Internal Management of Coco Company - Assignment Example

Shareholder Protection Name Course Lecture Date Introduction Minority shareholders in both public and proprietary companies do not have effective control in the running of the affairs of the company. Tomasic, Jackson and Woellner, define minority shareholder as those individual who hold less than 50 per cent shareholding in a limited or proprietary company1. In most cases, minority shareholders are oppressed and their interests are also disregarded by the majority. This conduct of majority shareholders overlooks the fact that minority shareholder are partially owners in these corporations. The situation is particularly worse in tightly controlled proprietary companies which might have a handful of shareholders, while there is one dominant shareholder who owns more that 50 per cent of the company shares. In recognition of the important role of minority shareholder in the economy, the Australian Corporation Act 2001 (cth) provides various remedies to protect and enforce the rights of minority shareholders, alongside those of majority shareholder2. For example, the oppression remedy enables a minority shareholder to institute action against the company management and board of directors. Minority shareholders can also rely on remedies available to majority shareholders in case the directors breach their fiduciary and statutory duties. For example, where directors breach their fiduciary duties and by trying to gain personal benefits from corporate opportunity both, majority and minority shareholder have the same remedies3. In the case, three issues of violation of the rights of Bryan, a minority shareholder and director of Coco Company arise. The first, issue is concerned with the oppressive and unfair treatment of Bryan in the internal management of Coco Company. The second and third issues; are whether Don has breached his statutory and fiduciary as regard conflict of interests and improper use of position in awarding Myco the supply contract. Issue 1: What are the remedies available to Bryan as he has been unfairly and oppressively treated in the internal management of Coco Company? The law At common law, the case of Scottish Co-operative society Ltd v Meyer the court held that the interests of minority shareholder in the running of the affairs of the company must not be subjugated by those of dominant shareholders4. Minority shareholder protection for oppressive or unfair conduct by the controlling shareholder is incorporated in the Corporation Act 2001 (cth) Part 2F. D.5 A minority shareholder can have a court order action against the company or its management if they have been “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity”6. In Thomas v HW Thomas Ltd, the court ruled that the words “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” should be interpreted as overlapping each other and not as alternatives to each other7. A similar interpretation was adopted in Wayde v New South Wales Rugby League Limited (1985) 180 CLR 4598. Similarly, in Morgan v 45 Flers Avenue Pty Ltd, oppressive treatment of minority shareholder was held to be actionable and could be explained by an overlap of the three terms used in section 2329. In this case, Don the majority shareholder and a Director of Myco company uses various board tactics to oppress, Bryan the minority shareholder. As held in Scottish Co-operative society Ltd v Meyer, majority shareholder through their directors are required to take into consideration the interests of minority shareholder in the internal management of the company10. Contrary to these, Don holds separate meeting with his directors to adopt a stand that is inconsiderate of Bryan opinion and interest in the internal management of Coco Company. Secondly, the tactics of not allowing Bryan enough time to speak at board meetings and using voting power to dominate decision making were identified in John J Starr (Real Estate) Ply Limited v Robert R Andrew & Ors 6 ACSR 63 as consisting oppressive conduct11. Thirdly, Don conducts the affairs of Coco Company in an “overbearing manner” giving little consideration to the interest of other minority shareholders12. In John J Starr (Real Estate) Ply Limited v Robert R Andrew & Ors conducting of company affairs in an overbearing manner was identified as the main factor in identifying oppressive conduct as defined by section 132 (e)13. Murray J in Re Spargos NL identified the harm suffered as result of the conduct, in the decision making process within the company as consisting oppressive conduct.14 Oppression comes about because of the conduct of members or in the procedures used to control the corporation, which reffered to as procedural unfairness15. In this case, the procedures used to make decision at Coco Company are unfair to Bryan in his capacity as director and results in the “procedural unfairness” described in Re Spargos Nl.16 Remedies available to Bryan If Bryan can prove to the court oppression against his interest both as a shareholder and director of company as provided for by section 234 and section 232 he may obtain one of the statutory remedies available to minority shareholders17. These remedies are set out in section 233 as follows18: a) Orders to wind up, Coco Company as seen in Hillam v Ample Source International (No 2) [2012] FCAFC 7319. b) Orders for the repeal or modification of the Coco Company’s