Decision making by the General Meeting

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Contents

Required Reading

Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC, pp. .

Introduction

The provisions governing decision making by the General Meeting (GM) are found in the Corporations Act, Part 2G.2: Meetings of Members. The purpose of a meeting is to pass a valid resolution (which has to be recorded).

  • A resolution might be invalid if there is either a procedural (wrong number of people, invalid notice given before, etc) or substantive error (outside the powers of the general meeting).

Disclosure obligations

[1] When directors want to call a general meeting of the shareholders, they have disclosure obligations- they have to inform the shareholders of what the meeting is about. There are three sources to this duty:

  1. Statutory – s 249L (b) - state the general nature of the business of a meeting as outlined in s 249L(b).
  2. Common law - frame proper notices: the notice to the shareholders must make a sufficient statement of the objects and general nature of the meeting.
    1. A meeting is only competent to deal with business which is properly notified to members in the notice convening it: Holmes v Life Funds of Australia Ltd [1971].
    2. This is because it is on the basis of this notice that members make their decision as to whether to participate in the meeting: Devereaux Holdings Pty Ltd v Parry Corp Ltd (1985).
    3. Notice need not be meticulously precise, but must give fair and reasonable intimation of what is proposed to be dealt with in meeting: Devereaux.
    4. Equity - equitable duty to provide members with information material to their deliberations: case law is predominantly concerned with the fullness, fairness and clarity of directors’ disclosure in general meeting - failure may vitiate decisions taken in those meetings.

Notice must be given at least 21 days before the meeting: s 249H.

The equitable duty to disclose matters material to shareholder judgment

Directors are under an equitable duty to make full disclosure of facts within their knowledge which are material to decision before shareholders, including whether/not to attend the meeting: Bulfin v Benarfield’s Ltd (1938).

  • Both what is proposed in the resolution, and other relevant factors which might influence the members’ decision.
  • Particularly important when the directors actually advise the members in a particular way: Bulfin.
    • Not every piece of information which might be relevant – merely indicate the information which they consider the shareholders should have and the information which would be obvious to the average commercial reader that they should have: Buttonwood Nominees v Sundowner Minerals (1986).
    • Disclosure must be made in terms that do not mislead members whether by suppression of information or by what is expressly stated: Devereaux
    • Breach of this obligation need not be dishonest/involve moral turpitude: Chequepoint Securities v Claremont Petroleum (1987).
      1. However, an expression of an honest opinion does not amount to a misrepresentation or even inaccuracy in the opinion, even if wrong, if is accurately stated as an opinion”: Peters’ American Delicacy v Heath (1939)
      2. The court only looks to whether the information provided to shareholders was capable of misleading (ie, strict liability): 'Shears v Chisholm (1992).

The disclosure is ‘particularly insistent’ where directors derive benefits from the resolution: Chequepoint Securities v Claremont Petroleum (1987).

Standards of clarity and intelligibility

The information must be provided in an easy-to-read manner so that it can be read ‘on the run’ (ordinary people could read it by scanning it or quickly): Devereaux.

  • Shareholders are not assumed to be conversant in business or finance. There are standards of clarity and simplicity of expression.
  • Need to make full and fair disclosure needs to be balanced against the need to present a document which is intelligible to its readers.

This was discussed in Fraser v NRMA Holdings:[2]

  • Facts: the Plaintiffs [Fraser and another] were 2 members of the Defendant [NRMA]. The Defendant had two organisations: the Association and the Insurance. A prospectus was sent out to propose to members of the two companies. Somewhere in the prospectus’ were notices of meetings of the Association and Insurance convened to consider resolutions to amend the constitution of each company to give effect to the reconstruction. The Plaintiffs (who were also directors) applied to the court for a declarations that members of both companies were not fully and adequately informed of the proposals, and that the prospectus and the information in it was misleading and deceptive.
  • Argument: Three principal complaints:
    1. The repetition of the phrase ‘Free Shares’ in the prospectus gave the reader the impression that the shares may be acquired without any significant loss or outgoing to the offeree who accepts them.
    2. The failure of the prospectus to distinguish adequately between the impact of the proposal upon members of the Association and of Insurance was misleading.
    3. By the use of imprecise language, such as references to “business as usual”, to leave in a “half-light” the question whether Holdings would conduct its business, especially its road and travel services, in such a way as to “affect in any substantial way the extent or costs of services presently provided to members”
  • Judgment: duty to disclose relevant information arises as part of fiduciary duty of directors and under s 1022 of the Law. The information is to be such as will enable members to judge for themselves whether to attend the meeting and vote for or against the proposal or whether to leave the matter to be determined by a majority attending and voting at the meeting.
    • Directors must not turn a blind eye to relevant material in order to avoid placing before members information which may contradict or qualify any particular position taken or advocated by the directors or a majority of them.
    • TPA (and now ACL) requires that the information is not misleading of deceptive.
    • If the Plaintiffs sought relief under the general law (breach of the directors’ duties described in Bulfin) the knowledge of the directors’ knowledge of the facts would have been relevant. However, under the TPA, there is strict liability (knowledge is irrelevant).
    • The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and is likely to assist rather than to confuse: Devereaux
    • In complex cases it may be necessary to be selective in the information provided confining it to that which is realistically useful à clearly the present case was one of this kind
    • In this case, the first and second complaints are upheld.
    • However, the second complaint is dismissed: to describe the interests of the members of the Association and of Insurance as “similar” in the context of the proposal was not misleading or deceptive within the TPA notwithstanding that the description is not completely correct legally.
    • It is important that the adequacy of the information provided by the prospectus and supporting documents be assessed in a practical, realistic way having regard to the

