The Supreme Court of Victoria upheld the resolutions passed at a directors’ meeting conducted on the footpath outside the company’s office after the company’s managing director and 50% shareholder refused to recognise the appointments and authority of two directors nominated by the other shareholder in accordance with a shareholders agreement. This case demonstrates the approach of the Courts in recognising that the agreement of shareholders (evidenced by execution of a shareholders agreement) can be effective as a resolution to amend the constitution (in this case to introduce new director appointment rights, a limit on the number of directors and a casting vote).

Rectron Electronics Pty Ltd (Rectron Electronics) was owned as to one share by Rectron Australia BV (Rectron Australia) (a company wholly owned by Rectron Holdings Ltd in South Africa) which was ultimately owned by David Kan, one of the co-founders of the Rectron Group. The other share was held by Jimmy Lu (Jimmy) (the younger brother of Mark Lu (Mark) who was the other co-founder of the Rectron Group).

In 2003, as evidence to support the consolidation of the accounts of Rectron Electronics with the Rectron Group, the parties entered into a shareholders agreement (Shareholders Agreement) pursuant to which:

  • Jimmy and Rectron Australia would each be entitled to appoint (and to remove and replace) two nominee directors;
  • a quorum for a directors’ meeting would be 3 directors, and if such quorum was not met, the meeting would be adjourned for one week and the directors then present would constitute a quorum;
  • Rectron Australia or its duly appointed director would be appointed as Chairperson of, and have a casting vote at, any shareholders’ or directors’ meeting; and
  • in the event of any conflict with the Rectron Electronics constitution, the Shareholders Agreement would prevail.

Prior to the Shareholders Agreement, Mark and Jimmy were the directors of Rectron Electronics (with Mark being regarded as appointed to represent Rectron Australia) and remained the directors until 10 years later when Rectron Australia purported to appoint two nominee directors pursuant to the Shareholders Agreement. One of the issues before the Court was how the appointment of the two new Rectron Australia nominee directors impacted on Mark’s directorship, with Jimmy arguing that as Mark was appointed pursuant to the Rectron Electronics constitution prior to the execution of the Shareholders Agreement, Rectron Australia did not have the power under the Shareholders Agreement to remove him.

Judd J found that:

  • the Shareholders Agreement must be construed as a commercial agreement intended by the parties to implement a new regime and mechanism to ensure control of Rectron Electronics by the Rectron Group;
  • if the new regime is to have practical effect, and prevails over the constitution, each shareholder must be entitled to “start again” by the appointment of 2 nominated directors.  To limit the appointment right due to pre-existing appointments would undermine the entitlements in the Shareholders Agreement;
  • the Shareholders Agreement was in itself effective as a resolution of members to amend the constitution to introduce a limit on the number of directors and a casting vote; and
  • the effect of the appointment by Rectron Australia of 2 new directors was that unless Jimmy nominated Mark (and himself) as directors, they would be disqualified from acting because the shareholders were taken to have resolved that the only directors will be the two nominated and appointed by each shareholder under the Shareholders Agreement.

The two new Rectron Australia nominee directors sought to convene a meeting to, among other things, remove Jimmy as managing director. As the Rectron Australia nominee directors complied with the quorum provisions (but were ignored by both Jimmy and Mark), Judd J found that the resolutions made by the Rectron Australia nominee directors (ultimately on the footpath outside the Rectron Electronics office after being ejected from the building by Jimmy) were valid and effective resolutions made under the constitution as amended by the Shareholders Agreement.

See the case.