Shareholders' Rights & Shareholder Activism 2020 Comparisons

Last Updated October 28, 2020

Law and Practice

Authors



Herbert Smith Freehills operates from 26 offices across Asia Pacific, EMEA and North America and is at the heart of the new global business landscape, providing premium quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including banks, consumer products, energy, financial buyers, infrastructure and transport, mining, pharmaceuticals and healthcare, real estate, TMT and manufacturing and industries. Herbert Smith Freehills’ Sydney and Melbourne-based head office advisory team (HOAT) is Australia’s largest dedicated legal team specialising in corporate governance advice. As the "go-to" governance adviser for market-leading listed companies in Australia, HOAT’s permanent team of 17 qualified lawyers regularly advises major clients on sensitive and strategic matters relating to corporate culture and governance, executive remuneration, and shareholder engagement and activism.

In Australia, the Corporations Act 2001 (Corporations Act) provides that companies may be registered as either proprietary or public, depending on whether they are privately or publicly owned. Proprietary and public companies may be further categorised based on their level of shareholder (member) liability.

Proprietary Companies

The Corporations Act requires a proprietary company to have at least one shareholder at all times, and no more than 50 non-employee shareholders. A proprietary company may not invite the public to deposit money with the company or subscribe for its shares or debentures. A proprietary company may be a company limited by shares or an unlimited liability company. A proprietary company limited by shares is either "small" or "large", depending on whether they meet statutory thresholds for revenue, assets and employees.

Public Companies

By contrast, a public company may raise funds from the public and, subject to meeting relevant exchange requirements, list and be publicly traded on the Australian Securities Exchange (ASX). The Corporations Act requires a public company to have an auditor and, if it has more than one member, to hold a general meeting for its members at least once a year. A public company may be a company limited by shares, limited by guarantee, an unlimited company, or, in specific circumstances, a no-liability company.

Companies Limited by Shares

Companies limited by share capital, denoted by "Limited" or "Ltd" at the end of their name, are the most common type of proprietary and public company. In a company limited by shares, the personal liability of a shareholder is limited to the amount (if any) unpaid on shares held by that shareholder.

Other Types of Company

Other types of companies include:

  • companies limited by guarantee (eg, charities);
  • unlimited liability companies (eg, professional associations); and
  • no-liability companies (available for mining companies only).

Each of these company types involves varying degrees of shareholder liability, and this is reflected in their different naming conventions.

Shareholder Criteria and Restrictions

The Corporations Act imposes relatively few criteria in relation to a person’s eligibility to be a shareholder in an Australian company. Natural persons and bodies corporate may hold shares. Persons under the age of 18 may also hold shares in an Australian company; however, they are not considered to have legal capacity, which creates difficulties in relation to the enforceability of contracts and exercise of their rights. Accordingly, a company’s Constitution will often contain mechanisms to address these issues, such as allowing a parent or guardian of a minor to exercise their vote by proxy.

Generally, there are no requirements that a person must be an Australian citizen, resident or business in order to hold shares in an Australian company. However, the Foreign Acquisitions and Takeovers Act 1975 gives the Australian Federal Treasurer the power to prohibit a proposed acquisition by foreign persons of certain specified assets or shares in an Australian corporation (or a foreign corporation that holds relevant Australian assets or entities) where it is considered contrary to the national interest. The Treasurer can also make divestment orders when an investment has already been implemented without prior approval. The Treasurer administers the legislation with the advice and assistance of the Foreign Investment Review Board (FIRB).

Notably, proposals to acquire 20% or more of an Australian entity currently require prior approval from FIRB (as do certain acquisitions of interests in Australian media businesses, agribusinesses and Australian land, among others). More stringent rules apply to acquisitions made by foreign government investors.

Monetary screening thresholds would usually apply to determine whether such acquisitions require FIRB approval. However, on 29 March 2020, the Treasurer announced that due to the impacts of COVID-19, all monetary screening thresholds would be temporarily reduced to AUD0, meaning that approval is required. Additionally, the Treasurer has also announced a number of proposed changes to Australia’s foreign investment framework, intended in particular to address national security risks, compliance and enforcement powers and streamline investment in non-sensitive businesses. The changes are scheduled to become effective on 1 January 2021.

Most Australian companies have a single class of ordinary shares on issue. However, it is not uncommon to issue multiple classes of shares with differential rights. A company may use conventional class titles, such as "ordinary", "A-class", "B-class" and so on, or develop names for each class themselves. 

The rights attached to different classes of shares commonly differ in relation to:

  • voting at general or class meetings;
  • dividend entitlements and priority of payment; and
  • rights to repayment of capital on a reduction of capital or winding-up.

The most common categories of shares issued by Australian companies are ordinary shares, preference shares and partly paid (or contributing) shares. Hybrid securities are also relatively common, for example, debt securities which may be converted into equity securities under their terms of issue.

Ordinary Shares

Ordinary shares are the most commonly issued and traded shares and form the primary class of shares for Australian companies. All holders of ordinary shares generally have equivalent rights to vote at general meetings, to participate in dividends or to the distribution of assets if the company is wound up. Australian listed companies almost universally have a single class of ordinary voting shares, pursuant to the requirements of the ASX.

