Rights and remedies of members

Rights and remedies of members

Corporate Law: Law principles and practice

Defining membership

The members of a company include company officers. These are important insiders who are responsible for operating the business.

Officers include directors and the company secretary.

Officers owe their duties to the corporate entity.

The corporate entity is run for the benefit of the shareholders.


Defining membership cont …

Membership or shareholder status gives rise to rights under statute and at common law.

The Corporations Act 2001 (Cth) defines membership in s 9 as follows:

• A member of a managed investment scheme is a person who holds an interest in the scheme.

• A member of a company is a person who is defined as a member under s 231.



Section 231 of the Corporations Act 2001 (Cth) further defines membership of a company as follows:

A person is a member of a company if they:(a) are a member of the Company on its registration;

or(b) agree to become a member of the company after

its registration and their name is entered on the register of members; or

(c) become a member of the company under s 167(membership arising from conversion of a company from one limited by guarantee to one limited by shares).


According to the Corporations Act 2001 (Cth), the members of a company are:

• the subscribers whose names are the first entered in the company’s register of members after incorporation, pursuant to s 231

• all others who agree to become members and whose names are entered on the company’s register of members, pursuant to s 231.



Others who hold shares

Members who hold shares:

• by way of issue and allotment from the company’s authorised share capital

• by transfer—i.e. the transfer of already issued and allotted shares

• by transmission—that is, on the death of a shareholder• vesting by operation of law• to satisfy a qualification test—e.g. a director may be

required to hold a certain number of ‘qualification’ shares

• by virtue of some other reason—e.g. by employees of the company under participation in a share scheme

The statutory contract: s 140

Section 140 of the Corporations Act 2001 (Cth)

(1) A company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract:

(a) between the company and each member; and(b) between the company and each director and

company secretary; and(c) between a member and each other member;

under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.



The statutory contract: s 140 cont … Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became a member so far as the modification:

(a) requires the member to take up additional shares; or(b) increases the member’s liability to contribute to the

share capital of, or otherwise to pay money to, the company; or

(c) imposes or increases restrictions on the right to transfer the shares already held by the member, unless the modification is made:(i) in connection with the company’s change from a

public company to a proprietary company under Part 2B.7; or

(ii) to insert proportional takeover approval provisions into the company’s constitution.


Members’ rights

Members’ rights are similar to contractual principles.

Shares are units of ownership in a company and are collectively owned by the shareholders/members.

Shares are an intangible form of property and are transferred by means of a transfer document (the share transfer form).


Rights conferred by different types of share

Two most usual types of shares are:

• ordinary shares• preference shares

Shares are distinguished by rights and obligations attached by:

• the company’s constitution; or• the contract of allotment that specifically describes

the shares and the rights and liabilities attaching.


Rights conferred by different types of share cont …

The main differences between ordinary and preference shares lie in:

• the voting rights (if any) attaching to the shares under s 253C of the Corporations Act 2001 (Cth)

• the right (if any) to dividends under s 254W of the Act• the rights on winding up the company.

Voting rights Ordinary shares usually have attached the right to one vote at shareholders’ meetings by a ‘show of hands’ or one vote for every dollar value they have in the relevant scheme (Corporations Act 2001 (Cth) s 253C).



The right to be paid dividends

Dividends are payments potentially made out of company profit to the shareholders according to the number of shares held.

The assets test to pay profits, s 254T

(1) A company must not pay a dividend unless:(a) the company’s assets exceed its liabilities

immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and

(b) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and

(c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.



Entitlements on winding up

Secured creditors rank ahead of unsecured creditors when distributing funds from a winding up.

Shareholders are the last to be paid.

Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 232 ALR 232

Other rights of members

Members have the right to inspect the company books in certain circumstances.

Shareholders have the right to be advised of changes to their shares (Corporations Act 2001 (Cth) s 246F).

The company must provide copies of resolutions to the member upon request (s 246G).


Other rights of members cont …

A member can apply to the court to inspect the company’s books (Corporations Act 2001 (Cth) s 247A).

A person inspecting the books has a duty of non-disclosure (except to the ASIC or the applicant) (s 247C).

The company or the directors can authorise a member to inspect the company books (see the replaceable rule, s 135) (s 247D).


Litigation rights and remedies

Under statute, members have the right to:

• correct the share register• examine the company’s books• challenge a change to shares• pursue remedies for winding up, injunction or

damages.


Contractual rights

Members have rights under:

• common law contracts (e.g. employment)• the statutory contract (the Corporations Act 2001

(Cth) s 140(1))

Common Law RightsCase law provides rights to various remedies including declaration and injunction, damages, rescission, and account of profits.


Actions by members

Class action: in class actions, the member’s claim is one of several with a similar factual and evidential basis. The defendant is common to each claim.

Representative action: in a representative action, one member sues on behalf of other members to enforce the same action by the company.

Derivative action: under, for example, s 236 of the Corporations Act 2001 (Cth), a member may mount an action on behalf of the company where the company is unwilling to do so.


Advising a shareholder

• What is the company’s authorised share capital?• What is the company’s issue and allotted share capital

and are the shares fully paid or partly paid?• What voting rights, if any, are attached to the shares?• Do the shares carry a right to receipt of a dividend,

when one is declared?



