Chapter 5 – The significance of the regulation of ...satusworldwide.com/backup/5. Chapter 5 (31102014).docx · Web viewdetermining the criteria for a person to be appointed as

Chapter 2 Version controlDate:8-May-23Time: 8:45 PM

[I.] CHAPTER 6 5 – THE SIGNIFICANCE OF THE REGULATION OF CORPORATE

GOVERNANCE AND THE IMPORTANCE OF THE ROLE OF SHAREHOLDERS IN THE

CONTEXT OF RATIFICATION AND AUTHORISATION

Contents of Chapter 6 5 (temporary use only)

ContentsI. Chapter 6 – The significance of the regulation of corporate governance and the importance of the role of shareholders in the context of authorisation...............................1II. Introduction..................................................................................................................2III. Significance of the regulation of corporate governance..........................................2

A. Corporate governance models and the overarching principles of corporate governance.......................................................................................................................2

1 Corporate governance framework.......................................................................7B. How is corporate governance regulated?...............................................................11C. Company constitution as a source of shareholder rights.......................................14D. Separation of powers between the internal corporate organs................................15E. Public companies listed on a securities exchange.................................................19F. Significance of the regulation of corporate governance........................................20

IV. Importance of the role of shareholders in the context of authorisation.................24G. The division of power amongst the internal corporate organs..............................24H. The shareholder’s right to vote..............................................................................25I. The exercise of powers by shareholders in general meeting.................................29J. The shareholder’s role in corporate governance....................................................33K. Should the power of ratification vest exclusively in the shareholders in general meeting?.........................................................................................................................35

2 Principles of authorisation of a breach of fiduciary duties................................353 Purpose of ratification resolution.......................................................................39

L. Are the principles underlying the doctrine of ratification consistent with the principles of good corporate governance?.....................................................................40M. The voting power of shareholders of listed and unlisted public companies......45N. The implications of the rules of a securities exchange..........................................46

V. Conclusion.................................................................................................................47

Page 1 of 46

Satus, 10/14/16,

This chapter was originally Chapter 2


I.[II.] INTRODUCTION

In this Chapter, the regulation of corporate governance in Australia is considered firstly

by considering the different definitions of corporate governance and the different models

of corporate governance which are used in both common law and civil law countries.

This Chapter then considers the significance of the regulation of corporate governance to

shareholders in the context of authorisation. The overarching principles of good

corporate governance and the role of shareholders in corporate governance is discussed.

The preceding discussion is necessary before this Chapter considers whether the

shareholders should have the exclusive power to authorise a breach of fiduciary duty and

whether the principles of good corporate governance are consistent with the principles

underlying authorisation. If the principles of good corporate governance and

authorisation are inconsistent, then this may indicate that there should be law reform to

properly align these principles.

II.[III.] SIGNIFICANCE OF THE REGULATION OF CORPORATE GOVERNANCE

A. Corporate governance models and the overarching principles of corporate governance

There is no universally accepted definition of ‘corporate governance’. In recent times,

there have been attempts to define corporate governance, the most notable of which in

chronological order, are as follows:

(i) the United Kingdom ‘Cadbury Report’ in which it was stated that:

[c]orporate governance is the system by which companies are directed and

controlled. The boards of directors are responsible for the governance of their

companies. The shareholder’s role in governance is to appoint the directors and

the auditors to satisfy themselves that an appropriate governance structure is in

place. The responsibilities of the board include setting the company’s strategic

aims, providing the leadership to put them into effect, supervising the

Page 2 of 46


management of the business and reporting to shareholders on their stewardship.

The board’s actions are subject to laws, regulations and the shareholders in

general meeting.1

(ii) the Australian Report of the Royal Commission into HIH Insurance in which it

was stated that:

[a]t its broadest, the governance of corporate entities comprehends the

framework of rules, relationships, systems and processes within and by which

authority is exercised and controlled in corporations. It includes the practices by

which that exercise and control of authority is in fact effected.2

(iii) the Organisation for Economic Co-operation and Development defined corporate

governance as:

[p]rocedures and processes according to which an organisation is directed and

controlled. The corporate governance structure specifies the distribution of rights

and responsibilities among the different participants in the organisation – such as

the board, managers, shareholders and other stakeholders – and lays down the

rules and procedures for decision-making;3 and

(iv) the Australian Securities Exchange Corporate Governance Council defined

corporate governance as ‘the framework of rules, relationships, systems and

processes within and by which authority is exercised and controlled in

corporations.’4

The above definitions of corporate governance include accountability for conduct by the

directors,5 whether to shareholders alone (the narrow view) or to additional stakeholders

(the broader view).6 It has also been stated that the definitions of corporate governance

rely upon the overarching principles of leadership, effectiveness, ethics, openness,

1 The Committee on the Financial Aspects of Corporate Governance and Gee and Co Ltd, The Report of the Committee on the financial aspects of corporate governance (1992), Paragraph 2.5 (‘Cadbury Report’).2 Commonwealth, Report of the Royal Commission into HIH Insurance (2001), Part 3 Chapter 6.3 Organisation for Economic Co-operation and Development (21 July 2013) OECD StatExtracts <http://stats.oecd.org/glossary/detail.asp?ID=6778>.4 Australian Securities Exchange Corporate Governance Council, ‘Corporate Governance Principles and Recommendations with 2010 Amendments (2nd ed.)’ (2010) Australian Securities Exchange.5 Accountability is defined ‘as the quality or state of being accountable; especially: an obligation or willingness to accept responsibility or to account for one's actions.’ (Merriam Webster, Dictionary (21 July 2013) Merriam Webster <http://www.merriam-webster.com/>.6 Jill Solomon and Aris Solomon, Corporate Governance and Accountability (John Wiley & Sons, Ltd, 2004), 14.

Page 3 of 46


integrity and accountability.7 Internationally, the various definitions of corporate

governance may diverge in their scope and focus because of social, cultural, economic

and political influences in countries which have followed either a common law or civil

law tradition.8 The complexity which gives rise to the different approaches taken to the

regulation of corporate governance may in part be explained by the fact that there are at

least seventeen theories of corporate governance.9

The following are the principles of good corporate governance which have been

recognised by the Organisation for Economic Co-operation and Development10 and the

Australian Securities Exchange Corporate Governance Council:11

(i) The corporate governance framework should promote transparent and efficient

markets, be consistent with the rule of law and clearly articulate the division of

responsibilities among different supervisory, regulatory and enforcement

authorities;

(ii) The corporate governance framework should protect and facilitate the exercise of

shareholders’ rights;

(iii) The corporate governance framework should ensure the equitable treatment of all

shareholders, including minority and foreign shareholders. All shareholders

should have the opportunity to obtain effective redress for violation of their rights;

(iv) The corporate governance framework should recognise the rights of stakeholders

established by law or through mutual agreements and encourage active co-

operation between corporations and stakeholders in creating wealth, jobs, and the

sustainability of financially sound enterprises;

7 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, [4367] (Owen J). See generally Cadbury Report above n; Financial Reporting Council, The UK Corporate Governance Code (2014), < https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf> as at 27 October 2014.8 Jeswald W Salacuse, ‘The Cultural roots of Corporate Governance’ (2004-2005) 7 Studies in International, Financial, Economic and Technology Law 433 (2004-2005).9 Richard Ziolkowski, A re-examination of corporate governance: Concepts, models, theories and future directions (PhD, University of Canberra, 2005) 362.10 Organisation for Economic Co-operation and Development, OECD Principles of Corporate Governance (2004) < http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf>.11 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations with 2010 Amendments, 2nd ed, (27 August 2010).

Page 4 of 46

https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf

https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf


(v) The corporate governance framework should ensure that timely and accurate

disclosure is made on all material matters regarding the corporation, including the

financial situation, performance, ownership, and governance of the company;

(vi) The corporate governance framework should ensure the strategic guidance of the

company, the effective monitoring of management by the board, and the board’s

accountability to the company and the shareholders;

(vii) Companies should establish and disclose the respective roles and responsibilities

of the board of directors and management;

(viii) Companies should have a board of effective composition, size and commitment to

adequately discharge its responsibilities and duties;

(ix) Companies should actively promote ethical and responsible decision-making;

(x) Companies should have a structure to independently verify and safeguard the

integrity of their financial reporting;

(xi) Companies should promote timely and balanced disclosure of all material matters

concerning the company;

(xii) Companies should respect the rights of shareholders and facilitate the effective

exercise of those rights;

(xiii) Companies should establish a sound system of risk oversight, management and

internal control; and

(xiv) Companies should ensure that the level and composition of remuneration is

sufficient and reasonable and that its relationship to performance is clear.

The underlying need for corporate governance arises from the separation of the

ownership of the corporation by the shareholders and the control of the corporation by the

board of directors. The separation of ownership and control is the classic agency

problem which was considered in the seminal paper of Berle and Means published in

1932.12

Whilst there are different approaches taken internationally to the regulation of corporate

governance (ipso facto what is self-regulated by companies), there is no academic

12 Adolf Berle Jr and Gardner Means, The modern corporation and private property (Macmillan, 1932).

Page 5 of 46


agreement about the best model for the regulation of corporate governance.13 There are

two broad models of corporate governance, which may be summarised as follows:

(i) The insider (stakeholder) model. The model arises principally from the existence

of a high concentration of ownership of shares in companies and is prevalent in

Japan, South Korea and in many European countries including Germany. A key

feature of this model is that the ownership and control are predominantly not

separated thus the major shareholders are actively involved in the management

and/or decision-making of the company;14 and

(ii) The outsider (shareholder) model. The model arises principally from the

dispersed ownership of shares by shareholders and is prevalent in the United

Kingdom, United States of America, Canada, Singapore, New Zealand and

Australia.15 A feature of this model is that there is a distinct separation of

ownership and control and the use of either independent boards of directors, or

non-executive directors.

The insider (stakeholder) model is generally speaking a model which operates in civil law

jurisdictions, whereas the outsider (shareholder) model generally operates in common

law jurisdictions. The key features of the two models is summarised below:

Table [xx]. Features of the insider and outsider corporate governance models.16

Feature Insider (stakeholder) model Outsider (shareholder) model

Share ownership Concentrated Dispersed

Shareholder influence on

management

Strong Weak

Cross-shareholdings Significant Negligible

13 See generally Andrei Shleifer and Robert Vishny, ‘A survey of corporate governance’ (1997) Journal of Finance 52(2) 737.14 Mahmoud Ezzamel and Robert Watson ‘Organizational from, ownership structure and corporate performance: A contextual empirical analysis of UK companies’, (1993) 4(3) British Journal of Management 161.15 Yochai Benkler ‘Freedom in the Commons: Towards a Political Economy of Information’ (2003) Duke Law Journal 52(6) 1245.16 See Richard Ziolkowski, A re-examination of corporate governance: Concepts, models, theories and future directions (PhD, University of Canberra, 2005); Kevin Campbell and Magdalena Jerzemowska, ‘Corporate Governance in Developed Economies. Accounting and Audit. Problems of Development’ (1999) University of Latvia 151.

Page 6 of 46

Michael Robson, 10/14/16,


Company’s relationships with

banks

Long-term relationship of

significant nature

Arm’s-length or insignificant

Management Usually two tiered Board of

directors and a supervisory board

One tier, single Board of directors

Minority shareholder protection Negligible Important

Insolvency/bankruptcy law Strong protection of investors Strong protection of investors

Accounting standards17 Lower requirements for reporting

financial information

Higher requirements for reporting

financial information

Transparency Low High

Market control of the company Negligible Active

Managerial incentives Negligible Wide

There have been different approaches to regulation which vary along a continuum

between:

(i) rule-based regulatory models where prescriptive rules are established; and

(ii) principles-based regulatory models which allows companies to comply with the

principles of corporate governance in a flexible way.18

Under either of the two broad models of corporate governance, there remains the possibility that a director may seek authorisation of a breach of fiduciary duties from the shareholders.

