Corporate Governance: Shareholder Rights and Remedies

PART B: CORPORATIONS LAW
Week 10:
Corporate Governance: Shareholder Rights and
Remedies
Lecture Notes
Topics for week 10
Weekly textbook reading: Business and Corporations Law (BCL) chapter 10
The topics to be covered in this class are:
● Shareholders’ meetings
● Shareholders’ remedies
● The rule in
Foss v Harbottle and enforcing personal rights of members.
Shareholders: General Revision
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Members of a company with share capital are called shareholders. A proprietary company
can have a maximum of 50 non-employee shareholders. There is no maximum number of
shareholders for a public company.
1
An unlisted company must generally issue a share certificate when shares are issued or a
transfer or shares has been lodged. A
share certificate is evidence of the title of a member
to the shares specified: s 1070C(2).
A share certificate may be relied on and if it contains errors the company is liable for any
loss arising out of the errors.
A
transfer of shares occurs on a sale or gift and passes ownership from one shareholder to
another: s 1070A. Shares are presumed to be freely transferable although proprietary
companies in particular often restrict the transfer of shares by a provision in the constitution
that permits directors to refuse to register a transfer: s 1072G. Any restriction must be clear
1
S 113 Proprietary companies
(1) A company must have no more than 50 non—employee shareholders if it is to:
(a) be registered as a proprietary company; or
(b) change to a proprietary company; or
(c) remain registered as a proprietary company.

Note: Proprietary companies have different financial reporting obligations depending on whether they
are small proprietary companies or large proprietary companies (see section 45A and Part 2M.3).

(2) In applying subsection (1):
(a) count joint holders of a particular parcel of shares as 1 person; and
(b) an employee shareholder is:
(i) a shareholder who is an employee of the company or of a subsidiary of the company; or
(ii) a shareholder who was an employee of the company, or of a subsidiary of the company, when they
became a shareholder; and
(c) do not count as a shareholder any CSF shareholder of the company; and
(d) do not count as a shareholder an entity, in relation to a security of the company held by the entity, if:
(i) that security was originally issued to another entity pursuant to a CSF offer by the company; and
(ii) unless the circumstances (if any) prescribed by the regulations for the purposes of this subparagraph
exist—no securities of the company have been traded on a financial market (whether in
Australia or elsewhere); and
(iii) all the other requirements (if any) prescribed by the regulations for the purposes of this subparagraph
are met.
(3) A proprietary company must not engage in any activity that would require disclosure to investors under
Chapter 6D, except for:
(a) an offer of its shares to:
(i) existing shareholders of the company; or
(ii) employees of the company or of a subsidiary of the company; or
(b) a CSF offer.
(3A) An offence based on subsection (3) is an offence of strict liability.

Note: For strict liability, see section 6.1 of the Criminal Code.
(4) An act or transaction is not invalid merely because of a contravention of subsection (3).
Note: If a proprietary company contravenes this section, ASIC may require it to change to a public
company (see section 165).

S 114 Minimum of 1 member
A company needs to have at least 1 member.
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and unambiguous. Directors may not be required to provide a reason for the refusal.
Directors must exercise their discretion consistently with their fiduciary duties. A court may
intervene where a refusal to register a transfer is without just cause or is oppressive.
The procedure for transfer of shares requires delivery to the company of
an instrument of
transfer
signed by the transferor and transferee and the share certificate held by the
transferor.
Shares may pass from a shareholder to another person by operation of law. This can
happen on the death or bankruptcy of a member: s 1072A.
Shareholders’ meetings
Shareholders make decisions by passing resolutions at meetings, which are held to make
decisions which are the decisions of the meeting as a whole. The calling and conduct of
shareholders’ meetings is governed by the
Corporations Act 2001 (Cth) as well as a
company’s constitution (if it has one) and applicable replaceable rules. The ASX Listing
Rules impose additional requirements for shareholders’ meetings of listed companies.
Public company’s must hold an annual general meeting (AGM) at least once in every
calendar year and within five months after the end of their financial year. A proprietary
company needs to hold an AGM only if this is required by its constitution. See ss 249Q and
249R.
