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LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 6.1

Corporate fundraising Activities 6.1.3 & 6.2.3

Activity 6.1.3 X, Y and Z were the sole directors of Austral Ltd, a public company. A and B were each registered holders of a large part of the company’s shareholding. Over a period of about five years, A and B had continually brought frivolous and vexatious lawsuits against the company, against the directors, and against each other. The company, as a result, was hindered in its everyday management, and the price of its shares was declining. Article 50 of the constitution of the company stipulated: ‘whensoever a shareholder shall be desirous of selling his shares or any part thereof, he shall first offer the same to the directors for the time being at the company, who may take the shares at a fair price’. A and B contracted to sell some of their shares to outsiders, retaining others. They also advertised their intention to sell all of their shares as soon as possible.

The constitution was altered, largely at the instigation of X, Y and Z, to give power to the directors for the time being of the company to compulsorily acquire the shares of any member at a fair price.

Discuss, citing authority where appropriate, whether (a) X, Y & Z may, after the Articles were altered,

compulsorily acquire any of the shares of A and B;

Alteration of CC •  s 135(2) RR can be displaced/modified by the

adoption of a constitution •  s 136(2) company has power to alter its constitution

by a special resolution of its members reading the sections together, conclude that replaceable rules can also be displaced or modified by a special resolution

Limitations •  Statutory: see ss 140(2), 136(3)-136(4), Part 2F.2

(special rights) and Part 2F.1 (oppression) • General law: eg additional tests of fairness

Gambotto’s Case

• Was the alteration to the CC for a proper purpose? • Was the alteration to acquire the shares of existing

shareholders “necessary to protect or promote the interests of the company” (per McHugh J at 453) in circumstances that is not oppressive to existing shareholders?

• Alteration was directed at A & B, •  Too broad? Could be used against any shareholder? •  If alteration had been directed against them

specifically - A & B may have better chance of success.

• Could A & B bring an action under section 232?

Minority oppression sections 232-234

•  A member or former member s 234 may apply for remedy under s 233

where the company has: •  acted in the ‘conduct of the company’s business’ s 232(a) •  through an act (actual or proposed) or omission s 232(b) •  passed/proposed a resolution, of members or a class of

members that is:

•  contrary to members’ interests as a whole s 232(d) or •  oppressive to/unfailry prejudicial to/unfairly discriminatory

against a member/s s 232(e)

Key terms in section 232(e) oppressive

unfairly prejudicial unfairly discriminatory

all elements of same issue – commercial unfairness Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459

Minority oppression sections 232-234

Where breach of s 232 has been established, court has the power to make range of under s 233 to remedy oppression or prejudice to members Orders that may be made include: • company be wound up • constitution be amended • company to purchase member’s shares • company partake in proceedings against another

party • appointment of receiver

Activity 6.1.3 Under Part 6A.2 (section 664A) a 90% holder of shares in the class to be acquired can compulsorily acquire any other shares in that class Notwithstanding this, if the change to the constitution is valid, A and B may apply to the Court to have the acquisition (or the resolution) overturned as oppressive conduct; ss.232-234. However due to the frivolous and vexatious lawsuits brought it appears they have no grounds to argue that there is a detriment to the company as a whole - in fact quite the reverse.

Activity 6.1.3 If the alteration had been directed against them specifically it may have had a better chance of success given their past behaviour; Note specifically the Gambotto test (proper purpose & fair in all the circumstances) and the exceptions as to when a compulsory acquisition may be allowed. Note also the possible use of section 232 on these facts though A & B may have difficulty establishing oppression given their behaviour. © John ORR

Note • Many of the questions involving oppressive

behaviour of majorities have much in common with each other.

•  You could use this question as a part model for answering such questions, (Topic 6 has some additional remedies for minorities not relevant on these facts).

Discuss, citing authority where appropriate, whether (b) X, Y & Z have any rights against A & B concerning the shares which they contracted to sell.

Article 50: Whensoever a shareholder shall be desirous of selling his shares or any part thereof, he shall first offer the same to the directors for the time being at the company, who may take the shares at a fair price.

Activity 6.1.3

Under section 1070A(1)(a) a share is ‘personal property Section 1070A(1)(b) ‘transferable or transmissible as provided by a company's constitution’ So X,Y and Z have rights to A's and B's contracted shares

A company can enforce its memorandum and articles against a recalcitrant shareholder; rule in Hickman v Kent or Romney Marsh Sheep Breeders’ Association [1915] 1 Ch 881 Enforceable where breach affects: • Member as member • Director or company secretary (in that capacity) Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88 Now enshrined in statute law

Section 140(1) - goes further than the case law Provides that the CC is a contract between: (a) the company and each member,

(b) the company and each eligible officer, and (c) a member and each other member.

X, Y & Z are directors ….

So can direct the company to sue A & B for their breach of the constitution.

Are X, Y & Z also shareholders in Austral Ltd?

•  If they are members X, Y & Z could sue as such to enforce the provisions of the CC regarding the shares which A and B contracted to sell

•  They could as members also direct the company to

sue A & B for their breach of the constitution.

