MEMBERS RIGHTS

I.                   Dividends: Investors investing in company make money by:

·         Getting share of company’s profit in the form of dividend

·         Capital gain from sale of shares (when price of share increases)

1)      Rights of shareholders:

·         Unless provided otherwise in the Constitution, shareholders do NOT have the right to force the company to pay dividend, even if there is money/ profit available Burland v. Earle 1902

·         Broad of directors is given the power to declare dividends and to determine the amount, time for payment, and the method of payment. S254U (R.R)

·         For company with Constitution, the practice is for the directors to recommend the maximum amount payable and to have shareholders to vote on how much it will be in general meeting.

·         In proprietary co., s254W(2)(R.R)allows directors to pay dividends as they see fit.

2)      Rules regarding payment of dividends: Company can pay interim and a final dividend.

·         Interim dividend: can be revoked prior to the date for payment Industrial Equity v Blackburn (1977)

·         Final dividend:

ü  For company with a Constitution, once final dividend has been declared, it becomes debt enforceable against the company s254V(2).

ü  Under Replaceable Rules, final dividend is revocable before the date of payment.

3)      Funds available for dividend payment:

a)      Under the former s254T, dividends could only be paid out of profits. Then, it was amended so that it now states that: A company must not pay dividend unless:

ü  Assets exceeds liabilities of the company s254T(1)(a)

ü  Must be fair to both the shareholders as a whole s254T(1)(b)

ü  Must not materially hurt company ability to pay creditors s254T(1)(c)

b)     Remedies for improper dividend payments:

·         Unauthorized reduction of capital: does not satisfy the s256B(1)requirements, any director involved may be liable for penalty order – paying fine for company.

·         Insolvent trading: Directors contravened s588G(1A), which deems the payment of dividend as a deemed debt, or if the company has constitution that provides for the declaration of dividends, the corporate veil is lifted under statute and directors will personally liable to compensate the company unless one few limited defenses apply under s588H

·         Breach of directors’ duties: breach duty of care by not making appropriate inquires whether the company has assets that sufficiently exceed liabilities & breach fiduciary duties.

·         Injunction to restraint dividend payment: s1324 injunction to restrain company from paying dividend.

4)      Dividend policy: dividend policy is seen as a matter for the board of directors Burland v Earle [1902]

·         The court is reluctant to interfere with decisions of directors that are generally based on commercial considerations, such as the desire to build up the company’s working capital.

·         In exceptional circumstances, refusal to pay dividends would be oppressive or unfair conduct for purposes of a remedy underS232. This could occur when directors pay excessively high remuneration to themselves, while paying no or very low dividends to investors Sanford v Sanford Courier Service [1987].

II.                Voting rights:

1)      Calling general meetings:

·         Normally call by directors

·         Investors holding 5% of the votes that may be cast at a general meeting have the right to give the company notice that they propose to initiate resolutions s249Nand/or to require the company to call general meeting s249D and s249F

·         If the directors fail to comply with s249D request within 21 days, then investors holding more than 50% of the votes of those members requisitioning the meeting may call and hold such meeting s249E

·         The requisition power should be exercised in good faith and not for improper purpose Humes Ltd v Unity APA Ltd. [1987]

·         The directors are entitled to refuse to hold meeting if the investors are trying to interfere with a power conferred on the broad of directors under the constitution NRMA v Parker

2)      Typical resolutions at a general meeting:

·         Alteration of constitution, such as altering the company’s name s162, investors would have to pass a special resolution requiring 75% majority vote of those present and proxies s136

a)      Share capital decisions, company proposes to:

ü  Buy back certain proportion of shares s257B

ü  Reduce its share capital s256C(approval of shareholders)

ü  Engage in providing financial assistance s260B

ü  Vary class rights by operation of law s246C, where the company has issued shares with different rights attached to them s246B

b)     Appointment and removal of the company’s directors

ü  For proprietary co.: this is governed by ss201G and 201Hfor appointment and s203Cfor removal

ü  For public co.: according to s203D,investors have right to remove a director by passage of an ordinary resolution (50% of those present and proxies)

c)      Director’s remuneration (director’s salary): R.Runders202A, investors have the right to vote on director’s remuneration

d)     Appointment and removal of auditors:

ü  Proprietary co.: s325allows directors in proprietary company to appoint an auditor if the members have not done so.

