Keep it valid: member resolutions

On 17 April 2018, we provided a summary on the consequences of a failure to act on a section 249D notice. Click here to read the article.

Courts are often tasked with considering the validity of resolutions put forth by shareholders by way of a requisition notice as this is an issue that often comes up in commercial practice. In this publication we will consider the types of resolutions that can be raised by way of a requisition notice under section 249D of the Corporations Act.

Section 249D of the Corporations Act provides shareholders with the ability to request that a general meeting be called and held, at which they can then put their resolutions to the company’s members (for example, resolutions for the removal and/or appointment of directors of the company).

However directors may decline to call a meeting if the purpose of the requisition notice is to consider matters which are within the directors’ exclusive powers or functions – for example, the proposed resolution is not framed as a constitutional amendment or could not be lawfully effected by the company in a general meeting.1

In Automatic Self- Cleansing Filter Syndicate Co Ltd v Cunninghame,2 the Court had to determine whether the shareholders of a company have power by a resolution passed by a simple majority to order the directors to seal an agreement for the sale of the whole of the assets of the company notwithstanding that the directors may think that the sale was improvident and that the terms on which it was to be carried out were not fit terms on which the company ought to carry out such a sale. The court held that on the true construction of the articles, the management of the business and the control of the company was vested in the directors and consequently the control of the company (as to any particular matter), or the management of any particular transaction or any particular part of the business of the company, could only be removed from the board by an alteration of the articles, such alteration requiring a special resolution.3
In NRMA v Parker (1986) 6 NSWLR 517, McLelland J stated that:

“it is clear that, in general, a power vested by the constitution of a company exclusively in the directors cannot be effectively exercised, nor can its exercise by the directors be effectively controlled or interfered with, by a resolution of members in general meeting, and that a power of control and management of the business and affairs of a company vested in directors in terms similar to those of art 25 in the present case is within this principle."4

In NRMA v Parker 5, the court adopted the principle that directors need not include a proposed resolution in a notice of meeting if the object of that resolution 'could not lawfully be effectuated'
Further if one object of a requisition by members of a company for an extraordinary general meeting is an object which cannot be lawfully effectuated at such a meeting, the directors are entitled to omit that object from the notice of the meeting.6

This is in line with the principle that some of the powers of a company may, according to its articles, be exercised by directors and certain other powers may be reserved for the shareholders at a general meeting.  In John Share and Sons (Salford) Limited v Peter Shaw and John Shaw 2 KB 113 (which was cited in NRMA v Parker (1986) 6 NSWLR 517) it was held that:7

  • if powers of management are vested in the directors, they and they alone can exercise the powers;
  •  the only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove;
  • shareholders cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.

If a shareholder issues a section 249D notice which proposes several resolution and there are certain resolutions which are not valid (in light of the legal principles mentioned above), the directors will only be required to convene the meeting in respect of the valid parts if they be distinguished from the other parts.8

Member’s requisition power must be exercised in good faith and for a proper purpose, and directors may also decline the requisition if it is for an extraneous purpose, such as harassing the company and its directors. That said, subjective ill will or self-interest in convening the meeting will not exclude a proper purpose and a proposed requisition is not invalid because it may give the requisitionists a collateral bargaining advantage.9

Lavan comment

If you are a shareholder and you intend to issue a section 249D notice, it is imperative that you seek advice about the drafting of the proposed resolutions as a failure to take into consideration the above legal principles may result in:

  • the section 249 D notice being deemed to be invalid; and
  • the directors declining to call the meeting.

If you are a director and have received a section 249D notice, it is important that the resolutions are considered against the powers which have been conferred onto the directors and management of the company under the:

  • Corporations Act 2001; and
  • company’s constitution,

so as to ascertain if the proposed resolutions are valid. It is important that you seek advice before declining to call a meeting on the basis that the proposed resolutions are invalid as this may give the shareholders a basis to commence proceedings against the company under the Corporations Act 2001. Directors should seek legal advice if they are unsure whether a requisition notice is valid and should be complied with.

03 October 2018
Corporate Disputes
AUTHOR
Cinzia Donald
Partner
AUTHOR
Lorraine Madden
Special Counsel
SERVICES
Corporate Disputes


FOOTNOTES

[1] Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34.

[2] [1906] 2 Ch 34.

[3] Ibid, pg 88-89.

[4] See page 521.

[5] (1986) 6 NSWLR 517.

[6] NRMA v Parker (1986) 6 NSWLR 517, 521.

[7] John Share and sons (Salford) Limited v Peter Shaw and John Shaw 2 KB 113, 134.

[8] Totally & Permanently Incapacitated Veterans’ Assoc of NSW Ltd v Gadd (1998) 146 FLR 161.

[9] Adams v Adhesives Ltd (1932) 32 SR (NSW) 398,401; NRMA Ltd v Parkin [2004] NSWSC 296 at [56].