Corp Law Lecture Week 12 Tuesday

We looked at steps SH can take

Recall systemic issue – arises b.c. of negative balance of right of individual in a collective organisation

Law imposes filters

Refer to flowchart in One note

Foss v Harbottle urle: company suffers damage and is proper party. 2 key rules from Foss (proper
laintiff rule and internal management rule).

Internal management rule – if it turns out majority of members in GM would/have excused breach,
court will not hear case. So IMR emphasises collective nature of company. if breach of internal rule,
court will not waste time and it will excuse the breach if.

CL derivative suit has since been overrided

However, exceptions have developed over time

 ‘interest of justice’ – if you can’t get suit in orthodox category, court might allow you to bring
derivative suit in this way
 Personal rights – major exception - law has recognised many, some under constitution, some
under CL, and some other statute (we look at this today)
 Special majority
o Court more inclined to allow SH to complain where something has happened
otherwise than in accordance with special majority required by law
 Illegal or ultra vires acts
o More likely court will allow proceedings to be brought if illegal act
 Common law derivative suit – abolished
o we now have STATUTE derivative suit – if SH wants to bring derivative suit, MUST
BRING IT UNDER STATUTE now
 NOTE about statutory derivative suit: this is only means to an end, it just
allows SH to step into shoes of company and bring claim ob behalf of
company. You still need to bring substantive cause of action that company
would have. i.e. refer to all duties and identify possible breaches
o applied to problem question last week, if mandlery doesn’t want to bring action to
sue board for their breach of duty of care – Rebecca could bring statutory derivative
suit for example
 1324
o Court can grant injunction and/or damages for threatened breach of corp act
o As long asyou have an intetest more than just a member of the public, you have a
chance
o To come into s 1324, it is most likely you need to access it via one of the exceptions
described above. E.g. if breach of constitution = activate personal rights exception =
You can then go to court seeking damages or injunction under s 1324

Applying this framework in practical

  If oppression or if shareholder initiated winding up (largely those under statute), it is often
really clear that SH can bring proceedings via personal right. If it is clear, don’t labour the
framework.
o Under s 462 (i think), SH is person who can wind up company
o So don’t lay out the whole Foss framework – just refer to cases that give SH standing
 BUT, for common law breach of directors duties, you will need to work through this
framework
o Is ability of SH to prosecute this stopped by Foss v Harbottle or can I find one of the
exceptions?

I.E. COPIED FROM LAST LECTURE 

Recall problem question – remedies consideration

 Breach of duty of care

o Rebecca is shareholder so Foss says she can’t just start suing herself because of
proper plaintiff rule. Company is proper plaintiff
o Then: how can Rebecca be fitted into one of the exceptions
 Breach of duty of care will not likely be held as breach of personal right
 So left with s 1324
 Court may apply Mesenberg and apply section consistent with Foss –
thus, she is suing for wrong done to company, not a personal right
 Statutory derviatve rule
 Is company going to bring litigation?
 Think about breach to act proper purpose and best interest
o We said earlier here there might be this breach
o what is your remedy
 Equitable compensation
 Hogg – wrong done to company. so we need Rebecca in one of the
exceptions
 Good chance of finding a personal right given cases
 McCANN
 Hogg
 PP is common way into personal right

Fraud on minority

- we covered misapporpaition of property last week – now we focus on release of directors duty of
good faith

Duty we are talking about for this purpose is only one of the duties we have covered: director’s duty
to act of BF best interests and PP  Are there any limitations on GM’s ability to excuse/limit breach?
because this is one duty where court has said GM will not allow SH to bless, on basis of FOTM

composite duty

4 cases on reading list here

Ratification of DD’s duty to act bona fide in best interests of the company and for a PP – case law is
unsettled but suggests following propositions
 1. Director acts BF in best interests but for improper purpose
a. Ratification ok: Hogg v Cramphorn
2. Director netierh acts BF in best interests nor for proper purpose
a. Ratification seemingly ok: Bamford v Bamford, Winthrop Investments v Winns,
although those cases are not resounding endorsements
3. In any case, following limitations may apply:
a. Ratification might not be okay if majority in general meeting act with same improper
purpose: Winthrop Investments per Mahoney JA
b. Ratification might not be ok if there is an issue of shares for improper purpose:
Residues Treatment and Trading Co

First propostion – if D actsbona fide in BI of company but not for PP,

 Example if Hogg v Cramphorn

o cramphorn created trust – employees beneficiaries – they finance issue of shares in
that trust – those shares and voting rights were now added to voting rights of
cramphorn and his friends > 50% - this maent baxter could not get control of
company
o judge found cramphorn and co acted in good faith – they were trying to protect
interests of employees, didn’t think baxter was good  so D satisfied this
component of the duty
c. So: majority of members in GM can excuse breach where Director acts BF in best
interests but for improper purpose

