Board of control: Law Reporter

Can a private arrangement between members prevent removal of a company director? The constitution of a company will regulate many of the activities of the company. However, whatever the constitution of the company provides, it cannot override the operation of the provisions of the Corporations Act which governs companies.

The question is just how far can members of a company go in organising their affairs in a way that will give them the opportunity to control, for example, how the membership of the board of directors is to be made up. In Hopkins Professional Services Pty Ltd & Ors v Foyster Holdings Pty Ltd & Ors ((2001) 39 ACSR 519) Barrett J in the New South Wales Supreme Court had an interesting question to consider concerning the possible removal of an interest in a private (proprietary) company by virtue of arrangements that had been set up within the company. The facts of the case are taken from the Butterworths Law Report. Four plaintiffs were minority shareholders in a company known as Tasmanian Titanium Pty Ltd (the company). The defendants were shareholders in the Foyster Holdings company. Other defendants in the action were the remaining shareholders. The Foyster interests accounted for nearly 70 percent of the shares in the relevant company while the plaintiffs held between 10 percent and 15 percent of the shares and the other defendants holding the balance of the shares.

The plaintiffs sought, on an urgent basis by way of injunction, an order restraining the Foyster interests from voting in favour of all but one of certain resolutions dated 18 September 2001. Under those resolutions one of the Foyster members had purported to convene a general meeting of the company to be held which would consider among other things the removal of a certain person (Mr Hopkins) as director and secretary of the company and the appointment of other persons as director and secretary. Some of the resolutions were matters that were clearly within the powers of the board of directors rather than the general meeting of members. Barrett J was asked to rule to the effect that the general meeting could not deal with those particular issues. In his view one relevant question (the removal and appointment of secretary) was clearly a matter that was within the province of the power of the board of directors and could not be dealt with by the company in general meeting. The remaining major question was whether directors could be in fact removed by the company in general meeting rather than by the board of directors.

It was conceded that this was a matter governed by the Corporations Act (see in particular section 203C of the Act). Nevertheless, it was suggested in opposition to the application that the issue of the removal of Hopkins as a director arose out of contract. In particular, the court was asked to consider the application of a shareholders agreement and variations of that agreement in this matter which it was argued overrode the general principles of law. Justice Barrett described the agreements and their possible effect in this way: "I do not intend here and now to go into detail of the relevant provisions. It is sufficient to say that the effect of those provisions, if they are indeed binding, is such as to raise a strong argument that the removal of Mr Hopkins as a director would amount to a departure from a contractually basis for the conduct of the company's affairs. The arrangement with respect to the composition of the board contemplates that there will be a certain number of so called 'independent directors' of whom Mr Hopkins is one, given that, according to the documents, 'independent' effectively means unaligned with the Foyster interests." (39 ACSR at para 11)

In the circumstances the judge was satisfied that this was a serious question that had to be tried. Therefore it was sufficient to justify the granting of an injunction to prevent the meeting from going ahead. In all cases involving injunctions the court is asked to consider whether on the balance of convenience it is better to let things go ahead and ask the parties to seek remedies by way of damages. In this context Barrett J noted that the court was normally reluctant to interfere in advance of a company meeting on the basis that it was rarely possible to say with any certainty how a particular meeting would turn out. The purpose of a meeting, the judge noted, was for the shareholders: "to come together, to consult, to debate and to try to impress competing points of view upon one another so that an informed decision can thereby be made. Generally speaking, it is not possible or feasible to try to guess what the outcome will be, the appropriate course being to let the meeting proceed, let the votes be cast and then, when the dust has settled, see whether some wrong has been done which is in need of redress." (39 ACSR at para 14)

But, in his view, this case was different. When he examined the list of proxies he noted that there was a considerable amount of opposition to the propositions. Of course, the Foyster interests did control the company (because of their 70 percent of the votes) and in the circumstances the court should assume that the resolutions would have been passed if the meeting had been allowed to go ahead. Having recognised that normally he would not grant the injunction, Barrett J indicated that in this case his approach should be different.

"We are dealing here with what are arguably breaches of contract and there is a real case for saying that the contractual position should be preserved in its existing state rather than allowing the meeting to go ahead and produce what is arguably a departure from that contract. It is this contractual feature that sets this case apart from those to which I have referred, in which the appropriate course is to let the meeting take its course and deal with the result afterwards." (39 ACSR at para 41)

Accordingly, appropriate orders were made and it will be interesting to see how the dispute in this matter eventually resolves itself.

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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.