud
on the minority
(a) What is the essence of the distinction between a void transaction and one
which is voidable in the context of the doctrine?49
(b) Why should a voidable transaction be able to be ratified whereas a void
transaction cannot?
48 (2005) 226 CLR 507.49 See, eg, The Directors of the Ashbury Railway Carriage and Iron Company Ltd v Riche (1875) LR7 HL 653 where it was held that the shareholders could not ratify a contract entered into ultra vires the objects of the company because the contract was void, not merely voidable.
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Michael Anthony Robson Thesis Progress Report
6. Management buyouts
(a) Why does an offer by the directors to buy shareholders’ shares (colloquially
known as a ‘management buyout’) not give rise to a breach of their duties to
the company given the state of their knowledge? Does the avoidance of
breach arise from the disclosure requirements?
(b) Is the process of a management buyout merely a process of authorisation of
a prospective breach which was considered in Winthrop Investments Ltd v
Winns Ltd?50
7. What is the rationale for a ratification resolution being relevant to (moreover
given significant weight) reducing or extinguishing a director’s liability under
sections 1317S and 1318 of the Corporations Act in the context of a statutory
derivative action?
8. Is there any significance to the independent development of the law in Australia
in respect of ‘oppressive conduct’51 and ‘unacceptable circumstances’52?
(a) In relation to oppressive conduct, HNA Irish Nominee Ltd v Kinghorn (No
2)53 is a significant development in relation to the lawfulness of a ratification
resolution in Australia. The Court held that the approval by the major
shareholders of a ratification resolution was oppressive pursuant to section
232, ergo oppressive conduct is independent of the doctrine of ratification.
At the current time, no authorities have followed HNA Irish Nominee in
relation to oppression arising from a ratification resolution.
9. Whether the doctrine of the fraud on the minority in the context of ratification has
been subsumed by the principles in HNA Irish Nominee, a case which concerned
section 232 of the Corporations Act?
10. In Pramatha Nath Mullick v Pradyumna Kumar Mullick,54 the Indian idol was
considered to be an entity (not property) and consequently had the rights of a
natural person. The idol was required to be represented by a disinterested next
friend appointed by the Court. It raises doctrinal questions:
50 [1975] 2 NSWLR 666.51 Corporations Act 2001 (Cth) s 232.52 Corporations Act 2001 (Cth) s 657A.53 [2012] FCA 228 (‘HNA Irish Nominee’).54 (1925) LR 52 Ind App 245.
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Michael Anthony Robson Thesis Progress Report
(a) Are the best interests of the entity the relevant test in the context of
ratification?
(b) If so, does this imply anything about the nature of the powers given to the
internal organs of a company?
(c) How does this compare to how the interests of a company are determined by
the internal corporate organs?
(d) Should approval of a ratification resolution be undertaken by an
independent majority of shareholders, or should a director be required to
approach the Court?
11. Why has the jurisprudence developed independently in the USA?
12. Do other common law countries have different jurisprudence to the UK and
Australia?
13. Did the Canadian Courts follow North-West Transportation Co v Beatty55 after it
was overturned on appeal from the Supreme Court of Canada to the Privy
Council?
14. Is there a different doctrinal approach between civil law and common law
jurisdictions in relation to the doctrine of ratification and if so, does this arise
from:
(a) the corporate governance model used?;
(b) adoption of the Roman law doctrine in whole; or
(c) some other basis?
15. How have equitable principles been applied by the international jurisprudence?
16. Whether there is an argument for international comity on the principles
underlying the doctrine of ratification?
Chapter 5 - The significance of the regulation of corporate governance and the
importance of the role of shareholders in the context of ratification
1. Are the principles of good corporate governance and the principles underlying the
doctrine of ratification consistent (based on the further research in Chapter 4)?
55 (1887) 12 App Cas 589.
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Michael Anthony Robson Thesis Progress Report
Chapter 6 - Proposals for law reform
1. Oppressive conduct under section 232 of the Corporations Act
(a) Is the HNA Irish Nominees decision sufficiently broad to allow any
ratification to be held to be ‘oppressive conduct’ under section 232 of the
Corporations Act?
(b) Does the oppression remedy in section 232 need to be amended?
2. Whether in the context of oppressive conduct, a doctrine of waste of corporate
assets should be recognised in Australia?
(a) Is it recognisable from the existing case law which recognises that a
misappropriation of company resources or an appropriation to the majority
of shareholders is incapable of ratification?
(b) Is it recognisable by way of analogy to the common law doctrine of waste in
property law?
(c) What should be the relevant test(s) for a gift of valuable property (eg. the
right to sue) being given to a director from the company (by way of release)
upon a ratification resolution being approved to be recognised within the
meaning of section 232?