Preference Shares

Preference shares give their holder priority over ordinary shareholders in relation to dividend payments or distributions of assets if the company is wound up. However, preference shares may carry no voting rights or rights to vote only on certain items of business or in particular circumstances.

Partly Paid Shares

Partly paid shares are issued by a company on terms that part of the share price is paid upfront, and the outstanding balance is to be paid when the company calls for it on a future date (or dates). When a call is made, holders of partly paid shares are legally obliged to pay. The exception to this is no-liability companies, the partly paid shareholders of which have the option to forfeit their shareholding when a call is made, instead of paying the amount called for.

Shareholders’ rights are derived from and governed by the terms of the company’s Constitution, shareholders’ agreements (if any), any "replaceable rules" in the Corporations Act which have not been replaced by the company’s Constitution, and the Corporations Act generally. 

The Corporations Act gives a company’s Constitution the effect of a statutory contract between the company and its shareholders, between the company and its directors and secretary, and between each shareholder. The Constitution typically establishes the powers of the company, and the rules which govern topics such as the issue and transfer of shares, meetings of members and directors, director appointments and distribution of dividends.

While shareholders’ rights in relation to a company are typically enshrined in the company’s Constitution (or the "replaceable rules" under the Corporations Act) and the Corporations Act generally, with respect to proprietary companies, it is relatively common for matters relating to the exercise of those rights to be agreed between shareholders and set out in a shareholders’ agreement. In some cases, the company may also be party to the shareholders’ agreement.

The rights conferred on shareholders (or members) differ based on the type of company and the class of shares held. However, rights commonly held by shareholders include:

  • the right to vote at general meetings of shareholders on items such as director appointment and removal, constitutional amendments, an advisory resolution to adopt the remuneration report (for listed companies), auditor appointments, certain issues of shares, share buy-backs, and mergers and de-mergers;
  • the right to share in dividends;
  • the right to participate in the distribution of company assets in the event of return of capital or the winding up of the company; and
  • the right to requisition a resolution or general meeting (see 1.9 Calling Shareholders' Meetings and 1.10 Voting Requirements and Proposal of Resolutions).

Varying Shareholders’ Rights

The rights attaching to different classes of shares may be varied or cancelled by following the process set out in the company’s Constitution or, if there is none, then by special resolution of the company (ie, at a general meeting) and a special resolution of the holders of shares in the affected class (ie, at a class meeting). A special resolution is passed if at least 75% of the votes cast by shareholders are in favour of the proposal.

Shareholders’ rights are typically varied through amendment to the company’s Constitution. In respect of a public company, once the Constitution is amended it must be provided to the Australian Securities and Investments Commission (ASIC) and, if listed, to the ASX as well.

A shareholders’ agreement may only be varied by consensus between all the parties to the agreement. Depending on the parties to the agreement, this could mean reaching consensus between all of a company’s existing shareholders, or just within a certain class (or classes) of shareholders.

Shareholders’ agreements and joint-venture agreements are enforceable as contracts under Australian common law, and subject to the same requirements and limitations as all contracts. Importantly, this includes the requirement that terms are sufficiently certain, that a person must be party to the contract in order to be bound by its terms or to enforce its terms (subject to certain exceptions), and that any claim must be brought within the relevant statute of limitations (typically, within six years of the date on which the cause of action under the contract accrued).

As in other jurisdictions, the more significant a shareholder’s holding in a company, the more influence they will be able to exert over the company. Under Australian law, common thresholds for the exercise of relevant rights include:

  • shareholders with at least 5% voting power may requisition a resolution, circulate a statement about a resolution or any other matter that may be properly considered at a general meeting, or requisition or convene a general meeting (see 1.9 Calling Shareholders' Meetings and 1.10 Voting Requirements and Proposal of Resolutions);
  • shareholders with more than 10% of a company’s ordinary shares, or shares in a class, can block the compulsory acquisition by an acquirer of the remaining (ie, not yet acquired) shares in the company or that class;
  • shareholders with at least 25% of voting power may block special resolutions (including special resolutions to change a company’s Constitution);
  • shareholders with more than 50% voting power may appoint and remove directors from a company’s board, as well as approve or block any other resolution that requires an ordinary resolution of the company;
  • shareholders with at least 75% voting power may amend the company’s Constitution, as well as approve any other resolution that requires a special resolution of the company; and
  • an acquirer with at least 90% of a company’s ordinary shares, or shares in a class, can compulsorily acquire any remaining (ie, not yet acquired) shares in the company or that class.

While there is no legislative threshold, it is relatively common for boards of Australian listed companies to acquiesce to a shareholder's request to nominate a director to the board where they hold 10-15% of the company’s voting power. Where the shareholder has a larger holding, they may often have multiple nominees on the company’s board.

Under Section 173 of the Corporations Act, companies are required to allow anyone to inspect the register of members and obtain a copy on payment of the relevant fees (which are prescribed and typically modest). Members have the right to inspect the register free of charge. Listed companies are also required to maintain a register of information relating to relevant beneficial interests held by shareholders in the company and access to that register must also be provided on similar terms to the register of members.

Section 251A of the Corporations Act requires companies to keep minute books for all decisions made by the company at general meetings of members and by the directors at board meetings. Section 251B provides members with the right to inspect the minute books of decisions made by the company at general meetings of members free of charge. Members may request copies, and the company may determine whether it will charge members for this service (up to a prescribed amount).

