Corporations Law

2013, Semester 1 Exam

Answer notes Q 1(a) and (b)

Question 1(a)

Pierce finds himself an effective outsider from the company. Pierce is likely to complain that a
number of actions taken against him constitute unfair treatment of him and breaches of the
Constitution and/or Corporations Act. These actions include:

 Removal of him as MD.

 Removal of him as a director of the company

 Creation of Class A and B shares, and allotment to him of non-voting Class B shares (and voting
Class A to everyone else)

 Appointment of Angela as MD, and Georgina and Hamish to the Board.

Remedies available to Pierce include:

 Action for breach of the Constitution / statutory contract (s 140)

Effect of s 125 - contravention of replaceable rules not a contravention of the Act (s 135(3) –
whether a breach of the statutory contract (s 140) – s 135(2)).

The relevant breaches that affect Pierce in his capacity as a director -

 Removal as MD – Pierce is removed as MD by a majority resolution of the Board. This is a

breach of Cl 21 of the Constitution which requires all resolutions be passed unanimously.

 Appointment of Angela as MD - Angela is appointed as MD by a majority resolution of the

Board. This is a breach of Cl 21 of the Constitution which requires all resolutions be passed
unanimously.

 Removal as a director - Pierce is removed by resolution at general meeting. This is a breach

of Cl 20 the Constitution which states that a director appointed under Cl 18 cannot be
removed by members.

 Appointment of Georgina to the Board - Initially Georgina is appointed by a majority

resolution of the Board – whether resolution is void because it does not comply with clause
21. However, clause 19 enables the appointment of directors by ordinary resolution of the
members. However this can only take place if a director appointed under clause 18 dies or
resigns. This precondition was met when Deborah resigned from the board in December
2012. The February 2013 general meeting of members did however purport to approve the

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 appointment of Georgina. The resolution may have been irregular in that it purported to
ratify the board’s appointment of Georgina. Technically this was deficient.

Whether presumption of validity under section 1322(2) for any procedural irregularities –
discussion of Weinstock v Beck [2013] HCA 14 and s 1322(6) – whether Pierce’s substantive
rights are affected – whether the value of his vote as a director rendered nugatory (i.e., ignoring
requirement for resolutions to be unanimous), and discussion of his removal as a director.

Remedies - a declaration or an injunction

 Improper variation of class rights / alteration of constitution / allotment of shares

Arguably existing shares have been converted into Class and Class B shares. [Note: It is arguable
that what has occurred is that Class A and B shares have been created and allotted in addition to
existing ordinary shares or in replacement of existing ordinary shares.]

Pierce could argue that the creation of Class A and B shares and the allotment to him of only
non-voting Class B shares constitutes –

 Variation of class rights –clear variation of the legal (e.g., voting) rights attaching to the
shares held by Pierce (White v Bristol Aeroplane Co; Greenhalgh v Arderne Cinemas Ltd) –
application of s 246C(5) – application of s 246B – note there is no pre-existing class from
which a second special resolution is required. Does not say if either new class is a
preference share – if they are, creation / conversion would require a special resolution (s
254A / s 254G). Change to constitution requires a special resolution (s 136(2) – satisfied BUT
variation was done without unanimous support of the class, Pierce could apply under s 246D
to have it set aside. Court would only set it aside if it would unfairly prejudice Pierce (see
discussion under oppression below).

 Improper alteration of constitution /allotment of shares – Pierce would argue that the
creation of Class A and B shares and the allotment of only Class B (non-voting shares) to him
are for an improper purpose – to deny him a say in the running of the company. Residues
Treatment and Trading Co Ltd v Southern Resources Ltd (No 4) suggests that shareholders
have a personal right to have the voting power of their shares undiminished by the improper
actions of directors
 Gambotto case – whether 2-fold test satisfied - More facts are required about how much
information was provided to the general meeting. Assume because a small family company
all members were aware of the full circumstances surrounding the resolution?
 The detriment caused to Pierce is that he has lost his voting rights as a member – whether
necessary to protect co to expropriate rights as a member as opposed to removal as a Dr –
whether fair if Pierce received no compensation for the loss of voting right. Remedy –
invalidate new allotment of shares.

 Oppression

Pierce would argue that the conduct taken as a whole is ‘oppressive to, unfairly prejudicial to or
unfairly discriminatory against’ him.

Standing – member (s 234).

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 Grounds – action against him is ‘oppressive, unfairly prejudicial or unfairly discriminatory’ –
apply key principles from Wayde v New South Wales Rugby League Limited.

 Relevant cases to discuss include:

o ‘Improper’ exclusion from management –Fexuto v Bosnjak; Re Dalkeith
Investments
o ‘Improper’ share issue – Re Dalkeith Investments

 Counter argts are important for high marks - Angela and other directors/members would
argue that Pierce’s removal and exclusion from management was necessary as he had
shown poor judgement in his decision making re the Sunshine housing project and was
pursuing business strategies contrary to the interests of the members as a whole. They
also would argue they are seeking to be fair by enabling him to continue to earn
dividends on an equal footing with other members.

