Rights and equitable treatment of shareholders

Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Shareholders in public companies have a statutory right to remove directors under section 203D of the Corporations Act by an ordinary resolution requiring 50 per cent of the company’s shareholders (in attendance and voting at the relevant meeting) to approve the resolution to remove a director. There are onerous notice requirements that must be complied with in order for this statutory right to be validly exercised.

This right to remove directors is frequently used in conjunction with the right of members controlling 5 per cent of the voting shares (section 249D of the Corporations Act) to call (or require the company to call) a general meeting.

This statutory right is not an exclusive method of director removal. While the section operates despite any other method prescribed, it does not limit the creation of alternative methods for director removal within a shareholders’ agreement or a company’s constitution.

For private companies the process is much simpler. Section 203C of the Corporations Act is a replaceable rule that allows companies, by ordinary resolution, to remove a director from office. The notice requirements contained within section 203D do not apply. However, if a private company’s constitution provides otherwise, the replaceable rules will not apply. Accordingly, private companies may establish alternative methods or limits on director removal within the company’s constitution.

The power to manage the affairs of Australian companies vests in the board. Shareholders do not have a general right to require that a board pursue (or not pursue) a particular course of action.

Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The directors of a company have the power to manage the business of the company generally and may exercise all the powers of the company except for certain actions that require shareholder approval, or any actions limited by the company’s constitution. Decisions that are reserved for shareholder approval include:

  • constitutional amendments: a company may only amend its constitution by a special resolution of members passed with at least 75 per cent approval. The process is the same for changing a company’s name;
  • election of directors: where a company is required to elect directors, either in accordance with its constitution or pursuant to Listing Rule 14.4, the director must be elected by ordinary resolution;
  • related party transactions: chapter 2E of the Corporations Act prohibits a public company from giving a financial benefit to a related party without first obtaining shareholder approval. For listed companies, the Listing Rules also require that shareholders approve transactions with specified persons of interest (which includes directors, substantial holders and any of their associates);
  • capital alterations: the Corporations Act requires various share capital alterations including capital reductions, selective buy backs and share buy backs to be approved by shareholders. In some circumstances, such as selective buy backs, shareholder approval must be sought by special resolution; and
  • major changes to company activities or the disposal of main undertaking: the ASX may require listed companies to seek shareholder approval to make a significant change to the nature and scale of its activities under Listing Rule 11.1. If the significant change involves the company disposing of its ‘main undertaking’, which is a term generally understood to be its main business activity, shareholder approval is mandatory.

Shareholder approval is required under the Corporations Act in a variety of further instances including appointing auditors, financial assistance, issuing incentive options or performance rights to directors, or applying for a company to be wound up.

As addressed further in question 28, shareholders have a non-­binding vote on the company’s remuneration report.

Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Listed companies are required by Listing Rule 6.9 to allocate one vote for each fully paid ordinary share in the capital of the company. The ASX does not usually trade alternative voting right shares such as non-voting shares, ‘golden’ shares or super voting shares. However, preference shares and partly paid shares are quoted by the ASX. Preference shareholders have voting rights restricted to particular circumstances prescribed by Listing Rule 6.3 and holders of partly paid shares are entitled to vote in proportion to the amount paid on the share (except for a vote by show of hands).

Unlisted companies have more flexibility in their share class structure and may provide for shares with disproportionate or limited voting rights in shareholder agreements or the company’s constitution.

Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

The procedures for general meetings of a company are prescribed by Part 2G.2 of the Corporations Act. Company shareholders must receive written notice of a general meeting of the company and may attend and vote, or vote by proxy. Listed companies must give shareholders notice of a general meeting with at least 28 ‘clear’ days’ notice prior to the meeting. This notice period is reduced to 21 ‘clear’ days for non-listed companies.

Owing to advancements in the functionality and reliability of technology, some major corporations around the world have held virtual general meetings online. While there have been some examples of general meetings held virtually within Australia, such as the 2017 AGM of the a2 Milk Company Limited, uptake of virtual AGMs is not widespread. Section 249S of the Corporations Act allows companies to hold a meeting of its members at two or more venues using technology, such as video conference, that allows members a reasonable opportunity to participate. At this point in time, ‘hybrid’ AGMs occurring in person at a particular place and via video conference or web conference externally are more common than truly ‘virtual’ AGMs occurring entirely online via technology.

Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The Corporations Act contains a variety of avenues for shareholder-driven company actions: shareholders may move resolutions against the wishes of the board, including the removal of directors (as outlined further in question 3 above) and issue dissident statements to be considered by other shareholders.

Shareholders with at least 5 per cent of the votes in the company may initiate a general meeting of the company by either: requisitioning the directors to call and hold a meeting under section 249D; or calling and arranging to hold a general meeting themselves under section 249F.

The procedure established by section 249D is generally preferred by companies, as directors retain elements of control that are absent under meetings held solely by members. While shareholders requisitioning the board must provide any resolutions proposed to be considered at the meeting in their notice to the company, the directors may include explanatory statements and recommendations prior to providing the notice to all members. In contrast, under the procedure established by section 249F, the members have complete autonomy in calling and holding the meeting, but are burdened with the corresponding expense. Alternatively, shareholders consisting of at least 5 per cent of the votes in the company, or at least 100 members entitled to vote, may give a company notice of a resolution to be considered at the next general meeting. The company must give notice to all shareholders in its next notice of meeting.

In addition to calling meetings and proposing resolutions, shareholders may request the company to circulate member statements addressing a proposed resolution or any other matter that may properly be considered at a general meeting, provided the request is made by members with at least 5 per cent of the vote in the company, or 100 members entitled to vote.

Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Shareholders, even major shareholders, are not fiduciaries owing duties to the company. However, in certain circumstances the actions of a company, which can extend to the actions of major shareholders, may be found to be oppressive, unfairly prejudicial or unfairly discriminatory to members, or contrary to the interests of the members as a whole. In these circumstances, Part 2F.1 of the Corporations Act allows the court to make remedial orders.

In certain circumstances, a major shareholder may be entitled to nominate a director to sit on the company’s board. As a director, the nominee will owe fiduciary duties to the company to act in the company’s best interest. A nominee director is not permitted to disregard the interests of the company; however, there may be instances where a nominee director is able to act in the best interest of the company and additionally in the interest of the nominating shareholder.

Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders are generally not liable for the acts or omissions of the company. However, in exceptional circumstances courts may pierce the corporate veil to find shareholders, or related companies responsible for the actions of a company. While there are examples of the corporate veil being lifted in Australia (such as the infamous James Hardie case), there remains no discernible principle of company law to dictate in what circumstances the court will infringe upon the separate legal entity doctrine.

Part 5.7B - Division 5 of the Corporations Act establishes particular circumstances where a holding company is liable for the debts of a subsidiary in insolvency. In order for a creditor to be able to look through the corporate veil, the holding company must have been aware, or should reasonably have been aware, that the subsidiary was insolvent.