Organising your board resignation and removals

How much more control should shareholders be given in running companies?

At the moment the Companies and Securities Advisory Committee is again examining the issue of just how much more control shareholders should be given in running companies. Changes to the Corporations Law (the Law) were introduced in the Company Law Reform Act of 1998, and to a lesser extent in the Company Law Economic Reform Program Act of 2000. Some changes were made to the legislation to provide greater control to shareholders in dealing with the way in which meetings are run, the appointment and removal of directors and related matters. This area is governed to a large extent by common law rather than by legislation. But the legislation is starting to play a bigger part as the recent decision of Austin J in the NSW Supreme Court decision of Dick v Comvergent Telecommunications has illustrated. Our discussion of this case is based on the CCH Company Law Report coverage of that case ((2000) 18 ACLC 442). The facts are taken from the CCH Report. Malcolm Stuart Dick and Annette Sylvia Presley (the plaintiffs) were directors of Comvergent Telecommunications Ltd (the first defendant). RSL Com Asia Ltd (the second defendant) held all the shares in Comvergent. The two directors sold their interest in the Tasman Group to Comvergent. Under the shareholders agreement, they acquired a certain number of shares in RSL Com Asia Ltd and were appointed as directors of Comvergent. Further, under the agreement, removal of the directors could only be effected if certain events occurred, none of which had occurred to give rise to an entitlement to end the directorships.

On 28 March 2000, the managing director of Comvergent instructed the company secretary to sign a notice of meeting for 19 April 2000 to consider a resolution for the removal of Mr Dick and Ms Presley as directors. The two directors sought an adjournment of that meeting, to which Comvergent responded that the meeting had properly been convened. Mr Dick and Ms Presley sought an injunction and argued that, as Comvergent proceeded under its constitution, the shareholders agreement was binding on RSL Com Asia Ltd and on Comvergent as a party to it. Secondly, that if section 203D was applicable them, because it overrode contractual rights, it should be construed as "operating to prevent a resolution for removal once passed from being ineffective, but its operation should be limited to that". The two directors were appointed to represent the interests of particular shareholders and so, pursuant to section 203D, any resolution would not take effect until a replacement to represent their interests had been appointed. The requirements of section 203D had not been met and that relief should be given to them under section 1322 for two reasons: first, if there had been a procedural irregularity, then what was done was deliberate and, secondly, because validation would cause substantial injustice to them.

Comvergent submitted that section 203D had been complied with or, if it had not, no substantial injustice had been caused to the two directors. Further, they could claim in damages. Additionally, as Mr Dick and Ms Presley had lost the confidence of the members of Comvergent, equity could not force the maintenance of a relationship of trust and confidence where one no longer existed. Austin J granted the injunction. In his view there was a need to balance between the interests of the individual directors and the view taken by the courts that companies should be allowed to govern their own affairs without interference from the courts unless there were very clear grounds to do so. In that context, it is perhaps useful to refer briefly to section 203D. This is headed "removal by the members of directors of public companies". The section provides for the removal of directors by a resolution provided notice is given and the director is informed. Directors are entitled to put their case to defend their position to the meeting of shareholders. It is unnecessary for our purposes to set out in full the relevant provision.

Austin J held that there was no basis for limiting the meaning of the section as suggested by the plaintiffs in their main argument. The court should not be given the power, if there was improper conduct, to restrict the right of company shareholders to remove the directors. However, the statutory procedures set down by the legislation needed to be followed. They could not be ignored just because it suited shareholders to do so. In his view notice had not been given pursuant to section 203D; nor had the procedures set out in that section been followed. So if a meeting had been called pursuant to the terms of the company's constitution, both the company and other companies were bound by the terms of the agreement with the relevant directors not to take action to remove them unless certain events occurred. Thus, the only avenue available to them was to pursue the removal under the Law. In his view the instructions that had been given to the company secretary did not amount to notice under the terms of the legislation and therefore the procedure had not been put in place.

When there are failures to comply with provisions of the statute - in this case the Law - the court does have a general power to "forgive technical breaches" if the circumstances warrant the courts overriding the technical reading of the law. The defendants argued that there had been no substantial injustice to the plaintiffs through their failure to comply with the requirements of the section. Austin J disagreed. It is interesting to note his comments: "It is not possible to determine what might have occurred. It is true that the directors [or the other company] might have given notice of the resolution to Comvergent and that a meeting might then have been called immediately on 21 days' notice. That is perhaps likely, but not certain, as one must assume no attention was paid to the section at all. The plaintiffs would have been entitled to put their case to members; they would have been entitled to have directors to ascertain the proposals for listing which might affect them and make representations about those; they would have been entitled to put their case to the new directors if they were properly appointed. The power to make representations is extremely important where the section provides to abrogate common law rights." (at para 17)

In these circumstances he felt that injustice would have been caused and therefore ordered the injunction as requested. The rights of company directors and their powers and duties are now more clearly stated in the Law than ever before. Yet, there are still gaps and there will still be a need to go to the common law to ascertain the true position in certain circumstances. Any assistance that can be obtained in interpreting these provisions by directors will no doubt be greatly appreciated. In that context, the new CCH publication CLERP Explained of which this writer is one of the authors, can be useful to directors. Details of that publication are set out in this issue.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.