An AGM enables shareholders to obtain information and gives them the opportunity to ask
questions and make comments regarding management of the company. To facilitate this, a
pubic company’s financial report, director’s report and auditor’s report must be laid before
the AGM (S 317). The usual business of an AGM is to enable shareholders to consider
these reports, elect directors and appoint an auditor and fix the pay of the auditor.
Shareholders must be given a reasonable opportunity to ask questions or make comments
regarding the company’s management (s 250S)
An AGM must be held once every year, but companies can also hold other general meetings
of shareholders. These are called “extraordinary general meetings”.
If a company has a constitution or if it uses replaceable rules, these rules, will specify who
has power to call a general meeting. In most cases, this is the board of directors. The
Corporations Act gives a single director of a listed Australian company the power to call a
general meeting (s 249C). The Act also permits a general meeting to be called at the
request of shareholders where the request is made by shareholders holding at least 5% of
the voting shares that may be cast at a general meeting (S249D(1)).
2
Shareholders must be given at least 21 days’ notice of a meeting (S 249D(5), 249H). For a
listed company this is 28 days (S 249HA). The notice must include the general nature of
business to be conducted at the meeting and details of any proposed special resolutions.
Shareholders also have the right to give the company notice of any resolution proposed to
be moved at a general meeting. Written notice of a meeting of shareholders must be given
to each shareholder and to each director individually. This can occur via post, fax or
electronically.
Section 249L provides that a notice of meeting must include the following information:
2 Section 249F does permit shareholders with at least 5% of the voting shares to call a general meeting without
asking directors to do so, but this does not occur often as the shareholders must pay for the cost of the meeting.
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Place, date and time of meeting and technology to be used (if the meeting is held
in more than one place)
● General nature of the
business of the meeting
Proposal for special resolution (if any)
● Whether the shareholders can appoint a
proxy
The information must be clear and concise so that shareholders are not overwhelmed with
too much information. Notices of meetings must not contain any misleading information.
Shareholders’ meetings must be held at a reasonable time and place. The company may
hold a meeting at more than one venue by using technology which allows shareholders to
participate (s 249S). Meetings of shareholders must be held for a proper purpose (S 249Q).
Directors may refuse to call a general meeting of shareholders if the purpose is to harass the
company and its directors (
Humes Ltd v Unity APA Ltd (1987)) or if the only purpose of the
meeting is to pass a resolution that interferes with the directors’ exclusive power to manage
the company (
NRMA v Parker (1986))
A
quorum is the minimum number of shareholders necessary for a valid meeting. Under the
replaceable rules the quorum for a meeting of shareholders is two, this includes the counting
of proxies and body corporate representatives: S 249T.
Voting on resolutions is carried out by a show of hands or by a poll. Unless the company’s
constitution says otherwise, each shareholder has one vote on a show of hands and one
vote per share on a poll (s 250E(1)). Shareholders may personally attend and vote at a
meeting or appoint a
proxy to attend and vote on their behalf (s 249X(1A). A proxy has the
rights of the shareholder who appointed him/her to speak at the meeting, to vote in
accordance with the appointment and join the demand for a poll (s 249Y) A company must
receive details of the appointment of a proxy 48 hours before a meeting (s 250B(1)).
There are
two types of resolutions which can be passed at a shareholders’ meeting:
ordinary resolutions and special resolutions. An
ordinary resolution is passed by a simple
majority vote of the shareholders voting in person or by proxy. The
Corporations Act
requires certain types of decisions, such as changing the constitution, to be passed by a
special resolution. This is passed by at least 75 % of the votes cast by shareholders
entitled to vote on the resolution.
Circulating resolution
A proprietary company with more than one shareholder may pass a resolution without
holding a general meeting if all shareholders entitled to vote on the resolution sign a
document which contains a statement that they are in favour of the resolution (S 249A(2).
Shareholders’ remedies
There are various statutory rights under which shareholders may bring an action to seek a
remedy where the controllers of a company act unfairly. This usually arises where the
relationship between the shareholders has broken down and they are no longer able to work
together. Minority shareholders of majority-controlled companies (especially proprietary
companies) can have difficulty where controlling shareholders, acting as either directors or
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majority shareholders, run the company in their own interests in a way which is not in the
interests of minority shareholders.
