Corporate Governance: Wk 5:

1. Role of the Companys Constitution:What is corporate GovernanceCorporate governance describes the systems by which a company is governed, including elements of: Accounting Management Finance Organisational behaviour Legal rules

Relevant legal rules include: Division of power between board and members Directors duties Shareholders rights and remedies Meeting procedures Reporting requirements Auditing requirements Others

Good corporate governance describes a system whereby management act in the best interests of all stakeholders. This includes: Compliance with legal rules, Annual report must disclose the extent to which they complied with ASX Corporate Governance Principles and Recommendations, Code of conduct for directors: LR4.10.3; Recommendation 3.1.

consitution and replaceable rules What is a constitution? Who needs to have one? Section 140 of the Corporations Act states that a company's constitution has the effect of a contract under seal between: the company and each member; the company and each director and company secretary; and members themselves. If not a constitution, then the company can have a replaceable rules.

internal governance rules What is meant by internal governance rules? This refers to the companys constitution Replaceable Rules and constitution examine ss 134, 135, 136 What is the difference between a special resolution and a resolution? An ordinary resolution is a requirement of 50% of the majority for matters such as giving dividends or moving assets. A special resolution is a requirement of a 75% of majority especially when changing a constitution. Section 141- note the table

statutory contract: s140 (1) Section 140(1) states that constitution and replaceable rules have effect of a contract between: Between company and each member: In their capacity as members only and not in their capacity as outsiders. Hickman v Kent or Romney Marsh Sheep- Breeders Association [1915] 1 Ch 881: see extract on page 657 of the text book Eley v Positive Government Security Life Assurance Co (1875) 1 Ex D 20 Between the company and each of its directors and company secretaries. Between a members and each other members. Note : doubtful whether damages is available as a remedy

changing of the consitution: Section 136 special resolution of 75% majority is needed. There are certain restrictions to ensure that members are protected. Note : They can argue that the change was for improper purpose or it was unfair Section 140 (1) (2). Pay close attention to the wording in s 140(2) Gambotto v WCP Ltd (1995) 182 CLR 432: Change of constitution to expropriate shares or proprietary rights- 2 tests need to be applied: the proper purpose test (This is the proper purpose of everyone. The change is fair) and the fairness test (The company disclosed all relevant information to the members; and if the change is in relation to expropriate of shares, that the members whose shares are being expropriated are paid the market value for the shares) (see case extract on page 630 of text book)

GAMBOTTO V WCP LTD (1995) 182 CLR 432 applies to changing the company constitution What are the main facts of this case? WCP was a company limited by shares. The majority shareholders were wholly-owned subsidiaries of Industrial Equity Limited ("IEL") and held 99.7 per cent of the issued capital). The appellants were two out of several of the minority shareholders. The shareholding of WCP was such that IEL or any of its associated companies could not have acquired the appellant's shares compulsorily under the then Corporations Law. On 16 April 1992, WCP notified all its members that a general meeting would be held on 11 May 1992 to consider an amendment to WCP's articles of association. The amendment proposed was that a new Article 20A should be included in the articles. The effect of the new article was to enable any member who was "entitled for the purposes of the Corporations Law to 90% or more of the issued shares" to acquire compulsorily, before 30 June 1992, all the issued shares in WCP, not being shares to which the majority members were entitled, at a price of $1.80 per share. The documentation which was sent to the members included the text of Article 20A, a proxy form and an expert's report valuing the shares at $1.365 per share. The appellants conceded that this was an independent and fair valuation. The appellants did not want to sell their shares. In May 1992, after WCP indicated that the majority shareholders were likely to vote in favour of the amendment, the appellants commenced proceedings seeking to prevent the meeting being held and the resolution being passed. Those proceedings were resolved on an interim basis. WCP gave an undertaking that, if the resolution were passed, it would not acquire any shares under the new article until the conclusion of the appellants' action. The meeting on 11 May 1992 was attended by representatives of the eight majority shareholders and a minority shareholder who also represented two other minority shareholders. The appellants did not attend the meeting either personally or by proxy. The chairperson demanded a poll, presumably to put the matter beyond doubt, after the resolution had been passed unanimously on a show of hands. The three minority shareholders were the only ones to vote in the poll and they all voted in favour of the resolution. What was the issue(s) before the court? What did the court hold? what is the ratio of this case? This case considered the issue of the powers to amend the constitution of a company and whether or not a resolution to amend the articles of a company with a view to allow the compulsory acquisition of minority shareholdings was valid. The High Court, McLelland J had held that the amendment was invalid and ineffective because its "immediate purpose and effect" was to permit the shares of the minority shareholders to be expropriated by the majority shareholders. According to his Honour, such an amendment amounted to "unjust oppression of those minority shareholders who object".

2. Distribution of powers between shareholders and directorsDirectors:DEFINITION:CA S9: a) is a person who:i. Is appointed to the position of a director; orii. Is appointed to the position of an alternative director and acting in their capacity as alternative director,b) Unless the contrary intention appears, a given person who is not validly appointed as a director if:i. They act in the position of a director; (This covers de facto directors - DCT v Austin), orii. The directors of the company or body are accustomed to act in accordance with the persons instructions or wishes. (This may cover situations where a holding company exercises control over the subsidiary - Standard Chartered Bank of Australia Ltd v Antico.)DIFFERENT TYPES OF DIRECTORS- SOME ARE: Managing directors : s 198C Nominee directors who sit on the Board Executive and non-executive directors APPOINTMENT OF Defacto and shadow directors

NUMBER OF DIRECTORS: What is the minimum number of directors required for a proprietary company? 1 director is needed. S201A (1) CA. Is it a replaceable rule? Yes it is. What is the minimum number of directors required for a public company? 3 directors. S201A (2) of CA. Is it a replaceable rule? Yes it is. What is the minimum number of members that a company must have? The minimum number of directors is 1 under section 114 of the CA.POWER OF DIRECTORS: directors (s198A(1)) may be restricted by companies constitution (s198A(2)) Directors can only act collectively as a board and the function of individual directors is to participate in decision on the board.

THEIR CONTROL: The board of directors is in control of the company, they decide on the management of the company (s198A). Managing directors have implied powers to be in charge of the day to day business of the company (s198C). However, the companys constitution may limit the power of the board of directors and the managing directors as ss198A and C are replaceable rules. Nonetheless, we need to differentiate between directors and officer in order to articulate if posing such management styles and whether they can be combatted (refer below) Thus members of a company are not usually involved within management unless stated within the constitution (Automatic Self Cleansing Filter Syndicate v Cunninghame: Facts Companys constitution conferred on board the powers of management and the powers to sell company property on terms it thought fit Board refused to comply with a general meeting resolution that certain property be sold, asserting that the sale was not in the companys best interests Held: The general meetings resolution was a nullity (void) and could be ignored by the board. The court rejected the suggestion that the directors were agents who had to obey the directions of the principal, the company. The court believed that the management article in the constitution constituted an agreement on the part of the membership to confer the powers of management solely on the board. If the shareholders wished the mandate of directors to be altered, it can only be done under the machinery of the memorandum and articles themselves. Until the constitution was so altered, the membership could not override the boards decisionsIS [PERSON X] A DIRECTOR, OFFICER OR MEMBER? (I.e. if a director his powers fall within s198A; if a member the rule in Cunninghame case applies)

Members: Section 231 defines a member a person of the company if they: Where members upon registration Agree to become members after registration and their names are recorded on the register. Companies need have at least 1 member (s114). However, proprietary companies have a limit of 50 non-employee shareholders (s113). Powers of members: Normally, members act collectively at general meetings to make binding decisions. S 201G [RR] & ASX LR 14.9: Members of a company may appoint a director by a resolution passed in general meeting. S 203C [RR]: Members of a proprietary company may remove or replace a director by resolution. S 203D (1): Members of a public company may remove a director by resolution. S 202A (1) [RR]: Directors remunerations are determined by resolutions passed in a general meeting. S 136(2): Members may modify or repeal a constitution by special resolution. Where management powers are vested in directors, members in general meeting cannot override managements decisions made by the board and cannot interfere with the powers under s198A (See Cunninghame Case; John Shaw and Sons v Shaw; NRMA v Parker). However, members may indirectly influence management as they vote and appoint directors. Power to appoint a returning officer lay with the Board, & members have no say on it the proposed resolution was invalid. But members can control directors decisions indirectly by: Removing directors and replacing them (by ordinary resolution); or Altering the constitution (by special resolution) to vest the relevant power in the general meeting rather than the board of directors.

