MEMBER’S RIGHTS AND REMEDIES
What are the statutory and common law protection for
members who may find their position in the company
pressured or compromised by the actions of directors
and/or majority shareholders?
IMPORTANT SECTIONS IN THIS CHAPTER
Section 247A : Inspection of Books
Section 246AA : Oppressive conduct
Section 461 : Grounds for winding up
Section 1324 : Injunctive relief
Background - The Rule in Foss v Harbottle
Rights of minority shareholders were seriously
disadvantaged by what became known as the rule in
Foss v Harbottle. In this case two shareholders
tried to bring an action on behalf of the company
against the directors and promoters who had sold
property to the company at an inflated value.
The Court held that the company was the proper person to
bring any action against the directors. In law the
company and the members are separate. The rule in
Foss v Harbottle has a number of advantages, e.g. it
tends to stop litigation where the outcome is a
resolution by the company ratifying the wrongdoing. It
also prevents the type of litigation which can be
started by troublesome minority shareholders trying to
harass the company and the directors.
However, what if the wrongdoers are directors
themselves? The problem becomes greater if the directors
are also the majority shareholders or if they link up
with the majority shareholders.
Courts quickly realised that the rule needed exceptions.
Exceptions to the Rule in Foss v Harbottle:
-
Fraud on the Minority;
this is the most important exception and the action
is brought by the shareholder on behalf of the
company. There are two essential elements to be
satisfied in an action based on a fraud on the
minority;
-
Fraud
- In this context is not fraud in the general
sense of the word; it is not criminal fraud. It
really means abuse or misuse of power.
-
Control by the wrongdoer
- this prevents the company itself from bringing
the action in its own name (See Peter's
American Delicacy Co Ltd v Heath (1939) 61
CLR 457).
-
Where Special Majority is required;
under this exception the majority of the company
cannot ratify by a simple majority conduct which
requires a special resolution (See Edwards v
Halliwell [1950] 2 ALL ER 1064).
-
Personal Rights Infringed;
if a member can show that a personal right has been
infringed, action can be brought against the company
as an exception to the rule in Foss v Harbottle.
The difficult question to be determined is what
membership rights can give rise to personal rights?
(See Hickmans case (1915) 1 Ch 881).
-
Interests of Justice;
this has been suggested as a further exception to
the rule in Foss v Harbottle. (See
Hawkesbury Development case (1969) 2 NSWR 782);
although there has also been opposition to this
"exception" (See Prudential Assurance case No 2,1
ALL ER 354).
Statutory protections:
-
Section 246AA- Oppressive or Unfair Conduct.
Under this section a member of a company or the ASIC may
apply to the Court for a remedy and the Court may grant
relief if it is of the opinion;
that the affairs of the company are being conducted in a
manner that is oppressive or unfairly prejudicial to, or
unfairly discriminatory against, a member or members, or
in a manner that is contrary to the interests of members
as a whole, OR
that an act or omission or a proposed act or omission by
or on behalf of the company or a resolution or proposed
resolution of a class of members was or would be
oppressive or unfairly prejudicial to, or unfairly
discriminatory against a member or members, or was or
would be contrary to the interests of the members as a
whole.
Orders that the Court may make (S. 246AA) the following
orders:
-
that the company be wound up.
-
that a receiver be appointed.
-
that the shares of a member be purchased by other
members,
-
that the conduct of the company affairs be regulated,
any order it (the Court) thinks fit.
Important Points to Note on Section 246AA
-
Under the section a member can seek relief: in order for
a person to be a member, the person's name has to
be entered in the register of members at the time when
the person makes the application for relief (see
Titlow v Inter capital Group (Australia) Pty Ltd & Anors
(1996) 14 ACLC 1065).
-
In
considering a case under section 246AA, the Court must
determine whether reasonable directors possessing
any special skill and knowledge available to the
directors, would have decided that it was unfair to make
the decision that was finally made (see Wayde v N.S.W.
Rugby League Ltd (1985) 10 ACLR 87).
-
Conservative management including the payment of
dividends and the refusal by one shareholder to buy the
shares of another shareholder does not necessarily
amount to oppression (see Re G Jeffrey (Metis Store)
Pty Ltd 1984 9 ACLR 193).
-
A
number of incidents which of themselves may be trivial
can, when put together over a period of time, add up to
a picture of oppression. A board of directors who
persistently carry on in such a way as to affect the
rights of minority shareholders and who are therefore
unable to fully participate in meetings, is guilty of
oppression (see John J. Starr (Real Estate Pty Ltd) v
Robert R. Andrew (A'Asia) Pty Ltd 1991 9 ACLC 1372).
