I.Chapter 7 – Proposals for law reform
Contents
I.Chapter 7 – Proposals for law reform
II.Introduction
III.The new proposed statutory obligation restricting the use of corporate property
A.The proposed amendment to section 232
B.Interpretation of the amended section
C.How does the proposed amendment address the prejudice to stakeholders arising from the doctrine of ratification?
IV.Statutory reform to voting exclusions
D.Proposed new section
E.Reduction of prejudice
V.Reforms to statutory defences
VI.Conclusion
II.Introduction
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III.The new proposed statutory obligation restricting the use of corporate property
In Chapter 2, a brief discussion was provided in relation to the nature of the statutory duties imposed upon company directors. In Chapter 3, it was discussed that the doctrine of ratification does not require that the directors act honestly and in good faith in the best interests of the company. Those duties arise as a statutory duties pursuant to section 181 of the Corporations Act and as discussed in Chapter 5, the principle of honesty is supported by good corporate governance principles.
It is significant to note that the duty of a director to act in good faith in the best interests of the company is not a duty to which a shareholder is bound with respect to either the company or to any other shareholder. It was also discussed in Chapter 2 that there is conflicting authority that a shareholder is subject to an implied limitation that their power is to be exercised in good faith in the best interests of the company.[1] Both of these matters draw attention to the right of a shareholder to vote to approve a ratification resolution, even where that resolution concerns their own breach of a director’s duty. At the core of the matter is the prejudice to stakeholders of the company.
In Chapter 6, this thesis concludes that in order to address the prejudice which arises from the operation of the doctrine of ratification, there must be statutory reform to the Corporations Act to eliminate or reduce the prejudice to all stakeholders. Four of the principles considered necessary for the proper operation of the doctrine of ratification are the requirements for honesty and good faith, solvency, the best interests of the company and corporate property must be used for proper corporate purposes. A discussion of reason for the requirements for those principles to operate to eliminate or reduce prejudice to all stakeholders is considered in detail in Chapter 6.
It is also important to recall from Chapter [x] that the statutory derivative action was, in part, enacted to relieve the prejudice which arose from circumstances where minority shareholders were unable to commence proceedings by reason of the rule in Foss v Harbottle which established that the company was the proper plaintiff for wrongs done to it. It is therefore consistent with previous reforms to the doctrine of ratification that statutory reforms be undertaken to further protect the rights of company and minority shareholders.
A.The proposed amendment to section 232
The proposed new statutory obligation could be introduced into the Corporations Act by amending section 232 in Part 2F.1 (Oppressive conduct of affairs). The amendment is proposed as follows:
The Court may make an order under section 233 if:
(a) the conduct of a company's affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company; or
(d) the use of a company’s property;
is either:
(de) contrary to the interests of the members as a whole; or
(ef) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity; or
(g) not for a proper corporate purpose.
For the purposes of this Part, ‘proper corporate purpose’ includesthe acquisition, disposal, surrender, loss, destruction, lease, licence or other use of the company’s property which was:
(i)reasonable having regard to the company’s principal activity;
(ii)not a material factor in the insolvency of the company;
(iii)for valuable consideration at market value; or
(iv)made in good faith in the best interests of the company.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.
B.Interpretation of the amended section
The new proposed statutory obligation seeks to restrict the use or corporate property to proper corporate purposes. Whilst this proposed amendment to the Corporations Act of itself would assist in reducing or perhaps eliminating the prejudice to minority shareholders and other stakeholders, the proposed amendment goes further in several respects.
Firstly, the amendment imposes a limitation on the powers of the board of directors and the powers of shareholders in general meeting in respect of the use of the company’s property other than for a proper corporate purpose.
Secondly, the test is whether the use of the company’s property is not for a proper corporate purpose. This seeks to impose a further restriction on the use of company property. The definition of ‘proper corporate purpose’ in the amended section is an inclusive and not exhaustive definition to enable the Courts develop the meaning of the phrase on a case by case basis.
Thirdly, an objective test is introduced in relation to the determination of the use of corporate since the meaning of ‘proper corporate purpose’ includes whether the use was reasonable having regard to the company’s principal activity, whether the use was given for market value, or whether the use was in good faith in the best interests of the company. The use of an objective test seeks to avoid questions about the subjective intentions of one or more directors and/or shareholders which may be unable to determined given that a group of people may each have different subjective intentions.
The amendments seeks to prevent a majority of shareholders in general meeting from acting contrary to the best interests of the company. This ensures that the company’s best interests are considered in the context of the use of its property and thereby draws attention to the distinction between the ownership of the property by the company and the rights of the board of directors or the shareholders in general meeting to deal with the property of the company.
Fourthly, section 232 of the Corporations Act is broadened to include uses of corporate property which are not for a proper corporate purpose in addition to the use of the company’s property being used contrary to the interests of the members as a whole, or oppressively, unfairly prejudicially or unfairly discriminatory against one or more members on the usual principles developed by the Courts since the introduction of Part 2F.1 into the Corporations Act.
