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Shareholders Remedies Oppression Updated Notes

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BA 1718 Shareholders Remedies

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BA 17 18 Shareholders remedies Table of Contents

Intro to these notes
These notes cover what remedies the shareholder has towards the company or the directors. o Legal standing in respect of wrongs done personally o Legal standing in respect of wrongs done to the company
? General law
? Statutory derivative action
? Compulsory liquidation remedies
? Statutory oppression o Equitable remedies - due to the equitable restraints upon the voting power of the majority Shareholders Remedies checklist short Can the shareholder:

1. Sue on personal rights?
a. Sue on the corporate contract? S 140, Hickman b. Other statutory rights: s 1324 (injnction restraining act contravening CA), s 246D (class rights variations set aside if not all members agreeing to it), and misleading/deceptive conduct: 1041H; s 12DA ASICA (Gwalia) c. Proceedings for the rectification of the share register either pursuant to statutory power under s 175 or general law rights (no new rights are conferred by s 175). d. Sue on directors' fiduciary obligation to individual shareholders ? Coleman v Myers; Brunninghausen e. Proceedings in the nature of a derivative suit for vindication of corporate interests: Ngurli f. Proceedings in the nature of a personal action against directors and co for breach of fiduciary obligations: Harlowe's Nominees; Howard Smit i. Allotment and dilution of shares for improper purpose, giving rise to shareholders' personal right of action: Residues Treatment g. Rights from equitable limitation upon majority's voting rights: ie Unconscientious alteration to the constitution in expropriating the minority's rights (Gambotto)

2. Statutory derivative action: under s 236; where leave granted under s 237 (Swansson; Oates; Charlton and Chapman)

3. Oppression action (ss 232, 233, 234); Wayde General law a. Statute

4. Winding up: on s 461 grounds, s462; Ebrahimi v Westbourne; Re Tivoli a. Eg on just and equitable grounds

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Checklist long Issues to consider:

1. Legal standing in respect of wrongs done personally

2. Legal standing in respect of wrongs done to the company a. General law b. Statutory derivative action c. Compulsory liquidation remedies d. Statutory oppression

3. Equitable remedies - due to the equitable restraints upon the voting power of the majority

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Shareholders Remedies long notes

1. Personal actions? under contract, s 140 CA, other statute, equity?
(1) Sue on personal rights?
(a) Sue on the corporate contract? S 140, Hickman (b) Other statutory rights: s 1324 (injnction restraining act contravening CA), s 246D (class rights variations set aside if not all members agreeing to it), and misleading/deceptive conduct: 1041H; s 12DA ASICA (Gwalia) (c) Proceedings for the rectification of the share register either pursuant to statutory power under s 175 or general law rights (no new rights are conferred by s 175). (d) Sue on directors' fiduciary obligation to individual shareholders? Coleman v Myers; Brunninghausen (e) Proceedings in the nature of a derivative suit for vindication of corporate interests: Ngurli (f) Proceedings in the nature of a personal action against directors and co for breach of fiduciary obligations: Harlowe's Nominees; Howard Smit a. Allotment and dilution of shares for improper purpose, giving rise to shareholders' personal right of action: Residues Treatment (g) Rights from equitable limitation upon majority's voting rights: ie Unconscientious alteration to the constitution in expropriating the minority's rights (Gambotto)

Notes

Excludes: no claim in negligence against the directors for causing the value of shareholding to decline: Prudential Assurance v Newman Note General rule prohibiting double recovery where shareholders' loss is just company's loss: shareholders may not bring an action in their own interest in respect of a wrong done to their company, even where it reduces the value of their shareholding in the company if such an action were allowed in addition to the corporate action, and given that the individual shareholder's loss would simply be a reflection of the company's loss. (Thomas v D'Arcy; Johnson)

* Exception: Personal action: despite the above principle, where the company suffers loss but has no remedy in respect of that loss, a shareholder who has a personal right of action may sue in respect of it, even though it merely reflects the diminution in the value of his/her shareholding.

