Introduction
It is vital understand the nature of minority shareholders' complaints and the nature of the company in which they occur. The nature of minority shareholders' complaints and the nature of the company in which they occur are interrelated, since the nature of the company will determine whether and to what extent minority shareholders are affected by particular forms of conduct (Skeel 2004, 151). Minority shareholders have dilemma some of which involves disagreements over policy matters, charges of inefficiency or negligence. The dilemma of most minority shareholder is experienced by Bob Crundall. Bob Crundall had a number of matters affecting his relationship with RC Hardware Supplies Pty Ltd (“RC”) in which he is a shareholder. Harold Sampson is the majority shareholder, Manager Director and he has told the board that in his opinion “RC” should shed a number of contracts it has with suppliers. He recommends that the company negotiate a contract with Crittals Machine Parts Pty Ltd. The change resulted in the payment of 0 000 of penalties for broken contracts. “RC” records a loss of 0 000 at the year-end. It also comes to light that the company has given Harold a new Mercedes car for his birthday.
Directory’s duty
As previously discussed, directors are usually conferred with extensive express or implied powers that may be utilized in managing a company. As these powers leave the fate of the company largely in the directors' hands, the common law and the CA impose certain duties on directors. These are designed to ensure that they will use their powers with a reasonable degree of care and in the company's best interests.
The common law position
Fiduciary relationships exist between persons who stand in a position of trust and power over others and the law requires that such persons act in the latter's best interests. As directors have the ability to control the corporation's conduct, directors are considered to stand in a fiduciary relationship with their company and are subject to the duties that stem from that relationship: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. Fiduciary duties require directors: to act bona fide in the interests of the company as a whole: Re Smith and Fawcett Ltd [1942] 1 All ER 542; to exercise their powers for a proper purpose: Re Lee Behrens & Co Ltd [1932] 2 Ch 46. Here the Court said the test was to ask if whether what was done was for the benefit and to promote the prosperity of the company; to avoid conflicts of interest in a contract with the company: Aberdeen Railway Co Ltd v Blaikie Bros (1854) 1 Macq 461. The directors can avoid a conflict of interest by making a full and frank disclosure, of their interest, to the company in general meeting. Disclosure to the board, if any, is not sufficient: Furs Ltd v Tomkies (1936) 54 CLR 583; to act with care, skill and diligence: Re City Equitable Fire Insurance Co Ltd [1925] Ch 407.
The statutory position
The Corporate Law Economic Reform Program Act 1999 has made significant changes to the CA with respect to statutory duties for directors, other officers and employees of companies. The important provisions are: CA ss179, 180, 181, 182, 183, and 184. The relevant statutory duties are as follows: 5.9.73.1 CA s179 gives a general background to Part 2D.1 that deals with the duties and powers of officers and employees of a company. The basic fiduciary duty to act bona fide for the good of the company is preserved in the CA. Closely linked to this duty is the duty to act for a proper purpose. In addition there is a duty not to fetter one's discretion and a duty to avoid a conflict of interest. The CA has a separate remedial regime of civil and criminal penalties where ASIC has locus standing. This necessitates some duplication of the general law duties in Part 2D.1 of the CA. 5.9.73.2 CA s180(1) (a civil obligation only) provides that the duty requires a reasonable person to be placed in the position of a director or officer of the company when exercising duties of care and diligence taking special account of the nature of the company, the nature of the decision and position of the director and the nature of the responsibilities undertaken by the director.
Both the duty and standard of care of directors were initially developed in equity before the evolution of the modern tort of negligence. Numerous cases have been used to refine the duty, notably Re City Equitable Fire Insurance Co. Ltd [1925] Ch 207 and latterly the Australian case Daniels v Anderson (1995) 13 ACLC 614 which required directors to demonstrate a high level duty of care with no limitation of knowledge or experience being accepted as excuses. Both executive and non-executive directors were held to be under the same duty and standard of care. Harold did not provide high level duty of care for company. He did not follow CA s180 (1) and the director’s duty under the corporation law. The director’s duty under the Corporation law of Australia states that the director or Harold Sampson should act in good faith and make sure that the interest of the company will be his top priority. In the case Harold Sampson has shown that he doesn’t think of the company’s interest as the top priority. His recommendation to shed a number of contracts with suppliers has given problems to the company. It created 0,000 worth of penalties for broken contracts. The director’s duty under the Corporation act states that the director should avoid conflicts between one’s role as director and any of one’s personal interests. It seems that Sampson was showing some preference for the company Crittals Machine Parts Pty Ltd. It seems that he had some connivance with Crittals Machine Parts Pty Ltd and he received a Mercedes Benz after he helped Crittals to have a contract with his company RC Hardware Supplies Pty Ltd. CA s180(2) introduces a business judgment rule concerning business judgments made by directors and other company officers. The business judgment is to be the subject of the reasonable person test as to its validity in the interests of the corporation as a whole. It is important to note that all officers of a company, not just directors will be covered under the rule. It is recognized that Daniels v Anderson (1995) 13 ACLC 614 imposed heavy responsibilities on directors and officers of a company. The concern was that directors would be restricted in displaying an entrepreneurial flair which would involve a degree of risk taking. The business judgment rule is intended to provide a safe harbor for honest decisions, which turn out badly providing they satisfy specific criteria. These include making the judgment in good faith, not having a material personal interest in the subject matter of the judgment, obtaining sufficient information on the subject matter of the judgment up to an appropriate level and having a rational belief that the judgment is in the best interests of the company. Harold did not make a good business judgment and was not able to follow the business judgment rule to make honest decisions. The criteria of good business judgment seems to be ignored by Harold, this can lead to problems.
