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5.5 Governance--relief for members.docx

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Queensland University of Technology

Relief for Minority Members Members  Rights o Right to vote (usually one vote per ordinary share): s250E o right to distributions eg dividends. o right to information eg inspect company’s books: Pt 2F.3 CA; o class rights where different classes of shares exist: Pt 2 F.2  Powers: s198A o adopting and amending constitution: s 136(2) CA o appointing and removing directors: s 201G, s 203 C, D CA Controlling Members & Doctrine of Fraud on the Minority ← Much more important in Pty companies—in public coy shareholders can sell their holding and escape more easily Context  Qualification to general principle that shareholders may act in self-interest: Peters American Delicacy v Heath; Allens v Golden Reefs of West Africa (cf. directors & officers) o Equitable limitation not based in fiduciary principle—members not fiduciaries with respect to each other: Ngurli Ltd v McCann o Rationale—Right to vote is an incidence of property in shares—to be exercised & enjoyed to own advantage  Exception to ratification [→relief from liability] Rule Majority must not use voting power for purpose which reasonable person would say is outside that contemplated by company’s constitution or replaceable rules: Peters American Delicacy v Heath; Vatcher v Paul  Controlling members cannot vote for own benefit at expense of minority—voting powers must be exercised bona fide for the benefit of the company as a whole: Ngurli v McCann (majority shareholders = directors stripping the company of assets—then ratifying breaches with majority votes  fraud on minority) o Variations of class rights & alterations to constitution: Gambotto [→Constitution] o Other uses of controlling member’s voting power—  Appropriating rights or property: Menier v Hooper’s Telegraph Works (1874); Cook v Deeks  Majority refusing to seek remedy after wrong against company: Biala Pty Ltd v Mallina Holdings (No 2) per Ipp J (directors doing wrong against company— directors also majority shareholders—can vote against taking action against themselves  fraud against minority)  ← Whether wrong by majority shareholders or by third party Enforcement  Company damaged → company has right of action → derivative action  Common law derivative action—abolished  Statutory law derivative action in name of company  Minority shareholders injured → shareholders have right of action → personal action  Common law personal action against majority & company  Must prove that persons who abused power also controlled company  Statutory personal action = oppression action under ss232-234 Andrew Trotter LWB334 Corporate Law D ERIVATIVE A CTIONS = action person (shareholders) brings when that particular cause of action doesn’t belong to them personally but to someone else (company) General Rule  Proper Plaintiff Rule—Wrong done to a company is properly actionable only by the company, not the shareholders (← Company is a separate legal entity to which wrong can be done & should institute own proceedings) o Common Law: Foss v Harbottle (fraudulent misapplication of company funds— shareholders sued directors on behalf of themselves & other shareholders  action must be brought in name of company—therefore no standing || shareholder actions may be justified in some cases but not here) o = Statute: s236(2) (Proceedings brought on behalf of a coy must be brought in the company’s name)  Internal Management Rule—Members have no right to bring legal action to remedy internal irregularity where it can be remedied by resolution at GM o Rationale—  Courts reluctant to interfere with internal irregularities that were capable of being ratified by members in general meeting  Courts wanted to prevent individual shareholders from bringing multiple actions Common Law Derivative Action (abolished by statute: s236(3)) Rule in Foss v Harbottle  Proper plaintiff rule—action of the company must be brought by the company  Internal management rule—if irregularity can be ratified by ordinary resolution, courts will not allow a group of minority shareholders to bring an action Exceptions & Common Law Derivative Action Member suing on behalf of all the other members—also a representative action: Wallersteiner v Moir (No2) [1975] could be brought where—  was ultra vires o → constitution is a statutory contract: s140 → breach infringes personal right [→personal actions]  failed to comply with requirement for a special resolution  constitutes a perpetuation by the majority of a fraud on the minority  otherwise in the interests of justice to allow a derivate action (Aus only)  infringed personal rights of the member o ← not really an exception, but outside the scope of the rule in the first place [→personal actions] Now abolished by statute: s236(3) (The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished); Karam v ANZ Banking Group Limited (2000); Advent Investors Pty Ltd & Ors v Goldhirsch & Ors Statutory Derivative Action: Part 2F.1A Generally—Proceedings brought on behalf of a company must be brought in the company’s name: s236(2)  Rationale—balance between o Ease for shareholders bringing action in name of coy o Inconvenience for directors as a result of legal proceedings Andrew Trotter LWB334 Corporate Law Standing: s236(1)(a) May bring or intervene in proceedings (with leave under s237)— (s236(1)(a))  Member: s236(1)(a)(i)  Former member: s236(1)(a)(i)  Person entitled to be registered as member of company or related body corporate: s236(1)(a)(i)  Present or former officer: s236(1)(a)(ii) Must be brought in company name: s236(2) BUT courts have interpreted broadly—Company can just be joined as a