ü  Public co.: must have director, while directors appoint the first auditor s325A, members have right to vote on that appointment at the next company meeting and to fill subsequent auditors at next meetings ss327B and 329. If members do not appoint an auditor, the ASIC cans327F

3)      Voting procedures: Decisions of the meeting are made by resolution.

a)      Special resolution: passed by 75% or more of the votess9. The special resolution is only required if the Corporation Act or the Constitution specially require this.

b)     Ordinary resolution: the majority votes (50% + 1)

c)      Methods of voting:

ü  A show of hands: s250J, every member, regardless of no. of shares held, has 1 vote

ü  A pool: the chairman, 5 members, or members holding 5% of the votes may demand a poll s250L.The votes must be counted in accordance with the no. of votes that each share carries, normally 1 vote s250E

4)      Notice of general meetings[9.140]Correcting the members’ register[9.200]

III.             Right to inspect company books:

·         S251B:Investors have personal rights to inspect:

ü  Company’s minute book

ü  Company’s register of members

·         Investors have right under s247Ato apply to the court for an order that the person can inspect the company’s books. The investor has to make the application in good faith and for a proper purpose.

IV.             Rights in relation to Constitution:

·         Some RRs are only applicable to proprietary companies:

ü  S.254Dpre-emptive right for existing shareholders: prop co., before issuing shares of a particular class, the directors of a prop co. must offer them to existing shareholders of that class.

·         Some rules are RR for proprietary companies, but are mandatory for public ones.

ü  S.249X members have the right to appoint proxies: shareholders who are unable to attend meetings themselves have the rights to appoint a person as member’s proxy to attend with the same voting power.

V.                Contractual effect of Constitution:

S140 (1) provides that the company’s constitution and any applicable replaceable rules have effect as a contract between the company and each member.

1)      Company and members: Company can take action against its members to force them to comply with the provisions in the constitution or RR where they are unwilling to do so voluntarily Hickman v Ken [1915].Under this case, according to Constitution, members must refer disputes to arbitration rather than going to the court.

2)      Members enforcing contract on the company:

I: The legal issue here is whether provisions in Constitution or RR “…” confer rights on members in their membership capacity to be enforceable as a contract against the company under s140(1)(a)

·         R :(S140(1)(a)provides that the Constitution and RR have effect as a contract between member and the co.

·         However, not all provisions in a company’s constitution have contractual effect. In Hickman v Kent [1915] it was held that members may enforce only those provisions that cover rights on members in their capacity as members.

ü  Right to have the votes counted at general meeting Pender v Lushington [1877] 6 Ch D70

ü  Right to enforce payment of declared dividend Wood v Odessa Waterworks Co [1889] 42 Ch D 636

ü  Right to demand a poll is questionable

E.g. S254D, pre-emption clause, non-compliance with s254D would be breach of contract because shares are issued by directors on company’s behalf.

·         Members cannot enforce provisions in the Constitution that purport to give them rights in some other capacity than that of a member such as solicitor Eley v Positive Government Security Life Assurance Co [1875] or promoter.)

·         There might be other things in Constitution that benefits shareholders but not relate to their membership, like the Eley case, Eley is appointed to be permanent solicitor, he was seeking to assert a right in capacity as solicitor of the company, in order to do so, he should have entered into separate contract independent of the constitution.

A: Similar to this case, Harris even though he is a member, he is not claiming for provision that cover right in his membership capacity like the right to have votes counted in general meeting or to enforce payment of declared dividend. Instead, he claims for his right as a sale manager for not to be fired and continue working and receive salary for 8 years more.  As a consequence, there is no enforceable contract between Harris and Brick Pty Ltd so Harris cannot sue Brick Pty Ltd. for breach of contract. In order to do so, he should have entered into an independent employment contract with the company.

