Legal Issues In Corporate Law

Minority Shareholder Oppression

Questions:

Question 1

Cotton Limited holds 89.5% of the shares in Satin Co Limited. The remaining shares are held by Silk and several other small investors. The Board of Satin wants the company to become a wholly owned subsidiary of Cotton Limited as they expect this will result in both taxation benefits and a saving on accounting fees and administration charges of about $230,000. Cotton Limited offers to buy the shares held by Silk and other minority members but they refuse. Arrangements are made to hold a members meeting to pass a resolution changing the constitution of Satin by inserting a new clause 53 “any member entitled to 80% or more of the issued shares may compulsorily acquire all the remaining shares”. Silk and other minority members receive written notice of the company meeting together with a proxy form and a valuation certificate stating the shares were worth $2.50 each. Although the offer is fair Silk does not want to sell her shares and wants to start legal action to prevent the proposed alteration to the constitution.

Discuss whether she may succeed in her action.

Would your answer be different if the real reason for compulsorily acquiring the shares from Silk was that she discovered operating a business in competition with Satin Co and was using information gained as a member to take away some of Satin’s business?

Question 2

Polyester is a director of Style Pty. Limited involved in making women’s clothing. Has she breached any duties under the Corporation Act in the following situations?

Situation 1. She arranges with the company’s bank to transfer an amount of $65,000 from the company account into a personal bank account held by her in her own name. She uses the funds to finalise some outstanding personal debts.

Situation 2. As a director she receives information that the company is in a serious financial position. She arranges to transfer a larger amount of the assets of the company over a new proprietary company that she formed with the intention of caring on the same business.

Situation 3. Contrary to a resolution of the Board and notwithstanding established business practice that limits credit to $20,000 she allows a trade debtor (who has a history of bad debts) to exceed its credit limits by $25,000. The debtor fails to pay the outstanding amount of $45,000. Can she rely on the business judgment rule in this situation?

The corporation law of Australia had a strong command over the majority rule among the companies. The company’s management is said to be in the hand of the board of director and hence they can run the company as they use their power within approved duties.  As a result, the minority shareholders have a little, if any, control or influence over the operations of company. They may also be powerless for influencing the management, development and the direction of company in which they have their money invested. It is possible that the BOD and the shareholders decision are different on same transaction and at that time the BOD and majority of the shareholder can suppress the minority decision purposefully.

Director’s Duties

The law provides protection to such minority shareholders who are purposefully suppressed. As per section 233 the minority shareholder can make an application to demand protection. The court may direct in such case to buy the stake of minority shareholder, also the direction of the winding up of the company.

As per Sec 233 of the corporation Act 2001, the Court is empowered to order that it may consider it to be appropriate in the situations where the necessities of the Sec 232 are been met.  Such power may include the power of making the order that the party may purchase the shares of any another shareholder with the reduction in the share capital of company or in the order in which the company shall be wounded up. 

The Sec 232 of this Act states that Court may have it ssole discretion to make such order if:

-The affairs of the company is handling in manner or

-Proposed move, act to be taken by company or its authorised or

– Any resolution passed by class of members

That affects shareholders interest or found oppressive on class of shareholders

The person who is bidding can also acquire remaining share compulsorily in the class of bid if following fact exist:

If the bidder or and its associates hold 90% or more interest in bid class  And  acquired 75% or more shares as offered in particular class bid.

  under the takeover bid may also acquire compulsorily any of the remaining shares in the bid class if during the offer period, the bidder or their associates have:

• Significant interests in at least 90 percent (by number) of the shares in the bid class and
• Purchased at least 75 percent (by number) of the shares that the bidder had offered to purchase under the bid.

Ch 6Astates the requirements for the compulsory acquisition process.

Oppression on the minority shareholder

The ruler  in the case of Ample Source International Ltd v Bonython Metals Group Pty Ltd; Re Bonython Metals Group Pty Ltd (No 6) [2011] FCA 1484had held that there were number of cases where minority shareholders are oppressed . This oppression had been brought due to the manner in which the activities of BMG were operated, specifically:

1. The Part management of the BMG in a way which is commercially unfair to the Source;
2. Failure to give the significant information to the Ample Source;

The judge ordered that the BMG shall be wind up under the sec 233(a) of the Act.

Facts And Figures

Following are the facts of the given case:

1. Satin Company Ltd is a Subsidiary Company of Cotton Limited which holds 89.5% of its shares and the remaining shares were held by Silk Ltd and other minority shareholders.