* relationship with stat derivative action: the existence of the statutory derivative action does not prevent a member bringing or intervening in proceedings on their own behalf in respect of a breach of a right recognized as of a personal or individual character (i.e. not a wrong to the company) (s. 236, note 3)

(a) Statutory contract in constitution? S 140

Effect of company's constitution is as contract between company, each member, director/company secretary, and each member vs member under s 140: a company's constitution and any replaceable rules that apply to it have effect as a contract, which each person agrees to observe and perform -(1) between the company and each member, and (2) between the company and each director and company secretary, and (3) between a member and each other member: s 140. Limitations to this: from Hickman: they are - (1) a company's constitution cannot constitute a contract between the company and a third party (2) a right purported to be given by a company's constitution to a person in a nonmember capacity (whether or not s/he is in fact a member) cannot be enforced against the company (3) the constitution creates rights and obligations between the members and the company.

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Examples:

* in Hickman where the constitution required that there be reference to arbitration for disputes, that was a contractual requirement between members

* in Pender v Lushington where constitution adopted a sliding scale of voting rights, and shareholder split his shareholding among nominees to maximize his voting power, that was valid, and he could sue to require the chairof the general meeting to accept the nominees' votes on resolutions Hickman v Kent or Romney MarshSheep Breeders' Association Div.) Facts: The association was incorporated as a Held: An outsider t non profit company, whose objects were be given by the con (inter alia) to encourage the breeding of an outsider, whethe Kent or Romney Marsh sheep. Article 49 of becomes a member its constitution provided for reference of constitution treating disputes to arbitration. himself and the com A dispute arose between the plaintiff & the rights. association - the plaintiff sought to have the Here, the plaintiff w association and its secretary restrained from company, and so w acts in derogation of his rights as a member. 'constitutional cont The association pointed to the arbitration (and all the other m clause. company. Arbitratio

(b) Other statutory rights: eg injunctions to stop contraventions of CA; class right variations;

misleading and deceptive conduct (1) [s. 1324] Contravention of Act: where a person has contravened, is contravening or is proposing to contravene the Corporations Act, the court may restrain this conduct or require the person to do something WHERE:

* The Applicant: ASIC, or a person whose interests have been, are or would be affected by the contravention;

* Remedies: the court can order the defendant to pay damages, either in addition to or in substitution for the injunction (s. 1324(10)).

* Discretion: this power is discretionary; the applicant has no right to an injunction (Re Brunswick). (A narrow interpretation was taken in Mesenberg where the court held that only ASIC had power to enforce the provision, but this has been crticised by commentators as going against the terms of s 1324. )

* relationship with Pt. 2D.1: it is possible that Pt. 2D.1 & s. 1324 in conjunction might allow minority shareholders to restrain directors from breaching their fiduciary duties or duties of care, diligence & skill. [Not clear whether proceedings under s 1324w ould be derivative or personal (Scarel). (2) [s. 246D] Class rights variations: if the members of a share class do not all agree to a variation or cancelation of their rights (or a modification of the company's constitution to allow either thing), then:

* members with at least 10% of the votes may apply to the court to have the variation, cancelation or modification set aside.

* time limitation: an application must be made within one month of one of the above three events. (3) [s. 1041H; s. 12DA ASIC Act] Misleading and deceptive conduct: the two sections are similar -

* s. 1041H(1): a person must not engage in conduct that is misleading or deceptive or is

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likely to mislead or deceive, in relation to a financial product or a financial service.? intention: the presence or absence of an intention to mislead or deceive is irrelevant. s. 12DA: a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. o Q: is shareholder pursing remedies for misleading and deceptive conductthat arises from buying, holding, selling or otherwise dealing in shares in the company? Then their claims will be subordinated until all other claims aginst the company are satisfied: s 563A (after Dec 2010; Sons of Gwalia Act). In Sons of Gwalia , sought actions relating to nondisclosure inducing them to purchase ranks. Held they ranked equally with general unsecured creditors. Now pursuant to the Sons of Gwalia Act for all claims arising after 18 December 2010, a claim arising from a person buying, holding, selling or otherwise dealing in shares in the co is postponed such that it is only once all other claims made against the co are satisfied can the subordinate claim be satisfied: s 563A.

