busn7057 week 5 2013.ppt
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BUSN7057
Restrictions on member decision making
Company Directors
Restrictions on members Voting rights
Members may exercise voting rights in their own self-interest (even if they are also directors)
Yet, restrictions are needed for two reasons: to stop unfair exploitation of minority
shareholders by majority not always possible for minority to sell
How does the law protect the minority? Equitable limitation on majority voting power
(including Gambotto) Procedural requirements – eg for holding meetings
or reducing share capital Voting restrictions – eg on aproavl of related party
transactions Protection of members’ personal rights – see text ch
16 Statutory protections -see ss 232 oppression remedy
and s 236 (statutory derivative action) text ch 16 Limits on power of the majority to ratify breaches of
directors’ duties – see text ch 15.
The equitable limitation Not a positive duty, not a fiduciary duty Rule: if majority passes a resolution
which no group of reasonable people would think is within majority’s power, with regard to the purpose of the company, a court can declare the resolution void (invalid)
Sometimes overlaps with oppression remedy
Cases other than amendment of constitution Taking the company’s property:
Breach of equitable limitation to use voting power so as to give themselves property, advantages or rights belonging to the company: Ngurli Ltd v McCann (1953)
Preventing the company taking action against them: Breach of equitable limitation to use their voting
power to prevent the company taking legal action against them where they have acted improperly: Biala Pty Ltd v Mallina Holdings Ltd (No 2)
Amendments to constitution
Even where s 136 is complied with, amendment may be invalid due to equitable limitation
The important case of Gambotto deals with: amendments that expropriate shares other amendments that give rise to
conflict
Members’ voting Gambotto v WCP Ltd
(1995) 13 ACLC 342 Majority passed a resolution for compulsory acquisition by IEL of other shares – in order to get tax advantages (of around $4 million) only available if it was a wholly owned subsidiary
Price to be paid was $1.80 above the valuation of $1.36
IEL did not vote Mr Gambotto did not
attend or vote
Mr G0.09%
Others0.21%
IEL 99.7%
WCP
Gambotto establishes different tests for different amendments
Category 1 amendments: Amendments to allow expropriation of minority’s shares; or valuable proprietary rights attached to
their shares (eg voting or dividend rights)
Category 2 amendments: Other amendments involving a conflict of interest
Category 1 amendments
Are only valid if: proper purpose, and no oppression of minority
shareholders Proper purpose test is very
restrictive – advancing company’s commercial interests is not enough
Category 1 amendments Note that statutory procedures have
been introduced since Gambotto to allow compulsory acquisition of shares by 90% shareholder – consistent with provision in post take-over context.
Category 1 (cont)
The only “proper purpose” recognised by the court is to prevent harm being done to company, eg: minority s/h is competing with
company removal of member is necessary to
allow company to continue in present business
Category 1 (cont)
Also must show that there was no oppression. This requires: procedural fairness – full disclosure
and independent valuation substantive fairness – price is fair
(may not always be market value)
Decision in Gambotto
Mr Gambotto was successful because the attempted expropriation of shares was not for a proper purpose even though there was procedural and substantive fairness.
He was not causing significant detriment or harm to the company.
Decision in Gambotto The court gave 2 examples of what would
be a proper purpose for the expropriation of shares:
The minority shareholder is competing with the company.
Where it is necessary for the company to comply with the law eg compulsory expropriation of shares owned by foreign shareholders in a media company where the law requires 100% Australian ownership.
Example of category 1 amendment Eg Bundaberg Sugar Ltd v Isis Central
Sugar Mill Co Ltd (2006) 24 ACLC 1,550. text 194
The company’s constitution required members to dispose of their shares if they no longer supplied sugar to Isis – purpose was to retain tax benefits available to it only if it retained its status as a co-operative. That was held to be a proper purpose.
