Corp Law Week 12 Thursday

Can give approval after the event

Kinsela – where duty to take into account creditor interests and this is breached it is not in the
power of SH to ratify this breach

If you cant get up on ratification, there is 1317S which allows court to excuse D in certain
circumstances

Next week he will do q1 and 2 from 2008 exam

We went through FOTM and we started looking at statutory causes of action (SH initiated winding
up, oppression)

Shareholder initiated winding up

2 main grounds (e) and (k)

We looked at failure of substratum. Be careful about boiling down these cases into simple
propositions

Fraud or misconduct – when company is pursuing fraudulent purposes of defrauding investing public
or serious misocnudct in its management

Denial of information – will need to be very significant denial to prompt court to wind up company.
Denial regarding company’s financial situation, constant and ongoing.

Deadlock – irreconcilable differences b/w founders such that company cannot go on. Court may
exercise discretion to wind it up here

Application by ASIC acting in the public interest

S 461(e) has wide application – two cases: Cumberland Holdings and Weedmans

Cumberland Holdings

 ASX listed company – major SH was FAI (insurance company – C’s board had 3 D’s – two
were nominees (nominated by FAI) – FAI makes takeover bid for Cumberland shares it
doesn’t own – after this, clearly C directors need to respond to this takeover bid
o Note nominee d’s have conflict of interest - they didn’t manage this conflict well,
the price being offered was low, below fair vaule. Misleading statements in response
documents to SH also made. So conflicts of interests not managed well nor
mitigated by independent advice
 One minority SH in C rbought proceedings to hve company wound up on this basis (s 461(e))
 Judge came up with propositios about how ss works
o Directors is not limited to situation where all d’s act in the one way – you don’t need
t point to unanimous action by all directors. It is enough that as here, 2/3 D’s were
acting in poor way in affairs of company
o ‘Affairs of company’ is a broad concept
 Includes working out company’s capital structure, dividends, voting rights,
takeovers, etc and all matters before BOD’s consideration
 o ‘Own interests’
 Equals personal interest
 As well as the interests of another company a D is director of
o ‘own interests’ must be compared to interests of members as a whole
 This part of the section directs court to consider whether own interests
considered by D was greater than the interests of members as a whole
 W.r.t. this, D said they were considering interests of major SH (FAI) –
judge said there weer still a huge section of SH members that the
D’s wer eignoring and not considering
o ‘Unfair or unjust’
 Sufficient if unfair or unjust to any section of mmebers
 If this section of members was small, court will take this into account in
exercising discretion to wind up
 Outcome: court ordered winding up

Weedman

 Concerns weedman (women fashion retail shop)

 Facts irrelevant
 Judge thought breaches extended to breaches of commercial morality
 Suppose company doesn’t pay dividends = this is not breach of commercial morality,
because no obligation on company to do this
o Judge contrasted this to situation where board refuses to pay dividend and then
pays massive amounts of compensation to themselves. Judge said this is the sort of
case where s 461(e) ground may be used to wind up the company

Last point on shareholdering initiatd winding up – s 467(4) provides that if winding up is applied for
on grounds we looked at, and either ground found, court may order winding up unless some other
remedy available and court feels applicant is acting unreasonably in pursuing winding up of business
instead of other available remedy  So if other remedy available, and it is reaosnbale, this should be
pursued and not winding up order

Now we look at oppression action (statute)

See s 232 - Broad circumstances that can activate it

S 233 has remedies (orders court can make)

Who has standing? S 234

 Members
 Ppl who have been removed from register
 Perosn who has gotten shares by will4

Cause of action isn’t restricted by type of company

We look at 7 propositions

Proposition 1
two aspects d) and e), both talk about consequences from conduct to give cause of action (contrary
to interess of members as a whole and then unfair, discriminative, etc)

d) seems to have a role different from e)

Judge in (case) said d) and e) are not interchangeable. E) comes up most of the time but they are
different

Proposition 2

S 232(3) is all about fairness

Reference to prejudice and discrimination makes it clear you ened to look at consequences of
conduct, motives not so important by this section

