4. ALTERING THE CONSTITUTION
An SR by members is needed for an alteration of the con (s 136). However, equitable/statutory limits apply.
STATUTORY LIMTS Entrenching provisions
Company must abide by any entrenching provisions in its con (s 136(3)) Limitation on taking up more shares or increasing liability
S 140(2): Unless they agree in writing, members cannot be bound by alterations made after they date they became a member that:
(a) Requires the member to buy additional shares;
(b) Increases members’ liability to pay share capital of, or otherwise pay money to, the co (c) Restricts members’ right to transfer shares they already own
Varying class rights See below.
Remedies
Oppression remedies (s 232)
• If not, the member can argue breach of the statutory contract (Eley) or they might be able to seek a statutory injunction under s 1324.
EQUITABLE LIMTS
STATE: Previously, a majority’s power to alter the con was subject to it being ‘bona fide for the benefit of the co as a whole’. (Gold Reefs) This test was widely criticised (e.g. Dixon J in Peter’s American; Gambotto). Now, the equitable limitation is that the voting power be used for a ‘proper purpose’: (Gambotto)
1. Does the alteration create conflict of interests and advantages between maj and min?
• If no, the maj has the onus of proving the alteration bona fide affects all SHs equally (Gold Reefs)
• If yes, step 2
2. Does the alteration involve an actual/effective expropriation of shares/rights?
• If no, alteration is valid, unless it is ultra vires, beyond any purpose contemplated by the con or oppressive.
o Includes expropriation of valuable proprietary rights attaching to shares (Gambotto).
Need to identify which specific rights in exam. Includes right to receive dividends, right to vote etc.
• If yes, step 3 3. Proper purpose:
Alteration invalid unless maj members prove it is:
1. Done for a proper purpose (to protect the co from harm)?
• The purpose must be to protect the co from harm – must show the co will come to some harm unless the shares of the min are sold.
VARIATION OF CLASS RIGHTS
STATE: [Co] can alter its con with an SR by members. (s 136) It may also issue shares with different classes on terms it chooses (s 254B(1)). However, statutory limits apply where there is a variation/cancellation of class rights.
1. Is there a variation/cancellation of class rights?
FIRST: STATE WHAT THE VARIATION/CANCELLATION IS
• All cos: if a co converts ordinary shares into pref shares or vice versa (s 254G(1)) 1. Cos with share capital:
• Dividing a class into two or more classes of shares with different rights (s 246C(1))
• Where the rights attaching to only some shares in a class are varied (s 246C(1)) 2 Cos without share capital (e.g. co limited by guarantee)
• Dividing SHs into further classes with different rights ((s 246C(3))
• Varying the rights of some SHs (s 246C(4)) 3. Cos with one class of shares issuing new shares:
• If the new shares have different rights to existing shares and those rights are not provided in the con/a document lodged in ASIC (s 246C(5))
o Abrogates principle in White v Bristol. Now, rights of existing shares (Class A) are taken to be varied by the mere issue of Class B shares.
• If the co issues new pref shares that rank equally with existing pref, unless authorised by terms of issue of existing pref shares/by con (s 246C(6))
o Note White v Bristol point above.
2. Has the proper process been followed?
If co has a con setting out a process for variation/cancellation of class rights, it must be followed (s 246B(1)).
If co does not have a con OR con does not address variation of class rights, the class rights can only be varied/cancelled by (s 246B(2)):
• An SR of the co; AND
• SR passed at a meeting of the holders of the affected class OR with the written consent from 75% of them
• NOTE: co must give written notice of variation/cancellation to members of class within 7 days after it is made (s 246B(3)).
3. Outcome (usually this is enough, but can go to Gambotto equitable limits)
• Those in breach commit an offence (strict liability) (s 246B(4))
• SHs (who did not agree to the variation or cancellation of their rights) may apply to the court to have the variation or cancellation set aside (s 246D(1))
o Application must be made by members with at least 10% of the vote of the class concerned
o Court must be satisfied it would unfairly prejudice the applicants (s246D(5))
• If not, the member can argue breach of the statutory contract (Eley) or they might be able to seek a statutory injunction (s 1324) or an oppression remedy (s 232).
III. REDUCING SHARE (EQUITY) CAPITAL 1. CAPITAL REDUCTIONS
II. DUTY TO EXERCISE POWER FOR PROPER PURPOSES (PPs) DO GOOD FAITH/BEST INTERESTS AS WELL
IN REMEDIES – DO PERSONAL ACTION TO SUE
MUST STATE: Dr must exercise his powers for PPs. This fiduciary duty is sourced in statute (s 181(1)(b)) and equity (Mills), but there is no meaningful difference so they will be
considered together. The shares may have been issued for an improper purpose. Following the two-step test in Howard Smith:
(a) Objective purpose for which power is granted
• At law, the purpose drs are given this power to raise shares is to raise capital (Whitehouse), but can also be:
o to address financial issues (Howard Smith)
o using shares as a cash equivalent (e.g. for employee remuneration, as consideration for a purpose)
o to give greater freedom to plan for future joint operations and ensure long-term stability (Harlowe’s Case)
o to obtain best agreement directors could get for company while they were still in control regarding exploitation of company mineral rights. (Teck’s Case)
o creating sufficient number of shareholders to allow certain statutory powers to be exercised. (Hogg)
(b) Actual purpose of the exercise of the power
• On the facts, the power was exercised to ______ (state if proper/improper for each one).