Fifthly, the Court is not restricted to considerations only of prejudice to shareholders arising from oppressive, prejudicial or discriminatory matters. The amendment is broad enough for the Court to take into consideration the effect of the use of the corporate property on some or all stakeholders. By way of example, a Court may consider that the use of a company’s property was not for a proper corporate purpose because of the detrimental effect which a particular transaction will have on unsecured creditors.
Sixthly, the Court is not restricted in the weight to which it may concern itself with the effect on different stakeholders and in this respect, the Court can consider the competing interests (if any) between different stakeholders including shareholders, creditors and employees.
Seventhly, the notion of proper corporate purpose includes an assessment of the materiality of the use of the company’s property in the context of the company’s solvency within the meaning of section 95A of the Corporations Act.
Eighthly, the limitation on the use of corporate property does not create any statutory duty upon a shareholder and accordingly there is no statutory right created which would empower a shareholder to commence proceedings against other shareholders for the use of corporate property contrary to the amended section.
C.How does the proposed amendment address the prejudice to stakeholders arising from the doctrine of ratification?
The proposed amendment to section 232 of the Corporations Act either eliminates or reduces the prejudice suffered by stakeholders in the context of the doctrine of ratification in a number of key ways. Before embarking on an analysis of the issue of prejudice suffered by stakeholders, it is helpful to recall from Chapter 2 that the scope of the doctrine of ratification is limited in key respects which include where the ratification resolution would constitute a fraud on the minority, the transaction was entered into by an insolvent company to the prejudice of creditors, the resolution was contrary to section 232 of the Corporations Act or the majority of shareholders in general meeting acted for the same improper purpose as the directors. It is notable therefore from the discussion in Chapter 2 that the doctrine of ratification will continue therefore to operate to the prejudice of minority shareholders, creditors and employees in a wide variety of situations.
The essense of the prejudice to stakeholders is a director obtaining a private benefit as a result of the operation of the doctrine of ratification. The amendment addresses the possibility of a director obtaining a private benefit by requiring that corporate property be used for a proper corporate purpose. Section 9 of the Corporations Act provides for a broad definition of property, including of choses in action such as a right to sue.
The inclusive definition of the phrase ‘proper corporate purpose’ is permissive of a broad meaning and therefore the Courts will be able to apply the new obligation in a wide variety of circumstances where the Courts consider that a remedy is required. Importantly, the amendment does not seek to change the discretionary nature of the Court’s right to grant a remedy. The amendment’s purpose is to give the Courts a wider discretionary power to make an order under section 233 of the Corporations Act.
A primary example of the prejudice suffered by the company and therefore the shareholders is the extinguishment of a cause of action against a director for a breach of fiduciary duties which was owed to the company. Where the ratification resolution is approved for nil, or minimal consideration, an asset of the company, being its right to sue, has been destroyed and rendered worthless. A cognate point is the granting of relief from liability for contravention of a civil penalty provision by a Court pursuant to section 1317S and section 1318 of the Corporations Act which may result in (for example) the excusal from liability for insolvent trading pursuant to section 588G of the Corporations Act and thereby affecting the company’s right to obtain damages against the directors of the company.
Under the current law, there is some uncertainty whether a formal release is required in addition to the approval of a ratification resolution.[2] A release given for valuable consideration or by deed without valuable consideration is not contrary to section 199A of the Corporations Act. If a ratification resolution was approved and a formal release was given for less than market value, the proposed amendment seeks to redress those matters by the requirement that the use of corporate property be for valuable consideration at market value. Alternately, the giving of a release may not be reasonable with regard to the company’s principal activity or the release may not have been made in good faith in the best interests of the company.
Relevantly under the proposed amendment, there is no requirement for an exchange of money through the requirement for valuable consideration since the company may elect to reduce some other benefit which was due to the director such as the issuance of further shares or options, or a bonus payment. Thus the mutual exchange of rights and/or benefits could be sufficient to meet the requirements of valuable conisderation for market value.
The proposed amendment provides for the possibility that the conduct of the affairs, an act or omission by the company or a resolution may not be for a proper corporate purpose. This therefore directly relates to a proposal for, or the approval of, a ratification resolution by the shareholders in general meeting and a resolution proposing or approving a release to a director by the board of directors or the shareholders in general meeting. This is significant in respect of a release given to a director in the context of section 199A of the Corporations Act since there is doubt whether at the time of giving the release that there is any property in existence.
The extent to which the amended section would be given an ambulatory construction is always a question of law for a Court to determine and hence constructions which are inconsistent with best achieving the purpose of object of an Act shall not be preferred over other interpretations pursuant to section 15AA of the Acts Interpretation Act 1901.
IV.Statutory reform to voting exclusions
It is proposed that a new section be inserted into Part 2D.1 Division 2 (Disclosure of, and voting on matters involving, material personal interests)[MR1] of the Corporations Act to implement new voting restrictions affecting directors and their associates.
In the United Kingdom, section 239 of the Companies Act 2006 deals with the ratification of acts of directors. There are a number of deficiencies which have been identified with the law in the United Kingdom which are explained below.
