Shareholder activism: Full Court says no to revolution by resolution

In brief

At a time of increasing shareholder activism, a recent decision of the Full Court of the Federal Court has confirmed that activist shareholders have a very limited part to play in the exercise of a board's power in the management of a company. Partners Kim Reid and Julian Donnan and Associate Manu Jaireth report on the decision and what it means for boards of listed companies dealing with activist shareholders.

Factual background

In 2014, the Australasian Centre for Corporate Responsibility (ACCR), which represented over 100 shareholders in the Commonwealth Bank of Australia (CBA), notified CBA that it proposed to move one of three alternate resolutions at CBA's next Annual General Meeting (AGM). ACCR relied on the so-called '100 member power' in the Corporations Act.¹

The key facts were:

• the first two of ACCR's proposed resolutions were framed so as to express an opinion on behalf of CBA's shareholders that CBA's directors should either provide a report to shareholders outlining environmental issues including the greenhouse gas emissions attributable to the bank's lending activity, or, in the alternative, expressing shareholders' concern that such a report was not included in CBA's annual directors' report.
• the third resolution was proposed as a further alternative. It took the form of a special resolution to amend CBA's constitution to include a requirement that CBA's annual report would disclose the amount of greenhouse gas emissions it was responsible for financing.
• CBA did not include either of the first two proposed resolutions in its AGM notice, and informed ACCR that they were 'matters within the purview of the Board and management of the Bank …', and accordingly were 'not valid and capable of being legally effective'.
• CBA included the third proposed resolution in its notice of AGM together with its view that the resolution was not in the interests of shareholders and a recommendation that shareholders should vote against it.

ACCR sought a court declaration in the Federal Court that 'each of the three proposed resolutions could validly be moved at an AGM of CBA' and that CBA's Board acted beyond its power by responding publicly to the third resolution.²

At first instance,³ Justice Davies held that CBA was not required to put the first or second proposed resolutions to its AGM. Her Honour also found that CBA's directors had acted within their power in including commentary and a recommendation on the third proposed resolution in the notice of meeting. See our Focus: Decision confirms limits on general meeting shareholder activism for our discussion on the first instance decision.

ACCR appealed to the Full Federal Court.⁴

The Full Court's findings

The Full Federal Court (Chief Justice Allsop and Justices Foster and Gleeson) rejected ACCR's appeal on all grounds.

Shareholders may only propose effective resolutions

ACCR said that shareholders did not require a power to propose resolutions if those resolutions were advisory in nature. It argued, in the alternative, that if such a power were required, it could be derived either from an inherent plenary power of shareholders to propose resolutions to be decided at an AGM or a power to be implied in CBA's constitution.

In rejecting the first argument, the Full Court affirmed a line of authority which provided that shareholders may not 'control, usurp or exercise the powers of the directors' (subject to provisions in a company's constitution to the contrary).⁵ The Full Court confirmed that 'there is no universal rule that shareholders in general meeting may by ordinary resolution bind or represent the company with respect to anything and everything.'⁶

ACCR argued that its resolutions were intended to advise CBA's board of the opinion of shareholders, and so did not purport to wrest control of the company from the directors.

However, the Full Court held that advisory resolutions which are not grounded in powers granted by statute or the company's constitution are legally ineffective and do not have to be put to shareholders at a general meeting. Their Honours referred, by way of illustration, to one statutory example: an advisory resolution for the adoption of a remuneration report is permitted under section 250R of the Corporations Act.

The Full Court held that ineffective resolutions impose no obligations on a board of directors.⁷ ACCR's submission that the resolutions were of an advisory nature was fatal to its case.⁸

Shareholders' interests should not be confused with the company's interests

The fact that a shareholder has a legitimate interest in the subject matter of a resolution does not by itself make that resolution effective.

The Full Court held that ACCR's argument that its first two resolutions were effective because of the individual 'legitimate interest' of the shareholders misunderstood 'the nature of the company as an entity distinct from its shareholders and directors.'⁹ A shareholder's individual interest is distinct from the company's interest.

No plenary or implied power of shareholders to propose resolutions

If shareholders wish to propose resolutions, they must do so under an authorised power.¹⁰ Shareholders do not have an inherent plenary power to propose resolutions that are not otherwise within power.¹¹

ACCR argued that the CBA constitution implied a power to propose such resolutions. This purported source of power was also rejected by the Full Court.¹²

Company constitutions which either incorporate the replaceable rules or mirror them are unlikely to provide the basis for any implied power of shareholders to propose otherwise ineffective resolutions.

Statements by boards on resolutions proposed

The Full Court supported the view that a board may comment on a proposed resolution and provide its opinion about the merits or effect of such a resolution, provided the comment is not defamatory, would not constitute misleading or deceptive conduct, or would otherwise be unlawful.

CBA's statement on the proposed resolution informed shareholders that its board did not consider the resolution to be in the best interests of shareholders. ACCR argued that this statement went 'beyond what was required to fully and fairly inform shareholders' regarding the resolution 'because it included opinions', a proposition emphatically rejected by the Full Court.¹³

Public interest costs

The Full Court rejected ACCR's submission that it should be exempted from a costs order on the grounds of public interest.

ACCR argued that the ordinary rule that costs should follow the event should not apply in this case because the proceedings had been brought in the public interest and that it is within the court's discretion to make such an exception.¹⁴

The Full Court rejected this because ACCR was a body established for the purpose of advancing a particular public interest, with litigation central to its strategy.¹⁵

Courts will not depart from the usual rule merely because a party is a public interest or activist organisation. However, a court may exercise its discretion to make an exception if:

• the proceedings concern a novel question of law of general importance;
• the appellant has no financial interest in the outcome;
• the appeal was, on its face, arguable; and
• the public has some interest in the outcome of the case and its implications.¹⁶

The Full Court's decision will give shareholder activists, and activist groups more broadly, at least some pause for thought before commencing litigation.

Conclusion

The decision accords with a strong line of authority that:¹⁷

it is no part of the function of the members of a company in general meeting by resolution… to express an opinion as to how a power vested by the constitution of the company…ought to be exercised… [M]embers… no doubt have a legitimate interest in how these powers are exercised, but in their organic capacity in general meeting they have no part to play in the actual exercise of the powers.

 

The Full Court of the Federal Court has confirmed the line between the powers of shareholders and the powers of directors in the management of companies. Advisory resolutions have no place in the activist shareholder's toolbox unless the constitution of a company permits them or if the Corporations Act provides otherwise.