Category 2 amendments
Are only valid if : done for a company purpose, and no oppression of minority
shareholders More “purposes” are valid here
compared with Category 1
Example of Category 2 amendment (pre-dates Gambotto)
Peter’s American Delicacy v Heath (1939) 61 CLR 457 Where the alteration does not involve an expropriation of shares it will be valid unless it is either beyond any purpose contemplated by the constitution or oppressive. Constitution was changed so that bonus shares were distributed according to the amount paid up on the shares rather than on the number of shares held. Reasonable opinions might differ.
Directors Must be a natural
person over 18 s 201B
s 201A Public companies –
min 3 drs (2 resident in Australia)
Pty company – min 1 dr resident in Australia
Directors
The role of director will vary depending on the size of the company
In larger companies directors will set the strategic direction and appoint managers to implement that.
Officer of a corporation S9 definition of officer (wider than defn of
director – focuses on function) Director or secretary Person
Who makes or participates in decision that affect a substantial part of the company’s business
Who has the capacity to affect the corporation’s financial standing
In accordance with whose instructions or wishes the directors are accustomed to act.
Company secretary Public co min 1
secretary resident in Australia s 204A(2)
Appointed by directors s 204D
Pty cos may have a secretary but not required by legislation
Company secretary Role of company secretary Responsible for record-keeping
within a company such as maintenance of registers (eg register of members) required to be kept by the Corporations Act
Responsible for keeping of minutes of meetings
Types of directors Definition of director s
9 Appointed to position of
director Appointed to position of
alternate director and is acting in that capacity
A person not validly appointed if
They act in the position of director (de facto) or
The directors are accustomed to act in accordance with the person’s instructions or wishes (shadow)
Types of directors De facto
Corporate Affairs Commission v Drysdale (1978) 141 CLR 236director appointed to fill casual vacancy until next AGM but continued to act in office after that date without being re-elected – charged with breach of directors’ duties – unsuccessfully argued he wasn’t a director
Types of directors Shadow
Standard Chartered Bank of Australia Ltd v Antico (1995) 13 ACLC 1381Pioneer International Ltd found to be a director of Giant Resources Ltd because in fact it exercised extensive management control even though it was not majority shareholder
Types of directors Executive – full-
time employee Non-executive –
part-time, not part of senior management
Independent – non-executive and no other relevant connection which would influence independence
Types of directors Managing director (CEO) ss201J and 198C(RR)
– Board member and full-time employee appointed by drs Usual function to deal with every day matters, to
supervise the other managers and be in charge of the company’s business Entwell’s Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424
Types of directors Chair of the board
ASIC v Rich [2003] NSWSC85Role of the chair
Leadership Agenda setting Monitoring management and company’s financial
position Provision of financial information Information to board about cash reserves Appointment of finance director public statements and compliance with Listing Rules
Types of directors Governing director – position
may be established in the constitution which gives that person very extensive powers of management – more common in pty companies
Alternate director s201K (RR) – gives power to director to appoint an alternate for a specified period (eg to cover absence or sickness)
Nominee director – represents a particular group (eg creditor or employees) but still has overriding duties to the company as a whole
Appointment of directors Director must be
an individual who is 18 s 201B and must give signed consent to appointment s 201D and not be disqualified.
Appointment of directors Members in general meeting pass an
ordinary resolution appointing directors s 201G (RR)
Appointment by directors s 201H (RR) Pty co – members must confirm within 2
months or appointment lapses Public co – must be confirmed by members
at next AGM
Resignation and removal of directors Resignation on giving written notice s 203A Removal
Pty co - s 203C - members in general meeting may remove a director but other provisions of the constitution may affect thatHopkins v Foster (2002) 20 ACLC 396 – removal of dr was restrained because then there would be less than the min no of independent drs required by the company’s constitution.
Public co – s 203D – members in general meeting may remove a director despite the constitution or other agreements but the procedure must be followed which gives the director a right to make a written statement and put his or her case to the meeting.
