Is The Shareholder An Appropriate Beneficiary?

Corporations Act 2001

A company may include a clause restricting the objects and powers of the officers in the constitution, s 125 of the Corporations Act 2001. However, an act is not invalid merely because it has gone beyond the restrictions on the objects or powers exercised beyond the limits as per s 125 (2) of Corporations Act 2001. Even where an officer has acted beyond his authority and objects the company will still be bound. This might be associated with the presumptions available to third parties dealing with the company. A third party may presume that the officers have complied with the company’s constitution and other internal rules and are authorised to bind the company.

However, these presumptions are limited where the third party has knowledge of defect in the authority and compliance with the company’s constitution, s 128 (4). In Sunburst Pty Ltd v Agwater Pty Ltd it was held that the knowledge or suspicion must be actual and not constructive. The test is subjective and the company contesting the presumption bears the burden.

OW is permitted to restrict its objects and officers authority under s 125 of Corporations Act 2001. Priya’s authority was restricted, however, this does not invalidate the contract with Seedy Vineyards. The assumptions provided in the Act are available to Seedy Vineyards provide they meet the conditions provided under s 128.

Seedy Vineyards believe that Priya exceeded her authority and the objects of the contract were beyond the restrictions in the constitution. They cannot, therefore, rely on the presumptions based on s 128 (4) Corporations Act 2001. They had actual knowledge and suspicion of the defects in accordance Sunburst Pty Ltd. OW is not bound by the contract.

Ted was the company’s solicitor and participated in drafting the company’s constitution. He inserted a clause appointing himself as the company’s solicitor and restricting his termination. He was later allotted shares in the company. The issue is can Ted sue Organic Wines Pty Ltd for contract breach relying on the clause in the constitution.

S 140

Eley v Positive Government Security Life Assurance Co Ltd

Hickman v Kent or Romney Marsh Sheep-Breeders Association

Browne v la Trinidad

The company’s constitution creates a statutory contract governing various parties in the company, s 140 (1) of Corporations Act 2001. These include contract between shareholders and the company, shareholders and shareholders, the company and its officers. The section does not provide protection for other relation. It is only persons provided under s 140 of Corporations Act 2001 who have the locus to bring an action under the terms of the constitution. However, the enforcement of the terms by the members is limited to their capacity as shareholders. Eley v Positive Government Security Life Assurance Co Ltd had almost similar facts. In that case there was a clause in the company’s constitution restricting removal of the company solicitor. The solicitor was removed and he brought an action against the company under contract relying on the clause. It was held that the statutory clause governed the relationship of the solicitor and the company as shareholder. The court was also moved by the fact the clause was never brought to the attention of the original shareholders. In Hickman v Kent or Romney Marsh Sheep-Breeders Association it was stated that a shareholder cannot sue on the clause of the company constitution except in the capacity as such shareholder. That is, he cannot sue as employee of the company. That was the holding in Browne v la Trinidad where it stated that a claim under the constitution could only succeed where it relates to shareholding.

S 140

Ted is a shareholder in the company and as such there exists statutory contract between Ted and the Company by virtue of s 140 of Corporations Act. The claim for breach will be against the company in his capacity of a dismissed solicitor and not shareholder and based on Eley, Hickman and Browne cannot succeed. The fact that the clause was inserted by Ted but never brought to the attention of the original shareholders could aggravate Ted’s circumstance based on the holding in Eley.

Ted’s claim against the company cannot succeed. Ted’s claim can only succeed where there was an independent contract similar to the clause inserted in the constitution based on the holding in Southern Foundries Ltd v Shirlaw.

Olive sold her shares Karim and Miles refused to register the transfer. Karim and Mile as directors had the discretion to register or not register the transfer provided they acted faithfully and Company’s best interest. Karim and Miles must also exercise their power for a proper purpose. The issue is did Karim and Miles exercise their powers as directors properly?

S 181

S 182

Cases

Australian Metropolitan Life Assurance Co Ltd v Ure

Sections 181 and 182 of Corporations Act 2001 provide that the directors should act honestly in the exercise of their duties. In the exercise of their powers, the directors must have company’s interest at heart. Section 182, abhors misuse of position by the director. The section prohibits misuse of position for personal gain or to the detriment of the company. The courts are slow to interfere with a director’s action provided it can be shown they acted properly and in the interest of the company. However, where director deviates, courts are willing to intervene and offer a proper remedy. Australian Metropolitan Life Assurance Co Ltd v Ure demonstrates court’s slowness to interfere with director’s acts.