(d) Whether section 232 should be expanded to encompass excessive
remuneration of directors?
3. Whether a company incorporated under the Corporations Act can transfer its
incorporated status to a State or Territory pursuant to section 601AI of the
Corporations Act and thereby permit the officers to avoid the statutory duties
established by the Corporations Act?56
4. Whether fiduciary duties should be imposed between (i) shareholders inter se or
(ii) controlling shareholders and other shareholders.
5. What is the history of the introduction of section 239 of the Companies Act 2006
(UK) which enacted restrictions on the ratification of acts of directors?
6. Codification of shareholders’ conflicts of interest
56 There is no authority on the point, however obiter in Australian Securities and Investments Commission v Medical Defence Association of Western Australia Inc [2005] FCAFC 173 may indicate that this is not possible.
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Michael Anthony Robson Thesis Progress Report
(a) Should there be statutory reform to codify the recognition of a conflict of
interest where a shareholder votes to ratify/approve their own breach of
fiduciary or statutory duties?
(b) Should the conflict of interest extend to; associates of the director in
breach, related parties of the director in breach, persons involved in the
breach, all directors (within the meaning of section 9 of the Corporations
Act), or all former directors?
7. Whether statutory law reform should be approached in Australia on the basis of
one or more of the following models of regulation:
(a) imposing greater corporate governance requirements (using a rule-based
approach);
(b) imposing greater corporate governance requirements adopting a principles-
based approach (ie. by not regulating in a manner consistent with a rule-
based approach);
(c) limited risk mitigation (a risk-based approach) to minimise the risks to
shareholders in company over a certain size; or
(d) other models of regulation?
VIII. CURRENT PROPOSALS FOR LAW REFORM TO THE CORPORATIONS ACT 2001
The following draft proposals for law reform arise from the state of the current research
and will be discussed in Chapter 6:
Amendments to the replaceable rules
1. Voting rights. Amend the Corporations Act to prohibit companies issuing shares
which exclude the right to vote.
2. No implied approval or waiver. A ratification resolution must be approved by a
general meeting of the shareholders.
3. Independent vote and/or maintenance of legal rights
(i) Introduce a requirement that an independent majority of shareholders is
required to approve a ratification or authorisation resolution. This should be
implemented by introducing a new definition of an ‘excluded person’ which
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would be a prescriptive list of shareholders which are not entitled to vote,
being, a director, former director, an associate of a director, an entity which
is a related party of a director or associate of a director and any party
involved in the acts or conduct which is sought to be ratified (whether or not
the ratification resolutions presented at the meeting are split into different
resolutions to be put).
(ii) Amend the Corporations Act such that only those shareholders which vote
to approve a ratification resolution are bound by its effect.
4. Applicability of the Replaceable Rules. Consider whether the Replaceable Rules
may be mandatorily applied to companies.
Saving provision for non-compliance
5. Amend the Corporations Act to allow a ratification resolution to be confirmed
where there is evidence that the ratification resolution would have been passed but
for non-compliance with a voting exclusion rule by an excluded person.
Introduction of a solvency requirement
6. Invalidation of a ratification resolution if the company is insolvent within 6
months of the relation-back day.57
Introduction of a prohibition and/or restriction of waste of corporate assets
7. Definition of waste of corporate assets. Amend the Corporations Act to include a
definition of ‘waste of corporate assets’. The objective test would include
whether:
(i) the acquisition or disposal of the company’s asset was reasonable; and
(ii) the directors acted in good faith for the benefit of the company as a whole.58
57 Corporations Act 2001 (Cth) s 9 (definition of ‘relation-back day’)58 In the United States of America in relevant test is whether the consideration received by the corporation was so inadequate that no person of ordinary sound business judgment would deem it worth that which the corporation paid (see Saxe v Brady, 184 A.2d 602 (Del Ch. 1962); Steiner v Meyerson, C.A. No. 13139 (Del. Ch. July 18, 1995)). See also Daniels v Daniels [1978] Ch 406; MacFarlane v Barlow (1997) 8 NZCLC 261; Pramatha Nath Mullick v Pradyumna Kumar Mullick (1925) LR 52 Ind App 245.
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8. Special resolution for gifts to an excluded person. Amend the Corporations Act
to require a special resolution of independent shareholders which concerns an
agreement between the company and an excluded person which is within the
meaning of a waste of corporate assets.
Restrictions and prohibitions
9. If the company is a trustee of a trust, the shareholders may not ratify a breach of
fiduciary duties to relieve the director against a liability to beneficiaries of the
trust.
