Research question: Does the doctrine of ratification remain relevant and appropriate to companies incorporated under the Corporations Act 2001?
Introductory paragraphs to Chapters 2 -9
I.Chapter 2 – The Doctrine of ratification and its legal effect
Pursuant to the doctrine of ratification, a shareholder who is also a director of the company may vote at a general meeting of the shareholders to approve a ratification resolution in respect of their own breach of fiduciary and/or statutory duty as a director of the company. The Australian jurisprudenceThere are no decisions in Australia or the United Kingdomdoes notwhichsuggest have found that the director’s conduct in their capacity as a shareholder amounts to a fraud on the minority, a conflict of interest, or that a shareholder owes any fiduciary duties to each other shareholder or to the company[M1]. Further, there are no Australian cases in Australia or the United Kingdom where restitution for unjust enrichment has been claimed against a director because of detriment caused to a company arising from the approval of a ratification resolution.
In the context of public and private companies incorporated[M2] under or now governed by the Corporations Act, a shareholder may therefore under Australian jurisprudence exercise their vote unrestrained by good corporate governance principles[M3] and equitable principles[M4] unless that conduct is not ratifiable because, for example the conduct was within the meaning of oppressive conduct pursuant to section 232 of the Corporations Act, unlawful (including because of actual, constructive or equitable fraud[M5], an abuse of power or a breach or threatened breach of the Corporations Act or a breach of a director’s duties), a fraud on the minorityor was an expropriation of the company’s property.
Arising from the different legal contexts in which the word ‘ratification’ is used, the doctrine of four possible meanings of ratification is then[M6]defined and the scope of its applicability to companies is considered[M7]. An understanding of the legal effect of the doctrine a ratification resolution provides a basis for the later consideration of whether shareholders and creditors a company’s stakeholders may suffer any prejudice as a result of the operation of the doctrine and whether as a result of the identified prejudice there should be law reform in Australia.
In this Chapter, the continuing relevance of the doctrine of ratification to companies incorporated under the Corporations Act [M8]is considered for the purpose of describingand thethe essence of the differences between retrospective ratification and prospective authorisation [M9]of a breach of fiduciary and statutory duty is discussed. and setting out how ratification and authorisation may arise. As a part of this discussion, the legislative context is considered first to establish the context of the Australian corporations law[M10] before a consideration of the This part of the Chapter provides a basis for the different legal issues which arise for consideration of the attenuation of fiduciary and statutory duties which is considered in detail in Chapter 5.
II.Chapter 3 – The uncertain operation and criticisms of the doctrine
This Chapter commences with a discussion concerning the inappropriate misapplication[M11] application of the doctrine of ratification to companies the fiduciary relationship of director and company following on from the discussion in Chapter 2. Since the application of the doctrine to corporations in Beatty[1] in 1887 there continues to be doctrinal issues and this raises a question concerning the basis of the application of the doctrine to the fiduciary relationship of director and company.
It is trite law that a trustee must obtain the informed consent of each beneficiary of a trust before engaging in conduct which would be in breach of the trustee’s duties. This however cannot apply with respect to companies because a ratification resolution may be approved by ordinary resolution by the shareholders in general meeting. Accordingly, only a majority of votes is required for the approval of the resolution and the minority shareholders become bound by the decision. A director/shareholder can exercise their right to vote at a general meeting of the shareholders for their own benefit, whether or not the interests of the director/shareholder are contrary to the company, or to the shareholders as a whole. The application of the doctrine to companies in theabove contexts raises issues concerning the prejudice to minority shareholders.
Following the above discussion, the uncertainty in the operation of the doctrine is considered. Some of the authorities are irreconcilable and there is consequently significant uncertainty in the operation of the doctrine and legal effect of retrospective ratification and prospective authorisation. One significant question is the scope of the categories of non-ratifiable wrongs. The question is not trivial since if a wrong is ratifiable, then the shareholders in general meeting may approve a ratification resolution and thereby extinguish the company’s cause of action against any relevant directors. There is also uncertainty in relation to the legal requirements of the doctrine of ratification which result in the exoneration of a director and the legal effect of a ratification resolution.
As discussed in Chapter 1, there has been significant criticism by academics and the judiciary in relation to the operation of the doctrine. The academic and judicial criticisms [M12]of the doctrine and uncertainty in the operation of the law discussed in this Chapter below suggest that the uncertainty is prejudicial to the interests of companies and some or all of the company’s stakeholders which may include different shareholders in corporate groups. The extent of the prejudice to companies and the company stakeholdersis considered in the context of the need of law reform in Australia.
It is argued in this Chapter that the criterions of (i) uncertainty in the law and (ii) prejudice to companies and corporate stakeholders in this reassessment of the doctrine of ratification provide a basis for law reform to the Corporations Act.
