Discuss about the Corporate Governance and Shareholder Litigation.
The general rule of law that is applicable in the present case provides that the articles of Association of company bind the members of the company as well as the members themselves. Therefore, it can be said that the articles amount to a contract that has been. The company and its members regarding the rights and liabilities imposed on members of a corporation. As a result, the law allows a member the company the same way as the company may sue the members in order to enforce or restrain a breach of the articles. Therefore the law provides that the company is bound to its members to all of the articles (Crosling and Murphy, 2009). On the other hand, if there is a breach of the articles by the company, in such a case the members can restrain the company and for this purpose may bring an injunction against the corporation. These provisions have also been given effect by the corporation’s law. As a result, it has been provided by section 140 of the of the Corporations Act, 2001 (Cth) that the effect of the Constitution of the company can be described as a contract under seal that has been created between (i) the company and each member of the company (ii) The company and its directors, as well as the company secretary, and also (iii) The members of the companies themselves. Regarding the contractual effect of Constitution of the company, it needs to be noted that this effect is restricted to certain conditions. Therefore, the common law does not provide any rights to any other person in any other capacity (Shapira, 2003). An example of the situation was seen in Eley v Positive Life Assurance Co Ltd (1876). In this case, the company has appointed Eley as its solicitor for life. However, later on, he also became a member of the corporation. His appointment as the solicitor of the company was also mentioned in the articles of Association of company. Ultimately, Eley was removed from his position as the company’s solicitor. Under these circumstances, he decided to the company for the breach of contract. It was held by the court that no rights were conferred on Eley as a result of the articles of company, in any capacity, other than his capacity as a member of the company (Ramsay, 1992). The reason that these eyes have not been affected, the court stated that the action cannot succeed. Under the common law, the articles of Association of the company are considered as a contract that has been created between the company and its members. This view was also been codified by section 140(1)(a). In the same way, an example of the position in this regard under the common law can be given in the form of Hickman v Kent or Romney Marsh Sheep-breeders Association (1915). In this case, it was mentioned in the articles of Association of the company that in case of a dispute between the members and the company, but this needs to be referred to arbitration before initiating court proceedings. However, Hickman, directly initiated court action without referring the matter to an arbitrator. As a result, the company proved to be successful in obtaining a stay of these proceedings. It was held by the court that the memorandum and the articles of Association of the company amounted to a contract created between the company and each of its members. Such contract in the enforced by the company as well as by the members. Therefore, it was stated by the court that when certain rights are purported to be given to an outsider in his capacity as such, whether the person subsequently becomes a member, such outsider cannot sue the company on the basis of these articles, considering them a contract between the person and the company in order to enforce these rights (James, 2013). Therefore the law provides that no rights can be enforced against the company, if such right is purported to be conferred on such person by any article of the company, whether the person is a member or not, and in any press the other than as a member of the company, for example as a solicitor, director or promoter.
Under these circumstances, it can be concluded that Max cannot enforce the laws that this was when the Constitution of Chocolate Cleaning Products Pty Ltd. and according to which, Max will remain the solicitor of the company for life and he cannot be removed except in case of negligence. The reason behind this conclusion is that in this case Max wants to enforce the clause in his capacity other than the member of the company. Max is not going to enforce the clause as a member of the company but he wants to enforce the laws in his position as the company’s solicitor. Hence, in such a case, it cannot be considered as a contract between the company and Max. Therefore, Max cannot enforce the clause mentioned in the Constitution of Chocolate Cleaning Products Pty Ltd.
The issue in this question is if Max can prevent the company from including a clause which allows the directors to expropriate his shares, although a special resolution has been passed by the other shareholders. There are certain rules present in the corporations’ law that have been developed with a view to protect the minority members of the company in case they have to face oppressive conduct. The term minority oppression includes the conduct that is governed by section 232 of the Corporations Act. In order to deal with such conduct, the courts have been given extensive powers so that really may be provided to a shareholder was to deal with oppressive conduct (Whincop, 2001). Oppressive conduct takes place, for example, when the affairs of the company, including any proposed or real act or omission or resolution takes place in such a way that is against the interests of the shareholders of the corporation as a whole or if the conduct can be described as oppressive, discriminatory or prejudicial against the shareholder.
Under these circumstances, section 232 of Corporations Act deals with the conduct of the directors due to which the minority shareholders may have to face commercial unfairness. The provisions of section 232 are wide enough and no restrictions have been placed on what may be considered as oppressive conduct. For the purpose of finding out if the conduct can be described as a process, the courts apply an objective test. In order to do so, the courts are required to consider if the particular conduct also be considered as unfair by any reasonable person. However, the conduct cannot be described as oppressive. Only thing to reason that such conduct is discriminatory or prejudicial for a minority shareholder. Hence it is also necessary that there should be an element of unfairness, present in the conduct (Schreiner, 1979).
