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1. Shareholders: Their rights and powers, enforcement actions, insolvency
2. Alteration of Constitution
4. Derivative Action, Representative Action and Class Action
5. Minority Buyout
6. Unfair prejudice
8. Takeovers Three groups of people that are important:
3. Creditors Solomon: Can be a shareholder, director, creditor all at the same time. Lees Air Farm: Employee and a shareholder - multiple capacities Maximisation of profit for shareholders. Shareholder bears the ultimate risk, primarily motivated by economic concerns.
16th July: Creditors supply finance to companies. Such lending can be secured or unsecured - this is a matter of contract. Employees can be thought of as creditors in some situations. Directors manage the company. There must be a board of directors. In some cases, the shareholders can directly tell the directors what to do, in others the directors have a tremendous amount of autonomy. Small companies vs big companies - the situation often changes. Shareholders supply risk capital to the company, usually in the form of money. If things don't go right, you won't get it back - creditors have a contractual right to get their money back, but shareholders don't. Shareholders attain the right to ultimate control of the company - they appoint and remove directors, and they control the constitution. They also have the right to receive a financial surplus. Shareholders are only at risk in terms of what they put into the company - purchase of shares. Shareholders used to be referred to as members in NZ, and they still are in Aus and UK. Companies Act 1955 drew a distinction between large (public) companies and small companies (private). 1993 Act got rid of the distinction, and instead, you alter the constitution to suit your company. The Core Characteristics of Company Law:
1. The company is a distinct entity from shareholders. This facilitates some of the other characteristics. Incorporated into the Companies Act s15. Three classes of people that we mentioned before, and the company.
2. Limited liability for shareholders. Not essential, can be unlimited. Doesn't mean the company's liability is limited, it means the shareholders liability is limited.
3. Specialised management separate from the shareholders. Ability for those with capital to get together with those with ingenuity. A company must have a board of directors - s128, separation of ownership and control - creates an agency problem. Duties put on directors to deal with agency problem.
4. The ease of transfer of the shareholder interest. Directors can refuse to register share transfers. The law doesn't guarantee freedom for transferral of shares. Exceptons in Companies Act to resolve disputes in the situations related to share transfer.
5. Allocations of rights of control and rights to receive profits to the shareholders. Directors have no authority to distribute the company's money to anyone other than the shareholders. Dividends are within the control of directors, but can only go to shareholders. Shareholders have no right to dividends (it's a distribution rather than a debt, and thus depends on solvency.) Shareholder Control: Control over: Constitution, management, economic surplus. How do they exercise this control? Voting. What happens if the form of doing something hasn't been complied with, e.g. technical breach?
Shareholders can ratify the decision. When shareholders are making these decisions, what ought they have regard to? The interests of the company? Creditors? Employees? Other shareholders?
The Scope of Company Law: It's for shareholders to decide the objectives that they want their company to achieve - the ultimate repositary of power. The present structure recognises:
- Companies are formed and managed for the benefit of shareholders, but subject to protection of actual and potential creditors e.g. the solvency test, the capital maintenance doctrine (until 1993 Act) Allocaton of Resources on Insolvency: Secured Creditors Employees ('preferential creditors' Unsecured creditors Shareholders The shareholder primacy doctrine is based on the theory that the fact of being last in the queue means that shareholders will act so as to make the residual amount as big as possible. While the law recognises that shareholders have ultimate control, it also recognises that directors need discretion - the business judgement rule.
21st July: Complaint of Minority Shareholders: The importance of majority rule - brings with it an inherent abuse of power. Publicly Listed Companies: Those for which there is a continuous market available e.g. telecom, warehouse. Management and risk being totally separate. Minority complaints are usually about management/policy decisions, withholding of information. If you are a shareholder in such a company, you can just sell your
shares. But if the company is not going so well because of poor management, your share value will be diminished - might not want to sell?
Can get out easily, but may not be what you want.
- Widely held shares
- Market for shares
- Separation of ownership and control QuasiPartnership Company: Decisions will be made by consensus. Sometimes a breakdown in personal relationships, one party feels oppressed. The expectations that shareholders have of these companies are different to what you expect from a publicly listed company - you expect you might have a say e.g. profits distributed as directors fees instead of dividends
- No market for shares
- Few Shareholders
- Shareholders play an active role in management What differences will there be in the nature of conflict in such companies?
Corporate Objective: Two primary models:
1. Shareholder primacy model
2. Stakeholder model Shareholder Primacy Model: NZ, England, Australia Company law is based on this. The company is set up to make as large a profit as possible for shareholders. Directors make a promise to shareholders to maximise wealth. Directors are the agents of shareholders. Residual claimants - shareholders, ensure that directors perform their duties and functions properly. Most efficient system - maximising efficiency because focussing on profits means resources will be placed wherever it is most profitable. Is wealth to be maximised short term or long term? Shareholder ideas are not always homogenous. In a practical sense, the idea that the shareholders will manage and discipline the directors often doesn't turn out to be true. Shareholders are not the only residual claimants. Suppliers invest in being able to supply the company, for example in a specific investment that only relates to the company. This gave rise to the stakeholder model. Stakeholder Model: Suppliers, employees etc do have a stake in the company. Nebulous - criticism of the far reaching aspect of this model. How practical is it? Cohesive? Too much discretion to directors to balance competing interests? Directors could play each group off against each other, and be answerable to none. How useful is the idea of ownership applying to Companies?