Under the Corporations Act, a reasonable opportunity must be given for members of a public company to ask questions about the management of the company at an annual general meeting (AGM).

Shareholders may apply to the Federal Court of Australia or the Supreme Court of Australian State of Territory (a Court) for an order to inspect the company’s books; however, this right is rarely invoked in practice. The nature of information that a shareholder may inspect under a Court order is broad, subject to any limitations imposed by the order. "Books" is defined in the Corporations Act to include a document, register, any other record of information and financial reports or records, however compiled, recorded or stored. The right to inspect books is conditional upon the member’s application being in good faith and for a proper purpose.

In other forms of court proceedings, shareholders are able to inspect the company’s books only to the extent that the inspection is necessary with reference to a specific dispute or question.

The decision-making powers of a company are divided between the board and the company’s shareholders under Australian law.

A company’s Constitution will generally vest all powers of management in the board. Accordingly, in the absence of express constitutional provisions providing otherwise, shareholder power to affect management decisions is limited. Shareholders most often exercise their decision-making power by voting for or against resolutions at general meetings and by appointing and removing directors.

Under the Corporations Act, particular issues that require the approval of shareholders by a simple majority at a general meeting (including an AGM) include:

  • director election (Section 201G – however, this is a replaceable rule and the company’s Constitution can establish an alternative process for director appointment and election);
  • director removal (Section 203D – public companies);
  • auditor appointment (Section 327B and 327D – public companies);
  • certain types of "equal" return or reduction of capital or "equal" buying back of shares (for example, Sections 256C and 257C); and
  • entering into certain transactions that give a related party (including directors) a financial benefit (Section 208 – public companies).

Under the Corporations Act, particular issues that require the approval of shareholders by a specified "special" majority include:

  • adoption, amendment or repeal of the Constitution (Section 136);
  • changing the company’s name (Section 157);
  • changing the company’s type (Section 162);
  • variation of the rights attached to a class of shares (under the Constitution or, if it does not have a process under its Constitution, then Section 246B);
  • certain "selective" types of return or reduction of capital or "selective" buying back of shares or buying back of shares outside statutory limits (for example, Sections 256C and 257D);
  • a voluntary winding-up of the company (Section 491); and
  • providing financial assistance for the acquisition of shares in the company (Section 260B).

Shareholders’ Rights to Call Meetings

Ordinarily, general meetings of shareholders will be called by the board.

However, the Corporations Act provides that shareholders with at least 5% of the votes which may be cast in a general meeting may either request that the board call a general meeting, or call one themselves at their own cost. See 2.1 Legal and Regulatory Provisions.

If members call and arrange to hold a general meeting themselves, they must pay the associated expenses, and the meeting must be called in the same way, as far as possible, in which general meetings of the company may be called.

Shareholders’ Rights to Notice of Meetings and Information

In general, private proprietary and unlisted public companies are required under Section 249H of the Corporations Act to provide members with at least 21 days’ notice of a shareholders’ meeting. A company’s Constitution may specify a longer period of notice.

With the exception of meetings to appoint or remove a director of a public company, or to remove an auditor, a company may give a shorter notice period if agreed among the requisite number of shareholders. To give a shorter notice period for AGMs, all shareholders with voting rights must agree. To give a shorter notice period for other general meetings, shareholders with at least 95% of the votes must agree.

Listed companies must provide members with at least 28 days’ notice of a general meeting (including an AGM).

Calling Meetings Electronically

The general position is that, unless specifically permitted by a company’s Constitution, notices of meeting may only be given electronically to shareholders who have opted to receive them electronically.

As a result of the COVID-19 pandemic, temporary amendments were made to the Corporations Act under the Corporations (Coronavirus Economic Response) Determination (No 1) 2020 and the Corporations (Coronavirus Economic Response) Determination (No 3) 2020 (together, Coronavirus Determination)expressly to permit notices of meeting and any other accompanying information to be provided electronically. Shareholders who have not provided electronic addresses need only be sent a letter or postcard setting out details of an online location where the notice of the meeting and accompanying information can be viewed and downloaded.

Holding Meetings Electronically

Australian law only partially permits virtual meetings of shareholders. Many companies also have practical obstacles to holding one in their constitutional provisions.

The Coronavirus Determination expressly permits virtual meetings to be held despite any legal or constitutional obstacles, provided (among other things) that shareholders are given the ability to ask questions and vote in real time.

The Coronavirus Determination will expire on 21 March 2021.

Method of Voting

Voting at shareholders’ meetings is governed by the company’s Constitution and would usually be conducted on:

  • a show of hands, where each shareholder typically has one vote; or
  • a poll, where each shareholder typically has one vote for each share held.

Listed companies are expected under the 4th Edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations to ensure that all substantial resolutions are decided by poll. While this is not a legal requirement, any non-compliance must be explained in the company’s annual Corporate Governance Statement.

Additionally, companies that are holding virtual meetings under the Coronavirus Determination are required to take all votes on a poll.

Electronic Voting

Shareholders are often given the ability to appoint a proxy electronicallyto vote on their behalf at a general meeting, and they have a right to direct their proxies how to vote. Certain companies also have constitutional provisions that enable shareholders to lodge a direct vote electronically ahead of a general meeting.

