Are super funds and managed investment schemes the next frontier for shareholders with activist agendas?

In brief

Written by Partner Kim Reid, Associate Manu Jaireth and Lawyer Hugo Dupree

In a recent decision¹, the Full Court of the Federal Court has confirmed that activist shareholders may play no direct role in the exercise of a board's power in the management of a company. The decision should make investors in institutional shareholders (like super funds and managed investment schemes (MIS)) think twice before encouraging their respective trustees or responsible entities to be activist shareholders.

In summary, the Full Court: confirmed that shareholders may not propose resolutions in an attempt to usurp powers properly vested in the board to manage the company, unless the company's constitution or the Corporations Act 2001 (Cth) says otherwise; and held that a board of directors may, and in certain circumstances should, express its opinion on a proposed resolution, including expressing a view that the resolution may not be in the best interests of the company or its shareholders.

The decision highlights a fundamental tension in the Corporations Act between shareholders' power to propose resolutions at members' meetings² and the proposition that (subject to any provisions of the company constitution) the management of a company is to be undertaken 'by or under the direction of the directors.'³

The decision primarily concerns shareholder activism in a form frequently faced by listed public companies during annual general meeting (AGM) season. However, it also has implications for super funds and MIS whose members and unitholders may be encouraging them to pursue activist agendas through use of their significant shareholdings.

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 resolutions at CBA's next AGM. ACCR relied on the so-called '100 member power' in the Corporations Act.⁴ (Read our Focus on the first instance decision.)

The key facts were as follows:

• 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'.⁵
• 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.⁶
• At first instance, 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.

ACCR appealed to the Full Federal Court.⁷

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 contended that shareholders did not need 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 a general plenary power of shareholders to propose resolutions to be decided at 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).⁸

ACCR's submissions relied heavily on the proposition that its resolutions were intended to advise CBA's board of the opinion of shareholders, and therefore did not purport to wrest control of the company from the directors.

The Full Court clarified that ineffective resolutions impose no obligations on a board of directors.⁹ ACCR's submission that the resolutions were of an advisory nature was therefore fatal to its case.¹⁰

Individual shareholders' interests should not be confused with the company's interests

The fact that a shareholder possesses a legitimate interest in the subject matter of the resolution does not provide grounds for an effective resolution.

The Full Court held that the ACCR's argument that the resolution was effective based on the individual 'legitimate interest' of the shareholders misunderstood 'the nature of the company as an entity distinct from its shareholders and directors.'¹¹

It must be borne in mind that 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.¹² Shareholders do not have a general plenary power to propose resolutions that are not otherwise within power.¹³

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 as to 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.¹⁴

What does the decision mean for super funds and managed investment schemes?

It is estimated that Australian superannuation funds account for around A$1.8 trillion in assets. Because of this, super funds and managed investments schemes may find themselves under pressure from members and unitholders to be more active shareholders.

Trustees of super funds and schemes do not have a general obligation to be active shareholders and the decision in ACCR v CBA reinforces the limit of their powers as shareholders to intervene in a company's management processes.