Topic 19 Members’ remedies
The common law offers a remedy where there has been an infringement of the rights a shareholder enjoys in their capacity as a shareholder, as held in Hickman v Kent or Romney Marsh Sheep Breeders’ Association [1915] 1 Ch 881. Thus a shareholder could take action to prevent expropriation of their shares, interference in their voting / dividend rights, or improper conduct of shareholder meetings. Note however that a shareholder cannot enforce provisions of the constitution which confer a personal right on them unrelated to their status as a shareholder (see Eley v Positive Government Life Assurance Co Ltd(1875) 1 Ex D 20, discussed in a previous Module).
A shareholder can also use the common law injunction to prevent breaches of the company constitution in so far as such breaches relate to the running of the company, as s 140(1) states that it has the effect of a contract between the members, the Co and its directors. Thus, for example, a shareholder could seek an injunction if the board was breaching a provision of the constitution which restricted the company's activity to certain areas of business.
Other than that, where disputes arise in relation to the running of the company, the general common law principle is that the majority rules. This means that the majority may use its voting power to determine issues arising within the Co and that it will be the majority which determines whether an action needs to be brought to vindicate Co rights. Thus the common law offers little to assist members wanting to prevent harm to a company:
Foss v Harbottle (1843) 67 ER 189– the plaintiffs sought to bring an action on behalf of Co. The court held that shareholders could not bring an action on behalf of company where Directors refused to do so because
(i)the Co. is separate entity, it (acting through its Board) must bring actions on its own behalf.
(ii)the Co. is ultimately governed by majority rule – if shareholders challenge what the Board has done / not done, the majority decides when the Co. should act, and so a meeting of all the members is thus the mechanism to use to control the board. If the majority at such a meeting ratifies a certain action, then the disgruntled minority cannot challenge it.
B. Statutory remedies
To address the lack of common law remedies available to shareholders wanting to challenge wrongdoing in relation to how a company is run, the CA provides a number of statutory remedies to shareholders.
It is very important, when dealing with problems in this area of the law, to analyse the facts of the problem, to determine exactly what wrongdoing has occurred and to select the correct remedy or remedies that are available to address that specific wrong. In other words, one needs to recognise at the outset that each remedy deals with a specific type of wrongdoing. It is not sufficient simply to state that „a statutory remedy is available‟ without identifying what wrong has occurred and which remedy is available.
/ Video(i) Injunction
An injunction is a court order requiring someone to stop doing something unlawful – in other words, it exists to stop or prevent current or future wrongdoing. It is of no assistance in relation to events that have already occurred.
The s 1324 injunction is available where someone is, or is about to, infringe the Corporations Act.
Note that this is different from the common law injunction used to prevent infringements of the company constitution as a contract, as a breach of the constitution is not a breach of the Act.
The s 1324 injunction can be brought by ASIC or anyone whose interests may be affected by conduct complained of. In Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 23 ACSR 715 - held that a shareholder had standing to seek an injunction for any breach of the CA, such as a director‟s failure to comply with ss 180-183 duties.
(ii) Statutory derivative action
Normally, when harm has been done to a company, it is only the board, or its delegate, who can initiate legal action on behalf of the company against the wrongdoer (be they someone inside the company or a 3rd party). This is in accordance with the principles enunciated in Foss v Harbottle (1843) 67 ER 189. An ordinary shareholder cannot bring actions on behalf of the company, because the company is run by the board, not the shareholders.
Normally one would expect a Co to initiate legal action against a person who has harmed it, and this is what happens in 99% of cases. However, where the company(not the shareholders) has been harmed and the board has refused to take action after having been given an opportunity to do so, a shareholder or group of them can, after seeking permission of a court, bring a statutory derivative action on behalf of the Co – s 236(1).
Standing to apply to court for permission to bring the action is conferred upon members, former members or person entitled to be registered as a member, or an officer or former officer.
The classic example of where it will be necessary to bring the statutory derivative action is where someone harms the Co and the board refuses to take legal action against that person – eg where a director expropriates Co property by taking a corporate opportunity, and the rest of the board will not act against him or her:
In Cook v Deeks [1916] 1 AC 554 a railway Co. had four directors who were each 25% shareholders. Three directors knew a certain contract would be beneficial to Co, but formed their own Co. to enter into the contract! An action was brought by other Director. The court held that the three had misappropriated Co. property (the opportunity), and ordered them to surrender their profit. Furthermore, their conduct was not ratifiable by the board or even by a GM a majority cannot strip a Co. of its assets, as that affect both the company and the minority adversely.
Because the action departs from the normal rule that it is the board which decides whether to launch legal action on behalf of the Co, it is necessary to obtain leave of court to bring the derivative action – s 237. Criteria used by the court in determining whether to give leave – s 237(2) are:
it must be probable that the Co will not itself bring the proceedings
the applicant must be acting in good faith
it is in the best interests of the Co that the applicant be granted leave
there is a serious question to be tried
the applicant gave 14 day‟s notice to Co
Perhaps the most important of these will be the issue of whether the action is in the best interests of the Co – will be used as a filter by the courts to exclude actions based merely on mere commercial disagreements between minority and majority: there must be some harm to the Co.
