A recent decision handed down by the NSW Court of Appeal in Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd  NSWSCA 326 has affirmed the right of a shareholder to receive fixed and mandatory dividends from the profits of the company in circumstances where the company’s constitution has been amended to account for such. This is distinct from the traditional approach where a shareholder's expectation of receiving a dividend is limited by the discretion of the board of directors.
In this alert, Senior Associate Alex Davies and Solicitor Andrew Clements look at the key takeaways from the case.
In 2001 Sumiseki Materials Co Ltd (Sumiseki) was issued with 25 million B class securities in Wambo Coal Pty Ltd (Wambo) under the terms of a restructure agreement, which converted a $25 million debt owed to Sumiseki by Wambo’s sole shareholder, Hunter Coal Pty Ltd (Hunter). As part of the restructure, Wambo’s constitution was amended to set out the rights attached to the B class securities. This entitled Sumiseki to receive a fixed and mandatory dividend in respect of every six month period of an amount equal to 25% of “the profit of the Company available for dividend purposes”.
When the B class securities were issued to Sumiseki, all the ordinary securities in Wambo were held by Hunter. In 2006, Peabody Energy Corporation (Peabody) gained control of Hunter, and in 2009 all the assets of Hunter became the assets of Peabody Australia Mining Limited (PAML) under a scheme of arrangement. PAML also entered into a loan agreement with Wambo which amended the constitution and, in part, led Wambo to believe that the payment of dividends was again at the directors’ discretion.
Between December 2009 and December 2011, Wambo’s directors decided not to pay B class shareholders a dividend in respect of the 6 month periods, even though Wambo’s accounts disclosed an after tax profit from which dividends could have been paid.
Sumiseki brought proceedings against Wambo in the NSW Supreme Court alleging an entitlement to dividends in respect of those profits based on the proper construction of Wambo’s constitution. Sumiseki also asked the Court to consider whether Wambo’s decision amounted to conduct that was oppressive within the terms of section 232 of the Corporations Act 2001 (Cth) (Corporations Act).
In 2013, the NSW Supreme Court found that Sumiseki was entitled to the outstanding dividends and that withholding the dividend payments from Sumiseki amounted to oppressive conduct. Wambo appealed the decision, however the Court of Appeal upheld the original decision. The Court of Appeal confirmed that the meaning of the phrase contained in Wambo’s constitution that “the profit of the company available for dividend purposes”, was that the profits were undiminished by the directors’ discretion to declare dividends, capitalise profits, set aside reserves or provisions, or carry forward profits. The Court of Appeal said that specifying a fixed amount and date for the payment of a dividend gave Sumiseki the “right” to receive a dividend regardless of the discretion afforded to the directors.
Importantly, the Court of Appeal found that together with the construction of Wambo’s constitution and the application of section 140(1)(a) of the Corporations Act, it had the effect of making the constitution a contract "between the company and each member".
The Court of Appeal made comments that Wambo’s constitution may depart from the traditional form which gives directors the discretion under section 254U of the Corporations Act regarding when and in what amounts dividends are to be paid to shareholders. The constitution therefore removed those matters from the scope of Wambo’s internal decision making.
The Court of Appeal also confirmed that the decision of Wambo not to pay the dividends to Sumiseki amounted to oppressive conduct.
Key take away points
- Company boards should be aware that changes to the constitution around dividend payments may affect their internal decision making ability.
- Denying a shareholder an express right provided for in a constitution may be deemed oppressive and unfairly prejudicial to the shareholder.
- Shareholders should be mindful of their rights and how they are affected where the company enters into restructure or finance arrangements.
- Shareholders may consider utilising the constitution as an additional form of security to reinforce their rights pursuant to agreements made with a company.