MLL221 Study Guide - Final Guide: Derivative Suit, Corporate Law, Best Interests
24 May 2018
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Topic Nine Corporate Law
• Know appropriate legal action relating to remedies where controlling shareholders abuse their
powers.
MEMBERS REMEDIES:
• Problems with directors
➢ May not exercise their powers in the interests of shareholders.
• Problems with majority shareholders
➢ Copaies opeate o the piiple of ajoit ule
• Minorities are often locked-in and cannot escape
➢ If the company is not listed an outside buyer is difficult to find and so the controllers will buy
the shares from them at less than a fair price
• Corporations law provides a range of protections for shareholders and minorities
• Question what to do when a company does not bring an action itself (because the directors who
breached their duties usually control the company). Evaluate whether the statutory derivative action
would be an option as it enables an individual shareholder to bring legal proceedings on behalf of a
company where the company is unwilling or fails to do so.
STATUTORY DERIVATIVE ACTION s 236
• A right of action to bring legal proceedings that belongs to someone else
• Section 236 permits a shareholder (or officer) to apply to a Court for an order permitting the
shareholder (or officer) to bring legal proceedings on behalf of a company where the company is
unwilling or unable to do so itself
– The right of action belongs to (or is derived from) the
company, not the shareholder
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WHO CAN APPLY?
Under s.236(1), the following persons may bring proceedings on behalf of a company:
➢ A member (i.e. shareholder) of a company or related company;
➢ A former member of a company or related company;
➢ A person entitled to be registered as a member of a company or related company; or
➢ An officer or former officer of the company.
s.237: The Court must grant the application if it is satisfied that
1. It is probable that the company will not itself bring the proceedings, or properly take responsibility for
them
1. EVIDENCE:
1. What as the opas respose to the shareholders otie of itetio to
apply for the derivative action?
1. If company still refused to bring proceedings, this may be used as evidence
2. If the alleged wrongdoer has a dominant influence on the board of directors
1. For example, if it is alleged that all or a majority of the directors breached
their duties, it is not likely that these directors will authorise the company
to bring proceedings against them
2. The applicant is acting in good faith
1. The applicant must be acting in good faith, and not acting to further a private purpose
2. Courts will consider:
1. Was the applicant complicit in the matter that is complained of
2. Is applicant motivated by best interests of the company or his/her private interests
3. Whether applicant believes that there is a good cause of action with a reasonable
prospect of success
4. Whethe the appliat is atig fo a ollateal pupose
5. Whethe a eal ad sustatie iju ould esult.
3. It is in the best interests of the company that the application be granted
1. The Company may have sound business reasons for not bringing an action
2. Example:
1. If a breach of duty only resulted in small or no loss to the Company
2. Cost of legal proceedings would outweigh any benefit
3. The Court in Swansson v RA Pratt Properties Pty Ltd
4. considered the following factors:
1. Character of the company
1. e.g. What would be the effect of legal proceedings involving a small family
company?
2. Effect of litigation on business of the company
3. Would the eed e aailale othe eas
4. Would the defedat e ale to pa fo a daages if the ee aaded i
favour of the Company
5. REBUTTABLE PRESUMPTION
1. A rebuttable presumption that granting leave is not in the best interests of the
company arises if it is established that:
2. (a) the proceedings are by the company against a third party or by a third party
against the company; and
3. (b) the company has decided not to bring/defend the proceedings or has decided
to settle or compromise the proceedings; and
4. (c) all of the directors who participated in that decision:
1. (i) acted in good faith for a proper purpose; and
2. (ii) did not have a material personal interest in the decision; and
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3. (iii) informed themselves about the subject matter of the decision to the
extent they reasonably believed to be appropriate; and
4. (iv) rationally believed that the decision was in the best interests of the
company.
4. There is a serious question to be tried by the Court, and
1. The claim must not be frivolous
2. Can the applicant provide sufficient material to the Court to enable it to determine
whether there is a serious question to be tried?
5. Either:
• Applicant gave notice to the Company at least 14 days before making the application of the intention
to apply for the statutory derivative action (and the reasons for applying); or
• The Copa should e gie the opportuit ad tie to address the appliats
concerns
• Failure of the Company to take action may be used as evidence that it probably will not
itself take legal proceedings
• It is appropriate for the Court to grant the leave even though the notice was not given to the
Company
Section 241 gives the Court power to appoint an independent person to investigate and report to Court on:
➢ Financial affairs of company
➢ Facts that gave rise to the cause of action
➢ Costs incurred by parties to the proceedings
PERMISSION TO DISCOUNTINUE OR SETTLE PROCEEDINGS
Section 240 states that a derivative action must not be discontinued or settled without the permission of the
Court
➢ Why?
➢ Prevent collusion between the shareholder applicant and defendants which may benefit the applicant
but not be in the best interests of the Company
COSTS:
Section 242 gives the Court broad power to make orders about costs of the proceedings, including the
power to have the company pay the legal costs of the application
CHARLTON V BABER (2003)
FACTS
• Shareholder alleged that prior to
Copas liuidatio, dieto breached
duties:
➢ Arranged for company to lend
money on uncommercial terms
➢ Paid excessive wages and benefits
to dietos ife
➢ Caused improper dividend to be
paid to dietos ife
➢ Lease arrangements with
dietos fail o
disadvantageous terms
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Document Summary
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