CORPORATE Alert: Limitations of shareholder activism in general meeting

Sep 1 2015

Publications

Key points

  • Shareholders can requisition general meetings if they hold at least 5% of the votes that may be cast at the general meeting.
  • Shareholders are not entitled to require a company to hold a general meeting to pass advisory resolutions or express opinions as to how a power vested in the board ought to be exercised. These are invalid resolutions.
  • Shareholders wanting to effect change at an operational level are limited to changing the composition of the board or amending the constitution of the company.
  • Shareholders of a listed company should be careful that any collective action to change the composition of the board does not trigger the substantial holding provisions of the Corporations Act or breach the takeover rules.

Background

In Australasian Centre of Corporate Responsibility v Commonwealth Bank of Australia [2015] FCA 785, the Australasian Centre for Corporate Responsibility (ACCR) (who represented over 100 members of Commonwealth Bank of Australia (CBA)) gave CBA notice under section 249N of the Corporations Act of three proposed resolutions to move at an upcoming annual general meeting (AGM) of CBA. 

The first two resolutions were ‘advisory’ resolutions expressing shareholder opinions in respect of various environmental issues relating to CBA’s business. 

The third resolution was a special resolution proposing to amend the company’s constitution to include a requirement that CBA’s annual report contain disclosures relating to greenhouse gas emissions.

CBA did not include the first and second resolutions in the Notice of Meeting on the basis that the resolutions were “matters within the purview of the Board and management of the Bank” and accordingly were “not valid and capable of being legally effective” ( Ibid at [4]).  CBA did include the third resolution in the notice along with the members’ statement supplied by ACCR in support of the resolution as well as commentary from the CBA board regarding the proposed resolution and a recommendation that shareholders vote against it.

ACCR sought a declaration from the Federal Court that each of the three proposed resolutions could be validly moved at an AGM of CBA and that CBA’s board acted beyond its powers by responding publicly to the third resolution. 

Decision

Davies J found in favour of CBA and dismissed ACCR’s application on all grounds. 

In respect of the first two resolutions proposed by ACCR, it was held that the resolutions expressed opinions as to how the management of the company, being a power exclusively vested in the board by the constitution, should be exercised by the board. As a result, they were legally ineffective and rightfully omitted from the Notice of Meeting.  Davies J reaffirmed the general principle held in National Roads & Motorists’ Association v Parker [1986] 6 NSWLR 517 that shareholders in general meeting cannot interfere with, or express opinions in relation to, the board’s exercise of powers which are exclusively vested in the board under the constitution of the company.  CBA’s constitution expressly provided that the authority and responsibility for the management of the company is vested in its directors, except only in so far as the constitution or the Corporations Act required any power to be exercised by shareholders in general meeting. 

In respect of the third resolution, Davies J confirmed that the directors were authorised to express their opinions in the notice of meeting and recommend shareholders vote against the proposed resolution. In doing so, the directors also upheld their duty at general law to fully and fairly inform shareholders of the matters to be considered at the meeting to enable them to make a properly informed decision. 

Impact on shareholder activism

In recent years, the statutory rights of shareholders under the Corporations Act have been increasingly used as tools for shareholder activism.  The ACCR decision is a timely reminder of the limitations of those powers and reaffirms the primary role of the board in managing the company. 

The strategies available to activist shareholders to limit or influence the exercise of the powers of the board include requisitioning a meeting (or themselves convening a meeting) to amend the company’s constitution or to change the composition of the board.

Shareholders holding at least 5% of the votes that may be cast at a general meeting have the right to requisition a general meeting of a company for these purposes.  Until recently, at least 100 members entitled to vote at the general meeting of the company could also requisition a general meeting however that right has been abolished.

Amend constitution

A proposed amendment to the constitution could seek to limit the powers of the board or require the board to comply with certain requirements. For example, by including a requirement that shareholder approval be obtained before the directors could undertake certain actions (eg. a sale of assets) or by imposing additional reporting requirements on directors.

Any proposed resolution seeking to amend the constitution would need to be approved by at least 75% of members present and voting.  This is a high threshold for success and, as confirmed in the ACCR case above, the board is entitled to express its opinion on the proposed resolution and recommend that shareholders vote against it if they believe that recommendation is in the company’s best interests.

Change in composition of board

The removal and appointment of directors only needs to be approved by a simple majority, so it carries a much lower success threshold than amending the company’s constitution.

Collective actions

ASIC has indicated that it will closely scrutinise collective action by shareholders that seeks to change the composition of a company’s board to facilitate or promote the plans of the shareholders involved in the collective action.

Shareholders taking collective action need to be aware of and ensure that they do not inadvertently become associates and become exposed to:

  •  an obligation to lodge substantial holder notices (including changes in substantial holdings and disclosure of all arrangements that gave rise to the association):
  •  the risk of contravention of the takeover prohibitions (eg an unlawful acquisition of a relevant interest in 20% or more of the company); and
  • regulatory intervention by the ASIC or the Takeovers Panel to challenge and disrupt the collective action.

For further information, contact Corporate partners Jason Lambeth, Eugene Fung or any other partner in the Corporate Group.

Written by:

Jason Lambeth | Partner | +61 2 8248 3422 | jlambeth@tglaw.com.au

Eugene Fung | Partner | +61 7 3338 7524 | efung@tglaw.com.au

Andrew Mock | Senior Associate | +61 2 8248 3458 | amock@tglaw.com.au

Katrina Byrne | Graduate Lawyer | +61 7 3338 7940 | kbyrne@tglaw.com.au