10. Prohibit solicitation of votes by an excluded person.
11. Prohibit a shareholder from dealing with or disposing of their right to vote at a
shareholders meeting. Such a restriction could be limited to dealings with or in
connection to an excluded person.
Introduction of statutory duties on controlling shareholders
12. Introduce a statutory duty on controlling shareholders to the minority shareholders
to act in good faith for the benefit of the company as a whole.
Amend existing law concerning director liability to the company
13. Exclude from consideration the relevance of a ratification resolution to section
1317S of the Corporations Act (Relief from liability for contravention of civil
penalty provision).
14. Exclude from consideration the relevance of a ratification resolution to section
1318 (Power to grant relief).
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Michael Anthony Robson Thesis Progress Report
IX. OTHER LAW REFORM RESEARCH
As discussed above, strata companies, incorporated associations and trade union
legislation in the States and Territories have generally not codified any of the duties of
officers and accordingly, the doctrine of ratification may be utilised to relieve an officer
from liability for a breach of fiduciary duties. This is to be compared to co-operatives
legislation where all States and Territories have at least in part codified the duties of
directors.
The laws in the States and Territories which concern strata titles, incorporated
associations and trade unions have not generally undergone any significant reforms,
unlike co-operatives legislation and the Corporations Act. There is, for example, no
strata titles, trade union or incorporated associations legislation which has adopted a
statutory derivative action in any of the 8 State and Territory jurisdictions. These laws
are overdue for reform in relation to the codification of officer’s duties and other law
reforms which are proposed by this thesis.
A summary of the relevant State and Territory legislation is set out below:
Jurisdiction Strata companies
Incorporated Associations
Trade Unions Co-operatives
WA Strata Titles Act 1985
Associations Incorporation Act 1987
Industrial Relations Act 1979
Co-operatives Act 2009
NT Unit Titles Act Associations Act N/A Co-operatives ActQLD Body
Corporate and Community Management Act 1997
Associations Incorporation Act 1981
Industrial Relations Act 1999
Cooperatives Act 1997
NSW Strata Schemes Management Act 1996
Associations Incorporation Act 2009
Industrial Relations Act 1996
Co-operatives (Adoption of National Law) Act 2012
ACT Unit Titles (Management) Act 2011
Associations Incorporation Act 1991
N/A Co-operatives Act 2002
VIC Owner Corporations
Associations Incorporation
Trade Unions Act 1958
Co-operatives National Law
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Michael Anthony Robson Thesis Progress Report
Act 2006 Reform Act 2012 Application Act 2013
TAS Strata Titles Act 1998
Associations Incorporation Act 1964
Trades Unions Act 1889
Cooperatives Act 1999
SA Strata Titles Act 1988
Associations Incorporation Act 1985
Fair Work Act 1994
Co-operatives National Law (South Australia) Act 2013
X. TIMETABLE FOR COMPLETING THE THESIS
The following is the proposed timetable for completion of the thesis:
Date Activity
March 2015 Finalisation of Chapters 1, 2, 3
Expected to receive supervisor comments
on Chapter 5
November 2015 Finalise draft of Chapter 4 for review
July 2016 Finalise Chapter 4
November 2016 Finalise Chapter 5
January 2016 Finalise draft of Chapter 6 for review
July 2016 Finalise Chapter 6
November 2016 Finalise draft of Chapter 7 for review
January 2017 Finalise Chapter 7
January 2017 Proof reading
8 July 2017 Mid-candidature review stage
TBC Pre-submission seminar
January 2018 Submission
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Michael Anthony Robson Thesis Progress Report
XI. BIBLIOGRAPHY
The following list of resources contains the most significant information which the author
will be relying upon for the thesis:
Articles/Book/Reports
Austin R P, Ramsay, I M, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007)
Australian Securities Exchange, Corporate Governance Principles and recommendations with 2010 amendments (2nd ed, 2007), 6 March 2013
Baxt, R, ‘Judges in their own cause: The ratification of directors’ breaches of duty’, (1978) 5 Monash University Law Review 16
Dickerson, R et al, Proposals for a New Business Corporations Law for Canada (1971)
The Committee on the Financial Aspects of Corporate Governance, Report of the Committee on the financial Aspects of Corporate Governance (1992)
The Companies and Securities Law Review Committee, ‘Company Directors and Officers: Indemnification, Relief and Insurance’ (21 May 1990)
Finn, P. D, Fiduciary Obligations (The Law Book Company Ltd, 1977)
Hargovan, A, ‘Australian Securities and Investments Commission v McDonald [No 11] – Corporate governance lessons from James Hardie’ (2009) 33 Melbourne University Law Review 984
Landgate, Strata Titles Act Reform Consultation Paper (31 October 2014)
LexisNexis, Ford’s Principles of Corporations Law
LexisNexis, Halsbury’s Laws of Australia
LexisNexis, Halsbury’s Laws of England
Munday, R, Agency law and principles (Oxford University Press, 2010)
Report of the HIH Royal Commission, The failure of HIH Insurance – Volume I: A corporate collapse and its lessons, Canberra, Commonwealth of Australia (2003) xxxiii.