-
Conduct may amount to oppression even though directors
and majority shareholders are acting in what they think
are the best interests of the company. It is the
result and not the motive that counts (see Re
Harmer Ltd (1958) 3 ALL ER 689).
-
An
application can be made under section 246AA by a member
even if that member is not directly affected by the
conduct complained of and furthermore it need not be of
a continuing nature. Relief will be given if the
directors conduct the affairs of the company in a way as
to promote their own interests or the interests of other
companies in the group to the detriment of the company
or its shareholders (see Re Spargos Mining NL
(1990) 8 ACLC 128).
-
A
court cannot grant relief under section 260 (now 246AA)
to a shareholder who controls a majority of the
voting share capital in the company. The cases
establish that it is not necessary that those, against
whom an order pursuant to section 260 is sought, be in
control of a majority of shares. Nor is it necessary
that only a minority of shareholders be affected by the
impugned conduct. It is enough that the conduct of the
type described in the action is unfair to some or all of
the company's members. It is however, necessary that the
applicant not be the controlling shareholder (see Re
Polyresins Pty Ltd (1998) 28 ACSR 671).
-
Section 461(e) - Directors Acting in their Own
Interests
-
Under this section a company can be wound up if the
directors have acted in their own interests rather than
in the interests of the members as a whole or in a
manner that appears to be unfair or unjust to other
members.
-
A
director who ran a listed company as if it were his own
business and who arranged bonuses for employees in order
to disguise the profits the company was making, was held
to be acting in his own interests (see Re William
Brooks & Co Ltd (1962) NSWR 142).
-
-
Section 461(k) - ''Just and Equitable"
-
Under this section a company can be wound up if the
Court is of the opinion it is "just and equitable".
-
Section 462(5) contains a clear statement of legislative
intent that only persons listed in the section can apply
to wind a company up. In Western Interstate Pty Ltd v
DFC (1996) 14 ACLC 216, it was held although the
Court had an inherent jurisdiction in winding up, it was
subject to, a contrary statutory provision (in this case
section.462(5)). The Deputy Federal Commissioner
of Taxation had applied to wind a company up on the"
just and equitable" ground in section.461(k).
-
Cases decided on this section have revolved around what
is "just and equitable". The cases can be put into the
following categories;
o
Partnership Analogy:
If the Court finds that the company really is an
incorporated partnership and that the personal
relationship of the members has broken down, it is just
and equitable to wind the company up (see Re Yenidje
Tobacco Co Ltd (1916) 2 Ch 426).
o
Loss of substratum:
If at the time of formation of the company it was, or
later became impossible or even illegal to achieve the
main objects of the company then it is just and
equitable for the company to be wound up (see Re
Tivoli Freeholds Ltd (1972 VR 445).
o
Fraud or misconduct on the part of management:
If there is a justifiable lack of confidence in the
conduct and management of the company's affairs it will
be just and equitable to wind the company up. This lack
of confidence may arise out of fraud or misconduct (see
Loch v John Blackwood Ltd [1924] AC 783).
o
Expulsion from office:
The Court can order a company to be wound up under the
just and equitable rule if it prevents a member of the
company from insisting on legal rights where it would be
unjust and inequitable for the company to do so (see
Ebrahimi v Westbourne Galleries Ltd (1972) 2 ALL ER
492.)
-
Section 247A - Inspection of Books
-
This section can be used by a shareholder who is
dissatisfied with certain aspects of the way in which
the company is being run. The section gives the Court
power to order inspection of the books by any person
including the member. The member must make out a case.
The section is also dealt with in chapter 11.
-
Section 1324 - Injunctions
-
Under this section the Court can grant an injunction on
its terms restraining a person from taking part in
conduct that is;
a
contravention or attempted contravention of the
Corporations Law, aiding, abetting etc, a person to
contravene the law, conspiring with others to contravene
the law.
-
In
addition to the injunction, the Court can require the
person to do any act or thing.
-
The injunction can be granted requiring an act to be
done where there has been a refusal to act.
-
Damages can be awarded in addition to or in substitution
for the injunction.
-
An
application for an injunction under section 1324 can be
made by;
the ASIC or, a person whose interests have been or would
be affected by the conduct complained of. In Allen v
Atalay (1993) 12 ACLC 7 the Court said that a
creditor was a person whose interests are affected.