constitution. c) Order to regulate the future running of the Coco company affairs. d) Order for the purchase of shares, with an appropriate reduction of Coco Company’s share capital. e) Orders for the company to prosecute Don or for Bryan to institute legal proceedings in against Don the name of Coco Company. f) Appointment of new management team. g) Ordering Don and the other managers to restrain from oppressive conduct. h) Ordering Don to do a specific act. Conclusion As seen in the discussion above Bryan rights as minority shareholder are recognized in Part 2F of the Australian Corporation Act 2001 (cth)20. In my opinion, Bryan would find it easy to convince the court of his oppression in the unfair decision making procedures followed at Cocoa Company. Therefore, a court may order any of the action discussed above and contained in Section 233 as remedies against Bryan’s oppression as a minority shareholder of Cocoa Company. Issue 2: Has Don breached his Fiduciary and statutory Duty to disclose material interests in transactions involving the company. As espoused in Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 46121, the common law places the directors of a company under a fiduciary duty to avoid conflict of interests with the company. In North-West transportation Ltd v Beatty, directors as fiduciary agents of the company may not enter into a contract where their personal interest conflict or may potentially conflict with the interests of the company22. Furthermore, they may not make profits for themselves from transactions made on behalf of the company. This, duty exists to guarantee that the interests of the shareholders take precedent over those of the directors, this is almost impossible if a conflict of interest occurs. However, situations arise where it is in the company’s best interest to contract with its directors. At common law, a director is required to disclose any material interest in a transaction with the company to the shareholders of the company. They must detail the nature and the extent of their interest in the transaction; Guinness plc v Saunders [1990] 2 AC 663.23 However, it is not practical to expect directors to call a meeting of shareholder every time directors have a material interest in a contract with companies. Therefore, companies circumvent this requirement by drafting an article of association that only requires disclosure to a meeting of directors; Woolworths Ltd v Kelly.24 Section 191 (1) codifies the common law duty requiring directors to disclose material interest in transactions with the company. The section asserts that “a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise”25. Furthermore, Sub-section 3 requires the disclosure to detail the nature and extent of director’s interest in the affair26. Sub- section 3 also requires the notice to be given as soon as possible at a directors meeting. In some cases, companies choose to forgive a directors breach of section 191 (1) and ratify the contract where a directors interest conflict with those of the company27. However, as set out by Section 195, a director who has a material interest in the contract must not be present at the board meeting which decides whether to ratify the contract. Even, where the article of association allows him to be present at the board meeting, Section 195 (1), requires him to abstain from voting28. However as seen in Peninsular and Oriental Steam Navigation Co v Johnson, the article of association can allow the affected director to be present and vote on the matter29. Alternatively, Section 195 (2) allows the affected director to vote, if a director’s resolution decides so30. Don was under fiduciary duty to avoid conflict of interest in any transactions as regards the contracts he signed on behalf of Coco Company. Despite this Don went ahead and awarded, Myco a three year contract for supply of diamonds. The conflict of interest arises in this case as Don held a 30 per cent shareholding in Myco Pty Company. Similarly, in North-West transportation Ltd v Beatty, the contract to buy a steamer from Beatty, a Majority shareholder and Director breached the duty to avoid conflict of interest31. However, in Beatty, the contract was ratified by members at a general meeting32. In contrast, Don does not seek the ratification of his contract with Myco from shareholders or directors. By failing to seek shareholder approval of the award of the supply contract to Myco; Dan violates the fiduciary duty of disclosure as set out in Guinness Plc. V Saunders33. Dan action to award the contract to Myco clearly violates section 191 as no one knows of the contract award until Bryan stumbles on documents revealing the secretive dealing34. John position as director of Coco clearly conflicts with his interest in Myco where he is a 20 per cent shareholder. Therefore, Don was under obligation to disclose the transaction to the other directors. In Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co, a very small shareholding in a company that was contracting with the director’s company was ruled to constitute material interest which should have been disclosed35. In contrast, Don hold 20 per cent shareholding in Myco, the diamond supplier he has contracted. This substantial shareholding means the degree of Don’s interest in the transaction is higher, making his lack of disclosure more serious. Conclusion In my opinion, Don has breached his fiduciary