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Quiz 3 Study Notes

2015 S2

Week 10

Chapter 19 Members Remedies

Division of power in a company
S198A confers very broad management powers: business of the company is to be managed by or
under the direction of the directors.
At common law, members cannot override/interfere with board decisions: Howard Smith Ltd v Ampol
The only way in which members can control the exercise of powers by:

Altering the rules

Refusing to re-elect the directors

They cannot usurp the powers by which by the rules are vested in the directors any more than the
directors can usurp the powers vested by the rules in the general body of shareholders. John Shaw
& Sons v Shaw (1935)

Common squeeze-out techniques used on minorities

Types of squeeze-out methods commonly used by majority on minority shareholders

Diversion of corporate opportunities (contracts)

Diversion of profits
Exclusion from management
Exclusion from dividends
Improper share issue

Range of shareholder remedies under CA (Statutory Remedies)

The minority oppression remedy

S 232 of CA arguably most important members remedy, starting point for unhappy member.
Member or anyone with ASIC consent may rely on it.
In order to seek a remedy under s 233, the member applying for an order must prove the elements of
s 232 which are:

The conduct of a companys affairs (includes the business management and internal
affairs of the company: s 53); or
Actual or proposed act or omission by or on behalf of a company; or
A resolution, or a proposed resolution, of members or a class of members of a company;
was either
Contrary to the interests of the members as a whole (s 232(d)); or
Oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or
members whether in that capacity or in any other capacity (s 232(e)).

No statutory definition of oppression


Conduct that is burdensome, harsh and wrongful (Scottish Co-op case)

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Quiz 3 Study Notes

2015 S2

Objective test: essential criterion of commercial unfairness

Conduct will be oppressive if that conduct was unfair according to ordinary standards of
reasonableness and fair dealing (Wayde v New South Wales Rugby League Ltd)
No need to examine the motives for what was done (Campbell v Backoffice Investments Pty

Legal Test (objective test of unfairness)


Objective test: ask how would a reasonable person view the conduct; whether a commercial
bystander would see it unfair
No need to show unlawful or dishonest conduct by others. It is the effect of the conduct that
is important

The Statutory Derivative Action (ss 236-237 under Part 2F.1A)

Derivative action is an action brought by an individual member in the name of the company to enforce
the companys rights.
Compensation is paid to the company rather than the plaintiff (in this case the individual
member/shareholder) because the legal action is brought in the companys name.
Reasons for SDA

Common law derivation action (Foss v Harbottle) perceived to be problematic and inadequate
Barriers hindering use of remedies at common law:
o Restrictive access
o Impact and effect of ratification
o Uncertainty as to costs

Government response to ineffective common law derivation action


Abolished precedent in Foss v Harbottle and its exception (except for personal action) in 2000
Replaced with Part 2F.1A (the SDA) to overcome inadequacy of common law

Aims/purpose of Part 2F.1A (SDA)


Deterrence aim: increase managerial accountability by deterring wrongful act

Compensation aim: company can recover damages plus attain the goal of deterrence
Activism aim: empowering shareholders to act as a corporate watchdog

S 236 allows shareholders and officers (both current and former) to apply to court for leave (consent)
to bring a SDA.
Court may only do so only if following criteria are met (s 237(2)):

Probable that the company will not initiate litigation

Applicant acting in good faith
Companys best interests
Serious question to be tried (applicant does not have to have sufficient evidence to win). MG
Corrosion Consultants Pty Ltd v Vinciguerra (2011): There would be little point (to) the
introduction of s 237 CA if there were to be a complete trial of the issues before granting the
Notify company 14 days in advance of the intention and reasons

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Quiz 3 Study Notes

2015 S2

Ratification issue

S 239 overcome ratification issue by making prior ratification of conduct no longer prevent an
applicant from applying for leave to bring an SDA.

Cost issue

S 242 gives court power to have the company pay the legal costs of the applicant.
Research suggests 21% of successful applicants were granted costs, none of which required
the company to fund applicant. Hence, costs remains as a great inhibitor to shareholder
Critics have suggested SDA to follow the NZ and Canadian model where company must pay
for costs when leave is granted.

Winding up remedy (s 461)

S461 confers judicial discretion to wind up a company under a broad range of ground. One of which
is the just and equitable ground in s 461(l)(k).
Meaning of just and equitable: s 461(k)
Range of situations that are considered just and equitable from precedents:

Breakdown of mutual trust and confidence (Ebrahimi case)

Deadlock in company management (Yenidje Tobacco case)
Fraudulent or oppressive conduct
Failure of companys substratum/purpose (Tivoli case)
Justifiable lack of confidence in management
Illegal investment schemes
Consistently fail to comply with CA/ taxation laws

Legal test in Ebrahimi case


Fact that company is small or private is not enough.

Five steps for courts to consider:
o Was company intended to be run as a quasi-partnership
o Was company in fact run as a quasi-partnership
o Reason why the court should intervene in companys affairs
o Alternate solution
o Just and equitable.

Statutory Injunction (s 1324)


S 1324 provides the court with the power to order an injunction to stop a person from
engaging in conduct that is in breach or would breach the CA.
Any person whose interests have been affected by wrongful conduct or ASIC may apply.

Inspection Remedy (s 247A)


Right to inspect companys books

Member or their solicitor/accountant may apply
Statutory criteria: good faith and proper purpose

Variation of rights attached to shares (discussed in Week 6)

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Quiz 3 Study Notes

2015 S2

Shareholder remedies at general law

Relevance of Gambotto v WCO

The case confirms that members have property rights in their shares which simply cannot
be taken away for the purposes of increasing business.
The case imposed two-staged test for assessing the validity of alteration of constitution to
compulsory acquire shares of minority shareholders:
o Proper purpose
o Is it fair?
Gambotto succeeded because high court held that the amendment was not for proper
Highly controversial
o Should share be treated like any other property or should it be viewed simply as a
dividend stream which can be compulsorily acquired provided the price offered is
o Greenmail: minority shareholders preventing a corporate restructure with
commercial benefits unless they are paid a price well above the fair value of their

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