1 Corporate governance framework

At least one objective of the regulation of corporate governance is to establish a corporate

governance framework for the internal controls of the company through a prism of the

overarching principles of good corporate governance, those being leadership,

effectiveness, ethics, openness, integrity and accountability.19 In Australia, the regulation

of corporate governance principally through the Corporations Act allows the shareholders

17 The issue of the differences between accounting standards from jurisdiction to jurisdiction will be obviated by the acceptance of International Accounting Stantards Board financial reporting standards (see generally Mehrani, S, Moradi, M and Eskandar, Corporate Governance: Convergence v.s Divergence, British Journal of Economics, Finance and Management Sciences (May 2014 Vol 9(1)).18 See generally Joshua Blackmore, ‘Evaluating New Zealand's evolving corporate governance regulatory regime in a comparative context’ (2006) 12 Canterbury Law Review 34.19 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, [4367] (Owen J); Cadbury Report, above n.

Page 7 of 46


to monitor the performance of the company’s directors and it enables remedial steps to be

taken if the directors breach their fiduciary or statutory duties to the company.

The company’s responsibility for establishing, implementing and maintaining corporate

governance extends to all matters which are regulated by; the Corporations Act, the

listing rules of a securities exchange (if the company is publicly listed) and any licence

held by the company in addition to any matter of self-regulation of corporate governance

which the company determines which are in addition to any statutory obligations. Many

aspects of corporate governance must be established, implemented and maintained by the

board of directors by reason of the mandatory requirements of the Corporations Act. The

shareholders may determine to regulate non-mandatory aspects of corporate governance

either through the company’s constitution by approving a special resolution20 at a general

meeting of shareholders or through an ordinary resolution of the shareholders in general

meeting, provided that the resolution does not effectively control or interfere with the

powers given to the board of directors by the company’s constitution.21 The scope of the

issues related to corporate governance is not restricted to legal matters because of the

management control which the board of directors exercises over the company’s affairs.22

It may be noted that ‘corporate culture’ and ‘corporate social responsibility’ are issues

relevant to corporate governance, albeit not regulated in Australia by the Corporations

Act.

PropositionIt is a proposition advanced by this thesis that the requirement for a 75% majority of shareholders to

establish or amend corporate governance requirements under a company’s constitution establishes a

procedural barrier to protecting the interests and rights of minority shareholders and is therefore contrary to

the maintenance of good corporate governance standards.

20 A special resolution requires at least 75% of shareholders to approve a resolution.21 see, eg, Bamford v Bamford [1970] Ch 212, 220 (Plowman J); National Roads & Motorists’ Association v Parker (1986) 6 NSWLR 517, 521; Howard Smith Ltd v Ampol Ltd [1974] 1 NSWLR 68, 79; Federal Commissioner of Taxation v Commonwealth Aluminium Corporation (1980) 143 CLR 646 at 660-661; John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, 134; Salmon v Quin and Axtens [1909] 1 Ch 311; Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34; Imperial Hydropathetic Hotel Co Blackpool v Hampson (1882) 23 Ch D 1; Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89, 105-106 (Buckley LJ); Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2002] EWHC 2141 (Ch).22 See generally LexisNexis, Ford’s Principles of Corporations Law [6.005].

Page 8 of 46

Robson & Hayes Legal, 01/05/17,


The corollary of the above proposition is that the ability of a minority of shareholders of at least 25% to

prevent the company’s constitution from being amended by the majority of shareholders is contraryf to the

maintenance of good corporate governance.

Corporate governance has continued to become a matter of greater significance to

shareholders since the release of the Cadbury Report in the United Kingdom in 1992,

however the statutory requirements for a special resolution have remained static. The

constitution establishes all of the shareholders’ rights and obligations, not merely the

substantive and procedural rules which concern corporate governance. It is impractical,

in light of the difficultly of defining corporate governance, to allow shareholders to

establish or amend a constitutional clause which relates to corporate governance, or to

establish a separate procedure by which a smaller majority than 75% could establish or

amend a clause in the constitution relating to corporate governance.

PropositionIt is a proposition advanced by this thesis that the increasing significance of corporate governance to

shareholders indicates that there should be law reform to the Corporations Act to implement mechanisms

by which good corporate governance can be maintained by all companies.

The primary responsibility for corporate governance lies with the board of directors.23

This arises from the broad power granted to the board of directors to manage the business

of the company.24 As Middleton J stated in Australian Securities and Investments

Commission v Healey:25

A director is an essential component of corporate governance. Each director is placed at

the apex of the structure of direction and management of a company. The higher the office

that is held by a person, the greater the responsibility that falls upon him or her. The role

of a director is significant as their actions may have a profound effect on the community,

and not just shareholders, employees and creditors.26

23 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, [4365] (Owen J).24 Corporations Act 2001 (Cth) s 198A(1).25 (2011) 196 FCR 291.26 Australian Securities and Investments Commission v Healey (2011) 196 FCR 291, [14] (Middleton J).

Page 9 of 46



In the context of the objective27 reasonable standard of care, it may be noted from the

above statement, the law draws no relevant distinction between an executive and non-

executive director.28 Consequently, all directors are expected to meet minimum standards

of conduct in the performance of their duties.

In Australian Securities and Investments Commission v Rich29 and Australian Securities

and Investments Commission v Healey,30 the Australian Securities and Investments

Commission tendered evidence of the ‘usual practices’ of directors of publicly listed

companies. This evidence was accepted in both cases as being relevant to determining

the obligations upon directors. In this context, without specific legislation, corporate

governance standards could be set at a relatively low level because the usual practices

may not objectively be good practices. Thus what may be considered to be ‘good’

corporate governance may in fact at the relevant time be a usual practice which is

objectively ‘average’, ‘sub-optimal’ or indeed ‘poor’ corporate governance.

PropositionIt is a proposition advanced by this thesis that a reference point of the usual practices of directors may be an

inadequate mechanism to determining good corporate governance practices.

B. How is corporate governance regulated?

It is useful at this point to highlight that the aim of legislation regulating corporations is

to create a self-governing system with a minimal role of the courts.31 Thus it is necessary

for the Commonwealth parliament to give consideration to the principles underlying the

division of powers between the two internal ‘corporate organs’ (the board of directors

and the shareholders32 in general meeting) so as to ensure as far as possible that 27 See, eg, Gamble v Hoffman (1997) 24 ACSR 369 where the court refused to subjectify the standard of care to the standard of a person who “left school at the age of 14 years, has no tertiary qualifications and has spent his life…essentially as a fruit and vegetable market gardener”.28 Australian Securities and Investments Commission v Healey [2011] FCA 717, [172] (Middleton J).29 (2003) 44 ACSR 341.30 [2011] FCA 717.31 Michael Whincop, ‘The role of the shareholder in corporate governance: A theoretical approach’ (2001) Melbourne University Law Review 25 418, 419.32 Pursuant to section 231(b) of the Corporations Act 2001, a person is a member of a company if they agree to become a member of the company after its registration and their name is entered on the register of

Page 10 of 46


shareholders’ rights are protected.33 In practice, a balance must however be reached

because if shareholders are granted too many rights, the additional costs of compliance to

companies may outweigh the benefits of the shareholders having those rights.

The statutory scheme reflects the shareholder primacy theory, however in this Chapter it

is argued that a pluralist approach should be taken in relation to the doctrine of

ratification to eliminate or reduce the prejudice to all stakeholders.

Corporate governance is principally regulated by the Corporations Act through the

regulation of:

(i) director’s and other officer’s duties;34

(ii) disclosure of director’s conflicts of interest;35

(iii) members’ remedies;36

(iv) the integrity of financial information;37

(v) a member’s right to inspect the company’s books;38 and

(vi) through the separation of powers between the internal corporate organs.39

Separate to the regulation of corporate governance by the Corporations Act, the

constitution is determinative of rights between shareholders inter se and only a majority

members. A company must set up and maintain a register of members pursuant to section 168 of the Corporations Act 2001 in the form prescribed by section 169 of the Corporations Act 2001. A person is not a member until their name is entered on the register of members (Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104).33 In the 19th century, the shareholders in general meeting were regarded as the supreme corporate organ (see, eg, Conservators of the River Tone v Ash (1829) 10 B&C 349). See generally Michael Whincop, ‘The role of the shareholder in corporate governance: A theoretical approach’ (2001) Melbourne University Law Review 25 418, 442.34 At least in part, section 107 of the Companies Act 1958 (Vic) (now sections 182 to 184 of the Corporations Act 2001) was designed to encourage good corporate governance (see Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23, [62] (Gummow and Hayne JJ). Section 183 (use of information) and section 184(3) (criminal offence for the use of information) of the Corporations Act 2001 supplement the fiduciary duties upon directors.35 Corporations Act 2001 (Cth) s 191(1).36 Ibid Chapter 2F.37 Ibid Chapter 2M. The history of the requirements of providing financial information in relation to Australian companies can be traced back to section 23 of the Companies Act 1896 (Vic) which required that a company produce an audited financial statement.38 Ibid s 247A.39 Ibid s 198A(2). The current regulation of corporate governance has been considered to be a response to ‘demonstrated abuses and errors in the management of Australian corporations in the 1980s’ (see Rich v Australian Securities and Investments Commission [2004] HCA 42, [117] (Kirby J)).

Page 11 of 46


In Ch 4, reference is made as at 14/10/16 to a pluralist approach being taken. Argument to be set out in this chapter.


of 75% of shareholders may amend the constitution. It follows that a minority of more

than 25% can constrain the actions of a majority of shareholders by preventing any

amendment to the constitution and insisting up procedural and substantive compliance

with the requirements of the constitution.

Companies, which are not otherwise regulated by conditions imposed upon a licence or

the listing rules of a securities exchange, may self-regulate corporate governance in the

following key ways:

(i) determining the criteria for a person to be appointed as a director who is over

18 and not otherwise prohibited from acting as a director;

(ii) whether there should be standing sub-committees of the board of directors

(eg. audit, risk and remuneration committees);

(iii) establishing training standards for directors;

(iv) determining the employment and conditions of key managers including all

employment benefits;

(v) determining the procedural and substantive requirements for corporate

governance in the constitution;

(vi) determining the rights of shareholders inter se in the constitution;

(vii) complaint handling procedures;40

(viii) policies and procedures which relate to risk management;41

(ix) the extent to which corporate social responsibility is implemented into the

company’s business model and operations;42 and

(x) establishing and maintaining an appropriate corporate culture.43

40 See generally SAI Global, ‘Customer satisfaction – guidelines for complaints handling in organizations’ (AS/ISO 10002:2006), SAI Gobal, 2006.41 See generally International Standards Organisation, ‘Risk management – Principles and guidelines’ (ISO 31000:2009), International Standards Organisation, 2009.42 See generally International Standards Organisation ‘Social Responsibility’ (ISO 26000:2010), International Standards Organisation, 2010 which provides guidance to companies on how they can operate in a socially responsible way. One such issue is the extent to which a company voluntarily offsets its carbon emissions.43 Pursuant to section 12.3(6) of the Criminal Code 1995 (Cth), ‘corporate culture’ means an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities takes place. The Inquiry into certain Australian companies in relation to the UN Oil-for-Food Programme concluded that AWB Ltd ‘s conduct was ‘indicative of a closed corporate culture...such an approach did not constitute a breach of any Commonwealth, State or Territory Law.’ (see Commonwealth, Report of the Inquiry into certain Australian companies in relation to

Page 12 of 46


Subject to the constitution of the company, the content and scope of the self-regulation of

corporate governance may be determined by the board of directors, or the shareholders in

general meeting.

