Shareholder Selling Shares in Company by wys12714

VIEWS: 18 PAGES: 11

Shareholder Selling Shares in Company document sample

More Info
									                                                                          Shareholder Remedies



      Melbourne University Law Students’ Society Tutorial Service:
                                   Sponsoring Partners:
                                        Clayton Utz
                                 Mallesons Stephen Jaques
                                       Blake Dawson
                                         SPP Books
                                   Leo Cussen Institute




         Subject Name: Corporations Law Subject Number: 730-456
         Tutorial Number: Tutorial 9
         Date: 01/06/2010


                                    DISCLAIMER:

 These tutorials and the notes are designed to assist students in their learning. The
tutorials and the notes are not a substitute for the course material, nor should they
 be relied upon as representative of the subject matter of the course. Neither the
 Melbourne University Law Students’ Society nor the student tutor of these tutorials
 will take responsibility for any consequences flowing from the use of the material.
                         provided in the tutorials or in the notes.




                                                                                            1
                                                                                                                Shareholder Remedies

                                     SHAREHOLDER REMEDIES
A. Introduction
    At general law, directors owe their duties to the company
    Therefore, as the “person” directly affected by a breach of duty, the company can bring action itself
    However because the directors are unlikely to cause the company to sue them while they are still in office, this will usually only
     happen after there has been a change of control (as in {Regal (Hastings); Peso Silver Mines}
    When the directors breach duties to the company, the person wronged is the company as an entity not the shareholders
    The law has struggled to determine the criteria for granting shareholders standing because to allow individual shareholders
     unrestricted standing to sue in respect of wrongs done to the company would raise problems like:
          o Multiplicity of actions (that are numerous shareholders could bring same action)
          o Vexatious litigation
    Therefore there are many considerations when determining what shareholder action and subsequent remedy are available to the
     shareholder
B. Immediate Shareholder Actions
    The most obvious options available to disgruntled shareholders are:
          o Leave the Company by selling shares
                          For example Rio Tinto shareholders expressed dissatisfaction with board‟s rejection of BHP bid by selling down
          o Vote the directors out at the general meeting
                          This would require submitting a resolution beforehand
                          However you would need to have 5% or 100 members supporting you
          o Vote to amend the constitution
                          However this has become difficult as it requires a special resolution and 75% of the vote
B.1 Seek to have ASIC Enforce Duties
    ASIC can bring action in respect of breaches of statutory duties under the civil penalty provisions (ss 180-184)
    ASIC is governed by the Act and cannot bring actions for breaches of general law – however this is not really relevant as most
     duties are encompassed in statute
    Getting ASIC to enforce duties may mean:
          o Cheaper and easier if you are just seeking “justice”
          o Compensation back to the company can be sought
          o Directors‟ can face criminal liability
    However on the other hand:
          o ASIC may not bring your claim because of a lack of resources
          o Shareholder gets no direct compensation
B.2 Shareholder Litigation vs. ASIC {Ian Ramsay}
(1) Shareholder Litigation
    The benefits of shareholders instituting proceedings include:
          o Monetary compensation
          o Deters wrongdoing by imposing threat of liability
          o Ensures directors and officers discharge their duties
    The downside of shareholders taking action include:
          o Cost of litigation is still substantial
          o Disruption of Co‟s business activities and give rise to undesirable publicity, create uncertainty
          o Makes it difficult for Cos to attract qualified directors/officers
                          Must be offered adequate liability insurance or increased salaries to incentivise them
          o Shareholders act in their own interests - may be detrimental to other shareholders
                          i.e. where a small shareholder brings litigation they have very little incentive to consider the effect of the
                           litigation upon other shareholders and the company as a whole, and may act in opposition of the majority‟s
                           interests
          o Small shareholders have little incentive to commence litigation, even where it is appropriate, due to cost to them
                outweighing the benefit they will personally receive
    Therefore there are not huge incentives for shareholder litigation, less so the more financial trouble the company is in. In theory it
     is useful, in practice the disincentives provided by the costs of the action are much larger than the possible benefits
(2) ASIC Litigation
    The benefits of ASIC instituting proceedings include:
          o Litigation commenced by ASIC can provide similar benefits to those of shareholder litigation.
          o In a good position to ascertain whether litigation is wise or not (due to their investigative powers)
          o Does not suffer the „collective action‟ problem suffered most acutely by small shareholders in large public companies (i.e.
                no incentive to apply individually)
    The downside of ASIC taking action include:
          o Disagreements may exist in relation to ASIC‟s enforcement priorities
          o Over-reliance on the enforcement of corporate rights and duties by ASIC is troubling if ASIC is under-resourced
                          The more under-resourced the regulatory agency is, „the more its decisions must be reached with inadequate
                           information, unless the agency relies on those it regulates for information, whereupon it is more susceptible to
                           unacceptable influence‟.
                          i.e. either under-researched or independence is compromised
                          Also means that not many cases can be heard, and smaller ones rather than big resource-draining ones are
                           preferred.
                                                                                                                                         2
                                                                                                                  Shareholder Remedies