Member and Member right
The existence of directors duties have been discussed previously and these would be ineffective in the promotion of proper corporate conduct if these were not enforceable. It is therefore necessary to consider the members' ability to initiate proceedings against offending directors/majority shareholders. At common law, this power is limited by the "proper plaintiff" rule which confines the ability to commence proceedings for a breach of duties owed to the company to the company itself. The CA through CA ss232, 233, 234 1324 and 461 has attempted to combat these limitations by providing members with statutory forms of relief. Members, unlike directors, do not stand in a fiduciary relationship with the company or one another: Peter's American Delicacy Co Ltd v Heath (1939) 61 CLR 457. They may vote in their own interests: North-West Transportation v Beatty (1877) 12 App. Cas.589; In case 1939 Mills v Mills –If the majority exercises their power bona fide for the benefit of the company as a whole the courts will not intervene to invalidate the resolution. However, in any situation where the rights of the minority are subject to the will of the majority a resolution will be held invalid if it was passed - Fraudulently or oppressively or was so extravagant that no reasonable person could believe that it was for the benefit of the company.
If the minority can show that the majority has passed a resolution merely to benefit the majority and not for the benefit of the company as a whole the court will hold the resolution invalid: Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290. If directors make the decision that will, benefit the majority only, the majority members may not vote: 5.10.3.1 to ratify irregular acts of the directors in a fraud of the minority ('fraud' is used in the sense of improper conduct rather than deceit): Cook v Deeks [1916] 1 AC 55; or, 5.10.3.2 to enable the majority to benefit at the expense of the company: Daniels v Daniels [1978] 2 WLR 73. If the minority can show that the majority has passed a resolution merely to benefit the majority and not for the benefit of the company as a whole the court will hold the resolution invalid: Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290. If directors make the decision that will, benefit the majority only, the majority members may not vote: 5.10.3.1 to ratify irregular acts of the directors in a fraud of the minority ('fraud' is used in the sense of improper conduct rather than deceit): Cook v Deeks [1916] 1 AC 55; or, 5.10.3.2 to enable the majority to benefit at the expense of the company: Daniels v Daniels [1978] 2 WLR 73. Individual members, who are of the opinion that the affairs of the company are not being conducted properly, have several options open to them, dependent upon the conduct of which they complain. In common law they could seek remedies under Foss v Harbottle which held that where the wrong was done to the company the company was the proper plaintiff. Derivative actions are only allowed if their cause falls within an "exception"" to the rule. A fraud on a minority is just such an exception. Under statutory rights and remedies the likely provision is CA ss232, 233, 234 for oppressive and unfair conduct of the company's affairs. It provides that a member may seek a remedy where the "affairs of the company" are being conducted in an "oppressive", "unfairly prejudicial" or "unfairly discriminatory" way. CA s53: defines "affairs of the company". Under CA s247A a member can apply to the Court for an order to inspect the books of the company. The Court would need to be convinced that there was ample evidence of wrongdoing by directors before granting an order for the member or his/her legal representative or auditor access to the company's books. The grounds available to members for the winding up of their company are specified in CA s461 and echo the grounds for relief under CA ss232, 233, 234. In this way CA s461 provides members with a further means of controlling directors' and majority shareholders' abuses of powers. The most frequent grounds used to bring actions under CA s461 include those involving directors who have acted in their own interests or have acted in some other manner which appears unjust or unfair, or where the affairs of the company have been conducted oppressively, prejudicially or discriminatory to a class of members who are in the minority. The minority or Bob in the case has the right to prove that the Majority or Harold has instituted change will only benefit him. By proving the fraudulent nature of change Bob can have the courts hold the change as invalid.
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