HI 6027

BUSINESS AND CORPORATIONS LAW

Session 11
Members Rights and Remedies

Membership
a person (an individual or another company) can

become a member when the company is registered

or, subsequently by
taking up directors share qualification
an allotment
registration of transfer
transmission by will or bankruptcy
converting convertible notes

Membership cont
an (unlisted) companys internal rules can impose

restrictions on membership and/or transfers

companies must maintain a register of members

ss 168-169
court can correct the register (s 175)
register important for determining membership
rights (eg, oppression action)

Membership cont
certain members must disclose holdings

non-beneficial ownership
substantial shareholdings (5%) (see s 671B)
restrictions on transfers
through internal rules
on winding up (s 468)
during takeovers
evidence of membership
unlisted company, certificate
listed company, electronic record and statement
(CHESS)

Members benefits
may include

voting rights
dividends
tax credits
discounts

Restrictions on member decision making

Overview
Equitable limitation on majority voting power
Gambotto

Other restrictions on voting power

Overview of restrictions
Members may exercise voting rights in their own

self-interest (even if they are also directors)

Why are restrictions needed?
to stop unfair exploitation of minority shareholders by

majority
not always possible for minority to sell

How does the law protect the minority?

Equitable limitation on majority voting power

(including Gambotto)
Procedural requirements
Voting restrictions
Protection of members personal rights
Statutory protections
Limits on ratification

The equitable limitation

Not a positive duty
Rule: if majority passes a resolution which no

group of reasonable people would think is within

majoritys power, a court can declare the
resolution void (invalid)
Sometimes overlaps with oppression remedy
(Lecture 15)

Applying the equitable limitation

Do the facts involve a decision by the majority of

members that harms the minority?

The rule applies slightly differently for:
cases involving constitutional amendment
cases not involving constitutional amendment

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Cases other than amendment of constitution

Taking the companys property:
Breach of equitable limitation to use voting power so

as to give themselves property, advantages or rights

belonging to the company: Ngurli

Majority unwilling to sue where they are the

alleged wrongdoers: Biala

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Amendments to constitution
Even where s 136 is complied with, amendment

may be invalid due to equitable limitation

The important case of Gambotto deals with:
amendments that expropriate shares
other amendments that give rise to conflict

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Gambotto

Majority passed a

resolution for
compulsory
acquisition by IEL of
other shares
IEL did not vote
Mr Gambotto did not
attend or vote

IEL
99.7%

WCP
Mr G
0.09%

Others
0.21%

13

Gambotto establishes different tests for

different amendments
Category 1 amendments: Amendments to allow

expropriation of
minoritys shares; or
valuable proprietary rights attached to their shares (eg

voting or dividend rights)

Category 2 amendments: Other amendments

involving a conflict of interest

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Category 1 amendments
Are only valid if:
proper purpose, and
no oppression of minority shareholders

Proper purpose test is very restrictive

advancing companys commercial interests is

not enough

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Category 1 (cont)
The only proper purpose recognised by the

court is to prevent harm being done to company,

eg:
minority s/h is competing with company
removal of member is necessary to allow company to

continue in present business

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Category 1 (cont)
Also must show that there was no oppression.

This requires:
procedural fairness full disclosure and independent

valuation
substantive fairness price is fair (may not always be

market value)

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Category 2 amendments
Are only valid if :
done for a company purpose, and
no oppression of minority shareholders

More purposes are valid here compared with

Category 1

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Gambotto (cont)
Policy aspects
Is it appropriate to disregard commercial advantages

to the company ?
Should price be the only concern ?
Does Gambotto facilitate greenmail ?

19

Other protections for the minority

Must comply with procedural requirements

(eg, requirements for holding meetings -)

Voting restrictions on interested shareholder in
some cases

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Other protections (cont)

Statutory protections for minority shareholders

oppression, class rights, winding up

Personal rights cannot be taken away
Limits on power of majority to ratify breaches of
directors duties

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Members remedies
Members statutory remedies
Oppression remedy
Court-ordered winding up
Statutory injunction
Statutory right to inspect company books

Members personal action

Members derivative action

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Introduction to members remedies

Members remedies may be available where

officers have breached their duties

But sometimes members can also obtain a

remedy even though there has been no breach

of officers duty
Members have statutory and general law
remedies

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Why do minority members need remedies?