What is required is unfair dealing or commercially unfair behaviour

Thomas v HW Thomas

 Small company in NZ – family owned – one of the family members was minority SH and was
unhappy about how company was run – run in very financially conservative manner – really
low dividends – he brought proceedings for oppression
 Court said
o In e), all are overlapping categories – not distinguishable alternatives that need to be
considered separately.
o Want of good faith, lack of probity – these things do NOT need to be shown for this
remedy to apply
 Richardson J – ‘s 232 is a remedial provision designed o allow the court to intervene where
there is a visible departure from the standards of fair dealing; and in the light of the history
and structure of the particular company and the reasonable expectations of the mmbers to
determinw ether the detriment occasioned to the complaining member’s interests…is
justiifcaible’
 Outcome: SH was unusccessful
o He was not being treated in requisite unfair manner
o There was significant capital appreciation in shares

Wayde v NSW Rugby League

 NSW Rugby league (company) was concerned about competition (how long the season was)
- felt it had to cut the no of teams playing – clear constitutional power allowed them to cut
out some teams – Western Sydney districti club was booted out
 Board felt it was doing something reasonable – West sued, saying there had been
oppression
 Court
 Brennan J delivered different judgment from majority – Brennan’s is the one now referred to
as legal position. He said
o MUST SHOW there was unfairness or oppression
o The fact board was acting in good faith is not end of the matter
o Court must decide whether according to ordinary standards of reasonableness/fair
dealing that the decision in this case was unfair
o “the test of unfariesns is objective and it is necessary to postulate a standard of
reasonable directors possessed of any special skill, knowledge or acumen possessed
 by d’s…the court must determine whether [such reasonable directors] having in
mind the importance of furthering the corporate object on one handand
disadvantage, disaibility which their decisionwill impose ona member on the other,
would have decided that it was unfair to make the decision.”
 Outcome: reasonable board would have considered this was fair. Why? Because there was
clear power for them to doo this. All the clubs had approved this constitution so how could it
be deemed unfair

Third proposition

There is no restriction as to capacity in which oppression need be suffered by the member

Wrongful exclusion from management – there are some circumstances a member might need to be
removed from management. The fact you got excluded is not enough (must be wrongful or unfair):
Campbell v Back Office Investments

Fourth proposition

A broad range of acts and ommissions are covered – see s 232(a)-(c) and Spargos Mining NL

(b) and (c) show it can be isolated incidents. It can be something happening now or in the future (e.g.
proposed acts).

Can deal with acts in the past (Spargos is authority).

Proposition five

Hopelessly conflicted D’s watch out!

Jenkins v Enterprise gold mines NL

 Enterprise Gold Mines was member of independent resources group ltd which crashed –
board of enterprise had many nominees of independent resources group – they did thigns
which were just not in the best interest of enterprise (purely to serve interests of IRG) –
 Court held there was oppression
o Many conflicts that weren’t managed, transactions which had no benefit for
enterprise
o Minority SH had been shafted because so mouch value had been extracted out of
enterprise

Sixth proposition

Ratification by a majority of SH in general meeting will not be an answer if it is just another

manifestation of oppressive conduct. See Jenkins

Proposition 7

Remedies can be wide-ranging. See Spargos Mining NL

In spargos, court said they need a remedy to address the issues that existed. So they removed
nominees of IRG, selected new directors on board

Protection of class rights (statute)

This is the last key protection for SH that we cover

Recall share capital often divided into different classes

Calss rights amended by special majority

If s 136 was the end of the matter, in a case where share capital consists of 750k ordinary shares and
250k preference cshares, clearly there would be some issues. In light of this, there are some extra
protective requirements to vary or cancel class rights. this framework now in s 246B

Protection of class rghts

 Framework for varying or cancelling class rights established by s 246B corps act
 Two potential scenarios contemplated by s 246B framework:
o Where company’s constitution specifies procedure, s 246B(1) says procedure must
be followed
o Where company does not have constitution or has constitution silent on issue, the
procedure in s 246B(2) must be followed

Constitutional regime can only be amended if the same procedure is carried out – so this is
entrenchment

How is this relevant for SH remedies

 If you are a minority SH and your rights are being affected in such a way, you can use this
section to protect your special rights

Two issues/triggers for this:

1. What are class rights? Only applies with class rights

2. When are class rights varied or cancelled?

Issue 1

 S 246B “rights attached to shares in a class of shares

 Cumbrian Newspapes Group

Cumbrian Newspapes Group

 P acquired stake in newspaper (10%) on condition he had constitutional articles inserted:

that he had pre-emptive right and had right to appoint director while continuing to hold 10%
of company (this was part of negotiated deal) – later on, company didn’t want articles
anymore and tried to get rid of them
 P argued these were class rights and couldn’t be amended by special majority
 Court had to think about what class rights are
 Three categories in this case
1. Rights or benefits specifically annexed to particular shares
 These are class rights
2. Rights or benefits conferred on an individual otherwise than in the capacity of
shareholder
 These are not class rights
 3. Rights conferred on a SH in its capacity as SH but which are nto annexed to any
particular shares
 These are class rights
 E.g. Suppose you have right that says ‘you get special erprots every month’ –
this is not annexed to any particular share type.
 E.g. article that gives SH right to force sale of shares to directors – this is
clearly grnted to SH in their capacity as SH but it is not tied to particular
share type. This is still a class right

If it is aclass right you are protected

When applying this, be aware

 Australian provision: ‘rights attached to shares in a class of shares’

 English provision: ‘rights attached to a class of shares’
 So there is question mark whether Cumbrian is applied in Australia exactly

FOR PROBLEM QUESTION: Go through Cumbrian 3 categories – if in third category, Cumbrian case
says it class right, however acknowledge that this case was based on English legislation (above)
which had mroe generic lwgislation than Australian provision, so may be open to debate.

To get into this regime, you must show there are class rights and then show varied or cancelled

Issue 2

Cancellation is clear, but variation may be problematic sometimes

White v Bristle

 preference shares in company (e.g. 5% dividend each year) – suppose company says it will
just not pay dividends – you don’t get your 5% - is this a variation? has your class right been
varied? this case considers this question.
 wanted to make bonus issue of shares (bonus means just issued to you, you don’t need to
pay again) – company was going to issue $1 preference shares to everyone, existing holders
of preference shares got ANGRY because they would be diluted – clearly, their entitlemtnt to
dividends would be less with the preferenctial share issue
 Increase no of preference shares – p’s argued this was variation of preferential class rights
 Court said no
o Content of the class right has not changed – the party’s ‘enjoyment’ of this class
right has changed.
o distinction (b/w content and enjoyment) remains in Australia
 however, the idea that issue of new shares is not variation has been
reversed by legislation
 s246C – in certain circumstances, it will deem issue of new shares to be a
variation
 also deems other actions as constituting variation

s 246D – party can apply to have variation set aside.  The Court may set aside the variation,
cancellation or modification if it is satisfied that it would unfairly prejudice the applicants. Regarding
section who don’t share uninanimous view (for those who didn’t approve, they can go to court and
say ‘even though majority said it is ok, we don’t think it is fair’
last point: depending on nature of variation or cancellation, it may trigger Gambotto

 recall this case dealt with expropriation of shares

 gambotto argument in this scenario is good/beneficial because if accepted you get it struck
down, whereas this statutory regime only allows you to stop something happening with 25%
of the class
o court may say s 246B may constitute parliament’s sole protection for you, thus
gambotto has no role to play. NOTE THIS IN PROBLEM QUESTION if variation or
cancellation scenario triggered Gambotto.
 Court may say there may be gambotto, but court could say statute is primary protection and
thus gambotto argument cannot be relied on

End of content

Duty for PP - recall all takeover cases - these were SH bringign caction - so duty for PP results in
personal right
Personal rights arise under constitution/may be granted under constitution. But must be in SH
capacity (recall solicitor case, there was no personal right here)

To come into s 1324, it is most likely you need to access it via one of the exceptions described
above under mesenberg. E.g. if breach of constitution = activate personal rights exception = You
can then go to court seeking damages or injunction under s 1324

True/False

1. F
2. F
 Legilsation says court will account for it
3. T
4. F
 Must be wrongful
5. F
6. F
 Special regime
7. T
 One of the remedies available
8. T
 “theoretically”
9. F
10. F