The different rights that apply in relation to shareholdings

A person is a member/shareholder of the company atregistration of the company or if named in the register of members (Corporations Act 2001 (Cth) s 231).

• The shareholder can apply to court for a meeting to be held (s 249G).

• The right to vote at shareholders’ meetings is determined by the company’s constitution.

• The company’s constitution and s 252V provide for the right to appoint a proxy.

Rights cont …

Under s 249D of the Corporations Act 2001 (Cth), members with 5% of the votes or 100 members can request that the directors hold a general meeting; under s 249F, such members can arrange (and pay for) a general meeting.

Under s 249E, members with more than 50% of the votes can arrange and hold a general meeting if they have made an earlier request to the directors (under s 249D) and the directors have failed to do so.

Special resolutions can be passed by shareholders with 75% of the shares (ss 9 and 249L).


The statutory derivative action

Usually only the directors can bring an action on behalf of the company since they are the appropriate agent of the company.

A member does not have the right to represent the company (the proper plaintiff principle); unless

The are granted the right to represent the company in place of the directors through a statutory (under the Corporations Act) derivative (being given the right) to take action (legal action as a representative of the company).


The statutory derivative action cont …

Who can apply?A member, former member, officer or former officer can apply for a statutory derivative action (Corporations Act 2001 (Cth) s 236(1)) to bring proceedings on behalf of the company, intervene in proceedings or to take any particular steps regarding proceedings.



The applicant seeks an order under s 237 of the Corporations Act 2001 (Cth).

A court must grant the application if they are satisfied that:

• it is probable that the company will not bring the proceedings

• the applicant is acting in good faith• it is in the best interests of the company that the

application be granted• there is a serious question to be tried.



The company can rebut the presumption that a party be allowed to bring an action if the company has decided not to bring proceedings, nor to defend them, discontinue, settle or compromise them, and the directors:

• have acted in good faith• do not have a material personal interest• have informed themselves of the subject matter in a

reasonable way; and• rationally believe the decision is in the best interests of

the company.



A court may decide that the directors have good reason not to take the legal action because:

• there is little chance of success in the action• the person targeted has no means of paying up, even if

the company is successful• they have legal advice against taking action.

Otherwise, the court should allow the action.


Shareholders’ duties

Shareholders are not fiduciaries. They do not have to disclose any interests or conflicts of interest (unless they are a director!).

However, if a large shareholder uses their power against minorities, then such power must be used appropriately and not oppressively.Gambotto v WCP Ltd (1995) 13 ACLC 342 (8 March 1995)

A majority cannot change the constitution and compulsorily acquire the property of a minority member, unless they can prove this is fair to all members and is in the interests of the whole company.


Members’ statutory remedies

Section 232 of the Corporations Act 2001 (Cth) allows a member of a company to apply to the court for an order under s 233 if the company’s affairs are being conducted:

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

discriminatory against, a member or members in that or any other capacity.


Members’ statutory remedies cont …

Under s 233 of the Corporations Act 2001 (Cth) there are various persons who can seek an action, including members who have ceased to be a member (e.g. because their shares have been sold or taken).


The statutory framework for oppressive conduct

The court may make an order under s 233 of the Corporations Act 2001 (Cth) if:

(a) the conduct of a company’s affairs; or(b) an actual or proposed act or omission by or on

behalf of a company; or(c) a resolution or a proposed resolution, of members

or a class of members of a company; is either; (d) contrary to the interest of the member as a whole; or(e) oppressive to, unfairly discriminatory against a

member or members whether in that capacity or in any other capacity


The statutory framework for oppressive conduct cont …

An action for oppression may be the result of an act or an omission.

Under s 233 of the Corporations Act 2001 (Cth), orders that a court can make include:

• ordering that the company be wound up• ordering that the company constitution be modified or

repealed• regulating the company’s affairs in the future• ordering that transferred shares by purchased• ordering that the company institute, prosecute, defend or

discontinue proceedings• appointing a receiver or manager over the company• restraining a person from engaging in some conduct• requiring a person to do some act


The statutory framework for oppressive conduct cont …

A action for oppression takes place when a person believes the company, or its personnel, has done something unfair, prejudicial or discriminatory.

Wayde v New South Wales Rugby League

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd


The statutory injunction, s 1324

An injunction is one of the interim remedies sought by ASIC or an affected member if a corporate activity contravenes the law.

Conduct that can trigger this is:

• any contravention of the Corporations Act• aiding and abetting contravention• inducing another to contravene• being involved in a contravention• conspiring with others in a contravention.


Winding up the company, s 461

There are a number of grounds by which a court may order a winding up. For example:

• The company has resolved by resolution to wind up.• The company does not commence business within one year

of its registration.• The company has no members.• Directors have not acted in the interests of the members as

whole.• The affairs of the company have been conducted

oppressively, through an act or omission.• The company is insolvent and it is in the interests of the

public, members or creditors that it should be wound up.

Macquarie University v Macquarie UniversityUnion Ltd (No 2)


Documents

Rights and remedies of members