Question:
Advise what are the various legal issues and causes of action that are available to the shareholders arising from the directors conduct in the above circumstances. Students should answer this question with reference to the relevant provisions of the Corporations Act 2001 and the relevant case law.
The directors of a company named Mobile Technology Limited (MTL) are Harry, Minh and Jackson. The said company is a public company which is unlisted and limited by shares. The said company, at the time of formation, adopted an object clause in its constitution that prohibited the said company to make, purchase and distribute plasma televisions and DVD players. The shareholders of the Mobile Technology Limited (MTL) were unsatisfied with the manner the directors were running the said company especially as the company had declared very low level dividends along with the unbothered behavior of the directors to the needs and concerns of the shareholders. James and Jenny are shareholders of the company who hold the maximum percent of shares that is around 60% of the shares of Mobile Technology Limited (MTL), making them the majority shareholders and they intend to be a part of the management of the said company. They advised the directors of Mobile Technology Limited (MTL) to alter the business plan and pay more intention to the needs of the majority shareholders. James and Jenny also threaten to terminate the directors and handle the management of thee company themselves. Moreover, Martin Lu being a minority shareholding holding only 5 %of the company’s shares was concerning that the directors of Mobile Technology Limited (MTL) will mismanage the company and drain its assets. He wishes to set an extraordinary meeting of the members to voices his issues however; the directors never organize the same.
In the mean while, the directors of Mobile Technology Limited (MTL) decide to alter the business activities of the company and concentrate on making and selling smart phones and I-pads as they believe that the market of television and DVD player will fall apart sooner or later. Thus, to fulfill the said goal, the directors of Mobile Technology Limited (MTL) propose to enter into a contract on behalf of Mobile Technology Limited (MTL) to acquire a huge mobile manufacturing company in Shanghai without the knowledge of the shareholders of the company.
Additionally, the directors of Mobile Technology Limited (MTL) started another company called Stan Mobile Pty Ltd which they established and managed and decided to sell the television business of the Mobile Technology Limited (MTL) to their newly established company. However, a Chinese company at the same time proposed to purchase the television business of Mobile Technology Limited (MTL) at a higher rate than what Stan Mobile Pty Ltd was going to pay for the said company. The shareholders of the Mobile Technology Limited (MTL) were not aware that a big asset of the company was being disposed off and that a company of the director’s was involved in the said transfer.
Thus, concerning the facts discussed above, the issues in the said case are as follows:-
Every company in Australia, whether public or private, is governed by the rules and regulations made under the Corporation Act 2001 (Van der Laan and Dean 2010). A company has a separate legal entity which is different from its directors; managers and officers, however, there are certain circumstances in which the director is liable for the losses suffered by the company. However, the appointment and removal of directors depend on the shareholders of a company. Individual’s holding different types of shares have different voting rights in a company. The shareholders are usually divided into two parts depending on the number of shares they hold namely the majority shareholders and the minority shareholders (Lan and Heracleous 2010). The majority shareholders have more rights and powers than a minority shareholder. Under section 203D (1) of the Corporation Act 2001, a public company can with a resolution of more than 50% votes of its shareholders have the authority to remove the directors from his office (Du Plessis, Hargovan and Bagaric 2010). In the judgment of a English case, Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame, the judge stated that unless the directors of a company are removed or asked to change their view through special resolution, a mere majority of does not override the decisions of a directors of a company or remove them from their office.
The minority shareholders of a company have limited rights however; the Corporation Act 2001 makes provisions to protect their interest in a company. Section 232 of the Corporation Act 2001 give wide powers to the court to grant relief to minority shareholders, in case, the company’s internal affairs are contrary to the interest of the minority holders or the minority shareholders are being unflavored and discriminated (Schenone 2013). Thus, under section 232 of the Corporation Act 2001, if the directors fail to serve the needs and concern of the minority directors, the minority directors can ask the court to grant them relief and order the directors to satisfy the demands of minority shareholders.
Every public company operative in Australia needs to register its constitution at the Companies House at the time it’s formed. Most of the times, the said constitution consists of an object clause, which describes the objective, activities which the company intends to undertake and many more important internal regulations (Anderson and Howe 2012). The constitution is an important document and requires compliance just like the rules established by the Corporation Act 2001 in Australia. When a company wants to change its type of business activities which is mentioned in the constitution of the company, the company is required to change or alter the constitution of the company (Berk et al 2013). The Corporation Act 2001 makes rules relating to alteration and change in the Company’s Constitution under section 136 of the Corporation Act 2001. Section 136 of the Corporation Act 2001 states that a special resolution needs to be passed before the constitution of a company can be altered. Special resolution is always required to be passed by the shareholders of the company which required at least 75% of the shareholder who are allowed to vote, be present and vote in the meeting. If the votes are in favor of alteration, the constitution of the company is altered (Du Plessis 2010). In popular English case law, Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch D 656, the company in the said case had an articles which gave first lien on all the party paid shares which was held by the shareholder (Thirarungrueang 2013). An individual holds certain partly paid shares along with the few paid shares which the company had issued. The said individual died insolvent and the company ordered to alter its articles to make a lien on fully paid shares of the said company (Mukwiri 2013). Mr. Allen, who was the executor of the individuals will, sued the company to get back the lien on fully paid up shares. The judgment in the said case stated that alteration or change in the articles was allowed as far as the said alteration was made for the overall benefit of the company (La Porta et al 2011). Thus, the company is allowed to alter or change its constitution by a special resolution and for the benefit of the company at large (Nicholson and Newton 2010).
