In a series of recent cases, the Federal Court[1] and Full Federal Court[2] have re-affirmed the basis for the distribution of corporate power between the members in general meeting and the board of directors. In order to make valid resolutions, members must have a specific power to do so conferred on them by the company constitution or by statute.

A company’s powers are distinct from those of its two primary organs, the members in general meeting and the board of directors. The Full Federal Court in Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016] FCAFC 80 (ACCR) and Aveo Group Limited v State Street Australia Ltd in its capacity as Custodian for Retail Employees Superannuation Pty Ltd (Trustee) [2016] FCAFC 81 (Aveo Group) emphasised that each organ is sovereign in its sphere, and one organ cannot use its powers to interfere with those of another.

Typically, the powers of management of the company are vested exclusively in the board of directors, with specific powers conferred on the members in general meeting. The distribution of power between those organs is subject to the precise terms of the company’s constitution and any relevant statute. When the functions of two organs intersect, the validity of exercise of those functions will be determined by the corporate balance of powers, the determination of which will often have significant commercial consequences.

The series of cases identified deal with a common circumstance where the functions of different organs intersect: when members in general meeting attempt to make resolutions which relate to the company’s management.

In ACCR, members proposed to move resolutions that, in effect, stated it was their intention that the directors provide certain environmental reports in the company’s Annual Report. The Full Federal Court found that the directors were entitled to decline to include the proposed resolutions in the notice for the company’s Annual General Meeting. In doing so, the Court highlighted that members cannot make resolutions regarding the management of the company simply on the basis of a legitimate interest in how the managerial powers are exercised. It was not the function of the members to express an opinion as to how a power of the board of directors should be exercised. Indeed, the Court considered it a “fundamental proposition” that members in general meeting cannot speak or act on behalf of a company except as specifically authorised by constitution or statute to do so.

The cases of State Street Australia Ltd in its capacity as Custodian for Retail Employees Superannuation Pty Ltd (Trustee) v Retirement Villages Group Management Pty Ltd [2016] FCA 675 (State Street Australia) and Aveo Group provide examples of where the members were conferred powers in the company constitutions to make resolutions regarding specific matters of management.

In State Street Australia, resolutions for the removal of two directors were proposed by a securityholder. Amongst other things, Beach J held in that case that the securityholders’ constitutional power to remove a director by ordinary resolution was not abrogated by the statutory removal power in section 203D of the Corporations Act 2001 (Cth), declining to follow a previous Federal Court case which decided the contrary.

Aveo Group concerned the appeal of a decision by Beach J on litigation related to State Street Australia. It regarded the validity of resolutions made by securityholders concerning removing an entity as manager and advisor in the context of a stapled investment. The Full Federal Court found, amongst other things, that the resolutions did not usurp the directors’ powers and were validly made pursuant to specific powers conferred on the securityholders by the constitution.

Members in general meeting who wish to make a resolution must identify specific powers for those resolutions in the company constitution or statute. They must also consider potential interactions of relevant constitutional and statutory provisions. Correct interpretation of those provisions is critical in order to determine whether directors are required to put proposed resolutions to the members, or whether they can decline to do so.