When change is worse than a holiday

It pays to check the rules if you want to remove directors from the board.

At a time when there is increased speculation about battles for corporate control, the battle for Coles Myer is hotting up and there is a move to remove directors from David Jones Limited, Justice Windeyer in the Supreme Court of NSW has delivered an interesting judgment in a case involving the procedures to be followed in replacing directors in public companies. Briefly, in DVT Holdings v Bishop.com.au ((2002) 20 ACLC 1458) members of DVT Holdings (DVT), a public company with four directors, by notice under S.249D(1) of the Corporations Act, requisitioned a general meeting of the company to consider three resolutions for the removal of three persons as directors. DVT sought declarations that the requisition was invalid and ineffective and an order restraining the requisitionists from calling a meeting to consider the resolutions. Section 201G of the Corporations Act which is a replaceable rule ie. it applies unless the constitution of the company includes an alternative provision, provides that a company might appoint a person as a director by resolution passed in general meeting. Clause 3 of DVT's constitution provided that all replaceable rules that applied to public companies were displaced by its constitution. Clauses 14.1 and 14.2 provided for the appointment of directors by the board; and the company by ordinary resolution at an annual general meeting of the company.

DVT argued that the members' power to appoint directors at a general meeting was removed by the replaceable rule, so that Clause 14.1 and 14.2 set out the only means by which a director could be appointed. Accordingly, the members' power to appoint directors was limited to their power to do so by ordinary resolution passed at an annual general meeting of DVT. It followed that DVT was not required to call a meeting to consider resolutions which it could not pass. The requisitionists argued that there was an inherent power at common law for a general meeting to appoint directors by ordinary resolution, which could only be displaced by clear language evincing an intention to do so. His Honour granted some of the applications. In his view Clause 14 of the company's constitution was clear. In the presence of such a clause, there was little room for the common law power to appoint directors to operate. Further, he held that the proposed resolutions for the appointment of directors would be invalid if they were passed in accordance with the constitution. In his view DVT was not required to convene a meeting to consider the relevant resolutions. He ruled it was appropriate the requisitionists to be restrained from calling a meeting to consider these further resolutions.

Although the constitution did provide what appeared to be fairly clear rules about how these matters were to be dealt with, the judge did recognise that there may be a gap in the operation of the relevant rule (Clause 14). He said: "The power to remove directors in general meeting is one given by the [Act] and cannot be altered by the constitution. It is therefore difficult to think that the legislature intended to make it impossible in a particular case to exercise that power, it being said to be made impossible as a result of a company by its constitution having deleted [a rule of law and replacing that rule] with one limiting the powers of the company in general meeting to appoint directors. In those circumstances I consider that a court should be very careful before coming to a view that resolutions for removal of directors cannot be validly passed if this would result in the company having fewer than the required number [of directors] at least for a short period. Although I do not think it is necessary to decide this for the purpose of this case, it is also possible that notwithstanding the provisions of Clause 14 [of this company's constitution] there may be some residual power in the members in a case of necessity to appoint new directors in general meeting. I would be more inclined to consider this a residual power rather than some inherent power. I do not consider that the company is necessarily stultified and unable to act at all if the number of its directors is reduced below the statutory number and if any remaining director refuses to act to fill any casual vacancy."

In conclusion the judge did not have to decide the particular issue in this case because: "I think the court should assume that a director who would remain in office if all the removal resolutions succeeded would carry out his statutory duties. It follows from this that the plaintiff's claim for declarations and orders in the amended statement of claim should be dismissed but appropriate declarations should reflect the issues upon which the case was fought. There should be a declaration that the proposed removal resolutions are valid and the proposed appointment resolutions are invalid."

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