Officers: Section 9 defines officer as a:i. Director or secretaryii. Persona) Making decisions that affect the whole or substantial part of the company; orb) Affects companies financial standingiii. Reciever, administrator, liquidator Board definition of officer.shareholders: Shareholders at a general meeting may: Appoint a person as a director (s201G) Remove a director (s203C-203D) Determine remuneration of directors (s203A) Board may appoint managing directors (s198C)

3. Directors independence in the exercise of their powers

4. Appointing and Removing DirectorsAppointmentNumber of DirectorsPublic companies must have at least 3 directors - s 201A.Private companies must have at least 1 director - s 201A.The companys constitution may provide a maximum number of directors.Appointment of First directorsThe first directors are appointed upon the registration of the company provided that they are included in the application under ss 117(2)(d) & (f) & s 120 (1); Form 201.Confirmation of Appointment at GM or AGMPublic company confirmation by next AGM: s201H(3)If confirmation not done within time, person ceases to be directorSubsequent appointmentsIn the absence of a provision in the companys constitution or the replaceable rules provide for appointment: By an ordinary resolution 50% at a general meeting - s 2001G, or Casual vacancies, by resolution of the board, subject to later ratification s 201H.

Removal of DirectorsPUBLIC COMPANY A resolution by a board of a public company to remove a director is void (s 203E) (Director cannot be removed by other directors public companies). A director of a public company can be removed by a resolution in general meeting (s 203D (1)). Two months notice is required, with certain natural justice requirements to be given to the director (s203D).PRIVATE COMPANY The constitution of a private company may allow the other directors to remove the director (cf Lee v Chou Wen Hsien). Pty companies may remove directors by a general meeting resolution s 203C. (replaceable rule--see section 135) In Compare and contrast these two sections Section 203C applies to proprietary companies while Section 203D applies to public companies.

DISQUALIFICATION The Act empowers both the court and ASIC to disqualify a person from acting as a director or participating in management. Automatic disqualifications S 206B (1)Convicted for an indictable offence S 206B (3) undischarged bankrupts S 206B (4) persons, who have signed a personal insolvency agreement under Part X of the Bankruptcy Act S 206C : Courts power to disqualify contravention of the civil penalty provisions Who makes this application to the court? The Board S 206F (1) ASICs power of disqualification up to 5 years

5. Functioning of the Board of DirectorsThe role of the Board Who can be appointed as a director? Anyone who is over 18 years. How can directors be removed? They can be removed by resolution. What rules govern disqualification of the directors from the board? Bankruptcy, serious indictable offences. What are the powers of the Board? See s 198A including to vote, decide the direction, make other company related decisions and all the company powers are vested in the Board. Can members interne and override the management decisions of the Board? No they canno, Automatic Self-Cleansing Filter Sydnicate Co Ltd v Cuninghame[1906] 2 Ch 34; John Shaw & Sons ( Salford) Ltd v Shaw [1935] 2 KB 113

MANAGING COMPANIES- CHECK SECTIONS 198A, 198C AND 198D Who manages the company? The Board of Directors 1 director in a company with multi directors- what power does such a person have? Who else may be involved in the management of the company? The shareholders and BoardFUNCTIONING OF THE BOARD Board acts as a collective and the role of an individual director is to participate in the decisions of the board: Northside Developments Pty Ltd v Registrar-General (1990) This requirement can be displaced by constitutional provisions for eg- the appointment of a managing director. An individual director, unless expressly authorised to do so or who has ostensible authority, cannot act on the companys behalf as an individual.

NOTE LISTING RULES FOR PUBLIC COMPANIES May prohibit the board of directors of listed companies exercising certain powers without the approval of the members at a general meeting eg: Issuing new shares beyond 15% of its share capital within any 12 month period and the issue is not to be made equally between existing shareholders in proportion to their holdings. Enter into e related party transaction for a value more than 5% of shareholder funds Sell its main undertaking Significantly change its activities.

6. Directors MeetingsCONVENING A DIRECTORS MEETING: S 248C (RR) a director may call a directors meeting by serving reasonable notice either orally or in writing. Notice need only be that there is to be a meeting and need not specify the purpose or business to be transacted. S 248D (RR) - Directors meetings can be held by using technology agreed to by the directors

CONDUCT OF DIRECTORS MEETINGS: S248F (RR): Unless the directors determine otherwise, the quorum for a directors meeting is 2 directors, at all times during the meeting. S248E (2) (RR): Directors must elect a director present to chair their meeting (or part of it), if: a director has not already been elected to chair the meeting; or A previously elected chairman is not available. S248G (1) (RR): A resolution of directors must be passed by a majority of the votes cast by directors entitled to vote on the resolution S248G (2) (RR): The chairman has one more casting vote, if necessary. SLR 14:10: The chairman of a listed companys board meeting must not exercise a casting vote where only 2 of the directors who are present are entitled to vote. s 248A Resolutions can be passed without holding a directors meeting:; note also s 248B, which applies to the sole director of a proprietary company. Directors can delegate their powers : s 198D Minutes of directors meetings must be kept : s 251A (1) Procedural irregularities at directors meetings may be cured by an order under s 1322. Directors have a right to access the companys financial records at all reasonable times: s 290: See s 9 for a definition of financial records.remedies:Individuals actions are reverted or company is compensatedProprietary company Unlisted public companyListed public company

How are directors appointed?Check constitution or replaceable rules (RR). If RR apply:

Board may appoint but members must confirm appointment later: RR s. 201H

Members may appoint by ordinary resolution: RR s. 201GCheck constitution or RR. If RR apply:

Board may appoint but members must confirm appointment later: RR S. 201H

Members may appoint by ordinary resolution: RR s. 201G

Separate resolution is required for each director unless all members agree: s. 201E

Check constitution.

If board may appoint, members must confirm at the next AGM: ASX Listing Rules

Separate resolution required for each director unless all members agree: s. 201E

How are directors removed?Check constitution (may allow board or members to remove). If RR apply, members may remove by ordinary resolution: RR s. 203CMembers may remove by ordinary resolution: s. 203DBoard cannot remove a director: s. 203EMembers may remove by ordinary resolution: s. 203DBoard cannot remove a director: s. 203E

Directors Duties: Remedies for breach and who can take action: Wk 9-11 important to distinguish between common law, equity and statute for the following two reasons:1. Different person who will take action(a) Duties Under Common Law: Company; ASIC can only sue in the name of the company(b) Duties Under Equity: Company; ASIC can only sue in the name of the company(c) Duties Under Statute: Company (but it will not have access to all the civil penalties): ASIC

2. Different remedies apply depending on which duty (common law, equity or statute) has been breached.WHO IS A DIRECTO OR OFFICER OF THE COMPANY? Director is s91. A person who is appointed to the position of a director2. A person acting in that capacity, regardless of the name that is given to their position: DE FACTO DIRECTOR (E.g. hasnt been given the name but acts in the position of one) Deputy Commissioner of Taxation v Austin3. Unless the contrary intention appears, a person who is not validly appointed as a director if they act in the position of a director; or the directors of the company or body are accustomed to act in accordance with the persons instructions or wishes: SHADOW DIRECTOR Standard Chartered Bank of Australia v Antico (1995) (A company was found to be the director)

Officer is s9 ASIC vAdler (No 3)1. A director or secretary2. A Person who: who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or3. A Person who: who has the capacity to affect significantly the corporation's financial standing; 4. A Person who: whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation);5. A receiver, or receiver and manager, of the property of the corporation, administrator, liquidator, trustee or similar person

1. duty of care, dilligence and skill:COMMON LAW:Daniels v Anderson: Directors owe to their company a duty to take reasonable care of the reasonable person in the performance of their office. If this duty is breached, the company may bring an action for negligence. - The standard of care is always objective, regardless of whether the director is an executive or a non-executive director.

Under CL of negligence there are several elements:1. DOC owed2. Negligent performance (i.e breach standard expected)3. A loss suffered4. The loss is foreseeable result of the negligence

Company must prove as one of the elements that it suffered a loss (Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers (2006).

STATUTE:S 180(1): director (or officer) must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise, if they: (a) were a director (or officer) of a company in the companys circumstances; and(b) occupied the office held by, and had the same responsibilities within the company as, the director (or officer).

