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Law of investment and finance market, try to do option 1 and question 2 only Essay Example

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The doctrine of corporate personality as envisioned in the locus clasicus case of Salmon v A Salmon1 is trite: a company is a juristic person separate from its owners and as such, it has legal rights and obligations including: ability to contract, sue and to be sued as well as having perpetual succession spanning long after the lives of its owners.2

The ownership of a company lies in the possession of shares. A share is defined as a unit of ownership interest in a company.3 It is also defined as a financial interest. Hence, a shareholder is an individual (either natural or corporate) owning a company and just like any other owner, they feel and are entitled to know how their interests are being taken care of. Due to various reasons (among them being they are too many) that may deem the shareholders unable to manage the company, the power of management are transferred to the board of directors who are appointed by the shareholders. The issue of control comes in play as to how far can shareholders control decisions in the firm using their power to vote. So how far is too far when it comes to shareholders’ activism? The Corporations Act 2001 stands as a guide to this power. From the ruling of the case of Australasian Centre for Corporate Responsibility (ACCR) versus Commonwealth Bank of Australia (CBA)4, there are legal lessons to be learnt pertaining to governance and powers of the directors and the shareholders. This paper seeks to highlight the issues as broken down to 4-tier.

  1. What are the powers of the shareholders?

  2. What are the powers of the directors?

  3. To what extent can shareholders can influence the way the management performs its duties?

  4. To what degree does the management have the power to prevent shareholders from passing a resolution that would dictate how the management exercises its powers?

General Meetings

The Act S 250N (2) provides that AGMs be held once per year or 5 months after the end of a given financial year. The purpose of AGMs is mainly for the election of the board of directors and a platform for members to be kept in the loop of the company’s activities in their last financial year and the next one. Appointment of auditors and their remuneration is also among the agendas S 250R (1). However, there are issues that may lead to general meetings being called for before the close of one financial year. The Act S 249C chiefly stipulates that directors are to call for a meeting, moreover, this call may be done within 21 days on the request of members and held 2 months after this as stated in S 249D. Members may request a meeting based on resolutions5 that they what the company to consider and as S 249N stipulates, 100 of the members with the power to vote may give the resolution. The resolutions may be ordinary, that is, require a 50 percent vote and seek to address various issues. Special resolutions seek to have the company’s constitution amended and thus require a vote at least 75 percent.

In ACCR vs. CBA, were the shareholders acting within their jurisdiction by requesting for a general meeting? The ACCR acted in accordance to the Act S 249D. They (the ACCR) presented a resolution as per S 249N that was drafted as an ordinary resolution. The ACCR wanted the CBA to disclose the amount of greenhouse has emitted by projects funded by CBA. The first and second resolutions were presented as ordinary but thee third resolution which was an alternative for the first and second resolution, was drafted as a special resolution. The response of CBA to the first and second resolution was that, the issue was limited to the management of the Bank and the board. However, when the special resolution was presented, the CBA had no choice but to call for an AGM but was clear to cite that this was not in their (CBA) best interest.

Power of the shareholders

The response of CBA to the first and second resolutions raises the question on the powers of the shareholders. Shareholders are entitled to various rights as conferred by the Act. Some of the rights may include the power to vote on major issues such as the appointment of the board of directors. Right to request the directors to call for a general meeting and they can hold the meeting if the directors fail to comply with their request S 249E. Right to ownership of the company that is, shareholders are entitled to receive dividends and in case of winding up of a company, they are entitled to return of capital. They are entitled to transfer ownership and can inspect the company’s books and records. The shareholders can sue the company for any wrong doings. Once the shareholders appoint the directors, the directors carry out the duties of management of the company.

Duties of Directors

The duties of directors can broadly be summed up as duty of care and diligence and fiduciary duties6. As they are appointed by the shareholders, directors are expected to act in the best interest of the shareholders whom they are proxy to. Therefore, directors shouldn’t take up risks or duties that are greater than their experience or their level of skill. They should be committed to the company carry out duties that are intermittent that are required in meetings they (director) attend.