(c) Proceedings for rectification of share register

Proceedings for the rectification of the share register either pursuant to statutory power under s 175 or general law rights (no new rights are conferred by s 175).

* S 175 gives the co or a person aggrieved to have a right ot have a register maintained under Ch 2C including the register of members under s 169 corrected.

* eg rectification ordered to remove reference to shares allotted by improperly constituted board: Grant's case

* Eg where issue of shares was in breach of directors' duties: plaintiff entitled to rectification order in Ngurli v McCann

* Note: (ratification by general meeting extinguishes a shareholders right to seek rectification of the share register: Winthrop).

(d) Noncategorical fiduciary duty between directors to individual shareholders? Coleman v Myers; Brunninghausen (Rare) (struck out in Chapman Generally: The fiduciary duty of directors is usually owed to the company, not to individual shareholders (Percival v Wright). However, fiduciary obligations may be found in dealings with shareholders and directors if dictated by the circumstances of the particular case (Coleman v Myers). Test:

* Existence and content of fiduciary obligation depends on circumstances: "standard of conduct required by D in relation t oa shlder will differ on all circumstances and nature of responsibility which in a real and practical sense the director has assumed towards the shareholder. IN one case there may be a need to provide an explicit warning and a great deal of info concerning the transaction: Coleman

* Limitation: fiduciary duties having identical content cannot be owed both to the company and to one or more of its shareholders in relation to the same subject matter, and that, to the extent that they exist at all, fiduciary duties owed by directors to shareholders can be recognized only where they would not compete with any duty owed to the company: Brunninghausen

* Ie Company remains the beneficiary of the comprehensive fiduciary duties which directors owe by virtue of their office

* Factors to consider: (a) dependence upon information and advice, (b) the existence of a relationship of confidence (c) the significance of some particular transaction for the parties and (d) the extent of any positive action taken by or on behalf of the director(s) ot promote it: Coleman

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*

In COleman - the two directors did owe a fiduciary duty to individual shareholders - because of depth of knowledge and experience on one side, contrasted with relative lack of it on the other and careful development of the takeover proposals, family situation etc.

* In Brunninghausen - two brothersinlaw Shareholder/director received takeover offer, did not disclose to other shareholder/director who was his brotherinlaw and the only other director (but who wasn't effective)- got him to sell his minority stake: In Glavanics a director (also a shareholder) owed fiduciary duties to the company's other shareholder in the context of negotiations to buy the other shareholder's shares when he received word of a takeover offer, he breached by not disclosing this. o Plaintiff's case was not as strong as that in coleman. However the P entirely depended on the D for information and advice about the transforming circumstances that negotiations were in hand directed to selling the entire undertaking to business people who appeared seriously interested in buying it. P was entitled to expet that he wouldn't be cheated by nondisclosure of negotiations as those that were being conducted. o Fiduciary duty would require directors to loyalty promote the joint intersts of all shareholders. o Wasn't necessary to note the family relationship but it was noted. o Held: The defendant owed a fiduciary duty to the defendant. Though there was no conscious dependence by the plaintiff on information and advice from the defendant, and though there was no relationship of confidence between the two parties, the plaintiff was totally dependent on the defendant for information about the negotiations for the selling of the company. Thus, the fiduciary duty was breached in allowing the plaintiff to operate under a false impression. Example:

* In family company, high position of managing director, degree of inside knowledge, ad misleading manner in which he persuaded tem to sell shares, found a fiduciary obligation because of the relationship whereby they were required to act for protection of the shareholders individual company, father and son conceived plan to acquire all shares because liquid assets plus funds from sale of assets would make him millions - as directors they recommended that shareholders Coleman Appellants asserted that the fiduciary relationship had arisen because those respondents were executive directors in a private co with a shareholding larlgey spread over a few associated family groups each one of which had come to rely upon Sir Kenneth Myers (chairman and family leader) and later his son (managing director), not simply for development of policy within company and good management of its affairs but for protection and cultivation of their particular interests as shareholders.') Other factors: (a) that directors recommended the offer be accepted; the massive capital gain at stake; wholesale use of C &E funds that could make total achievemtn possible - ie that managing director, by use of inside knowledge ould literally name his own price for shares and get it accepted because shareholders were uninformed or had been positively misled. o Facts: Myers and his father were the only directors of the company. Myers formed a scheme by which he bought out his family members via another company wholly owned by him. His intention was to thereafter liquidate the company, which plus sale of assets, would mean that he would get millions. o Lies: In purchasing the shares, he represented to the shareholders that the share price reflected the worth of the assets (it did not) and that the company would not be liquidated afterwards. The fact that the company had liquid assets available for distribution as dividends was also withheld from the shareholders. o Shareholders: When the shareholders found out about the difference in value of the shares and underlying assets, they sued Douglas and his father, claiming, inter alia, fraud, breach of fiduciary duty, and negligence o Held: The shareholders were either misinformed or positively misled. Based on the

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(Fiduciary notes from GB)

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relevant factors (listed above), each of the two directors did owe a fiduciary duty to the shareholders, and it was breached.
? ? it was a small company (a quasipartnership); ? it had a strong family character; ? the high position of the directors; ? the high degree of insider knowledge ; ? the misleading manner in which the shareholders were persuaded to sell their shares o Remedy: order for compensation for the sale of the shareholders' shares at an undervalue ($4.50), with the fair value being assessed at $7 per share Broad notes on determining a fiduciary duty that is not categorical: C. Outside category If not in a category, a duty may still arise, but there is no formula (Pavan v Ratnam). Where there is a contract, the first thing to consider is the terms of the contract (Hospital Products). However, it is not necessary that there be a concluded agreement (United Dominions). Example:

* Duties from proposed joint venture: In United Dominions fiduciary duties arose between parties at a proposed joint venture in respect of matters that were to be the subject of the venture, even though a concluded joint venture agreement had not been signed. Factors:

1. Contractual exclusion. A contractual exclusion by the contract will be determinative if the duty would come from a contractual undertaking (ASIC v Citigroup). If the contract is silent, it will be necessary to consider other factors. Examples: Duty under contract but contract excluded fiduciary obligations no obligation: In ASIC v Citigroup Citigroup had a mandate to act for Toll Holdings in takeover. Mandate letter, specifically excluded fiduciary obligations. Where a fiduciary relationship only exists because of a contract, then contractual exclusion determinative. Here Citigroup only owed fiduciary obligations to Toll Holdings if they arose out of the contractual undertaking to act for them in the takeover, not a standard category, hence excluded.

* This will not prevent a duty from existing in a recognized category , since the obligations come from the category, not the contract. (ASIC v Citigroup).

* Informed consent isn't required for a contractual exclusion (ASIC v Citigroup). Eg, there no informed consent.Undertaking. The fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense (Hospital Products). A contractual undertaking will demonstrate this.

* Absence of any undertaking no obligation: In Moorgate v Philip Morris no fiduciary obligations arose out of licence agreements for the marketing of cigarettes the rights and obligations of the parties were defined by the agreements, and neither party was under a general obligation to avoid any conflict between its own interests and those of the other, or to prefer the interests of that other party or the joint interest to its own.

2. Vulnerability. The relationship between the parties is one which gives the fiduciary a

special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position (Hospital Products). Issues: (a) Vulnerability merely to a breach of contract is not sufficient (JAC).

* No fiduciary duty despite contractual duty as no vulnerability other than to breach: In Pilmer v Duke Group accountants had an association with the directors of Kia Ora, report to shareholders that shares of another company a good price for takeover. Majority said no relationship as no ascendancy/dependency (reliance was placed on them to produce a competent report, but the appellants were not in any position to direct the affairs of Kia Ora).

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