It should not be assumed that self-regulation of the above aspects of corporate

governance demonstrates a lack of response by the Commonwealth parliament to

determining how corporate governance should be regulated or that self-regulation is not

the preferred mechanism. Self-regulation of corporate governance is adaptable, flexible

and can be implemented far quicker than any law can be implemented. Further, the

insolvency of a corporation of itself may not result from poor standards of corporate

governance. Rather, economic factors and/or legislative change may be the sole reasons

for a particular business model to cause a company to become insolvent.

PropositionIt is a proposition advanced by this thesis that:

(i) self-regulation of corporate governance is an effective mechanism for

shareholders, however, a majority of shareholders may be unable to amend the

company’s constitution to insist on procedural and substantive compliance with

good corporate governance standards; and

(ii) reliance upon an ordinary resolution passed by a majority of shareholders in

general meeting for the purpose of strengthening corporate governance is likely to

be ineffective as at any time a majority of shareholders can pass a new resolution,

eroding the benefits of any good corporate governance policies and practices

which were implemented.

C. Company constitution as a source of shareholder rights

The constitution of a company is the principle source of shareholders’ rights through

which the shareholders may establish a corporate governance framework in addition to

the UN Oil-for-Food Programme (2006), paragraph 8.135).

Page 13 of 46


the requirements of the Corporations Act. The constitution may establish both

substantive and procedural corporate governance requirements which may self-regulate

such matters from the engagement of key personnel to significant acquisitions or

disposals of business assets.

For all companies registered after 1 July 1998, the replaceable rules operate.44 The

shareholders of an unlisted public company may elect to put in place a written

constitution which displaces or modifies any or all of the replaceable rules.45 The

company’s constitution, whether it modifies or replaces any replaceable rules, has effect

as a contract between the company and each member, the company and each director and

company secretary and between a member and each other member.46 A breach of any

provision of the company’s constitution is thus a breach of contract for which a remedy

may be sought by a shareholder47 from the Federal Court of Australia or a State or

Territory Supreme Court.48

Companies may elect to regulate corporate governance through the use of; a

shareholders’ agreement, written corporate governance policies and procedures49

compliance and risk management systems and due diligence procedures. Companies may

also create sub-committees of the board of directors for the purpose of the

implementation of a company’s corporate governance practices such as audit, risk and

remuneration committees.50

PropositionIt is a proposition advanced by this thesis that the ability of a majority of 75% of shareholders to elect to

displace the non-mandatory replaceable rules in the company’s constitution means that there is no uniform

44 Corporations Act 2001 (Cth) s 135(1)(a)(i).45 Ibid s 135(2).46 Ibid s 140(1).47 Former section 180 was held in Jones v Money Mining NL (1995) 17 ACSR 531 to give an officer standing to obtain a declaration (see R P Austin, I M Ramsay, Ford’s principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007), [6.030]).48 Section 233 and Part 9.5 of the Corporations Act 2001 grants broad powers to the Court to grant relief.49 See, eg, Belgiorno-Zegna v Exben Pty Ltd [2000] NSWSC 884; Porter v GIO Australia Ltd [2003] NSWSC 668; Australian Securities and Investments Commission, in the matter of Chemeq Limited (ACN 009 135 264) v Chemeq Limited (ACN 009 135 264) [2006] FCA 936.50 See generally Australian Securities and Investments Commission v Healey [2011] FCA 717, [302] (Middleton J).

Page 14 of 46


mechanism by which good corporate governance standards may be imposed upon all companies

incorporated under the Corporations Act.

D. Separation of powers between the internal corporate organs

A company incorporated under the Corporations Act has the legal capacity and all the

powers of an individual,51 however, as a creature of statute, the company must act

through its human actors52 in accordance with the division of powers in the constitution.

The two internal corporate organs of a company have original authority to bind the

company or delegate to others, make decisions and act as the company within those areas

allocated to it by law or the company’s constitution.53,54 There is a clear division of

powers between the shareholders in general meeting and the board of directors.55 Unless

there is something specific in the company’s constitution, or the constitution is amended,

the directors cannot usurp the powers which by the constitution are vested in the

shareholders in general meeting.56

The business of a company is managed by or under the direction of the board of

directors57 and the directors may exercise all the powers of the company except any

powers that the Corporations Act or the company's constitution requires the company to

exercise in general meeting.58 A power vested by the constitution of a company

exclusively in the directors cannot be effectively exercised, nor can its exercise by the

directors be effectively controlled or interfered with, by a resolution of shareholders in 51 Corporations Act 2001 (Cth) s 124(1). A consequence of these rights means that a company can grant a power of attorney to an individual whi can then act on behalf of the company (as distinct from acting as a managing director of a company).52 Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, 713 (Viscount Holden).53 Federal Commissioner of Taxation v Lutovi Investments Pty Ltd (1978) 20 ALR 157, 176 (Deane J). See also LexisNexis, Australian Encyclopedia of Forms & Precedents (at 15 September 2013) ‘Importance of meetings and respective roles of members and directors’ [175.A[1]].54 In the 18th and early 19th century, it was common to include a clause in the deed of settlement of the unincorporated joint stock company conferring managerial power on a board of directors or analogous body (see H Ford, R Austin and I Ramsay, Ford’s Principles of Corporations Law (LexisNexis, 10th ed, 2001) 216-218). See generally Michael Whincop, ‘The role of the shareholder in corporate governance: A theoretical approach’ (2001) Melbourne University Law Review 25 418, 442.55 Duke Group Ltd (in liq) v Pilmer [1998] SASC 6529 citing with approval John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, 134 (Greer LJ).56 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, 134 (Greer LJ).57 Corporations Act 2001 (Cth) s 198A(1).58 Ibid s 198A(2).

Page 15 of 46


general meeting.59 The only way in which the shareholders can control the exercise of

the powers vested by the constitution in the directors is by (i) altering the constitution or

(ii) if the power exists under the constitution, by refusing to re-elect the directors of

whose actions they disapprove.60 These issues highlight the nature of the problem created

by the division between the separation of ownership and control of a company.

The powers of the company are subject to the company’s constitution.61 If the company’s

constitution merely empowers the directors to perform an action, it may be construed that

the concurrent power of shareholders remains to perform the same action.62 Thus, some

powers may be shared between the board of directors and the shareholders in general

meeting. It will therefore be a question of the proper construction of a constitutional

clause as to whether the grant of power is exclusive to any one of the internal corporate

organs.63

Pursuant to the Corporations Act, the following matters are required to be decided by the

shareholders in general meeting:

(i) change of name to the company;64

(ii) an amendment to the constitution;65

(iii) consolidating or subdividing the company’s shares;66

(iv) reducing the company’s issued share capital;67

(v) altering the company’s status;68

59 see, eg, Bamford v Bamford [1970] Ch 212, 220 (Plowman J); National Roads & Motorists’ Association v Parker (1986) 6 NSWLR 517, 521; Howard Smith Ltd v Ampol Ltd [1974] 1 NSWLR 68, 79; Federal Commissioner of Taxation v Commonwealth Aluminium Corporation (1980) 143 CLR 646 at 660-661; John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, 134; Salmon v Quin and Axtens [1909] 1 Ch 311; Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34; Imperial Hydropathetic Hotel Co Blackpool v Hampson (1882) 23 Ch D 1; Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89, 105-106 (Buckley LJ); Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2002] EWHC 2141 (Ch).60 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, 134 (Greer LJ).61 The doctrine of ultra vires was abolished in Australia for companies incorporated under the Corporations Law following the enactment of the Company Law Review Act 1998 (Cth).62 See, eg, Doncon v Doncon (1990) 2 ACSR 385 where the directors were empowered to issue shares.63 See, eg, John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113.64 Corporations Act 2001 (Cth) s 157.65 Ibid s 136.66 Ibid s 254H.67 Ibid ss 256B; 256C.68 Ibid Part 2B.7.

Page 16 of 46


(vi) a selective buy-back;69

(vii) the giving of financial assistance by a company for the acquisition of its

shares;70

(viii) voluntary winding up of the company;71 and

(ix) giving retirement benefits.72

It is notable that for proprietary companies, the removal and appointment of directors

pursuant to section 203C of the Corporations Act is a replaceable rule which is subject to

modification or replacement in the company’s constitution. Accordingly, the

shareholders of a proprietary company may not have the right to appoint or remove a

director if section 203C of the Corporations Act is displaced or modified by the

company’s constitution. In the context of the role which the board of director’s plays in

corporate governance, given the significance of a shareholder’s right to remove or

appoint the directors, it is questionable whether all proprietary companies should be

permitted to modify or exclude from the constitution the right of shareholders to appoint

or remove a director. The Corporations Act however requires that directors of public

companies may be removed from office by the shareholders.73

PropositionIt is a proposition advanced by this thesis that section 203C of the Corporations Act should not be a

replaceable rule which may be displaced or modified by a company’s constitution so as to strengthen

shareholders’ rights for the removal and appointment of directors.

In extraordinary circumstances, the shareholders in general meeting may exercise the

reserve powers. Those circumstances have been determined to include; when the board is

69 Ibid ss 257C; 257D.70 Ibid s 260B.71 Ibid s 491.72 Ibid s 200B.73 Ibid s 203D.

Page 17 of 46


unable to act due to a deadlock,74 or there are insufficient directors to form a quorum at a

board meeting.75

Where shareholders are granted the power to bind the company, the Commonwealth

parliament has adopted the general rule that a simple majority (50% plus 1) of

shareholders permitted to vote is required to pass a resolution unless it is considered

necessary to require a ‘special majority’ of 75% of shareholders.

In Australia, an important aspect of the shareholders acting in general meeting is that the

shareholders do not owe fiduciary duties inter se or to the company.76 Thus a shareholder

which has an interest in relation to a resolution is not prohibited from voting on the

resolution by reason of a legally recognised conflict of interest. The majority of

shareholders however are restricted in two main ways:

(i) a majority may only modify the company’s constitution in good faith for the

benefit of the company;77 and

(ii) a majority may not pass a resolution which is a fraud on the minority78 or is

contrary to the interests of the members as a whole or is oppressive to, unfairly

prejudicial, or unfairly discriminatory against, a member or members whether in

that capacity or in any other capacity.79

E. Public companies listed on a securities exchange

74 Barron v Potter [1914] 1 Ch 895. It may be inappropriate for a board of directors to be considered to be deadlocked if the shareholders have the power to appoint or remove a director (see Massey v Wales; Massey v Cooney (2003) 47 ACSR 1).75 See, eg, Isle of Wight Railway Co v Tahourdin (1883) 25 Ch D 320; Barron v Potter [1914] 1 Ch 895. It may be noted that generally under a company’s constitution the directors have the power to appoint additional directors even in circumstances where there are insufficient directors to form a quorum pursuant to section 201H of the Corporations Act 2001.76 Pender v Lushington (1877) 6 Ch D 70; Northern Counties Sec. Ltd v Jackson & Steeple Ltd [1974] 1 WLR 1133.77 Allen v Gold Reefs of W Africa Ltd [1900] 1 Ch 656; Rights & Issues Inv. Ltd v Stylo Shoes Ltd [1965] Ch 250.78 Cooks v Deeks [1916] 1 AC 554; Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290.79 Corporations Act 2001 (Cth) ss 232(d)-(e). See especially HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228.