   Therefore „It is inappropriate to advocate that the enforcement of corporate rights and duties should be undertaken exclusively by
    ASIC or shareholders. However ASIC is often in a superior position to shareholders to enforce corporate rights.‟
C. Statutory Derivative Action
   Because the wrong is to the company, when shareholders sue in relation to wrong they do so on behalf of the company
         o Hence it is a derivative action
   Therefore any money recovered as a result of action goes to the company, not to shareholders bringing the derivative action on its
    behalf
   The statutory derivative action is contained in {Part 2F.1A Corporations Act} and it replaces the general law criteria under {s 237
    Corporations Act}
   Note that the original rule under general law in {Foss v Harbottle} was that the company was the proper plaintiff but over time a
    number of exceptions to that rule were created until it was all overridden by statute
C.1 Who can bring a Statutory Derivative Action?
   The right to bring a derivative action is NOT automatic, therefore leave of the court is first required under {s 237(1) Corporations
    Act}
         o This requirement is stipulated in {s 236(1)(b) Corporations Act}
   Under {s 236(1) Corporations Act} the following persons have standing to apply for leave to bring a derivative action:
   (1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is party
    for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those
    proceedings if:
         o (a) the person is:
                         (i) a member, former member, or person entitled to be registered as a member of the company or related
                          body corporation or
                         (ii) an officer or former officer of the company; AND
           o    (b) the person is acting with leave granted under section 237
   Note that under general law, the exceptions to the rule in {Foss v Harbottle} applied only to members, the potential applicants under
    s 236 are much wider
C.2 What Proceedings can SDA be brought for?
   Additionally Part 2F.1A also applies to a wider range of situations than the rule in {Foss v Harbottle} as it allows a person to obtain
    leave of the court to:
         o Bring proceedings on behalf of the company
         o Intervene in any proceedings to which the company is party for the purpose of taking responsibility on behalf of the
               company for those proceedings
   Essentially this means that under {s 236(1) Corporations Act} a statutory derivative action may be brought for:
         o (a) breach of director‟s duties or
         o (b) any proceedings to which the company is party (however this is more rebuttable under Business Judgement Rule)
C.3 Grounds for Granting Leave (Requirements for SDA)
   Under {s 237(2) Corporations Act} the court must grant the application if satisfied that:
         o (a) it is probable that company will not itself bring the proceedings, or properly take responsibility for them;
                        This will be clearly made our where there is an alleged breach of director‟s duties where the directors are still in
                         control of the company
           o    (b) applicant is acting in good faith
           o    (c) it is in the best interests of the company that the applicant be granted leave
           o    (d) If the applicant is applying for leave to bring proceedings rather than intervene, there is a serious question to be tried
                and
           o    (e) Either:
                         (i) at least 14 days before making the application the applicant gave written notice to the company of its
                          intention to apply for leave and the reasons for applying; or
                         (ii) it is appropriate to grant leave even thought (i) is not satisfied
   These are the requirements for bringing a SDA and we will now consider particular ones
C.4 Inaction by the Company {s 237(1)(a) Corporations Act}
   This requirement relates to the final requirement of notice to the company
   “The company‟s response to any notice of intention to apply for a grant of leave would provide evidence relevant to this criterion”
    {Explanatory Memorandum to the CLERP Bill 1998 (Cth)}
   You can also use the fact that the alleged wrongdoer has influence over the board as evidence of the company‟s inaction
C.5 Applicant‟s Good Faith {s 237(1)(b) Corporations Act}
   In {Swansson, Palmer J} held that good faith involves at least two interrelated factors:
           o    (1) applicant honestly believes that a good cause of action exists and has reasonable prospect of success
           o    (2) applicant is seeking derivative action for a collateral purpose which would amount to abuse
     Additionally in {Swansson, Palmer J} noted that the fact that standing is given to former members and officers suggest that it is
      possible to be acting in good faith even where the applicant has no financial interest in the company
                                                                                                                                            3
                                                                                                                 Shareholder Remedies