For a virtual meeting held under the Coronavirus Determination, shareholders have a right to appoint a proxy electronically in the manner specified in the notice of the meeting. As previously noted (see 1.9 Calling Shareholders’ Meetings), shareholders must also be given the ability to vote live during the meeting.

Quorum

In order for the meeting to be valid, the Corporations Act provides that a quorum of at least two members must be present at all times. However, a company’s Constitution can provide otherwise.

Members who are attending a virtual meeting held under the Coronavirus Determination are taken to be present at the meeting for all purposes, including for the purpose of constituting quorum.

Proposing Resolutions

Generally, the business to be considered at shareholders’ meetings is determined by the board and notified to shareholders in the relevant notice of meeting. However, under the Corporations Act, the business of an AGM may include specified items even if they are not provided for in the notice of meeting.

Resolutions may also be proposed by shareholders holding at least 5% of the votes that may be cast at a general meeting, or at least 100 shareholders who are entitled to vote at the general meeting. See 2.1 Legal and Regulatory Provisions.

Shareholders’ Rights to Participate in Management

A company’s Constitution will usually reserve all powers of management of the company to the board. Thus, if a shareholder is not on the board, unless a matter is one on which shareholders may validly vote, shareholder participation on issues of management is limited to their ability to appoint and remove directors or amend the company’s Constitution at a general meeting using the methods described in 1.9 Calling Shareholders' Meetings or 1.10 Voting Requirements and Proposal of Resolutions.

Shareholders on the Board

Provided they can secure the requisite support for their appointment, a shareholder may sit on a company’s board of directors if they meet the relevant requirements in the Corporations Act and any rules in the company’s Constitution. Under the Corporations Act, a director must be an individual of at least 18 years of age, not a body corporate, and cannot be disqualified from managing corporations under the Corporations Act unless ASIC permission or leave by a Court is granted. A director of an entity regulated by the Australian Prudential Regulation Authority must meet certain additional requirements in relation to being "fit and proper" according to prudential standards.

The company’s Constitution may impose further requirements for a shareholder to qualify as a director, for example, that they obtain a minimum shareholding prior to, or within a certain timeframe following, their appointment.

Director appointments of listed companies are subject to further requirements, including election by shareholders at the AGM following their appointment, a requirement that directors (except the managing director) stand for re-election every three years, disclosure of a director’s interest in securities in the company within five business days of appointment (as well as any subsequent changes to their notifiable interests), and immediate notification to the ASX of changes to the board.

A company’s Constitution will generally provide both the board and shareholders with the right to appoint directors. Shareholders also have the right to appoint directors at common law, unless a company’s Constitution limits that right.

Whether shareholders have the power to remove directors depends on whether the company is public or proprietary. For a proprietary company, the Constitution will determine whether the shareholders have a right to remove directors from the board. For a public company, shareholders have a statutory right to do so by way of ordinary resolution.

As discussed in 1.11 Shareholder Participation in Company Management, shareholders vest the board with the power to manage the company. Shareholders cannot use their statutory right to requisition resolutions to challenge the board’s decisions if the subject of the resolution is a matter of management exclusively vested in the directors. Shareholders' main recourse in relation to these matters is to amend the company’s Constitution either to confer additional rights on the shareholders or to direct the board in relation to the exercise of the power to manage the company (which shareholder activists typically propose in conjunction with a substantive resolution – see 2.1 Legal and Regulatory Provisions) or, alternatively, to appoint or remove directors from the board.

Section 301 of the Corporations Act requires companies to have their financial reports audited. However, small proprietary companies and small companies limited by guarantee are exempt from this requirement in most circumstances.

Section 327A of the Corporations Act requires public companies to appoint an auditor (subject to the auditor’s consent under Section 328A) within one month of registering as a company, unless the company has already done so at a general meeting. At a public company’s first AGM, shareholders are required to approve the appointment of the auditor by an ordinary resolution. The auditor will hold office until they resign or are removed.

Where the auditor resigns, a company is required to appoint a new auditor to fill the vacancy until the company’s next AGM. A shareholder is required to nominate a new auditor under Section 328B of the Corporations Act, and at the next AGM shareholders will be required to vote on a resolution to appoint the nominated auditor (provided the nominated auditor consents to their appointment).

Shareholders of public companies and proprietary companies that have appointed auditors may also remove an auditor by ordinary resolution under Section 329 of the Corporations Act provided that notice of the proposed removal is given at least two months prior to any scheduled meeting of shareholders.

In certain circumstances, shareholders of public companies are required to disclose their interests in a company.

Substantial Shareholder Notice

Shareholders who have a "substantial holding" in a listed company must provide a substantial holding notice to the company if they:

  • begin or cease to have a substantial holding;
  • have a substantial holding and there is a 1% or greater movement in their holding; and/or
  • make a takeover bid for securities of the company.

A shareholder has a "substantial holding" if they (alone or with associates) hold relevant interests in voting shares which represent at least 5% of the total votes available. Relevant notices received by the company are required to be released on the ASX’s market announcements platform.

Directors’ Notifiable Interest

Where a director of a listed company is also a shareholder of the relevant company, the Corporations Act and ASX Listing Rules require the company to notify the ASX of the directors’ notifiable interests in relation to the company’s securities.