Residual control in the general meeting

There are certain instances where the general meeting retains what might be thought of as some measure of residual control over directors:

Where the board is unable to act

If there is a deadlock upon the board or if the board lacks a quorum because of disqualification of interested directors or vacation of all board offices, there is authority that the general meeting may fill the void and by ordinary resolution exercise management powers

  • Injunctive relief and the appointment of a receiver may be granted to restore management to a proper footing where owing to disputes among directors, they are unable to act.
  • However, there is also a narrower view of the general meeting’s power as expressed by an Australian appeal court in Massey v Wales[3] - on this view, the residual power would be limited to reconstituting the board so that it might effectively exercise the management powers vested in it under the constitution.

Ratification of directors’ acts

Another residual power of the general meeting is that it can ratify any director’s acts which are in breach of their duties or an abuse of their power.

  • However, can’t ratify anything which disadvantages creditors: Kinsella.
  • Directors may also exceed their powers without abusing them, eg, by exercising borrowing powers in excess of a limitation fixed in the constitution.
    • Under the general law such an act may be ratified by ordinary resolution of the company
    • Sections 124 and 125 restrict the circumstances in which the company may plead the breach of such a restriction.

Dual initiative to litigate in the company’s name?

Commencing litigation on behalf and in the name of the company clearly falls within the management powers of the directors. There was a school of thought in England that specified that if there is a cause of action and the directors will not commence proceedings, the shareholders may apply to the court to pursue a claim (Marshall’s Valve).

  • House of Lords in Alexander Ward & Co Ltd v Samyang Navigation Co Ltd held that the liquidator of a company might ratify the commencement of proceedings on behalf of a company by two unauthorised agents acting as directors when the company lacked directors.

However, in Australia, the court in Massey v Wales held that the broad rule that the general meeting may not make management decisions applies to the commencement of legal proceedings. Thus, the general meeting cannot commence litigation in the company’s name.

Informal corporate acts

A further potential instance of residual general meeting power is informal corporate acts – the informal assent of members (that is, given other than through the formal procedures laid down by the Corporations Act and constitution of the company) will sometimes be effective.

  • Of particular importance for small private companies.
  • The basis for the doctrine is unclear. The development of this doctrine began with Salomon’s Case, in which Lord Davey held that “a company is bound in a matter intra vires by the unanimous agreement of its members”.
    • However - “For the purpose of binding a company in its corporate capacity individual assents given separately are not equivalent to the assent of a meeting - the company is entitled to the protection afforded by a duly convened meeting, and by a resolution properly considered and carried and duly recorded”: Re George Newman & Co

The following questions go to the nature of the doctrine and the consequent scope of its operation:

  • Is the doctrine concerned solely with whether shareholders have waived the formalities for company meetings and is limited to their right to do so? Herman v Simon is perhaps the clearest characterisation of the doctrine in these terms.
  • Alternatively, does the doctrine operate to express the ultimate sovereignty in the totality of members subject only to limited inroads upon unanimity and the interests of creditors where insolvency threatens? - on this view, it may not matter whether the subject matter of the unanimous informal agreement is formally within the powers of the general meeting. Under this view, the doctrine might be seen as a genuine exception to Salomon’s case and have a wider operation than under the waiver characterisation. Does Re Express Engineering support this approach?
  • A third characterisation is as an application of principles of equitable estoppels which prevent an assenting member from challenging the validity or the informal agreement - what support has this approach in the case law and what consequences ensure?
  • See also s 249A(7).