·         S232 has some extent reduced the importance of determining whether members are enforcing rights in their capacity as members. Under that constitution, a member need only prove that breach of constitution or RR is contrary to the interests of members as a whole, or is oppressive or unfair (further discussed in Oppression)

C: in conclusion, the provision in Constitution has contractual effect between member and the co., so it is enforceable contract against the company, and the company must follow the Constitution to …

In conclusion, provision in Brick Pty Ltd. has no contractual effect because it covers the rights in other capacity as … than that of member.

3)      Member and each other member: Pre-emptive clauses

S140(1)(c)provides that the Constitution and RR have effect as a contract between member and each other member

·         S140(1)(c) assumes importance where co’s constitution contains a pre-emption clause. Such clauses give shareholders right of first refusal to buy other shareholder’s shares or to sell their own shares to remaining shareholders =>Members can sue for breach of K.

4)      Co and directors: Derivative action

The legal issue here is whether member can sue director for his breach of duties in “…” successfully on behalf of company under s236(1) if permission is given by the court under s237(2).

·         R: (Historically, Foss v Harbottle rule is generally members do not have standing to sue the wrongdoer on behalf of co. Members cannot challenge breaches of Constitution, if breach is ratified (forgiven/ said to be ok) by an ordinary resolution. This is because company is separate legal entity; it is the company that must sue not shareholders.

·         However, Foss rule is abolished by s. 239(1).

·         S236 (1)Derivative action: enable shareholder to bring an action in the courts on behalf of a company, in the case that directors of the company have breached their duty to the company if the court grants leave, if they are successful, compensation is paid to the company, not the individual investor.

·         S237(2),court must give permission if 5 requirements/ elements are satisfied:

(a)   Probable co itself won’t sue – it’s directors who decide what company does, thus they would not pass the resolution to sue themselves

(b)   Person is acting in good faith – in the interest of co. not for a private purpose

(c)    In the best interest of the co.

(d)   Serious question to be tried – the court believes that shareholders have reasonable chances to win in real court cases, shareholders might have to show evidences proving directors are doing wrong.

(e)    Notice give to co – 14 days)

VI.             Altering the Constitution: Shareholder approval is required to alter a constitution or displace a RR

1)      Statutory requirements

·         A company may displace or modify any one or more RR that applies to it by adopting a Constitutions135(2)

·         A company adopts constitution if it passes a special resolution to that effect s136(1)(b)

·         A special resolution is also required to modify or repeal (deleted) or provision of Constitutions136(2). Once deleted, rules can be found in RR in Corporation Act.

·         A public co. must lodge alteration to ASICs136 (5) a copy of a special resolution adopting, modifying or repealing a company’s constitution within 14 days after it is passed.

2)      Limits on right to alter Constitution:

The legal issue here is whether the alteration of Constitution of “…” is effective so that itwill be binding on all members

a)      Entrenching provisionss136(3): Constitution may contain provisions that restrict company’s ability to alter/repeal its constitution by imposing further requirements:

ü  Greater majority than 75%

ü  Obtaining the consent of particular person.

b)     S140 (2)

·         Under s140 (2), member is NOT bound by alteration of Constitution made after being a member that :

ü  Requires to take up additional shares

ü  Increase liability to contribute to share capital/ to pay money to company

ü  Increase/impose restriction to transfer shares already held by the member.

UNLESS members are agreed to in writing 

·         Gambotto v WCP Ltd [1995]: The Court held that the predecessor of s140 (2) (c) did NOT apply to an alteration of co.’s Constitution that forced minority shareholders to sell their shares to the majority shareholders. Such alteration did NOT impose or increase restrictions on the right to transfer the shares already held by the minority shareholders.

c)      Variation of class rights:[9.270]a further limitation on the power to alter a company’s constitution occurs when its share capital is divided into shares of different classes.

