There has been, for a long time, an understanding that boards manage and shareholders do not, this has recently been challenged in the Court.

Shareholders who are dissatisfied with the decisions or performance of directors have the right to vote on the election or removal of the directors, but not interfere in their decisions – unless there are other provisions in the company constitution (though usually not!)

In recent times, shareholders have placed great emphasis on becoming more involved with the running of their companies. This demand for enhanced responsibility has resulted in rules being introduced to increase the accountability of directors to shareholders (the two strikes rule).

The case of Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016] FCAFC 80 considers issues that can arise when distinguishing between shareholders’ and directors’ authority.

The Australian Centre for Corporate Responsibility had requested the board of the Commonwealth Bank of Australia to discuss three proposed resolutions at the company’s annual general meeting. The resolutions were in relation to greenhouse gas emissions by companies financially supported by the bank.

Shareholders argued in the Full Federal Court that the bank had a duty to discuss the proposed resolutions at the annual general meeting due to provisions in the Corporations Act 2001. However, the Court ruled against the shareholders, stating that the bank was under no obligation to include the resolutions in their meeting.

The Court ruled that the demands of the shareholders were not backed up by any legal authority or power, and as such the management of the bank was solely the responsibility of the board. In addition, shareholders’ authority did not include the authority to pass resolutions of the nature intended.

The Full Federal Court confirmed that the management responsibilities for the bank lay with the directors.

In coming to their verdict, the Court examined the Corporations Act 2001 for provisions referring to the division of powers between a companies’ board and its shareholders. They reviewed the bank’s constitution, specifically studying clause 12.1(a). A clause stating that “the business of the company shall be managed by or under the direction of the directors, who may exercise all such powers of the company as are not, by [the Act] or the constitution, required to be exercised by the company in general meeting”.

The shareholder argued that the resolutions dealt with matters of a controversial nature and therefore should be reviewed and voted on appropriately at the annual general meeting. However, the Court could not find a binding authority for the suggestion that the bank should be required to put the matters proposed up for consideration at an annual general meeting.

The Court felt that the arguments made by the shareholders, which would “support the existence of a legal power or capacity in the company general meeting to express an opinion, by resolution, on a matter concerning the company’s management”, were unsupported by legal authority.

In an unsurprising decision, the Court went on to explain: “An individual’s expression of an opinion, even an opinion concerning him or herself, ordinarily does not involve the exercise of any legal power or capacity” (para 50). The Court considered that the shareholders were confusing legal powers and capacities with other powers and capacities that have no legal basis in disrupting the ability of directors to manage company affairs.