The statutory remedies for members in the
Corporations Act 2001 (Cth) largely replace the
common law rules, which imposed greater difficulties on minority shareholders. The
Corporations Act permits members (including shareholders) access to a range of remedies,
including in relation to:
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S 232 which provides a remedy where the affairs of the company3 are carried on
in a fashion that it contrary to the interests of the members as a whole,
oppressive, unfairly discriminatory or unfairly prejudicial.
4
4
232 Grounds for Court order
The Court may make an order under section 233 if:
(a) the conduct of a company’s affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
3 Under s 232 the complaint may be about the “conduct of a company’s affairs”. This includes the conduct of
directors, majority shareholders, substantial shareholders or the company itself. See section 53:
53 Affairs of a body corporate
For the purposes of the definition of examinable affairs in section 9, section 53AA, 232, 233 or 234,
paragraph 461(1)(e), section 487, subsection 1307(1) or section 1309, or of a prescribed provision of this
Act,
the affairs of a body corporate include:
(a) the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone
or jointly with any other person or persons and including transactions and dealings as agent, bailee or
trustee), property (whether held alone or jointly with any other person or persons and including
property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other
person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and
expenditure of the body; and
(b) in the case of a body corporate (not being a licensed trustee company or the Public Trustee of a State or
Territory) that is a trustee (but without limiting the generality of paragraph (a))—matters concerned
with the ascertainment of the identity of the persons who are beneficiaries under the trust, their rights
under the trust and any payments that they have received, or are entitled to receive, under the terms of
the trust; and
(c) the internal management and proceedings of the body; and
(d) any act or thing done (including any contract made and any transaction entered into) by or on behalf of the
body, or to or in relation to the body or its business or property, at a time when:
(i) a receiver, or a receiver and manager, is in possession of, or has control over, property of the body; or
(ii) the body is under administration; or
(iia) a deed of company arrangement executed by the body has not yet terminated; or
(iii) a compromise or arrangement made between the body and any other person or persons is being
administered; or
(iv) the body is being wound up;
and, without limiting the generality of the foregoing, any conduct of such a receiver or such a receiver and
manager, of an administrator of the body, of an administrator of such a deed of company arrangement,
of a person administering such a compromise or arrangement or of a liquidator or provisional
liquidator of the body; and
(e) the ownership of shares in, debentures of, and interests in a managed investment scheme made available by,
the body; and
(f) the power of persons to exercise, or to control the exercise of, the rights to vote attached to shares in the
body or to dispose of, or to exercise control over the disposal of, such shares; and
(g) matters concerned with the ascertainment of the persons who are or have been financially interested in the
success or failure, or apparent success or failure, of the body or are or have been able to control or
materially to influence the policy of the body; and
(h) the circumstances under which a person acquired or disposed of, or became entitled to acquire or dispose
of, shares in, debentures of, or interests in a managed investment scheme made available by, the body;
and
(j) where the body has made available interests in a managed investment scheme—any matters concerning the
financial or business undertaking, scheme, common enterprise or investment contract to which the
interests relate; and
(k) matters relating to or arising out of the audit of, or working papers or reports of an auditor concerning, any
matters referred to in a preceding paragraph.
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Often a member seeking a remedy under s 232 will be a shareholder in a small
company who cannot continue to work with other shareholders. Sometimes a
shareholder in such a company can become “locked in” and is unable to sell his/her
shares at a fair price.
The conduct about which a member is complaining can affect them in their capacity
as a member or in any other capacity (eg director or employee): s 234(a)(i)
Conduct is oppressive if it is “burdensome, harsh and wrong”:
Scottish Co-operative
Wholesale Society v Meyer
[1959]
The elements of s 232 of the Corporations Act are different aspects of commercial
unfairness which is determined objectively ie where no “reasonable” director would
have acted in that way.: see
Wayde v NSW Rugby League Ltd (1985). The court will
balance the competing interests of majority and minority shareholders. The court will
look at the background of the company and the reasonable expectation of its
shareholders.
Some examples of unfair and oppressive conduct include:
-Diverting corporate opportunities from the company
-Refusal to pay dividends
-Paying very high directors’ fees and low dividends
-Exclusion of family members from management
-Where directors breach their fiduciary duties and do not allow the company take
action against them.