Note that where the action is between the Co and a 3rd party (NB defined in s
237(4) as excluding related parties of Co‟s as defined in s 228 – thus the directors are not 3rd parties for the purposes of s 237), a rebuttable presumption arises under s 237(3) that it would not be in the best interests of the Co to grant leave if all the directors who participated in the decision not to bring an action
acted in good faith and for proper purpose
had no material personal interest in the decision
informed themselves to a reasonable extent about the subject matter
rationally believed the decision not to bring the action was in the best interests of the Co – such a belief is rational unless it is one that no-one in the position of the Ds‟ could hold it
Note that the court can appoint an investigator to report on Co‟s situation in order to assist court in coming to a decision – s 241(1)(d).
The GM has power to ratify a director‟s breach of duties, but only in certain circumstances:
In Bamford v Bamford [1970] Ch 212, the court held that it was competent for GM to ratify the directors‟ exercise of share issuing power for improper purpose (fending off takeover).
However, ratification contrary to wishes of a minority is not possible where the director who committed the wrong is also a shareholder and uses their voting power as a shareholder to ratify their own wrong, as in Cook v Deeks. Similarly, a purported ratification was invalidated by the court in Parke v Daily News Ltd [1962] Ch 297, where the directors used their majority shareholding to ratify their giving of large payouts to certain employees.
In other words, a party whose acts are being ratified cannot use the votes attaching to their shares (if they are a shareholder) to help ratify their own breach – they must abstain from the vote when the shareholders meet to decide whether to ratify the wrong done by the director.
In any event, under s 239 ratification in any circumstances (i.e. whether the Co has been harmed or not) is not an impediment to granting leave, but is only one factor to be taken into account by the court, bearing in mind how well informed the members were and whether they were acting for a proper purpose – s 239(2).
The court has a discretion re orders about costs – s 242 enables the court to order that the company bear the costs of the action by the minority.
(iii) Right to inspect books
This remedy is important where members seek evidence of wrongdoing, and is often brought in conjunction with the s 236-7 statutory derivative action, where shareholders are seeking evidence proving that harm has been caused to the Co.
Section 247D contains a replaceable rule stating that access to financial records may be given to the shareholders by the board (s 247D). This can also be authorised by GM.
However, in the absence of permission by the Co, a court order will be granted to member to whom access has been refused by the board if court is satisfied as to bona fides and proper purpose – insurance against exploratory expeditions by competitors who are also shareholders – s 247A(1).
In addition, persons other than members (eg former members) who have been granted leave to take a statutory derivative action can apply to court for an order giving them the right to inspect the Co‟s books – s 247A(2)-(5).
(iv) Member’s remedy for oppressive or unfair conduct
The remedy for oppression is provided by s 232.
This is a very broad remedy and is available where the Co‟s „affairs‟ (defined in s 53) are being conducted, or act or omission, or proposed act or omission, is / would be oppressive or unfairly prejudicial to members or unfairly discriminatory against them or contrary to interests of members as a whole. Note that the same set of facts can potentially give rise to a number of alternative actions. For example, a course of conduct by directors could contain elements which harmful to the Co (which would be remedied by the s 236 derivative action) and elements which were oppressive to shareholders (which would be remedied using s 232) – but one must remember that the s 232 remedy deals with a different type of harm than does s 236-7. Section 232 deals with unfair or oppressive conduct towards shareholders, whereas s 236-7 deals with harm to the company.
It is therefore always important, when dealing with problems in this area, to firstly determine who has been harmed (the company or the shareholders) and then to select the appropriate remedy (s 236 or s 232).
The s 232 action can be brought by member (even in respect of acts before he became a member) or by ASIC.
The courts have interpreted „oppressive...etc‟ very broadly – it is a composite expression – not a set of individual wrongs – and points to an overall concept of unfairness / injustice.
The test for unfairness is that of the objective bystander. The applicant does not have to show that defendants knowingly acted in an unfair manner. Fairness is looked at from the perspective of all interested parties.
In Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 a court found oppression where a holding Co. nominated three directors of a subsidiary. They used their power to strangle the subsidiary by refusing to supply it with raw materials. The court held the holding Co. was acting oppressively in its capacity as shareholder of the subsidiary.
To what extent will the court‟s scrutinise commercial decisions? In Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 the court suggested that a commercial decision might be unfair / oppressive even if bona fide and for proper purposes if it could be shown that no reasonable Board could have arrived at it. However, more usually the courts are reluctant to impugn business decisions. In other words, mere disagreement by a group of minority shareholders relating to the commercial direction of the Co will not in itself lead to a finding of unfairness.