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Michael Anthony Robson Thesis Progress Report
Sneed, E, ‘The stockholder may vote as he pleases: Theory and fact’, (1960) 22 University of Pittsburgh Law Review 23
The Committee on the Financial Aspects of Corporate Governance and Gee and Co Ltd, The Report of the Committee on the financial aspects of corporate governance (1992)
Worthington, S, ‘Corporate Governance: remedying and ratifying directors’ breaches’ (2000) Law Quarterly Review 116
Warnick, L, Incorporated Associations: Liability of Board/Committee Members (1 June 2005), Lavan Legal <http://www.lavanlegal.com.au/images/galleries/12654233_40_Inc_ass_liab_paper_(2).pdf>
Wright, E. B, The law of principal and agent (Stevens and Sons, Ltd, 2nd ed, 1901)
Case Law
Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507
Australian Securities and Investments Commission v Medical Defence Association of Western Australia Inc [2005] FCAFC 173
Bamford v Bamford [1970] Ch 212
Daniels v Daniels [1978] Ch 406
HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228
Hogg v Cramphorn Ltd [1967] Ch 254
Quarante Pty Ltd v The Owners Strata Plan No. 67212 [2008] NSWCA 258
MacFarlane v Barlow (1997) 8 NZCLC 261
Miller v Miller (1995) 16 ACSR 73
North-West Transportation Co v Beatty (1887) 12 App Cas 589
Pramatha Nath Mullick v Pradyumna Kumar Mullick (1925) LR 52 Ind App 245
Saxe v Brady, 184 A.2d 602 (Del Ch. 1962)
Steiner v Meyerson, C.A. No. 13139 (Del. Ch. July 18, 1995)
Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666
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Michael Anthony Robson Thesis Progress Report
Legislation
Associations Act (NT)
Associations Incorporation Act 1985 (SA)
Associations Incorporation Act 1987 (WA)
Associations Incorporation Reform Act 2012 (VIC)
Canada Business Corporations Act (Canada)
Companies Act (Singapore)
Companies Act 1993 (NZ)
Companies Act 2006 (UK)
Corporations Act 2001 (Cth)
Delaware General Corporations Law (US)
Industrial Relations Act 1979 (WA)
Industrial Relations Act 1996 (NSW)
Industrial Relations Act 1999 (QLD)
Owner Corporations Act 2006 (VIC)
Strata Titles Act 1985 (WA)
Unit Titles (Management) Act 2011 (ACT)
Treaties
Nil.
Other sources
Australian Bureau of Statistics, Residential Property Price Indexes: Eight Capital Cities,
Sep 2014, Australian Bureau of Statistics
<http://www.abs.gov.au/ausstats/[email protected]/mf/6416.0>
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Michael Anthony Robson Thesis Progress Report
Australian Bureau of Statistics, Australian Social Trends 2008 (23 July 2008), Australian Bureau of Statistics <http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Chapter7202008>
Australian Bureau of Statistics, 3101.0 - Australian Demographic Statistics, Mar 2014 (18 December 2014), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/mf/3101.0>
Australian Bureau of Statistics, 1301.0 Year Book Australia 2012 (24 May 2012), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1301.0~2012~Main%20Features~Measuring%20the%20activity%20of%20co-operatives~289>
Department of Commerce (Western Australia), Licensing of Strata Managers in Western Australia (October 2011), Department of Commerce <http://www.commerce.wa.gov.au/sites/default/files/atoms/files/thestratamgrsconregpaperoct2011.pdf>, 4; Western Australian Government, Report of Legislative Council Standing Committee on Public Administration into Western Australian Strata Manager (September 2011)
Justice Connect, Which incorporated legal structure should we choose? (Unknown date) Not-for-profit Law Information Hub <http://www.nfplaw.org.au/sites/default/files/Which%20incorporated%20legal%20structure%20should%20we%20choose.pdf>
Office of Finance & Services (NSW), Office of Finance & Services Annual Report 2013/14 (Unknown date), Office of Finance & Services <http://www.finance.nsw.gov.au/sites/default/files/pdfs/OSF_Annual_Report_2013-14_section_1.pdf>
Strata Community Australia Ltd, Submission to Inquiry into residential strata title insurance (Unknown date) Strata Community Australia <http://www.stratacommunity.org.au/sites/default/files/stratainsuranceinquiry1.pdf>
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