Eiffel Towers Ltd, a listed company, was a builder and property developer specialising in projects in Brisbane’s central business district. It has five directors. Giscard is the managing director and Henri is the chief financial officer. They are the only

Reading

Text, Chapter 12 pp387-400, Chapter19

Objectives

On successful completion of this module, you should be able to:

· appropriately advise on when a person may be successful in obtaining court approval to commence a statutory derivative action

· understand and describe how and when and by whom meetings may be called

· advise on the obligations associated with calling and holding meetings of company members

· determine whether a resolution has been appropriately passed in accordance with the

· Corporations Act

· understand and apply (in relevant situations) particular members’ remedies, particularly focusing on those in sections 232-234 (oppression), sections 236-242 (statutory derivative rights); section 1324 (contravention of Corporations Act); section 461 (winding up)

10.1 Introduction

This module discusses the rights and remedies available to members of a company as well as company meetings. Member’s remedies provide relief to members who are not happy with the company. There are a number of means members can rely on to obtain relief (discussed below).

A company is not a human being and can only act or operate through human activity– for example, by decisions made by its board of directors and the general meeting of its members(Members meetings are also known as ‘general meetings’ or ‘company meetings’). In practice, the decision making power of a company is divided between the board of directors and the members in general meeting in accordance with the company’s constitution. The constitution typically vests management powers in the directors but ultimately residual power over the company remains with the members (and, for example, only members can amend the constitution under section 136). As the owners of a company, members are entitled to make decisions relating to matters affecting the company. These decisions are made by members voting on proposed resolutions.

10.2 Meetings

Resolutions are normally passed at a members’ meeting. The number of votes ‘in favour’ of a resolution before the resolution is ‘passed’ , will depend on the total number of votes ‘cast’ at the meeting, and the percentage of votes necessary to pass that type of resolution. Normally, over 50% of the votes need to be in favour before an ‘ordinary resolution’ is passed; normally over 75% of the votes need to be in favour before a ‘special resolution’ is passed. These percentages can be raised (but not lowered) by the internal rules of the company. These terms are defined in section 9.

In general, unless a special resolution is specifically required, an ordinary resolution is sufficient. References in the legislation to ‘a resolution’ mean an ordinary resolution.

Members are the only persons who can make the decisions which are specified in either the Corporations Act or the internal rules as decisions on which only the general meeting can vote. (Other decisions can be made by either the general meeting, or by a directors’ resolution). For example, the Corporations Act gives the general meeting the power to make the following resolutions:

· to alter the company constitution, a special resolution is required: s 136

· to alter the company name, a special resolution is required: s 162

· certain transactions affecting company share capital, such as a buy back of shares (s

· 257B), a reduction in share capital (s 256C), all require investor approval

· any related party transaction in a public company requires member approval under

· Chapter 2E.

· some issues of shares require member approval – eg, if the issue constitutes a variation of class rights under s 246C; or if a listed company proposes to issue new shares of an amount which is 15% of the company’s issued capital

· to appoint and remove directors (proprietary companies: appointments are governed by ss

· 201G and 201H, and s 203C applies to the removal of a director; for public companies, s 203D applies).

10.2.1 Types of meetings

Annual General Meeting (AGM)

Reading activity 10.1

1. When must a public company hold its first AGM?

2. How often (and when) must a public company hold AGMs?

3. If the financial accounts have not been completed and signed off, can a public company extend the time for the AGM? If so, how?

4. What must an AGM consider?

Extraordinary general meeting

Any meeting of a company which is not an AGM, is an ‘extraordinary general meeting’. These are called and held when needed to deal with company business.

Class meeting

A company with a share capital may, if authorised by its constitution, issue shares of more than one class. The different classes of shares that may be issued include preference shares, ordinary shares and deferred shares. Shares are in different classes if they carry different rights.

A class meeting is open only to members holding shares of the particular class. If a company has different classes of shares, the company can call and hold meetings of the holders of any class of shares. At such a meeting, only members who hold that particular class of share can attend and vote. Such meetings can be required by the Corporations Act (for example, section 246B) or by the internal rules, but are only held when necessary for the company’s business.