Company doesnt need to prove a loss

ASIC v Adler (2002):(2) However, the equitable duty to exercise reasonable care and skill is not properly classified as a fiduciary duty: Permanent Building Society (in liq) (supra) (3) It has been said of the latter that the duties imposed upon directors by it are essentially the same as the duties of directors under the common law:Sheahan (as liquidator of South Australian Service Stations) (In liq) v Verco(4) In determining whether a director has exercised reasonable care and diligence one must ask what an ordinary person, with the knowledge and experience of the Defendant might be expected to have done in the circumstances if he or she was acting on their own behalf: ASC v Gallagher (1993)(5) However, under the implied term in a contract of employment of an executive director, the director will be taken to have promised the company that he or she has the skills of a reasonably competent person in his or her category of appointment and that he or she will act with reasonable care, diligence and skill:Permanent Building Society v Wheeler(6) lthough the standard of reasonable care is generally said to be that of an ordinary prudent person (Re City Equitable Fire Insurance Co. Ltd(1925) there is some suggestion that directors of a professional trustee company owe a higher duty of care:Wilkinson v Feldworth Financial Services Pty Ltd(1998)(7) In determining whether a director has breached the statutory standard of care and diligence(s180(1)), the court will have regard to the companys circumstances and the directors position and responsibilities within the company(8) Reasonable steps to place themselves in a position to guide and monitor the management of the company:Daniels t/as Deloitte. That is to say:(a) a director should become familiar with the fundamentals of the business in which the corporation is engaged;(b) a director is under a continuing obligation to keep informed about the activities of the corporation(c) directorial management requires a general monitoring of corporate affairs and policies, by way of regular attendance at board meetings; and(d) a director should maintain familiarity with the financial status of the corporation by a regular review of financial statements. Indeed, he or she will be unable to avoid liability for insolvent trading by claiming that they had never learned to read financial statements:Commonwealth Bank of Australia v Friedrich (1991)(9) A director appointed to a company because of special expertise in an area of the companys business is not relieved of the duty to pay attention to the companys affairs which might reasonably be expected to attract inquiry, even outside that area of expertise:Re Property Force Consultants Pty Ltd(1995)(10) At common law, a director is entitled to rely without verification on the judgment, information and advice of management and other officers appropriately so entrusted. However, reliance would be unreasonable where directors know, or by the exercise of ordinary care should have known, any facts that would deny reliance on others:Daniels t/as Deloitte(11) Although reasonableness of the reliance or delegation must be determined in each case, the following may be important in determining reasonableness:(a) the function that has been delegated is such that it may properly be left to such officers:Re City Equitable Fire Insurance Co Ltd(b) he extent to which the director is put on inquiry, or given the facts of a case, should have been put on inquiry:Re Property Force Consultants Pty Ltd(c) the relationship between the director and delegate, must be such that the director honestly holds the belief that the delegate is trustworthy, competent and someone on who reliance can be placed. Knowledge that the delegate is dishonest or incompetent will make reliance unreasonable:Biala Pty Ltd v Mallina Holdings Ltd (1994)(d) the risk involved in the transaction and the nature of the transaction: Permanent Building Society v Wheeler(1994)(although in this case the Chief Executive Officer in question also had a conflict of interest).(e) the extent of steps taken by the director, for example, inquiries made or other circumstances engendering trust;(12) Common Law explains what theCorporations Actnow requires when referring(s190(2))to reasonable grounds in codifying the directors responsibilities for the actions of the delegate. Thus unders198Ddirectors may delegate any of their powers to a committee of directors, a single director, an employee of the company or any other person (This delegation must be recorded in the company's minute book: s251A).Moreover, the director will be responsible for the delegates exercise of power if he or she did not believe on reasonable grounds and in good faith, after making proper inquiries if the circumstances indicate the need for it, that the delegate was reliable and competent in relation to the power delegated and would exercise the power in conformity with the duties imposed on the directors of the company by thes190(2).(13) For the purposes ofs180(1)and relevantly in the present case, failing to ensure that a company makes loans only in accordance with its authorised practices and failing to ensure that the company has a proper system of controls and audit in its business to avoid any defalcation by officers and employees may amount to breaches of the statutory duty of care and diligence: Cashflow Finance Pty Ltd v Westpac Banking Corp (1999)(14) There there is a transaction involving the potential for conflict between interest and duty, as here arose, the duty of care and diligence falls to be exercised in a context requiring special vigilance, calling for scrupulous concern on the part of those officers who become aware of that transaction to ensure that any necessary corporate approvals are obtained and safeguards put in place. While the primary responsibility will fall on the director or officer proposing to enter into the transaction, this does not excuse other directors or officers who become aware of the transaction.

DEFENCES:BUSINESS JUDGEMENT RULE: 180(2): A company director (or other officer) who makes a business judgement is taken to meet their statutory, common law and equitable duties of care (in respect of the judgement) if:(a) they make the judgement in good faith for a proper purpose;(b) they do not have a material personal interest in the judgements subject matter;(c) they inform themselves about the judgements subject matter to the extent they reasonably believe to be appropriate [ie. made an informed decision]; and(d) they rationally believe that the judgement is in the companys best interests (ie. a reasonable person in their position would believe it).

S 180(3): Business judgement means any decision to take or not to take action which is relevant to the companys business operations. Adler : The director bears the onus of satisfying the elements in s 180(2).

RELIANCE ON OTHERS s189 189: A directors reliance on information or professional/expert advice, is taken to be reasonable if:(a) the information or advice was given by:(i) an employee whom the director believes on reasonable grounds to be reliable & competent in relation to the matters concerned; (ii) a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within his professional or expert competence;(iii) another director or officer in relation to matters within his authority; or(iv) a committee of directors (on which the director did not serve) in relation to matters within the committees authority; and(b) the reliance was made:(i) in good faith; and(ii) after making an independent assessment of the information/advice.

HOWEVER, despite the statutory provision, the court may still impose a higher standard. Healey, it was held that while directors are entitled to rely on others for preparation of financial statements, they retain the responsibility to read, understand and question the contents; ASIC v Macdonald, s 189 did not apply because the non-exec directors were not entitled to rely on the exec directors because this was a key statement in relation to a highly significant restructure of the group.

DELEGATION: s190(2): 198D(1): Unless the constitution provides otherwise, the directors may delegate any of their powers to:(a) a committee of directors; or(b) a director; or(c) an employee; or(d) any other person. 190(2): A director is not responsible for the delegates exercise of delegated power, if:(a) the director believed on reasonable grounds that the delegate would exercise the power in conformity with the duties imposed on directors by the CL & constitution; and(b) the director believed on reasonable grounds, in good faith, and after making proper inquiry (if needed), that the delegate was reliable and competent in relation to the power delegated. What if the delegate uses power negligently? The director is prima facie responsible s 190(1) BUT s190(2) provides that the director is not responsible if ABOVE. (Alder)

CONSQUENCES OF BREACH: For breaching the common law duty of care: Damages Breaching the statutory duty of care s1317E: Civil penalties, which are: a declaration, a pecuniary penalty up to $200,000 s1317G, disqualification from managing companies for a specified time (s 206C) and/or pay compensation s1317

2. duty to act bona fide fr the benefit of the company as a whole: (w/o intention to deceive) About protecting the companys interests Fiduciary duties impose standards of honest and probity (rightness) on directors In equity arises where there is a relationship of trust, such as a company director who must act for the benefit of the company. Duty of Loyalty: Cannot advance their personal or others interests, nor can they profit from their position. Which leads to the below

DUTY OF GOOD FAITH s181(1)(A) s181(1)(A): A director must exercise his powers and discharge his duties in good faith in the best interests of the company.

TEST: This is subjective; however, the Court will look for objective evidence of the directors assertion (Bell Group per Owen J). If no rational director would have considered the actions to be in the best interests of the company, then the duty is breached (Adler). Otherwise a company could be run by a lunatic (Hutton). (Equiticorp Finance v Bank of NZ (1993))

WHAT DOES IN THE COMPANYS INTERESTS MEAN? The duty is owed to the company (being the collective body of shareholders) and not to individual members (Percival v Wright); Director must consider the interests of present and future shareholders and the company as a commercial entity (Darvall v North Sydney per Hodgson J).

ACT IN BEST INTEREST OF THE COMPANY: Interests of the company means interests of the shareholders as a whole Directors may act in anyones interest, as long as it aligns with the interests of shareholders as a whole. Greenhalgh v Arderne

1. Directors must act in the best interests of individual shareholders or groups of shareholders in some circumstances:

1. Small family companies A fiduciary relationship can arise in equity when a person in whom particular trust, confidence and dependence has been reposed exploits this to achieve an improper benefit (Coleman v Myers); For example, where a director possesses special knowledge, they must disclose this to the shareholders and not use it to the disadvantage of the shareholders: Coleman, the MD arranged for the company to be taken over by a company controlled by him. The MD and the Chairman recommended that the shareholders accept a price per share that was a substantial undervalue. A fiduciary relationship was found to exist, because the directors had inside knowledge of the true value of the shares, and they used this to the detriment of the shareholders; and Brunninghausen v Glavanics, G, a director and minority shareholder, agreed to sell his shares to the other director, B. B then sold all the shares to a third party for a much higher price. The Court held that B owed G a fiduciary duty, because B possessed special knowledge about the third party offer (which G did not have, because he did not participate in the management of the company).