III.Chapter 4 - The doctrinal issues with ratification
Following the significant law reforms in Australia made to the Corporations Act through the Corporate Law Economic Reform Program (‘CLERP’) commencing in 1997[M13], despite Despite the codification of directors’ fiduciary duties and the introduction of the statutory derivative action from March 2000, for the reasons discussed in Chapter 2, the doctrine of ratification continues to be relevant, albeit in a less significant context, to a company incorporated under the Corporations Act.
In this Chapter, this thesis firstly considers the theory of the corporation which is applied by the doctrine of ratification. It is argued in this Chapter that the doctrine of ratification operates independently of the organic theory of the corporation.
It is argued in this Chapter that retrospective ratification and prospective authorisation are conceptually different and therefore there should be the development of separate principles when applying the doctrine to companies either retrospectively, or prospectively.The consideration of the historical origins of the doctrine from customary Roman law and the analysis of the theory of the corporation which is applied by the doctrine provide a doctrinal perspective[M14] to the criticisms and the uncertainty in the operation of the doctrine which was discussed in Chapter 3[M15]. Further, an understanding of the doctrinal issues with retrospective ratification and prospective authorisation provides a separate criterion from which an assessment may be made about whether the doctrine remains relevant and appropriate to companies incorporated under the Corporations Act. Therefore a detailed analysis of the doctrinal issues may suggest that there should be law reform to the Corporations Act.
This Chapter is concluded with an examination of the legal reasoning for the doctrine. An analysis of the different underlying principles of the law of agency, law of fiduciaries and equitable defences to a breach of trust are considered and compared to the underlying principles of the doctrine of ratification and to each other. It is argued in this Chapter that the adoption of the doctrine of ratification into the English common law had no clear doctrinal basis in its application to the fiduciary relationship of director and company but that the principles supporting the doctrine are consistent with principles from the law of agency, equitable principles concerning informed consent and the equitable doctrine of release.If there are inconsistent underlying principles of law, then this may suggest that there should be law reform to the Corporations Act.
The consideration of the adoption of the doctrine of ratification into the English common law from customary Roman law provides a different perspective[M16] to the criticisms and the uncertainty in the operation of the doctrine which was discussed in Chapter 3[M17]. Further, an understanding of the doctrinal issues with retrospective ratification and prospective authorisation provides a separate criterion from which an assessment may be made about whether the doctrine remains relevant and appropriate to companies incorporated under the Corporations Act. Therefore a detailed analysis of the doctrinal issues may suggest that there should be law reform to the Corporations Act.
IV.Chapter 5 The attenuation of directors’ statutory duties by ratification or authorisation[MR18]
In this Chapter, the question whether statutory duties may be attenuated by retrospective ratification or prospective authorisation is addressed to provide a separate criterion for assessing whether the doctrine of ratification remains relevant and appropriate to companies incorporated under the Corporations Act.
The case law concerning attenuation of statutory duties arises principally in respect of ‘nominee’ directors and joint venture style companies and is exemplified by Levin v Clark.[2] The issue was only partly resolved by the High Court in Angas Law Services[3] with respect to ratification and there is limited other authority in Australia considering the legal issues, including in respect of incorporated associations, strata companies and trade unions. Accordingly, there remain doctrinal and policy issues which have not been addressed in Australia, including by the academic literature.
The analysis provided in this Chapter considering the attenuation of statutory duties is principally focused upon statutory interpretation in the context of the codification of directors’ duties under the Corporations Act and the associated criminal offences. If there is legal uncertainty in whether a particular statutory duty may be attenuated, then this suggests that there should be law reform to the doctrine of ratification.
As a part of the consideration of the attenuation of statutory duties, this Chapter considers the prejudice to stakeholders which arises from the attenuation of statutory duties which would otherwise give rise to a breach of those duties. If there is prejudice to stakeholders arising from the attenuation of statutory duties, this may suggest that there should be law reform in Australia because the legal and financial benefits of allowing attenuation of duties as a matter of public policy may outweigh the effect of the prejudice.
Following on from the discussion concerning attenuation of directors’ statutory duties, this Chapter addresses the legal issues concerning the attenuation of directors’ duties. An important question is how a company’s constitution or shareholders’ agreement could affect the content of a director’s duties, especially given that fiduciary duties of directors developed independently of contract law. It is further questioned whether the company is the sole beneficiary of duties owed to it by the directors in light of the duty against insolvent trading and the statutory duties imposed upon directors by the Taxation Administration Act 1953 (Cth). [MR19]If there is no doctrinal basis in support of the attenuation of statutory duties, then this suggests that there should be law reform to the doctrine of ratification in Australia.
This Chapter concludes by considering the policy arguments in favour and against the adoption of an attenuated duty approach[MR20]. Whilst the Australian and international case law has responded to the unique issues which arise from joint venture companies and the prevalence of directors whom are nominees of particular shareholders, the continued development of the common law and the general law is questioned in the context of the doctrine of ratification. Where the policy arguments suggest that there may be prejudice to stakeholders of the company, this may suggest that there should be law reform in Australia.
In this Chapter, the question whether statutory duties may be attenuated by retrospective ratification or prospective authorisation is addressed to provide a separate doctrinal criterion for assessing whether the doctrine of ratification remains relevant and appropriate to companies incorporated under the Corporations Act.