As stated earlier, the directors are required to call for a meeting 21 days from the day the request has been made by majority of the shareholders. However, in Howard Smith Ltd v Ampol Petroleum Ltd7, it was ruled that the directors may choose to act against the wish of the majority shareholders if this was in the best interest of the company and the shareholders couldn’t do anything about it as long as the directors still hold office. This may have led to ACCR drafting a third resolution that was cited as a special resolution. The court ruling however made reference to the New South Wales Supreme Court in National Roads & Motorists’ Association v Parker8, that, the members can’t propose a resolution if that resolution is a subject pertaining to management and the powers are vested on the board of directors.

Therefore, CBA argued that, the resolution presented by ACCR was an infringement to the power vested on the board as in NRMA v Parker. Basically presenting that ACCR was trying to dictate to the board, what projects to finance and how to manage the greenhouse gas risk. However, ACCR argued that the referenced case was wrongfully decided. They cited that in the case of Winthrop Investment Ltd v Winns Ltd9, which sought to have shareholders validate the directors’ decision, showed that the resolutions of the shareholders, that simply stated their non-binding opinion as provided in S 249P did not impinge on the powers of the directors.

  1. It did not exercise the power of the company

  2. It was exercise of a power that was not be stored to the board by the constitution and neither was it meant to impose on the board to act in a certain way

  3. The opinion did not in any way relate to the “company’s business»

Thereby, their resolution was valid and within reasonable concern.


The judge, Justice Davies rejected their (ACCR) argument, declining that the Parker case was wrongfully decided. She ruled that the first and second resolution were an expression of the shareholders opinion and as such, CBA was right to reject them and they (the two resolutions) need not be put on the agenda of the AGM. ACCR submitted S 250R makes provision for statutory reports to be considered at the same time allow members to express their opinion on the same. Justice Davies rejected this argument on the grounds that the section was read in wholeness and that members were only entitled to voice their opinion on an advisory level. The third resolution was placed on the agenda on the grounds of being a special resolution. It is important to point out that, if the company’s constitutions provides that the board has the power to manage all the businesses and any other power that shareholders do not possess, then members have limited power to act outside the power vested on them at the general meetings. The only way the members can only seize the power of the board by amending the constitution that governs the company as in the case of Quin & Axtens Ltd v Salmon10. ACCR presented an argument that the board was acting beyond its power by provision of the explanatory memorandum that they included on the agenda issued to the members as the third resolution. CBA pointed out that it was upon them as directors to advice the members on issues that would not be in the company’s best interest.

Were the director’s in breach of their directors’ duties?

No, they were not.

  1. As stated, by rejecting the first and second resolution, the directors were acting within their power. They didn’t believe that the shareholders’ resolution was in the best interest of the company and as such were at liberty to reject the opinion expressed.

  2. When the special resolution was presented, the directors went out and made the call, and exercised their power of informing the members that this wasn’t in the best interest of the company.

  3. In the common law, the directors owe their members a duty of care and skill. It would be a breach of contact if the directors did not take it upon themselves to point out to the members that the resolution would not be in their best interest. Moreover, by allowing members dictate what the company should finance, losses may be incurred as the members would lack the expertise needed to run the company.

In times when shareholders’ activism is on the rise, it is important that companies clearly stipulate roles and powers of their members in their constitution. This limits the loop holes through which many may seek to advance their interests on the grounds that they are shareholders of the company. Moreover, in case of a dispute presented in the courts of law seeking to overrule the set regulations of the company, presentation of clear facts may help settle the issue within no time. There are venues that will allow members express their opinions and have their grievances addressed in an AGM but from the ruling, it is certain that opinion resolution is not among them.

2Lewis A. Kornhauser and W. Bentley MacLeod (June 2010). «Contracts between Legal Persons National Bureau of Economic Research. Retrieved 7 June 2013


5The act S 249C clause 2b

6The act S 180 & S184

7 (1974)NSWLR 68 at 79)

8 (1986) 6 NSWLR 517.

9 [1975] 2NSWLR 666