Page 18 of 46


If a company is listed on the Australian Securities Exchange, there are the additional

requirements of the Corporations Act and the ASX Listing Rules which relate to

corporate governance. The key additional requirements are that:

(i) the Corporations Act80 requires that the listed company ensure the continuous81

disclosure of information which is not generally available82 and is information

which a reasonable person would expect to have a material effect on the price or

value83 of the company’s securities. The law seeks to reduce as far as possible the

ability of a person with ‘inside information’84 the opportunity to use the

information by purchasing or disposing of shares before the information is made

publicly available;85

(ii) the company must have in place a written constitution;86 and

(iii) annual reports are required to outline the entity's compliance with ASX operating

rules, including corporate governance requirements.87

Compliance with ASX Listing Rules is a requirement under the contract the entity enters

into with ASX on being admitted to the official list of companies. Further, the ASX

Listing Rules are enforceable against listed entities and their associates under the

Corporations Act.88

F. Significance of the regulation of corporate governance

80 Corporations Act 2001 (Cth) s 674.81 For companies listed on the Australian Securities Exchange, ASX Listing Rule 3.1 requires that the listed entity must immediately tell ASX that information. The Australian Securities Exchange consider that the word ‘immediately’ means ‘promptly and without delay’, not ‘instantaneously’ (see Australian Securities Exchange, ASX Listing Rules Guidance Note 8 (21 July 2013) Australian Securities Exchange <http://www.asxgroup.com.au/media/PDFs/gn08_continuous_disclosure.pdf>.82 Corporations Act 2001 (Cth) s 676.83 Ibid s 677.84 Ibid s 1043A.85 A person involved in a contravention of 674(2) of the Corporations Act 2001 also contravenes the section. The term ‘involved’ is defined by section 79 of the Corporations Act 2001.86 See, eg, Australian Securities Exchange, Listing Rules (at 29 October 2014) r 15.11.87 Australian Securities Exchange, Listing Rules (at 29 October 2014) r 4.10.88 Corporations Act 2001 (Cth) ss 793C; 1101B.

Page 19 of 46


In this part of the Chapter, it is necessary at this point to reflect on the significance of the

regulation of corporate governance before embarking upon a consideration of the

importance of the role of shareholders in the context of authorisation.

It is important to note from the preceding discussion that the current rule-based model of

corporate governance regulation established by the Corporations Act requires companies

to implement a minimum standard of corporate governance which is considered by the

Commonwealth parliament to be an appropriate standard of corporate governance. A

company can therefore comply with the minimum standards of corporate governance by

meeting the technical threshold for compliance with the statutory requirements,

irrespective of the size, scale and complexity of the business which the company

operates. The rule-based (threshold) approach to regulation has been criticised by reason

that rules are just a ‘best guess’ as to the future, rules are never perfectly congruent with

their purpose, whether a rule is clear or certain depends on shared understandings and

how a rule affects behaviour does not depend solely on the rule.89 This approach to

regulation is to be contrasted with statutory requirements which adopt a principles-based

or risk-based approach.

A principles-based regulatory model establishes a broad and operative principle. The

advantages of adopting this model of regulation include; the principles are easy to

understand, the avoidance of ‘bright-line’ tests, the avoidance of loopholes and the

flexibility with which the principles can be complied with by companies.90 The major

criticism of this model of regulation is the uncertainty which it can introduce into the

operation of a law and consequently, too much power is given to the executive and to the

courts in applying the legislation.91

89 Black, J, Principles Based Regulation: Risks, Challenges and Opportunities (2007) London School of Economics and Political Science, 8.90 See generally Sauder School of Business, Broshko, E. B, Li, K, Corporate Governance Requirements in Canada and the United States: A Legal and Emirical Comparison of the Principles-based and Rules-based Approaches (2006), < http://finance.sauder.ubc.ca/~kaili/BroshkoLi.pdf>91 See generally Office of Parliamentary Counsel, Lovric, D, Principles-based drafting: experiences from tax drafting (30 October 2014) < http://www.opc.gov.au/calc/docs/Loophole_papers/Lovric_Dec2010.pdf>

Page 20 of 46


A risk-based regulatory model requires the directors to consider the risks which the

company faces in the context of the size, scale and complexity of the business operated

by the company.92 An example of a risk-based regulatory approach is the capital

adequacy requirement for all banks, building societies and credit unions.93 Very few

companies in Australia are required to comply with capital adequacy requirements and/or

the Australian Standard for Risk Management94 which mandates that companies identify,

monitor and put in place measures to control risks faced by the company.95 This model of

regulation has not been adopted on a broad scale unlike the rule-based and principles-

based regulatory models.

There is unlikely to be a direct and immediate financial benefit to a company which

implements a standard of corporate governance which is higher than the minimum

statutory standard. This arises because generally the risk of failure of a company from

any single event is very unlikely because such events are rare. A company may however

be frequently exposed to the risks of a failure arising from a single event making the

company more likely to fail in the future. By way of example, the insolvency of Lehman

Brothers Holdings, Inc in September 2008 arose from the rapid decline in value of

mortgage-backed securities which it underwrote which in total were circa US$85

billion.96 Clearly, the higher the frequency of exposure to such events, the more likely a

company would be to implement policies, procedures, methods and systems to minimise

the chance of a single event causing the failure of the company.

Given that there is unlikely to be a short-term financial benefit from complying

voluntarily with higher standards of corporate governance, a majority of shareholders of a

92 See generally Andenas, M, Chiu, I, The Foundations and future of Financial Regulation: Governance for responsibility (Routledge, 2014), 381-382.93 See Australian Prudential Regulatory Authority, APS 110 Capital Adequacy (19 August 2013) Australian Prudential Regulatory Authority <http://www.apra.gov.au/adi/PrudentialFramework/Documents/Basel-III-Prudential-Standard-APS-110-%28January-2013%29.pdf>.94 International Standards Organisation, ‘Risk management – Principles and guidelines’ (ISO 31000:2009), International Standards Organisation, 2009.95 Companies which are required to comply with the Australian Standard on Risk Management include; companies regulated by the Australian Prudential Regulation Authority (such as financial institutions) and Australian Financial Services Licensees including stockbrokers, financial planners and accountants.96 See generally Epiq Systems, Lehman Brothers Holding, Inc (26 October 2014) Epiq Systems debtorMatrix < http://dm.epiq11.com/LBH/Project>.

Page 21 of 46


company would likely consider that the additional compliance costs are a misallocation

of resources and thus not directed to maximising the profitability of the company. It is

important to recognise that any additional corporate governance regulation will tend to

increase the costs of compliance of a company and therefore there is logically a limit to

regulation beyond which the average company’s costs of complying with the corporate

governance regulation would outweigh the benefits to shareholders and to other

stakeholders.

PropositionIt is a proposition advanced by this thesis that a strictly rule-based approach to regulation is inconsistent

with good corporate governance because all companies are permitted to legally comply with the minimum

statutory requirements for corporate governance, irrespective of the size, scale and complexity of the

company’s affairs.

The regulation of corporate governance is in part designed to be beneficial to

shareholders and separately to stakeholders including employees and creditors of a

company. In summary, the significance of corporate governance regulation to

shareholders is to:

(i) encourage diligence by the directors in carrying out their fiduciary and statutory

duties;

(ii) discourage unethical or unlawful behaviour by directors;

(iii) require companies to implement internal controls;

(iv) require the disclosure by directors and other officers of conflicts of interest;

(v) establish standards for the reporting of financial performance by a company;

(vi) require disclosure of financial information for the benefit of shareholders making

informed decisions;

(vii) permit shareholders to inspect the company’s books in specified circumstances;

(viii) protect shareholders’ equity;

(ix) permit shareholders to enforce legal rights arising from the regulation of corporate

governance; and

(x) permit the Australian Securities & Investments Commission to commence action

against directors and other officers who breach their statutory duties.

Page 22 of 46


The above points arise directly from the regulation of corporate governance by the

Corporations Act. It has been the progressive implementation of new corporate

governance regulation which has resulted in the above suite of benefits to shareholders.

In particular, from 13 March 2000 members’ remedies were reformed by the Corporate

Law Economic Reform Program Act 1999 (Cth) which enacted a new statutory derivative

action97 to overcome the shortcomings of the common law rule in Foss v Harbottle.98

The regulation of corporate governance is also significant generally because:

(i) at least in part it protects the interests of stakeholders such as employees and

creditors because there is less likely to be a failure of the company resulting from

inadequate corporate governance;

(ii) it promotes investor confidence in capital markets; and

(iii) it is relevant to the extent to which foreign capital investment is attracted to

Australia.

Whilst the regulation of corporate governance is beneficial to shareholders, it is not a

panacea for preventing corporate governance failures. In Peoples Department Stores Inc.

v Wise,99 the Supreme Court of Canada opined that ‘the establishment of good corporate

governance rules should be a shield that protects directors from allegations that they

have breached their duty of care.’100 The corporate collapses in Australia and

internationally which have highlighted problems with the regulation of corporate

governance or the failure of corporate governance include; Long Term Capital

Management, WorldCom, Lehman Brothers, Enron Corp, AIG, Bear Stearns, Parmalat,

HIH Insurance, One-Tel, Firepower International and Australian Wheat Board.

The understanding of the significance of the regulation of corporate governance as it

relates to shareholders is fundamental to the analysis of whether the underlying principles

of corporate governance are consistent with the principles of authorisation. Before 97 Corporations Act 2001 (Cth) s 236.98 [1843] EngR 478.99 [2004] 3 SCR 461.100 [2004] 3 SCR 461, 491 (the Court).

Page 23 of 46


attempting to consider any such analysis, the next part of this Chapter considers the

importance of the role of shareholders in the context of authorisation.

III.[IV.] IMPORTANCE OF THE ROLE OF SHAREHOLDERS IN THE CONTEXT OF

AUTHORISATION

In this part of the Chapter, the role of shareholders in corporate governance is examined

and an analysis undertaken of whether the shareholders’ power of authorisation is

consistent with the principles of corporate governance considered earlier in this Chapter.

G. The division of power amongst the internal corporate organs

The decisions of the board of directors ultimately determines how funds and other assets

owned or controlled by the company will be employed leaving the shareholders (as

owners of the company) to determine other matters outside of the exclusive powers of the

board of directors.101 A company’s constitution may however vary the powers which are

exclusive to the directors and the shareholders.102

Powers which are exclusively for the exercise of shareholders in general meeting

relevantly include:

(i) the alteration of the constitution of the company;103

(ii) altering rights attaching to shares;104 and

(iii) the authorisation of a prospective breach105 or ratification of a past breach of a

director’s fiduciary or statutory duties.106

101 The powers given to the equivalent of the board of directors of a body corporate incorporated under an Act may be different to the powers given to the board of directors of a company incorporated under the Corporations Act 2001. A determination of the powers which are specific to the board of directors may only be determined by considering the specific legislative scheme pursuant to which the body corporate was incorporated.102 See R P Austin, I M Ramsay, Ford’s principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007), [7.070]. Further, special rules relate to the powers of a director who is a sole director and sole shareholder (see section 198E of the Corporations Act 2001 (Cth)).103 Corporations Act 2001 (Cth) s 136.104 Ibid Part 2F.2.105 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.106 Bamford v Bamford [1970] Ch 212; Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23.

Page 24 of 46


The Corporations Act does not mandate that the shareholders in general meeting have a

right to remove a director from office, other than for public companies.107 It is commonly

the case however for proprietary companies that the removal of directors is regulated by

the company’s constitution (including a constitution which adopts the replaceable rules)

and/or a shareholders’ agreement.

H. The shareholder’s right to vote

In Angas Law Services Pty Ltd (In liquidation) v Carabelas,108 the High Court followed

the English decision of Bamford v Bamford109 which concluded that shareholders are

entitled to ratify or excuse directors’ breaches of fiduciary duty by ordinary resolution. It

is important therefore to consider the extent to which a shareholder may be excluded

from voting on a proposed resolution for the ratification or authorisation of a breach of

fiduciary or statutory duties.

Subject to the rights established by a company’s constitution, the company may issue a

class of shares which exclude the right to vote. Accordingly, there may shareholders who

have all of the rights attaching to their shares (such as the right to receive a dividend), but

not the right to vote at a general meeting of the shareholders. In such circumstances, the

shareholders entitled to vote on a resolution at a general meeting is a subset of all of the

company’s shareholders.

