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Rights and remedies
of members
Corporate Law: Law principles and practice
Defining membership
The members of a company include company officers.
These are important insiders who are responsible for
operating the business.
Officers include directors and the company secretary.
Officers owe their duties to the corporate entity.
The corporate entity is run for the benefit of the
shareholders.
Corporate Law: Law principles and practice
Defining membership cont …
Membership or shareholder status gives rise to rights
under statute and at common law.
The Corporations Act 2001 (Cth) defines membership in
s 9 as follows:
•
•
A member of a managed investment scheme is a
person who holds an interest in the scheme.
A member of a company is a person who is defined as
a member under s 231.
Corporate Law: Law principles and practice
Defining membership cont …
Section 231 of the Corporations Act 2001 (Cth) further
defines membership of a company as follows:
A person is a member of a company if they:
(a) are a member of the Company on its registration;
or
(b) agree to become a member of the company after
its registration and their name is entered on the
register of members; or
(c) become a member of the company under s
167(membership arising from conversion of a
company from one limited by guarantee to one
limited by shares).
Corporate Law: Law principles and practice
Defining membership cont …
According to the Corporations Act 2001 (Cth), the members
of a company are:
•
•
the subscribers whose names are the first entered in the
company’s register of members after incorporation,
pursuant to s 231
all others who agree to become members and whose
names are entered on the company’s register of
members, pursuant to s 231.
Corporate Law: Law principles and practice
Others who hold shares
Members who hold shares:
•
•
•
•
•
•
by way of issue and allotment from the company’s
authorised share capital
by transfer—i.e. the transfer of already issued and
allotted shares
by transmission—that is, on the death of a shareholder
vesting by operation of law
to satisfy a qualification test—e.g. a director may be
required to hold a certain number of ‘qualification’
shares
by virtue of some other reason—e.g. by employees of
the company under participation in a share scheme
Corporate Law: Law principles and practice
The statutory contract: s 140
Section 140 of the Corporations Act 2001 (Cth)
(1) A company’s constitution (if any) and any replaceable
rules that apply to the company have effect as a contract:
(a) between the company and each member; and
(b) between the company and each director and
company secretary; and
(c) between a member and each other member;
under which each person agrees to observe and
perform the constitution and rules so far as they apply
to that person.
Corporate Law: Law principles and practice
The statutory contract: s 140 cont …
Unless a member of a company agrees in writing to be bound,
they are not bound by a modification of the constitution made
after the date on which they became a member so far as the
modification:
(a) requires the member to take up additional shares; or
(b) increases the member’s liability to contribute to the
share capital of, or otherwise to pay money to, the
company; or
(c) imposes or increases restrictions on the right to transfer
the shares already held by the member, unless the
modification is made:
(i) in connection with the company’s change from a
public company to a proprietary company under
Part 2B.7; or
(ii) to insert proportional takeover approval provisions
into the company’s constitution.
Corporate Law: Law principles and practice
Members’ rights
Members’ rights are similar to contractual principles.
Shares are units of ownership in a company and are
collectively owned by the shareholders/members.
Shares are an intangible form of property and are
transferred by means of a transfer document (the share
transfer form).
Corporate Law: Law principles and practice
Rights conferred by different types of share
Two most usual types of shares are:
•
•
ordinary shares
preference shares
Shares are distinguished by rights and obligations
attached by:
•
•
the company’s constitution; or
the contract of allotment that specifically describes
the shares and the rights and liabilities attaching.
Corporate Law: Law principles and practice
Rights conferred by different types of share cont …
The main differences between ordinary and preference
shares lie in:
•
•
•
the voting rights (if any) attaching to the shares under
s 253C of the Corporations Act 2001 (Cth)
the right (if any) to dividends under s 254W of the Act
the rights on winding up the company.
Corporate Law: Law principles and practice
Voting rights
Ordinary shares usually have attached the right to one
vote at shareholders’ meetings by a ‘show of hands’ or
one vote for every dollar value they have in the relevant
scheme (Corporations Act 2001 (Cth) s 253C).
Corporate Law: Law principles and practice
The right to be paid dividends
Dividends are payments potentially made out of company
profit to the shareholders according to the number of
shares held.
