Shareholders’ Right To Call Meetings Now Hollow

Dissatisfied shareholders considering calling a general meeting under section 249F should think again.  The recent decision in Wun v CellOS Software Ltd [2018] FCA 1947 confirms that directors may exercise powers available them to postpone or cancel shareholder called general meetings without much limitation being placed on the exercise of the power.  The board can even cancel or postpone a shareholder convened meeting even though it may have the effect of frustrating shareholders’ attempts to hold the board to account.

The dispute

The case involved a dispute between CellOS Software Ltd (CellOS) and three of its shareholders (the Applicants).

CellOS is an unlisted public company, with 2,072 shareholders. Ten of its shareholders, who hold almost 7% of the issued shares between them, sought to call an extraordinary general meeting (EGM) to take place in April 2018 pursuant to their statutory right to do so under section 249F of the Corporations Act 2001 (Cth). The shareholders’ primary reason for calling the EGM was to spill the board due to ongoing concerns about mismanagement and regarding the financial viability of the company.  The Applicants considered that it was vital that the EGM take place as soon as possible in order to remove the existing directors and appoint new directors who they considered could turn around the fortunes of the company in the interest of all shareholders.

In response, the CellOS board exercised their powers under the company’s constitution to postpone the EGM by over two months.  The directors’ stated reasons for postponing the EGM included a desire to ensure that the company’s audited accounts were completed and available to shareholders before they decided how to vote and so that the EGM could be held on the same day as a proposed AGM (even though that AGM had not yet been called at the time of the postponement).

The issues

While there were a number of issues in consideration, the most pressing for determination was whether a board of directors could validly rely on their power to postpone a meeting if that meeting was validly convened under section 249F.

The weight of case law prior to the present judgment indicated that such a power could be exercised in respect of shareholder called meetings, but only where it is exercised extremely sparingly so as not to frustrate the right conferred by section 249F.  The Applicants contended that the directors’ exercise of their power was not consistent with the high standard of extremely sparing use.

The decision

Justice Middleton found that where a board has the power to postpone a general meeting, the board may exercise that power at their discretion, with the only qualification being that it is for a “proper purpose”.  The reasoning in his Honour’s judgement essentially adopts the 2000 decision in Pinnacle VRB Ltd v Ronay Investments Pty Ltd (2000) 35 ACSR 240, notwithstanding that that decision has been the subject of significant criticism in subsequent commentary and authorities.

While the Applicants contended that this would frustrate the operation of section 249F, his Honour considered that this section gives members a right to a call a meeting and arrange its holding, and does not extend to conferring a right to hold a meeting or conduct a meeting. His Honour placed importance on the phrase “arrange to hold” under section 249F, and considered that this merely reflects a preliminary course of conduct.  His Honour also considered that as section 249F has not expressly removed the power given to directors under a constitution to postpone a meeting, this should be interpreted to mean that this is not the intent of the legislation. 

Comment

The judgment effectively provides directors with a carte blanche right to exercise powers given to them by the company’s constitution to cancel or postpone shareholder convened general meetings.  The only limitation is the need to identify a “proper purpose”.  In practice, this means that a board of directors may be able to take steps to defeat shareholder attempts to hold or conduct a meeting called under section 249F, so long as the board provides evidence that it is acting for a proper purpose.

Where shareholders wish to have a general meeting held as soon as possible, it may be preferable to instead request that the company convene a meeting under section 249D.  While this will mean shareholders have to relinquish the right to control the time and location of the meeting in the first instance, it will ensure that a meeting is promptly held (given that the company is obliged to hold the meeting within 2 months of the request).