PropositionIt is a proposition advanced by this thesis that the ability of a company to issue classes of shares which do

not include a right to vote is inconsistent with the general right of a shareholder to vote on any matters

which concern amendments to the company’s constitution and are therefore inconsistent with good

corporate governance and the protection of minority shareholders’ rights and interests.

107 Corporations Act 2001 (Cth) s 203D.108 [2005] HCA 23.109 [1970] Ch 212, 227 (Plowman J).

Page 25 of 46


In respect of the rights attaching to ordinary110 fully paid shares as set out in the

company’s constitution,111 subject to any restrictions attaching to those shares,112 or a

restriction113 on the exercise of a shareholder’s right to vote on certain matters,114 upon the

share register of a company showing that a person holds shares the shareholder may:

(i) exercise the right to vote;115 or

(ii) appoint116 a proxy117 or attorney to exercise the right to vote118 either for a specific

meeting or on a continuing basis.119

The replaceable rules120 also provide that a challenge to a right to vote at a meeting of

shareholders may only be made at the meeting and must be determined by the chair and

any decision of the chair is final.121 The determination of the chair is however subject to

curial review since relevantly, the question of the validity of a shareholder’s vote is a

question of law.122 The case law indicates that save for an error of law in a chair

disallowing a vote,123 it is not possible to impugn a resolution after a meeting in the 110 It should be noted however that a company may be authorised to issue shares in one or more classes which specifically exclude the right to vote.111 Section 250E of the Corporations Act 2001 is a replaceable rule which recognises that, subject to any rights or restrictions attached to the shares, each shareholder has one vote per share held. A replaceable rule may be displaced or modified by a company’s constitution (see section 135(2) of the Corporations Act 2001).112 See generally HNA Irish Nominee Limited v Kinghorn [2010] FCAFC 57.113 A shareholders’ agreement may restrict one or more shareholder’s right to vote on particular matters such as the appointment and removal of directors.114 Carr Boyd Minerals Ltd v Ashton Mining Ltd (1989) 15 ACLR 599. See also Carpathian Resources Ltd v Hendriks [2011] FCA 41.115 HNA Irish Nominee Ltd v Kinghorn [2010] FCAFC 57, [37] (the Court) citing with approval Archibald Howie Pty Ltd v Cmr of Stamp Duties (NSW) (1948) 77 CLR 143, 154 (Dixon J). See generally Russell v Northern Bank Development Corp Ltd [1992] 3 All ER 161; Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512, 515–16; White v Bristol Aeroplane Co White v Bristol Aeroplane Co Ltd [1953] Ch 65, 70 and 75; Re Ballarat Brewing Co Ltd (1977-78) CLC ¶40-344, 29,480 (Jenkinson J).116 The requirements of the appointment of a proxy are established by section 250A of the Corporations Act 2001.117 Pursuant to section 249X(1A) of the Corporations Act 2001, the person appointed may be an individual or a body corporate.118 Corporations Act 2001 (Cth) ss 249X; 249Y. This a mandatory rule for public companies and a replaceable rule for proprietary companies.119 Ibid s 250A.120 Ibid s 135.121 Ibid s 250G. See also Colonial Gold Reef Ltd v Free State Rand Ltd [1914] 1 Ch 382. The objection need not be made before the commencement of a poll or a voting process (MTQ Holdings Pty Ltd v RCR Tomlinson Ltd [2006] WASC 96, [73] (Le Miere J)).122 Carpathian Resources Ltd v Hendriks [2011] FCA 41, [65] – [69] (Gilmour J).123 Wall v Exchange Investment Corp Ltd [1926] Ch 143, 148 (Sargent LJ), CA; Fast Scout Ltd v Bergel [2001] WASC 343; Link Agricultural Pty Ltd v Shanahan, McCallum & Pivot Ltd [1999] 1 VR 466; Portman Iron Ore Limited (ACN 007 871 892), in the matter of Golden West Resources Limited (ACN 102

Page 26 of 46


absence of fraud or bad faith124 and a vote not disallowed pursuant to a proper objection is

valid for all purposes.125

Subject to there being no statutory prohibition126 or contractual breach,127 a shareholder128

has a cause of action arising from their rights in personam under the statutory contract129

if a breach of the company’s constitution deprives the shareholder of a personal right,

which relevantly includes the right to vote at a general meeting of the shareholders.130

Such a breach is not a procedural irregularity which can be cured by the Court.131

In respect of proprietary132 and unlisted public companies,133 the case law in Australia has

thus far not recognised a basis upon which the general law would restrict or prohibit the

exercise of a shareholder’s voting rights on the basis of a conflict of interest.134 However,

where a director has a ‘material personal interest’135 in the matter to be approved by a

general meeting, the notice of that meeting must clearly bring the nature and extent of the

director’s interest to the attention of the members with full disclosure.136

622 051) [2008] FCA 1362.124 Colonial Gold Reef Ltd v Free State Rand Ltd [1914] 1 Ch 382; Siemens Bros & Co Ltd v Burns [1918] 2 Ch 324; Wall v London and Northern Assets Corp [1899] 1 Ch 550; Gold Reef Ltd v Free State Rand Ltd [1914] 1 Ch 382. See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [120-8155].125 Wall v Exchange Investment Corp Ltd [1926] Ch 143; Fast Scout Ltd v Bergel [2001] WASC 343; Link Agricultural Pty Ltd v Shanahan, McCallum & Pivot Ltd [1999] 1 VR 466; Portman Iron Ore Limited (ACN 007 871 892), in the matter of Golden West Resources Limited (ACN 102 622 051) [2008] FCA 1362.126 For example, if there has been a contravention of the takeover provisions in section 606 of the Corporations Act 2001 which (subject to section 607) rendered the transaction invalid or shares were transferred without lodging an instrument of transfer with the company as required by section 1071B of the Corporations Act 2001.127 By way of example, a shareholders’ agreement may restrict a shareholders right to vote on specified resolutions considered by the shareholders in general meeting.128 See section 231 of the Corporations Act 2001as to when a person becomes a shareholder.129 Corporations Act 2001 (Cth) s 140.130 Pender v Lushington (1877) 6 Ch D 70.131 Carpathian Resources Ltd v Hendriks [2011] FCA 41, 67 (Gilmour J) approving Concordant Communications (Australia) Pty Ltd v The Communication Group Holdings Pty Ltd [2005] NSWSC 1005 at [101] (Palmer J).132 Corporations Act 2001 (Cth) s 45A (definition of ‘proprietary company’).133 Ibid s 9 (definition of ‘pubic company’). An unlisted public company is a company which has not been admitted to the official list of companies where its shares are quoted on a securities exchange.134 In particular the decisions in Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23 and Bamford v Bamford [1970] Ch 212 do not indicate any legal basis upon which the law of equity would restrict the voting rights of a shareholder.135 Corporations Act 2001 (Cth) ss 191; 195. See Grand Enterprises Pty Ltd v Aurium Resources Ltd [2009] FCA 513.136 Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94, 96.

Page 27 of 46


In Bulfin v Bebarfalds Ltd,137 Long Innes CJ stated:

[t]he duty to take care to make a sufficient statement of the material facts is particularly

insistent when the individual interests of the directors purporting to discharge that duty

are adverse ... to those of the corporations whom they are advising.138

Under the current law in Australia, a shareholder cannot be denied the right to vote at a

meeting of shareholders, in essence because this would be a limitation upon the exercise

of rights attached to a proprietary interest.139 The underlying principle is underpinned in

the following ways:

(i) Section 250E of the Corporations Act establishes that, subject to any rights or

restrictions attaching to a shareholder’s shares, each shareholder has one vote for

each share they hold;

(ii) a shareholder’s right to vote at general meetings is a personal right which may be

enforced;140

(iii) a shareholder has a personal right to challenge modifications to the company’s

constitution which expropriate valuable proprietary rights attaching to shares;141

(iv) an error of law resulting in the denial of the right to vote will invalidate a

resolution;142 and

(v) the denial of a right to vote is not a procedural irregularity which may be cured by

a court.143

For listed public companies, non-compliance with a voting exclusion requirement of a

securities exchange is a breach of an implied term of the contract between the shareholder

and the company,144 thus such a breach would support the basis for a cause of action

arising from the shareholder’s rights in personam under the statutory contract.

137 (1938) 38 SR (NSW) 423.138 (1938) 38 SR (NSW) 423, 432 (Long Innes CJ).139 Gambotto v WCP Ltd (1995) 182 CLR 432.140 Pender v Lushington (1877) 6 Ch D 70.141 Gambotto v WCP Ltd (1995) 182 CLR 432.142 Wall v Exchange Investment Corp Ltd [1926] Ch 143, 148.143 Corporations Act 2001 (Cth) s 1322.144 Zytan Nominees Pty Ltd v Laverton Gold NL [1988] 1 WAR 227; R P Austin, I M Ramsay, Ford’s principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007), [6.070].

Page 28 of 46


I. The exercise of powers by shareholders in general meeting

The exercise of powers by the shareholders in general meeting is by a majority of votes

which are permitted to be exercised by the shareholders,145 unless the exercise of power

relates to a matter which requires a different majority, such as is the case for a special

resolution. For example, the Corporations Act requires that a majority of at least 75%146

of votes cast by shareholders entitled to vote on the resolution approve any amendment or

repeal to the constitution of a company.147 A company’s constitution may also require a

different majority of shareholders for specific matters.

Subject to the common law and constitution of the company,148 a company has an

inherent residual power exercisable by the shareholders in general meeting which is not

subject to any implied limitation149 save that it cannot, except by special resolution, be

exercised in such a way as to conflict with the express power given by the company’s

constitution.150 Accordingly, the general law permits shareholders in general meeting to

manage the affairs of the company whenever there may doubt as to which internal organ

of the company has an exclusive power to bind the company.

Shareholders are entitled to consult their own interests and are not bound to consult only

the benefit of the company,151 even in circumstances whereby a shareholder may have a

personal interest in the subject matter opposed to, or different from, the general or

particular interests of the company.152 This statement appears to arise from the following

legal principles:

(i) the proprietary nature153 of a share;154 and

145 Save for the regulation of share ownership in public companies pursuant to the takeover provisions established by section 606 of the Corporations Act 2001, the concentration of ownership of a company is not generally regulated.146 The resolution is a special resolution as defined by section 9 of the Corporations Act 2001.147 Corporations Act 2001 (Cth) s 136(2).148 Bamford v Bamford [1970] Ch 212, 227 (Plowman J).149 Bamford v Bamford [1970] Ch 212, 224 (Plowman J). 150 Bamford v Bamford [1970] Ch 212, 224 (Plowman J).151 Bamford v Bamford [1970] Ch 212, 223 (Plowman J); Peter’s American Delicacy Pty Ltd v Heath (1939) 61 CLR 457; Gambotto v WCP Ltd (1995) 182 CLR 432.152 Bamford v Bamford [1970] Ch 212, 218 (Plowman J) citing with approval North-West Transportation Co. v Beatty (1887) 12 App Cas 589, 593 (Sir Richard Baggallay).

Page 29 of 46


(ii) fiduciary duties are not owed by the shareholders inter se or to the company.155

A resolution is approved by shareholders if a majority of the votes cast on the resolution

are in support of the resolution.156 In Australia, there is no common law or statutory

requirement that a resolution be approved by an independent majority of shareholders

arising from the exclusion of any shareholder which has a conflict of interest arising from

their personal interest in a proposed resolution. Unless some provision to the contrary is

to be found in the company’s constitution, the resolution of a majority of votes cast by

shareholders at a duly convened meeting, upon any question with which the company is

legally competent to deal, is binding upon the minority, and consequently upon the

company.157

Significantly, in the context of the authorisation of breaches of fiduciary duties, a

shareholder who is also a director whom is seeking the authorisation is not excluded from

voting on the proposed resolution. Any associates of the director and any other directors

are similarly not excluded from voting as shareholders. Further, there is no restriction

upon any director or associates of directors soliciting votes from or being appointed as a

proxy by a shareholder to vote in favour of the proposed resolution.