·         The rights attached to various classes and the procedure for varying the rights of class of shares are set out in company’s constitution, if it does so, this procedure must be complied with for the variation to be effective s246B(1).In the case that company’s Constitution does not specify any procedure dealing with variation of class rights, then the legislation sets out:

ü  S246B(2):Class rights can be varied or cancelled only with the approval of special resolution of both company and the holders of the affected class (75% votes)at separate meeting of that class.

VII.          Powers of company: Object clause

I: The legal issue here is whether outsider can enforce contract in … that was not within the scope of one of company’s objectives in Constitution under s124 (1) & s125.

·         A company’s Constitution may contain an objects clause that identifies and restricts the businesses and activities in which company may engages125(2)

·         Objects clause is optional (since 84)

·         R: The general rule is that under doctrine of “ultra vires” companies were legally capable of engaging only in those businesses set out in the objects clause. Any company contract or transaction that was not within the scope of one of its objects was referred to “ultra vires” – beyond the power of company. According to Ashbury Railway Carriage Iron Co v Riche [1875],such contracts or transactions were void and had no legal effect

A: In this case, clause 3 stated clearly that the object of Chill Pty Ltd is to manufacture refrigerators, so the company’s operation is only to produce refrigerators and no other commodities like toasters.  Thus, the contract between Targetto and the company is not enforceable because it is beyond company’s capacity.

·         NOW, Ultra vires rule is abolished by the combined effects of s125 and s124. All companies have legal capacity and power of INDIVIDUAL, meaning it is able to engage in any business or activity s124(1).A contract outside objects is still a valid contracts125

A: Applying to the case, Chill Pty Ltd entered into a contract supplying 50,000 toasters to Targetto, this contract is legally enforceable within the company’s capacity to any businesses that bring profit to the company despite the fact that it against the Constitution of company. The object clause 3 only affects internal members as breach of Constitution not the outsiders – Targetto. Contravention of Constitution cannot affect the validity of the company’s contracts. Therefore, if the company does not follow the contract, Targetto can sue for breach of contract and claim for remedy such as specific performance, to force company to supply goods for Targetto or claim for any damages suffered from breach of contract.

·         Objects clause only affects internal members as a breach of Constitution NOT outsiders. Contraventions of a company’s Constitution may have other consequences even though they cannot affect the validity of the company’s contracts:     

ü  Company acted contrary to its objects in company’s Constitution may be an element in a legal action against the company’s directors for breach of duty.

ü  A failure to comply with the Constitute may also be contrary to the interests of members as a whole or oppressive and allow members to seek a remedy under s233

ü  Allow members to obtain an order for winding up the company on a just and equitable grounds461(1)(k)

C: In conclusion, due to the abolition of doctrine of ultra vires, the contract between the outsider and the co. is enforceable, so the co. must honour the contract; otherwise, outsider can sue the company for breach of contract.

VIII.       Oppression/ Oppressive conduct/ Omissions

The legal issue here is whether member can seek the court order in response to s232 of being treated unfairly or oppressively by the conduct of directors.

·         R: (S 232 A range of remedies will be available, if a court is satisfied that the conduct of the company’s affairs (include  conduct of directors, majority/substantial shareholders and the company itself) is either:

ü  Contrary to the interests of the members as a whole,

ü  Oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.)

1)      Examples of oppressive and unfair conduct:

a)      Diverting corporate opportunities to another entity or associates of directors:

·         Allowing the company to remain in difficult situation through failure to supply essential materials to it Scottish Co-operative Wholesale Soc Ltd v Meyer [1959]

·         Green v Bestobel 1982 case

·         Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001]: two of three directors of Bosnjak successfully tendered for a contract for additional bus services to be provided by Fexuto, the company in which they were only shareholders. It was held that the directors breached fiduciary duties and engaged in oppressive conduct, as the bus services contract was a corporate opportunity that belonged to Bosnjak.

b)     Diversion of profits: paying very high director’s salaries and low dividends

·         Directors pay excessively high remuneration to themselves, while paying no or very low dividends to investors Sanford v Sanford Courier Service [1987].