-
In
Mesenberg v Cord Industrial Recruiters Pty Ltd
(1996) 14 ACLC 519, the Court gave the words "a person
whose interests are affected" a narrow interpretation
and held that in respect of an alleged breach of section
232 only the ASC could apply for an injunction under
section 1324; the reason given was that a breach of
section 232 is a breach of a civil penalty provision and
only the ASC can apply for an order regarding breaches
of section 232.
-
In
Air Peak Pty Ltd & Ors v Jetstream Aircraft Ltd
(1997) 15 ACLC 715, the Court refused to follow the
decision in Mesenberg's case and held that a
creditor had standing under section 1324 to claim a
breach of director's duties under section 232.
Relevant Cases
Re
SPARGOS MINING N.L.
Supreme Court of Western Australia [1990] 8 ACLC 1218
FACTS:
This was an application by a minority shareholder under
the predecessor to section 260 (now section 246 AA)
alleging oppression arising out of the behaviour of the
directors of the company. Spargos was under the
influence and control of IRL and there were common
directors. The minority shareholder brought evidence to
show that a number of dealings and transactions approved
by the board were not for the benefit of S but were for
the benefit of IRL and the companies under its control.
HELD:
There was sufficient evidence to prove oppression under
section 260 (now section 246AA), In regard to the
section the Court made the following points:
1.
An
application can be made under the section by a member
even if that member is not directly affected by the
conduct complained of.
2.
The conduct complained of need not be continuing at the
time the application is made. It will be important
however when the Court considers the remedy.
3.
Since Spargos fell under the influence of IRL there had
been a failure by the board in giving sole attention to
the company's affairs. No reasonable board could have
undertaken the transactions if the interests of the
company had been considered. It was therefore proper to
give relief under section 260 (now section 246AA) in
order to secure independent management of the company.
COMMENTARY:
This is a significant and important case for a number of
reasons.
-
The Court adopted the test of the reasonable
board of directors: i.e. was the conduct
complained of, such that a reasonable board of
directors would have approved of it? If the answer
is no then there is probably unfair and oppressive
conduct under section 260 (now section 246 AA). This
was the approach of the High Court in Wayde's
case.
-
The orders made by the Court were unusual. Murray J.
made the following orders in relation to a listed
company.
(i)
A
board of directors was to be appointed.
(ii)
Certain articles of the company were to be removed.
(iii)
The board was to investigate the transactions complained
of and to report back to the Court and the NCSC (now the
ASIC) every three months on the affairs of the company
and the progress of investigations.
-
This is a case where there is ample evidence of
managerial interference by the Court. Although for
many years Judges have said Courts should be slow to
interfere with the management decision of directors,
here we have the Court appointing new directors and
ordering them to report back to the Court every
three months. The Court seems to be adopting a
supervisory as well as a judicial role.
-
The controllers of IRL were responsible for a number
of questionable dealings in relation to the group of
companies they controlled. A number of them may
warrant and may be the subject of criminal
investigations. The action in this case and in Re
Enterprise Gold Mines N. L. shows that
proceedings may be commenced under the Corporations
Laws by minority shareholders and orders made
against company directors who have dealt with the
assets of the company in a way which may be
improper. The Court in both cases made it quite
clear that orders under section 260 (now section
246AA) were remedial rather than punitive and
perhaps minority shareholders would rather see
remedial action than punitive action where the
company's assets have been run down and are being
run down by the questionable activities of
directors.
-
Criminal proceedings against directors of companies
have not been successful in Australia. This approach
under section 260 (now section 246AA) by the Court
signals that it can be used by minority shareholders
to keep a check on directors who threaten the
company's assets through their neglect or bias in
favour of parties outside the company.
Re
ENTERPRISE GOLD MINES LTD
Supreme Court of Western Australia (1991) 9 ACLC 168
FACTS:
This was another case involving a member company of the
IRL group of companies.
The petition under the predecessor to section 260 (now
section 246 AA) was brought by a small shareholder
arguing oppressive conduct on the part of the directors
resulting from a series of transactions and activities
over a number of years- The remedy sought was the
appointment of a receiver and manager.
For the company it was argued that even if the ground
for the petition had been proved relief should not be
granted because the minority shareholder was motivated
to take control of the company and the Court should
exercise its discretion against interference in the
company for that reason.
HELD:
At
the time of the hearing the board had a chairman and
another director, both of whom could be described as
truly independent, while the other directors were
associated with the events which were the subject of
complaint and were involved with other IRL Group
companies. But although they were prepared to give up a
degree of control they maintained a substantial
influence and exercised 45% of the voting power in the
company. This indicated how difficult it would be for
the minority shareholders if they rushed to move the
company in a direction not supported by the "two IRL
directors".