2. Corporate groups A director will not breach their duty if they act for the benefit of the corporate group, where it will benefit the company on whose board they sit (Equiticorp); It is not necessary for the director to independently consider the interests of the company on whose board he sits, provided the decision benefits the company as well as the corporate group (Equiticorp, cf. dissent of Kirby P).

3. Employees Directors cannot favour the interests of employees at the expense of the shareholders; For example, gratuitous payments cannot be made to ex-employees (in Parke v Daily News, DN closed down one branch of the company and gave the surplus from the sale to the dismissed employees. Held: Breach, because it does not serve the interests of the company); A payment to current employees may be in the interests of the company, because industrial relations may be improved.

4. Creditors Creditors interests must be taken into account when the comp is insolvent or near insolvency (Kinsela). At this time, the shareholder value is almost nil and so the focus of the directors must shift; Can shareholders cure a breach? NO since the duty is owed to the creditors, the shareholders cannot cure a breach by majority vote (eg in Kinsela, the directors caused the company nearing insolvency to lease its premises to the directors, on less than commercial terms. Held: Breach, because a reasonable person could not have believed that the lease transaction was for the benefit of the company, having regard to the interests of creditors lease set aside); How close to insolvency? The greater the degree of financial instability, the less risk the directors can take with the assets (Kinsela); *BUT this obligation does not give creditors an independent right to sue for breach (Spies v R). It is up to the liquidator to ensure fair proportional distribution to creditors.

Company as a whole May Mean: Darvall v Nth Sydney: Directors must have regard to interests of both present & future shareholders. Spice v The Queen [2002]: Directors dont owe a duty to act in the interests of individual creditors. Mills v Mills: If different classes of shareholders exist, the directors act must be fair as between the classes of shareholders. Spies v R: When a company is experiencing financial difficulty, directors must act in the interests of creditors in order to act in the interests of the company. Darvall v Nth Sydney: Directors also must have regard to interests of the company as a commercial entity. Walker v Wimborne: Directors need not act in the interests of the company group as a whole. S 187: A director of a wholly-owned subsidiary who acts in good faith in the best interests of the holding company, as expressly authorised by the constitution of the subsidiary, is taken to act in good faith in the best interests of the subsidiary. Parke v Daily News: Directors must not act in the interests of employees at the expense of the company. Company sold a business, & intended to distribute surplus proceeds to dismissed employees. Since the employees employment ceases, the payment will not improve industrial relations payment will be to the detriment of shareholders & the company as a whole. Bennetts v Board of Fire Comms: Nominee directors must put the companys interests ahead of the appointors interests whenever a conflict arises.

DUTY TO ACT FOR PROPER PURPOSE: s181(1)(B) 181(1)(b): A director must exercise his powers and discharge his duties for a proper purpose. The fiduciary duty requires directors to exercise their powers for proper purpose. Directors may breach this duty even if they honestly believe their actions are in the best company as a whole A company should issue shares for a proper purpose. If there is a mixed purpose, the test that is applied to determine if there is a breach of duty is the but for test. A director who exercises their powers to secure some private advantage is acting for an improper purpose because such a purpose is outside the purpose of benefiting the company (Mills v Mills); Onus of showing that a power has been misused: Australian Metropolitan Life Assurance Co Ltd v Ure (1923) Two steps 1. Ascertaining as a matter of law the purpose for which the power may and may not be exercised;2. Determining as a matter of fact that the purpose is within the category of permissible purposes.

Court will consider three steps:1. Identify the particular power in question being exercised by directors2. Ascertain the legal purposes for which this power may be used (objective text)3. Examine the facts of the case and the intentions of the director and decide what the actual purpose was for which the director exercised the power

MORE THAN ONE PURPOSE: (but for (Mills v Mills)) If the Directors act for more than one purpose, apply the but for test (Whitehouse v Carlton Hotel): If not for the improper purpose, would the directors still have acted that way? If no, then breach of duty. Howard Smith, the Millers board argued that the issue of shares to HS was primarily motivated by the fact that their company was in urgent need of funds to finance tankers (and the share issue indirectly blocked a takeover bid). The Court examined how real and pressing the proper purpose was here, there was no pressing need for the tankers and the need had been alleviated by the company raising loan capital, therefore primary purpose was to block takeover.

POWER TO ISSUE SHARES: Directors can issue shares for the following proper purposes: To raise capital for the company; As part of an employee share scheme; To foster business connections; or As consideration for the purchase of assets.

Improper purposes include: To dilute the voting power of another shareholder (eg in Whitehouse, the father, who was the governing director with the sole power to issue shares, issued shares to his sons to dilute the voting power of his ex-wife and this was an impermissible purpose. The primary purpose of share issue is to raise capital). To create a new majority shareholder, to block takeover (eg in Howard Smith, the two majority shareholders of Miller, Ampol and Bulkships, wanted to make a hostile takeover bid for the minority (45%). A company friendly to Miller, HS, agreed to make its own higher takeover bid. To make this bid successful, the Millers board issued sufficient shares to HS to reduce A and Bs majority to a minority. This was improper); BUT not all transactions that defeat a takeover bid will be improper (for example, where the transaction both defeats the takeover offer and is in the best interests of the company, it will not be improper; Darvall per Mahoney JA). In this case, the directors decided to sell land, and a term of the agreement was that another party would make a higher takeover bid of the company. This was not improper). See but for test. In Adler, Mr Adler breached s181 by using the loan from HIHC (where Mr A was a director) to purchase bad investments from his own company; In PBS v Wheeler, the MD was not in breach because he excused himself from the transaction because of the conflict of interest.

DEFENCES: Civil penalty provision enforceable by ASIC. 184(1): Criminal penalty if reckless or intentionally dishonest. 1324 injunction. Ratification Whitehouse v Carlton Hotel: A transaction stemming from an improper use of power is voidable at the companys option. Relief from liability under statute: For courts to excuse a breach, the director must have acted honestly and ought fairly be excused. D must positively demonstrate honesty to the court in order to persuade it to exercise its discretion favourably (ASIC v Adler (No 5)

CIVIL PENALTY SCHEME: Range of sanctions which may operate cumulatively . These include : A pecuniary penalty disqualification from management Compensation Criminal liability only arises generally if some other factor besides a breach of the provision has occurred eg the breach was done intentionally or is reckless : s184 Provisions subject to civil penalty provisions include: Directors and officers duties : ss 180(1), 181(1)(2), 183(1)(2) Insolvent trading : s5ggG(2) Giving an unsanctioned financial benefit to a related party of a public company : s 209 Court will make a declaration specifying the provision breached, who breached it and the conduct, which constitutes the breach : s 1317E ONLY ASIC may seek a declaration : s1317J(1)(4)

CONSQUENCES OF BREACH: Once a declaration is made ASIC may seek a pecuniary penalty order (s 1317G) or a disqualification order Pecuniary penalties up to $200,000 payable to the Commonwealth may be sought against the person who has breached the provision. Such an order can only be sought where the matter is serious and where the breach significantly affects the companys interests or its ability to pay its creditors. A company may seek a compensation order without a prior declaration of breach having been made. A company or ASIC may seek a compensation order : s1317J(1)(2)(4). Limitation period to bring the action 6years from the date of the contravention : s 1317K Criminal liability in some instances may arise for a breach of a civil penalty provision. See Schedule 3 for the penalties, which apply Civil proceedings cannot follow criminal proceedings, where the conduct is substantially the same: s 1317M The commencement of criminal proceedings will stay proceedings for a declaration or a pecuniary penalty order, where the conduct complained of is substantially the same : s 1317N Criminal proceedings may be commenced against a person for conduct that is the subject of a declaration, pecuniary penalty order, disqualification order or a compensation order : s1317P

3. fiduciary obligation to shareholders : secret profits conflict of interest Directors and senior employees are fiduciaries; Chan v Zacharia This imposes a duty of absolute loyalty on the fiduciary:

1. CONFLICTS RULE; AND A director must not enter into engagements in which he has or can have a personal interest conflicting with the interests of the company (Aberdeen Railway); Most common examples of conflict of interest:(a) Diversion of business opportunity: Green v Bestobell Industries Pty Ltd (b) Misappropriation of company property: Cook v Deeks(c) Secret profits: Regal (Hastings Ltd) v GulliverMULTIPLE DIRECTORSHIPS: Prima facie, holding more than one directorship is not a breach; Provided:(a) No confidential information is divulged; and(b) If a transaction involves both companies, the director:i. Discloses the conflict (R v Byrnes);ii. Refrains from negotiating the contract and voting (Fitzsimmons v R); andiii. May need to take positive steps to protect the company (for example, where the director has power and influence over the board and should use it to prevent a risky transaction going ahead, Adler; or where the director has special knowledge about the transaction, Wheeler).REQUIREMENTS: 182: A director, officer or employee of a corporation must not improperly use their position to: Aberdeen Railway v Baikie Bros Gain advantage for themselves or someone else Cause detriment to the corporation

183: A director, officer or employee of a corporation must not improperly use the companys information to: Furs vTomkies: Gain advantage for themselves or someone else Cause detriment to the corporationDISCLOURE OF PERSONAL INTERESTS: Inflexible Rule : Parker v Mckenna this appeal is governed by the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his so doing, or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company.

