Final exam preparation Essay Example

5Members Remedies

Members’ Remedies

The directors of Watermark Specialists Ltd (WSL) may be said to have acted oppressively against the minority shareholders by offering additional shares to the large manufacturers and purchasing a large portion of the company shares.

Section 232 of Corporation Act 2001 (cth) asserts that members have a remedy, if the conduct of the Corporation is “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members”1. Under Part F.1 of the Act any shareholder or class of shareholders who feel they have been oppressed by action taken by the directors or other shareholders may apply for the “oppression remedy”2.

Application

Oppressive conduct is mostly judged against the intended intention of the company at formation3. The original intentions of the shareholders or group of shareholders in forming the company is the most important consideration in deciding whether the directors of a company have acted oppressively. In this case, the original shareholders of WSL intended to form a company to manufacture high quality paper. The court would likely come to the aid of the original shareholders as the directors are seeking to defeat their original purpose of manufacturing high quality paper4. In fact, the directors are seeking to increase the voting powers of large manufacturers so that they can vote through their resolution to change the company’s purpose to manufacture of low quality paper. In addition, the attempt to change the direction of the company attracts section 181 as it is not being done for a proper purpose5. The directors would not be able to justify an improper issue of shares that dilutes the voting rights of the original shareholders.

Conclusion

The issuance of shares to the large manufacturers and the purchase of large share options by directors are oppressive to the minority shareholders and are solely meant to dilute their voting rights.

Did the directors fail to act in good faith and for a proper purpose? The directors gave false reasons for the sale of shares and their purchase of large share options with WSL.

Section 181 of the Corporation Act requires directors to act in Good faith and for a proper purpose6.

Application

The directors of WSL failed to act in Good faith as they failed to state the real purpose of issuing additional shares to large manufacturers and their own purchase of share options. If the directors were acting in good faith, they would have sought the minority shareholders support in changing the direction of the business from the manufacture of high quality paper to mass production of commercial paper. In addition, courts are likely to take a dim view of any transfer or issuance of shares done for the purpose of diluting the voting rights of any group of shareholders7. Although the directors may argue they were acting in the interest of the corporation, the purpose of the issuance of shares is improper.

Conclusion

WSL directors are liable for breaching their duty to act in good faith and exercise their power for a proper purpose. Issuing shares to weaken the voting rights of other shareholder is wrong and is not one of the proper purposes for issuing shares.

Bibliography

  1. Articles/Books/Reports

Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance. Ashgate Publishing, Ltd., 2007.

Latimer, Paul. Australian Business Law 2012 (CCH Australia Limited, 2012).

Tomasic, Roman; Stephen Bottomley, Stephen & Queen, Rob, ‘Corporations Law in Australia’ (Federation Press. 2nd ed, 2002).

  1. Legislation

Corporation Act 2001(cth)

1
Corporation Act 2001 (cth), s. 232

2
Corporation Act 2001 (cth), s. 234

3
Tomasic, Roman; Bottomley, Stephen & Queen, Rob, ‘Corporations Law in Australia’ (Federation Press. 2nd ed, 2002).

4
Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance. Ashgate Publishing, Ltd., 2007.

5
Latimer, Paul. Australian Business Law 2012 (CCH Australia Limited, 2012)

6
Corporation Act 2001 (cth), s. 181

7
See, Tomasic, Bottomley and Queen, above, n 1

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