D.Proposed new section
195A(1)An excluded person must not vote on a matter being considered at a meeting which concerns:
(i)the approval or ratification of:
- conduct by an officer amounting to negligence, default, breach of duty or breach of trust in relation to the company;or
- the approval or ratification of the purported exercise of a power by an officer or the board of directors of a company[MR2]; or
(ii)an indemnity,release or settlement of a claim in relation to:
- conduct by an officer amounting to negligence, default, breach of duty or breach of trust in relation to the company; or
- the purported exercise of a power by an officer or the board of directors of a company[MR3].
(ii).
195A(2) For the purposes of this section:
(a)‘excluded person’ means:
(i)a director;[MR4]
(ii)an associate of a director;
(iii)an associated entity under section 50AAA; and
(iv)a related party under section 228.
(b)‘conduct’ includes acts and omissions.[MR5]
(c)‘director’ includes a former director.[MR6]
195A(3)This section does not prevent an excluded person from attending, being counted towards the quorum or taking part in the proceedings at any meeting at which the decision is considered.[MR7]
195A(4)This section does not affect any other enactment or rule of law imposing additional requirements for valid ratification or any rule of law as to acts that are incapable of being ratified by the company.[MR8]
195A(5)A resolution contemplated by section 195A(1) shall not be valid unless that resolution is approved at a general meeting of the shareholders in accordance with this section[MR9].Nothing in this section affects the validity of a decision taken by unanimous consent of the members of the company.[MR10]
Each officer of the company whom is concerned with a ratification or approval resolution under section 195A(1) shall give full and frank disclosure in writing within a period of seven (7) before the shareholders meeting.
The purported exercise of a power that is ratified under section 195A(1) is deemed to be, and always to have been, a proper and valid exercise of power[MR11].
The ratification or approval under this section of the purported exercise of power by a director or the board of directors does not prevent a court from exercising a power, which might, apart from the ratification or approval, be exercised in relation to the of the director or the board of directors[MR12].
195A(6)If a company does not comply with section 195A(1), unless there is evidence that a resolution approved would have been approved but for the noncompliance with section 195A(1), the resolution is invalid.[MR13]
195A(7)A person contravenes this section if they if they are involved in a contravention of section 195A(1).[MR14]
195A(8)A person commits an offence if they are involved in a contravention of section 195A(1) and the involvement is dishonest.[MR15]
195A(9)Nothing in this section limits or affects any rule of law relating to the ratification or approval by the shareholders of any act or omission of a director.
Note 1: This section is a civil penalty provision (see section 1317E).[MR16]
Note 2: Section 79 defines involved.
E.Interpretation of the new section
The effect of the section restricts the directors, their associates, associated entities and related parties from voting on a resolution which would approve or ratify certain conduct of an officer, which includes the directors of the company. The section also extends to indemnifying or releasing an officer of the company from a liability to the company. Accordingly, any such resolution must be considered by the shareholders in general meeting.
The definition of excluded person seeks to implement a public policy of ensuring that only shareholders independent of the directors and their associates is permitted to vote on resolutions which concern ratification, approval, indemnity and release.
F.Reduction of prejudice
Overturn the common law on the right of all shareholders to vote.
Whilst there is no special rule governing the authority of directors in connection with elections or proxy solicitation, the heightened risk of a confusion between private interest and the best interests of the corporation (or corporate purposes) requires scrupulous conduct on the part of directors. It necessitates particular care where that conduct has the effect of influencing the outcome of an election in favour of themselves or their colleagues.[3]
V.Reforms to statutory defences
Current law
s 1318 Corporations Act – relief from liability, relevance of approval of ratification resolution
New statutory defences
Should there be statutory defences to avoid, excuse or limit a director’s liability for a breach of fiduciary duty?
VI.Conclusion
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[1]Compare Ngurli Ltd v McCann (1953) 90 CLR 425 and Bamford v Bamford [1970] Ch 212. See Austin R P, Ramsay, I M, Ford’s Principles of Corporations Law (2007, 13th ed), [8.390].
[2] See Miller v Miller(1995) 16 ACSR 73.
[3]ADVANCE BANK OF AUSTRALIA LTD & OR v FAI INSURANCES AUSTRALIA LTD & ORS - (1987)12 ACLR 118 at 136 per Kirby P (Glass JA and Mahoney JA agreeing). Some US authorities referred to in the judgment.
[MR1]Query whether there is an argument the section is restrited to matters concerning material personal interests
[MR2]NZ s 177(1)
[MR3]NZ s 177(1)
[MR4]S 120(5) Canada Business Corporations Act only restricts the director making disclosure
[MR5]S 239(5) Companies Act 2006
[MR6]S 239(5) Companies Act 2006
[MR7]S 239(4) Companies Act 2006
[MR8]S 239(7) Companies Act 2006
[MR9]See s 239(2)
[MR10]S 239(6)(a) Companies Act 2006
Check whether 239(6)(a) is permissive of informal assent
[MR11]NZ s 177(2)
[MR12]NZ s 177(3)
[MR13]Saving provision
[MR14]See s 209 CA
[MR15]See s 209 CA
[MR16]Any consequential amendments?