Disqualification – automatic s 206B Conviction of an indictable
offence concerning the making of decision affecting the business of the corporation or its financial position
Conviction of an offence Against the Corporations
Act > 12 mths prison Involving dishonesty > 3
mths prison Conviction of an offence
against law of foreign country > 12 months prison
Undischarged bankrupt or entry into Part X arrangement
Period of disqualification 5 years post
conviction or post release s 206B (2)
ASIC may apply to the court to extend the period up to an additional 15 years s 206BA(2).
Disqualification on application of ASIC to the court
Contravention of civil penalty provision s 206C ( see s 1317E – includes directors’ duties)
court has discretion about whether to disqualify and the period of disqualification
Disqualification on application of ASIC to the court Failed companies -
Insolvency and non-payment of debts s 206D
Within last 7 years person has been an officer of at least 2 corporations which have failed
Management was at least partly responsible for the failure and
Disqualification is justified
Disqualification for up to 20 years
Disqualification on application of ASIC to the court Repeated contraventions of the
Corporations Act s 206E At least twice been an officer of a
corporation that has contravened the Corporations Act and the person failed to take reasonable steps to prevent the contravention
At least twice contravened the Corporations Act while being an officer of the corporation
Disqualification on application of ASIC to the court
Repeated contraventions cont
Court has discretion whether to disqualify and in relation to the period of disqualification
Disqualification on application of ASIC to the court Factors to be taken into account
ASIC v Adler [2002] NSWSC 483Adler was found to have breached his statutory duties in ss 180 – 182 he was disqualified from being a director for 20 years. The court looked at the following factors when determining period of disqualification:
Protection of public from harmful use of corporate structure Safeguarding public interest in transparency and
accountability of companies and in the suitability of drs to hold office
Personal and general deterrence but not punitive In assessing fitness to manage a co it is necessary that
directors understand proper role of director and duty of due diligence
Seriousness of contravention and risk of reoffending Personal hardship to be balanced against public interest
Disqualification on application of ASIC to the court
ASIC v Adler [2002] NSWSC 483 Longer periods of disqualification
justified in circumstances including: Large financial losses dishonesty
Disqualification on application of ASIC to the court ASIC v Vizard (2005)
FCA 1037Steve Vizard admitted misusing his position on the board of Telstra by insider trading in shares of companies dealing with Telstra. The trading was deliberately concealed by use of a company and accountant. The insider trading actually resulted in a net loss due to a general fall in the stock market for tech cos.
ASIC v Vizard (2005) FCA 1037 per Finkelstein J “This brings me to the issue of disqualification. It
is my view that a disqualification for five years as suggested by ASIC is not sufficient. Although specific deterrence is generally not in issue here, general deterrence is of primary importance in cases of this kind. A message must be sent to the business community that for white collar offences "the game is not worth the candle". That is, the period of disqualification should reflect the need to protect society from the kind of unlawful conduct engaged in by the defendant. In my view the appropriate period of disqualification is ten years.”
ASIC’s own power of disqualification s 206F Within last 7 years the person has been
an officer of at least 2 corporations and while an officer or within 12 months of ceasing to be an officer, a liquidator’s report is lodged under s 533 regarding the corporation’s inability to pay its debts
ASIC has given notice Disqualification justified Disqualification up to 5 years
Breaching a disqualification order S 206A a person who is disqualified from managing a
corporation commits an offence if They make or participate in decision that affect at
least a substantial part of the corporations’ business They exercise the capacity to affect significantly the
corporations’ financial standing They communicate instructions (other than in a
professional capacity) or wishes to the directors knowing or intending that the directors will act in accordance with those instructions.
Contravention may result in a fine of up to $5,500 or imprisonment for up to 1 year or both.
Proceedings of the board Directors’ meetings
ss248C, 248F (RR) – called by director – quorum is 2
Informal decisions s 248A - resolution signed by all directors effective without a meeting
Vrisakis v ASC (1993) 11 ACSR 162A dr is expected to attend all meetings unless exceptional circumstances such as illness or absence from the State prevent him or her from doing so
Proceedings of the board
Delegation of powers ss 198D, 190 – permissible but responsibility rests with drs unless believed on reasonable grounds that person would act in compliance with law and was reliable and competent
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