Law Reporter

  • Date:01 Sep 2007
  • Type:CompanyDirectorMagazine

Professor Bob Baxt provides an overview of recent court decisions affecting the role and responsibility of directors.

Corporate governance – changing a company’s consitution to limit the powers of the directors

It has been the position in our corporations law that companies are structured in a way, and constitutions of the company are drawn up, so that the board of directors, and basically management, is given the power and the obligation to run the company. The members at the general meeting have the final ‘say’ so on the election of directors, confirming dividend policy and generally dealing with the broad issue where corporate control is to be changed and critical questions surrounding the amendment of the constitution. But, the Full Federal Court has recently ruled that in principle there is no good reason why the company should at least not amend its constitution to permit the shareholders to change the constitution to rearrange how the company is to be governed. That is the potential result from the Full Federal Court decision in a fascinating recent takeover battle involving Capricornia Credit Union Limited (Capricornia Credit Union Limited v Australian Securities and Investments Commission [2007] FCAFC 79).

The facts of the case were briefly these. Mackay Permanent Building Society wanted to take over the Capricornia Credit Union. In order to run a better campaign to achieve this result, Mackay sought access to the register of shareholders. It wanted to contact the shareholders to see if they could persuade them to override the board’s current disapproval of the takeover offer.

Under s 173(3B) of the Corporations Act (the Act), access to the register of shareholders (hereafter referred to as members) can only be granted for a proper purpose and if approved by the Australian Securities and Investments Commission (ASIC). Mackay sought permission from ASIC to access the register of members and stated that its purpose for contacting the members was to convene a meeting of the members to enable them to provide directions to the board of directors of Capricornia in relation to the takeover. An alternative reason was to see if the composition of the board could be recast. Later, Mackay amended its application by asking for access to the register on the basis that it wished to communicate with members so that it could convene a meeting. It wished the members to pass a resolution to amend the constitution so as to confer on the members a right to give directions and recommendations to the board of directors.

ASIC approved the application, but not for the purposes of amending the constitution. Both Mackay and Capricornia appealed ASIC’s decision to the Administrative Appeals Tribunal. This Tribunal ruled that the purposes that had been stated by Mackay to convene a meeting were not proper purposes because the members could not pre-decide how the directors should exercise their powers.

Both parties appealed the decision in the Full Federal Court.

During the course of the appeal, the Full Federal Court suggested that Capricornia should make additional submissions to it on the purposes as stated by Mackay to be critical to its application – to convene meetings of members so as to amend the constitution and recast the powers of directors. Capricornia took up this invitation and its arguments before the Full Federal Court suggested that any directions given by the members to the board to act in the interests of a particular group (in this case, the Mackay group or those who wanted to support the takeover) might result in a breach of duty on the part of the directors. If the members voted in this way it could be argued that they were, in effect, only acting in the interest of a particular class of members and not for the company as a whole. This could expose the directors to potential breaches of duty.

In dealing with this central question, the Full Federal Court first of all referred to s 198A of the Act. This confers on the board of directors the power to manage the company. These powers are traditionally construed very widely. The relevant provision is, in effect, part of the corporation’s constitution which may be altered. In this case the company’s constitution had not been altered. In the Full Federal Court’s opinion, it was a central feature of corporate law that it was the board of directors which was responsible for the management of the company. Of course, the constitution could require the directors to seek and obey the views of the members but this was most unusual.

The Full Federal Court then turned to consider Mackay’s stated purpose of seeking the ability to change the way in which the company’s management was structured. It was suggested that it is within the power of the general meeting to remove directors; the rules usually require that members cannot instruct directors as to the performance of their duties. In addition, a director who is prepared to give effect to members’ directions without consideration of his or her own personal judgment regarding what is in the best interests of the company as a whole arguably fails to satisfy the obligations set out in ss 180 and 181 of the Act and their equivalents in general law. Moreover, under s 249Q of the Act, a general meeting can only be held for a proper purpose; to convene a meeting for the purposes of appointing directors who will breach their duties would amount to a breach of the law. For these reasons, any attempt to impose on a board of directors a duty to act upon the intention of the majority could be an illegitimate purpose.

In response to these suggestions, Mackay argued that it was seeking a list of members so that it could ask them to vote in a particular fashion – there was nothing wrong in canvassing the shareholders to vote in a particular way.

The three judges in the Federal Court, Dowsett, Edmonds and Besanko, ruled that while the traditional view under the general law was that an amendment along these lines would be permissible, this would not exempt the directors from continuing to act in the best interests of their company and in accordance with their duties of diligence and care as enunciated in ss 180 and 181 of the Act. There was a limit on how far the constitution could exempt the directors from these general obligations.