The most common remedy which minority shareholders seek under s 232 is an order
that the majority shareholders buy out their shares: s 233(1)(d)
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in
that capacity or in any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by
operation of law is taken to be a member of the company.
Note: For
affairs, see section 53.
233 Orders the Court can make
(1) The Court can make any order under this section that it considers appropriate in relation to the company,
including an order:
(a) that the company be wound up;
(b) that the company’s existing constitution be modified or repealed;
(c) regulating the conduct of the company’s affairs in the future;
(d) for the purchase of any shares by any member or person to whom a share in the company has been
transmitted by will or by operation of law;
(e) for the purchase of shares with an appropriate reduction of the company’s share capital;
(f) for the company to institute, prosecute, defend or discontinue specified proceedings;
(g) authorising a member, or a person to whom a share in the company has been transmitted by will or by
operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and
on behalf of the company;
(h) appointing a receiver or a receiver and manager of any or all of the company’s property;
(i) restraining a person from engaging in specified conduct or from doing a specified act;
(j) requiring a person to do a specified act.
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The oppression remedy allows for a flexible range of remedies which the court can order
when appropriate. The court has a wide discretion to make an order where the affairs of the
company are conducted contrary to the interests of the shareholders as a whole,
oppressively or in a manner unfairly prejudicial to, or discriminatory against, shareholders.
● Ss 236-242 enable members and officers to bring an action on behalf of a company
where the company does not do so.
A
statutory derivative action (now called “Proceedings on behalf of a company”) enables
an individual shareholder to bring legal proceedings on behalf of a company where the
company is unwilling or fails to do so (Part 2F.1A of the
Corporations Act 2001 (Cth)).5 This
action is usually brought to enforce rights against directors who breach their duties to the
company. A company will rarely bring such an action itself because the directors who
breached their duties usually control the company. Part 2F.1A is designed to strengthen
shareholders’ rights and promote appropriate behaviour by directors. Such an action
requires the permission of the court in order to proceed to stop inappropriate legal actions
being brought against directors by unhappy shareholders. The court will consider the
following matters in relation to granting leave to members
6:
6 S 237 Applying for and granting leave
(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in,
proceedings.
(2) The Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for
them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
(e) either:
5 S 236 Bringing, or intervening in, proceedings on behalf of a company
(1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company
is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a
particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i) a member, former member, or person entitled to be registered as a member, of the company or of a
related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2) Proceedings brought on behalf of a company must be brought in the company’s name.
(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.

Note 1:
Note 2:
For the right to inspect company books, see subsections 247A(3) to (6).
For the requirements to disclose proceedings and leave applications in the annual directors’
report, see subsections 300(14) and (15).
This section does not prevent a person bringing, or intervening in, proceedings on their own
behalf in respect of a personal right.
Note 3:

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● The applicant is acting in good faith
● It is in the best interests of the company that the applicant be granted leave
● There is a serious question to be tried
● The applicant gave the relevant notice to the company at least 14 days before the
application
The right to bring a derivative action at common law has been abolished.
One of the risks for shareholders bringing an action on behalf of a company is that they may
be required to pay some of the costs of the litigation. See s 242.
● Other statutory remedies allow shareholders to
seek an injunction to prevent
conduct that contravenes the
Corporations Act 2001 (Cth) and to apply to the court to
wind up a company.
-S 461(1)(e) allows a court to wind up a company where directors have acted in
their own interests, rather than in the interests of the members as a whole, or in any
other way that appears unfair or unjust to the members.
-S 461(1)(f) and (g), which permits the court to wind up a company where the
grounds set out in s 232 are established.
-Courts are generally reluctant
to wind up a solvent company as some other remedy
will usually be better for members.
-S 461(1)(k) permits the court to
wind up a company where the court finds that it is
just and equitable to do so.
(i) at least 14 days before making the application, the applicant gave written notice to the company of the
intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established
that:
(a) the proceedings are:
(i) by the company against a third party; or
(ii) by a third party against the company; and
(b) the company has decided:
(i) not to bring the proceedings; or
(ii) not to defend the proceedings; or
(iii) to discontinue, settle or compromise the proceedings; and
(c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to
be appropriate; and
(iv) rationally believed that the decision was in the best interests of the company.
