MEMBERS RIGHTS AND REMEDYS Flashcards
1
Q
WHERE ARE MEMBERS RIGHTS AND REMEDIES CONTAINED
A
CH 2F
2
Q
OBJECTIVES OF MEMBERS REMEDIES
A
- The principal objective of member’s remedies is to control divergences of interest between managers and shareholders
› For example: where there is a breach of duty by directors of the company against other directors, and the majority members (often directors acting in their capacity as members) use their voting power to ratify that breach at general meeting. This may affect the value of minority members investment in the company being reduced. - Members remedies are one of several mechanisms which attempt to control the severity of the divergence of interest between managers and shareholders
3
Q
OTHER MECHANISMS TO CONTROL DIVERGENT INTERESTS
A
- Other mechanisms to control divergent interests?:
› Shareholder voting
Sometimes difficult because shareholders won’t always be on the same page.
› Corporate regulator (ASIC)
Limitations.
ASIC has priorities that they focus on when enforcing the corporations act.
› ASX Listing Rules
› Market forces
Aligned interests of managers and shareholders? - Obvious remedy for public companies = sell your shares.
› Not the same for sml proprietary company. Minority shareholders said to be ‘locked in’. probably wont be able to sell their shares, or not for a fair price
4
Q
DIFFERENCE BETWEEN MAJORITY AND MINORITY SHAREHOLDERS
A
- Majority shareholder = holds more than 50%, minority shareholder = less than 50%.
› Technically speaking have the same rights.
› But majority shareholders have more power (voting).
› But if majority shareholder uses voting power inappropriately (deny minority shareholder rights), then their may be legitimate grounds for claiming oppressive conduct etc, under the corporations act.
› Corps act provides some basic rights for minority shareholders. Check company constitution.
Shareholder agreement to expand on these rights.
5
Q
MAJORITY SHAREHOLDERS
A
- Illegal for majority shareholders to act in a way contrary to interests of shareholders as a whole.
› Conduct
Excessive remuneration to directors.
Denial of access to company information
Denial of dividends being paid without reasonable reasons/cause.
6
Q
CORPORATION ACT REMEDIES
A
› Rights:
Right to inspect company books (s 247A)
Right to correct register (s 175)
Right to challenge variation of shares (s 246D)
› Remedies:
Injunction and damages (s 1324)
Oppression remedies (Part 2F.1)
Winding up order (s 461)
Statutory derivative action Part 2F.1A
Procedural irregularities (s 1322)
7
Q
CONTRACT REMEDIES
A
› Statutory contract (s 140(1)):
Rights under company’s internal rules
* Remedies: injunction and declaration
› Special agreements:
Rights under terms of contract
Remedies based on contract law principles
Shareholders agreements
8
Q
WHAT ARE MEMBERS REMEDIES
A
› Remedies for oppressive or unfair conduct (s 232);
› Members’ statutory derivative action (Part 2F.1A) (proceedings on behalf of a company);
› Section 1324 injunctions;
› Winding up the company on just and equitable grounds (s 461);
› Enforcement of members’ personal rights (s 246D, among others)
9
Q
OPPRESIVE OR UNFAIR CONDUCT
A
- ss 232 - 235 provides remedies for oppressive or unfair conduct if a member or members can show that the conduct of the company’s affairs is contrary to the interests of members’ as a whole, or oppressive, unfairly prejudicial or unfairly discriminatory against a member or members in any capacity
- Conduct of the company’s affairs means actual or proposed act or omission by or on behalf of the company, or a resolution or proposed resolution of members or a class of members of a company (can include the business, trading, transactions, dealings, finances, etc) and includes conduct of the directors, majority shareholders as well as the company itself
- Also note s 53 broad definition of ‘company affairs’
- Often a member seeking s 232 remedy will be a shareholder in a small company rather than in a large public company; proprietary companies offer more scope for the majority to abuse their positions
- s 234 provides a list of who can apply for a remedy (an order) under s 233
10
Q
CONDUCT WHERE A REMEDY MAY BE SOUGHT - OPPRESSIVE CONDUCT
A
- A single resolution of the board of directors could be an oppressive or unfair act on behalf of the company: Wayde v NSE Rugby League Ltd (1985) 180 CLR 459
- Egs of oppressive conduct –
› ‘Burdensome, harsh and wrongful’ conduct: Scottish Co-operative Wholesale Soc Ltd v Meyer [1959] AC 324
› paying excessive remuneration: Sanford v Sanford (1987) 10 ACLR 549
› unfairly restricting dividends
› Repeated refusal to call directors’ meetings: Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd [2002] NSWCS 13
› share issue to reduce shareholder’s proportionate stake
› decisions for benefit of related companies rather than shareholders: Re Enterprise Gold Mines NL (1992) 6 ACSR 539
› sale of company assets at undervalue/ uncommercial terms: Cassegrain (2012) 88 ACSR 358
› Failure to prosecute an action
11
Q
ORDERS THAT THE COURT CAN MAKE - OPPRESIVE CONDUCT
A
- Orders that the court can make (s 233):
› The company be wound up;
› The company’s existing constitution be modified or repealed;
› Regulating the conduct of the company’s affairs in the future;
› The purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
› For the purchase of shares with an appropriate reduction of the company’s share capital;
› For the company to institute, prosecute, defend or discontinue specified proceedings;
› Authorising a member or a person to whom a share in the company has been transmitted by wiil or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
› Appoint a receiver;
› Require a person to do or refrain from doing a specified act or conduct. - Order can be made whether the action affected all members, or just a few.
- If an order is made under s 233, the applicant must lodge a copy of the order with ASIC within 14 days after it is made
12
Q
STATUTORY DERIVATIVE ACTION
A
- A statutory derivative action enables shareholders and other eligible applicants to bring legal proceedings on behalf of a company where the company is unwilling or unable to do so itself: (ss 236-242)
› Corrects the wrong.
› Proceedings are brought in the companys name. but it is the members bringing the action because the directors are the ones in the wrong and they aren’t going to bring an action against themselves. (this is like an exception to the foss v Harbottle).
› Any benefit that comes out of the proceedings belongs to the company. - In any action in which wrong is alleged to have been done to a company, the proper claimant is the company itself: Foss v Harbottle (1843) 67 ER 189
› One of the exceptions to Foss v Harbottle is derivative actions; “Proceedings on behalf of a company” by members and others is often the terminology used instead of “statutory derivative action”
13
Q
S 236(1)
A
- S 236(1) provides that the following persons may bring proceedings on behalf of a company:
› A member, former member or person entitled to be registered as a member of the company or of a related body corporate or present or former directors and officers of the company
› Replaces Foss v Harbottle. - The Corporations Act recognises that, by making it easier for shareholders to bring an action on behalf of the company, directors may have inappropriate legal action brought against them by disgruntled shareholders; that is why leave of the court is required before this legal action can proceed
14
Q
S 237(2)
A
- The court must grant an application for leave if it is satisfied that each requirement at s 237(2) is met:
(2) The Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
(e) either:
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
15
Q
S 237(3)
A
- Best interests: S 237(3) assists a court in deciding whether it is in the best interests of the company that an applicant be granted leave for the purposes of s 237(2)(c):
(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv) rationally believed that the decision was in the best interests of the company.
The director’s belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
Same considerations as the business judgement rule.