PropositionIt is a proposition advanced by this thesis that the right of a director to vote on a resolution to ratify their

own breach of fiduciary or statutory duty is inconsistent with the principles of good corporate governance.

153 A share is indivisible personal property which is transferrable or transmissible (Sydney Futures Exchange Limited v Australian Stock Exchange Limited and Australian Securities Commission (Intervener) [1995] FCA 1106, [102] (Lockhart J); Inland Revenue Commissioners v Crossman [1937] AC 26, 51 (Lord Blanesburgh)).154 Australian Trust Ltd v Ho Chin (1932) 33 SR (NSW) 55; Archibald Howie Pty Ltd v Cmr of Stamp Duties (NSW) (1948) 77 CLR 143, 156-7 (Williams J). See generally Borland's Trustee v Steel Bros. & Co. Ltd (1901) 1 Ch 279, 288 (Farwell J) concerning the nature of a share.155 Peters' American Delicacy Co. Ltd v Heath (1939) 61 CLR 457; Gambotto v WCP Ltd (1995) 182 CLR 432.156 Hascard v Somany (1693) 89 ER 380; Attorney-General v Davy (1741) 26 ER 531; R v Monday (1777) 2 Cowp 530, 538 (Lord Mansfield); Merchants of the Staple of England v Bank of England (1887) 21 QBD 160, 165 (Wills J). See LexisNexis, Halbury’s Laws of Australia (at 23 June 2013) [120-8155].157 Bamford v Bamford [1970] Ch 212, 218 (Plowman J) citing with approval North-West Transportation Co. v Beatty (1887) 12 App Cas 589, 593 (Sir Richard Baggallay).

Page 30 of 46


The exercise of power by the shareholders in general meeting is circumscribed in the

following ways:

(i) shareholders cannot sanction improper expropriation of a company's property158 by

the directors;159

(ii) the purpose of the majority of the meeting must be for the purposes of the

company as a whole;160

(iii) the majority in general meeting cannot act for the same improper purpose as

directors;161 and

(iv) the exercise of power must not be a fraud on the minority,162 or contrary to the

interests of the members as a whole or be oppressive to, unfairly prejudicial, or

unfairly discriminatory against, a member or members whether in that capacity or

in any other capacity.163

There may also be a separate right of shareholders in large corporations in which

shareholdings are highly diffuse to challenge the validity of a transaction on the basis of

the interests of justice.164

Accordingly, a director could seek the ratification of a breach of fiduciary duty by

shareholders in general meeting, even after legal proceedings have been commenced.165 158 Ngurli Ltd v McCann (1953) 90 CLR 425; Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350; Cook v Deeks [1916] 1 AC 554; Parke v Daily News Ltd [1962] Ch 927. This principle applies notwithstanding the property is only owned in equity (Cook v Deeks [1916] 1 AC 554).159 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246, 296; Macleod v The Queen (2003) 214 CLR 230; Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23; Forge v ASIC (2004) 52 ACSR 1. In McLeod it was stated that ‘The self-interested 'consent' of the shareholder, given in furtherance of a crime committed against the company, cannot be said to represent the consent of the company.’ (Macleod v The Queen (2003) 214 CLR 230, 240 (Gleeson CJ, Gummow and Hayne JJ)).160 Allen v Gold Reefs of West Africa [1900] 1 Ch 656; Ngurli Ltd v McCann (1953) 90 CLR 425.161 Miller v Miller (1995) 16 ACSR 73.162 Allen v Gold Reefs of West Africa [1900] 1 Ch 656. The majority of members commit fraud on the minority if they use their voting power to deprive the minority of their shares or “valuable proprietary rights attaching to those shares” (eg. a voting power as was the case in Gambotto v WPC Ltd (1995) 182 CLR 432). There may be irregularities that can be ratified by a general meeting but there cannot be fraud on the minority. The difficulty is to determine whether a breach of internal rules is either (i) an internal irregularity curable by ratification at a general meeting; or (ii) a serious infringement of a personal right (see Bamford v Bamford [1970] Ch 212; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666).163 Corporations Act 2001 (Cth) ss 232(d)-(e). See especially HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228.164 Biala Pty Ltd v Mallina Holdings (1993) 13 WAR 11.165 See, eg. Forge v Australian Securities and Investments Commission [2004] NSWCA 448.

Page 31 of 46


If the resolution was approved by a majority of shareholders, the breach of fiduciary duty

is retrospectively ratified and accordingly, any rights to commence proceedings in respect

of the breach which the company or any shareholder had, subject to interpretation of the

effect of the resolution, are extinguished.

J. The shareholder’s role in corporate governance

Shareholders play an important role in corporate governance through direct methods

including voting at general meeting of shareholders and indirectly through the exercise of

shareholders’ remedies. The focus of this section is to consider the collective role of

shareholders in general meeting in establishing or maintaining standards of corporate

governance.

The shareholders in general meeting are effectively the mechanism by which the

standards of corporate governance are overseen. This arises because, outside of the

regulation of corporate governance in the Corporations Act and the company’s

constitution, the shareholders in general meeting may exercise the residual powers of the

company. Accordingly, a majority of the shareholders may determine the content of the

requirements for all other matters of corporate governance which are self-regulated by the

company. How corporate governance is regulated and self-regulated was considered

above in section III subsection B.

The power of a majority of shareholders in general meeting to self-regulate corporate

governance is of great significance. It should be recognised from the above discussion

that the regulation of corporate governance by the Corporations Act establishes a

minimum standard of corporate governance and is a one-size-fits-all approach to

establishing a mandatory corporate governance framework. Accordingly, a majority of

shareholders have the power to (i) require that the directors of the company comply with

a higher standard of corporate governance or (ii) only impose the minimum standard of

corporate governance. It is undoubtedly true that the regulation of corporate governance

enforces minimum standards of corporate governance and thereby reduces the incidence

of poor corporate governance because regulation creates the threat of penalties being

Page 32 of 46


x-ref


imposed upon directors and/or the risk of litigation being commenced by the company or

a shareholder.

Unless a proprietary company’s constitution has displaced the replaceable rules, the

shareholders in general meeting have the right to appoint166 and remove a director.167 If

the shareholders are desirous of implementing different standards of corporate

governance, it may be considered necessary to remove and/or appoint directors in an

attempt to change (i) the standards of corporate governance and/or (ii) the corporate

culture of the company. Further, shareholders may determine that it is necessary for the

board of directors to be constituted by a majority of independent directors so that the

matters before the board of directors are given adequate scrutiny prior to any decisions

being taken and implemented.

The problem of shareholders establishing and maintaining standards of corporate

governance does not arise from any lack of powers which the shareholders have in

general meeting. Moreover, in Australia the problem is a function of such issues as:

(i) the generally small size of individual shareholdings,168

(ii) differences between objectives sought by shareholders,169

(iii) shareholder apathy;170 and

(iv) the costs associated with implementing and maintaining higher standards of

corporate governance when the benefits of higher standards are very likely to be

considered in the abstract and are thus very hard to quantify as a benefit to the

company.171

166 Corporations Act 2001 (Cth) s 201G.167 Ibid s 203C.168 See generally Michael Whincop, ‘The role of the shareholder in corporate governance: A theoretical approach’ (2001) Melbourne University Law Review 25 418.169 Ibid.170 See generally S Bottomley, ‘The Role Of Shareholders’ Meetings In Improving Corporate Governance’ (2003) Research Report, Centre for Commercial Law, Australian National University; Carolyn J Cordery, ‘The Annual General Meeting as an Accountability Mechanism’ (2005) Working Paper Series, Working paper 23, Centre for Accounting, Governance and Taxation Research, School of Accounting and Commercial Law, Victoria University of Wellington.171 See generally Michael Whincop, ‘The role of the shareholder in corporate governance: A theoretical approach’ (2001) Melbourne University Law Review 25 418.

Page 33 of 46


In relation to ‘Institutional Investors’ such as superannuation funds, these investors have

historically been passive investors and consequently not sought to influence corporate

governance. If Institutional Investors take an active role as shareholders, this would

likely positively affect the company’s corporate governance policies.172

K. Should the power of ratification vest exclusively in the shareholders in general meeting?

There are three possible ways in which the powers of the corporation may be exercised:

(i) by the board of directors;

(ii) by a majority of shareholders in general meeting; or

(iii) by either the board of directors or a majority of the shareholders in general

meeting.

In analysing whether the power of authorisation should be exercisable only by a majority

of shareholders in general meeting, it is necessary to consider whether the principles of

authorisation and the principles of corporate governance suggest that the shareholders in

general meeting should be the sole repository of the power. These issues are considered

in detail below.

2 Principles of authorisation of a breach of fiduciary duties

The law concerning the authorisation of acts arises from Roman law in respect of the

conduct of an agent acting for one or more principals.173 Provided that an act done was

172 See generally AMP Capital, Corporate Governance 2013 mid year report (August 2013) <http://www.ampcapital.com.au/AMPCapitalAU/media/contents/Articles/ESG%20and%20Responsible%20Investment/Corporate-Governance-2013-mid-year-report.pdf>.173 Keay v Fenwick (1876) 1 CPD 745. One co-principal may ratify the action of an agent (for example, a sale) without ratifying the appointment of the agent, and therefore may not be liable for a share of the commission payable to the agent (Hughes v Hughes (1971) 115 Sol Jo 911). See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-65].

Page 34 of 46


not void174 and was capable of being done by the principal175 at the time,176 a principal

may by conduct177 ratify an act or acts, whether lawful or unlawful,178 done by an agent

who acted without the authority or knowledge of the principal. An exception to the

requirement that the act was not void ab initio is the situation whereby a solicitor

commences proceedings without the proper authority to do so.179

Once ratified, the act is taken to have been authorised retrospectively at the time it was

done180 and the act is considered to be the act of the principal. The principal is thus

bound by the ratification of the act of the agent. The ratification retrospectively creates

the relationship of agent and principal181 in respect of the transaction(s) ratified. However

the ratification does not confirm the purported grant of authority under which the

transactions were performed.182

In the context of companies, if the authorisation resolution is approved by a majority of

shareholders, subject to interpretation of the resolution, the effect of the authorisation of a

breach of fiduciary duty is to relieve the fiduciary from liability for the breach. Thus, the

fiduciary could not be sued for the relevant breach of fiduciary duty because the cause of

174 Firth v Staines [1897] 2 QB 70, 75 (Lord Wright). See also Grice Holdings Pty Ltd v Commissioner of Taxes [2000] NTSC 88; Wolf v Frank 477 F.2d 467, 17 Fed. R. Serv. 2d 701 (5th Cir. 1973); Bloodworth v Bloodworth 225 Ga. 379, 169 S.E.2d 150 (1969); Dannen v Scafidi 75 Ill. App. 3d 10, 30 Ill. Dec. 899, 393 N.E.2d 1246 (1st Dist. 1979); Michelson v Duncan 407 A.2d 211 (Del. 1979). See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-130].175 The principal must be ascertainable at the time the act is done (see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270, 276 following Watson v Swann (1862) 11 CBNS 756). See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-135].176 See Firth v Staines [1897] 2 QB 70, 75 (Wright J); Boston Deep Sea Fishing and Ice Co Ltd v Farnham [1957] 3 All ER 204; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270, (McHugh JA). See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-130].177 The time for ratification will either be a time fixed by the nature of the particular case, or within a reasonable time (see Re Portuguese Consolidated Copper Mines Ltd (1890) 45 Ch D 16, 31). See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-140].178 Hull v Pickersgill (1819) 129 ER 731; Bedford Insurance Co Ltd v Institutto de Resseguros Do Brasil [1985] QB 966. See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-145].179 Raja v Darul-Man (WA) Incorporated [No 2] [2011] WASC 251, [33] (the Court); Chalker v Barwon Coast Committee of Management Inc [2003] VSC 286, [36] (Gillard J) citing Danish Mercantile Co Ltd v Beaumont [1951] 1 Ch 680.180 Danish Mercantile Co. Ltd v Beaumont [1951] Ch. 680; Alexander Ward & Co. Ltd v Samyang Navigation Co. Ltd [1975] 1 WLR 673.181 Australian Blue Metal Ltd v Hughes (1962) 79 WN (NSW) 498, 515 (Jacobs J). See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-130].182 Bayer Pharma Pty Ltd v Farbenfabriken Bayer Aktiengesellschaft (1965) 120 CLR 285, 290-1 (Kitto J). See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-130].