Under these circumstances, it can be claimed that in the present case, the conduct of the majority shareholders of the company is oppressive and unfairly prejudicial to Max. Therefore, Max can seek an order from the court, preventing the inclusion of the clause, which allows the directors of Chocolate Cleaning Products Pty Ltd to expropriate the shares of the minority shareholders, although such resolution has been passed by the other shareholders of the company.
The issue in the present case is if the resolution passed by the executive directors of Aussie Boats Ltd (AB), according to which the company was going to issue additional shares in order to thwart the takeover bid that was going to be made by Millionaires on Water Ltd (“MWB”) can be treated as a breach of duty by these directors, particularly in view of the fact that the takeover bid is being opposed by these directors to save their own positions because it is known that MWB terminates the position of executive directors after it has completed a takeover while on the other hand, generally the nonexecutive directors are retained. Under these circumstances, advise needs to be given to Banjo if the executive directors of AB have breached any of their equitable or statutory duties.
A number of duties have been imposed on the directors. These duties have been prescribed by the common law and at the same time, they have also been incorporated in the Corporations Act, 2001. First and foremost, the directors owe these duties towards the corporation. The basis for these duties can be found in the principles of good faith and accountability (Hanrahan, 1997). The requirements imposed on the directors by common law and statutory right to establish the parameters of this duty but without restricting the flexibility of these principles (Pentony, Graw, Parker and Whitford, 2012).
The directors are required by the law to discharge their duties “keeping in view the best interests of the corporation”. Generally this phrase is interpreted as covering only the “shareholders of the company as a whole”. But while making decisions on behalf of the company, generally, the directors may have to deal with several conflicting interests. Therefore, during the recent years, the courts have been ready to give more scope to the directors in considering the interests of various persons who are affected by the acts of the company without encroaching on the principle which requires the directors to act in the best interests of the company (Chumir, 1965). It has been recognized by the courts that acting in the best interests of the company does not mean that the directors should disregard the interests of other stakeholders like the employees, creditors and the community, who may be impacted by the actions of company. Generally it is in the long-term best interests of the company to consider these interests also.
Under the present circumstances, if the executive directors of Aussie Boats have made a decision to counter the takeover bid made by MWB, only due to the reason that it is known that after the takeover, MWB abolishes the position of executive directors, it can be said that there has been a breach of duty by these directors. The reason is that the law requires the directors to make decisions by keeping in view the best interests of the corporation. On the other hand, even the present case, the decision has been made by the executive directors of Aussie Boats for the purpose of protecting their position instead of preserving the best interests of the company, and can be said that there has been a breach of the duty by these directors. In this regard, civil penalties that have been described by the Corporations Act, 2001 can be imposed on these directors if it has been established that the decision was not made by them in the best interests of the company and as a result there has been a breach of duty by these directors.
References
Crosling, G. M. and Murphy, H. M. 2009,How to study business law (4thed.) Sydney, NSW: Lexis Nexis
Shapira, G., (2003) ‘Shareholder Personal Action in Respect of a Loss Suffered by the Company: The Problem of Overlapping Claims and “Reflective Loss” in English Company Law’ 37 International Lawyer 137.
Ramsay, I., (1992) ‘Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action’ 15 University of New South Wales Law Journal 149 at 156
James, N, 2013, Business Law (3rded.) Brisbane, QLD: Wiley.
Whincop, M.J. (2001) ‘The Role of the Shareholder in Corporate Governance: A Theoretical Approach’ 25 Melbourne University Law Review 418 at 432-8
Schreiner, O. C., (1979) ‘The Shareholder’s Derivative Action – A Comparative Study of Procedures’ 96 South African Law Journal 203 at 211
Hanrahan, P. F. (1997) ‘Distinguishing Corporate and Personal Claims in Australian Company Litigation’ 15 Company & Securities Law Journal 21
Pentony, Graw, Parker &Whitford, 2012,Understanding Business Law, Sydney, NSW, LexisNexis
Chumir, S., (1965) ‘Challenging Directors and the Rule in Foss v. Harbottle’ 4 Alberta Law Review 96
Eley v Positive Life Assurance Co Ltd [1876] 1 Ex D 88
Hickman v Kent or Romney Marsh Sheep-breeders Association [1915] 1 Ch D 881
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