Notice is required: Under s 191(1), a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest (there are exceptions see page 49); Material personal interest means a substantial interest. The test is whether a reasonable person would believe that the director might be influenced by the interest (McGellin). For example, in McGellin, a director was regarded as having a material personal interest in board discussions about whether the company should issue shares to him.

Requirements of notice The notice must give details of the nature and extent of the interest and how it relates to the affairs of the company (s 191(3)(a)). The disclosure must enable the board to understand the scope of the benefit and potential profit that the director will receive (Camelot per Santow J). Mere suggestions are insufficient (Camelot); It must be given by the director (Camelot), and as soon as practicable after the director becomes aware of their interest in the matter (s 191(3)(b)); The details must be recorded in the minutes of the meeting (s 191(3) and Camelot).

Standing notice can be given: Notice is not required under s 191(1) if standing notice has been given (s 191(2)(d)); Under s 192(1), a director of a company who has an interest in a matter may give the other directors standing notice of the nature and extent of the interest in the matter. The notice may be given at any time and whether or not the matter relates to the affairs of the company at the time the notice is given; Does not need to be a material personal interest; The notice must be given to all directors at a meeting, or to all directors individually (s 192(2)). It must be recorded in the minutes of the meeting (s 192(4)); Further notice must be given if a new director is appointed (s 192(5)) or the interest materially changes (s 192(6))

Consequences of notice: Can the conflicted director vote on, and retain benefits from, the transaction if the directors go ahead with it? Pty Ltd company = depends on the constitution. BUT s 194 (RR) says that the director may vote and retain any personal benefits; Public company = the director must not vote or be present while the matter is being considered (s 195(1)), unless the other directors pass a resolution to the contrary (2) , ASIC makes a declaration or order (3), or there are not enough directors to form a quorum (4).

Consequences of breach: Civil penalty offence; Breach of s 191(1) = 10 penalty units or imprisonment for 3 months, or both (Sch 3); Breach of s 195(1) = 5 penalty units (Sch 3); Contravention does not affect the validity of any act, transaction, agreement, instrument, resolution or other thing (ss 191(4), 192(7)).

2. SECRETPROFITS RULE. A director must not make an undisclosed personal profit from his position, or appropriate corporate opportunities. Regal (Hastings) v Gulliver: Directors must not make a personal profit by reason of acting in their position as directors. Account of profits is the usual remedy here.

PROHIBITED ACTIVITIES A director may not misappropriate business opportunities or confidential information belonging to the company. For example, diversion of a contract from the company to the director is a breach (Cook v Deeks); A director may not profit personally from transacting the companys business. For example, receiving a personal incentive payment by the buyer for selling a part of the business (Furs v Tomkies). It is irrelevant that the directors act in good faith and in the interests of the company (Regal (Hastings)). In this case, the directors bought shares in a subsidiary so it could fund the lease of cinemas. These shares were later sold at a profit. This was a breach, because the directors acted on knowledge that they acquired as directors of the company and they made profit without the consent of the company. Fiduciary duties survive resignation of the fiduciary (Canadian Aero Service). That is, a director or senior employee cannot resign and then exploit a corporate opportunity if the resignation was for the purpose of taking up that opportunity.

PERMITTING THE DIRECTOR TO BENEFIT Profit can be permitted or ratified by the shareholders by ordinary resolution; Permission of the board? Generally insufficient (eg Regal (Hastings)); However, it may be enough if board represents all SH interests (in Queensland Mines, all shareholders were represented on the board and therefore boards consent was sufficient). *Approval must not be a fraud on the minority; For example, in Cook v Deeks, the breaching directors were also majority shareholders. They passed a resolution to forgive the breach. This resolution was found to be ineffective to validate the transactions, because it was a fraud on the minority; Such approval may also be oppressive under s 232. If there is no shareholder approval The director may still be able to take up the opportunity (eg in Peso Silver Mines, the company rejected to buy a mining claim. The MD, Cropper, later purchased the claims. The court held there was no breach of duty, because he had been approached in his capacity as a member of the public he had no special information by virtue of his position as MD, he was approached independently, and the company did not want to take up the offer).

AVOIDING BREACH BY DISCLOSURE Woolworths v Kelly: Directors avoid a breach of this duty if they:(b) make full disclosure of their personal interests to the company; and(c) obtain the companys permission to continue. Permission is obtained:(b) by resolution of a general meeting (Fur v Tomkies); or(c) from the board, if the constitution authorises it (Woolworths v Kelly).

CONSEQENCES: Civil Penalty directors and officers may experiences: Under Equity:If an officer breaches their fiduciary duty, the company has a variety of remedies available Damages or compensation Account of profits Rescission of contract Return of property and constructive trusts Claim for damages by company s1317H Disqualification s206C Criminal Action- s 184 and Schedule 3

MISUSE OF POSITION CONFLICTS AND PROFITS RULE1. Under s 182(1), a director, secretary, other officer or employee must not improperly use their position to:(a) Gain an advantage for themselves or someone else; OR(b) Cause detriment to the corporation.

A person who is involved in a contravention is liable for a civil penalty (s 182(2)). Also, might be an offence under s 184 if dishonest.

MISUSE OF INFO PROFITS RULE1. Under s 183(1), a person who obtains information because they are, or have been, a director or other officer or employee must not improperly use the information to:(a) Gain an advantage for themselves or someone else; OR(b) Cause detriment to the corporation.*This duty continues after the person stops being an officer or employee (Note 1 of s 183(1)). A person who is involved in a contravention is liable for a civil penalty (s 183(2)). Also, might be an offence under s 184 if dishonest. in ASIC v Vizard, Mr Vizard was held to have breached his duty by making three share transactions based on confidential information he gained as a non-executive director of Telstra.

4. indemnification: Certain breaches may be released by a resolution passed at a general meeting, ratifying the breach of duty or validating the transaction resulting from it 1. Secret profits (Regal Hastings v Gulliver)2. Duties of care, diligence and skill (Pavildes v Jensen)3. Duty of Good faith (Hogg v Cramphom

In certain cases, the Board itself may be able to release one of its directors from the consequences of a breach of duty (Queensland Mines Case) Statutory regulation as to when companies may release officers and auditors from liabilities of office, indemnify them against such liabilities or pay premiums upon insurance policies in relation to their performance as a director. S 199A(1): A company must not exempt an officer from liability to the company. S 199A(2) A company or a related body corporate must not indemnify a person (whether by agreement or by making a payment and whether directly or through an interposed entity) against any of the following liabilities incurred as an officer or auditor of the company:(a) a liability owed to the company or a related body corporate;(b) a liability for a pecuniary penalty order under section 1317G or a compensation order under section 961M, 1317H, 1317HA or 1317HB;(c) a liability that is owed to someone other than the company or a related body corporate and did not arise out of conduct in good faith. S 199A(3): A company must not indemnify an officer against legal costs incurred in defending an action, unless he was successful in the defence. Miller v Miller: This section does not intend to nullify approval or ratification by general meeting.

5. insolvent trading:THE DUTY Under ss 588G(1) and (2), a breach occurs if:s 588G(1)(a) A person is a director at the time when the company incurs a debt; Debt? A debt is an obligation by one person to pay a sum of money to another (Powell v Fryer); Includes a contingent debt (Hawkins v Bank of China, eg a guarantee); Includes non-voluntary debts (Powell v Fryer, eg statutory payments). Incurred? A debt is incurred when a company so acts to expose itself contractually to an obligation to make a future payment of a sum of money as a debt (Hawkins v Bank of China); Section 588G(1A) deems when a company incurs a debt:

INCURRING OF DEBTS 588G(1A): When debts are incurred:Action of companyWhen debt is incurred

1) paying dividendWhen dividend is paid, or if constitution provides for dividend declaration when it is declared

2) making reduction of share capital for considerationWhen reduction takes effect

3) buying back sharesWhen buy-back agreement is entered into

4) redeeming redeemable preference shares at companys optionWhen the company exercises the option

5) issuing redeemable preference shares that are not redeemable at companys optionWhen the shares are issued

6) financially assist a person to acquire shares in itself or a holding companyWhen the agreement to provide assistance is entered into, or if no agreement when the assistance is provided.