2. The board of directors of Satin Ltd wishes that the company shall become a Fully owned subsidiary of Cotton Limited and that the remaining shares held by Silk Ltd and other minority shareholders shall be acquired by Cotton Limited, due to which there would be tax benefits and accounting or administration charges of both the companies, resulting in savings of $230,000.

3. Cotton Limited proposes Silk Ltd and other minority shareholders to sell their shares, but they denied the proposal, as a result of which the board decided to hold a shareholder’s meeting for passing a resolution to change the constitution of Satin Ltd.

4. Satin Ltd inserted a new clause 53 stating that, “any member entitled to 80% or more of the issued shares may compulsorily acquire all the remaining shares”.

Case Studies

5. Silk Ltd and other shareholders also received a notice stating that the company shall meet to pass the above mentioned resolution and they also received a valuation certificate stating that the shares $2.50 each. However Silk Ltd is not ready to accept this offer.

Following is the relevant issue that aroused in the given case:

Silk Ltd wanted to Sue the Satin Ltd for the proposal offering it to sell its shares. Whether Silk Ltd would succeed in this case or would it get a relief from oppression under sec 233 of corporation act 2001.

Conclusions To Be Drawn

As per Section 232 and Section 233 of Corporation Act 2001, the Court is empowered to order that it may consider it to be appropriate in the situations where the requirements of the sec 232 are been met.  Such power may include the power of making the order that the party may purchase the shares of any another shareholder with the reduction in the share capital of company or in the order in which the company shall be wounded up. 

The Sec 232 of this Act states that, Court has its sole rights to make such order if:

1. The conduct of the affairs of company; or
2. An proposed or actual act by or on behalf of the company; or
3. A resolution of the members or class of members; is either:

• Contrary to the members’ interest as a whole; or
• Oppressiveto, prejudicial to, or discriminatory against, the members whether in such capacity or in any other capacity.

Hence, in the given case Silk Ltd has a right to initiate a legal action against Satin Ltd in the lights of Sec 232 and 233 of the Corporation Act 2001.

However, the position would differ in case where Silk Ltd uses the Operative information of Satin Ltd i.e. its Competitor, by being its member and thereby getting insider information of the activities and transactions to be performed by Satin Ltd, in which case the court may order Compulsory Acquisition of the shares held by it under the provisions of Corporation Act 2001 as discussed above.

Duties Of Directors Under Corporation Act 2001

Directors are the top most authorities in the company and also the key persons for managing the company’s affairs. The directors shall know their duties and responsibilities towards the company and its stakeholders. The careless, Ignorant and dishonest directors who do not care for their duties towards the company may lose their reputations and image and the savings and may also be subject to imprisonment, because they do not bother to connect the laid down standards which the law has imposed upon them.

Following are various general duties of directors:

• To bonafidely act towards the company’s interest.
• To exercise the power as a director and shall not use them for any own benefits.
• Not to be occupied in such position for the conflicting interest.

Following are some Fiduciary duties of the directors:

1. Not to obtain any illegal benefit for their own selves
2. They shall not utilise any information that they gained during their tenure of directorship to get the undue advantage.
3. They shall put their powers for well-being of the company.
4. They shall call their executives for any personal interest in case of conflicts.

The directors may be held responsible towards the company for the gains made by breaching their Professional duties. Such duties are created if:

1. The directors had shown their own likeliness to act as the agent on behalf of the shareholders of company.

2. For a related company, the director having family relation and providing the advices or suggestions for the shares to any family shareholders, then it may create a strong relationship between the director and shareholders.

The director should not allow his duties and interests for the company in a conflicting state.

He shall ask:

1. For the conflicts that are more than the actual proposal?
2. Should a director end to engage in the arrangement soon after getting a fact that he will have the chance of interests which is conflicting for the company?

• Is there some sorts of conflict whereby a director held the shares in any another related entity?

As per Sec 191(1) the director may also possess a responsibility for notifying the remaining directors that he has a personal interest in the material transactions of the company and that he shall not remain present in the events of such meetings and discussions in which such material transactions are been held, otherwise there will be a conflict of the Professional duties and responsibilities of such director for which he may held guilty for the misconduct under the provisions of this act and may also be held culprit under the Corporation Act 2001. Because of this act, the reputation of the entity may be endangered and that the other director’s image may also be affected.

Following are various general duties of directors:

• To bonafidely act towards the company’s interest.
• To exercise the power as a director and shall not use them for any own benefits.
• Not to be occupied in such position for the conflicting interest.