Often a class meeting is held immediately before or after a general meeting (of the whole company), but normally it is held separately, because only those shareholders who hold shares in the relevant ‘class’ are entitled to attend that meeting.

Normally the procedures for calling class meetings are the same as for other types of meetings, but each company’s constitution is free to alter this if it wishes.

No meeting – circulating resolutions

Although not strictly a type of meeting, in some cases a resolution can still be passed even if no meeting is called. A company which has only one member can pass a resolution by signing a record of that resolution: section 249B.

A proprietary company with more than one shareholder can pass a resolution without a meeting if all members unanimously agree in writing to the resolution (by signing a copy of the resolution): s 249A. Members can sign different copies, but the resolution is only passed when the last copy is returned to the company: s 249A(4). This procedure cannot be used to remove an auditor: s 329.

10.2.2 Meeting procedures

Calling a meeting

Reading activity 10.2

1. Who normally calls members’ meetings?

2. Under the replaceable rules, who can call a meeting of members?

3. If the constitution is inconsistent to section 249CA, which applies?

4. What are the differences between sections 249D and 249E on the one hand, and section 249F on the other hand?

Notice of a meeting\

Reading activity 10.3

1. How much notice must be given? Is this different for different types of companies?

2. Can notice be shortened? In which circumstances? Who must receive notice?

3. What must the notice contain? Is this different for different types of companies?

Proceedings at meetings

Venue: The meeting must be held at a reasonable time and place: section 249R. The meeting is normally held in a hired hall or other large venue. Because it is often inconvenient to have investors (who may live all across Australia) travel to the venue, the meeting can also be held by videoconference. In fact, section 249S allows the meeting to be held using ‘any technology which gives members a reasonable opportunity to participate’.

This would require giving members an opportunity to ask questions and receive answers. The meeting can be held in multiple venues using any technology that gives members a

reasonable opportunity to participate: section 249S.

Quorum: The quorum is the minimum number of people at a meeting that is necessary for the meeting to be a valid meeting. The number is normally specified in the internal rules.

Chairperson: The chairperson is the person in control of the meeting. Sometimes the internal rules will give special voting rights, such as a ‘casting vote’, to the chairperson.

Minutes: Minutes are the records of decisions made at a meeting.

Voting: Normally, the internal rules will specify how voting will occur. There are two ways in which voting can occur: by ‘show of hands’ or ‘on a poll’. On a ‘show of hands’, each person present has one vote, no matter how many shares that person holds, and demonstrates that vote by putting their hand in the air when required. (The chairperson determines

whether the vote is passed: s 250J(2)). On a poll, the number of votes available to a member depends on the number of votes which are attached to that person’s shares. For example, if a member holds 5 shares, and each share is entitled to one vote, the member would have only one vote on a show of hands, but would have five votes on a poll.

The replaceable rules provide that voting occurs by ‘show of hands’ unless a poll is validly demanded: s 250J(1). A poll can be demanded by any five members, or by shareholders holding at least 5% of the available votes: s 250L(1). A poll can normally be demanded on any resolution, although the constitution can provide that a poll cannot be called in relation to electing the chairperson or adjourning the meeting: s 250K.

A person who has more than one vote does not need to vote all their votes, and can vote their votes in two different ways: section 250H.

Proxies: If a member is unable or unwilling to attend the meeting in person, the member does not necessarily lose their vote(s). Instead, each member is entitled to appoint a proxy, which allows another person (known as ‘the proxy’) to attend and vote at a general meeting instead of the member. The proxy can be, but need not be, a member of the company. Often, one of the directors of the company will offer himself or herself to members as a ‘default proxy’ so that the member does not have to arrange a separate proxy.

The rules relating to proxies will be specified in the company’s internal rules. However, section 249X operates as a replaceable rule for proprietary companies (so a proprietary company can override these provisions by an inconsistent clause in the company constitution) and as a mandatory provision for public companies (so that section 249X applies to all public companies, even if the constitution is inconsistent. The section will override the inconsistent provision in the constitution). A proxy has the same rights as the member to speak at the meeting, to demand a poll, and – to the extent the proxy appointment and the internal rules allow – to vote: section 249Y(1).