(b)The company is insolvent at that time, or becomes insolvent by incurring that debt; and A company is insolvent if it is unable to pay all its debts, as and when they become due and payable (s 95A); The conclusion of insolvency must be derived from a proper consideration of the companys financial position, in its entirety, based on commercial reality. A company is not insolvent simply because it is suffering a temporary lack of liquidity. Insolvency is the inability of the company to meet debts, utilising the resources available to the company (Powell v Fryer per Olsson J); Common indicators of insolvency include (ASIC v Plymin per Mandie J): Continuing losses; More liabilities than assets; Overdue taxes; Inability to borrow further funds from present bank; No access to alternative finance; Inability to raise further equity capital; Suppliers requiring COD, or otherwise demanding special payments before supply; Creditors unpaid outside trading terms; Issuing of post-dated cheques; Dishonoured cheques; Special arrangements with selected creditors; Impending court action for debts; and Inability to produce timely and accurate financial information.

(c)At that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent. Suspect means more than mere speculation, but less than actual belief or expectation it is a positive feeling of apprehension or mistrust (Queensland Bacon); Satisfied where a reasonably competent and diligent director would have grounds to suspect insolvency, in all the circumstances of that company (ASIC v Plymin per Mandie J).

AND the director failed to prevent the company from incurring the debt (s 588G(2)). Covers inactivity (ASIC v Plymin).DEFENCES: General points: Director has burden of proof on BOP; Director can rely on more than one defence; The defences are designed to assist directors who have otherwise acted diligently. There are four defences:

1. s 588H(2): EXPECTATION OF SOLVENCY; It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time; Expect means a higher degree of certainty than mere hope, possibility or optimism. It implies a measure of confidence that the company is solvent (MFS v Miller). It must be certain or probable (Hall v Poolman); The expectation must be that the company can pay its debts at the present time (it is not sufficient if the expectation is that the company can trade out of its difficulty; Hall v Poolman); The director can consider assets that could be sold and, per Palmer J in Hall v Poolman, a director would be justified in expecting solvency if an asset could be realised to pay accrued and future creditors in full within about ninety days.

2. s 588H(3): RELIANCE ON ANOTHER; It is a defence if it is proved that, at the time when the debt was incurred, the person:(a) Had reasonable grounds to believe, and did believe, that a competent and reliable person was providing them adequate information; and(b) Expected, on the basis of that information, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. Passive reliance is not sufficient the directors must actually make inquiries about the companys solvency from another (otherwise the expectation is not based on any information; MFS v Miller). That is, it is not sufficient to sit back and say that another director was responsible for the finances and not ask any questions of that director. See the obligations to monitor the financial status of the company, and for min financial literacy.

3. s 588H(4): NON-PARTICIPATION IN MANAGEMENT; AND If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company; Some other good reason does not include a total failure to participate in management, for example, where one director defers to another (in DCT v Clark, it was not sufficient that the wife simply deferred to her husband to make decisions).

4. s 588H(5): REASONABLE STEPS TO PREVENT THE DEBT s 588H(5): It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt; Under s 588H(6), the court must consider:(a) Any action person took with a view to appointing an administrator [voluntary administration];(b) When that action was taken; and(c) The results of that action. Requires strong and unequivocal action. Simply telling the MD that you have reservations and do not agree with the company acquiring further debts is not sufficient (Byron v Southern Star Group). As Ormiston J suggested in Morley, if a director cannot prevent the debt being incurred, they should seek to have the company wound up or they should resign.CONSQUENCES OF BREACH: A director who breaches s 588G(2) is liable for a civil penalty; A director commits an offence if the failure to prevent the company incurring the debt was dishonest (s 588G(3)); The court may also make a compensation order against the director: ASIC can seek recovery from the director under ss 588J or 588K (K for criminal proceedings) for the amount of loss or damage suffered by all unsecured creditors (loss or damage is generally the amount of the unpaid debt; Powell v Fryer); The liquidator may recover from the director under s 588M(2) for the loss or damage of all unsecured creditors; and Individual creditors may recover from the director under s 588M(3) an amount equal to their loss or damage.6. related party transactions : Only applies to public companies S 208(1): For a public company (or an entity it controls) to give a financial benefit to a related party:(a) the public company (or entity) must obtain approval of members under ss 217-227 and give the benefit within 15 months after approval; or(b) an exception in ss 210-216 must apply.

S 228: Related party includes directors and their spouses (s 228(2)), their parents and children (s 228(3)), and any entity controlled by such persons (s 228(4)).

S 229(3): Giving a financial benefit includes(b) buying an asset from, or selling an asset to, the related party; and(d) supplying services to, or receiving services from, the related party.

S 230: Transactions authorised by Ch 2E or by resolution of members under Ch 2E, do not relieve the director from any other duties.EXCEPTIONSShareholder approval is not required if: S 210: Member approval is not needed if the financial benefit was reasonably derived on arms length terms or on more unfavourable terms. S 211: Member approval is not needed if the financial benefit was reasonable remuneration. s 213: Amounts of money given to a director or spouse of less than $5,000 s 214: Financial benefits to or by a closely held subsidiary s215: -Financial benefits given to members of the company, without unfairly discriminating between members

If an exception applies, the directors control whether or not to give the financial benefit otherwise, a majority vote is required.CONSEQUENCES FOR BREACH A contravention of s 208 does not affect the validity of any contract or transaction (s 209(1)); However, a person who is involved in a contravention of s 208 is liable for a civil penalty (s 209(2) see footnote 10 for definition of involved in). See for remedies. A person commits an offence if the involvement is dishonest (s 209(3)).

Meetings: Directors and Members Meetings: Wk 6

TYPES OF MEETINGS:ANNUAL GENERAL MEETING (AGM) s250R(1): Meeting may include any of the following, even if not referred to in the notice of meeting:(a) The consideration of the annual financial report, directors' report and auditor's report;(b) The election of directors;(c) The appointment of the auditor; and(d) The fixing of the auditors remuneration. s 250N(1): A public company must hold an AGM within 18 months after its registration. And it must hold an AGM annually, within 5 months after the end of its financial year (s 250N(2)). Failure to do so is a strict liability offence (s 250N(2A)). A public company with 1 member does not have to hold an AGM (s 250N(4)). Reasonable time allowed for shareholder questions: s250PA (shareholder questions auditor), and s250S (questions to chairman). Usually the only meeting for shareholders in public companies

EXTRAORDINARY GENERAL MEETINGS (EGM)

Called by notice Once called, cannot be cancelled/postponed but can be adjourned: Bell Resources v Turnbridge (1988) 6 ACLC 970 When reconvened it must only attend to unfinished business: s249W(2)

1. CONVENING THE GENERAL MEETING :DIRECTORS POWERS TO CONVENE MEETINGS: A director may call a meeting of the companys members (s 249C RR); For a listed company, directors have the power to call meetings regardless of Constitution (s 249CA); BUT directors bear the cost of the meeting. A company's constitution will usually make provision for calling a general meeting although the Act provides a replaceable rule authorising a director to call a general meeting (s 249C). In the case of a listed company incorporated in Australia, the rule is mandatory and applies not withstanding anything in the company's constitution (s 249CA). The board of directors enjoys an inherent power to convene a general meeting. Usually convened by a notice signed by the company secretary pursuant to a resolution of directors. Even when the power to convene a meeting is exercised by an individual director, it is a fiduciary power to be exercised for the benefit of the company as a whole, and not for the benefit of the directors or a group of shareholders of the company. Requirement that a general meeting must be held for a proper purpose (s 249Q). A general meeting must be held a reasonable time and place (s 249R). Smith v Sadler (1997) 25 ASCR 672 as per Young J: Facts: A companys AGM was convened to be held on premises licenses under the then Liquor Act 1982 (NSW) of which premises D was licensee. D would not permit P to enter upon the premises because he was apprehensive about Ps conduct and owed a duty under the Liquor Act to ensure that no disturbance occurred upon licensed premises. P sought to restrain his exclusion from attending the AGM.

In Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 at 93, von Doussa J said: An annual general meeting is not a mere formality, particularly for members who have no opportunity to ask questions about the affairs of the company. To hold a meeting at a time and place where members are unlikely to be able to attend is tantamount (equal) to not holding a meeting at all. I respectfully agree. Held: It seemed to me that had this consensus not been reached, it would have been necessary to order that the meeting only transact formal business and then adjourn to premises where the plaintiff had a right to attend. In this way the court would cause minimum disruption to the 250 people who may well attend the meeting but still permit the plaintiff to attend. Such an order would get over the problem that the defendant had the right to control who came onto his licensed premises, as well as the principle that the court does not lightly prevent people from meeting: see Uniting Church of Australia Property Trust (NSW) v Macquarie Radio Network Pty Ltd (1997) 24 ACSR 721.

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunningham: Facts were: A shareholder wanted the director to sell part of the assets of the company. At a shareholders meeting the shareholders voted in favour of the proposal. The directors, however, did not approve of the resolution and refused to enact it. The shareholder applied to have the directors forced to enact the resolution. Court found in favour of the directors, the directors (management) were entitled to reject the offer. Theyre not agents to the shareholders nor the company. Activities such as sale of company assets are in the discretion of the directors. The shareholders may only interfere with the decisions of the directors through a special resolution by amending the articles of association or the Companys Constitution, or by dismissing them.

MEMBERS POWERS TO CONVENE MEETINGS: Members possess 2 distinct statutory rights to convene meetings:1. A direct right to convene a meeting at their own expense. s 249F(1).Members with at least 5% of the votes that may be cast at a general meeting may convene a general meeting at their own expense . (3) The percentage of votes that members have is to be worked out as at the midnight before the meeting is called. Directors may only postpose such a general meeting if the companys constitution expressly permits them to do so. S 198A power is not sufficient to confer such authority. Can be used where there are no directors to call meeting or if a companys constitution does not allow a director to call a meeting.

2. The right to requisition (demand) directors to call a meeting and, if directors fail to do so, to convene it themselves. s 249D(1), the directors must hold a meeting on the request of members with at least 5% of the votes that may be cast at the general meeting. s 249D(2)The request must be in writing, state any resolution to be proposed at the meeting, be signed by the members making the request , and be given to company Members with >50% of the votes may call a meeting if the directors do not do so within 21 days after the request is given (s 249E(1)). The company must pay the expenses of the members (s 249E(4)). A member might find a tactical advantage over directors in a contested meeting thought their choice of timing and venue rather than leaving these matters to the directors; determination under a requisitioned meeting. There are limitations: i. Members may not requisition a meeting for the purpose of passing a resolution that in beyond the constitutional power of the general meeting.ii. Court would restrain such a meeting convened by members and say to directors that they are under no obligation to convene a requisitioned meeting to consider proposed resolutions beyond power.

A Meeting Must Be For Proper Purpose: A meeting must be for a proper purpose (s 249Q). Eg the meeting is not for a proper purpose if it is to decide a matter that is not within the powers of members to decide such as directing the directors how to exercise their exclusive powers (NRMA v Parker). Shareholders must exercise their right to convene a general meeting as interests of the company as a whole. A shareholder can act in self-interests, provided he acts bona fide in that the objective of calling the meeting is to have the resolution passed and not simply to harass the company and its directors (Humes Lrd v Unity APA Ltd) NRMA v Scandrett [2002] If the purpose for which the requisition is made is truly to have a meeting of members convened in order to consider and, if thought fit, to pass the resolution, then it does not matter that the requisitionist is motivated to pursue that purpose by ill-will or self-interest. The rationale underlying the law in this regard is the same as that which applies in the law relating to abuse of process an abuse of process occurs when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or for some collateral advantage beyond what the law offers... If, as in this case, the Defendants resort to the rights to requisition a meeting for the purpose of passing a resolution valid in terms, then their motivation in doing so is irrelevant to the question whether the requisition power is properly exercised.

Convening general meetings by court order: A meeting may also be convened by court order if it is impracticable to call the meeting in any other way (s 249G(1)). The court may make the order on the application of a director or any member who would be entitled to vote at the meeting (s 249G(2)). Re El Sombrero Ltd 1958 3 All ER 1 one shareholder held 90% of the issued capital of the company; each of the two directors held 5% of the shareholders. These three were the only members of the company. No general meeting ever held. The majority shareholder requisitioned a meeting for the purposes of passing resolutions for the removal of the directors. Directors did not attend meeting deliberately and meeting was dissolved. The major shareholder applied for an order for a court-convened meeting under the equivalent of s 249G. The application was opposed by the directors. [T]his is eminently (high) a case in which the court ought to exercise its discretion (wil); first, because, of the court were refuse the application, it would be depriving the applicant of statutory right which, through the company, he is entitled to exercise under [s 203D] to remove the respondents as directors. Second (and I think that this is a proper matter to take into account as part of the reasons for deciding to exercise my discretion), because the evidence disclosed that the respondents are failing to perform their statutory duty to call an annual general meeting. Re Totex-Adon Pty Ltd [1980] 1 NSWLR 605: court did not order a meeting because it was unlikely the director would attend and therefore there would not be enough members for quorum.

MEMBERS POWERS IN GENERAL MEETING:Although the board has broad powers of management under s 198A, certain decisions are reserved for members in general meeting, such as Change to constitution via Special Resolution of 75% of votes cast by members entitled to vote: s 136(2); or Ratification of directors exercise of power Ratification of conflict of interest can only be ratified before the transaction Other breaches can be ratified after the fact appointment & removal of directors: s 203C&D Calling a meeting must have business for meeting. Members cannot interfere with the management decisions of the company or board of directors (Imperial Hydropathic Hotel Co Blackpool v Hampson (1882) 23 Ch D 1) Under standard constitutional provisions and the Act, the general meeting may be convened by:i. An individual directorii. the board of directorsiii. a member or group of members satisfying minimum or voting standard oriv. a court order.

2. Notice of meeting :

s 249H(1): General rule 21 days but companys constitution may specify a longer period of notice Subject to exceptions:i. A company may call a general meeting on shorter notice if members with at 95% of the votes that may be cast at the meeting on shorter beforehand or, in the case of an AGM, all member so agree (s 249H(2)). Does not apply to public companies at which a resolution will be moved to remove a director or, for all companies to remove an auditor (s 249H(3)(4)). Intend to give sufficient time to respond.ii. At least 28 days notice must be given of a general meeting of an Australian incorporated listed company notwithstanding anything it the companys constitution (s 249HA). Notice must be given individually to each member entitled to vote at the meeting and to each director (s 249J(1)).The auditor is also entitled to notice (s 249K).iii. Unlisted companies = 21 days minimum (s249H)iv. Listed companies = 28 days minimum (s249HA)v. Plus 3 days 249J (for fax or postal)vi. For a shorter period follow the procedure in s249H(2) (95% to agree)

Notice must be given to each shareholder and director (249J) and the auditor (249K) s249L must contain place, time, date, nature of business, including special resolutions and proxies. Must be clear and precise. Any attachments must not be misleading to an ordinary shareholder reading the material quickly: Deveraux Holdings Pty Ltd v Pelstart Resources NL (1986) 4 ACLC 12. It must be realistically useful, not overwhelming death by paperwork: Fraser v NRMA Holdings (1995) 13 ACLC 132. If misleading, meeting can be restrained or business overturned: Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 4 ACLC 711. Accidental omission not a good enough excuse. However court may declare the proceedings at the meeting to be void (s 1322(1)(3)(6)).

The notice of a general meeting must: Set out the place, date, time of the meeting and the technology to be used if the meeting is to be held simultaneously at two or more venues; State the general nature of the meetings business If a special resolution is to be proposed at the meeting state that intention and the text of the resolution; and Inform members of their proxy appointment rights (s 249L(1)). Information included in the notice of meeting must be worded and presented in a clean and concise and effective manner (s 249L(3)). A replaceable rule provides for notice to be given of a resumed meeting if a meeting is adjourned for one month or more (s 249M).

3. MEMBERS RIGHTS TO PUT RESOLUTIONS AND CIRCULATE STATEMENTS : Members may require the company to put a resolution on the agenda of a general meeting and to circulate to all members of a statement about a proposed resolution or any other matter that may properly be considered at a meeting, If an AGM meeting, considerations of the annual financial report and the directors and auditor (s 250R). The request in either case must be made in writing by members with at least 5% of voting rights or by 100 voting members (ss 249N, 249P). The proposed resolution will be considered at the next general meeting held two months after the request is served on the company (s 249O(1)). The company must give members notice of the resolution at the same time as it gives notice of the meeting or as soon as practicable (s 249O(2)). The company must pay for the distribution of the text of the proposed resolution or the statement if it is received in time to send it out with the notice of meeting (s 249O(3), 249P(7)). Company doesnt need to give notice of resolution if: ss 249O(5) 249P (9)(a) if it is more than 1,000 words long or defamatory; or(b) if the members making the request are to bear the expenses of sending the notice out--unless the members give the company a sum reasonably sufficient to meet the expenses that it will reasonably incur in giving the notice.