Orders – s 233 – any order court thinks appropriate:

 Discussion of orders Pierce might want eg reinstating him as a director
 Better students will point out that the requirement that Board resolutions are unanimous in
particular is likely to mean the company is likely to continue to be dysfunctional (as Angela
and Pierce cannot agree) – whether court could order that the constitution be modified to
provide for majority Board resolutions and shareholder power to change the Board (s
233(1)(b), and entrenched by s 233(3)), and possibly even that Pierce be bought out at a fair
price (s 233(1)(d), as per Scottish Co-operative Wholesale Soc Ltd v Meyer). [Students who
discuss these points were rewarded.]

 Winding-up s 461

Standing – s 461(2) – member.

Grounds –
 s 461(1)(f), (g) – oppression (see above discussion)
 s 461(1)(h) – just and equitable
o breakdown of mutual trust and confidence - Ebrahimi v Westbourne Galleries –
however, unlike Ebrahimi, here siblings did not set up company but inherited shares.
Is it more like Re G Jeffrey (Mens Store) Pty Ltd? Or notwithstanding they inherited
their shares, was the devolution of management from the parents to the children
such that Pierce had a ‘legitimate expectation’ that he would be involved in the
company’s management (Fexuto v Bosnjak)?

Orders – w/up only if no other remedy available: s 467(4). On the facts, other orders could
remedy the problems and so the Court would be very unlikely to wind up.

 Statutory derivative action

While he has standing as a member/former director (s 236(1)), students needed to explain why
he is likely to struggle to establish the grounds, especially –
 S 237(2)(a) – company unlikely to bring an action;
 S 237(2)(b) – is Pierce acting in good faith?
 S 237(2)(c) – whether it would be in the ‘best interests of the company’ that Pierce be
granted leave - what loss has the company suffered?; and

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  S 237(2)(d) - what are the ‘serious questions to be tried’ – again breach of directors’ duties
are not the issues which Pierce is going to want to try.

Also he is exposed to the risks of costs if he proceeds.

 Statutory injunction / damages (s 1324)

Could bring an action under s 1324 with respect to a contravention of the Act. Note though that
a breach of the constitution or replaceable rules is not a contravention of the Act (s 135(3)).
Moreover, as most of the actions of which Pierce complains have already taken place, remedy
might be limited to damages as a substitute for injunction per s 1324(10).

Question 1(b)

Pierce

Failure to exercise due care, skill and diligence

Approving the Sunshine housing project could constitute a breach of the duty of care, skill and
diligence.

Nature and source of duty should be articulated - s 180 of CA; equity; ASIC v Vines.

Standard of care should be articulated – as per s 180. Standards set out in Daniels v Anderson – what
standard applies to Managing Director (an executive director) – Daniels v Anderson, McDonald v
ASIC, Adler case.

Was the standard met? Consider:

 Expertise, reputation of prominent local businessman
 Proceeding before the government grant was secured
 independent judgement (ASIC v Healy)

Whether Business judgement rule assists him

General reliance under s 189 – need to go through elements of section and apply to facts.

Note – there is no delegation of power. Discussion of delegation should not be rewarded.

Good faith in the best interests of the company

Whether breach of s 181(a) of the CA and corresponding equitable duties (Re Smith and Fawcett Ltd).

Best interests of the company – Pierce says it is in the company’s interests to serve society’s
interests. Is his interest political/personal?

Evidence of lack of good faith? Genuinely held belief or desire to advance his own political career?
Is it a view that no reasonable director could have reached (ASIC v Adler)?

Could be a criminal offence if reckless or dishonest (s 184). Evidence?

Acting for an improper purpose

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Here, the challenge is to identify the specific power/duty being exercised. Some students might
identify the exercise of powers of general management. This is unlikely to be specific enough to
trigger the section.

Conflict of interest

Pierce being on the Brimbank Council – and potential for him to be rewarded politically – is a
potential source of conflict.

Equitable principles to be discussed

Under Act –
 disclose material personal interest (MPI) – s 191(1) –
 Is this a MPI - something having the capacity to influence the vote of the particular
director upon the decision to be made (McGellin v Mount King Mining NL)?
 Does an exception apply - proprietary companies (s 191(2)), other directors already
aware of the nature and extent of the interest.
 breach of s 182 – misuse of position? Was it improper (objective test - R v Byrnes)? Advantage
to him/detriment to company?

Angela

Failure to exercise due care, skill and diligence

See Pierce above – students can cross-reference explanation of law. Can analyse Angela’s position
by way of noting differences with analysis of Pierce.

Key differences between Angela and Pierce – which makes the case against Angela more difficult:
 Angela appears to be a non-executive director
 Has no knowledge of legal proceedings against Disney – but should she have made inquiries?
 Reliance not only on Disney, but also on Pierce as MD. Was that reliance reasonable re s 189?

Deborah

Failure to exercise due care, skill and diligence? By refusing to attend meetings and automatically
agreeing with decisions that have first been agreed by Pierce and Angela, Deborah is arguably in
breach of this duty.

Also, arguably cannot rely on the business judgement rule as she did not make a conscious decision
to act or not to act - failure to turn your mind to a matter is not a business judgement (ASIC v Adler).

Fettering of discretion
By automatically agreeing with decisions that have first been agreed by Pierce and Angela, Deborah
is in breach if this duty.

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What action could ASIC take?

Civil consequences – ‘civil penalty provisions’ – Part 9.4B – discussion of options, which orders are
best and why

Criminal penalties (ASIC/DPP)

 Relevant crim provisions eg s 184 – whether Dr’s behaviour satisfies crim standard
 range of penalties available.

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