Second proposition

 Bamford V Bamford
o Suggests majority of mebers in GM can excuse breach where D has failed to satisfy
both elements of composite duty (best interests and PP)
o This was takeover case – involving issue of shareas as defensive move
o before matter got to court, GM meeting and SH passed resolution excusing breach
o Court was asked by parties to assume both elements of duty had not been satisfied
(hadn’t acted in GF and not acted for PP) – court of appeal said yes, SH can excuse
breach
o However, this case is a little shakey – judges are not super explicit about this
assumption. Although, decision can be cobined with Winthrop
 one judge said fine but other judge was not clear
 Winthrop
o Another takeover case – defensive move involving issue of shares to thwart bidder –
Winthrop had issued about 10% of shares to another company
o Court asked to make same assumption as bamford, i.e that both elements of duty
had been breached
o Court said following bamford, this kind of breach can be excused. However justice
Mahoney made a qualification (see below)
o interestingly, shareholders at GM had approved breached in advance
o Also, court of appeal said when board goes to SH seeking ratification, they must
uphold full and fair disclosure
 This is authority of rhtis point
  Must tell SH that what is being done constitutes a breach of duty – SH must
be told explicitly that if vote yes, they are excusing a breach
o in this case, they failed to disclose
 so winthrop and bamford tell us you can generally excuse breach were both elements of
composite duty breached, however qualifications do seem to apply
 Qualifiacations that apply – third proposition
o First qualification - Mahoney JA in Wintrhop - queried (not decided) whether court
would uphold ratification of such double breach if SH who were excusing breach
were also acting for the same improper purpose – he sort of just put this idea out
there. it hasn’t been picked up in subsequent cases, but it is sitting there to keep in
mind when dealing with these ratiffications
o Other qualification comes from Residues Tratment Company v Southern Resources
 Another takeover case involvind defensive move of issuing shares
 Court said SH stake has been diluted from issue of shares for improper
purpose
 court felt SH had personal right to be protected from this sort of
situation
 court said the relative size of SH holding is important
 GM majority cannot waive breach of PP duty where there has been issue of
shares for improper purpose – because it would be majority at GM waiving
away personal right of SH
 so this case reflects the idea that GM cannot waive breach of
(general law) best interest and PP duty in circumstances where
there is personal right

These limitations deals with the ratification of that specific common law duty (act best interests and
for PP), not others

These are the first 2 ‘categories’ of FOTM – next one is divided into 2 parts on the reading list

FOTM and amending the constitution

Alteration of constitution

 Non-exproproation cases
 Exprop. Of a members shares or other valuable share rights

S 136(2)

If special majority at GM wanted to be aggressive, how aggressive could they be? Reasonably, law
will tolerate reasonable amount of self-interest by SH’s acting

Dixon J in Peters American

 Because a constitution can be amended, a SH’s rights are necessarily capable of alteration
 A SH right to vote is not subject to constraint by fiducriary duies
 Combining this: it will not of itself, be a problem if SH act in a less than altruistic manner to
amend or remove the constitutional rights of other SH’s
Law does draw a line in the sand at some point. traditionally the line in the sand was drawn by Gold
Reefs. Allen v Gold Reefs – when majority exercise power to amend cosntituion exercised, ‘it must be
exercised, not only in the manner required by law, but also bona fide for the benefit of the comapny,
and it must not be exceeded’

Greenhalgh

 Arderne operated cinemas

 Clause said a member must not sell their shares to a non-member if another member is
prepared to buy them for fair value
 group of SH – if you want to sell out, fellow SH can have first dibs
 MD Mallard wanted to sell out – found someone interested but had to stick to process
where he takes offer first to SH – enough people passed a special resolution to alter the
‘pre-emptive rights article’ as it was called – this amendment added the proviso that any
member with the passing of an ordinary resolution might transfer shares to a non-member
– at next resolution, he exercises majority shareholding to approve by ordinary resolution
sale of his shares to outsider
 Decided to amend constitution
o Added proviso – that the clause above did not aply if approved by ordinary
resolution passed at GM (beauty for mallard guy here was that he had majority
shareholding so he could approve sale of his shares to an outsider)
 Clearly this is a change for the benefit of him
 His shares then sold to outsider
 What did court do?
o Court did not have issue with this at all
o Started with Allen v Gold reefs test (makes point it is objective) then says that this is
fine – it was just a relaxation of a strict rule (referring to the clause).