    A more liberal approach was taken in {Charlton v Baber per Barrett J} where His Honour held that the fact that the applicant was
     unlikely to benefit financially from successful action was irrelevant to his bona fides
          o “he may have motives that go beyond mere personal gain. As a former director, he may feel a sense of responsibility to
                creditors who have suffered losses. Such an attitude would be entirely consistent with the exercise of good faith”
                {Charlton per Barrett J}
C.6 Best Interests of the Company {s 237(1)(c) Corporations Act}
    This criterion recognises that “a company might have sound business reasons for not pursuing a cause of action open to it and that
     its management might legitimately have decided that the best interests of the company would be served by not taking action”
     {Explanatory Memorandum to CLERP 1998 Bill}
    Generally if a company is solvent its best interests will be those of its shareholders {Ngurli; Parke}
    Many cases have concerned companies in liquidation or financial difficulty and in this context it has been held that “best
     interests” is the predominantly the interests of the creditors {Charlton v Baber; Walker}
(1) Likely Considerations
    Generally the court will have regard to:
          o The effect of litigation on the purpose for which the company was established
          o The effects of litigation on the company‟s business
          o Whether there are any other means of redressing the harm claimed by the applicant
          o If there is any evidence of the defendant‟s ability to meet any judgment in favour of the Company
(2) Note Presumption for Proceedings Against Not Related Parties
    Under {s 237(4) Corporations Act} there is a rebuttable presumption that granting leave is NOT in the best interests of the
     company if it is established that:
          o (a) the proceedings are:
                          (i) by the company against a third party; or
                          (ii) by a third party against the company; and
          o (b) the company has decided
                          (i) not to bring proceedings; or
                          (ii) not to defend the proceedings; or
                          (iii) to discontinue, settle or compromise the proceedings; and
          o (c) all of the directors who participated in that decision
                          (i) acted in good faith for a proper purpose
                          (ii) did not have a material personal interest in the decision; and
                          (iii) informed themselves about the subject matter of the decision to the extent that they reasonably believed to
                           be appropriate; and
                          (iv) rationally believed that the decision was in best interests of the company
    Further to this under {s 237(4) Corporations Act} defines a person as a third party it:
          o (a) the company is a public company and the person is not a related party of the company as defined in s 288
          o (b) the company is not a public company and the person would not be a related party to the company if the company were
                public
    This presumption only applies to third parties being involved in the proceedings
          o Current directors are related parties but former directors (> 6 months {s 228(5)}) and other officers and employees are
                NOT related parties {s 228(2)}
    This presumption recognises that if a claim is NOT against one of the directors the directors will generally be in a better place than a
     court to determine whether to bring action
          o However by using the term “related party” it opens up the possibility of directors who have been out of office for >
                6months will be third parties and these presumptions would apply for proceedings brought against them
C.7 Serious Question to be Tried {s 237(d) Corporations Act}
    This requirement does not mean the applicant has to prove the substantive issues (for example that the director has breached a duty)
    The applicant is only required to show that proceedings should be commenced – designed to prevent frivolous claims {Explanatory
     Memorandum to CLERP 1998 Bill}
C.8 Notice of Proceedings to the Company
    Criterion is meant to allow the company time to address the applicant‟s concerns prior to the court hearing the matter
    Failure by the company to take action may support the court arriving at the conclusion that the company probably would not itself
     take proceedings {Explanatory Memorandum to CLERP 1998 Bill}
C.9 Effect of Ratification by Members
    Under {s 239(1) Corporations Act} if the members of a company ratify or approve conduct, the ratification or approval does not
     prevent a person from applying for leave, or if leave has been granted, from bringing or continuing with proceedings
    Instead ratification is simply a factor which the court will consider and take into account in deciding an application for leave
    Court will have regard to {s 239(2) Corporations Act}
          o (a) how well informed about the conduct the members were when deciding to ratify or approve their conduct
          o (b) whether the members who ratified the approved conduct were acting for proper purposes
C.10 Powers of Court
    The court is given broad powers to ensure that the SDA process is not abused
    Leave of the court is required to discontinue or settle an action {s 240 Corporations Act} – thereby precluding nuisance claims or
     attempts by directors to buy off the shareholder
    Under {s 241(1) Corporations Act} the court has express powers to:
          o (a) make interim orders
          o (b) directions about the conduct of proceedings, including requiring mediation
          o (c) order directing the company, or an officer of the company to do or not to do any act

                                                                                                                                           4
                                                                                                                 Shareholder Remedies

          o    (d) an order appointing an independent person to investigate and report to the Court on:
                        (i) the financial affairs of the company
                        (ii) the facts or circumstances which gave rise to the cause of action the subject of the proceedings
                        (iii) the costs incurred in the proceedings by the parties to the proceedings and the applicant
C.11 Costs
    Finally under {s 242 Corporations Act} the court may make any orders it considers appropriate about costs at any time “in relation
     to proceedings brought” under s 237, for:
           o (a) the person who applied for or was granted leave
           o (b) the company
           o (c) any other party to the proceedings or application
    Remember that this is the maximum “compensation” that a shareholder can receive under SDA, and any compensation for breach of
     a civil penalty provision will be paid to the company
    Note that {Ramsay and Saunders} found that only 15.8% of applicants whose leave applications were successful got full costs back
     and 5.3% got part costs back
D. Injunctive Relief
    Under {s 1324 Corporations Act} an injunction may be sought to restrain a threatened contravention of the Act
    Under {s 1324(1) Corporations Act} where a person has engaged, is engaging or is proposing to engage in conduct that constituted,
     constitutes or would constitute:
           o (a) a contravention of this Act; or
           o (b) attempting to contravene this Act; or
           o (c) aiding, abetting, counselling or procuring a person to contravene this Act; or
           o (d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or
           o (e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act;
                 or
           o (f) conspiring with others to contravene this Act;
    the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant
     an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct
     and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.
    This would include:
           o A threatened breach of civil penalty provisions
    An application may be made by ASIC OR a person whose interests have been or would be affected by conduct
    There have been inconsistent decisions regarding whether this remedy is only available to ASIC or whether interested persons
     such as shareholders may also bring an action in respect of breach of civil penalty provisions
    Some view this as a kind of statutory derivative action
    In {Messenberg v Cord Industrial Recruiters, Young J} held that members cannot seek an injunction under s1324 because it was
     Parliament‟s intention that the civil penalty regime, providing ASIC with exclusive standing was exhaustive
           o The availability of s 1324 to shareholders would be inconsistent with this
    HOWEVER in {Airpeak v Jestream, Enfield J} completely rejected this approach by stating that given the broad terms of s 1324,
     its injunctive relief is available to shareholders
    In light of other remedies available to members, and particularly the oppression remedy, it seems unlikely that the potential of s
     1324 will be explored or resolved
E. Personal Actions
    Unlike derivative actions, where a shareholder only has standing to bring action if granted leave by the court, and where any benefit
     of the litigation goes to the company – where a shareholder sues in their personal capacity, their standing is automatic and if the
     action is successful any damages are awarded to them personally
E.1 Personal Actions under General Law
    There are three main situations where shareholders have standing to bring a personal action in equity
           o (1) Where the shareholder can establish that the director owed them specifically a “special fact” fiduciary relationship
           o (2) Where allotment of shares are made for an improper purpose
           o (3) Where the company exercises a power to alter the constitution in a way that harms some shareholders
    If one of these situations arise, then the shareholder will have standing to bring a personal action
(1) Instances of “Special Fact” Fiduciary Obligation to Individual Shareholders
    There is an additional fiduciary obligation to individual shareholders that may arise on the facts {Coleman v Myers}
    A “special fact” fiduciary obligation between a director and shareholder was also found in {Glavanics v Brunninghausen}
    In both cases the facts gave rise to a fiduciary duty owed by each director to a individual shareholder because the shareholders
     were selling their shares to the directors in the context of a small proprietary company
    Pursuant to {Coleman v Myers per Woodhouse J} there are four factors which if present may result in the imposition of a
     „special fact‟ fiduciary relationship:
           o (1) the dependence of shareholders on the directors‟ information and advice
           o (2) the existence of a relationship of confidence
           o (3) the significance of the transaction for the parties
           o (4) the extent to which the directors have promoted the transaction
    If each of these factors was found then a fiduciary duty to individual shareholders will exist
    Additionally under {Glavanics v Brunninghausen} Bryson J noted that there were two facts which indicated a fiduciary
     relationship as well
           o (1) Directors dealt directly with shareholders
           o (2) There were very few members, very few directors and their relationships were not impersonal but close