Granting Security over Shares

Shares are considered personal property under the Personal Properties Securities Act 2009 (PPSA). A shareholder may therefore grant security interests over their shares, subject to meeting the requirements of the PPSA.

Disposing of Shares

Australian courts have established a strong presumption that shares in commercial companies are freely transferable, unless there is a clear statement to the contrary in the terms of issue of the shares, the company’s Constitution or applicable replaceable rules in the Corporations Act.

If a company is publicly listed, a shareholder can readily dispose of their shares by selling them on the ASX. Alternatively, or if the shares are in a proprietary company, a shareholder may dispose of their shares by:

  • selling to a third-party purchaser, if they know of one;
  • selling to one or more existing shareholders in the company; or
  • participating in a share buy-back by the company.

It is relatively common for the Constitution of a proprietary company to contain limitations on share transfers. For example, the Constitution may confer upon directors the right to refuse to register a share transfer for any reason, or require that the transferor offer shares to other shareholders before offering those shares to third parties. By contrast, pre-emptive rights are less common in the Constitutions of public companies and prohibited from the Constitutions of ASX-listed companies.

Members of a company can resolve to put a company into voluntary liquidation by passing a special resolution. Alternatively, members may petition the Court to put a company into liquidation compulsorily. The Corporations Act governs the circumstances in which members may do so:

  • where directors are acting in their own best interests, and not those of the company;
  • where there is oppressive, unfairly prejudicial or unfairly discriminatory conduct; or
  • where it is "just and equitable" to do so.

Courts are hesitant to grant an order of compulsory liquidation readily and, as such, it is seen as a remedy of last resort.

In the case of a company becoming insolvent, shareholders’ rights to repayment of capital rank behind those of the company’s creditors. During liquidation, the liquidator is required to keep books that provide a complete and accurate record of the administration of the company’s affairs, which shareholders are entitled to inspect.

The Australian legal regime is generally conducive to shareholder activism. This notwithstanding, boards and management of Australian companies also have various defences and structural advantages at their disposal to counter activist campaigns.

Calling Shareholders’ Meetings

Section 249D of the Corporations Act provides that a shareholder, or a group of shareholders acting together, can requisition a general meeting of a company’s shareholders provided that they hold 5% of the votes in the company. The directors of a company that receives a legally compliant requisition under section 249D are obliged to hold a meeting of shareholders within two months of the date of receiving the notice.

To be legally compliant, the requisition must be in writing, state any proposed resolutions, be signed by the shareholders making the requisition and be given to the company. If shareholders fail to adhere to these requirements, a company is entitled to refuse the request to convene a meeting.

Alternatively, shareholders themselves may convene a general meeting of shareholders under section 249F of the Corporations Act. Section 249F allows shareholders with at least 5% of the votes in the company to convene a meeting and, as the conveners of the meeting, they will have the ability to determine the time and place for the meeting and the content of the relevant notice of meeting. Whilst this alternative means of convening a meeting may provide the requisitioning shareholders with a strategic advantage by affording them greater control, it is rarely used in Australia, as the chairman of the board will typically have the right to conduct the proceedings of the meeting under the company’s Constitution anyway, and the requisitioning shareholders must also bear the considerable costs associated with calling and holding the meeting.

Requisitioning Additional Resolutions

Section 249N of the Corporations Act provides for either 100 shareholders or shareholders with 5% of a company’s votes to provide a company with notice of a resolution that they will seek to move at the next scheduled general meeting that is more than two months later (usually, the next AGM).

Notice must: be appropriately provided to the company in writing, set out the wording of the proposed resolution, be signed by those shareholders seeking to move the resolution, be no longer than 1,000 words, and not be defamatory. Listed companies have two business days to make an announcement on the ASX market announcements platform after receiving notice from a shareholder.

Almost universally, a company’s Constitution will vest the power of management in the company’s board. Australian case law has confirmed that if a requisitioned resolution seeks to direct the board on the exercise of its powers, the board is entitled to dismiss the requisitioned resolution and is not required put it to shareholders for consideration.

In practice, shareholder activists targeting Australian companies will often seek to pass a preliminary special resolution to amend the company’s constitution to enable shareholders to direct the Board in the exercise of its powers or to allow shareholders to pass "advisory" resolutions in relation to the exercise of board powers. A second resolution will then also be proposed (contingent on the passage of the Constitutional amendment), which will be a "substantive" resolution to direct the board on the exercise of its powers or express an advisory view in relation to the relevant matter. Given the significant threshold for amending a company’s Constitution (which is a special resolution passed by at least 75% of the votes cast by shareholders), this style of requisition is rarely successful. Although a few "substantive" resolutions have recently achieved relatively high levels of support, the underlying constitutional amendments are usually overwhelmingly defeated, which suggests that some activist shareholders, and, increasingly, institutional investors, are using this mechanism as a forum for communicating their concerns to the board and the broader shareholder base without the intention of effecting binding change in this particular manner.

Shareholder activism is prevalent and growing in Australia, particularly in the environment, social and governance (ESG) space. A number of recent developments have placed ESG issues at the front of mind of many shareholders, including recent bushfires, floods and other natural disasters, an Australian Prudential and Regulatory Authority inquiry and a Royal Commission which uncovered failings and misconduct at major financial institutions, and the passage of whistle-blower protection and modern slavery legislation.