Peters American Delicacy

 Company had share capital constiitng of fully paid shares and partly paid shares – had a lot
of retaining earnings it wanted to distribute via bonus shares - company had 2 articles
expressing inconsistent basis for how profits were distributed (one said profits dist in
proportion to no of shares of SH and another article said dist in proportion to paid/unpaid
portion of SH’s shares)
 Company had profits to distribute – had to make decision as to which article it would follow
for distribution. It goes with article about dist in proportion to capital paid up, which was
disadavtange to SH who had fully paid shares
 Court said
o Board had to make ad ecision one way or another– and in any event, one group was
going to be disadavantged by choice of articles
o going for distribution in proportion to capital paid up was good for fully paid SH but
bad for partyl paid
o Minority was partly paid shareholders
o they chose course of action that penalised minority – partly-paid SH
 but this was only 1 of 2 reasonable choices
 holders of fully paid shares held vast majority of shares/voting power – so
they voted on the inconsistency/amendment for themselves
o court said this was fine
Australian Fixed Trusts

 Case shows Allen v Gold Reef in application

 the case had egregious circumstances
 Company called clyde industries (ASX listed company) – trustee company – and many unit
trusts – clyde didn’t like this particular SH – introduced amendment to constitution, which
prrvent SH holding shares in unit trust from voting shares unless it had received direction to
vote in such a way from a majority of the unit holders (unit holders being pensioners
throughout Australia).
o This made it essentially impossible for trustee company to cast vote (because of
logistics involved in getting unit holder direction)
 The plaintiffs used, as members of the company, to restrain the proposed alteration
 Court said this would reduce trustee’s right to vote, even remove it in effect
 whereas the vote of one group of SH became ineffective, the voting rights of other SH’s
became more effective and valuable
 change was highly prejudicial to unit trusts
 Clyde argued rationale – this amendment allowed voting power to be expressed by
beneficiaries of the trust, the real owners of the company (as opposed to the fund
managers/institutional investor)
o court said if the above was in fact the rationale of the directors, making such an
amendment did not carry out this purpose (it was confined in unit trust SH’s)
o Court said clyde had only focused on one particular kind of SH (those in unit trusts)
 Thus, court inferred amendment was not for valid prupose and unjustified
discrimination – conclusion: struck down the amendment
 i..e the amendment was not ‘for the benefit of the company as a whole’ as
required by Allens v Gold Reef

Gambotto

 Court could revist Gold Reefs

 Majoor shareholder (with 97%) had amendment done so they could compulsory acquire
remainder of shares held by minority
o the offer price was above fair value
 Court said Gold Reefs test was inappropriate
 In Peter Delicacy, court said where constitutional amendment generates conflict b/w
majority and minority, Gold Reefs doesn’t strictly apply
 Court said new approach should apply to cases where constitutional amendment gives rise
to conflict of interest b/w shareholders. So forget Gold Reefs test and apply framework with
2 categories below

Gambotto framework – this is the framework when assessing change in constitution

1. Where a constitutional amendment gives rise to a conflict of interests b/w SH:

a) Where amendment involves appropriation of shares or other valuabll proprietary
rights attaching to shares of minority (category 1)
b) Where amendment does NOT involve apopriation of shares or other valuabll
proprietary rights attaching to shares of minority (category 2)
2. Implicitly, a third category: where the amendment does not give rise to a conflict of interest
b/w SH (Category 3)
What is test to apply in category 1?

 When is it category 1? Such circumstances involving this category are where forced sale or
transfer of shares
o Also arises where forced cancellation of shares/extinguishment (Young v Leona’s
Strata Plan)
o Destroying of other proprietary rights (giving up of dividend rights, etc)
 Test: 2 parts (discussed earlier in course)
o First limb: Must show alteration power is being exercised for proper purpose
 PP will not in this context involve interests of company as a commercial
entity OR commercial interests of majority SH (pursuing tax benefit is
commercial interest, which is not enough)
 Where significant detriment to company and expopriration is needed to
allegviate this detriment
 E.g. Take out shares of SH who is competing with company
 E.g 2. Licence and minrotiy SH is preventing company from having
license
o Second limb: powers exercised cannot be oppressive (defined as both procedurally
and substantively fair)
 Procedurally = disclosure of relevant info, preparation of independent
valuation,justification of fairness of offer
 Substantive = fair price
 ONUS: majority looking to pass amendment
 Note; conclusion in Gambotto was that procedural (in second limb) was not followed, thus
failed test

What about category 2?

 Test: a passed alteration will be valid unless it is ultra vires beyond any purpose of articles
OR if it is oppressive
 Law will strike out purpose that is foreign to cmpany’s affairs
 Unclear about what ‘beyond any purpose contemplated by articles’ means
o Will not be as narrow as category 1
o seems law will strick out purposes that are foreign to company’s operation, e.g.
those purposes above achieving ulterior advantages
 Onus: on challenger (i.e. minority)
 Oppressive means reference to statutory oppression remedy
o So if circumstances fit statutory oppression in corp act, test will be made out

What about category 3?