                                                                                                                                        5
                                                                                                                 Shareholder Remedies

    Additionally even if these factors are not there, if the shareholder was entitled to expect that he would be told of such a basic
     alteration in the company‟s affairs then this could give rise to the personal fiduciary duty
 (2) Allotment of Shares for Improper Purpose
    An allotment of shares made for an improper purpose amounts to a breach of directors‟ duties
           o As such one would expect that any action to complain about the allotment would be brought by the either the company or
                by shareholder in a SDA
    However unlike other breaches which affect shareholders indirectly, an allotment of shares for an improper purpose can have a
     direct effect on shareholders by diminishing their voting power
           o This meant that breach of this duty is treated differently and may give rise to an personal action under equity
    In {Residues Treatment} the court gave an unequivocal recognition to the existence of a personal right in a shareholder (founded in
     equity) to have the voting power of their shares undiminished by improper actions on the part of directors
           o Further ratification would be ineffective to deprive shareholders of standing to bring personal action if the shareholders
                were motivated by an improper purpose in passing the resolution {Residues Treatment per King CJ}
    Therefore where there had been an issue of shares for an improper purpose which affects some but not all shareholders, and
     therefore the shareholders could bring a personal action
    {Residues Treatment per King CJ} “a member’s voting rights and the rights of participation which they provide in the decision
     making of the company are a fundamental attribute of membership and are rights which the member should be able to protect by
     legal action against improper diminution. The rule in Foss v Harbottle has no application where individual membership rights as
     opposed to corporate rights are involved”
    This could also be brought under oppression remedy (see below)
(3) Alteration to the Constitution
    Finally the third means of personal action under general law, is for alteration to the Company constitution
    This is considered below under “Equitable Limitations on the Power of Majority Shareholders”
E.2 Personal Actions under Contract
(1) Express Contract
    Firstly a personal right may arise under an express contract between the members or between the members and the company (eg. A
     Shareholder Agreement)
(2) Company Constitution
    Secondly a personal right may arise under the company constitution as a statutory contract
    Under {s 140(1) Corporations Act} the company constitution and any replaceable rules that apply to the company have the effect as
     a contract:
           o (a) between the company and each member; and
           o (b) between the company and each director and company secretary; and
           o (c) between a member and each other member
    Under whish each person agrees to observe and perform the constitution and rules so far as they apply to that person
(3) Under Corporations Act
    Under {s 249F and 249D(1) Corporations Act} a member who holds at least 5% of the votes can call a general meeting or force
     directors to call a general meeting
    Shareholders with at least 10% of voting shares in affected class, have the right to have a variation of class rights set aside {s 246D
     Corporations Act}
    Shareholders can seek injunctive relief under {s 1324 Corporations Act}
    Remedy against oppressive conduct in Part 2F.1
F. Application to Wind-Up the Company
    Winding up the Company is another word for liquidation
    Under {s 461 Corporations Act} it deals with winding up the company on grounds other than insolvency – so it functions as a
     shareholder remedy
F.1 Who has Standing under s 461?
    Under {s 461(2)(c) Corporations Act} standing to make an application to wind up a company is given to a „contributory‟
    Under {s 9 Corporations Act} a „contributory‟ is defined to include the holder of a fully paid shares as well as a person who is
     liable to contribute to the property of the company if it were wound up
    Therefore shareholders have standing under s 461 to apply to wind up the company
    Standing is also given to the
           o company, {s 461(2)(a) Corporations Act}
           o a creditor – including a contingent or prospective creditor {s 461(2)(b) Corporations Act}
           o     the liquidator, {s 461(2)(d) Corporations Act}
           o     ASIC and {s 461(2)(e) or (f) Corporations Act}
           o Australian Prudential Regulation Authority (APRA) {s 461(2)(g) Corporations Act}
    Grounds for Winding Up
           o There are several grounds under which winding up may be sought (which may be relevant to minority shareholders)
           o     (1) Directors have acted in their own interests {s 461(1)(e) Corporations Act}
           o (2) Just and equitable grounds {s 461(1)(k) Corporations Act}
    Court may also find a ground to wind up the company based on oppressive conduct {s 461(1)(f) or (g) Corporations Act} – see next
     part
F.2 Directors Acting in their Own Interests {s 461(1)(e) Corps Act}
    The first ground for applying to wind up the company is if the directors are acting in their own interests – this is a two limb test
    Under {s 461(1)(e) Corporations Act}, winding up can be ordered by the court where the directors have acted:
          o    (i) in affairs of the company in their own interests rather than the interests of the members as a whole; or