Directors and majority shareholders can use

their power to harm minority shareholders

Not always possible for a shareholder to sell
their shares
This explains why the oppression remedy is most

commonly sought by shareholders in proprietary

companies rather than public companies

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Members statutory remedies

Oppression remedy
Court-ordered winding up
Statutory injunction
Statutory right to inspect company books
Other protection :
Variation of class rights (Lecture 6)
Transactions affecting share capital (Lecture 19)

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Oppression remedy Pt 2F.1

Available in respect of:

the conduct of the companys affairs, or
an actual or proposed act or omission by or on behalf

of the company, or
a resolution, or a proposed resolution, of members or

a class of members

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Oppression remedy (cont)

Where the conduct complained of is either:
contrary to the interests of the members as a whole,

or
oppressive to, unfairly prejudicial to, or unfairly

discriminatory against, a member or members

27

To what types of companies can the remedy

apply?
In theory, any company
But in practice, most oppression actions are

brought by members of proprietary companies

which have only a few participants, and
in which members are also involved in management

28

Who can apply to the court ?

A member, even if the oppression relates to
the member in a capacity other than a member
another member in their capacity as a member

A person removed from the register of members

because of a selective capital reduction

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Who can apply (cont)?

A person who will cease to be a member if the

oppression action relates to the circumstances in

which they cease to be a member
A person whom ASIC thinks appropriate having
regard to its investigations into the companys
affairs

30

10

What are the tests ?

Waydes case : Was directors decision one that

no board of directors acting reasonably would

have made?
Not necessary for directors / majority
shareholders to have acted dishonestly or
intended to harm the minority - it is a question of
impact - is the conduct oppressive in effect?
Reasonable expectations

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Examples of oppressive conduct

Diversion of business opportunities
Improper exclusion from management
Does member have a reasonable expectation?

Unfairly restricting dividends

Oppressive conduct of board meetings
Share issue for improper purpose
Breaches of directors duties

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What orders can the court make?

Any order it thinks appropriate. For example:
winding up
regulating the companys affairs
purchase of oppressed members shares
appointment of a receiver
restraining someone from doing something, or

requiring someone to do something

33

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Court-ordered winding up
Section 461(1)(e), (f), (g), (k)
A member (and some others, eg a creditor,

ASIC) can apply to court to have company

wound up where :
just and equitable, or
directors acting in own interests, or
oppressive, unfairly prejudicial or unfairly

discriminatory conduct

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Winding up on just and equitable ground

Deadlock
Fraud or misconduct
Failure of substratum
The reason for the companys existence is no longer

being pursued

Breakdown in mutual trust

35

Statutory injunction s 1324

Court order to stop someone breaching the

Corporations Act
Who can apply ?
ASIC
someone whose interests have been affected

eg a creditor (sometimes)
eg a member (sometimes)

36

12

Statutory right to inspect books

Section 247A - Member can apply to court for

authorisation to inspect company books

Court can authorise either the member or their

representative
Member must be acting in good faith and for a proper

purpose

37

Inspection of books (cont)

RR s 247D - Directors or general meeting of

members may authorise a member to inspect

company books

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Members personal action

Personal action = a legal action to enforce a

personal right
How might a member have a personal right?
May arise under express contract, statutory contract

(s 140), Corporations Act, or general law

39

13

Personal rights (cont)

From an express contract
Between the member and other members, or
Between the member and the company

From the statutory contract

s 140 - companys constitution and the

replaceable
rules have effect of a contract
members may have personal rights due to
s 140

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Personal rights (cont)

From the Corporations Act
eg right of a member holding at least 5% of votes to

call a general meeting: s 249F

From the general law

eg the right to receive adequate information in a

notice of general meeting

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Members derivative action

What is a derivative action ?
An action to enforce a right of the company

eg to enforce a breach of directors duties

Even though a member brings a derivative action, the

action is not for the benefit of the member - its for the
companys benefit
any remedies go to the company

42

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Statutory derivative action: Pt 2F.1A

Introduced March 2000
Deals with standing of the applicant - not the

merits of the case

Who may apply?

a member, former member, or person entitled to be

registered as a member of the company or a related

company
an officer or former officer of the company

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What are the criteria?

Court must grant leave if all of the criteria are

met:

is probable that the company will not take legal action

applicant is acting in good faith
is in the best interests of the company for applicant to

be granted leave

serious question to be tried

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