 Test: old Gold Reefs test

 Onus: not told however most likely challenger, imported from Gold Reefs which said
challenger has onus

So this framework is where you have constitutional amendment and you are asking if FOTM. Does it
fall into category 1? If so, apply test. Category 2 or 3?

Statutory compulsory acquisition

  Applies OUTSIDE takeover context
 Part 6a.2
 90% shareholder of shares in a class
 Time limit = must be done within 6 months of becoming a 90% shareholder
 Independent valuation = ASIC provide report on fair value of shares
 This offers another way of achieving outcome the majority might pursue (as in Gambotto)
o simpler approach than gambotto
o don’t need to worry about concepts of procedural and substantive fairness
o however, you have to prove fairness and minority gets a free shot at you in court
because you have to cover costs

FOTM largely to protect minrotiy from actions of majority SH – these provisions can capture bad
behaviour by directors and include to more broader range of conduct. the other cause of actions
we’ll look at now are arguably more useful to the SH

Now we look at shareholder initiated winding up and oppression remedy

First look at shareholder initating widning up

S 461 gives court poer to order winding up of company

s 462 says class of people who can go seek order

 Contributory’ – defined in s 9 as including a shareholder. So SH can go to court ask for

company to be wound up. Court can make this order under S 461, look at factors/basis in
the section
 ground s 461(e) and (k) just and equitable ground

If SH wins, and court orders company to be wound up, a liquidator will be appointed – sells all assets
– pays all creditors – what’s left goes to shareholders

Let’s start with winding up on just and equitable gorund (ss k). in practice, it has bene invoked in
following situtations (we only look in detail at 1 and 2)

1. Failuri of substratum
a. E.g. Trivoli Freholds
b. Substratum = foundation/bedrock of company vanishes or destroyed
2. Quasi-partnership companies
a. Ebrahimi v Westbourne
3. Fraud or misconduct
4. Denial of information
5. Deadlock
6. Applciation by ASIC acting in public interest

Trivoli Freholds

 Industrial Equity SH – 42% died not like corporate raiding strategy – they argued it was
oppressive and that company should be wound up because the substratum was gone
o Court said it was not oppressive
 Court said 2 circumstances in which there might be failure of substratum
 o First: where company ceases to carry on business within its objects because ithas
become impracticable to do so
o Second: (situation in this case) where it might still be possible for cmpny to pursue
its original objects but its operation has changed so that it pursues different objects,
contrary from the general intention and common understanding of SH
 How do you show general intention and common understanding of SH
o Start by looking at constitution – has objects
o Look at prospectus that might have been issued or other issued company docs
amounting to general statement
o Company’s name
o Company’s course of conduct
 In this case, court looked at Tivoli freeholds
o objects in constitution indicated company was all about entertainment
 the name incorporated name of theatre – i.e. this was company setup in
entertainment business
o therefore, corporate raiding represented a failure of the substratum
 court said: is it going to disrpoprotioantely harm industrial equity? this was a bit of a check
the court wanted to do
o Court said not really – industrial equity is just using the company for cash
 court concluded winding up was appropriate
o unclear whether the minority shareholders would benefit from corporate raiding
(because dividends rarely paid)
o lack of independence (industrial equity had 55% of Tivoli but treated it like whlly
owned subsidiary)
 so this is the failure of substratum category
o must shw particular group of people adhered to initial objects - need reasonably
static group of SH
o bigger the company is the harder it will be to apply this

other category: quasi-partnership companies

 in partnership, al lparnters have right to engage in management

 partners owe fiduciary duty to each other – partnership is participatory enterprise where
mutual trust and ocnifence b/w parties
o if there is company anaologus to this type of structure, it may be basis for court to
order wind up company
 ebrahami – classic case
o rug sellers in England –partnership set up - both mahimi and mr nasa had 500 shares
each – mr n wanted to bring his son into business, so mahimi had 400, mr n had 400
and son had 200 – so mr nasa and son removed mahimi from board in line with
company constitution – mahimi challenged it but difficulty because he had been
voted off in line with constitution and legislation
o court subjects legal rules to equitable considerations whne it orders winding up on
this basis
o court said with this structure, it is going to think about the structure a bit differently
o court will look for such circumstances: company is small + 1 or more of these 3
factors
 1. basedon association formed by personal relationship of mutual trust and
confidence
2. mutual understanding everyone will take party in company managent
3. practical or legal restriction on someone’s ability to leave
company/partnership
o if you have this kind of company, court may intervene and prevent someone from
exercising legal rights and undercutting close ties that underpin this quasi-
partnership
o here, mahimi understood at beginning to play crucial part in business (first 2 factors
found in this case). So his removal as a D was expelling him from business (cut him
out from management and profits). Court ordered winding up of company to
prevent this expulsion from happening
1. by removing him as D they cut his partipation from profits and management
of company – court did not want to allow this to happen – so orderd winding
up