Page 35 of 46


action was extinguished as distinct from barring a remedy for the breach or the

authorisation being pleaded as a defence to a claim.183

Under an early theory of the corporation, directors were considered to be agents of the

company.184 It was therefore an analogous situation for the imposition of the principles

of ratification from agency law to corporate law. The relevant distinctions to be drawn

however are that:

(i) a company is a creature of statute and accordingly an artificial legal person which

must act through human hands;185

(ii) a company is a separate legal entity186 distinct from its shareholders187 which can

sue and be sued;

(iii) the veil of incorporation will rarely be lifted;188

(iv) the directors managing the company’s affairs may be different persons to the

shareholders of the company, or have put at risk insignificant money in becoming

shareholders of the company; and

(v) the powers of the company are exercisable either by the board of directors, the

shareholders in general meeting or a combination of the two repositories of

power.

183 In agency law, the effect of the ratification of the agent’s act is generally to relive the agent from personal liability to the principal (see Union Bank of Australia Ltd v Rudder (1911) 13 CLR 152; Hartas v Ribbons (1889) 22 QBD 254. Compare Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225, 235 (Waller J); Ali v Hartley Poynton Ltd (2002) 20 ACLC 1006; Delco Australia Pty Ltd v Darlington Futures Ltd (1986) 43 SASR 519. See generally LexisNexis, Halsbury’s Laws of Australia (at 23 June 2013) [15-160]).184 Marks v Commonwealth (1964) 111 CLR 549.185 H L Bolton & Co v T J Graham & Sons [1957] 1 QB 159; Tesco Supermarkets Ltd v Nattrass [1971] 2 WLR 1166.186 Salomon v Salomon & Co Ltd [1897] AC 22; Lee v Lee's Air Farming [1961] AC 12; Industrial Equity Ltd v Blackburn (1977) 52 ALJR 89.187 Macaura v Northern Assurance Co Ltd [1925] AC 619.188 At common law, the veil of incorporation may be lifted in at least the following circumstances; to reach the company’s directors (eg. arising from a fraudulent purpose or the avoidance of a legal obligation), where the company is closely held and where the company has committed a tort (see generally Helen Anderson, ‘Piercing the veil on corporate groups in Australia: The case for reform’ (2009) Melbourne University Law Review 333). The Corporations Act 2001 gives effect to the lifting of the corporate veil if there has been insolvent trading, uncommercial transactions, unreasonable director related transactions, or there has been unlawful financial assistance by a company for acquiring in a company or a holding company.

Page 36 of 46


In light of the distinctions between a company and a natural person as a principal, it is

necessary to consider which repository of corporate power should exercise the power of

authorisation in respect of different acts done purportedly for the company.

At common law, unless a company’s constitution otherwise provides, a board of directors

can, within a reasonable time, ratify the acts of one or more directors, when they acted,

had no authority to bind the company.189 A typical example cited previously whereby the

board of directors are entitled to ratify an act is when the company’s solicitors commence

legal proceedings without authority.

In considering whether the board of directors should be permitted to exercise the power

to ratify an act, focus is immediately drawn to an implication that the exercise of the

ratification power by the board of directors would in many cases result in the board of

directors ratifying its own act. This would be analogous to a principal asserting to be an

agent for himself. Logically this is a non sequitur.

A separate, but related circumstance, is the board of directors considering the ratification

of an act of a director. At least in circumstances whereby the act of the director is a

breach of a fiduciary duty to the company, it would be at a minimum imprudent to allow

the other directors to consider whether to ratify an act of a director because the directors

(in that capacity) are not the shareholders of the company and it raises the question

whether the other directors could be considered to be independent. In those

circumstances, the other directors would likely feel under pressure to ratify the director’s

conduct or be concerned about the potential ramifications of failing to ratify the director’s

conduct.

The common law approach to resolving the question of which repository of power is

permitted to exercise the power of authorisation in respect of a breach of fiduciary duties

was to permit the shareholders in general meeting to exercise the power. A consequence 189 Re Portuguese Consolidated Copper Mines Ltd [1890] LR 45 Ch D 16; Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100; Municipal Mutual Insurance Ltd v Harrop [1998] 2 BCLC 540; Danish Mercantile Co Ltd v Beaumont [1951] Ch 68; Alexander Ward & Co. Ltd v Samyang Navigation Co. Ltd [1975] 1 WLR 673.

Page 37 of 46


of that approach meant that a majority of shareholders could bind the company by

authorising a breach of fiduciary duty by a director and thereby a minority of

shareholders would lose their rights to sue for the relevant breach.

It is also considered that powers of the board of directors conferred by section 198A(2) of

the Corporations Act do not apply to breaches of a fiduciary duty, otherwise it would be

permissible for the board of directors to authorise a breach of fiduciary duty.190

3 Purpose of ratification resolution

The board of directors must act by a decision of the majority of directors permitted by

law to vote on a resolution and in accordance with the company’s constitution. A key

restraint on the board of directors decision-making powers is that each director owes a

fiduciary duty to the company as a whole (distinct from owing a duty to the

shareholders)191 and Courts have traditionally applied strict standards upon directors.192

In the context of an authorisation resolution, the director seeking the authorisation is

required to fully and frankly disclose all the material facts of the breach so that

shareholders may consider whether the director’s breach should be authorised. The rule

is analogous to the requirement of a trustee obtaining informed consent from a

beneficiary.193 Accordingly, a majority of shareholders may consider the disclosures

made by the director to determine whether the director should be relieved of the relevant

breach.

L. Are the principles underlying the doctrine of ratification consistent with the principles of good corporate governance?

190 The likely reasoning of a Court would be that the right of ratification of a breach of fiduciary duty is not a ‘power of the company’ (see generally Michael Whincop, ‘The role of the shareholder in corporate governance: A theoretical approach’ (2001) Melbourne University Law Review 25 418, 446).191 Percival v Wright [1902] 1 Ch 421.192 See, eg, Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; Parker v McKenna (1874) LR 10 Ch App 96; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.193 See, eg. Loughnan v McConnel [2006] QSC 359.

Page 38 of 46


In this section, consideration is given to two questions:

(i) whether the principles of good corporate governance are consistent with the

principle that the shareholders in general meeting should exclusively have the

power to authorise a breach of fiduciary duty by a director? If the principles are

aligned, this may indicate that the power should be exclusively exercised by the

shareholders in general meeting and is thereby consistent with the principles of

good corporate governance; and

(ii) whether the principles of good corporate governance are consistent with the

principles underlying the doctrine of ratification? If the principles are aligned,

this may indicate that there is not a need to reform the law.

The principles of leadership, effectiveness, ethics, openness, integrity and accountability

upon which corporate governance is based suggests that the principles of corporate

governance are designed to protect the rights and interests of the company as a whole.

This consequently includes all stakeholders including shareholders, employees and the

company’s creditors.194

PropositionIt is a proposition advanced by this thesis that the principles of good corporate governance must be

designed to protect the rights and interests of the company as a whole for the benefit of all stakeholders.

The views of the company’s shareholders as the owners are to be regarded as being more

relevant to the protection of the company’s rights and interests as a whole because:

(i) stakeholders such as employees and creditors have interests limited to the extent

of the rights and obligations arising under their respective contracts;

(ii) shareholders have invested moneys in the company and are thus exposed to all of

the risks associated with the company’s business affairs; and

194 Ratification is not permissible if it was entered into by an insolvent company to the prejudice of creditors (Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Miller v Miller (1995) 16 ACSR 73 at 89 followed in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303 at 312–13(on appeal Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252). See also LexisNexis, Ford’s Principles of Corporations Law [8.390] The limits to the general meeting’s power to ratify.

Page 39 of 46


(iii) in any winding up of the company, employee entitlements and money owed to

creditors rank ahead of any money payable to shareholders,195 thus any right of

employees and creditors to make decisions related to the company would focus

attention on their respective abilities to recover any moneys in the event of

winding up. Such a focus is too narrow in the context of the company’s rights

and interests as a whole.

A majority of shareholders as representative of all of the owners of the company are thus

uniquely placed to determine the best interests of the company as a whole.

The approval by a majority of shareholders of an authorisation resolution establishes, in

effect, the acceptable minimum standards of conduct of the directors in the context of

corporate governance. It is also notable that the same majority have the power to appoint

or remove a director and accordingly may indirectly influence the corporate governance

standards of the company.

However, generally the substantive and procedural requirements of corporate governance

are established by a special resolution196 of shareholders through the company’s

constitution which requires a 75% majority. Shareholders may alternately determine

some matters which concern or relate to corporate governance by:

(i) a shareholders’ agreement, however such agreement requires each shareholder to

agree to be bound to the terms of the agreement; and

(ii) ordinary resolution, provided that this does not interfere with the powers of the

board of directors. Examples of such resolutions include; the removal or

appointment of a director, appointment or removal of an auditor,197 approval of a

transaction between the company and related parties, total non-executive director

remuneration, and the approval of a remuneration report (for publicly listed

companies).

195 Corporations Act 2001 (Cth) Part 5.6, Division 6, Subdivision D.196 Corporations Act 2001 (Cth) s 9 (definition of ‘special resolution’).197 Ibid Part 2M.4, Division 6.

Page 40 of 46


The shareholders whom form a part of the majority may however over time change, thus,

an entirely different majority of shareholders may later be desirous of commencing

proceedings against the director whose breach of fiduciary duty was authorised. If the

effect of the authorisation resolution was to extinguish the cause of action against the

director, then the consequent effect is to prevent the shareholders in general meeting in

the future from commencing proceedings. This consequence would be most noticeable if

in the future the company became aware of the extent of the damages it has suffered as a

result of the breach. The requirement that a ratification resolution be approved within a

reasonable time may in such circumstances work an injustice against a company which

was unaware of, or unable to determine the extent of the damages it may suffer in the

future.

A systemic weakness of the doctrine of ratification is the ability of a majority of 75% of

shareholders in general meeting to modify the company’s constitution to put into effect

new or modified corporate governance standards. Accordingly, a majority of

shareholders can both (i) prevent any change or reduce (if permissible) the existing

corporate governance standards in the constitution and separately (ii) approve a breach of

fiduciary duty.

The level of disclosure for an authorisation resolution is ‘full and frank’ disclosure.198

The purpose of the meeting of shareholders must be clearly stated, and the nature of the

contemplated breach of duty clearly disclosed by the directors seeking to be absolved at

that meeting.199 It is clear that this obligation of disclosure to shareholders is far in excess

of any disclosure obligation arising from the Corporations Act. Accordingly, this aspect

of the doctrine of ratification is consistent with the principles of good corporate

governance.