The company constitution can restrict a proxy’s right to vote on a show of hands: s 249Y(2), and may deal with the effect on the proxy’s rights if the member who appointed the proxy attends the meeting: section 249Y(3). If the company sends a proxy form, it must send it to all members: s 249Z.

Reading activity 10.4

1. What occurs if a quorum is not present? Is this a replaceable rule?

2. Who is the chairperson and how is that person appointed?

3. When must minutes be prepared? Who signs them and when? Where are they kept?

4. Describe how voting occurs. Is voting normally on a show of hands or on a poll? What is the difference between these?

Irregularities in meeting procedures

A meeting is not invalidated merely because of a procedural irregularity, unless a court is of the opinion that they caused or will cause substantial injustice that cannot be remedied by any order of the court. Under section 1322, a court can make orders which remedy ‘substantial injustice’ caused by a ‘procedural irregularity’ in a ‘proceeding’ (which includes a meeting).

10.3 Member’s Remedies

This part is one of the most important areas in the course, because it brings together concepts and ideas from other parts of the course and helps you consolidate a greater understanding of the course as a whole. Member’s remedies are available under a few avenues as discussed in your text book. Here we focus on four types of statutory remedies.

10.3.1 Oppression and section 232

Section 232 sets out the grounds upon which a member can apply to the Court for an order to remedy oppression or injustice. To succeed, the member must prove that the affairs of a company are being conducted in a manner contrary to the interests of the members as a

whole or that the conduct complained of is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members whether in their capacity as members or in any other capacity.

The main question is the meaning of ‘oppressive conduct’. ‘Burdensome, harsh or wrongful’ conduct will be oppressive conduct under section 232 (Scottish Co-operative Wholesale Society Ltd v Meyer (1959) AC 324). The test is objective, which means the conduct is viewed in the light of its impact on the oppressed person; the intention of the oppressor is not relevant. The directors or shareholders following a course of conduct with which the members disagrees or where the company is not managed to its maximum efficiency, will not by itself constitute oppressive conduct. To be oppressive, there must be something adverse or detrimental to the members’ financial interest as shareholders (see Re Tivoli Freeholds Ltd [1972] VR 445). The word ‘oppressive’ suggests commercial unfairness: Wayde v NSW Rugby League Ltd (1985) 180 CLR 459. If the conduct is oppressive, the court has a wide discretion and variety of remedies – see section 233.

Reading activity 10.5

1. What interests must a court balance, when it is determining whether conduct is oppressive or unfair?

2. Refer to the case of John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’asia) Pty Ltd (1991) 6 ACSR. How did the court interpret the meaning of oppressive conduct?

3. Refer to the case of Wayde v NSW Rugby League Ltd (1985) 180 CLR 459. Why did the court ruled against Wayde in this case?

10.3.2 Derivative action – exceptions to Foss v Harbottle

This common law rule originated in, and has taken its name from, a very old English case which was decided in 1843: Foss v Harbottle. In that case, the court held that members’ rights to bring legal proceedings in relation to issues affecting the company should be restricted. As the company is a separate legal entity from its members, only the company is the proper person that could exercise the company’s rights to bring legal proceedings to seek remedies. This is known as the ‘proper plaintiff rule’.

Due to the unfairness sometimes caused by the rule, exceptions were recognised by later cases. These also fall into two main categories:

· The courts specifically allowed a member to exercise the member’s personal rights and that this was an exception to the rule in Foss v Harbottle. (This can be confusing because nowadays, with the benefit of today’s legal concepts, we would no longer include the member’s personal rights in the same category as company rights, however, you must remember that these cases were decided long before the current concepts were developed). (These cases remain relevant today).

· a member was allowed to seek the court’s permission to bring legal action on behalf of the company against the directors for breach of duty. (This part of the rule has now been abolished by and replaced by the statutory derivative action under ss 236-242 of the Corporations Act.