Corporate Law: Law principles and practice
The assets test to pay profits, s 254T
(1) A company must not pay a dividend unless:
(a) the company’s assets exceed its liabilities
immediately before the dividend is declared and
the excess is sufficient for the payment of the
dividend; and
(b) the payment of the dividend is fair and reasonable
to the company’s shareholders as a whole; and
(c) the payment of the dividend does not materially
prejudice the company’s ability to pay its
creditors.
Corporate Law: Law principles and practice
Entitlements on winding up
Secured creditors rank ahead of unsecured creditors when
distributing funds from a winding up.
Shareholders are the last to be paid.
Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007)
232 ALR 232
Corporate Law: Law principles and practice
Other rights of members
Members have the right to inspect the company books in
certain circumstances.
Shareholders have the right to be advised of changes to
their shares (Corporations Act 2001 (Cth) s 246F).
The company must provide copies of resolutions to the
member upon request (s 246G).
Corporate Law: Law principles and practice
Other rights of members cont …
A member can apply to the court to inspect the company’s
books (Corporations Act 2001 (Cth) s 247A).
A person inspecting the books has a duty of nondisclosure (except to the ASIC or the applicant) (s 247C).
The company or the directors can authorise a member to
inspect the company books (see the replaceable rule, s
135) (s 247D).
Corporate Law: Law principles and practice
Litigation rights and remedies
Under statute, members have the right to:
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correct the share register
examine the company’s books
challenge a change to shares
pursue remedies for winding up, injunction or
damages.
Corporate Law: Law principles and practice
Contractual rights
Members have rights under:
•
•
common law contracts (e.g. employment)
the statutory contract (the Corporations Act 2001 (Cth)
s 140(1))
Common Law Rights
Case law provides rights to various remedies including
declaration and injunction, damages, rescission, and
account of profits.
Corporate Law: Law principles and practice
Actions by members
Class action: in class actions, the member’s claim is one
of several with a similar factual and evidential basis. The
defendant is common to each claim.
Representative action: in a representative action, one
member sues on behalf of other members to enforce the
same action by the company.
Derivative action: under, for example, s 236 of the
Corporations Act 2001 (Cth), a member may mount an
action on behalf of the company where the company is
unwilling to do so.
Corporate Law: Law principles and practice
Advising a shareholder
•
•
•
•
What is the company’s authorised share capital?
What is the company’s issue and allotted share capital
and are the shares fully paid or partly paid?
What voting rights, if any, are attached to the shares?
Do the shares carry a right to receipt of a dividend,
when one is declared?
Corporate Law: Law principles and practice
The different rights that apply in relation to
shareholdings
A person is a member/shareholder of the company at
registration of the company or if named in the register of
members (Corporations Act 2001 (Cth) s 231).
•
•
•
The shareholder can apply to court for a meeting to be
held (s 249G).
The right to vote at shareholders’ meetings is
determined by the company’s constitution.
The company’s constitution and s 252V provide for
the right to appoint a proxy.
Corporate Law: Law principles and practice
Rights cont …
Under s 249D of the Corporations Act 2001 (Cth),
members with 5% of the votes or 100 members can
request that the directors hold a general meeting; under s
249F, such members can arrange (and pay for) a general
meeting.
Under s 249E, members with more than 50% of the votes
can arrange and hold a general meeting if they have made
an earlier request to the directors (under s 249D) and the
directors have failed to do so.
Special resolutions can be passed by shareholders with
75% of the shares (ss 9 and 249L).
Corporate Law: Law principles and practice
The statutory derivative action
Usually only the directors can bring an action on behalf of
the company since they are the appropriate agent of the
company.
A member does not have the right to represent the
company (the proper plaintiff principle); unless
The are granted the right to represent the company in
place of the directors through a statutory (under the
Corporations Act) derivative (being given the right) to
take action (legal action as a representative of the
company).
Corporate Law: Law principles and practice
The statutory derivative action cont …
Who can apply?
A member, former member, officer or former officer can
apply for a statutory derivative action (Corporations Act
2001 (Cth) s 236(1)) to bring proceedings on behalf of the
company, intervene in proceedings or to take any
particular steps regarding proceedings.
Corporate Law: Law principles and practice
The statutory derivative action cont …
The applicant seeks an order under s 237 of the
Corporations Act 2001 (Cth).
