Professional Documents
Culture Documents
Problem Set 5
The following problems and questions should be answered after you have read
Chapters 9 and 10.
However, even if members have the power to pass a resolution over a matter, there
are still limits on their powers. It is possible for members who are able to exercise a
majority of the votes in a company to use their voting power to exploit those
members who are the minority. To prevent this, there are principles referred to as the
equitable limitation on majority voting power. This means that the majority
cannot make decisions that are unfair or unreasonable on minority members.
The equitable limitation can apply to a number of actions of the majority. However,
many of the cases that have come before the courts concern situations where the
majority has voted to amend the company’s constitution.
Even if this was an example where the general meeting has the power to approve
this decision (ie the complete sale of the company’s assets), the effect is to deprive
the company of its operational assets and future profits, and transfer them into the
hands of the majority. Note that the sale will be ‘profitable’. The test is whether the
majority exercised their vote so as to give themselves “property, advantages or rights
which belong to the company”, as this breaches the equitable limitation: see Ngurli
Ltd v McCann. This would be an example where Jason could prevent any such
resolution based on the equitable limitation on majority voting power principle.
2. GML owns 92% of the issued shares in Explorer Ltd. The remaining 8% of the
shares are held by five individuals, including a Mr Owen who owns 0.5% of the
issued shares. Mr Owen is a high profile individual who has at times been critical
of the Chinese government’s activities in the South China Sea. GML is concerned
that its ongoing association (through Explorer) with Mr Owen may harm its
relationship with its Chinese customers. At a meeting of Explorer, a resolution is
passed amending the constitution of Explorer, to allow any member who was
entitled to at least 90% of the issued shares of Explorer to acquire compulsorily,
the shares of any other member at a price of $20.00 per share. Explorer shares
have recently been valued by an independent expert at $15.78. Mr Owen does not
attend this meeting and the majority shareholder (GML) does not vote. The
resolution is passed unanimously by the four other minority shareholders. Mr
Owen is challenging the validity of the amendment. Having regard to the decision
in Gambotto, will his challenge succeed?
However, even if members have the power to pass a resolution over a matter, there
are still limits on their powers. It is possible for members who are able to exercise a
majority of the votes in a company, to use their voting power to exploit those
members who are the minority. To prevent this, there are principles referred to as the
equitable limitation on majority voting power. This means that the majority
cannot make decisions that are unfair or unreasonable on minority members.
The equitable limitation can apply to a number of actions of the majority. However,
many of the cases that have come before the courts concern situations where the
majority has voted to amend the company’s constitution. The High Court decision in
Gambotto is important in setting out the detailed principles and requirements to take
into account in cases involving majority shareholder resolutions to change the
constitution.
The High Court said that the general meeting cannot amend a company’s
constitution, where the effect of the amendment is to allow the majority to expropriate
The High Court’s “proper purpose” test is very narrow: to prevent significant
detriment or harm being done to the company because of the minority shareholder.
The facts here regarding Mr Owens as a member, may be sufficiently speculative
and uncertain as to satisfy the “proper purpose” test. It appears that removal of Mr
Owens, while convenient, is not necessary.
The second test requires procedural and substantive fairness. Among other things
this requires that the minority are offered a fair price.
3. The directors of Blue Mine Pty Ltd are Mr Chester and Ms Wu. Blue Mine has not
held a board meeting for several months. At a recent GML board meeting, it was
resolved to reduce production at Blue Mine by 10%. Mr Boon, the managing
director of GML, instructed the mine manager at Blue Mine to make the reduction
and she did. In these circumstances, could GML itself be considered a director of
Blue Mine?
The definition of “director” in the Corporations Act includes (in para (b)(ii)) a person
who is not validly appointed as a director, if the directors of the company are
accustomed to act in accordance with the person’s instructions or wishes.
