Corporate Law 9 - Lecture notes 9 PDF

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Corporate Law 9...

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MEMBERS’ REMEDIES  Where directors breach their duty to the company:  Personal action (if affects members’ personal rights).  Derivative action (if doesn’t affect members’ personal rights).  Oppression remedy (if unfair conduct).  Where directors or majority members act to the unfair detriment of minority members (without breaching any duties):  Oppression remedy: s 233.  Winding up action: s 461.  Equitable limitation on abuse of majority voting power: Gambotto.

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Directors were responsible for the company’s success  reasonable for them to take high salaries that weren’t excessive. Improved revenue + directors reviewed their own remuneration up  oppressive to not have reviewed the dividend policy. Minority was associated with competitor  not oppressive for directors to refuse their request for information. Order: Majority shareholder buys shares of minority at a price including goodwill.

Remedies  S 233(1): The Court can make any order under this section MEMBERS’ STATUTORY REMEDIES that it considers appropriate, including an order:  (a) that the company be wound up;  (b) that the company’s existing constitution be Oppression remedy modified/repealed; Who may apply  (c) regulating the company’s affairs in future;  (d) for the purchase of shares by any member;  S 234: An application for an order under s 233 may be made  (e) for the purchase of shares with an appropriate by: reduction of share capital;  (a) a member of the company, even if the application  (f-g) for the company (or authorising a member in the relates to an act or omission against (i) the member in a name of the company) to institute, defend or discontinue capacity other than as member; or (ii) another member in specified proceedings; their capacity as member;  (h) appointing a receiver;  (b) a person removed from the register because of a  (i) restraining a person from engaging in a specified selective reduction; conduct/act.  (c) a past member if the application relates to  (j) requiring a person to do a specified act. circumstances in which he ceased to be a member;  Court will determine the purchase price of shares by:  (d) a person to whom a share in the company has been  Excluding the effect of the oppressive/unfair conduct on transmitted by will or operation of law; the share price (Scottish Co-operative v Meyer); and  (e) a person whom ASIC thinks appropriate having  Including goodwill (Shamsallah Holdings v CBD). regard to investigations it conducted into the company’s affairs. Successful pleas of oppression  Roberts v Walter Developments: Failure to pay dividends Grounds for remedy when the directors are paid excessive salaries and minority  S 232: The Court may make an order under s 233 if: member reasonably expects dividends.  (a) the conduct of a company’s affairs; or  Hogg v Dymock: Minority member excluded from  (b) an actual or proposed act or omission by or on behalf participating in management when the parties were expecting of a company; or to work in a quasi-partnership.  (c) a resolution or proposed resolution of members;  John J Starr v Robert R Andrew: Manner in which the is either: managing director conducted board meetings.  (d) contrary to members’ interests as a whole; or  Kokotovich Constructions v Wallington: Share issue in  (e) oppressive to, unfairly prejudicial to, or unfairly breach of duties to reduce a shareholder’s proportionate discriminatory against, member(s) in any capacity. interest  wind up.  Wayde v NSW Rugby League: s 232 is satisfied if directors  Scottish Co-operative Wholesale Society v Meyer: Diversion make a decision which reasonable directors would think to be of corporate opportunity by directors that worsened unfair. company’s operations  majority buy shares of minority.  *Company’s directors sought to remove a member from  Sanford v Sanford Courier Service: Majority shareholders + a competition. Constitution allowed it. directors diverted business away to another company of  *Removal would result in severe financial detriment to which they were the sole directors & shareholders. the member.  The board made decisions in good faith and for a proper  Re Spargos Mining: Directors breached fiduciary duty by causing the company to enter into transactions devoid of any purpose. commercial benefit to the company  replace directors &  Although the directors imposed a disadvantage on a investigate whether should take action against former member, it was a decision a reasonable board would directors. have made  not unfairly prejudicial.  S 232 is satisfied if the directors impose a disadvantage, disability or burden on a member that is unfair according Unsuccessful pleas of oppression to ordinary standards of reasonableness & fair dealing.  Re HW Thomas: Conservative management style with low dividends was not enough.  Shamsallah Holdings v CBD  *Directors paid themselves high salaries, restricted  Dosike v Johnson: Company only paid salaries to directors dividends, and prevented minority from accessing who work in the business, and not to a director who did information. nothing.  *Company had been commercially successful.

MEMBERS’ REMEDIES  Re G Jeffrey: Majority’s refusal to buy minority’s shares is not, by itself, unfair.  Wayde v NSW Rugby League: Board’s decision that carry detrimental/harsh consequences for one member  reasonable & fair.