A court must grant the application if they are satisfied
that:
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•
•
•
it is probable that the company will not bring the
proceedings
the applicant is acting in good faith
it is in the best interests of the company that the
application be granted
there is a serious question to be tried.
Corporate Law: Law principles and practice
The statutory derivative action cont …
The company can rebut the presumption that a party be
allowed to bring an action if the company has decided not
to bring proceedings, nor to defend them, discontinue,
settle or compromise them, and the directors:
•
•
•
•
have acted in good faith
do not have a material personal interest
have informed themselves of the subject matter in a
reasonable way; and
rationally believe the decision is in the best interests of
the company.
Corporate Law: Law principles and practice
The statutory derivative action cont …
A court may decide that the directors have good reason
not to take the legal action because:
•
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•
there is little chance of success in the action
the person targeted has no means of paying up, even if
the company is successful
they have legal advice against taking action.
Otherwise, the court should allow the action.
Corporate Law: Law principles and practice
Shareholders’ duties
Shareholders are not fiduciaries. They do not have to
disclose any interests or conflicts of interest (unless they
are a director!).
However, if a large shareholder uses their power against
minorities, then such power must be used appropriately
and not oppressively.
Gambotto v WCP Ltd (1995) 13 ACLC 342 (8 March
1995)
A majority cannot change the constitution and
compulsorily acquire the property of a minority member,
unless they can prove this is fair to all members and is in
the interests of the whole company.
Corporate Law: Law principles and practice
Members’ statutory remedies
Section 232 of the Corporations Act 2001 (Cth) allows a
member of a company to apply to the court for an order
under s 233 if the company’s affairs are being conducted:
•
•
contrary to the interests of the members as a whole
oppressive to, unfairly prejudicial to, or unfairly
discriminatory against, a member or members in that
or any other capacity.
Corporate Law: Law principles and practice
Members’ statutory remedies cont …
Under s 233 of the Corporations Act 2001 (Cth) there are
various persons who can seek an action, including
members who have ceased to be a member (e.g. because
their shares have been sold or taken).
Corporate Law: Law principles and practice
The statutory framework for oppressive conduct
The court may make an order under s 233 of the
Corporations Act 2001 (Cth) if:
(a) the conduct of a company’s affairs; or
(b) an actual or proposed act or omission by or on
behalf of a company; or
(c) a resolution or a proposed resolution, of members
or a class of members of a company;
is either;
(d) contrary to the interest of the member as a whole; or
(e) oppressive to, unfairly discriminatory against a
member or members whether in that capacity or in
any other capacity
Corporate Law: Law principles and practice
The statutory framework for oppressive conduct cont …
An action for oppression may be the result of an act or an
omission.
Under s 233 of the Corporations Act 2001 (Cth), orders that a
court can make include:
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•
•
•
•
•
•
•
ordering that the company be wound up
ordering that the company constitution be modified or
repealed
regulating the company’s affairs in the future
ordering that transferred shares by purchased
ordering that the company institute, prosecute, defend or
discontinue proceedings
appointing a receiver or manager over the company
restraining a person from engaging in some conduct
requiring a person to do some act
Corporate Law: Law principles and practice
The statutory framework for oppressive conduct cont …
A action for oppression takes place when a person
believes the company, or its personnel, has done
something unfair, prejudicial or discriminatory.
Wayde v New South Wales Rugby League
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd
Corporate Law: Law principles and practice
The statutory injunction, s 1324
An injunction is one of the interim remedies sought by
ASIC or an affected member if a corporate activity
contravenes the law.
Conduct that can trigger this is:
•
•
•
•
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any contravention of the Corporations Act
aiding and abetting contravention
inducing another to contravene
being involved in a contravention
conspiring with others in a contravention.
Corporate Law: Law principles and practice
Winding up the company, s 461
There are a number of grounds by which a court may order a
winding up. For example:
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•
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The company has resolved by resolution to wind up.
The company does not commence business within one year
of its registration.
The company has no members.
Directors have not acted in the interests of the members as
whole.
The affairs of the company have been conducted
oppressively, through an act or omission.
The company is insolvent and it is in the interests of the
public, members or creditors that it should be wound up.
Macquarie University v Macquarie University
Union Ltd (No 2)