Commonwealth Bank of Australia’s AGM last year threw up an interesting case study involving shareholder activism that is worth bearing in mind.
Prior to the CBA AGM the Australian Centre for Corporate Responsibility (ACCR), representing more than 100 CBA shareholders, gave notice of proposed resolutions to be considered at the AGM. The Corporations Act provides that a 5% or more shareholder or 100 shareholders in aggregate are entitled to require the inclusion of a resolution at a meeting of the company.
The objective of ACCR was to draw attention to greenhouse gas emissions caused by CBA. The three resolutions were as follows:
- that CBA’s annual report provides shareholders with a report of its directors on the greenhouse gas emissions that CBA is responsible for, the current level and nature of risks to CBA from unburnable carbon and current approaches adopted by CBA to mitigate those risks;
- that the shareholders express their concern at the absence of these matters in the annual report;
- to amend the constitution by special resolution to require that the directors report in the annual report on these matters.
CBA advised the ACCR that it would not include the first two resolutions in its notice of meeting but would include the third resolution, on the basis that the first two resolutions were matters within the exclusive power of the board and were therefore not valid and capable of having legal effect. In the AGM notice of meeting the board advised shareholders not to vote in favour of the third resolution as it did not consider the resolution to be in the interests of CBA and that it was not clear to the directors how as a practical matter CBA could comply with the resolution. The special resolution was defeated at the AGM.
The ACCR commenced Court proceedings seeking a declaration that each of the three resolutions could be put at an annual general meeting.
The Federal Court rejected the application, setting out a fairly orthodox analysis of the legal principles that apply in this area.
If a company has a typical constitution that provides that the management and affairs of the company are vested in the directors, any resolution of members that seeks to direct the directors to exercise those powers in a particular way will be void and of no effect. For that reason the first two resolutions proposed by the Centre were clearly of no legal effect and CBA was not required to put the resolutions for consideration by shareholders at the AGM.
The third resolution was the only technically correct way in which the activist agenda could have been pursued – an amendment to the constitution that sought to explicitly fetter the general powers of management vested in the board. Of course, the difficulty for an activist in pursuing this strategy is that a special resolution is required to amend the constitution in this way.
The ACCR also sought to argue that the recommendation made by the directors that shareholders vote against the third resolution exceeded the powers of the directors. That argument was also rejected by the Federal Court on the basis that the power of the directors to make recommendations of that nature derives from the constitution and the duties of the directors.