Some ideas about ownership revolve around possession. A company is an abstract entity. We know shareholders control companies, but we know they control them in the abstract instead of a day to day basis. Is 'ownership' particularly useful for thinking about shareholders and companies?
Shareholders aren't owners of the assets in the company, they are owners of rights. Orthodontic Centre v MD Courtney:
- Specialist Orthodontic Centre, 50% owned by Tobin, 50% Courtney, rented premises, employed staff.
- Used by Courtney and Tobin to operate practices.
- Courtney and Tobin had a falling out.
- 18 months of disharmony and conflict.
- Courtney interests apply under s241(2) to have the company would up on 'just and equitable' grounds, s241(4)(d). s241(2) Liquidator may be appointed by special resolution of shareholders. S241(4) or Court can liquidate if shareholder applies on grounds of : (a) Company can't pay debts (b) Company or board consistently/seriously failed to comply with the Act (c) Company does not comply with s10 (d) Just and equitable to do so Mr Tobin applies to the court under s174. S174 Prejudiced Shareholders. Affairs of the company... conducted in such a way that it is oppressive, unfairly discriminatory or unfairly prejudicial. (2) Court can make an order of 'just and equitable'. Same threshold 'just and equitable' test - different meaning?
Nothing wrong with the company, still trading profitably, but for the persons who own it the relationship has broken down. Why make a company to operate your business? Limited liability? Nope. Conflict with the landlord? The landlord will want personal guarantees from Tobin and Courtney anyway. Perpetual life? If you're a partnership and have a falling out, you would have to dissolve your business. Likely reason why they chose to form a company. S241 is a reasonably brutal remedy, s174 purchase shares, s241 "blunt and drastic". Nothing wrong with the company itself. Radical step to order it to be wound up - a "mere disagreement is insufficient to warrant a winding up remedy". Not surprising that Courtney and Tobin would see winding up as not a silly idea. S174 seen as a more viable option to the Court. Courtney must acquire Tobin's shares at a reasonable price set by an expert. This case: Two person company gone wrong. Company still fine, 50:50% shareholding stalemate. Personal relationship gone wrong. S241 "extreme and drastic", s174 get an expert if you can't sort it out.
23rd July: MacFarlane v Barlow:
- Imported cigarettes, very profitable.
- 77.5% Barlow, 22.5% MacFarlane, family company
- Bruce and David Barlow were the sole directors, allocated themselves 300K and 150K salaries respectively
- The company rented its premises from Mara (owned by the Barlows). Shareholders not fiduciaries, so nothing necessarily objectionable about this.
- Rent paid was market price, but Barlow Bros had advanced money to Mara to buy the building and the loan was interest free. Nothing wrong with shareholders dealing with companies like this, but they have two hats on. They
are directors as well. Barlow Bros didn't pay much in the way of dividends to shareholders, so MacFarlanes didn't get very much. MacFarlanes argue that the Barlows are taking advantage of their position as directors and are disadvantaging the company by lending money to Mara interest free. Eroding the value of the shares because the money being distributed goes one way or another to the Barlows. S165: Derivative action - alleging breach of s131, s33 and common law fiduciary duties. S131 and s133 are duties owed to the company, so the company should prima facie bring a claim (Rule in Foss v Harbottle). For the MacFarlanes to bring a claim, it must be by derivative action. S165(2): Likelihood of success, costs in relation to likely relief, any action already taken by the company, the interests of the company. Test in Vrig v Boyle for the likelihood of success - would a prudent businessperson in the course of his own affairs bring a claim for derivative action?
Master Venning thinks a prudent businessperson would take litigation. The Barlows argue that the salaries were in the financial statements, and were approved at the annual meeting - argued they were ratified. Also knew about the loan being interest free and MacFarlanes said nothing. Argued ratification. Court didn't really decide on this point. Ratification, s177, and also as a common law principle. Subject to anything in the constitution, any resolution agreed to is binding on the company (North West Transportation). Ratification is allowed, shareholders can vote as they like. Can't use your privileged position to abuse your power - not allowed to approve excessive directors fees to yourself. Estmanco - no unrestricted right to pass a resolution depriving a minority shareholder of his rights or property. "Reasonable shareholder". Very arguable that no reasonable shareholder would have thought the interest free loan and excessive salaries were in the interests of the company. Ratification must be in the best interests of the company. Sons of Gwalia v Margaretic:
- Listed public company with widely dispersed shareholding, total separation of ownership and control.