The right of shareholders to authorise a breach is generally consistent with the principles

of good corporate governance at least on the narrow view described above in section A 198 Forge v ASIC [2004] NSWCA 448, 390 (Handley, Santow and McColl JJA) citing Bamford v Bamford [1970] Ch 212, 238 (Plowman J); Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, 672 and 704; Miller v Miller (1995) 16 ACSR 73, 89.199 Bamford v Bamford [1970] Ch 212; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.

Page 41 of 46


Check x-ref


above. The primary justification for this conclusion is that in Australia, medium to large

companies tend to have a distinct separation of ownership and control, especially public

companies which are listed entities on a stock exchange and accordingly, shareholder

oversight of corporate governance and the conduct of directors are interrelated

responsibilities.

PropositionIt is a proposition advanced by this thesis that the principles of good corporate governance are generally

consistent with the principle that the shareholders in general meeting should exclusively have the power to

ratify or authorise a breach of fiduciary or statutory duty by a director.

In consideration of the analysis above, this thesis now considers whether there is

alignment between the principles of good corporate governance and the principles

underlying the doctrine of ratification which were considered in Chapter [4].

[NB: At present the principles for review in Chapter 4 are:

Principle of knowledge and consent

Principle of fairness

Principle of parties consensus ad idem

Principle of regularity]

[address in this section how does ratification promote accountability and ethics and

thereby good corporate governance?]

Ratification is not permissible if it was entered into by an insolvent company to

the prejudice of creditors200

200 (Miller v Miller (1995) 16 ACSR 73 at 89 followed in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303 at 312–13; 13 ACLC 965 (on appeal Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252). Ford [8.390] The limits to the general meeting’s power to ratify. The Court of Appeal in New South Wales in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; 10 ACLR 395; 4 ACLC 215 held that a transaction entered into by directors for an improper purpose while the company was insolvent could not be validated by even unanimous approval of the members in disregard of the interests of creditors. Compare Heydon “Directors' Duties and the Company's Interests” in P D Finn (ed), Equity and Commercial Relationships, 1987, p 130. Kinsela's case was considered in Re G S Enterprises Pty Ltd (unreported, SC(ACT), Miles CJ, No 26 of 1984). See also Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 14 ACLR 39; 6 ACLC 647 ; Liquidator of West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 ; Bowthorpe Holdings Ltd v Hills [2003] 1 BCLC 226 (Ch D); Official Receiver v Stern [2004] BCC 581 (CA). The statutory position in the United

Page 42 of 46


NB: These are the descriptive headings I have given to the principles, they do not appear to have been formulated in any holistic way from my research


Consider whether the principles are consistent below based on the work set out in chapters 2 & 3

http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/enhRunRemoteLink.do?A=0.5878382817387874&service=citation&langcountry=AU&backKey=20_T18446088508&linkInfo=F%23AU%23ACLR%23vol%2514%25sel1%251988%25page%2539%25year%251988%25sel2%2514%25decisiondate%251988%25&ersKey=23_T18445861871

http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/enhRunRemoteLink.do?A=0.7661246451472046&service=citation&langcountry=AU&backKey=20_T18446088508&linkInfo=F%23AU%23ACLR%23vol%2510%25sel1%251986%25page%25395%25year%251986%25sel2%2510%25decisiondate%251986%25&ersKey=23_T18445861871

http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/enhRunRemoteLink.do?A=0.904161475251479&service=citation&langcountry=AU&backKey=20_T18446088508&linkInfo=F%23AU%23NSWLR%23vol%254%25sel1%251986%25page%25722%25year%251986%25sel2%254%25decisiondate%251986%25&ersKey=23_T18445861871

http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/enhRunRemoteLink.do?A=0.8441529716769489&service=citation&langcountry=AU&backKey=20_T18446088508&linkInfo=F%23AU%23ACSR%23vol%2517%25sel1%251995%25page%25303%25year%251995%25tpage%25312%25sel2%2517%25decisiondate%251995%25&ersKey=23_T18445861871

http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/enhRunRemoteLink.do?A=0.5563888857217497&service=citation&langcountry=AU&backKey=20_T18446088508&linkInfo=F%23AU%23ACSR%23vol%2517%25sel1%251995%25page%25303%25year%251995%25sel2%2517%25decisiondate%251995%25&ersKey=23_T18445861871

http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/enhRunRemoteLink.do?A=0.20527519035130037&service=citation&langcountry=AU&backKey=20_T18446088508&linkInfo=F%23AU%23ACSR%23vol%2516%25sel1%251995%25page%2573%25year%251995%25tpage%2589%25sel2%2516%25decisiondate%251995%25&ersKey=23_T18445861871

http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/enhRunRemoteLink.do?A=0.2199313531490451&service=citation&langcountry=AU&backKey=20_T18446088508&linkInfo=F%23AU%23ACSR%23vol%2516%25sel1%251995%25page%2573%25year%251995%25sel2%2516%25decisiondate%251995%25&ersKey=23_T18445861871


PropositionIt is a proposition advanced by this thesis that the principles of the doctrine of ratification are inconsistent

with the principles of good corporate governance, at least on the broader definition, since the interests of

creditors are not taken into consideration unless the company is insolvent.

M. The voting power of shareholders of listed and unlisted public companies

As has been considered above, shareholders of public companies tend to have small

shareholdings and thus public companies usually have medium to large numbers of

shareholders. This dispersed nature of the voting power amongst shareholders coupled

with shareholder apathy can give rise to circumstances where the authorisation of a

breach is approved by larger shareholders without those shareholders having a majority

interest in the company.

Since public companies tend to be financially capable of commencing proceedings

against directors, a director who has acted in breach of their fiduciary duties will be

incentivised to provide full and frank disclosures which improve the possibility of the

authorisation of the breach by shareholders.

In respect of listed and unlisted public companies with more than fifty members, unless

an exception applies,201 the Corporations Act202 prohibits a person from acquiring a

relevant interest in voting shares in circumstances which will increase any shareholder’s

voting power in the company from twenty percent or below to more than twenty percent

or from a starting point that is above twenty percent and below ninety percent. Thus

whilst shareholders have a right to vote, because there are limitations on the voting power

of a shareholder, a majority of shareholders will be comprised of different shareholders.

Kingdom is to the sale effect (see Bilta (UK) Ltd (in liquidation) and others v Nazir and others [2014] 1 All ER 168). The company's creditors would have an interest in the company which could not be overridden by the shareholders' authorisation or ratification (see Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler [1994] FCA 1117; (1994) 51 FCR 425 at 444).).201 Corporations Act 2001 (Cth) s 611.202 Ibid s 606.

Page 43 of 46


Review once Chapter finalised


It may however be the case that major shareholders are directors or have ‘nominee’

directors appointed to the board of directors.

Whilst it is generally true that all shareholders have a right to vote, there is no statutory

requirement under the Corporations Act that each class of shares is required to have

voting rights. These issues were considered in Chapter 3, however it is important to

consider whether the principles of good corporate governance indicate that all

shareholder should be entitled to vote at a general meeting of the shareholders.

N. The implications of the rules of a securities exchange

Any shareholder (and the shareholder’s associates) of a listed public company may be

excluded from voting on a particular proposed resolution by the listing rules of the

securities exchange.203 Common exclusionary circumstances include the giving of a

financial benefit to a related party204 and related party transactions.205

If a public company is listed on a securities exchange, there is an implied term in the

contract between the shareholder and the company that the company will comply with the

listing rules of the securities exchange.206 In relation to the ASX, all listed public

companies must also comply with Chapters 10 (Transactions with persons in a position of

influence) and 14 (Meetings) of the ASX Listing Rules and disclosure to shareholders in

the notice of meeting any voting exclusions which apply.207

203 For example, Australian Securities Exchange, Listing Rules (at 29 October 2014) r 14.11 provides that if a rule requires a notice of meeting to include a voting exclusion statement, the notice of meeting must contain such a statement.204 Corporations Act 2001 (Cth) s 208.205 See generally Chapter 2E of the Corporations Act 2001 and in particular section 219. See also LexisNexis, Australian Encyclopaedia of Forms & Precedents (at 15 September 2013) ‘Interested directors’ [175.E[80]].206 Zytan Nominees Pty Ltd v Laverton Gold NL [1988] 1 WAR 227; R P Austin, I M Ramsay, Ford’s principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007), [6.070].207 LexisNexis, Australian Encyclopaedia of Forms & Precedents (at 15 September 2013) ‘Interested directors’ [175.E[80]].

Page 44 of 46


To be considered further.


Pursuant to ASX Listing Rule 14.11.2, the ASX may identify a person whose votes

should be disregarded at any meeting of shareholders. In relation to a transaction which a

director has an interest in, unless the ASX apply their discretion under ASX Listing Rule

14.11.2, there is no specific rule which prevents other directors who are shareholders

from voting in favour of a fellow director’s interested transaction.208 There is no case

authority identifying the circumstances in which ASX may exercise its powers pursuant

to ASX Listing Rule 14.11.2. Arising from the current state of the law in Australia, it

would likely be considered unlawful for ASX to require a director, the director’s

associates and all other directors to be excluded on voting upon a resolution for the

authorisation of a breach of fiduciary duties.

IV.[V.] CONCLUSION

There are a number of problems inherent in the way in which the Corporations Act

operates with respect to the maintenance of good corporate governance in the context of

authorisation to protect the rights and interests of the company as a whole for the benefit

of all stakeholders, in particular minority shareholders.

Whilst the principles of good corporate governance are generally consistent with the

exercise of the power of authorisation by the shareholders in general meeting, the failure

of the general law to recognise a director’s conflict of interest in voting to authorise their

own breach of fiduciary duty is inconsistent with the principles of good corporate

governance, in particular the promotion of accountability and ethics by the directors.

Corporate governance should be considered to be a cornerstone of modern company

regulation, however reforms to the Corporations Act have not kept pace with

recommendations from significant government reports, in particular, the

208 By way of example, a series of director related resolutions could be linked in such a way that if any single resolution fails, all of the interlinked resolutions fail (see Australian Securities Exchange, Lumacom Ltd Notice of Meeting (12 June 2009) Australian Securities Exchange <http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=00960709>. This would effectively force directors to use their votes to ensure that each fellow director’s resolution was approved so as to ensure that their own resolution did not fail as a consequence.

Page 45 of 46


recommendations in the Companies and Securities Law Review Committee report in

1990209 were not enacted by the Commonwealth parliament to remedy significant

deficiencies in the operation of the doctrine of ratification. Key corporate collapses in

Australia and internationally also adds weight to a need for reform to the Corporations

Act.

A largely self-regulatory model together with a rule-based regulatory model for corporate

governance has been demonstrated by the preceding analysis encapsulated by the

propositions advanced above to be beset by a wide array of difficulties. These problems

could be addressed by amending the Corporations Act to require further aspects of

corporate governance to regulated by the replaceable rules which would have mandatory

application to companies incorporated under the Corporations Act. This could be

achieved by applying the requirements to (for example) large proprietary companies, or

by adopting a principles-based or risk-based model of regulation to take into account the

size, scale and complexity of a company’s affairs.

The above analysis also indicates that the principles of good corporate governance

are not consistent with the principles underlying the doctrine of ratification . Arising

from the misalignment of the principles, this suggests that there should be law reform to

address the inadequacies of the general law and the Corporations Act which are impeding

the protection of the rights and interests of minority shareholders and other stakeholders.

[to be updated with analysis based on alignment of good corporate governance principles

with principles underlying the doctrine of ratification once Chapter finalised]

This thesis will now consider the specific law reforms which are proposed to the general

law and to the Corporations Act.

209 The Companies and Securities Law Review Committee, ‘Company Directors and Officers: Indemnification, Relief and Insurance’, (21 May 1990)

Page 46 of 46


Consider further when chapter finalised