According to Sec 195(1)  the director  having a own interest in some transaction, which has been confirmed at any of the meetings of board, may not have any voting right on the resolutions to be passed for such transaction , he will not be able get involved in the meeting where such transactions are considered.

However, according to Sec 195(2),all the other directors who do not have anysuch personal interest are allowed to pass a resolution which states that all the directors are happy with  even that the rights of particular director  does not have power  to restrain from attendance of meeting and voting, According to per Sec 195(3), the ASIC can o its own judgment that the said director will attend meeting as well as vote.

Facts And Figures

Following are the facts of the given case:

Polyester is a director of Style Pty. Ltd which is involved in making the women’s clothing and has performed following activities:

1. Arranges for the transfer of $65,000 from the company’s bank account into her personal account and utilises the funds for finalising some outstanding personal debts.

2. Receives information that the company is in serious financial position and that she transfer large amount of assets over a new company which is formed for caring the same business.

3. Allows a debtor having a bad history in past to credit the limit exceeding $25,000 as against the resolution passed by board.

The main issue in this case is that, whether Polyester shall be held responsible for negligence of Professional duties in the above cases.

Conclusions To Be Made

1. As discussed above, the director who does any act for his personal interest shall be deprived from attending any board meeting in which such transaction is discussed and shall also be held responsible for breach of professional duties. As such in the first instance, Polyester has transferred $65,000 belonging to the company for her own personal interest shall be held liable for Professional misconduct under Corporation Act 2001.

2. In the second case, Polyester has transferred the company’s assets to the newly formed business to carry on the company’s business for the betterment of company. This act shall be deemed to have been done in good faith and for the benefit of company and thus she shall not to have breached her duties under corporation act 2001.

3. In third case, Polyester has allowed a higher credit to one of the company’s Debtor having bad track record and also did not considered the resolution passed by board of directors. In this case also, she is said to have breached her professional duties as a director under Corporation Act 2001.

The Compliance with Section 195(1)would not free any of the directors from the obligations of complying with the relevant Law.

References:

Holding Redlich, 2015, “Oppressed Minority Shareholders” reviewed on 5 February 2015, https://www.holdingredlich.com/dispute-resolution-litigation/oppressed-minority-shareholders-and-appropriate-relief-is-winding-up-a-solvent-company-an-extreme-step?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

Mark Easton, 2013, “Minority Shareholders” reviewed on 5 February 2015, https://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2013-back-editions/April/Opinion-Do-not-forget-minority-shareholders

Richard Brockett, 2015, “Minority Shareholders” reviewed on 5 February 2015, https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1434&context=blr

Australian Government, 2015, “Compulsory Acquisition” reviewed on 5 February 2015, https://www.takeovers.gov.au/content/DisplayDoc.aspx?doc=panel_process/summary_of_takeover_provisions_in_australia.htm

John H Farrar, 2015, “Minority Shareholder Remedies” reviewed on 5 February 2015, https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1207&context=blr

ACIS, NT, “Director’s Duties under The Corporations Act 2001”reviewed on 5 February 2015, https://www.acis.net.au/bulletins/Directors_Duties.pdf

Australian Institute of Company Directors, 2014, “Roles, Duties and Responsibilities of Director” reviewed on 5 February 2015, https://www.companydirectors.com.au/Director-Resource-Centre/Director-QA/Roles-Duties-and-Responsibilities

PWC.com, 2011, “Directors’ Duties” reviewed on 5 February 2015, https://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/GuideDirectors_Apr08.pdf

ASIC, 2014, “Directors Duties” reviewed on 5 February 2015, https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/your-company-and-the-law/

SBDC, 2015, “Closing or Winding up a business” reviewed on 5 February 2015, https://www.smallbusiness.wa.gov.au/business-life-cycle/exiting-a-business/closing-winding-up/

Dibbsbarker, 2014, “Corporate governance and Directors duties” reviewed on 5 February 2015, https://www.dibbsbarker.com/assets/document/Corporate_Governance_2014.pdf

Takeovers Panel, ND, “Directors duties” reviewed on 5 February 2015,https://www.takeovers.gov.au/content/Resources/parliamentary_reports/social_fuduciary_duties_obligations.aspx

Find Law, 2015, “Directors duties” reviewed on 5 February 2015, https://www.findlaw.com.au/articles/32/directors-duties.aspx

Commonwealth of Australia, ND, “Directors duties” reviewed on 5 February 2015, https://archive.treasury.gov.au/documents/283/PDF/full.pdf