#16725 - Corporate Governance

Facts: Family holding company of real estate. Three directors: two sisters and one brother. AoA Art 9 provided that, on any resolution to remove a director, that director’s shares to have three votes per share. CA S168 (now) provides that a director may be removed by ordinary resolution. Sisters wishes to remove brother. Was the weighting invalid meaning they removed him by 200 votes to 100, or was the triple weighting valid meaning that the resolution for removal did not pass so it failed 200 to 300.

Held: Provision valid. Drafters knew of common practice of weighting but did not seek to expressly exclude it.

Counsel for sisters:

Public policy argument against making a director’s removal without his consent impossible
Would ‘make a nonsense’ of the law
Parliament has only picked a few situations where CA will override AoA – court should give effect to those circumstances by not allowing contracting out.
Otherwise, the Act would be frustrated.
Note restrictive approach to such contracting out approach in Australia: Pye v Minister for Lands NSW [1954]

Counsel for brother:

Look at the language of the Act – legislative intent was actually ‘limited advance of shareholder control’.
Historical context: prior to 1948, removal typically required majority
Intention was to reduce this to primarily viz quoted companies, which has been achieved through twin effect of CA and LR
But a more protective approach may be valid for quasi-partnerships
Per Russell, the same effect could be achieved via SHA anyway
Note also that weighted voting is very common and is readily accepted in other areas of CA – what makes this different?
Ordinary Resolution simply means one passed with a bare majority of votes cast – not incompatible with weighting

Reply by sisters:

But here, Parliament did intend to interfere with voting rights in a way that was incompatible with weighted voting
Parliament could have restricted new rule to quoted companies but did not – issue is CA not LR

Lord Reid:

Would dismiss the appeal (provision valid)

AoA Art 9 certainly appears to evade the Act
Effect is that no Director may be removed without his consent.
However, the law is not unfamiliar with weighted voting

Lord Morris:

Would allow appeal (would strike down AoA Art 9) – wrong to allow this because it would make director irremovable against his will

Lord Guest:

Would dismiss appeal – agrees with Lord Donovan

Lord Upjohn:

Would dismiss appeal

A company may issue shares with special rights
Act did not prevent such weighting in any way
“Normal” vote may be show of hands but that does not mean that weighted voting is not permissible
3:1 in other situations would be valid so why not here?
If Parliament’s intention was to prevent this, they should have made it clearer
Some matters better to be left to business people to sort out themselves

Lord Donovan:

Would dismiss appeal

Look at true construction of the provision
S184 (today S168) overrides any AoA requirement for vote to remove director, or irrevocable appointment as director for life – this is already extensive
But weighted voting is a normal part of Company law (how is this different from ?)
Drafters must have known of this possibility but chose not to include it
Sometimes, it is necessary to keep family quarrels within the home and not let them spill over to the boardroom in such quasi-partnerships or family companies

B Ltd owned 49% L Ltd; C Ltd owned controlling 51%. C Ltd and B Ltd had SHA – C Ltd to appoint 2 Directors; B Ltd to appoint 1 Director. SHA provided that, if L Ltd were to commence legal proceedings, it had to be approved by the B Ltd Director and at least one C Ltd Director in writing.

L Ltd brought legal proceedings against controlling shareholder of B Ltd. This had not been approved by the board. B Ltd thus brought an action to restrain proceedings.

Held:

B Ltd director was not bound to vote to allow proceedings in interests of the company. Although he had fiduciary duties as director, it was impossible to say that he necessarily had to vote in favour of allowing proceedings.
B Ltd could not force General Meeting to vote to allow legal proceedings to continue by Ordinary Resolution. What the AoA had specified was a matter for the board would be a matter for the board, and what the AoA had specified was a matter for the members would be a division that would be respected.

Harman J thus ordered a board meeting to convene to sort this out; proceedings against B Ltd controlling shareholder were not struck out.

Facts: Company gave Directors power to decide on whether or not to sell the company per Articles. Takeover offer – shareholders passed ordinary resolution to say that they wanted the company to be sold. Directors did not believe that the sale would be interests of company and therefore blocked sale. Could they be forced to allow sale?

Held: Appeal dismissed – the articles are a contract between the members and the company. The members may not unilaterally assume a power that is not conferred onto them. Directors are not simply agents of the company and it within their authority to block the sale as they honestly believe it would not be in the best interests of the company.

Shareholders have an important role to play even though most decisions would be taken by the board. There are some matters reserved for shareholders, and there is a strong method of shareholder accountability – annual accounts and reports must be presented to them, shareholders of public companies are entitled to attend and speak at the GM at least once a year, and they are meant to have the power to remove directors by ordinary resolution.

However, the norm is private shareholder pressure rather than direct general meeting activism. Ultimate safeguard is meant to be S168 (removal of directors).

The GM is an imperfect process. In small companies (quasi-partnerships), it can seem like an unnecessary encumbrance. For large companies, attendance is often poor, meaning the GM can be ‘captured’ by shareholder-activists. The first issue is easier to address but the second one is harder; CLR made some general recommendations like providing for ‘more effective machinery for dealing enabling and encouraging shareholders to exercise effective and responsible control’.

Preliminary issue: who is entitled to vote on shareholder decisions – different shares have different voting rights; some may have no voting rights (eg preference shares) so it is a democracy of shares rather than shareholders. However, where voting power and risk are not aligned, there may be a tendency for too much risk-taking. Or – used to entrench current management. This is not too much of a problem when the shares are freely traded – a lack of voting rights may lead to a lower share price to reflect the associated risk, so regulatory intervention is directed as disclosure rather than intervention.

The nature of the problem

In a small company, there is often a fusion of ownership and management. Out of convenience, decisions will usually be taken through the board. However, in a board meeting, each member has one vote while in a shareholders meeting, one share has one vote. If the directors have different shareholdings, then the result will be different depending on the mechanism used.

One solution is to collapse board and GM into a single organ, which is possible in parts of the US. CLR did not recommend this but instead the 2006 Act simply makes it easier for small companies to operate, but still with two decision-making bodies. To formally collapse the two, a going concern will have to operate as an LLP.

Written resolutions

No more default rule of AGM, and resolutions of private companies can be made in writing by members rather than at a...

#16725 - Corporate Governance - Company Law

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