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(a) the company will probably not bring the proceedings itself;  (b) the applicant is acting in good faith;  (c) granting leave is in the company’s best interests;  (d) there is a serious question to be tried; and  (e) at least 14 days before the application, the applicant gave notice to the company of the intention to apply for leave & the reasons for applying; or it is appropriate to Winding up grant leave even though notice was not given.  S 461(1): A member may apply to the court to order the  S 237(3): Granting leave is presumed not to be in the winding up of a company, if: company’s best interests if:  (e) the directors are acting in their own interests;  (a) the proceedings are between the company & a 3rd  (f) the affairs of the company are being conducted in a party; manner that is oppressive, unfairly prejudicial or unfairly  (b) the company decided not to bring/defend/settle the discriminatory. proceedings; and  (g) the act/omission, proposed act/omission, resolution  (c) all the directors participating in that decision: or proposed resolution of members was/would be  (i) decided in good faith for a proper purpose; oppressive or unfairly prejudicial or discriminatory.  (ii) did not have a material personal interest in the  (k) it is just & equitable to do so. decision;  S 467(4): The court must not wind up the company if it  (iii) informed themselves about the decision’s believes that some other remedy is available and the subject matter to the extent they reasonably believed applicant is acting unreasonably in seeking winding up to be appropriate; and instead of pursuing that other remedy.  (iv) rationally [ie. reasonably] believed that the decision was in the company’s best interests.  Chapman v E-Sports Club: Obtaining leave is difficult. Injunction  *E transferred intellectual property for nominal  S 1324(1): On application of the ASIC or a person whose consideration & without director’s consent. interests is (or would be) affected, the court may restrain a  *Director applied for leave to bring a derivative action. person from engaging in conduct that contravenes (or would  Transaction was done for good commercial reasons + contravene) the Corporations Act. director was not harmed by the transaction + no affidavit  Mesenberg v Cord Industrial Recruiters: Members  he was attempting to use the proceedings to put cannot apply for a s 1324 injunction to restrain pressure on the other parties to buy him out. contraventions of civil penalty provisions.   Not acting in good faith + Leave is not in company’s  Airpeak v Jetstream Aircraft: Members & creditors can best interests + No serious question to be tried  leave apply for a s 1324 injunction to restrain breaches of civil not granted. penalty provisions.  S 1324(10): The court has power to award damages in Ratification by general meeting addition to, or instead of, an injunction.  S 239(1): Ratification/approval of conduct by members does not prevent a person from seeking leave to bring proceedings on behalf of the company under s 237. Rights arising on variation/cancellation of rights  S 239(2): The court may take members’ ratification/approval attached to shares - s 246D of conduct into account in deciding whether to give leave under s 237, or in proceedings brought under s 237. In doing Inspection of books this, the court must have regard to:  S 247A(1): A member has a right to apply to the court for an  (a) how well-informed the members were when deciding order allowing the member to inspect the company’s books. to ratify/approve the conduct; and The court may only make the order if it is satisfied that the  (b) whether the members who ratified/approved the member is acting in good faith & the inspection is made for a conduct were acting for proper purposes [eg. voting proper purpose. majority were the wrongdoers]. During the proceedings authorised by s 237  S 240: Proceedings brought with leave must not be discontinued, compromised or settled without the court’s leave.  S 241(1): The court may make orders & give directions concerning the conduct of the proceedings, including Who may bring proceedings on behalf of the company requiring mediation.  S 236(1): A member, former member, or person entitled to be  S 242 gives the court a broad discretion in making cost orders in relation to proceedings or leave under s 237. registered as a member, of a company or of a related body; or an officer or former officer of the company; may apply to the court for leave to bring proceedings on behalf of the company. Derivative action  S 236(3): General law derivative action rules are abolished.  Advent Investors v Goldhirsch: Part 2F.1A operates retrospectively because it is merely procedural.

Grounds for granting leave to bring proceedings  S 237(2): The court must grant the application if:

MEMBERS’ REMEDIES

MEMBERS’ GENERAL LAW REMEDIES Members’ personal rights  Where actions of directors or other members are detrimental to a member’s interests personally in his capacity as member, he may bring a personal action (under an exception to the rule in Foss v Harbottle).  Where the member is enforcing a personal right enjoyed by many other members, a class action may be pursued.  Members’ personal rights include:  Pender v Lushington: Members have a personal right to vote at general meetings, subject to constitution.  Residues Treatment & Trading v Southern Resources: Members have a personal right to have their voting power protected against the improper action of directors.  *Directors issued new shares for an improper purpose.  Not only is there a breach of duty; individual shareholders can also bring personal actions.  Glavanics v Brunninghausen: A member can bring a personal action against a director who breaches a fiduciary obligation owed to the member.  *Director bought a member’s shares without disclosing that he would sell those shares at a higher price.  Breach of fiduciary duty to member  member brings personal action.  Rights arising from contract with other members or the company (including constitution: s 140(1)). Equitable limitation on abuse of majority voting power  Peters’ American Delicacy v Health: Members generally may exercise their voting power in their self-interest. But it is fraudulent for a majority to use their voting power for their own gain that is outside the contemplated objects of the power.  Gambotto v WCP: Exercise of majority voting power to alter the constitution for the purpose of expropriating the shares of a minority, is only valid if:  It is for a proper purpose; and  It is fair in the circumstances. The minority shareholders have a personal action.  The Corporations Act allows shares of a minority to be expropriated by:  Selective reduction of capital (s 256B-C);  S 664A: A person who holds at least 90% of a company’s total voting power, and at least 90% of the securities in a particular class, may compulsorily acquire the remaining shares in that class.  S 664A(4): This power applies despite anything in the constitution.  S 664AA: This power can only be exercised within 6 months of the person gaining sufficient securities to be able to exercise it....