Michael Anthony Robson / Mid Candidature Thesis Progress Report

The contemporary role of shareholderratification and authorisation of breaches of directors’ duties

PhD Thesis Mid Candidature Progress Report

XX June 2017

Michael Anthony Robson

LLB (1st Class Hons) GDLP, BSc (Physics)

Faculty of Law, Monash University

Monash ID: 25002546

Supervisors

Associate Professor NormannWitzleb

Professor Bryan Horrigan

Contact details

Work: / (08) 9322 2256
Mobile: / 0401 002 997
Email: /
Address: / 4 Wintergreene Drive, Bennett Springs WA 6063
Postal: / PO Box 390 Beechboro WA 6063

I.Introduction

This contemporary review of the doctrine of ratification examines thelaw and public policy issues in the context of companies governed by the Corporations Act 2001 (‘Corporations Act’). This review whilst highlighting the uncertainty in the law and public policy problems, the thesis also recognises the benefits of the doctrine to companies and their stakeholders and accordingly, the thesis recommends limited law reform to the Corporations Act. Those reforms are proposed to resolve the law and policy issues which give rise to the most common abuses of the doctrine by directors and/or controlling shareholders of solvent companies.

II.Research question

Does the doctrine of ratification remain relevant and appropriate to companies incorporated under the Corporations Act?

This contemporary review focuses upon the following:

  1. the uncertainty in the operation and legal effect of the doctrine and the criticisms of the doctrine;
  2. were the principles of the doctrine misapplied to companies?;
  3. which theory of the corporation underlies the doctrine?;
  4. what is the legal reasoning for the doctrine?;
  5. can statutory duties be attenuated by ratification or authorisation and what are the legal issues with attenuation of duties?;
  6. what are the policy arguments in favour and against an attenuated duties approach?;
  7. should corporate property be used for proper corporate purposes?;
  8. are the principles of good corporate governance supported by the doctrine?;
  9. are there any shortcomings of members’ remedies?;
  10. what is the prejudice to a company and its stakeholders arising from the above matters? Do the benefits of maintaining the doctrine outweigh the prejudice?; and
  11. how can the identified legal and policy issues be best addressed to retain the doctrine, but eliminate or reduce the uncertainty, policy issues and prejudice to companies and their stakeholders?

III.The conclusions from the thesis research to date

The doctrine remains relevant (and legally important)to companies because:

(i)key areas of law rely on the operation of the doctrine (eg. assumptions permitted by and the binding effect of a director’s ratified conduct under section 128, statute of limitations effect on the ratification of irregular proceedings and the protection of honest directors[1]);

(ii)shareholders can determine whether a director should remain liable for breaches of fiduciary duty and seek to limit director liability for a breach of statutory duty;

(iii)a court has a greater discretion to prevent vexatious proceedings where a ratification resolution has been approved; and

(iv)in an insolvency context, the ratification of a payment made on the company’s behalf will result in a discharge of the company’s debt to a creditor.[2]

The doctrine suffers from the following legal and policy problems:

(i)the doctrine operates independently of the ‘organic’ theory of the corporation; and

(ii)there is no clear legal or public policy basis for permitting the attenuation of statutory duties when authorised by a constitutional provision or resolution of the shareholders in general meeting.

The operation of the doctrine is inappropriate because:

(i)in relation to proprietary companies, a director/shareholder (and their associates) can vote to approve a ratification resolution concerning their own breach of duty to the company and thereby extinguish the company’s cause of action for breach of duty;

(ii)there is uncertainty in the operation of the law and accordingly the doctrine has been widely criticised;

(iii)there is no requirement for a formal meeting to approve a ratification resolution;

(iv)there is no requirement for an independent majority of shareholders to approve a ratification resolution;

(v)a ratification resolution is not a voidable transaction;[3]

(vi)it limits shareholders’ rights because it is a factor taken into consideration with respect to applications for leave to commence derivative proceedings[4] and the quantum of damages which may be awarded in derivative proceedings;[5]

(vii)corporate property may not be used for proper corporate purposes and this is permissive of private benefits being obtained by the directors and/or controlling shareholders;

(viii)the principles underlying the doctrine are contrary to modern corporate governance principles; and

(ix)theeffect of the doctrine can result in prejudice to companies and their stakeholders.

Retention of the benefits of the doctrine does not mean retaining the problems with the doctrine provided there is statutory law reform to the operation of the doctrine.

IV.Thesis Chapter outline

The following is an outline of the Chapters for the thesis:

Chapter / Title
1 / Introduction
2 / The doctrine of ratification and its legal effect
3 / The uncertain operation and criticisms of the doctrine
4 / The doctrinal issues with ratification
5 / The attenuation of directors’ statutory duties by ratification or authorisation
6 / The use of corporate property in the context of ratification
7 / The significance of the regulation of corporate governance and the importance of the role of shareholders in the context of ratification and authorisation
8 / Reworking the principles of ratification
9 / Proposals for law reform
10 / Conclusion

V.Current proposals for law reform to the Corporations Act 2001

The following draft proposals for law reform arise from the state of the current research and will be discussed in Chapter 9.

Proposed new section to limit ratification and authorisation

Scope of affected matters:

  1. conduct amounting to negligence, default, breach of trust or duty
  2. a purported exercise of power of an officer
  3. an indemnity, release or settlement of a claim in relation to (a) or (b)

Restrictions on approval or ratification

  1. independent majority vote requirement by exclusion of directors, former directors, associates, associated entities and related parties;
  2. formal meeting requirement;
  3. new civil penalty provision;
  4. new offence for dishonest conduct; and
  5. a saving provision for a resolution where there was non-compliance but the resolution would have been validly approved but for the non-compliance.

The proposed amendment to section 232 (highlighted in red text)

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’ includes the 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.

VI.Timetable for completing the thesis

The following is the proposed timetable for completion of the thesis:

Date / Activity
TBC

VII.Example of written work for the thesis

Draft Chapter 5of the thesis is attached to this Progress Report at Annexure A.

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[1]See Corporations Act 2001 (Cth) ss 1317S;1318.

[2]Clarke & Anor v Abou-SamraOrs [2010] SASC 205, [102] (Kourakis J).

[3]Corporations Act 2001 (Cth) s 588FE.

[4]Corporations Act 2001 (Cth) s 237.

[5]Corporations Act 2001 (Cth) s 239.