o If multiple drs for multiple purposes, distinguish them
• As there are multiple purposes, the question is whether ‘but for’ the improper purpose, would the power would have been exercised? (Whitehouse) The ‘predominant purpose’
test in Howard Smith is effectively the same test. (Davall) Improper purposes:
o For miscellaneous purposes, is it for the purpose of getting cash into the co?
o Allotting shares to defeat voting power of existing shareholders by creating new majority (Whitehouse)
o Allotment of shares to defeat takeover; maintaining control and vision of co (Howard Smith)
o If dr already has board/share control, doesn’t need more power
III. DUTY OF CARE, SKILL AND DILIGENCE (CSD)
STATE: drs must perform duties with the CSD of a reasonable person (RP) in their position.
(s 180(1)) This duty is the same in general law and statute, but it is not fiduciary. (Vines) It is objectively assessed (Daniels v Anderson):
• DO DRS SEPERATELY
1. CO CIRCUMSTANCES (DON’T SPLIT YET)
• As the co is [large/public], it is expected the drs will be more/less diligent
• State of finances (Rich)
2. [INSERT INDIVIDUAL DR NAME]
On the facts:
• Office occupied
o MD/Exec D has a higher standard, day to day responsibilities (AWA; Wheeler) o If specialist, has as higher standard with matters relating to… As a result they
should have paid particular attention to…
o CFO held to a higher standard regarding the business’ finances (Hardie)
• Skill/experience/knowledge (Rich)
• Conflict of interest? (standard higher when conflict involved) (Adler)
IF REALLY BAD: in _______, dr has failed the minimum standard of CSD and is in breach (AWA):
• Keep familiar with co’s business + financial position (and make inquiries if fin statements call for it)
o Ignorance and failure to inquire are no longer a protection
• Understand financial statements and if necessary, make further enquiries (Healy)
• If feel they don’t have sufficient business experience to perform duties, acquire it/don’t act (cannot simply represent a particular field of experience whatever background and experience)
Limitations of drs individual knowledge/experiences for such breaches are irrelevant, as this is a minimum standard for all drs (AWA cf. City Equitable)
3. BREACH
Given [drs] standard, by [act], when [dr] ought to have [done XYZ], there is a prima facie breach.
• E.g. XYZ could be to interrogate the report/request more info about X 4. DEFENCES
A. Reasonable reliance (ALWAYS CONSIDER BUSINESS JUDGMENT RULE AFTER) Dr may argue he was entitled to rely on info/advice provided by X, a competent
employee/expert/board member (s 189(a)). However, his reliance was unlikely reliable because (s 189(b)):
• See factors below in delegation. E.g. it is unlikely [delegate] as a [position] had relevant experience to rely on their report. ALSO:
TOPIC 10: MEMBERS’ REMEDIES
IDENTIFY BREACHES OF DDs FIRST I. SDA
For a breach of DDs, the co is the ‘proper plaintiff’ to bring a claim. (Foss) Any remedy will go to [co].
1. STANDING
X can bring an SDA as they are (s 236(1)(a)):
(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 2. LEAVE
Court will grant leave if (s 237(2)):
(a) It is probable the co will not bring proceedings; AND
• Look at co’s response to notice of intention to apply for permission to bring proceedings
• If co is merely investigating the complaint, it does not mean they will bring proceedings (True Value Solar)
(b) [P] is acting in good faith
For the reasons above, a good cause of action exists. Also, there is no collateral purpose amounting to an abuse of process (Swansson)
• EXAMPLE: creditor (and former member) brought action so that co would be in a fin position so that it could repay debt owed to it as creditor = not good faith (Chahwan) (c) It is in co’s best interests leave be granted
There are often sound reasons for co not pursuing an action (EM 1998)
• Ragless – consider:
o Character of the company (type and size): if small family co, litigation will impact family members who are SH
o Nature of business: litigation may be bad for business rep o Whether there is a more appropriate means of redress;
o Will litigation be of financial benefit?
• When co is in liquidation, court cannot grant leave to bring SDA because company will be under control of liquidator (Chahwan)
• Rebuttable presumption leave not in co best interests if the co has decided to avoid proceedings with a 3P (s 237(3))
o 3P = someone NOT a related party under Ch 2E (dr, their spouse etc.) o The decision was made (s 237(3)) (cumulative requirements):
(a) In good faith for a proper purpose (b) Without a material personal interest
(c) With a reasonable belief they are sufficiently informed
(d) With a rational belief it is in the co’s best interests (one an RP in their position would hold)
(d) There is a serious question to be tried
