Cases Concerning Members Rights

If a person plans to generate money by being able to establish a business which is anticipated to fulfill such goals, there are many available choices such as establishing a sole proprietorship, partnership, corporations, and joint ventures among others. It will be largely dependent on the owner or owners among which type of business organization will be most suited and appropriate for their plans. With regards to how they are established and how they operate on a daily basis, there are many variations depending upon which type is utilized. These matters should be given important consideration by the company for this will not only satisfy their legal obligations as an organization but will also help them establish their name in the industry in which they belong. Above all, the existence and operation of these corporations must be governed by common law and laws which are specific only to their organization as stipulated in their articles and bylaws.

In this paper, the researcher is focused towards the discussion of one type of business organization, that is, corporation. Moreover, the particular focus which will be emphasized all throughout this research would be the members’ rights in many corporations that exist today. This will discuss the basic issues and the fundamental rights which are vested among the members of the corporations. The foundation of the findings which will be laid out in this paper will be based on the Corporations Act of 2001 [1] which provide stipulations on common guidelines and law governing the operation of corporations which operate in Australia. Practical law cases, which have been significant part of history of global corporations, will also be given a brief discussion to be able to potentially address some of the rights which have emanated as a result of the ruling out from such cases.

NATURE OF CORPORATIONS

One of the many options made available when putting up a company would be resorting into the establishment of a corporation. A corporation is said to be a statutory creature which is created and regulated by existing state laws. One of the things which makes corporations different from other forms of business entities is the fact that such form of business has a legal and tax entity which is separate from the group of people who own, control, manage, and operate the business. The existing federal and state laws assume that the corporation is a “legal person” thereby ruling that the business is capable of being engaged in a number of activities such as being able to enter into contracts, incur debts, and pay taxes as an entity separate from its owners (Mancuso, 2009).

Corporations can be classified in a number of different ways. Fro instance, they can be private or public, and domestic or foreign. Private corporations, as the name implies, are privately owned. If it is non-stock, it means that the company does not operate for profit and they do not issue stocks. On the other hand, a stock corporation is one which operates for profit and issues shares of stocks to its shareholders of members. Stock companies or corporations could be open, if stocks can be sold to the general public, and closed, if otherwise. Another type of corporation is a public corporation which is operated and owned by the government. Furthermore, domestic corporations are those which are operated and incorporated on that state as against foreign corporations in which their operations extend beyond their state of incorporation (Nikolai et al, 2010). Each corporation, aside from being able to adhere to common law and some national federal and government regulations, are also equipped with their own corporate constitution which provides the stipulations of their own laws to govern their operations.

MEMBERS OF A CORPORATION

The members of the corporation are entities which are concerned about the general operation of the business. They can have voting rights and they may be denied of such privilege dependent upon what is dictated by the bylaws and regulations which govern the corporation. In non-profit public benefit corporations which exist in the State of California, members are assumed to be any person, which can even be inclusive of the corporation itself, who were equipped with the right to vote, pursuant to the stipulations in the laws of the corporate entity, has the right to the disposition of the assets of the corporation, right on mergers and dissolution, and right on any changes which will be made in the articles of incorporation or bylaws. However, it is also assumed that not all members are given equal power as one may have more voting power compared to the other (Insight Center for Community Economic Development, 2008).

Furthermore, the Corporations Act of 2001, defines the member of a corporation as someone who satisfies the following stipulations: (a) a member of the company on its registration; (b) agree to become member of the company after its registration and their name entered on the register of members; and (c) become member of the company under section 167 which states that membership can possibly arise from the conversion of the company from one which is limited by guarantee to one which is limited by shares [2] (Corporations Act of 2001).