In Thomas v HW Thomas Ltd (1984) 2 ACLC 610 a shareholder wanted to be bought out of a conservative Co which paid few dividends. A general meeting had refused to sell company assets in order to get capital to repurchase his shares. Many employees were also shareholders, and the company was run with the primary objective of keeping members of the family who owned it in employment. The court refused the application. It held that the elements of the statutory definition of „oppressive conduct‟ definition overlap with each other, and the overall effect is to prevent conduct which is „unjustly detrimental‟ - i.e. unfair – a „visible departure from standards of fair dealing in light of reasonable expectations‟. The court held that it is not necessary for a plaintiff to adduce evidence of illegality or bad faith, but failure to demonstrate absence of probity or good faith makes the order less likely. The court must also be satisfied that granting order is „just and equitable‟ - i.e. fairness is a two-way street – it must be fair to other shareholders and Co. Held not unreasonable, in the case of a family Co. for the Co. to be operated primarily to give employment rather than dividends. It was also premature to say that the plaintiff was „locked in‟ - no objection would be raised by the Co to a purchaser who was not a member of the family.
Exclusion from management can be found to be oppressive, as in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97, where the court found that a closely held family Co (Bosjnak), with directors who were two brothers + their sister-in-law, had acted oppressively towards one of the brothers by excluding him from board discussions. There are interesting aspects of this case: (i) the court said that the Co should be equated to a partnership in which all three directors had a right to participate, even though it was a Co and (ii) the application was brought by Fexuto, the Co controlled by the excluded brother through which he held his interest in Bosnjak, rather than by the brother himself - this emphasises that a shareholder (in this case Fexuto, who had elected the brother as D of the Co) does not need to show that it has been unfairly treated, only that there has been unfair treatment in relation to the affairs of the Co.
In general, breaches of their duties by directors may amount to unfairness to minority shareholders. For example, in Hannes v MJH Pty Ltd (1992) 10 ACLC 400, the board of MJH resolved to issue shares to one of its members, H, who was also majority shareholder. This was done solely for the purpose of increasing the voting strength of H, who was at loggerheads with the other shareholders. Issue of shares for this purpose is a breach of the duty of directors to exercise powers for a proper purpose (s 181). The court held that H‟s use of his position as majority shareholder to ratify his breach of duties was oppressive.
The court can grant various orders - s 233(1) – and it is important to determine whichof these orders is most suitable – ie will address the specific type of oppression that has occurred.
winding up, provided that this does not prejudice the oppressed members – note that because this is the most drastic order available, it is also the one least likely to be granted (s 233(1)(a))
an order regulating conduct of Co‟s affairs (s 233(1)(c)) - can even include removing or appointing persons as directors (Spargos Mining).
a reduction in Co‟s capital and payment to applicant (ie the company purchases a person‟s shares from them) – s 233(1)(e)
an order directing Co to institute proceedings against someone (s 233(1(f)) or authorising member to do so on Co‟s behalf, with the court at actual hearing having the power to indemnify the member for the costs of the action, irrespective of outcome). A court would usually require its consent for discontinuance or settlement of action – s 233(1)(g).
an order restraining someone from doing something – s 233(1)(i)
an order requiring someone to do something – s 233(1)(j)
Where the order is for purchase of shares, valuation must be fair -Dynasty v Coombs (1995) 13 ACLC 1290. Various accounting methods have been used to determine a fair value.
Note that relief under s 232 will not be granted where the situation is simply one of deadlock over the direction of the Co with no-one at fault - in such circumstances winding up on the basis of deadlock is the appropriate remedy (s 461(k)). Similarly s 232 cannot be used as a way for a member to force buy-out in a way not prescribed by the constitution where he / she is unable to find a buyer for his / her shares.
(v) Winding up
Members may petition the court to compulsorily wind up a Co. Because winding up is a drastic remedy, it will be used only where court is satisfied that no other remedy is available – s 467(4).
Circumstances in which the order can be given are:
where it is „just and equitable‟ to do so - s 461(k)
where the directors are running Co in their own interests rather than in those of members as a whole or in an unfair or unjust manner- s 461(e)
where Co affairs are or will be run in an unfairly prejudicial manner or in a manner contrary to shareholders as a whole- s 461(f) and (g)
Note the overlap between s 461(f) and (g) and the same remedy in s 233(1)(a)
An example of winding up on the basis of „unfair and oppressive conduct‟ is
Kokotovitch Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 in which the court held that the „moral partnership‟ which existed between the two shareholders had broken down because the one had tried to dilute the shareholding of the other.
An example of winding up on the „just and equitable‟ ground is provided by
Ebrahimi v Westbourne Galleries [1970] AC 360, E and N were partners in rug business. Then converted the business into a Co, with E, N and N‟s son as shareholders. N and son used majority power to freeze E out of business. The court granted order to wind up – it held that the Co was „quasipartnership‟ and was formed on basis that both E and N would continue to run business. For this reason it was just an equitable to wind up. (Note similarities with Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA