You are on page 1of 6

CACL 2014

Case Studies and problem sets

Problem Set 5

The following problems and questions should be answered after you have read
Chapters 9 and 10.

1. At FWPL, the relationship between Mario and Jason is becoming very


acrimonious. Mario says to Jason that he should ‘stop making trouble’ in the
company. Mario is confident that Pia and Nick will always support him in
decisions relating to the company and that (because Simon never attends
meetings of FWPL) he will always have enough votes to control the general
meeting. So Mario tells Jason that if he keeps making trouble he will ask his
siblings to approve the transfer of the profitable North American export business
to a new company, in which the Galli grandchildren have no financial interest.
Could Mario, Pia and Nick pass such a resolution at a general meeting of FWPL?

Members of a company typically have a right to vote on matters such as:

 the composition of the board of directors;


 certain transactions affecting share capital;
 variations of class rights;
 adoption of, and amendment to, the internal governance rules – see Chapter 7.

However, even if members have the power to pass a resolution over a matter, there
are still limits on their powers. It is possible for members who are able to exercise a
majority of the votes in a company to use their voting power to exploit those
members who are the minority. To prevent this, there are principles referred to as the
equitable limitation on majority voting power. This means that the majority
cannot make decisions that are unfair or unreasonable on minority members.

The equitable limitation can apply to a number of actions of the majority. However,
many of the cases that have come before the courts concern situations where the
majority has voted to amend the company’s constitution.

Examples not involving the constitution include:

 vote to approve the sale of assets of the company to themselves or inappropriately


take away the company’s assets: Menier v Hooper’s Telegraph Works
 vote to approve certain benefits to themselves that are not available to the minority:
Biala Pty Ltd v Mallina Holdings Ltd (No 2).

ACC204 – Problem Set 5 with Solutions


1
Application of law to the facts

Even if this was an example where the general meeting has the power to approve
this decision (ie the complete sale of the company’s assets), the effect is to deprive
the company of its operational assets and future profits, and transfer them into the
hands of the majority. Note that the sale will be ‘profitable’. The test is whether the
majority exercised their vote so as to give themselves “property, advantages or rights
which belong to the company”, as this breaches the equitable limitation: see Ngurli
Ltd v McCann. This would be an example where Jason could prevent any such
resolution based on the equitable limitation on majority voting power principle.

2. GML owns 92% of the issued shares in Explorer Ltd. The remaining 8% of the
shares are held by five individuals, including a Mr Owen who owns 0.5% of the
issued shares. Mr Owen is a high profile individual who has at times been critical
of the Chinese government’s activities in the South China Sea. GML is concerned
that its ongoing association (through Explorer) with Mr Owen may harm its
relationship with its Chinese customers. At a meeting of Explorer, a resolution is
passed amending the constitution of Explorer, to allow any member who was
entitled to at least 90% of the issued shares of Explorer to acquire compulsorily,
the shares of any other member at a price of $20.00 per share. Explorer shares
have recently been valued by an independent expert at $15.78. Mr Owen does not
attend this meeting and the majority shareholder (GML) does not vote. The
resolution is passed unanimously by the four other minority shareholders. Mr
Owen is challenging the validity of the amendment. Having regard to the decision
in Gambotto, will his challenge succeed?

Members of a company typically have a right to vote on matters such as:

 the composition of the board of directors;


 certain transactions affecting share capital;
 variations of class rights;
 adoption of, and amendment to, the internal governance rules – see Chapter 7.

However, even if members have the power to pass a resolution over a matter, there
are still limits on their powers. It is possible for members who are able to exercise a
majority of the votes in a company, to use their voting power to exploit those
members who are the minority. To prevent this, there are principles referred to as the
equitable limitation on majority voting power. This means that the majority
cannot make decisions that are unfair or unreasonable on minority members.

The equitable limitation can apply to a number of actions of the majority. However,
many of the cases that have come before the courts concern situations where the
majority has voted to amend the company’s constitution. The High Court decision in
Gambotto is important in setting out the detailed principles and requirements to take
into account in cases involving majority shareholder resolutions to change the
constitution.

The High Court said that the general meeting cannot amend a company’s
constitution, where the effect of the amendment is to allow the majority to expropriate

ACC204 – Problem Set 5 with Solutions


2
(take away) minority members’ shares, except in very limited circumstances.

Such an amendment is only valid if:

i. it is done for a proper purpose; and


ii. the effect of the amendment is not to oppress minority shareholders.

Application of law to the facts

The High Court’s “proper purpose” test is very narrow: to prevent significant
detriment or harm being done to the company because of the minority shareholder.
The facts here regarding Mr Owens as a member, may be sufficiently speculative
and uncertain as to satisfy the “proper purpose” test. It appears that removal of Mr
Owens, while convenient, is not necessary.

The second test requires procedural and substantive fairness. Among other things
this requires that the minority are offered a fair price.

3. The directors of Blue Mine Pty Ltd are Mr Chester and Ms Wu. Blue Mine has not
held a board meeting for several months. At a recent GML board meeting, it was
resolved to reduce production at Blue Mine by 10%. Mr Boon, the managing
director of GML, instructed the mine manager at Blue Mine to make the reduction
and she did. In these circumstances, could GML itself be considered a director of
Blue Mine?

The definition of “director” in the Corporations Act includes (in para (b)(ii)) a person
who is not validly appointed as a director, if the directors of the company are
accustomed to act in accordance with the person’s instructions or wishes.

In Standard Chartered Bank v Antico, the court found that Pioneer International was
a “shadow director” of Giant Resources. The reasons for the decision are complex,
but the key factor seems to be that Pioneer exercised extensive management control
over Giant, effectively usurping the Giant board. In other words, instead of the Giant
board of directors debating and deciding issues relating to the management of the
company, these matters were decided by Pioneer and just communicated to Giant to
be acted upon.

In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd, White J put
forward the following propositions regarding the definition of shadow director in s9:

 in some circumstances, it is possible for the one person to be both a shadow director
and a de facto director;
 it is not necessary that the instructions or wishes of the shadow director be given
over all areas of corporate activity for which the directors are responsible;
 a person is not a shadow director merely because they impose conditions on their
commercial dealings with the company with which the directors feel obliged to
comply;
 there must be a causal connection between the instruction or the wish of the shadow
director and the directors acting on it. It is not sufficient if the act that was specified in
the instruction is something that the directors would do, irrespective of the instruction;

ACC204 – Problem Set 5 with Solutions


3
 for the directors to be ‘‘accustomed to act’’ in accordance with the instructions or
wishes, requires ‘‘habitual compliance over a period of time’’; and
 the directors collectively must be accustomed to act on the shadow director’s
instructions or wishes and it is sufficient if a ‘‘governing majority’’ of the board is so
accustomed to act.

Application of law to the facts


Although only a natural person can be appointed a director under s201B(1), the
definition of shadow director in s9 is wide enough, such that a company can be
considered a ‘director’ of another company. You would need to consider whether this
action of GML instructing the board of Blue Mines amounted to extensive
management control, as described in the Standard Chartered Bank case and the
Buzzle case.
A holding company is not a shadow director of a subsidiary, even if it controls all the
votes and appoints the directors, so long as the board (or single director) continues
to function as prime and separate decision-maker for the subsidiary. Among other
things, this involves the board (or single director) engaging in a separate
consideration of whether wishes or instructions communicated to it by the holding
company are in the best interests of the subsidiary, and retaining a separate active
discretion on the implementation of any wishes and instructions it chooses to adopt.

4. Before joining the board of GML in 2007, Frank Foster was an official in a trade
union. A recent investigation by Fair Work Australia into the affairs of the union at
the time Mr Foster worked there, has resulted in allegations of misuse of union
funds. There is a rumour that a number of officials, including Mr Foster, may be
charged with criminal offences punishable by more than 12 months imprisonment.
XYZ Limited, a shareholder in GML, wants Mr Foster removed from the board of
GML immediately. Mr Foster is refusing to resign. Can his fellow directors
remove him from office? Can he be removed by GML’s members? Discuss.

Recall that the decision to remove directors from the board is a decision-making
power for the general meeting – see Chapter 7.

Removal by directors

It is not possible for directors of a public company to remove another director – see s
203E of the Corporations Act.

The situation is different for proprietary companies. It is possible for the constitution
of a proprietary company to have a provision that allows directors to remove another
director.

Removal by members

In the case of a public company, s203D of the Corporations Act provides that
members may remove a director by ordinary resolution.
Disqualification

Note that if the charges are ultimately successfully prosecuted against Mr Foster,
this will be grounds for removal by disqualification. Under s206B of the Corporations

ACC204 – Problem Set 5 with Solutions


4
Act, conviction of an offence that involves dishonesty and is punishable by
imprisonment for at least three months, leads to disqualification.

Application of law to the facts

As GML is a public company, only members can pass a resolution to remove Mr


Foster. You may also note that there are some special procedural requirements
contained in s203D. For example, notice of this intention to remove must be given to
the company at least two months before the meeting at which the resolution is to be
considered, and the company must notify Mr Foster of the intention to remove him.
Mr Foster has the right to have representations sent to all members by the company
and to speak at the meeting.

5. XYZ Limited decides to increase its stake in GML from 6.5% to approximately 16%,
and acquires an additional 17.5 million shares in GML on market. XYZ informs the
board of GML that it would like a seat on the board for Mr Xu, its majority
shareholder. Mr Xu lives in Hong Kong. Can the directors appoint Mr Xu to the
board of GML?

Recall that the decision to appoint directors to the board is a decision-making power
for the general meeting – see Chapter 7.

To be appointed as a director of a company, a person must satisfy four conditions


contained in the Corporations Act. The person must:

i. consent to the appointment (s201D);


ii. be an individual and not a company (s201B(1));
iii. be at least 18 years old (s201B(1));
iv. not be disqualified from being a director (s201B(2)).

The members may appoint a director by passing an ordinary resolution: s201G of the
Corporations Act. It is also possible for the constitution of a company to allow the
directors themselves to appoint additional directors but this must subsequently be
approved by the members of the company: s201H of the Corporations Act.

In the new appointments, the board also needs to consider board size. Every
proprietary company must have at least one director, with at least one director
ordinarily residing in Australia: s201A(1) of the Corporations Act. Every public
company must have at least three directors, with at least two directors ordinarily
residing in Australia: s201A(2).

Application of law to the facts

As GML is a listed company, you will also have to check its constitution for rules as
to appointment (see ¶27-300). Clause 9 of GML’s constitution contains provisions
similar to ss201G & H of the Corporations Act. So the directors of GML can appoint
Mr Xu, provided the appointment is voted on at the next AGM.

You will also need to find out personal details pertaining to Mr Xu to ensure that he
meets the four requirements above.

ACC204 – Problem Set 5 with Solutions


5
Finally, as to board size, note there is a statutory minimum of 3 directors, with 2
directors residing in Australia. Mr Xu’s current residence in Hong Kong will not
matter, as sufficient other directors of GML reside in Australia. Note also that GML’s
constitution (cl 9.1) specifies a maximum board size of 15.
6. What procedural requirements must be followed to convene a meeting of the
board of GML to appoint Mr Xu?

The procedural rules that apply to board meetings of directors are typically contained
in the company’s constitution.
Board meetings can be called by any of the directors, with “reasonable notice”:
s248C of the Corporations Act.

Unless the directors decide otherwise, the quorum for a meeting of directors is two
directors, and the quorum must be present at all times during the meeting: s248F of
the Corporations Act.

Decisions at board meetings are usually taken by majority vote. Each director is
entitled to one vote, although it is possible for the company’s constitution to provide
that a director has more than one vote in some circumstances. It is common for the
constitution to provide that the chairperson of directors is to have a casting vote
where votes are tied.

Minutes must be kept of resolutions passed at board meetings: s251A(1) of the


Corporations Act.

Application of law to the facts


As GML is a listed company, you will also have to check its constitution for rules as
to board meetings (see ¶27-300). Clause 13 of GML’s constitution contains
provisions similar to ss 248C & F of the Corporations Act. So the directors of GML
can appoint Mr Xu, provided he meets the four criteria for appointment (consent,
age, natural person and not d

ACC204 – Problem Set 5 with Solutions


6