                                                                                                                                          6
                                                                                                                Shareholder Remedies

          o    (ii) in any other manner whatsoever that appears to be unfair and unjust to other members
    This ground for winding up is seldom used in Australia – the cases in which it has been successfully relied upon have concerned
     corporate groups where the directors of the board of one company in the group have acted in the interests of another group in the
     company
           o These cases pre-date the amendment of he oppression remedy and this has much greater scope for operation
    From {Re Cumberland Holdings Ltd} s 461(1)(e) is not limited to cases where the whole board acts unanimously – it will be met
     where it is shown that the effective majority has acted in its own interests or in the interests of one or more of those board members
    Also applies where one director has in some way caused ill will to be carried into effect by the board with the end result that his
     personal interests are preferred
    A director may also be held to have acted in their own interests where they act in the interests of another company of which they
     are also director and shareholders {Re Cumberland Holdings Ltd}
    It may also apply where director shows preference for one or more shareholders
F.3 Just and Equitable Ground {s 461(1)(k) Corps Act}
    The most commonly relied upon ground is the just and equitable ground – that is it is just and equitable in the opinion of the court
     that the company be wound up
    There are four categories of just and equitable grounds – a notion that was criticised by {Menhennit J in Re Tivoli Freeholds and
     House of Lords in Ebrahimi}
    Nonetheless for convenience sake they will be discussed according to the categories
(1) Deadlock
    Where there is a deadlock of the general meeting where the shareholders are equally divided and resolutions cannot be passed
    Generally arises where there are irreconcilable differences between controlling shareholders {McMillan v Toledo}
    However in practice most companies have deadlock provisions in constitution
    In {Re Yenidje Tobacco Co} the company had two members who were also the directors and who had equal voting power. Their
     relationship deteriorated to the point where they no longer spoke to each other. The court was prepared to wind up the company on
     the basis that this was in substance a partnership and there was no other satisfactory way of resolving the deadlock between the
     parties
(2) Justifiable Lack of Confidence
    Where the directors act in a manner that leads to a justifiable lack of confidence
    This arises for conduct such as fraud, misconduct, refusal to give information to shareholders, refusal to hold general meeting,
     refusal to provide information about company‟s accounts {Loch v John Blackwood Ltd}
(3) Failure of Substratum
    Failure of substratum occurs where the company can no longer pursue the objects for which it was formed
    In these circumstances it is considered just and equitable that the enterprise be wound up and the shareholder‟s capital returned to
     them.
    This requires the court to look at the Company‟s constitution and ascertain the general intention and common understanding of
     the shareholders {Re Tivoli Freeholds Ltd per Menhennit J}
           o The constitution is the prime source to find the intention and common understanding of the shareholders as it contains the
                company‟s objects {Re Tivoli per Menhennit J}
    However it should be noted that now that objects clauses are no longer required, failure of substratum will seldom be established on
     the basis of departure from the memorandum
    However it may still be relevant where a company is formed for a single purpose and achieves that purpose
(4) Quasi Partnership Companies
    The winding up remedy was extended to situations where the conduct of the majority of shareholders represented a departure from
     common assumptions and understandings on which the company was based that were not embodied in company‟s constitutional
     documents {Ebrahimi per Lord Wilberforce}
    There is a breakdown of mutual trust and confidence between shareholders {Ebrahimi per Lord Wilberforce}
    This category will usually apply where one or more of the following elements are present {Ebrahimi}:
           o (1) Small company based on personal relationships between shareholders involving mutual confidence and trust
                         This element will be found where a pre-existing partnership has been converted into a limited company
           o (2) Agreement that all or some shareholders participate in managing the company
                         Purportedly there may be „sleeping members‟ (who act like limited partners)
           o (3) Restrictions on transfer of shares – therefore must keep shares in the family
                         So that if the confidence is lost, or one member is removed from management, that member cannot take out
                          their stake and go elsewhere
    This was extended in the landmark decision of {Ebrahimi v Westbourne Galleries Ltd}
    NOTE: Equitable considerations would not be superimposed on the terms of the articles where the association purely a
     commercial one {Ebrahimi per Lord Wilberforce}
    Here E and N had joined in the formation of a company on the basis that the character of the association would remain the same as it
     had been when they were partners – that is a personal relationship involving trust and confidence and that E was entitled to
     participate in management
    N repudiated this relationship and E thereby lost his right to share in the profits and was in that respect at the mercy of N and G
    Since there were restrictions on the transfer of shares that prevented E disposing of his interest without N and G‟s consent, the
     House of Lords held that the proper thing to do was to wind up the company
F.4 Restrictions on Using Winding Up Remedy
    Winding up is a drastic remedy, especially if the company is otherwise successful and solvent
    Under {s 467(4) Corporations Act} recognises this and provides that the court must decline to make a winding up order under s
     461(1)(e) or (k) if some other remedy is available and the applicant is acting unreasonably in seeking to have the company
     comply with winding up provisions

                                                                                                                                         7
                                                                                                                Shareholder Remedies

