Week 8 - Members Rights & Company Meetings

Main Sources of Rights for Members and the two types

Rights arise from general law and the Corporations Act (including replaceable rules). There are two main sources of members' rights: Personal and Derivative.

Personal Rights

Personal rights belong to and are enforceable by the individual shareholder. They protect the member's individual interests in the company.

Derivative Rights

Belong to the company. The harm was done to the company, not the shareholder. The shareholder acquires the company’s right and brings proceedings on behalf of the company when the company fails to do so.

What section allows statutory derivative action and who is allowed to do that?

Statutory action available under s236. Allows a person (member/officer/former) to bring or intervene in proceedings on behalf of the company. Proceedings must be brought in the company’s name.

Company Inaction (s237 criterion)

It is probable the company will not itself bring proceedings or take responsibility. Often inferred when directors/shareholders are in dispute or deadlock.

Good Faith (s237 criterion)

Applicant must act in good faith. Must honestly believe a good claim exists and has reasonable prospects. Having a personal interest does not negate good faith.

Company's Best Interests (s237 criterion)

The action must be in the company’s best interests. Court weighs prospects and cost.

Serious Question (s237 criterion)

There must be a serious question to be tried. Low threshold; must reference infringement of a legal or equitable right.

Notice Requirement (s237 criterion)

14 days’ written notice to the company, unless the court excuses it.

BJR Presumption (s237(3))

Presumption that granting leave is NOT in the company’s best interests if

1. action is against a third party

2. company decided not to act

3. directors satisfied the Business Judgement Rule

Contractual Right

Personal right to enforce company’s constitution under s140

Inspection Right

Right to inspect the company’s books (s247A).

Registration Right

Right to correct the member register (s175).

Share Rights Variation

Right to challenge variation/cancellation of class rights if ≥10% oppose (s246D).

Procedural Irregularity

Right to apply to correct a procedural irregularity. (s1322).

Injunction

Right to restrain or enforce conduct breaching the Act (s1324).

Oppression/Discrimination

Right where company/directors act contrary to members’ interests or oppressive, prejudicial or discriminatory (s232).

Winding Up

Right to seek winding up on grounds incl. oppression or if just and equitable (s461).

Oppression Grounds (s232)

Conduct of the company’s affairs or an act/omission/resolution that is contrary to interests of members OR oppressive/unfairly prejudicial/discriminatory.

Commercial Unfairness Test

Oppression assessed objectively: whether reasonable directors could have made the decision.

Oppression Examples

• Diversion of Business Opportunity: Transferring a business opportunity from the company to another entity controlled by the majority shareholders

• Unfair Course of Conduct: A combination of actions, such as diverting business, paying high directors' salaries, and paying no dividends, which collectively oppress a minority shareholder

• Thwarting Legitimate Expectations: Altering the company's constitution to extinguish a member's established right to receive a dividend

• Exclusion from Management: Preventing a director/shareholder from participating in management when there was a legitimate expectation of doing so.

Available Orders (s233)

• Winding up the company.

• Modifying the company's constitution.

• Regulating the future conduct of the company's affairs.

• Authorizing a member to institute proceedings on behalf of the company.

• Ordering the purchase of a member's shares by other members or the company itself.

Class Meeting

Meeting of a specific share class to vote on variation or cancellation of rights (s246B). Requires special resolution.

Annual General Meeting

Required for public companies; considers reports, elects directors, appoints auditor; must allow questions (s250S); timing rules in s250N; remuneration report for listed entities.

Extraordinary General Meeting (EGM)

Can be called at any time to deal with urgent or specific matters that cannot wait for the next AGM. (s249Q).

Meeting Format

Meetings may be held at a physical venue, using a hybrid of physical and virtual technology, or entirely virtually if permitted by the company's constitution (s249R).

Section 249Q

A meeting of members must be held for a proper purpose (s 249Q)

Who can call a member meeting?

An EGM can be called by a director (s249C), the court (s249G), or members.

Members with at least 5% of votes can call a meeting at their own expense (s249F) or request the directors to call one (s249D).

If directors fail to act on a s249D request within 21 days, the members can call the meeting themselves, with the company bearing the reasonable costs (s249E).

Propose Resolution (s249N) - Who can propose a resolution?

Members with 5% or more of votes or by at least 100 members entitled to vote may propose resolution.

Ordinary Resolution

50% vote; used for removal/election of directors, auditor removal.

Special Resolution

≥75% vote; used for name change, constitution change, vary class rights.

Notice Period

21 days general; 28 days for listed companies (s249HA).
The notice must specify the time, place, and general nature of business, and include information about proxy votes (s249J, s249L).

Quorum

The minimum number of members required to be present. The replaceable rule (s249T) sets the quorum at two members, who must be present (physically or electronically) throughout the meeting.

Voting Procedures

Show of hands - One vote per member.
Poll - One vote per share (s250E); proxy votes counted

• A poll can be demanded by the chair, at least 5 members, or members with at least 5% of the votes (s250L).

Proxies

A member can appoint a proxy to attend and vote on their behalf. Proxies can be "directed" (instructed how to vote) or "undirected" (voting is at the proxy's discretion). The chair of a meeting must vote directed proxies on a poll as instructed (s250BB), but other proxy holders are not under the same obligation.

What are Minutes?

A record of the business transacted at a meeting, known as the minutes, must be kept. They can be stored in electronic form provided the information's integrity is maintained and it remains accessible.

Irregularities in procedure for member meetings

A procedural defect (e.g., deficient notice, lack of quorum) will not invalidate a proceeding unless a court finds it has caused "substantial injustice." This generally occurs only if the outcome of a resolution would have been different but for the irregularity. (s 1322)

Shareholder Class Action

Collective action for breach of rights; allows one decision for many.

Basis of Claim

Typically loss via share price drop; often disclosure breaches of continuous disclosure obligations.

Fault Element

For listed entity claims under s674A, s675A, or s1041H, must prove knowledge/recklessness/negligence (introduced 2021).

Role/Benefits

Promotes confidence, enables recovery, deters breaches; often funded by litigation funders.

What is a Shareholder Class Action?

A legal proceeding where a group of shareholders with similar claims collectively sue a company, typically for damages resulting from failures in public disclosure that led to inflated share prices.

What is the legal basis for Shareholder Class Actions?

Typically founded on breaches of continuous disclosure rules (ss 674A, 675A) or provisions against misleading or deceptive conduct (s1041H) under the Corporations Act.

What is the 'fault element' requirement for listed entities in Shareholder Class Actions?

For listed entities, claimants must now prove a fault element, specifically knowledge, recklessness, or negligence, for breaches of continuous disclosure or misleading/deceptive conduct provisions.

What is the role of Litigation Funding in Shareholder Class Actions?

Litigation funding involves a third party financing the legal action in return for a percentage of the settlement. It has been crucial for the viability of many class actions and is exempt from managed investment scheme regulations.

What is the purpose of Shareholder Class Actions?

Proponents argue they promote market integrity, deter corporate misconduct, and enable investors to recover losses. Critics, however, question their cost-effectiveness due to significant portions of recovery going to lawyers and funders.