Generally, corporations are recognized as legal entity and it invariably includes the relationships between the natural persons. Maximum part of the corporate law deals with these relationships and also regulates the same. Particularly, it deals with the potential conflicts of interest and abuses of powers. In context of the governance of the large companies, there is some fundamental issue, because of the division between the ownership and control. It mainly deals with the two areas that are shareholders power and rights, and second is director’s powers and control. The biggest issue arises in this context is that both directors and managers work in their own interest and fails to consider the interest of the shareholders of the company.
This paper consist reflective discussion on the statement “Companies are vital organizations in modern economies. Although most companies are small, some companies are huge and are extremely powerful. As corporate power is open to abuse and sometimes is abused, rigorous company law is crucial in regulating corporate activity”. In this we define the abuse of power by both director and shareholders, and also restrictions which can be imposed on the powers of the shareholders and directors of the company. Lastly, this paper is concluded with brief conclusion.
Director’s power and restrictions:
The costs of the breach of a director’s duties can be quite severe in nature, as shareholders and creditors of the company can file suit against the directors and make them personally liable for the breach. Corporation Act 2001 impose various powers under the directors for the purpose of managing the company, but for ensuring that these powers are not misused by the directors some restrictions are also imposed by the Corporation Act 2001.
Section 249C of the corporation Act 2001 states the provisions related to the calling of meetings of members by a director. As per this provision, a director of the company has duty to call a meeting of the members of the company. Usually, directors do not consider the request of the shareholders to call the meeting and ignores their request, and this is the biggest reason because of which provision is introduced under which obligation is imposed on the directors of the company. Section 249D of the Act also imposes duty on the directors of the company to call the meeting of the shareholders on their request in case request is made by the members holding 5% of voting rights or at least by 100 members who have right to vote. This provision imposed the restriction on the directors of the company to call the meeting if such request was properly made by the members of the company and directors are under obligation to fulfill this request.
One more example is there which defines the restrictions on the appointment and removal of the directors also, such as section 120 of the Act defines the provisions related to the appointments of the directors. Under the Act, directors can be appointed either by passing shareholder’s resolution at a general meeting or also by passing director’s resolution.
Provisions further stated that directors can be appointed by the other directors must be confirmed by a resolution passed by the shareholders either within the 2 months of the appointment or in case of public company at the next AGM. This provision imposed restriction on the power of the directors of the company so that they do not misuse their power by appointing any such person on the director’s position who is not able to understand and fulfill their obligation towards the shareholders or the company. This provision also ensures that director must not appoint any such person on their position which is appointed by the director for their own benefit.
Some additional requirements are also there which are applying on the listed companies and as per these provisions if person is appointed as director by the other director of the company, then such director must be elected by the shareholders at the next of the AGM, and directors of the company must be re-elected by the shareholders in every 3 years. This additional requirement can also be considered as additional restrictions on the power of the directors because it provides power to the members to remove the directors if they are not appropriate for the company.
Similarly, directors cannot remove any director of the company unless resolution is passed by the shareholders of the company, and this is another restriction which is imposed on director’s powers.
Another big issue in context of abuse of power is the remuneration paid to the director’s as this is the area in which maximum frauds take place (Parker and Cooper Ltd v Reading [1926] Ch 975 at 984). Generally, directors in context of remuneration get undue and unfair pay from the corporation which not only affect the member’s profitability but also reduce the efficiency of the company. Section 202 of the Act states the requirement to approve the remuneration of the directors of the company and directors of the company are restricted as they do not exceed the remuneration approved by the shareholders.
It must be noted that directors of the company possess all types of powers but some powers are expressly restricted and reserve for the company’s members, and this is done for ensuring that director’s does not misuse their power. This can be understood through case law such as company’s wind up and amendment in the company’s constitution. Corporation Act 2001 also imposes restrictions on the conduct and act done by the directors of the company, and these restrictions are imposed in the form of duties of the directors, such as:
Therefore, for ensuring the protection of the corporate dignity, law imposes number of duties on the directors of the company and also imposes restrictions on the power of the directors. Duties which are imposed by the corporation law also include duty which states to act fairly and honestly, and also includes the important duty of care (Mills v Mills (1938) 60 CLR 150). The biggest issue in this context is the enforcement of the duty, especially in the situation when wrongdoers control the operations of the company.