   Additionally under the equitable maxim, for an applicant to have a successful application to wind up a company on just and
    equitable grounds they must have clean hands {Ebrahimi per Lord Cross}
G. Oppression Remedy
G.1 Introduction
   The Court has a broad discretion under {Part 2F.1 Corporations Act} to make orders as it sees fit to protect against oppression
   This is the most important remedy for shareholders and is effectively a method of corporate divorce
   It is designed to protect fundamental rights of shareholders, particularly minority shareholders
          o These rights include the right to participate in the affairs of the company, the right to assure a return on investment, right
               to protect investment in the Company, right to monitor directors and management
   The current provision derives from UK legislation in the 1940s in recognition of the fact that winding up will not always be the
    most appropriate remedy and allowing the court a wide discretion as to the remedy given
G.2 Who can Apply?
   Under {s 234 Corporations Act} standing is given to:
          o (a) a member of the company (in any capacity)
          o (b) a former member (if they are no longer member because of selective reduction of capital)
          o (c) former member (application relates to the circumstances in which they ceased to be a member)
          o (d) a person to whom a share has been transmitted by will or operation of the law
          o (e) a person whom ASIC thinks is appropriate
   Under {s 231 Corporations Act} „member‟ is defined and essentially means a person who‟s name is on the register {s 231(a)
    Corporations Act}
   It is not necessary for the applicant to have been a member at the time the oppression took place {Re Spargos Mining}
   Applicant does not need to be a shareholder who has been adversely affected by the complained conduct {Re Spargos Mining}
   In practice most actions are brought against proprietary companies with only a few members in which members are also involved
    in management – the courts are reluctant to interfere with management decisions in commercial companies (since the appropriate
    action of a minority shareholder in such company is to sell) – nevertheless it can extend to public companies
   Also note that actions under s 232 will generally be brought by minority shareholders because majority shareholders can solve their
    grievances by voting power – however a member does not need to be a minority shareholder {Vujnovich}
G.3 Capacity in which Member is Affected
   Under both {s 232 and 234 Corporations Act} the application must be affected in their capacity as a member or in any other
    capacity
   This is intended to cover situations like in {Ebrahimi} where it could be argued that the applicant is affected in capacity as director
    not as shareholder – however under the provisions both would make the member have standing
G.4 Whose and What Conduct?
   Legislation does not specify who must be behaving in an oppressive, unfairly prejudicial or unfairly discriminator way, so that the
    oppressors may be:
          o Other members
          o Classes of members
          o Directors of company
          o Company itself
          o Holding company
   Additionally under {s 232 Corporations Act} the relevant conduct is:
          o (a) conduct of company‟s affairs; or
          o (b) an actual or proposed act or omission by or on behalf of the company; or
          o (c) a resolution, or a proposed resolution of members or a class of members of the company
G.5 FIRST Ground for an Order
   Under {s 232(d) Corporations Act} the first ground for an order is that the conduct is contrary to the interests of the members as
    a whole
   In {Re Spargos Mining, Murray J} confirmed in obiter that “contrary to the interests of members as a whole” is a distinct ground
    for relief
G.6 SECOND Ground for an Order
   Under {s 232(b) Corporations Act} the second ground for an order is that the conduct is oppressive to, unfairly prejudicial to, or
    unfairly discriminatory against, a member or members whether in that capacity or in any other capacity
   Note that the expression, “oppression to, unfairly prejudicial to or unfairly discriminatory against” is a compound expression
    {Wayde’s Case}
          o Generally its essentially feature is that of commercial unfairness {Morgan v 45 Flers Avenue Pty Ltd per Young J}
   The following are additional considerations which must be taken into account
(1) An Objective Test
   First it should be noted that whether conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory against‟ is an
    objective test
   The court examines the impact of the decision upon the member as adjudged by a reasonable bystander who is imbued with
    any special skills or knowledge possessed by the alleged oppressors {Wayde per Brennan J}
(2) Relevance of the Intention of the Oppressor
   It is not necessary to prove that the Company acted dishonestly, with bad faith or outside the powers conferred on the decision
    maker {Thomas per Richardson J}
   However the intention of the oppressor could become relevant {Wayde per Brennan J}
   The company‟s conduct does NOT need to be “burdensome, harsh and wrongful” nor “persistently illegal and dictated by self
    interest”

                                                                                                                                         8
                                                                                                                Shareholder Remedies