This was discussed in Re Express Engineering Works Ltd :[4]

  • Facts: a private company was formed to acquire assets from a syndicate of five persons who acquired assets for £7,000. At the first board meeting of the company those five persons were appointed as directors and the meeting resolved to purchase those assets for £15,000 to be paid by an issue of debentures of that amount. The constitution provided that no director should vote as a director in respect of a contract in which he might be interested.
    • When the company was later ordered to be wound up the liquidator claimed that the meeting was a directors meeting and that the five directors were precluded from voting, therefore the debentures were not properly issued and should be set aside.
    • The contrary argument was the five directors were the only shareholders and had, at a meeting, indicated their assent - in reply, Re George Newman & Co was relied on.
  • Held: two differences between Re George Newman and Co and this case:
    1. The transaction there was ultra vires; and
    2. There never was a meeting of the corporators
    • In this case these acting five persons were all the corporators of the company and they all met and agreed that these debentures should be issued. This case comes within the meaning of what was said by Lord Davey in Salomon: “I think it an inevitable inference from the circumstances of the case that every member of the company assented to the purchase, and the company is bound in a matter intra vires by the unanimous agreement of its members”
    • The meeting was a directors meeting but it might well be considered a general meeting of the company. Appeal dismissed

It was also discussed in Parker and Cooper Ltd v Reading:[5]

  • Facts: since the company’s bank was unwilling to increase its overdraft a director, Reading, advanced £1,750 to the company upon the security of a floating debenture. The debenture was issued with the assent of every shareholder. When the company later became insolvent, the liquidator sought to set aside the debenture for defects in the appointment of the directors who executed it as well as in its sealing by the company.
    • The defendants did not admit any of these irregularities, but their main defence was that every act or matter impugned by the plaintiffs was intra vires the company, and had been adopted and ratified by all the shareholders. The judge held that the sealing of the debenture had been done “with the utmost bona fides and solely for the benefit of the company”.
  • Held: Although the defendants were not validly or formally appointed directors, they believed they were and continued during the remaining history of the company to act as such. If the transaction is intra vires and honest, and especially if it is for the benefit of the company it cannot be upset if the assent of all the corporators is given to it. If company law enables the entirety of the corporators to ratify an irregular intra vires transaction why should this not protect an honest bona fide intra vires transaction entered into for the benefit of the company? Appeal dismissed.

And also in Re Duomatic Ltd:[6]

  • Facts: the holders of all the voting shares in the company had informally indicated their assent to payment of director’s salaries but no attempt had been made to show that the holder of non-voting redeemable preference shares had agreed. The directors relied upon the assent given as the company’s authorisation for the payment to them.
  • Held: where it can be shown that:
    1. All shareholders who have a right to attend and vote at general meeting of company
    2. Assent to some matter which a general meeting of company could carry into effect (s 249Q “proper purpose”) that assent is binding as a resolution in general meeting would be.
    • The preference shareholder, having shares which conferred upon him no right to receive notice of/to attend and vote at general meeting of the company, could be in no worse position if matter were dealt with informally by agreement between all shareholders having right to votes than he would be if shareholders met together in a duly constituted general meeting.

And also in Re Compaction Systems Pty Ltd:[7]

  • Facts: the issued capital of Compaction Systems consisted of 20 shares of $1 each. Omnico was registered as holder of 19 of them and a solicitor, McDonald, the chair of the board, was registered as the holder of the remaining share (a “B” class share).
    • The liquidator believed Omnico was the legal owner of all 20 shares. He signed as a representative of Omnico a minute recording that an extraordinary GM of members of the company had been held, the only member present being Omnico which recorded a resolution that Compaction Systems would be wound up. The following day a petition was issued in the name of Compaction Systems for winding up of the company by the Supreme Court of New South Wales.
    • McDonald convened a meeting of directors of Compaction Systems, following which counsel was instructed to seek an order to strike out the petition on the ground that the company had not authorised it and to revoke the appointment of the provisional liquidator.
  • Held: although the one “B” class share held by Mr McDonald did not entitle him to vote, it did, under the articles of Compaction Systems, entitle him to receive notice of and to attend any meeting. Also under art III and under ss 249K, 249V, an auditor is entitled to attend and receive notice of any general meeting and be heard.
    • The right to receive notice of a meeting and to attend and to be heard is not an insubstantial right
    • The principle laid down in Re Express Engineering should apply notwithstanding there was an omission to notify auditor but the court was not prepared to extend the principle to cover case where only the shareholder entitled to vote have assented to transaction while another entitled to receive notice of meeting and to attend has not been made aware of transaction and has not assented to it.