In Australian Metropolitan Life Assurance Co Ltd a shareholder bought shares but the directors refused to register the transfer. The court held that the directors properly exercised their powers in refusing to register the transfer and action had company’s core interest. The fact that the shareholder’s husband was a solicitor who had been struck off and the chances that he could end up in the board of directors influenced the court’s decision. Howards Smith Limited v Ampol Petroleum and Others demonstrates the courts willingness to interfere with the exercise of director’s power where it is improperly exercised. The court stated that the costs of individual shares and the person to sale is at the discretion of the individual shareholders and any action of the directors to the contrary is improper use of their powers.

Eley v Positive Government Security Life Assurance Co Ltd

Karim and Miles had intention of retaining control of the company but did not have money to purchase Olive’s shares. Olive found a buyer but the directors refused to register the transfer but purchased the shares at undervalue and registered the transfer. There are no circumstances such as was in Australian Metropolitan Life Assurance Co Ltd case to influence the refusal to register the transfer by the directors. Their only intention was to retain control of the organisation. Based on Howards Smith Limited case and without the factors in Australian Metropolitan Life Assurance Co Ltd case Olive had the right to decide the cost of her shares and the buyer.

Failure to register the transfer amounted to exercising power for an improper purpose and breach of ss 181 and 182 of Corporations Act 2001. Olive can seek damages or mandatory order reversing the registration.

Mile purchased Olive’s shares and thereafter the company declared dividends higher than its previous years. The intention to declare such dividend was not known to Olive. Was Miles supposed to disclose the information to Olive before purchasing her shares?

Percival v Wright

Hurley v B.G.H Nominees Pty. Ltd

Coleman v Myers

Brunninghausen v Glavanics

Directors of a company have must always have the interest of the company while performing their duties. Their main duty is to the company and not to individual shareholders, according to Percival v Wright. It was held that the directors of the company did not owe a duty to shareholders selling their shares to disclose undergoing negotiations to dispose the company. However, this duty to the company should not be exercised blindly without considering the interest of the shareholders.

In Hurley v B.G.H Nominees Pty. Ltd it was held that there are circumstances where the directors have fiduciary duty to the company as well as the shareholders. In Coleman v Myers directors of a company incorporated a company which purchased shares from the company at undervalue. The found that the directors owed the shareholders fiduciary duty of disclosure. Directors have a duty to shareholders where they are purchasing shares. In such circumstance the director is placed in a place of confidence and trust. In Brunninghausen v Glavanics the shareholders of the company were brothers-in-law. It was held that where the shareholders are dealing on their shares and there is no competing director’s duty to the company the directors owed a duty to the individual shareholders. In Brunninghausen case the director had exclusive special knowledge of certain existing circumstances which made him to be at an advantage compared to the shareholder.

Olive intended to sale her shares and had found a buyer. However, Miles purchased the share at undervalue and later the company declared divided higher than it had ever declared before. Based on Percival case Miles owed Olive no duty but to the company. However, the duty to Olive will arise where the exceptions to Percival case existed, such as those determined in Hurley, Coleman and Brunninghausen.

Conclusion

Miles had exclusive special knowledge of the company’s prospects almost similar to that in Brunninghausen case. That fact and the fact that Miles was the purchaser of the shares created a duty to Olive based on Coleman case to disclose the prospects of the company to Olive. Olive, therefore, has claim for breach of fiduciary duty against Miles.

References

Books and Journals Harris, Bede, ‘Third Party Suspicion of Lack of Authority on the Part of Company Agents: A Comparative Study and a Suggested Rule’ (2015) 8(2) Journal of Politics and Law 98

Cassidy, Julie, Concise Corporation Law (Federation Press, 2006)

Klein, Elizabeth and Jean J Du Plessis, ‘Corporate Donations, the Best Interest of the Company and the Proper Purpose Doctrine’ [2005] 28(1) University of New South Wales Law Journal 69

Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations Law in Australia (Federation Press, 2002)

Bottomley, Stephen et al, Contemporary Australian Corporate Law (Cambridge University Press, 2017)

Flannigan, Robert, ‘Shareholder Fiduciary Accountability’ (2014) 1 Journal of Business Law 1

Nosworthy, Beth, ’Directors’ Fiduciary Obligations: Is the Shareholder an Appropriate Beneficiary?’ (2010) 24 Australian Journal of Corporate Law 282

Nosworthy, Beth, Finding the Fiduciary: Recognition of the Director-Shareholder Relationship in Closely Held Companies (Phd Thesis, Adelaide Law School, 2013)

Sunburst Pty Ltd v Agwater Pty Ltd [2005] SASC 335

Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88

Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881

Browne v la Trinidad (1887) 37 Ch D 1

Southern Foundries Ltd v Shirlaw [1940] AC 701

Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199

Howards Smith Limited v Ampol Petroleum and Others [1974] AC 821