          o      It is sufficient for the purposes of s 232(e) that the conduct reflects unfair treatment of a group of members {Re G
                 Jeffrey per Crockett J}
    Also note that a single oppressive act or omission is sufficient
(3) Relevance of Conduct of the Applicant
    Where the applicant has a collateral purpose it may be relevant as well {Swansson}
    There could also be a possible requirement that the applicant come to the table with clean hands {Re R A Noble & Sons}
(4) Restricting Dividends [unlikely to come up]
    If the dividend payout ratio is low this will not necessarily amount to oppressive conduct particularly if the business is thriving
     under that policy and the capital gains on the value of the shares is great {Thomas per Richardson J}
    However if the dividends are being unfairly restricted then this could be oppressive {Reid v Bagot Well Pastoral Co Pty Ltd}
(5) Dissatisfaction with Management
    Dissatisfaction with management is not sufficient grounds for granting an oppression remedy {Re G Jeffrey}
    There must be an element of unfairness or discrimination in the way in which the management is acting
(6) Reasonable Expectations
    If there is a departure from the common intention or agreement of members when joining a company then the reasonable
     expectations which members have of management can mean that they are being oppressed based on their expectations formed from
     the common intention {Ebrahimi}
    Purportedly where there is an improper exclusion from management where a member had a reasonable expectation to
     participate in such a quasi-partnership company {Hogg v Dymock} this could be grounds for oppression
(7) Other Instances where Court Allows Oppression Remedy
    Oppressive conduct of board meetings, for example a Director improperly uses his influence in boardroom to promote personal
     interest {John J Starr (Real Estate) Pty Ltd}
    Overpaying directors {Sanford}
    Issuing shares for purpose of diluting a shareholder‟s voting power {Kokotovich Constructions}
    Failure to bring proceedings against directors {Re Spargos Mining}
G.7 Range of Orders the Court can Make:
    “The powers given to the court are extremely wide. They include the power to make orders regulating the conduct of the affairs of
     the company in the future. This necessarily involves the court making orders which may interfere with the internal administration
     of the company” {Jenkins v Enterprise Gold Mines NL}
    Under {s 233(1) Corporations Act} the court has a broad discretion to make any order it sees fit – non-exhaustive list
    Winding up company {s 233(1)(a) Corporations Act}
    Amending Company‟s constitution {s 233(1)(b) Corporations Act} – court can make an order that an amendment ordered by the
     court itself by altered by the Company without leave of the court {Re Spargos Mining}
    Orders “regulating the conduct of the company‟s affairs in the future” {s 233(1)(c) Corporations Act}
           o Can replace the directors of the Company to ensure “for the Company energetic, competent, independent management
                 with full and complete powers to investigate and provide such remedies to the company as are available in relation to past
                 misconduct, as well as to secure for the company, at least in the immediate future effective management skills” {Re
                 Spargos Mining}
           o Court can also order the replacement directors not be removed for a certain period {Re Spargos Mining}
    Require the purchase of shares {s 233(1)(d) and (e) Corporations Act}
           o Court can order the other shareholders to purchase the shares {Re G Jeffrey}
    Require the Company to institute, prosecute, defend or discontinue proceedings {s 233(1)(f) Corporations Act}
           o Includes proceedings against directors by company {Re Spargos Mining}
    Authorise a shareholder to institute, prosecute, defend or discontinue proceedings {s 233(10(g) Corporations Act}
           o NOTE overlap with winding up provisions
    Appoint a receiver {s 233(1)(h) Corporations Act}
           o Receiver can be instructed to investigate the conduct of the Company and institute proceedings against directors {Jenkins}
    Restrain a person from doing an act or requiring a person to do an act {s 233(1)(i) and (j) Corporations Act}
H. Comparison between Oppression and SDA
    The emphasis of the enquiry under Oppression is on the impact of the conduct on a member, as judged by a reasonable bystander
           o This is an objective test and is to be contrasted with the court‟s approach to setting aside company decisions on the basis
                 of a breach of directors‟ duties where the court focuses on the directors‟ knowledge and conduct
    An Oppression action considers the cumulative effect of the oppressor‟s conduct whereas a derivative action is concerned with
     particular wrongs
    There is no difficulty in establishing standing under Oppression, whereas applicants for SDA must have obtained leave from the
     court
    The court has total discretion as to the appropriate relief in relation to an oppression action whereas the result of a successful SDA
     will generally be a monetary compensation for the company
I. Essay Quotes
    Since the introduction of Statutory Derivative Action there has not been a significant rise or upward trend in the increase of cases
     {Ramsay and Saunders}
    In 38.7% of cases, the applicant was a shareholder who was NOT a current or former director {Ramsay and Saunders}
    87% of the cases were involving private companies {Ramsay and Saunders}
    Additionally in 71% of cases of SDA, there was NOT an additionally Oppression application also brought {Ramsay and Saunders}




                                                                                                                                         9
                                                                                                               Shareholder Remedies

 EQUITABLE LIMITATIONS ON THE POWER OF MAJORITY SHAREHOLDERS
A. Introduction
   There is a conflict between the principle of majority rules against the individual rights of shareholders in the context of the
    corporation
   This is particularly so because the majority of votes can be bought and is based on financial ability rather than normal attributes of
    equality under democratic notions
   Whilst in theory a minority can always just leave the company if they are not happy with the decisions of the Company but in
    reality that is not possible for companies not listed on the stock exchange (no market for shares)
   The equitable limitation of the power of majority shareholders aims to address instances where some injustice is committed against
    the minority due to wishes/actions of the majority
   Its should also be noted that the equitable limits on the power of the majority are a grounds for personal action in equity
B. Development of the Equitable Principle
   The courts have always recognised two principles in relation to shareholder voting:
          o (1) Shareholders are not in a fiduciary relationship with other shareholders
          o (2) A share is a right of property which can be exercised in the holder‟s self interest
   Old Test: {Allen v Gold Reefs of West Africa}
          o Shareholders must exercise their power to alter the articles of the company “bona fide for the benefit of the company as a
               whole”
          o This implies that shareholders owe a duty to each other to act in their interests as well „as a whole‟
   Later Test: {Peters American Delicacy v heath per Dixon J}
          o Shareholders are not in a fiduciary relationship with the company and majority shareholders are not in a fiduciary
               relationship with minority shareholders
          o Therefore it is not a positive requirement that must be fulfilled by members who vote in favour of an alteration
   Current Test: {Gambotto v WCP}
          o HCA have rejected Allen v Gold Reefs and have distinguished between two categories of majority falling within the
               equitable constraint on their power:
                         (1) Altering the constitution
                         (2) Ratification of certain breaches of director‟s duties
C. Categories of Majority Conduct Falling within Equitable Constraint
C.1 Altering the Constitution
   Under {s 136(2) Corporations Act} the company may modify or repeal its constitution or a provision in the constitution by special
    resolution (75%)
          o Further under {s 136(3) Corporations Act} the constitution may provide further requirement (eg. Demand a unanimous
               vote in favour of the constitution
          o Then under {s 136(4) Corporations Act} this further requirement must be complied with even when the resolution is about
               it being repealed
   Therefore a majority of shareholders would have significant power when trying to push through constitutional amendments – hence
    in the following instance (Expropriation) equity places limits on this power and it must meet certain requirements
   There is a limitation on the power of majority shareholders to alter the constitution for the purpose of expropriation of minority
    shares or valuable rights attaching to minority shares {Gambotto}
   TEST {Gambotto}: Amendment of constitution to include an expropriation power will be VALID if:
          o (a) the expropriation power is exercisable for a proper purpose AND
          o (b) the exercise of the power will not operate oppressively in relation to the minority shareholders – it must be fair in the
               circumstances
(1) What is a “Proper Purpose”?
   Expropriation is a reasonable means to prevent a detriment to the Company if:
          o The continued shareholding of the minority could be detrimental – ie. The minority shareholder is a competitor
          o Expropriation is necessary to allow Company to continue its present business – ie. Compliance with foreign ownership
               restrictions
          o If exercising the power will avoid insolvency
   BUT: The majority cannot use their power to expropriate the minority simply to make money
          o Not allowed to “expropriate the minority merely in order to secure for themselves the benefit of a corporate structure that
               can derive some new commercial advantage by virtue of the expropriation” {Gambotto}
   However note the dissenting judgment in {Gambotto}
          o “No distinction should be drawn between expropriation that will enable a company to pursue a beneficial course of action
               that would otherwise be denied to it and expropriation that avoids a detriment to the existing interests of the company”
(2) Expropriation must be „Fair in All Circumstances”
   For the expropriation to be fair in all the circumstances, procedural AND substantive fairness need to be present
   Procedural fairness will include:
          o Full disclosure of the purpose of the transaction (including balanced case for the transaction)
          o Independent value of the shares
   Substantive fairness will involve
          o Examination of whether adequate consideration was given for expropriation – ie “fair price”
          o Expropriation at less than market price is prima facie unfair
(3) Consequences of Illegal Expropriation
   The consequences of an illegal expropriation include:
          o Breach of duty of care (failure to comply with mandatory procedures)
          o An exercise of the amended constitutional powers will be invalidated on the basis of oppression