Shareholders powers and restrictions:
On the other hand, law does not make it easy for the shareholders to bring actions on behalf of the company. There are number of countries in which statutory procedure is established for bringing the action on behalf of the company and it also increase the shareholder activism. However, shareholders also abuse their power in many ways such as for oppressing the minority shareholders. Corporate law also imposes restrictions on the shareholders power for protecting the dignity of the corporates approach.
It must be noted that, ultimately corporation is subject to the shareholder’s control, which means control exercised by the majority shareholders. In other words, if any person or family group exercise any control over the majority of the shares enjoy the maximum power of the corporation, because usually majority shareholders vote in favor of those matters only which fall for their benefit or family or friends. Majority shareholders also appoint their friends and family on the board of director’s position, and this result in oppression for minority shareholders. In closely held organizations in which number of shares and shareholders are small, then in such organizations power exercised by single person or small group, and they exercise control over all the matters. It becomes impossible for the minority shareholders in these organizations to elect any officer or director for the purpose of protecting their interests and they fail to win any vote submitted to the shareholders. Minority shareholders of the organization exercise only that much power which is permitted by the majority shareholders.
It must be noted that, small group of shareholders in such organizations usually work closely with each other and have ties of family or friendships. Therefore, in this context opportunities of interpersonal conflict are greatly increased among the shareholders or between the management of the company. In case law, Ritchie v. Rupe, S.W.3d, 2014 WL 2788335, Court stated that not always things work in the same manner as planned (shareholders die, struggle was faced by business, changes occurred in the relationship, and dispute arise). In this case, there is no agreement in context of shareholders, and minority shareholders who only exercise little contractual right and voting power may have no control how to resolve these disputes. This happens because of the absence of a market in which shares of the company were sold, and once minority shareholders oppression begins, as these shareholders have no place to go for getting the benefit of the investment they made.
Corporation Act 2001 introduces various provisions which ensure the minority shareholders protection against the oppressive behavior of the majority shareholders. This Act provides numbers of powers to the Court for granting the relief to the shareholders of the company, in case operations conducted by the company are completely contrary to the shareholders interest or such operations are oppressive to, unfairly prejudicial to, or unfairly discriminatory in context of the shareholders of the company.
Section 232 of the corporation Act 2001 states that, target the conduct of the organizations which result in the unfairness on part of the shareholders of the organization. The scope of this section is very wide and there is no defined limits related to the situations which result in the offending conduct. However, any person can be held liable for this either such as the company, its directors or other shareholders. Court assess the conduct by applying the objective test, and this test is based on the fact whether conduct between the parties is viewed as unfair from the point of view of the reasonable commercial bystander.
That the shareholder of the organization is discriminated is not considered as the enough ground, and there must be the element of the unfairness must be present and it must go beyond the scope of the only disadvantage.
Conclusion:
After considering the above facts, it can be said that, power imposed by the corporation act is misused by both director and shareholder. For ensuring the protection of the corporate dignity, law imposes number of duties on the directors of the company and also imposes restrictions on the power of the directors. Duties which are imposed by the corporation law also include duty which states to act fairly and honestly, and also includes the important duty of care. However, shareholders also abuse their power in many ways such as for oppressing the minority shareholders. Corporate law also imposes restrictions on the shareholders power for protecting the dignity of the corporates approach.
References
John Lessing, 2009, https://epublications.bond.edu.au/cgi/viewcontent.cgi?referer=https://www.google.co.in/&httpsredir=1&article=1015&context=cgej, Accessed on 24th May 2018.
ASIC, Directors – What are my duties as a director?, < https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/>, Accessed on 24th May 2018.
Tim Lester and Hogan lovells, Corporate governance and directors’ duties in Australia: overview, https://uk.practicallaw.thomsonreuters.com/1-502-9743?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1, accessed on 24th May 2018.
AICD, Don’t forget minority shareholders, < https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2013-back-editions/april/opinion-do-not-forget-minority-shareholders>, Accessed on 24th May 2018.
Fryar Law Firm, Minority Shareholder Oppression in Closely Held Corporations, < https://www.shareholderoppression.com/minority-shareholder-oppression>, accessed on 24th May 2018.
Agus riyanto, (2016), protection of minority shareholders in Australia, < https://business-law.binus.ac.id/2016/10/18/protection-of-minority-shareholders-in-australia/>, accessed on 24th May 2018
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