In every company, the directors of the company have the responsibility for the overall management of the company. As the said task is a very critical one, the Corporation Act 2001 has created certain duties which the directors of every company in Australia need to comply with. Section 180 to section discusses the duties of directors in Corporation Act 2001 (Deva 2013). Section 180 of the Corporation Act 2001, discusses, that a director of a company in Australia must exercise his duties with care and diligence. The care and diligence of a director is often compared to the care and diligence a reasonable and a prudent individual would show in similar circumstances. Section 181 of the Corporation Act 2001, discusses, that the director of a company in Australia should perform the duties of his office in good faith and for the benefit of the company (Patel et al 2012). This also includes the duty where the director should avoid conflict of interest and inform about the same as soon as one arises. A director needs to exercise in a manner which is in the best interest of the company ignoring his personal benefits and profits. Section 182 and Section 183 of the Corporation Act 2001 makes laws which require the director of an Australian company to make proper use of his position and the information which possesses as a director (Acts 2010). A director of a company should refrain from deriving any personal advantages for himself because of his position as a director or with the help of the information he possess in his capacity as a director. Thus, a director of a company in Australia is not allowed to set up another company and then trade with the company where he is the director without the knowledge of the shareholders (Hill 2010). In ASIC V Alder, Alder being a non-executive director of a company, requested the directors to advance $10 million from the company to his newly formed company, thus Alder breached his duties as a directors and the said case involved conflicts of interest which is in violation of the director duties under the Corporation Act 2001.
Application and Conclusion
In the present case, Harry, Minh and Jackson are the three appointed directors of Mobile Technology Limited (MTL) who were appointed in a general meeting. However, the shareholders of the company were unhappy with the manner in which the three directors were managing the said company. The primary concern of the shareholders was the low dividends which the Mobile Technology Limited (MTL) declared along with the unresponsive attitude of the directors. James and Jenny who were the majority shareholders holding 60% of the shares of Mobile Technology Limited (MTL) on being concerned about the management of the company could legally call for a member’s meeting to remove the directors of the company. A resolution of more than 50% shareholders present and voting in favor of removal of the directors of a company can automatically discharge the director from his office resulting into his removal. Thus, in the present case, James and Jenny are permitted to call for a member’s meeting and with a resolution of more than 50% shareholders voting in favor of removal of the directors can remove Harry, Minh and Jackson from their position as a director in the Mobile Technology Limited (MTL).
The minority shareholders are protected under the Corporation Act 2001. Thus, Martin Lu being a minority shareholder in the Mobile Technology Limited (MTL) is protected under section 232 of the Corporation Act. The said act makes clear provisions and gives power to the court to grant relief to minority shareholders of the companies in Australia protecting them from unjust, discriminatory conduct of the company’s directors that is detrimental to their interest. Thus, in the said case, Martin Lu who wanted to call for an extraordinary general meeting of the shareholders but was not directors did not arrange for one, thus, in the said circumstances Martin Lu could ask the court to order the directors of the company to arrange the said meeting under section 232 of the Corporation Act 2001.
The directors of the Mobile Technology Limited (MTL) are not allowed to alter the business activities as the same is mentioned in the Constitution of the company and requires alternation in the constitution for doing the same. Thus, section 136 clearly says that the constitution of the company can only be altered by a special resolution, which requires at least 75% shareholders eligible for voting to be present in person and vote without proxy. Thus, the decision of the directors of Mobile Technology Limited (MTL) to alter the business activities of the company without the approval of the shareholders was in violation of section 136 of the Corporation Act 2001.
Lastly, directors of Mobile Technology Limited (MTL) started a separate company and tried to sell the television business of the Mobile Technology Limited (MTL) to their privately owned company. This is pure conflicts of interest and in violation of director’s duties under section 181-182 of the Corporation Act 2001 which requires the director to avoid conflict of interest and immediately report the conflict of interest as soon as it arises.
Reference List
Acts, W.P., 2010. Commonwealth of Australia.
Anderson, H. and Howe, J., 2012. Making sense of the compensation remedy in cases of accessorial liability under the Fair Work Act. Melb. UL Rev., 36, p.335.
Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N., 2013.Fundamentals of corporate finance. Pearson Higher Education AU.
Deva, S., 2013. Sustainable Business and Australian Corporate Law: An Exploration. University of Oslo Faculty of Law Research Paper, (2013-11).
Du Plessis, J.J., 2010. A comparative analysis of directors’ duty of care, skill and diligence in South Africa and in Australia. Acta juridica, 1(1).
Du Plessis, J.J., Hargovan, A. and Bagaric, M., 2010. Principles of contemporary corporate governance. Cambridge University Press.
Hill, J.G., 2010. Subverting shareholder rights: lessons from News Corp.’s migration to Delaware. Vanderbilt Law Review, 63(1), pp.1-51.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R.W., 2011. Law and finance. In Corporate governance (pp. 26-68). Springer Berlin Heidelberg.
Lan, L.L. and Heracleous, L., 2010. Rethinking agency theory: The view from law. Academy of management review, 35(2), pp.294-314.
Mukwiri, J., 2013. Takeovers and incidental protection of minority shareholders. European Company and Financial Law Review, 10(3), pp.432-460.
Nicholson, G. and Newton, C., 2010. The role of the board of directors: Perceptions of managerial elites. Journal of Management & Organization,16(02), pp.204-218.
Patel, V., Cordato, D.J., Dias, M. and Beran, R.G., 2012. Changed constitution without change in brand name–the risk of generics in epilepsy.Epilepsy research, 98(2), pp.269-272.
Schenone, S., 2013. Duties and Responsibilities of Directors and Company Secretaries in New Zealand. CCH New Zealand Limited.
Thirarungrueang, K., 2013. Rethinking CSR in Australia: time for binding regulation?. International Journal of Law and Management, 55(3), pp.173-200.
Van der Laan, S. and Dean, G., 2010. Corporate groups in Australia: State of play. Australian Accounting Review, 20(2), pp.121-133.
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