·         Failure to review the dividend policy in light of the company’s changing and improving circumstances is oppressive, especially at the same time the directors increase their own remuneration Shamsalla Holdings Pty Ltd v CBD Refrigeration &Airconditioning Services Pty Ltd [2001]

·         Decision by directors to pay themselves large bonuses and fees is not oppressive if the company’s profitability had increased significantly because of their efforts Morgan v 45 Flers Avenue Pty Ltd [1986]

·         There was no oppressive or unfair conduct if the company only paid salaries to directors who work in the business and not to a director who did not Dosike Pty Ltd v Johnson [1996]

c)      Exclusion from management: when a company is joint venture (2 companies working together to share any risk involved) or quasi-partnership between 2 or more independent investors, it may be oppressive or unfair to exclude one of investors from the company’s management.

·         Mopeke Pty v. Airport Fine Foods [2007]60% and 40% shareholders where majority held 2 of the 3 executive director seats. The minority director was accused of incompetence and was voted off.

d)     Conduct of broad meetings: policy was implemented without approval of the board or it matters were discussed without sufficient notice.

e)      Directors refusing to call a meeting and denying investors relevant information.

f)       Altering company’s constitution to restrict investors’ voting power Mamouney v Soliman [1992]

g)      Improper share issue: Inglis took the chair at general meeting and together with his wife was appointed director of company. Inglis, his wife and Smith’s wife as directors resolved to issue shares to all members for the purpose of diluting Smith’ shareholding in his absence Re Dalkeith Investments Pty Ltd [1984]

h)     Director’s failure to act in the interests of company: actions that do not benefit the co. or conflicting the co.

·         Re Spargos Mining NL [1990] and Jenkins v Enterprise Gold Mines NL [1992]: both companies were taken over by Independent Resources Ltd who effectively controlled the broads of directors of both companies. It caused 2 companies to enter into transactions (making loans and acquisition of shares), the purpose of which was to provide money to Independent Resources at the expense of Spargos and Enterprise Gold Mines.

·         Re Overton Holdings Pty Ltd [1984]: Faye breached his duty because he appeared to be no commercial advantage to Overton in lending money to two other companies controlled by him without knowledge of other directors and minority shareholder.

·         Dynasty Pty ltd v. Coombs: Director lent money to another company that he owned. No benefit or interest to the co.

A: Applying to the fact that Duc, a member of company, has the right to enforce payment of declared dividend when investing in ABC. However, due to the conduct of Beta and Cathy to divert corporate opportunities to Echo and cause detriment to ABC, hence the company is unable to pay any dividends to Duc. Also, Duc with only 33% shares ownership has little power over company, so he does not have any powers to prevent Beta and Cathy from taking secret profits and misuse position against the benefits of ABC. Thus, it is unfair and oppressive to Duc in his membership capacity.

2)      Remedies for Oppressions233

·         Winding ups233(1)(a) liquidator is appointed to sell company’s assets and distribute to unsecured creditors

·         Altering company’s constitutions233(1)(b)

·         Regulating the future conduct of the company s233(1)(c)

·         Ordering “buying out”s233(1)(d): order that the majority shareholders buy their shares

·         Ordering proceedings on behalf of companys233(1)(g) - derivative action

·         Ordering the appointment of receiver s233(1)(h)

·         Preventing a person from engaging in specified conduct or from doing specified act s233(1)(i): would be appropriate when an act has not yet been carried out but merely been proposed (Injunction)

·         Requiring a person to do a specified act s233(1)(j): enable omissions to be corrected(Specific performance)

C: in conclusion, due to unfairly prejudicial and oppressive conduct by directors under s232, shareholder can get range of remedies under s233 for compensation of any damages or losses suffered directors.