The Court was also of the view that the position of the
independent directors who were securing the
representation of the minority shareholders was
vulnerable because of the power of majority shareholders
at a general meeting.
The Court said that on the evidence the minority
shareholder was not motivated to control the company. As
a shareholder the petitioner came across the suspicion
of oppression and commenced to investigate and question
decisions.
The Court granted relief under section 260 (now section
246AA) but said that the proceedings were remedial and
not punitive therefore it would not appoint a receiver
and manager because such a step would create a technical
default for the company's loans from its financiers.
Accordingly it ordered that until the next Annual
General Meeting the company should not pay transfer,
sell, convey or otherwise dispose of any money or other
property to or in favour of a director of the company on
IRL or associate, without the prior approval of the
shareholders in general meeting at which neither the
beneficiary nor its associate shall be entitled to vote.
COMMENTARY:
-
The Court here followed a similar approach to the
Spargos case. It was the same Judge and the same
group of companies, - the IRL Group. The Court was
attacking what it described as dubious commercial
transactions which favoured the IRL Group.
-
Murray J. did go to lengths to justify his final orders.
He said that it is no part of the consideration of the
company's affairs within section 260 (now section 246
AA) that misjudgements or bad decisions were made, so
long as the board otherwise behaved properly, having
regard to their duties to the company and to exercising
their powers with reasonable skill to the best of their
ability. Note, the Court is applying a reasonable
test to the conduct of the directors.
-
In
regard to one transaction, the issue of $12m worth of
redeemable preference shares in IRL to Enterprise,
Murray J. said any reasonable investigation on behalf of
the company into the affairs of Enterprise would have
revealed cause for considerable concern as to the wisdom
of this substantial investment. This transaction was
from the viewpoint of the company's shareholders
oppressive or unjust within the meaning of section 260
(now section 246AA).
-
The order made by Murray J. was made under section
260(2)(d) (now section 246AA(2)(d)), an order for
regulating the conduct of the affairs of the company in
the future.
ON
APPEAL
In
Jenkins v Enterprise Gold Mines N.L.
[1992] 10 ACLC 136; The Full Court of the Supreme Court
of Western Australia ordered the appointment of a
receiver and manager with powers of investigation
including investigating alleged breaches of directors'
fiduciary duties and where necessary taking legal action
against them.
The Full Court thought that the orders of Murray J. did
not go far enough and certainly would not enable any
investigation and possible prosecution of transactions
which seem to involve conflicts of interest by former
directors.
Re
WILLIAM BROOKS & CO. LTD
N.S.W. Supreme Court (1962) N.S.W. R 142.
FACTS:
This was a case concerning the predecessor to
section 461 (e) of the Corporations Law.
The company involved was prosperous and was controlled
by the managing director. He was able to gain control of
the company through the shares he and his family owned
and by acquiring options over a large number of shares
which he arranged in his capacity as director, to be
purchased by or allotted to employees; on some occasions
using company funds to finance the purchases or
allotments.
Also he used his position to pay employees extravagant
bonuses which concealed from the shareholders that the
company was making large profits. This also had the
effect of pushing the share price down on the Stock
Exchange. Furthermore, over the years he managed the
affairs of the company without consultation of other
members of the board and surrounded himself with other
directors he knew he could dominate.
On
the evidence the company should be wound up under
section 461(e).
For the managing director it was argued that as the
company was a public company it would be appropriate for
the complaining shareholder to sell his shares rather
than to rely on Court proceedings to settle the dispute
and in fact the managing director said in evidence that
he was prepared to purchase the shares at the present
market price. The Court dismissed this argument saying
that the Stock Exchange price for the shares was not a
real guide to the value as the price had been
substantially depressed by the breaches of duty.
Finally the Court took the view that the winding up
should be made even though the company was conducting an
expanding prosperous and efficient business. The nature,
extent and duration of the managing director's
misconduct justified the winding up order.
Re
TIVOLI FREEHOLDS LTD
Supreme Court of Victoria (1972) VR 445
FACTS:
A
minority shareholder in T.F.L. brought an action for the
winding up of the company under the predecessor to
section 260 (now section 246AA) arguing that the affairs
of the company were being conducted in a manner
oppressive to one or more members of the company, and
alternatively, the predecessor to section 461 (k), that
it was just and equitable that the company should be
wound up.
T.F.L. had been formed for the purpose of acquiring
theatres and carrying out entertainment on these sites.
The main asset of the company was the valuable land on
which the theatres were built.
