Key Points:

The law governing corporate disputes is not overly concerned about what gets thrown around in arguments between opposing sides, but that situation changes if shareholders’ funds are involved.

Australian corporate disputes may get intense but they rarely degenerate into personal invective in public, even when board seats are in play.

However, as we note in our article on shareholder activism, battles with US hedge funds can be aggressive affairs, sometimes including personal attacks.

Given the potential arrival of such tactics in Australia, it is serendipitous that an Australian court recently examined whether debates about corporate governance are subject to the usual controls on misleading or deceptive conduct.

What’s “in trade or commerce”?

It’s generally accepted that comments made in the course of a dispute between shareholders and directors (or between directors) are not covered by section 1041H of the Corporations Act. This deals with misleading or deceptive conduct in relation to a financial product or service, and arguments between shareholders and directors don’t relate to a financial product or service.

That leaves cl 18 of the Australian Consumer Law:

“A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

Viscariello v Macks [2014] SASC 189 concerned an allegation that a voluntary administrator had engaged in misleading or deceptive conduct in trade or commerce. In the course of its judgement, the Court reviewed the case law on whether statements during board elections are made “in trade or commerce”:

  • Yates v Whitlam – where it was held that directors who published advertisements for themselves during a board election were not engaging in trade or commerce, and so weren’t subject to the rules governing misleading or deceptive conduct;
  • NRMA v Yates – where it was held that a board election advertisement which claimed that the current board was guilty of “great waste and mismanagement” was a statement made in trade and commerce, because it was an attempt to change the way the company did business;
  • Cleary v Australian Cooperative Foods – which tried to reconcile Yates and NRMA by noting that the advertisement in Yates v Whitlam didn’t say anything about how the company was being run or should be run.

The Court in Viscariello v Macks struggled with the idea (in Cleary) that whether you are engaged in trade or commerce depends upon what your proposed policy is:

“I find it difficult to see how conduct of the same legal, and business, kind, the election by shareholders of directors, can fall within or outside the scope of trade or commerce depending on the policy platform of the candidates.”

It preferred the decision in Yates v Whitlam.

“The election of directors is a matter of the internal governance of corporations. The election itself is not an aspect of, or even incidental to, trade or commerce in a market even though the election of one candidate over another is always likely to affect how the corporation itself engages in trade or commerce.”

Courts reluctant to intervene

This dovetails with another recent series of cases concerning attempts to change the responsible entity of a managed investment scheme: City Pacific Limited, in the matter of; City Pacific Limited ACN 079 453 955 v Bacon [2009] FCA 687; Lachlan Reit Limited v Garnaut & Ors [2010] VSC 399; and Century Funds Management Limited v Opus Capital Limited [2011] FCA 78.

In the course of the battles between the incumbent responsible entity and the unitholders who were seeking to replace it, the responsible entities and the unitholders made various statements in support of their position. In each case, the court was asked to rule that some of these statements were misleading or deceptive in the course of trade or commerce.

As well as having doubts about whether the statements were made in the course of trade or commerce, the courts indicated a reluctance to stymie debate between opposing sides during an ongoing internal dispute:

“The meeting process commenced with the notice of meeting and will only conclude with a vote at the meeting. It is an inherently dynamic process, incapable of a useful analysis, if one is to be undertaken, as to the accuracy of statements until its conclusion. The intervention of a court during that process, to adjudicate on statements and advocacy, would be premature, and a significant intrusion upon the member’s rights to call for and participate in the meeting process.” (Lachlan Reit and Century Funds)

“Members who disagree with statements made in support of a proposed resolution cannot simply resort to the Court in order to determine whether or not those facts are true. Such procedure, if it were available, would presumably also be applied to statements made at a meeting. The practical difficulties are obvious. It would be an abuse of the judicial process and would undermine the proper function of the meeting of members. Even if there is an arguable case for remedying misleading conduct by intervening in the conduct of a meeting, the Court would normally be careful not to do so in areas where the dispute may be more a difference of opinion than a case of truly misleading or deceptive conduct.” (City Pacific)

Restrictions on the board

This does not mean that there is open slather in debates between directors and shareholders. Apart from the defamation laws, there’s the tricky question of the use of company funds in an argument with shareholders: can directors spend company money in defending themselves against outside attacks?

The law on this point is clear in theory, but not in practice. It derives from the case of Advance Bank v FAI (1987) 5 ACLC 725.

The 1986 board election for Advance Bank was a contest between a number of directors who were up for re-election and candidates nominated by 10% shareholder FAI. The directors who were not up for re-election authorised a campaign against the FAI nominees.

FAI successfully challenged the board’s actions in the NSW Court of Appeal, and the directors were ordered to pay the costs of the anti-FAI campaign out of their own pockets.

The Court of Appeal rejected FAI’s argument that directors can never spend company money in a board election. However, it said that that money can only be used to present shareholders with factual matters concerning the best interests of the company – not with propaganda designed to secure the re-election of the existing directors. For example, if the election of a particular person to the board would result in the company’s losing an important government licence, it might be permissible to inform shareholders of that fact. On the other hand, it would not be permissible to use company money to tell shareholders that the company had been successful because the high performance of the existing directors:

“to the extent that directors, in a situation of potential conflict of personal interest and corporate duty, stray into exaggeration, half-truth, emotional language and misleading statements, the risk they run is that their activity will later be characterised by a court as not bona fide for a purpose of the company but rather for the primary purpose of their own re-election.”

These principles would be equally applicable to, say, an attack by an activist shareholder. The result is a form of asymmetric warfare. An activist shareholder who is jockeying for a seat or two on the board could (subject to the laws of defamation) publicly attack the existing board as being arrogant, out of touch and short-sighted; on the Advance Bank principle, the board’s response would be restricted to largely factual matters about its and the company’s business performance (and that of the activist shareholder) – but it could not use company funds to respond in kind to the activist shareholder’s personal attacks.

In conclusion, therefore, it can be said that the law governing corporate disputes is not overly concerned about what gets thrown around in arguments between opposing sides, but that situation changes if shareholders’ funds are involved. At that point, the company and its board are considerably more restrained than those who are attacking them.