And also in Ho Tung v Man On Insurance Co Ltd:[8]

  • Facts: a company registered a set of articles of association upon its incorporation in Hong Kong and used these articles as its regulations until it was discovered 19 years later that the articles had never been signed by the subscribers to the memorandum (as required). The registered articles conferred upon the directors a power to refuse to register share transfers - the Table A regulations under the local Companies Ordinance did not.
    • A shareholder whose transfer had been refused registration asserted that the Table A regulations applied to the company by virtue of the counterpart provision which deemed those regulations to apply to a company unless it adopt its own articles. The Supreme Court of Hong Kong held that the registered articles constituted the regulations of the company, and the shareholder appealed to the Privy Council
  • Held: the company had acted on, amended, and added to these articles and conducted its business for 19 years without any objection, and the company on the record says that these articles are its articles of association. The apparent object of requiring the articles to be signed before registration is to secure the adhesion of the only members of the company at that time to the regulations contained therein… But there is no reason why the shareholders should not adopt them although irregularly registered. By the acquiescence and agreement of the shareholders shown by a long course of dealing, the registered articles have become and are the articles of association of the company as surely as if they had been formally adopted by special resolution

And in Herrman v Simon:[9]

  • Facts: a special resolution was passed that art 5 of the articles of association was deleted and replaced in a new form. The issue was whether the special resolution passed on 9 March 1981 purporting to delete art 5 of the articles of association in one form and substituting a new form was invalid.
  • Held: 'Where it can be shown that all shareholders having a right to attend and vote at a general meeting of a company assent with full knowledge and consent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be… doctrine dispenses with the consumptive effect of formalities. It is a doctrine that formalities may be disregarded if they have been waived by all shareholders acting in concert who want the same substantial result”: Re Duomatic
    • Doctrine doesn’t touch the problem in this case, it is a doctrine which goes to formalities and not to substance - ie, it is not a doctrine which says that substantial rights may be varied
    • It is only a principle of waiver - would be odd if one could waive the destruction of rights of whose destruction one was ignorant. It can only operate where the persons attending a meeting have full knowledge and consent, or if a shareholder does not understand and did not consent to a resolution. A shareholder cannot be deemed to have known and consented to something if it clearly did not do so.
    • Cannot see how one could sensibly apply some doctrine to Mrs Simon which would amount to saying that she was deemed to have known and consented to the effect of the amendments even though the plain fact was that she did not do so - appeal dismissed.

And also Kinsela v Russell Kinsela Pty Ltd (In Liq):[10]

  • Facts: at a time when its financial position was precarious, a company granted a lease of its business premises to two of its directors. The company was wound up three months later as an insolvent company.
    • Its liquidator sought a declaration that the lease was voidable and had been duly avoided. The defendant lessees pleaded that all members of the company had, after full disclosure, authorised the granting of the lease.
    • While the primary judge felt constrained by authority to hold that the unanimous assent of members would cure any irregularity in the grant of the lease, he nonetheless made the orders sought since he found that full disclosure had not been made to one member. The defendants appealed.
  • Held: In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done, but where a company is insolvent the interests of the creditors intrude - shareholders cannot authorise the breach/absolve directors from a breach which impinges on creditors rights in insolvency.
    • Here, the prejudice to the creditors was the direct and calculated result of the lease - its purpose was to place the company’s assets beyond reach of creditors. True that you had shareholders all agree but there is a limit in acting improperly (puts a limit on informal unanimous consent doctrine in regard to rights of creditors).
    • Relied on Cooke J’s analysis in NZ case of Nicholson v Permakraft (1985).

Irregularities: s 1322

Section 1322 deals with procedural irregularities not substantive irregularities. Distinction between procedural and substantive irregularities is:

  • Procedural = an action departed from the prescribed manner in which it had to be performed, without changing the substance of the action.
  • Substantive = changes the substance of the action.

Under s 1322, the Court may correct a defect if it causes substantial injustice:

  • Effect of the procedural irregularity rather than the business transacted at an irregular meeting
  • Injustice requires real prejudice, not insubstantial or theoretical prejudice: Elderslie v ASIC.
  • Difference between s 1322 and 249A(7) and link with informal unanimous consent doctrine as established by case law?
  • Section 249A(7) gives statutory back to informal unanimous consent doctrine and case law statutory backing
  • Irregularities to procedural formalities can be cured by court if curing is not unjust.

End

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References

Textbook refers to Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC.

  1. Textbook, [6.90].
  2. (1995) 127 ALR 543.
  3. (2003) 57 NSWLR 718.
  4. [1920] 1 Ch 466.
  5. [1926] Ch 975.
  6. [1969] 2 Ch 365.
  7. (1976) 2 ACLR 135.
  8. [1902] AC 232.
  9. 1990) 4 ACSR 81.
  10. (1986) 4 NSWLR 722.
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