Professor Bob Baxt explains why greater involvement by shareholders in how companies are managed will become the norm rather than the exception.

    Recent developments in Australian corporate law have inclined towards ensuring that boards are given the major responsibility and power to activate the performance of the company they are involved with so it can operate effectively and within the law.

    Usually most powers are vested in the board. However, there is no reason why, in a company limited by shares (or limited by guarantee), the powers of the company could not be divided between the shareholders in general meeting and the directors in a specific way.

    Sometimes shareholders want to have a greater power in dealing with certain activities of the company. This was the case in the decision of Capricornia Credit Union Limited v ASIC (2007) 240 ALR 495 where shareholders, rather than the board or management, were given more significant powers in a range of matters that were affected by a proposed takeover. (Although, it is unnecessary to comment on that particular case in this column.)

    Generally speaking, however, decisions are usually left to the board of directors; the board will appoint executives (and other managers) who might have specific power vested in them; and the company’s constitution (previously the articles of association) will divide the powers up between the different organs of the company.

    The recent decision of the New South Wales Supreme Court in the Molopo Energy Limited v Keybridge Capital Limited [2014] NSW SC 1840 (Molopo) has provided some considerable food for thought on whether the general rule can be regarded as the norm.

    In very recent times the courts have had to consider the rights of shareholders who challenge the acts of majority shareholders (usually occupying managerial positions – for example, where oppression is being raised). These cases will raise very interesting questions for directors to ponder over in dealing with their obligations.

    Shareholder activism

    The Molopo case can best be described as a case involving an example of shareholder activism. We are seeing an increase in shareholder activity in a range of companies, usually companies whose shares are listed on the ASX.

    In these particular actions, shareholders, sometimes representing private equity funds, sometimes representing major overseas interests, tend to “flex their muscles” when it comes to the way in which they wish the company to be administered or managed.

    The Molopo case concerned the interpretation of 256B of the Corporations Act 2001 which came into law following the review of earlier legislation. The terms of section 256B, (relevant for our purposes in this column), are as follows:

    (1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction:
    (a) is fair and reasonable to the company’s shareholders as a whole.
    (b) does not materially prejudice the company’s ability to pay its creditors.
    (c) is approved by shareholders under section 256C.

    It is not necessary for us to deal with section 256C in discussing the interesting facts of this case.

    Keybridge Capital

    In October 2014, Keybridge Capital Limited (Keybridge) became a substantial shareholder in Molopo Energy Limited (Molopo). A few days after becoming a shareholder, Keybridge asked Molopo to hold a general meeting to consider a proposed resolution for the reduction of the company’s share capital by approximately $54 million.

    The board of Molopo rejected the validity of that request. Keybridge then requested another general meeting be held to consider resolutions to amend the company’s constitution, firstly to ensure that the “management” of company’s share capital could be exercised by the company in general meeting (as an alternative to the board exercising that power), and second, confirming the request that the company’s capital be reduced by $54 million.

    In the New South Wales Supreme Court, Justice White ruled that it was not possible for shareholders in a general meeting of a company to be given the power to resolve that the company’s capital be reduced in accordance with the terms of section 256B.
    In his view, the words “the company may reduce its share capital” in section 256B(1) should be read as saying “the company by its directors, may reduce share capital”.

    In his view it was important that this interpretation be adopted because if the power to reduce the capital of the company was left in the hands of the shareholders, this would undermine the ability of the company to pay its creditors as required by section 256B(1)(b).

    Justice White obviously felt that this view was the more supportable approach. This is particularly so in this case because Molopo was facing a number of creditors who were making claims against the company. It would only be the directors who would have sufficient information to be able to carry out the appropriate disclosure requirements, and to ensure that the shareholders were adequately protected and the interests of creditors adequately considered. It would be less likely that this could be achieved if the responsibility was vested in the shareholders, as would occur if Keybridge’s resolution was adopted.

    Information disclosure

    Had the shareholders been successful in their arguments, this might also have led to a broader disclosure of information not of a public nature, than was required for the purposes of the reduction of capital decision to be approved.

    In my view there is no reason in law why shareholders cannot be given more powers to conduct various parts of the company’s agenda. That proposition has been well recognised by the courts over the years.
    Indeed, if directors breach their common law duties to act in good faith and in the best interests of the company, it is the shareholders in general meeting who have the power to “forgive” the directors of those breaches (for example, if the directors issue shares which appear to block a proposed takeover rather than allow the takeover to proceed).

    It should be noted though that this power in the hands of the shareholders does not extend to forgiving breaches of statutory duties – that has clearly been rejected by the high court in a number of decisions over the years.

    Likely appeal

    The decision in the Molopo case is likely to be appealed, both in the New South Wales Court of Appeal, and perhaps inevitably the High Court of Australia will also be given the opportunity to deal with this matter.

    Corporate governance is now a matter of extreme importance and this is being highlighted almost on a daily basis.

    This is especially notable when important decisions are made by the courts, by the Australian Securities and Investments Commission, or by other appropriate bodies, when trying to ensure that shareholders are given appropriate protection.
    And also when trying to ensure that the regulation of our corporate law can proceed in a way that will bring greater satisfaction to the community.

    Safe steps

    While it is clear that the courts will be anxious to ensure that proper steps are taken in the reduction of capital scenario, there is no good reason why shareholders cannot obtain the appropriate legal advice, professional assistance and such other help necessary to ensure the steps that need to be taken are taken properly and efficiently.

    We face some very interesting times as shareholders become much more aggressive in the way in which they want their companies to be administered and managed, such developments occurring side-by-side with ever-increasing demands that better administration and performance of and by companies and their boards becomes the norm rather than the exception.

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