                                                                                                                                      10
                                                                                                                 Shareholder Remedies

(4) Under Statute: Equitable Limitations on Majority Power
    Under {s 140(2) Corporations Act} unless a member of a company agrees in writing to be bound, they are not bound by a
     modification of the constitution made after the date on which they became members so far as the modification:
          o (a) requires the member to take up additional shares
          o (b) increases the member‟s liability to contribute to the shares capital or otherwise pay money to the company
          o (c) imposes on increase restrictions on the right to transfer the shares already held by the member unless the
                modification is made:
                          (i) in connection with the company‟s change from public to proprietary company
                          (ii) to insert proportional takeover offer approval provisions into the company‟s constitution
    Therefore even under statute there are limitations on what the majority can do to the constitution
C.2 Ratification
    The other category identified in {Gambotto} was using majority shareholder power to ratify breaches of director and Company
     conduct
    Shareholders can exercise their voting rights meaning that shareholders can vote in simple (50% or special (75%) resolutions at
     general meetings
    Their duty to the company is not fiduciary and may be exercised selfishly {Peters per Dixon J}
    Therefore shareholders of a Company can vote to ratify (ie. Forgive) SOME breaches of duty by the directors, however:
          o ANY vote is ineffective if the company is insolvent
          o Furthermore these votes have no impact on ASIC‟s ability to pursue directors (but will release them under general law)
(1) Types of Breaches which Shareholders CAN Ratify
    Majority shareholders can ratify the following general law breaches
          o Duty of care, skill and diligence {Coleman v Myers; Residues Treatment}
          o Duty to exercise powers for proper purpose
                          This is particularly the case where shares have been issued to a friendly party to frustrate hostile takeover bid
                           {Hogg}
                          BUT if majority shareholders are involved in the breach, then the purported ratification amounts to fraud on the
                           minority or oppression and the ratification will be void {Ngurli; Residues Treatment}
          o Duty to avoid conflicts of interest
                          This is particularly the case for a business opportunity which the Company is unwilling to exploit {Cook v
                           Deeks; Peso Silver Mines}
                                      However where a company is financially unable to exploit an opportunity then this breach cannot be
                                       ratified {Regal (Hastings)}
                          Or where the director has made a secret profit but has not misappropriated property of the company {Furs}
                          Or where the Company purports to enter into a contract with entity which the director has a personal interest
(2) Types of Breaches which Shareholders CANNOT Ratify
    Majority of shareholders cannot ratify the following breaches
          o Duty to act in good faith and in the best interests of the Company
                          For example a transaction by an insolvent (or nearly insolvent) company that prejudices creditors of the
                           Company cannot be ratified by the majority of shareholders {Kinsela; Sycotex}
          o General law duties to creditors
                          Where a company is insolvent or near insolvency creditors interests “are paramount” {Walker v Wimbourne}
                          So shareholders would be wanting to get as much as possible before insolvency because after creditors get
                           priority, however you cannot ratify this
          o Duty to exercise powers for a proper purpose
                          If the majority shareholders ARE directors as well involved in the breach then the purported ratification
                           amounts to:
                                      Fraud on the minority {Ngurli}
                                      Oppression of the minority {Residues Treatment}
          o Statutory Directors Duties
                          Breaches of statute cannot be ratified {Miller v Miller} because of the underlying impression that civil penalty
                           provisions and criminal sanctions mean that the offence is against stakeholders not just company shareholders
(3) How can Shareholders Ratify a Breach?
    Ratification has to be made by shareholders voting in a general meeting
    In order for ratification to be effective it must not be brought about by unfair or improper means
          o Therefore the general meeting must be fully informed about the relevant conduct before the resolution is passed
          o Only disinterested shareholders can vote {Miller v Miller}




                                                                                                                                        11

								
To top