The rule in Foss v Harbottle, and its exceptions, was complex and made it extremely difficult for minority shareholders to take any action where the majority (controlling) engaged in conduct which was prejudicial to the interests of the company. As a result, part of the rule has now been abolished and replaced by a statutory derivative action – under sections 236-242 of the Corporations Act. Ss236-242 entitles a member to apply to the court for permission to enforce the company's legal rights in certain circumstances - for example, where company directors are refusing to exercise the company’s rights.

Reading activity 10.6

1. Who may apply to court for leave to commence proceedings on behalf of a company?

2. What criteria will be used by the court in deciding whether to grant such leave?

3. What powers does the court have in relation to the statutory derivative action?

4. Who pays the costs of such a proceeding?

5. Who benefits from such a proceeding?

6. Does it make a difference to such a proceeding, if the conduct complained of was ratified by the majority members at a company meeting?

10.3.3 Statutory injunctions: s1324

Section 1324 gives the court to order an injunction to stop or prevent any conduct which breaches, or would breach, the Corporations Act. In addition, the court has the power to make a damages order under s 1324(10). Any person affected by the conduct (or proposed conduct) has the right to apply to the court under s 1324. It is not necessary for the person’s personal rights to be affected: Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) 2 ACLC 157.

10.3.4 Winding up: s461

Winding up is the end of a company’s life. A court does not order it lightly. Indeed, under s

467(4) the court is specifically directed not to wind up a company where a more suitable remedy is available. It is considered to be a remedy ‘of last resort’.

However, a member is a ‘contributory’ and as such is entitled under s 462(2)(c)to apply to the court for winding up of a solvent company if any of the grounds listed in section 461 exist. These include, but are not limited to:

· directors acting in their own interest;

· affairs of the company are being conducted in an oppressive manner;

· there is an omission or resolution which would be oppressive; or

· it is just and equitable in the circumstances that the company be wound up.

Reading activity 10.7

1. Why are the courts reluctant to order that a company be wound up?

2. Why did the court decide to wind up the company in the case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360?

3. Give case examples of situations where the court might order the winding up of the company on the ground that it is ‘just and equitable to do so’.

Module 10 Tutorial Questions

1. Statewide Investment Ltd has 2000 members. It has adopted the replaceable rules as its constitution. The directors call a special meeting of the company to consider a number of possible changes to the constitution. The meeting is set for 22 April, and the notices of the meeting are sent on 3 April. Later it is discovered that only 1500 of the members have been notified due to a computer error in the company. The notice of meeting, apart from stipulating the time, date and place of the meeting is as follows:

‘The meeting will consider the following change to the Constitution: To consider creating a new class of shares with a dividend of 10%.’

At the meeting only twelve members turn up, including the Chairman of Directors, who

is a member and who chairs the meeting. There is a heated debate. During the debate four members walk out. The vote is then taken with two abstaining; four voting for the resolution; and two against. Assume the members present hold one share each and they are entitled to one vote per share. Comment on the validity of the resolution.

2. Bill holds 51% of the voting shares in Roseneath Pty Ltd. The balance of the shares are held by a number of shareholders – one being a public company which Bill feels might try to take over the company. Bill is unable to attend the forthcoming annual general meeting and appoints his brother as his proxy. At the meeting the Chairman refuses to allow Bill’s brother to vote on any motions because he (the Chairman) will not recognise the proxy. The company’s constitution is silent on the use of proxies. Advise the relevant parties.

Would your answer be different if the company had adopted the replaceable rules as its constitution? Would your answer be different if Bill had written out the proxy on the back of a beer coaster with the words ‘I (Bill) hereby appoint my brother John as my proxy at Roseneath’s AGM’?

3. A, the father of B and C, incorporated the A Co Pty Ltd to purchase A’s Queensland businesses. As consideration for the purchase moneys, A is given 50 000 fully paid-up shares in the newly-incorporated company. A gave 100 shares to each of B and C. B and C are made company directors and A is the managing director of the company for life. By reason of his voting control, A often ignores the resolutions of the board and operates the business in the way he considers fit. B and C, the minority shareholders, would like to know whether they have any remedies under the law.