- Mr Margaretic bought shares, 11 days later the directors believe the company is insolvent and appoint an administrator, shares are now worth nothing.
- If the directors of Sons of Gwalia had disclosed that the company was insolvet, Margaretic wouldn't have bought the shares
- Obligation to disclose information - he had lost $26,000 because the company had done something wrong.
28th July: Sons of Gwalia v Margaretic:
- Separation of ownership and control means that buyers don't know much about the company
- Rule that directors have to disclose to shareholders and the market, can make better bargains. S563A Australian Corporations Act - anything owed to a member in his capacity as a member is postponed in insolvency, i.e. creditors get paid first. Solomon and Lee state that you can have more than one hat - you can be a shareholder/member and a creditor, for example.
Solvency test: Assets greater than liabilities, have to pay debts as they fall due before you can pay any dividends. This test replaced the concept of 'par value', and the 'capital maintenance' doctrine. Margaretic's claim is based on the idea that he's not claiming in his capacity as a member, he's claiming under consumer protection legislation. Houldsworth principle - can not get money back from the company unless you rescind your contract. No claim by shareholder on basis of misrepresentations. Subject to lots of criticisms. Soden - Drew a clear distinction between subscribing shareholder and transferee shareholder - distinction between rights that arose from the statutory contract of shareholding and rights that arose out of company statute. Confines Houldsworth to subscribing shareholder. Transferee not 'as a member'. In the case of a solvent company, shareholder basically would be suing themselves, in an insolvent company shareholders are trying to be recognised as creditors. Majority found that membership was a statutory concept, Mr Margaretic was not claiming in his position as a member.
30th July: Sons of Gwalia v Margaretic: In distributions on insolvency, the creditors come before shareholders. Anyone who brings a claim in tort/contract against the company sits equal with the creditors, why should it be different because you are also a shareholder? In a normal situation you bargain for risk when you invest, but in this situation you aren't fully aware of the risk because there wasn't full disclosure. The directors of Sons of Gwalia misrepresented the situation to the market. Australian section is not reproduced in NZ legislation. What might an aggrieved shareholder actually want?
- Exit strategy
- Punishment Partnership - relationship is of a fiduciary nature. When they decide to use a vehicle to conduct their business, the relationship changes. No sense of mutuality, no fiduciary relationship. Shareholders/Company = not fiduciaries. Directors/Company = fiduciaries. Right to vote is attached to the ownership of a share. Vote as he or she sees fit and in their own personal interests. If your best interests have an oppressive effect on the minority, there are limits. No problem with a shareholder competing with a company they own shares in. Directors can't compete though, because of the fiduciary relationship. As long as resource flow is a genuine arms length transaction for which valuable consideration is given, it is not a distribution. The limits that we are likely to find will flow from the capacity of one group of shareholders to oppress another.
Shareholder: No fiduciary duties, has powers to vote, can compete, purchase and sell assets.
Powers Reserved to Shareholders:
- Appoint and remove directors
- Adopt or revoke constitution
- Approve major transactions
- Approve amalgamations
- Place company in liquidation
- Alter shareholder rights How can such powers be exercised?
- At an annual meeting, s120
- At a special meeting (not an annual meeting), s121
- By a special resolution in lieu of a meetin, s122 Doctrine of unanimous consent - Duomatic principle. Primary way of making a decision is in a meeting (ss120, 121), made by ordinary resolution (simple majority). Special resolution, s106, required when you want to: Adopt, alter or revoke a constitution, approve a major transaction, approve an amalgamation or put the company into liquidation. S120 requires the board to call an annual meeting - can be no longer than 15 months between annual meetings. Fixing of the date and the calling of the meeting rests with the board. S172 says that on the application of the shareholder, the court can (if it thinks it's just and equitable) order anything to be done. S122(4) Don't need to hold a physical meeting if everything that's needed to be done is done by resolution. It is possible to dispense with an audit of the financial statements, but only if everybody agrees. Special meeting can be called by the board of any person authorised by the constitution, and if any shareholder with 5% or more requests, the board must do so. S123 Court has power to call meeting when they believe its in the best interests of the company to do so. In Re Duomatic:
- Company distributed washing machines
- Directors Elvins (76%), Hanly (22%) and East (2%). Mr Hanly and other two quarrelled about how he was doing his job.
- Company agreed to pay him $4000 to leave, prior to leaving he had been paid a salary of
$5000. Salary to Elvins $10,000 per year.
- Company not going so well, financiers appointed to the board. Things kept going badly. Elvins agreed to limit his salary to $60 per week.
- By october, he had taken $2000 more
- A liquidator was appointed.
- Liquidator wants to claim money back from Elvins and Hanly.
- None of the amounts had been agreed to at a general meeting - non compliance with the Companies Act. But Mr Hanly and Mr Elvins agreed to the payments - at all relevant times they held all the voting shares - if they had followed the procedure the same things would have been agreed to. Technical noncompliance is immaterial.
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