defendant, need not be plaintiff: s236(2); Keyrate Pty Ltd v Hamarc Pty Ltd (2001); Cf Mc Lean v Lake Como Venture Pty Ltd Leave of court: s236(1)(b)  Leave of court required: s236(1)(b) (a person may bring proceedings … if (a) the person is…; and (b) the person is acting with leave granted under section 237), s237(1) (A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings)  Onus on the applicant=minority shareholder: Swansson v Pratt (2002) Court must grant leave if satisfied that— (s237(2)) 1. Probable that company will not bring proceedings itself: s237(2)(a)  Proposed defendant controls company → inferred: Swansson v RA Pratt 2. Applicant is acting in good faith: s237(2)(b)  Consider— (Swansson v RA Pratt Properties Pty Ltd (2002) per Palmer J)  Whether applicant honestly believes that a good cause of action exists and has reasonable prospects of success  Whether the applicant is seeking to bring the derivative action for some collateral purpose which amounts to an abuse of process  Not good faith if merely trying to force payment of dividend or buy-out of minority: Goozee v Graphic World Group Holdings Pty Ltd (2002) (only trying to force majority to either pay out dividend or buy minority’s shares  leave not granted)  Implicit requirement—Must also show applicant will suffer real & substantive injury if not granted: Swansson v RA Pratt 3. In best interests of the company that applicant be granted leave: s237(2)(c) (eg asset taken away without compensation)  Interests of company as a whole: Maher v Honeysett  Company solvent & no real risk of insolvency → interests of members as collective group or whole: Greenhalgh v Ardene Cinemas Ltd; Ngurli Ltd v McCann (1953) o Includes present and future members: Darvall v North Sydney Brick & Tile Co Ltd  Real risk of insolvency → interests of creditors as a whole: Kinsela v Russell Kinsela Pty Ltd (in liq)  NOT interests of employees: Parke v Daily News  Need not undertake strict cost-benefit analysis, but consider— (Swansson v Pratt; Metyor Inc v Qld Electronic Switching Pty Ltd)  Effects of proposed litigation on company business  Whether redress can be achieved by means other than litigation  Whether decision of company not to litigate based on business reasons  Whether defendant is worth suing  Rebuttable presumption that granting leave not in best interests if— (s237(3)) a. Proceedings involve a third party (by or against): s237(2)(a) Andrew Trotter LWB334 Corporate Law o including appeal: s237(4)(b) o 3P does not include— (related party: s237(4)(a) → s228: s9)  Entity in control of company: s228(1)  Directors & spouses: s228(2) (Directors of company | directors of controlling entity | spouses of directors)  Parents & children of directors or spouses: s228(3)  Entity controlled by any of these parties: s228(4)  Past & future o Was one of these within past 6 months: s228(5) o Reasonable grounds that will become at any point in the future: s228(6) b. Directors decided not to pursue: s237(2)(b) (not to bring or defend | to discontinue, settle or compromise) c. Directors participating in the decision— (s237(2)(c) (same elements as business judgement rule—but s180(2) is re decision which constitutes breach ↔ s237 re decision not to litigate that breach)) i. Acted in good faith for a proper purpose ii. Did not have a material personal interest iii. Informed themselves about the subject matter to the extent they reasonably believed to be appropriate iv. Rationally believed the decision was in the interests of the company 4. Serious question to be tried: s237(2)(d)  Need not prove prima facie case—just determining legal & equitable rights: Ragless v IPA Holdings Pty Ltd (in liq) (2008) 5. Written notice to the company of intention to apply for leave at least 14 days beforehand: s237(2)(e)(i)  Court may dispense with this requirement: s237(2)(e)(ii)  Rationale—to allow company to resolve out of court o All 5 criteria must be met—no residual discretion: Goozee v Graphic World Group Holdings (2002) Effect of Ratification of Conduct = directors by simple majority  CL—shareholders couldn’t bring derivative action against director if ratified or capable of being ratified (←created difficulties because hard to tell which breaches were capable of being ratified)  Statute—where conduct ratified at GM— o not an obstacle to a derivative action or application for leave to bring one: s239(1) (does not prevent from bringing or intervening or applying for leave to do so | does not mean that application must be refused or action brought or intervened in must be determined in favour of the defendant) o BUT be taken into account having regard to— (s239(2))  How well informed the shareholders were and  Whether shareholders were acting for proper purposes Court Orders Any orders it likes—including— (re application or actual proceedings)  Interim orders: s241(1)(a)  Directions about conduct of proceedings inc mediation: s241(1)(b)  Order directing coy or officer to do or not do any act: s241(1)(c) Andrew Trotter LWB334 Corporate Law  Any order appointing an independent person to investigate and report to court on financial affairs or coy, circumstance giving rise to cause of action or costs incurred in proceedings: s241(1)(d)  Any order it likes as to costs on application by company, applicant or any other party to the application or proceeding: ss 241(3), 242 Andrew Trotter LWB334 Corporate Law PERSONAL A CTIONS Common Law Personal Actions Members may enforce personal rights by members in their capacity as members  Rights conferred by Corporations Act o Rights about variation of class rights: s246D [→ alteration of constitution] o Company acting ultra vires → constitution is a statutory contract:
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