n this case, the Supreme Court of New South Wales found that the power to effect a capital reduction is vested in the board, with the role of shareholders simply being to approve (or not) the decision of the board.  Such power cannot be transferred to shareholders by way of an amendment to the constitution.  This case also serves to illustrate the role of shareholder activism in Australia to advance the interests of shareholders, in this case, by means of the power of holders of more than 5% of the votes that may be cast at a meeting to requisition a meeting.  It remains to be seen whether or not the related right of at least 100 shareholders to requisition a general meeting will survive following referral of the proposal to abolish it to the Senate Economics Legislation Committee for further consideration.

Keybridge Capital Limited (Keybridge) exercised its power under section 249D of the Corporations Act 2001 (Cth) (Act) as the holder of at least 5% (in this case 5.29%) of the votes that may be cast at a general meeting to issue 2 requests for the holding of a general meeting of Molopo Energy Limited (Molopo).

The first request (First Request) proposed resolutions that:

  • the Molopo constitution be amended so that the power to reduce Molopo’s capital could be exercised by Molopo shareholders in general meeting; and
  • the share capital of Molopo be reduced by approximately $55 million by the repayment to all holders of fully paid shares of the amount of 21.75 cents per share.

The second request (Second Request) proposed resolutions relating to the removal and appointment of directors of Molopo and stated that such resolutions were only to be considered if the resolutions proposed in the First Request were not passed.

Four of the Molopo directors were concerned that the proposed capital reduction might affect the ability of Molopo to pay its creditors, particularly if pending litigation was determined adversely to Molopo.

In finding that Molopo was not required to convene a meeting for shareholders to vote on the resolutions proposed in the First Request, White J in the Supreme Court of New South Wales found that:

  • a company’s power to reduce its capital lies with the directors, with the role of the shareholders being only to “approve” such a decision by the directors;
  • it is not the function of shareholders in a general meeting by resolution to “express an opinion as to how a power vested by the constitution of the company in some other body or person ought to be exercised by that other body or person”; (National Roads and Motorists’ Association v Parker (1986) 5 NSWLR 517), and as such, a capital reduction must be one proposed by the directors, and not one which the directors would not be minded to make; and
  • in any case, as the proposed capital reduction could not “lawfully be effectuated” because it did not satisfy section 256B(1) of the Act, the directors were not required to call the meeting.  There was sufficient evidence (contingent liabilities from the pending litigation) that the reduction “might” materially prejudice the ability of Molopo to pay its creditors which was enough to breach section 256B(1).

However, White J found that the Molopo directors were required to convene a meeting to consider the resolutions in the Second Request, finding firstly that the fact that a resolution is conditional does not in itself make a requisition under section 249D invalid, and further that there was no evidence to suggest that the newly appointed directors would seek to effect a capital reduction in breach of their duties as directors.