Campaigns to requisition resolutions are increasingly enjoying higher levels of support, including from institutional shareholders and proxy advisers. In 2020, a Paris Agreement-related resolution on climate that was proposed at the AGM of Woodside Petroleum attracted the support of just over 50% of directed proxies and direct votes received ahead of the meeting (although the resolution was not put to the meeting as the underlying constitutional amendment resolution was defeated by a large margin).

Activist campaigns are also increasingly involving higher numbers of resolutions being requisitioned by multiple shareholder groups simultaneously. For example, in 2019, Origin Energy, a major Australian energy provider received seven requisitioned resolutions at its AGM from two separate activist groups (although two of the resolutions were subsequently withdrawn).

Use of Publicity

Shareholder activism in Australia has traditionally been most often conducted through private approaches to companies’ boards. However, recent campaigns in Australia have begun adopting increasingly public methods of advocacy, including:

  • publicly criticising the incumbent members of the board and management;
  • proposing or supporting changes to the composition of the board;
  • requisitioning shareholder resolutions, statements and meetings; and
  • encouraging unsolicited offers to be made for the shares in, or the assets of, the company.

Use of the Advisory Vote on a Listed Company’s Remuneration Reports

The Corporations Act requires that the remuneration report of Australian listed companies be put to an advisory resolution at each AGM. Where "two strikes" are received (ie, at least 25% of the votes cast are cast against the report in two consecutive years), a board spill resolution must be put to shareholders. If the board spill resolution is passed, all the non-executive directors who wish to continue to serve on the board must stand for re-election at a special "board spill meeting" to be held within 90 days.

Given the potential pressure that delivering "two strikes" can place on the incumbent board, activist shareholders have used this mechanism to protest against issues that are unrelated to remuneration, including poor corporate conduct and performance.

Collaboration by Activist Groups

Collaboration amongst retail shareholder activist groups is commonplace in Australia, although increasingly, ESG-activist groups are individually targeting companies, resulting in duplicative or overlapping campaigns (eg, AGL Energy, Origin Energy, ANZ Banking Group and the National Australian Bank each received requisitioned resolutions from multiple climate-change activist groups at their respective 2019 AGMs).

Collaboration by institutional shareholder activists is less common. This is largely due to Section 12(2)(c) of the Corporations Act which provides that investors may become "associates" for the purposes of Australian laws where they act in concert in relation to a common portfolio company. As a result, the relevant activists may become subject to the requirement to lodge notices to the market for takeovers and substantial changes in shareholdings where they act together. While the Australian Takeovers Panel is generally reluctant to interfere with shareholders’ rights to requisition proposals and/or spill companies’ boards, recent decisions have shown that they will step in where there is sufficient evidence of an undisclosed association and intervention is in the public interest.

Holding discussions with and making voting recommendations to other shareholders, and making joint representations to the board, are generally permissible and unlikely to cause issues of association.

However, jointly signing shareholders’ requisitions (including to call a meeting or to propose a resolution), formulating joint proposals on issues such as board appointments and company strategy, and entering into agreements or plans in relation to voting (eg, offering or accepting inducements to vote in a specific way) are indicators that the investors involved may be associates.

In Australia, there are also broad provisions relating to insider trading that apply to the use of any material information in respect of a company, irrespective of whether it has come from a company insider. In the context of forcing a significant corporate transaction for the purposes of influencing a governance agenda, the significance of the broad insider trading laws is that knowledge of an activist’s intent to target a company could constitute materially price-sensitive information and any ensuing action could be deemed insider trading. The risk of liability in Australia for insider trading is thus a very influential factor in discouraging collaborative activist campaigns.

In Australia, the energy and resources sectors have been the traditional focuses of retail shareholder activists agitating for social or environmental change. These campaigns have not discriminated against the size of companies, and often they have targeted companies within the S&P ASX100. Examples include the requisitions proposed against Santos and Woodside, which attempted to amend the companies’ Constitutions and to request additional disclosure concerning alignment of the business with the Paris Climate Agreements and emissions targets, in addition to a review of the companies’ positions, oversight and processes relating to public policy advocacy. Neither requisition complied with the Corporations Act requirements and therefore were rejected on grounds of non-compliance.

Increasingly, however, retail shareholder activist campaigns are targeting a broader range of companies, including in the finance sector (in relation to the climate impact of their lending and investing activities) and the consumer sector (in relation to human rights and labour rights). While these campaigns are typically led by retail shareholder groups, they have, in some cases, been supported by larger institutional investors with aligned views on climate change and ESG matters.

In 2019, prominent examples of retail shareholder activism expanding outside of the energy and resources sector included:

  • international air carrier Qantas - for the second consecutive year, Qantas received requisitioned resolutions to amend its constitution and to implement heightened human rights due diligence and policies regarding involuntary transportation of refugees and asylum seekers on the airline’s services; and
  • national supermarket retailer Coles - in an Australian first, Coles received requisitioned resolutions to amend its constitution and requesting it to align its ethical sourcing policies and supplier requirements in its domestic fresh food supply chains to industry best practice.