In Standard Chartered Bank v Antico, the court found that Pioneer International was
a “shadow director” of Giant Resources. The reasons for the decision are complex,
but the key factor seems to be that Pioneer exercised extensive management control
over Giant, effectively usurping the Giant board. In other words, instead of the Giant
board of directors debating and deciding issues relating to the management of the
company, these matters were decided by Pioneer and just communicated to Giant to
be acted upon.
In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd, White J put
forward the following propositions regarding the definition of shadow director in s9:
in some circumstances, it is possible for the one person to be both a shadow director
and a de facto director;
it is not necessary that the instructions or wishes of the shadow director be given
over all areas of corporate activity for which the directors are responsible;
a person is not a shadow director merely because they impose conditions on their
commercial dealings with the company with which the directors feel obliged to
comply;
there must be a causal connection between the instruction or the wish of the shadow
director and the directors acting on it. It is not sufficient if the act that was specified in
the instruction is something that the directors would do, irrespective of the instruction;
4. Before joining the board of GML in 2007, Frank Foster was an official in a trade
union. A recent investigation by Fair Work Australia into the affairs of the union at
the time Mr Foster worked there, has resulted in allegations of misuse of union
funds. There is a rumour that a number of officials, including Mr Foster, may be
charged with criminal offences punishable by more than 12 months imprisonment.
XYZ Limited, a shareholder in GML, wants Mr Foster removed from the board of
GML immediately. Mr Foster is refusing to resign. Can his fellow directors
remove him from office? Can he be removed by GML’s members? Discuss.
Recall that the decision to remove directors from the board is a decision-making
power for the general meeting – see Chapter 7.
Removal by directors
It is not possible for directors of a public company to remove another director – see s
203E of the Corporations Act.
The situation is different for proprietary companies. It is possible for the constitution
of a proprietary company to have a provision that allows directors to remove another
director.
Removal by members
In the case of a public company, s203D of the Corporations Act provides that
members may remove a director by ordinary resolution.
Disqualification
Note that if the charges are ultimately successfully prosecuted against Mr Foster,
this will be grounds for removal by disqualification. Under s206B of the Corporations
5. XYZ Limited decides to increase its stake in GML from 6.5% to approximately 16%,
and acquires an additional 17.5 million shares in GML on market. XYZ informs the
board of GML that it would like a seat on the board for Mr Xu, its majority
shareholder. Mr Xu lives in Hong Kong. Can the directors appoint Mr Xu to the
board of GML?
Recall that the decision to appoint directors to the board is a decision-making power
for the general meeting – see Chapter 7.
The members may appoint a director by passing an ordinary resolution: s201G of the
Corporations Act. It is also possible for the constitution of a company to allow the
directors themselves to appoint additional directors but this must subsequently be
approved by the members of the company: s201H of the Corporations Act.
In the new appointments, the board also needs to consider board size. Every
proprietary company must have at least one director, with at least one director
ordinarily residing in Australia: s201A(1) of the Corporations Act. Every public
company must have at least three directors, with at least two directors ordinarily
residing in Australia: s201A(2).
As GML is a listed company, you will also have to check its constitution for rules as
to appointment (see ¶27-300). Clause 9 of GML’s constitution contains provisions
similar to ss201G & H of the Corporations Act. So the directors of GML can appoint
Mr Xu, provided the appointment is voted on at the next AGM.
You will also need to find out personal details pertaining to Mr Xu to ensure that he
meets the four requirements above.
The procedural rules that apply to board meetings of directors are typically contained
in the company’s constitution.
Board meetings can be called by any of the directors, with “reasonable notice”:
s248C of the Corporations Act.
Unless the directors decide otherwise, the quorum for a meeting of directors is two
directors, and the quorum must be present at all times during the meeting: s248F of
the Corporations Act.
Decisions at board meetings are usually taken by majority vote. Each director is
entitled to one vote, although it is possible for the company’s constitution to provide
that a director has more than one vote in some circumstances. It is common for the
constitution to provide that the chairperson of directors is to have a casting vote
where votes are tied.