Remedies?

• Contract law: declaration or injunction •  Section 1324 injunction - available for a breach of

the statutory contract? •  Section 1324 injunction available for a

contravention (or threatened contravention) of the Act

Activity 6.2.3 Is the area of law relating to security interests satisfactory and clear? Identify any difficulties in the provisions relating to registration of security interests.

Personal Property Securities Act 2009 (Cth)

• A great deal has been written on the PPSA •  The objective was the rationalisation of more than 70

separate Acts which regulated personal property securities in Australia.

•  By providing (more or less) a common set of rules for all secured transactions and a single register.

•  Source: Davies --- "Personal Properties Securities Act 2009 (Cth): objectives and emerging issues" (FCA) [2014] Federal Judicial Scholarship 7

Personal Property Securities Register •  The PPSR operates as a noticeboard of

security interests in personal property • As at 31 December 2013, there were over 7.7 million registrations on the Personal Property Securities Register (PPSR). The register is suffering from overload Source: Leigh Adams Lawyers, Top tips to overcome the practical problems with the PPSR, May 22, 2014

PPSA • A person who holds a ‘security interest’ in ‘personal property’ may ‘perfect’ the security to preserve a position of priority should a dispute between competing security interests arise.

• A security interest is ‘perfected" if it has ‘attached’ to ‘collateral’, it is enforceable against third parties and it has been registered or the secured party has control or possession of the collateral.

Source: Davies, noted above.

5 ways - perfecting a security interest 1. transitional security interest (pre 30/1/12) were protected under transitional provisions as a transitional security interest; s 322A PPSA (no longer applies - period ended 30/1/2014. 2. perfection by registration, 3. perfection by possession; 4. perfection by control (of controllable property); s 27 PPSA; and 5. temporary perfection; s 39(3)(b)) PPSA. Source: Leigh Adams Lawyers, noted above.

PPSA – Priority • priority between perfected interests is determined by

order of registration; or •  time of first perfection by control or possession; • priority between unperfected interests is determined

on a first-in -time basis Source: Davies, noted above

‘PPSA is not easy to read’ •  The PPSA is a major reform and a significant piece of

legislation. • Whilst the PPSA is a well-structured Act… the PPSA

cannot be picked up and read or understood easily Source: Davies, noted above

‘not old wine in a new bottle’* Not easy to read or understood – why? 1. An entirely new regime governing personal property securities 2. PPSA has its own statutory language 3.Complex rules and technicalities. 4. Perennial problem of statutory interpretation. example: security interest: - An interest in personal property - -provided for by a transaction - Transaction secures payment or performance obligation.

PPSR - registration •  Problem of non-registration •  ‘Millions of dollars have already been lost by

businesses that paid for an asset but had not registered that asset on the PPSR. Whilst it’s voluntary to register, businesses need to be alert to the requirement that, if they are going to register, they have to do so within a very tight registration time period.’

Source: Craig Waldon PPSA/PPSR – Auditors and Accountants Beware!, meth.od.ol.o.gy, November 17th, 2014, citing Peter Towers

PPSR - registration • Completing the financing statement •  generally the online financing statement is

completed and the applicable fee is paid. •  The purported secured party (grantee) needs to

have a security interest at that time or a belief on reasonable grounds that the secured party is or will become a secured party in relation to the identified collateral: section 151.

Source: Leigh Adams Lawyers, noted above

PPSR - registration The Registrar is bound to accept the application unless it is frivolous, vexatious or offensive, or contrary to the public interest; PPSA section 150 Source: Leigh Adams Lawyers, noted above

PPSR – registration

•  ‘Initial registration of a financing statement on the PPSR is very easy. You simply go to the Personal Property Securities Register (PPSR) website and follow the links, enter the prescribed data, pay a small fee and hit a button or two.

•  The ease of registration, compared to a paper based registry such as land titles or the former company charges register, makes the PPSR more open to abuse.’

Source: Markmckillopbarrister, Court Injuncts Sham PSR Registrations

Sandhurst v Coppersmith Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 Robson J accepted (at paragraphs 108 to 118) that the court has jurisdiction to grant an injunction restraining a person from seeking to register further financing statements Source: MinterEllison, noted above

Sham Registration

•  Registration of sham* (bogus or false but presented as true) financing statements on an electronic register has been a persistent problem in other jurisdictions with a PPSR equivalent. They have frequently been used as a retaliatory measure by political activists, prison inmates, the disgruntled and others looking to harass or intimidate public officials, corporations, banks, among others

Source: MinterEllison Lawyers, ‘Sham financing statements on the PPSR: problems caused and their resolution’, 22 May 2014

PPSR – registration

• Although administrative and judicial processes exist under the PPSA to remove a sham financing statement, in practice, a contested process can be time consuming and costly.

• Whether the existing provisions are adequate for the purpose is a real issue.

Source: MinterEllison Lawyers, ‘Sham financing statements on the

PPSR: problems caused and their resolution’, 22 May 2014