Outside of retail shareholder ESG activism, there is less correlation between sector and activist campaigns. Often, these campaigns are typically focused on crystallising economic gains from the relevant company and the relevant activists are typically institutional shareholders which are largely agnostic as to sector. Campaigns in recent years have targeted companies spanning sectors from retail (Myer), to finance (AMP) and aged care/real estate (Aveo Group).

Retail shareholders focusing on ESG issues have typically been the most prominent activists in Australia. Whilst such shareholders have always been active in Australia, in recent years there has been a spike in the number of shareholder-requisitioned resolutions being proposed in relation to ESG issues.

Economic activism by institutional shareholders is also becoming increasingly prominent in Australia. This has been driven by a mix of onshore and offshore institutional investors.

Notable local activist shareholders include Merlon Capital, Ariadne, Sandon Capital and Thorney Opportunities, and the local branch of Allan Gray.

Offshore shareholder activists which are active in the market include Lone Star Value Management, Janchor Partners, Coliseum Capital Management and, previously, Elliott Management.

With respect to retail shareholder activism, such as resolutions requisitioned under section 249N of the Corporations Act, activist campaigns have almost universally been unsuccessful. For example, all of the resolutions proposing to amend listed companies’ Constitutions at the 2019 AGM season were overwhelmingly defeated, with approximately 90-95% of shareholders typically voting against the resolutions. However, generally, the resolutions were requisitioned simply as a mechanism for the activist groups to have a platform for communicating with companies’ shareholders, and to encourage the relevant companies to engage in relation to the relevant issues and, from that perspective, the activist campaigns have been largely successful.

With respect to institutional shareholder activist campaigns, the outcomes are more varied. In several cases, activist investors have been successful in catalysing board changes and obtaining representation through nominee directors (eg, Janchor Partners at Bellamy’s Australia or Ariadne at Ardent Leisure). In other cases, however, the outcome has been less determinative and the relevant activist demands have not been met (eg, Elliott Management’s demand for BHP to abandon its dual-listed structure).

Directors’ duty to act in the best interests of the company and for a proper purpose remains paramount throughout an activist campaign and the board must have regard to this duty in formulating its strategic direction and response. Importantly, this consideration extends to the board’s use of company funds, which must be bona fide and not connected with a board’s own agenda. To this end, the Advance Bank case established the limitations placed on boards with respect to their use of company funds in any response to contested director elections (Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464; 12 ACLR 118).

The legal framework for how companies can respond to activist campaigns is not yet well defined in Australian case law; however, the Advanced Bank case and other case law does relevantly allow for:

  • directors to make recommendations to shareholders where they hold a genuine belief that it is preferable for shareholders to know the board’s view on a matter; and
  • directors to communicate information to shareholders that is material to their decision on how to vote on the external nomination or shareholder-requisitioned resolutions.

As part of directors’ obligation to provide shareholders with material information with regard to an activist proposal, the board may rebut factual inaccuracies and make counter-arguments to ensure that shareholders are adequately informed about the proposal. This may involve:

  • formulating a board recommendation (although noting that this does not permit the board to tell shareholders how to vote);
  • holding meetings with substantial shareholders;
  • communicating directly with shareholders; and
  • creating a hotline for receiving calls from shareholders to respond to questions relating to an activist’s proposals.

Boards may also engage a proxy solicitation firm to call shareholders directly. This approach carries some risk, given the principles established in the Advance Bank case, however, boards can reduce that risk by restricting the scope of these calls to making shareholders aware of the key issues, the relevant facts, and the relevance of their vote, and by avoiding incurring unreasonable costs in the process.

Under Australian law, a company has a separate legal personality and remains distinct from its shareholders, board, and management. The Corporations Act provides for the incorporation of companies as limited liability companies, which limits shareholders’ exposure to the company’s liabilities to unpaid amounts that remain outstanding on their shares (if any).

Australian courts are generally hesitant to "pierce the corporate veil" and will only do so in exceptional cases, for example where the company’s separate legal personality is being used as a vehicle for fraud, to shield the shareholder(s) from an existing legal obligation or, in corporate groups, where the level of control is so complete that the parent company should be deemed to be directly liable for its subsidiary company.

The Australian legal system provides shareholders with recourse to a number of different types of action against companies they hold shares in. These include:

  • personal actions – where the shareholder has a cause of action against the company for loss or harm that the shareholder has incurred personally;
  • shareholder class actions – where a class of current or former shareholders has a cause of action against the company for loss or harm that the shareholders have incurred collectively. Frequently, class action proceedings are instituted against listed companies in Australia for alleged breaches of their companies’ continuous disclosure obligations under the Corporations Act and ASX Listing Rules - although noting that, under temporary amendments to the Corporations Act under the Corporations (Coronavirus Economic Response) Determination (No 4) (originally made as Corporations (Coronavirus Economic Response) Determination (No 2) 2020), such a breach is currently more difficult to establish for plaintiffs, due to the introduction of a higher level of requisite fault). Through class actions, shareholders seek to recover alleged losses where they bought or sold shares during a period where the company is alleged to have failed to keep the market updated;
  • statutory injunction – if a shareholder perceives that the company will breach the Corporations Act, they may seek an injunction under section 1324 of the Corporations Act to prevent this kind of breach;
  • oppression – Section 232 of the Corporations Act provides shareholders with a means to seek remedial action where they determine the company has engaged in oppressive conduct. Specifically, a shareholder may bring an action against the company where the conduct of the company’s affairs, an actual or proposed act or omission by the company, or an actual or proposed resolution of shareholders or a class of shareholders is contrary to the interests of the shareholders as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder or shareholders;
  • winding up – there are some limited circumstances in which shareholders are able to apply to the court for an order to wind up the company.