T.F.L. was taken over by a "corporate raider", I.E.L and
the land and buildings were sold and the funds used for
corporate raiding purposes by I.E.L.
The minority shareholder objected to the company and its
funds being used for corporate raiding activities.
HELD:
The minority shareholder had not established oppression
under section 260 (now section 246AA) but had
established a case under the "just and equitable",
section 461 (k) to have the company wound up on the
grounds that it was "just and equitable".
COMMENTARY:
This case is interesting and significant because the
minority shareholders argued both section 260 (now
section 246AA) and section 461 (k) and the court
concluded that there was no evidence of oppression, in
fact the new activity of the company was profitable.
However the Court said it was "just and equitable" to
wind the company up because the company had acted
entirely outside what could fairly be regarded as having
been within the general intention and common
understanding of the members when they became members.
In this case the general intention and common
understanding of the members was that company was in the
entertainment business.
EBRAHIMI v WESTBOURNE GALLERIES LTD
House of Lords (1972) 2 ALL ER 492
FACTS:
E
and N had been partners for a number of years in a
carpet business when they decided to incorporate a small
company to take over the business. In the company both
were equal shareholders and directors. Soon after the
company's formation N's son was made a director and
shareholder, thus N and his son held a majority of votes
at a general meeting. The company made good profits all
of which were distributed to the directors by way of
salaries and expenses etc; no dividends were ever
declared and paid.
A
dispute arose between E & N and a resolution was passed
by the company at a general meeting by the votes of N
and his son removing E from his position as director.
There was no dispute about the legality of the
resolution.
E
brought an action under the English equivalent to
section 461(k) to wind the company up.
HELD:
The action to wind the company up should succeed because
the company had been formed on the basis and
understanding that both partners would share in the
management of the company when it was formed and that N
had broken this relationship.
COMMENTARY:
The Court said in this case that it would not be
equitable to allow N and his son to pursue and enforce
their legal rights where considerations of a personal
character arising between one person and another made it
unjust and unfair to do so.
WAYDE v N.S.W. RUGBY LEAGUE LTD
High Court of Australia (1985) 10 ACLR 87
FACTS:
The Board of Directors of the N.S.W. Rugby League Ltd
(the league) decided that the number of teams in their
premiership competition be limited to 12 and further
decided that the application of the Western Suburbs
District Rugby League Football Club for entry into the
competition be refused (Wests).
Wests brought an action under the predecessor to section
260 (now section 246AA).
HELD:
The High Court held that Wests did not have a valid case
as the decision of the league was made in good faith and
that given the expertise and experience of the board it
had properly exercised its powers to decide which teams
took part in the competition.
COMMENTARY:
This case is important in that the High Court introduced
a rather simple approach to what is a lengthy and
complex section. The Court introduced the test of the
reasonable director and said that it could not be shown
by Wests that the decisions of the board of directors
were such that no board acting reasonably could have
made them.
Brennan J. took it further and said;
"the Court must determine whether reasonable directors
possessing any special skill, knowledge or acumen
possessed by the directors and having in mind the
importance of furthering the corporate object on the one
hand and the disadvantage disability or burden which
their decision will impose on a member on the other,
would have decided that it was unfair to make that
decision.
The question here is whether the resolutions which were
manifestly prejudicial to and discriminatory against
Wests, were also unfair - that is, so unfair that
reasonable directors who considered the disability the
decision placed on Wests would not have thought it fair
to impose it".
Re
G. JEFFREY (MENS STORE) PTY. LTD
Supreme Court of Victoria (1984) 9ACLR 193
FACTS:
This case involved a dispute within a family business; a
common scenario for cases on oppression.
A
member of the family, R controlled a majority of the
votes on the board of the family companies as well as at
their general meeting of members. R had a conservative
approach to the financial management of the company
including payment of dividends. He also tended to treat
the businesses as his own and disregarded advice from A,
another director and the minority shareholder who
brought the action under the predecessor to section 260
(now section 246AA). A wanted R to buy his shares but
the offer was not realistic and was refused.
HELD:
There was no evidence of oppressive conduct. The refusal
by A by buy R shares and the conservative management of
the company did not amount to oppressive, discriminating
or unfair conduct.
COMMENTARY:
The Court said that section 260 (now section 246AA)
should not be looked at as providing a way for one
member to buy out another member of a proprietary
company in the event of a dispute.
Furthermore, a low dividend policy in itself does not
amount to unfair, discriminatory or oppressive conduct
if funds which would otherwise go towards dividends are
used to build up the assets of the company.
