A recent Federal Court of Australia decision has reaffirmed that a company's board of directors has the primary role in managing a company, and that there are limits on shareholders' legal ability to control that management. Partner and Co-Leader of Allens' Head Office & Governance team Greg Bosmans and Lawyer Manu Jaireth report on the decision and its ramifications for shareholder activism in listed companies.
How does it affect you?
- The decision in Australasian Centre of Corporate Responsibility v Commonwealth Bank of Australia1 confirms that shareholders cannot control or direct how their company is managed, in circumstances where the directors are vested with exclusive responsibility for that management.
- This limitation extends to whether a shareholder can propose resolutions at a general meeting of the company.
- Where a resolution is validly proposed by a shareholder at a general meeting, the company's directors can (and should) express their views on the resolution in the notice of meeting, to ensure shareholders are fully and fairly informed.
In 2014, the Australasian Centre for Corporate Responsibility (ACCR) notified Commonwealth Bank of Australia (CBA) that it proposed to move one of three resolutions at CBA's next AGM, using the power of shareholders to request that resolutions be put to a general meeting under the Corporations Act 2001 (Cth) (Corporations Act).2
The first resolution (to be proposed as an ordinary resolution) expressed the opinion that CBA's directors should provide to shareholders a report outlining various environmental issues relating to CBA's business. ACCR stated that its preferred option was for CBA to include this resolution in the 2014 AGM notice.
The second resolution (also to be proposed as an ordinary resolution) was put as an alternative to the first. It sought to express shareholders' concern, as part of their consideration of CBA's annual report at the AGM, regarding the absence of the report that was contemplated by the first resolution.
The third resolution was proposed as an alternative to both the first and second resolutions. It took the form of a special resolution to amend CBA's constitution to include a requirement that CBA's annual report would disclose each year 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, informing 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 did include the third proposed resolution in its AGM notice. In addition to including the members' statement supplied by ACCR,3 the CBA Board included its own commentary on the substance of the resolution and a recommendation to shareholders to vote against it.
ACCR sought a court declaration 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.4 The first issue in particular was of significance for ACCR given the lower voting threshold required for the first two resolutions.
The Federal Court's Justice Davies dismissed ACCR's application on all grounds, finding 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.
Justice Davies re-affirmed the principle that, at a general meeting, shareholders are not permitted to interfere with the company's board exercising any power that is exclusively vested in it. Her Honour stated:
This limitation on shareholder power means that if the company’s constitution gives to the board the power to manage the company’s business, the directors are exclusively responsible for the management of the company and shareholders cannot control the directors in the exercise of that power or direct the board by resolution to exercise that power in a particular way (save for any matters that are within the power of the company in general meeting).
As is customary for listed companies, CBA's constitution vests the authority and responsibility for the management of the company in its directors, except only in so far as the constitution or the Corporations Act requires any power to be exercised by shareholders in general meeting.
As the first and second resolutions proposed by ACCR went directly to matters concerning CBA's management, it followed that, given that this power was exclusively vested in its directors, CBA was not required to put the resolutions to its AGM, irrespective of section 249O of the Corporations Act.
ACCR in its submissions sought to avoid this conclusion by arguing that the two resolutions did not purport to control or direct CBA's management as such, but rather that they only sought to express non-binding opinions of the shareholders.
Justice Davies rejected this. Her Honour upheld the decision in National Roads & Motorists' Association v Parker5 as authority for the proposition that 'members cannot use their statutory power to move a resolution expressing an opinion as to how a power vested in the board by constitution should be exercised by the board'. In her Honour's view, there was no power implied at general law, nor conferred by anything in the Corporations Act, that gave shareholders the ability to express opinions by a formal resolution. This was despite specific provisions of the Corporations Act that gave shareholders the ability to make their views known by other means, such as by providing a members' statement under section 249P, or through the consideration of the annual report under section 250R, or as a result of being able under section 250S to ask questions about and comment on the management of the company at its AGM.
Finally, Justice Davies confirmed that it was within the power of the directors under CBA's constitution, and indeed incumbent on them by virtue of their duties as directors, to include commentary and a voting recommendation regarding the third proposed resolution in the AGM notice.
The statutory powers given to shareholders under the Corporations Act in relation to general meetings can sometimes be used, or sought to be used, by activist shareholders pursuing an agenda in relation to a listed company. The decision in this case is a timely reminder, in the context of the increase in such activism in recent years, of the limits of those powers. It also re-affirms the primary role of the board in managing the company, and its ability (and duty) to ensure shareholders are properly informed in relation to matters put before them.
Of course, the formal procedures of the Corporations Act are only part of most activists' toolkit. Listed companies need to understand, and be prepared for, the many other avenues of influence that an activist can pursue, many of which have relatively few constraints.