The case law concerning attenuation of statutory duties arises principally in respect of ‘nominee’ directors and joint venture style companies and is exemplified by Levin v Clark.[4] This question was only partly resolved by the High Court in Angas Law Services[5] with respect to ratification and there is limited other authority in Australia considering the legal issues, including in respect of incorporated associations, strata companies and trade unions. Accordingly, there remain doctrinal and policy issues which have not been addressed in Australia, including by the academic literature.
The analysis provided in this Chapter is principally focused upon statutory interpretation in the context of the codification of directors’ duties under the Corporations Act and the associated criminal offences. If there is legal uncertainty in whether a particular statutory duty may be attenuated, then this suggests that there should be law reform.
As a part of the consideration of the attenuation of statutory duties, this Chapter considers the prejudice to stakeholders which arises from any attenuation of statutory duties which would otherwise give rise to a breach of those duties. If there is prejudice to stakeholders arising from the attenuation of statutory duties, this may suggest that there should be law reform in Australia.
Following on from the discussion concerning attenuation of directors’ statutory duties, this Chapter addresses the doctrinal issues concerning the attenuation of directors’ duties. An important doctrinal question is how a company’s constitution or shareholders’ agreement could affect the content of a director’s duties, especially given that fiduciary duties of directors developed independently of contract law. It is further questioned whether the company is the sole beneficiary of duties owed to it by the directors in light of the duty against insolvent trading and the statutory duties imposed upon directors by the Taxation Administration Act 1953 (Cth). If there is no doctrinal basis in support of the attenuation of statutory duties, then this suggests that there should be law reform in Australia.
This Chapter concludes by considering the policy arguments in favour and against the adoption of an attenuated duty approach. Whilst the Australian and international case law has responded to the unique issues which arise from joint venture companies and the prevalence of directors whom are nominees of particular shareholders, the continued development of the common law and the general law is questioned in the context of the doctrine of ratification. Where the policy arguments suggest that there may be prejudice to stakeholders of the company, this may suggest that there should be law reform in Australia.
V.Chapter 6 – The use of corporate property in the context of ratification
In this Chapter, it is necessary[M21] first to discuss the intersection of shareholder ratification and the use of corporate property [M22]under the Corporations Actto explain the contemporary role of the doctrine of ratification in respect of solvent and insolvent companies, discuss the continuing importance of the doctrine of ratification to companies and to provide a different perspective for this reassessment of the doctrine. These matters have evaded close scrutiny by academics and the judiciary.
In light of the significant intersection between the doctrine of ratification and the use of corporate property, this Chapter then considers whether corporate property should be used for proper corporate purposes. Such an approach which is argued in this thesis would be a narrower approach than the current law enunciated in Hutton v West Cork Railway Co[6]andANZ Executors & Trustee Company Limited v Qintex Australia Limited (Receivers and Managers appointed).[7] The focus of the discussion in the context of ratification is whether a gift of corporate property, such as the extinguishment of a cause of action against a director arising from the approval of a ratification resolution, should be considered to be the use of corporate property for a proper corporate purpose[M23]. An important aspect of this discussion is whether the best interests of the corporation are a relevant consideration [M24]and whether there is prejudice to the company’s stakeholders because the law does not recognise the relevance of the corporation’s best interests[M25]. If the corporation’s best interests are relevant, then this criterion, together with a consideration of the principles of good corporate governance discussed in Chapter 7, may indicate that there should be law reform in Australia.
I.Chapter 7 - The significance of the regulation of corporate governance and the importance of the role of shareholders in the context of ratification and authorisation
In this Chapter, the regulation of corporate governance in Australia is considered firstly by considering the different definitions of corporate governance and the different models of corporate governance which are used in both common law and civil law countries. This Chapter then considers the significance of the regulation of corporate governance to shareholders in the context of the doctrine of ratification. The overarching principles of good corporate governance and the role of shareholders in corporate governance are discussed as a part of the consideration of the significance of the regulation of corporate governance by the Corporations Act[M26].
The case of Beatty[8] in 1887 established that a shareholder’s right to enforce [M27]their legal proprietary rights by voting on a ratification resolution was not unlawful[M28]. The principles which support a shareholder’s right to consult their own interests are discussed in the context of ratification. This analysis of the principles of law highlights a significant problem which arises from the doctrine of ratification because of the tension between a number of principles which were discussed in Chapter 5[M29].
The preceding discussion is necessary before this Chapter considers whether the shareholders in general meeting should have the exclusive power to authorise a breach of a director’s duties and whether the principles of good corporate governance are consistent with the principles underlying the doctrine of ratification[M30]. As was discussed in Chapter 4, the case law recognises the reserve powers [M31]of the shareholders which are exercisable in general meeting, however, there remains uncertainty about the scope of the reserve powers. The continued uncertainty in the application of the law concerning the scope of the reserve powers may suggest that there should be law reform.