A proprietary company with more than 1 member can pass a resolution by circulating a document and having all the members entitled to vote sign a statement on the document that they are in favour of the resolution. Where two or more people hold shares together, each member of a joint membership must sign. The resolution is passed when the last member signs (i.e 100% of members entitled to vote agree). A circulating resolution cannot be applied to a resolution to remove an auditor. The 75% requirement for votes in favour of the special resolution only applies when a company holds a physical meeting.

A proprietary company with only one director who is also the only member of the company can pass a resolution just by signing a document setting out the resolution.

Members with at least 5% of the votes, or at least 100 voting members, may give notice of a resolution that they propose to move (s 249N(1)). The notice must be in writing, set out the wording of the proposed resolution, and be signed by the members proposing to move the resolution (s 249N(2)). If the company is given notice, resolution is to be considered at the next general meeting that occurs >2 months after the notice is given (s 249O(1)). See extract of section below.

4. CONDUCTING THE MEETING: A company may hold a meeting of members at two or more venues using any technology that gives the members as a whole reasonable opportunity to participate in the meeting (s 249S). Where directors fails to call the meetings courts have discretion under s1234 to order that the meeting be called. s249EElecting a chair: 1. The directors must elect a chair to be present at every meeting (s 249U(1)-(3) RR). The chair must adjourn a meeting if the members present with a majority of votes agree (s 249U(4) RR).

Number of Members needed to be Present: A quorum is the minimum number of shareholders whose presence is necessary for a meeting to be able to validly transact business. The quorum for a meeting is 2 members and the quorum must be present at all times during the meeting. s 249T(1) RR An individual attending as a proxy or body corporate representative is included in the quorum but only once even if attending in more than one capacity (s 249T(2)). If a quorum is not present within 30 minutes of the specified in the notice, the meeting is adjourned to the date, time and place the directors specify and, in the absence of such specification, to the same day in the next week and at the same time and place (s 249T(3)). If no quorum is then present within 30 minutes, the meeting is dissolved (s 249T(4)). Under a replaceable rule, the directors may elect an individual to chair meeting of members (s 249U(1)). Under this rule the chair of the board does not automatically assume the chair of general meeting, allowing the appointment of an independent person. If a chair is not elected beforehand or is not available for a meeting, the members may elect a chair from among their numbers (s 249U(2)(3)). The chair must adjourn a meeting if directed to do so by members holding a majority of votes at the meeting (s 249U(4)). An adjourned meeting may deal with unfinished business: (s 249W(2)). If the constitution gives the chair of a meeting the power to adjourn the meeting without shareholder approval, the chairs power, even if it is not fiduciary, must in equity be exercised bona fide and for a proper purpose: Mckerlie v Drillsearch Energy Ltd (2009) 74 NSWLR 673: It follows from the nature of the chairmans role and the responsibilities and expectations it entails that it is foreign to the chairmans function to exercise the power of adjournment to further some personal preference of the chairman or some policy of a body of which the chairman is a member. It is thus foreign to the chairmans function, when the chairman is a director, to exercise the chairmans powers to implement some policy or decision of the board of directors. This is particularly so in a context such as the present where the purpose of the general meeting is to determine the constitution of the board itself. The right of the general body of members to remove directors by resolution is a statutory right which may or may not have some parallel in the constitution. If, by ordinary corporate processes, a forum is created to enable members to exercise that right if minded to do so, it will be an abuse of the power of a chairman to remove the opportunity to exercise the right except for some good and proper reason calculated to promote the due exercise of the right in more suitable or constructive circumstances at a later time. It will be a clear abuse of power if the chairman removes or postpones the right simply because he or she (alone or in consultation with others) thinks that it would somehow be more conducive to the interests of the company if members were not allowed to exercise the right to remove directors.Asking Questions: At an AGM, the chair must allow a reasonable opportunity for the member as a whole to ask questions about or make comments on the management of the company (s 250S) and, if the auditor is present, to ask questions of the auditor about the conduct of the audit and the preparation of the auditors report (s 250T). No obligation upon directors to answer questions. Only imposed as a reasonable opportunity. Failure to do so is a strict liability offence (s 250S(2)).Failure to Call the Meeting: s 249E Members with greater than 50% of the votes of those, who made the initial request may themselves call the meeting Must be held no later than 3 months after the request is given to the company Company must give the members a copy of the register of members of the company Company must pay for all reasonable expenses incurred for holding the meeting Failure by the company to provide the register and pay the reasonable expenses is a strict liability offence The company may be able to recover the expenses from the directors themselves personally

5. VOTING AT MEETING:THE FUNCTION OF VOTING RIGHTS Two principled arguments are put for the attachment of voting rights to ordinary share exclusively:1. The reduction of agency costs through shareholder monitoring of management and2. The utility of voting rights as a device to fill in gaps in the necessarily incomplete contracting between shareholders and management.

VOTING RIGHTS AND THEIR EXERCISE

How many votes a member has (replaceable rule--see section 135) s250E(1) at a meeting of members of a company with a share capital:(a) on a show of hands, each member has 1 vote; and(b) on a poll, each member has 1 vote for each share they hold.(2) Each member of a company that does not have a share capital has 1 vote, both on a show of hands and a poll(3) The chair has a casting vote, and also, if they are a member, any vote they have in their capacity as a member.

How voting is carried out (replaceable rule--see section 135) s250J

(1) Under a replaceable rule, a resolution put to the vote at a general meeting is decided om a show of hands unless a poll is demanded (1A) Before the vote is taken, the chair must inform the meeting whether any proxy have been received and how they are to be cast

Matters on which a poll may be demanded: s 250K

(1) A poll may be demanded on any resolution. (2) If a company has a constitution, the constitution may provide that a poll cannot be demanded on any resolution concerning:(a) the election of the chair of a meeting; or (b) the adjournment of a meeting. (3) A demand for a poll may be withdrawn.

When a poll is effectively demanded: 250L(1) At a meeting of a company's members, a poll may be demanded by: (a) at least 5 members entitled to vote on the resolution; or (b) members with at least 5% of the votes that may be cast on the resolution on a poll; or (c) the chair.Note: A proxy may join in the demand for a poll (see paragraph249Y(1)(c)). (2) If a company has a constitution, the constitution may provide that fewer members or members with a lesser percentage of votes may demand a poll. (3) The poll may be demanded: (a) before a vote is taken; or (b) before the voting results on a show of hands are declared; or (c) immediately after the voting results on a show of hands are declared.

When and how polls must be taken (replaceable rule--see section 135): s 250M Under a replaceable rule, a poll demanded on other matter is taken as and when directed by the chair

Votes need not all be cast in the same way: s 250H On a poll a person voting who is entitled to 2 or more votes: (a) need not cast all their votes; and (b) may cast their votes in different ways

PROXY VOTING Two other ways to vote:1. Directly: where there is an exercise of voting rights as a binding direction to the company2. Through proxy. Absentee voting: Proxy voting allows member to vote without attending the meeting.

Who can appoint a proxy (replaceable rule for proprietary companies and mandatory rule for public companies--see section 135) s 249X(1)(2)) Members of a company may appoint another person or persons as their proxy to vote some or all of their shares at a general meeting; mandatory for public companies but may be displaced by constitutional provision in propriety companies

Rights of proxies: s 249Y(1) A proxy enjoys the same rights as the appointing member to speak, vote and join in the demand for a poll.(2) A companys constitution may provide that a proxy is not entitled to vote on a show of hands and may determine the effect of the members presence at a meeting upon the authority of the proxy (s 249Y(2)(3)).(3) Members right to vote is an instance of their property right, and as such can advance their own personal interest - Peters American Delicacy. Members right to vote is an instance of their property right, and as such can advance their own personal interest - Peters American Delicacy.

Contents of notice of meetings of members: s249L A notice of meeting must contain a statement of the members right to vote by proxy, whether or not the proxy must be a member of the company, and the members rights to split votes between proxies .

Appointing a Proxy: (s250A The document must be signed by the member and contain the members name and address, companys name, proxys name, and the meetings at which the appointment may be used [may be a standing appointment] (s 250A(1)), unless the Constitution provides otherwise (s 250A(2)) Appointment must be received at least 48 hours before the meeting (s 250B(1)), unless the Constitution reduces this period (s 250B(5)). Proxies may be sent by fax or electronically (250B(3)) .Company sending appointment forms or lists of proxies must send to all members: s 249Z Must be sent to all members. An offence based on (1) is an offence of strict liability If the proxy is not the chair, there is no obligation upon the proxy holder to vote upon a poll b