Shareholders have similar remedial rights against directors to those they have against companies and, if directors are alleged to have breached any of these duties or obligations, shareholders might have recourse to the following remedies:

  • personal actions – where the shareholder has a cause of action against the director for loss or harm that the shareholder has incurred personally;
  • shareholder class actions – see 3.2 Legal Remedies Against the Company. Directors may be joined to shareholder class action claims against the company;
  • statutory derivative action – see 3.6 Derivative Actions;
  • statutory injunction – a shareholder can seek a statutory injunction against directors under Section 1324 of the Corporations Act if that shareholder perceives that the directors will cause the company to breach the Corporations Act;
  • oppression – see 3.2 Legal Remedies Against the Company. If oppression is established, a Court may require a person (including a director) to do or refrain from doing a specified act.

Most often, however, aggrieved shareholders will progress complaints against directors by reporting them to ASIC for investigation. ASIC is charged with enforcement of the Corporations Act and, where it perceives that directors have failed to discharge their duties under the Act or the common law, it may institute proceedings against them.

As discussed in 3.2 Legal Remedies Against the Company and 3.3 Legal Remedies Against the Company's Directors, Section 232 of the Corporations Act also provides shareholders with some recourse against another shareholder or a class of shareholders who bring about a set of circumstances that would be contrary to the best interests of, or oppressive to, the shareholders of the company as a whole. These actions are expensive and, unlike a derivative action (see 3.6 Derivative Actions), will be funded by the shareholder who brings the claim.

A shareholder may also be able to bring a contractual claim against another shareholder for breach of the terms of a relevant shareholders’ or joint-venture agreement, or enforcement of the provisions of the company’s Constitution, recognising that the Constitution applies as a statutory contract between shareholders (see 1.3 Primary Sources of Law and Regulation).

Auditors are strictly regulated by the Corporations Act. In ascertaining the true financial position of the company, auditors are subject to significant duties of care, independence, diligence and skill. Auditors may be liable to the company in both contract and tort for negligence, as well as statutory breach of duties under the Corporations Act. Where the company declines to pursue a claim against the auditor, shareholders may in limited circumstances have recourse to bring proceedings in the company’s name by way of a statutory derivative action (see 3.6 Derivative Actions).

Section 199A of the Corporations Act prohibits a company from excusing its auditor from any liability to the company incurred as an auditor of the company.

Under Section 236 of the Corporations Act, a shareholder can bring a derivative action in the name of the company provided the cause of action is vested in the company and is not one that belongs to the shareholder personally. A shareholder seeking to bring a derivative action must apply to the Court for leave to bring proceedings, and the Court must grant leave if it is satisfied the following conditions are met:

  • it is probable that the company will not bring the action itself;
  • the shareholder is acting in good faith;
  • it is in the best interests of the company that leave be granted;
  • there is a serious question to be tried; and
  • either the shareholder provided the company with written notice of their intention to seek leave from the Court for a derivative action 14 days prior to doing so, or the Court deems it appropriate to grant leave despite notice not having been given to the company.

Derivative actions typically relate to a breach of directors’ duties, although they can also be brought to enforce rights held against a third party (including an auditor) where the person bringing the claim can overcome the rebuttable assumption that a claim against the third party is not in the company’s best interests.

Courts are entitled to make cost orders against shareholders instituting proceedings, including those seeking leave to institute proceedings (eg, by way of a statutory derivative action) and, given the risk of cost orders, this can be a dissuasive factor for bringing proceedings. Accordingly, it is more common in Australia for shareholder activist campaigns to be focused on non-litigious processes such as shareholder-requisitioned resolutions and removal of directors.

Litigation against the company is, however, sometimes used as a tactic in activist campaigns as a means of placing pressure on the incumbent board to hasten negotiation or crystallise change at the company. Statutory derivative actions under Section 236 of the Corporations Act and proceedings related to conduct that is alleged to be oppressive to shareholders under Section 232 of the Corporations Act are sometimes used for this purpose. Occasionally, litigation may also be instituted against directors, such as defamation claims against individual directors.

Herbert Smith Freehills

Level 34, ANZ Tower
161 Castlereagh Street
Sydney NSW 2000
Australia

+61 2 9225 5000

+61 2 9322 4000

www.herbertsmithfreehills.com
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Law and Practice in Australia

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Herbert Smith Freehills operates from 26 offices across Asia Pacific, EMEA and North America and is at the heart of the new global business landscape, providing premium quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including banks, consumer products, energy, financial buyers, infrastructure and transport, mining, pharmaceuticals and healthcare, real estate, TMT and manufacturing and industries. Herbert Smith Freehills’ Sydney and Melbourne-based head office advisory team (HOAT) is Australia’s largest dedicated legal team specialising in corporate governance advice. As the "go-to" governance adviser for market-leading listed companies in Australia, HOAT’s permanent team of 17 qualified lawyers regularly advises major clients on sensitive and strategic matters relating to corporate culture and governance, executive remuneration, and shareholder engagement and activism.