The director’s belief that the decision was in the best interests of the company is a rational one unless the
belief is one that no reasonable person in their position would hold.
(4) For the purposes of subsection (3):
(a) a person is a third party if:
(i) the company is a public company and the person is not a related party of the company; or
(ii) the company is not a public company and the person would not be a related party of the company if
the company were a public company; and
(b) proceedings by or against the company include any appeal from a decision made in proceedings by or
against the company.
Note:
Related party is defined in section 228.
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● S 1324 allows a court to stop contraventions of the Corporations Act.
The court may
grant an injunction to stop a person from engaging in conduct which
is contrary to the Corporations Act. Behaviour that represents a contravention of the
Corporations Act incudes conduct that is regarded as criminal conduct under the Act,
but also breaches that are not criminal offences. ASIC or a person who has been
affected by the conduct may apply for an injunction.
● To assist in bringing a legal action, shareholders may apply to the court for the right
to inspect the company’s books where it can be shown that they
act in good faith
and the inspection is for a proper purpose. (s 247A)7.
A proper purpose means a purpose which is associated with the proper exercise of
shareholder rights but not in the case of a hostile takeover. Other examples of
proper purpose in an application to inspect a company’s books include:
-investigating irregularities in a company’s financial accounts
-inspection in order to value a member’s shares to negotiate a fair exit price
-inspecting books to get information about insurance cover of directors before
deciding whether to bring an action on behalf of the company
● A shareholder may also
enforce personal rights at common law. These include
rights conferred by the Corporations Act and constitution, voting rights and protection
against expropriation of shares (eg s 140 Corporations Act).
7 S 247A Order for inspection of books of company or registered scheme
(1) On application by a member of a company or registered scheme, the Court may make an order:
(a) authorising the applicant to inspect books of the company or scheme; or
(b) authorising another person (whether a member or not) to inspect books of the company or scheme on the
applicant’s behalf.
The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the
inspection is to be made for a proper purpose.
(2) A person authorised to inspect books may make copies of the books unless the Court orders otherwise.
(3) A person who:
(a) is granted leave under section 237; or
(b) applies for leave under that section; or
(c) is eligible to apply for leave under that section;
may apply to the Court for an order under this section.
(4) On application, the Court may make an order authorising:
(a) the applicant to inspect books of the company; or
(b) another person to inspect books of the company on the applicant’s behalf.
(5) The Court may make the order only if it is satisfied that:
(a) the applicant is acting in good faith; and
(b) the inspection is to be made for a purpose connected with:
(i) applying for leave under section 237; or
(ii) bringing or intervening in proceedings with leave under that section.
(6) A person authorised to inspect books may make copies of the books unless the Court orders otherwise.
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The common law right of a member to bring a legal action in the name of a company to
remedy an irregularity of wrong committed against a company was established in the case of
Foss v Harbottle (1843). The common law rule in Foss v Harbottle had two parts:
1. The internal management rule
2. The proper plaintiff rule
The internal management rule
This rule was based on the notion that the will of the majority in relation to a company will
prevail and courts did not want to interfere in internal management by the majority because if
there were irregularities these could later be ratified by the majority. Procedural irregularities
are now dealt with by s 1322 of the
Corporations Act 2001 (Cth).
The proper plaintiff rule
This rule states that because a company is a separate legal entity, if a wrong is done to a
company, the company itself is the proper plaintiff to commence legal proceedings.
The exceptions to the
rule in Foss v Harbottle are now only relevant to the enforcement of
personal rights by members in their capacity as members.
● A member has a personal right to prevent the company altering its constitution to
expropriate their shares if the expropriation is not for a proper purpose or is unfair:
Gambotto v WCP (1995)
● A member has a person right to have his/her votes at a general meeting counted:
Pender v Lushington (1877)
● Shareholders may have personal rights to sue if shares are issued for improper
purposes
● The exception to the “fraud on the minority” exception to the rule in Foss v Harbottle
are now covered by the oppression remedy or the statutory derivative procedure in
Part 2F.1A.
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