The judges also noted that such a course of action would, in effect, weaken the board’s capacity to protect the interests of the company as a whole. As Mackay owed no such duty to act for the benefit of the company as a whole, the board was the only group responsible for that obligation. The potential undermining of the board’s role and the confusion and disarray that would result from the inclusion of the amendments recommended under purpose 5 were therefore factors that both ASIC and the Tribunal had to take into account in assessing whether Mackay was pursuing a proper purpose in seeking access.

The Full Federal Court concluded that the relevant purposes were not necessarily improper on their face. If, however, once the changes had occurred, the members provided directions to the board of directors which resulted in breaches of their duty, a different situation would arise for the potential consideration of the court.

We will await with interest the outcome of this fascinating battle.

Corporate information – should shareholders have access?

If shareholders (hereafter, referred to as members) wish to obtain information about a company’s activities, they are given certain rights to do so under provisions of the Corporations Act (the Act). Section 247A of the Act enables a member of a company to seek an order from the court authorising the member to inspect the books of a company.

A court may only make such an order if it is satisfied that the member is acting “in good faith and that the inspection is to be made for a proper purpose”. Section 247A(5) provides the court with some guidance as to what amounts to an appropriate ground for a member seeking an application. It provides guidance by suggesting that if the inspection is made for the purpose of applying for leave to bring a representative action under the relevant legislation, or intervening in actions brought on behalf of the company where the directors refuse to bring them. Obviously any inspection for frivolous purposes will not be admitted.

Section 247A has been the subject of a few cases over the years and the most recent decision, that of Gilmour J in the Federal Court of Australia (Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583) is an interesting example of how this section will be viewed.

Vinciguerra was a shareholder in MG Corrosion Consultants. He held 30 of its 100 shares. He had been a shareholder for many years and had been employed by MG Corrosion during that period. Vinciguerra had generated significant profits for MG Corrosion as one of its most successful employees. He had also become a director of MG Corrosion but after four years, he resigned his position as director because he was unhappy with the way in which the business was conducted. In particular, he was concerned about potential liabilities that might arise, the failure to pay appropriate dividends, and in particular the behaviour of another company (the sole shareholder and director of which was a Mr Malcolm Gilmour, who was now the main director of MG Corrosion). It was suggested that dividends were not being paid because MG Corrosion just did not make enough money.

Vinciguerra contemplated his position and thought that he would commence proceedings against MG Corrosion for oppressive conduct under s 232 of the Act. He also thought that it was appropriate to see whether MG Corrosion should bring a representative action against Gilmour under s 237 of the Act on the basis that he was not acting in the best interests of MG Corrosion. The application was opposed by MG Corrosion which is not surprising, as Gilmour controlled MG Corrosion.

The court noted that access would only be granted under s 247A(1) of the Act if the court is satisfied “that the applicant is acting in good faith and that the inspection is to be made for a proper purpose. Similarly, before orders may be made under the [relevant section] the court must be satisfied that the applicant is acting in good faith” (see para 8). In order to assess that particular situation, the judge needed to be satisfied that the application was being made in good faith. It appeared that there was a considerable amount of disagreement concerning the affairs of MG Corrosion, the dividend policy and various other matters.

Gilmour J, however, believed that Vinciguerra was someone to be believed and that in the circumstances, he was satisfied that the shareholder was acting in good faith and for a proper purpose. In his view a shareholder in a company “could take the view that his investment in that company may be adversely affected by a particular transaction and could take a view that he wished to investigate the question of whether he should endeavour to cause legal proceedings to be taken [in order to evaluate that transaction]” (quoting from another case, Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151).

The judge rejected the argument by Gilmour that Vinciguerra had been acting in bad faith. It was argued that he had delayed seeking the relevant information and bringing the relevant proceedings. In the judge’s view, Vinciguerra had made out his case for inspection.

The decision is an important one. It illustrates that while the obligation on the part of a member wishing to obtain information is not hugely onerous, it nevertheless will be evaluated carefully by a court. The decision will give members in companies some encouragement that they can use the provisions in the Act to clearly support their claims. Of course, with the increase in class action litigation and the recognition that litigation funding is now appropriate, plus the proposed changes to the Victorian Rules of Court allowing for funding to be provided for class action litigation (a precedent that may be copied by other States), we may see a greater proliferation of these types of actions. That will not be something that directors of companies will generally welcome.

Professor Bob Baxtprovides an overview of recent court decisions affecting the role and responsibility of directors.