duty to avoid conflict of interest and to disclose any material interest in transaction that conflict with the company’s interest. Issue 3: Has Don Breached his duty not to make improper use of his position: S 182 and s 184 (2) Under Section 184 (2) it is a criminal offence for a director of a company to use their position dishonestly to gain “an advantage for themselves, someone else or cause detriment to the corporation”36. While under section 182 (2) a similar offence attracts a civil penalty37 According to Asic vs Adler, it is not necessary for a director to have accrued an advantage to establish a breach under section 182 (2) and 184 (2)38. In Jeffree v NCSC it was ruled that mere improper use of position by a director is a contravention of Section 18239. Despite the fact that the director’s actions were in the interest of the company and would not have caused detriment to the company it was ruled that he had contravened section 182. The reasoning in this case can be used to dismiss an argument by Don that the contract with Myco is in the best interest of the company. As seen earlier in Daniels v AWA Ltd, actual accrual of benefit is not necessary for a breach of section 182 to be established40. The ruling in Chew v R means that a breach can be established if it can be shown the director purpose or intention was to gain an advantage for themselves or cause a detriment to the company. According to the Majority in Chew v R, accrual of an advantage or detriment to the organization does not have to be proved to show breach41. In the case, Don Intentions was to give business to Myco a company where he was a shareholder. Consequently, he would gain an advantage as Myco would pay him a higher dividend as the contract with Myco was sure to lead to collection of higher revenue. Despite, the fact there is no detriment apparent to Coco from the transaction; Don is still held to have breached section 182. As established by Lipton and Herzberg, it is possible to show that Don intended and believed he could accrue an advantage for himself, a crucial factor in establishing breach under section 18242. However, to prove Don committed a criminal offence, an additional act of recklessness has to be proved43. In this case, it is not shown that Don acted recklessly in awarding the supply contract to Myco. Conclusion In my opinion, Don has committed a civil offence under section 182(2) by making improper use of his position as director of Myco with the view of accruing an advantage for himself. However, Don has not breached section 184 as it cannot be proved he acted recklessly in awarding the contract to Myco. Remedies available to Byran The remedy for Don’s breach of his fiduciary duty to avoid conflict of interest and disclose material interests in company’s affairs include paying back the profits made from the contract with Myco under section 1317J (2). Under section 1317(G), Don’s breach attracts a pecuniary penalty of up to $200,000. Alternatively, Don may be disqualified from Management as set out in section 206C. Another alternative would be to ask Don to compensate Myco for the damage suffered. Similar, liabilities apply for Don’ breach of his statutory duty not to make improper use of his position as a Director of Coco Overall Conclusion The common law and the Australian Corporation Act offer adequate protection to minority shareholder to curb potentially exploitation and oppression by majority shareholder and directors. In this case, Bryan can invoke section 232 to stop Don from oppressing him during decision making. Secondly, under section 191, 184 and 182, Bryan can show that Dan’s award of the supply contract to Coco breached his director’s duties. However, it would be difficult to prove that Dan committed a criminal offense as the aspect of recklessness is not present in his action to offer the contract to Myco. Therefore, Bryan can access various civil remedies for Don’s breach of his duties as a director. Bibliography Articles/Books/Reports Austin, Robert P., and Ian M. Ramsay, ‘Ford's principles of corporations law’, Vol. 14. (LexisNexis Butterworths, 2013). Lipton, Phillip, and Abraham Herzberg, ‘Understanding company law and Corporations Legislation’, (Law Book Company, 2013). Tomasic, Roman, James Jackson, and R. H. Woellner, ‘Corporations Law: Principles, Policy and Process, (Sydney: Butterworths1996). B. Cases Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461 ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 17 Austin, Robert P., and Ian M. Ramsay, ‘Ford's principles of corporations law’, Vol. 14. (LexisNexis Butterworths, 2013). Chew v R (1991) 5 ACSR 473 Daniels v AWA Ltd (1995) 13 ACLC 614 (CA Guinness plc v Saunders [1990] 2 AC 663 Guinness Plc. V Saunders Hillam v Ample Source International (No 2) [2012] FCAFC 73 Jeffree v. NCSC (1989) 7 ACLC 556 John J Starr (Real Estate) Ply Limited v Robert R Andrew & Ors 6 ACSR 63 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 North-West transportation Ltd v Beatty Peninsular & Oriental Steam Navigation Co v Johnson [1938] HCA 16; (1938) 60 CLR 189 Re Spargos Mining NL (1990) 3 ACSR 1 Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324 [HL] Thomas v HW Thomas Ltd (1984) 2 ACLC 610. Transvaal Lands Co. v. New Belgium (Transvaal) Land & Development Co. [1914] 2 Ch 488; Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 Legislation Corporation Act 2001 (cth) Read More