WHEN RIGHTS OF MEMBERS ARE CRITICAL

In the operation of any corporation, the occurrences of various scenarios might prove very evident that the rights of the members of the corporation should be given immediate and ample amount of attention for they can prove to be very necessary in its operations. The discussion of the rights of the members of the organization can be taken into a number of different contexts which can be very helpful in determining the rights which they have in the organization. For instance, the rights of the members of the corporation may become very evident during the process of insolvency. On this situation, there could be a conflict of interests between the members or the shareholders and the creditors. The management will be having the dilemma of whether giving up or trying to move on with revised strategies to make the business work. Either of the two choices would mean consideration on the rights of the members of the corporation as they are seen to be vital on the operation of the business. Secondly, rights of the members of the corporations will also be very important in cases where there is an existing contest between the shareholders and the company itself. Several scenarios which can give rise to this kind of dispute, thereby necessitating the discussion on what rights the members are endowed, include the following: deliberately disregarding the rights which should be given to the members, such as being participants in the meetings of the corporation; incorrect and inefficient management of the corporation, dilution of the right of the member to vote as called upon by the issuance of new voting shares, the absence of or the minimal amount of dividends which is given out to the members of the corporation, alterations in the corporate constitution, and other activities or procedures which might prove the disregard in the participation of the corporation’s members [3] . The contest between the shareholders or members and the company can be further subdivided into two factors: contest between the shareholders and the directors and the contest between the shareholders themselves. On the first note, it is possible in the corporation that there will a conflict between the shareholders and the directors especially in the exercise of the latter of their general powers of management. Furthermore, it is also possible to have a conflict between the shareholders themselves especially upon their individual conflict of interests. Fro instance, a minority of the members might disagree with the result of a decision as evident from the winning of the majority votes. In this regard, there is a fundamental question which asks what protection and rights should the law give to the minority members of a corporation (Tomasic et al, 2002).

With the above-mentioned conflicts which could possibly arise in the conduct of operation, it is critical to note that such problem has been laid out with the stipulated solutions aiming to regulate the operations of the business. With this, members of the corporation come together and voluntarily agree to stipulate their rights and have it formalized through certain rulings which will be fundamental to their operation (Tomasic et al, 2002). To resolve such conflicts, members are given their specific rights to give them sufficient voice in the corporation. Some of these rights are general in the Corporations Act of 2001 while some may be specific to the organization as laid out in the articles and in their by-laws [4] . The succeeding sections will provide some of the rights of the embers including their rights in meetings and a discussion on the rights of minority members of the corporation.

MEMBERS MEETINGS

One of the factors which is very essential for the members of the organization, both voting and non-voting, would be the general meetings which are held within the members of the corporations. During these instances, most of the important matters are being carried out for discussion. Oftentimes, this has also been the subject of the discrimination and the prejudice which exists between the majority and minority members of the corporations. It is in these meetings that rights are often waived and some members are taken for granted, their voices not being heard and given importance, as would be evident in the practical case studies which will be further discussed in the succeeding chapters of this paper. These meetings are very important for they can contain various decisions which might possibly be reflective of what the organization will pursue in the conduct of its operations.

In case the management or the board of directors decided to call upon a meeting to talk matters regarding the existence and operation of the corporation, it is the right of members to be informed and notified regarding the occurrence of such an activity. The notice for the occurrence of the meeting for the members should be given individually to each member who is entitled with the right to vote [5] . The notice for the said meeting can be given: (a) personally; (b) by sending it by post to the address for the member in the register of members or the alternative address (if any) nominated by the member; (c) by sending it to the fax number or electronic address (if any) nominated by the member; (d) by any other means that the company’s constitution (if any) permits [6] . Through these channels, the members of the corporation, specifically those who are entitled to vote, should be appropriately notified and informed. Aside from the members who are entitled to vote, the auditor of the corporation should also be given a notification about the meeting which will be held because the auditor is entitled to have one representative who should be present in the course of the general meeting. It is also a common law principle that there should be a quorum [7] present before the meeting can finally be initiated. To be able to establish a quorum, it is possible to count the person attending as a proxy or a representing body as a member (Tomasic et al, 2002).

A general meeting can be called upon by the directors of the corporation provided that there is a request for (1) members with minimum of 5% of votes which can be counted during the general meeting; or (2) a total of, at minimum, 100 of the members of the corporation entitled with the right to vote during the conduct of a general meeting. At some instances defined, it is also possible that the court can call for the meeting of the members of the corporation. This is possible if the court already assumes that it is entirely impractical to have the meeting called upon by any other means provided (Gillies, 2004).

The Corporations Act of 2001, alongside with any other similar doctrines with stipulations regarding the operations of a corporation, necessitate that meetings are very important for it is an event in which sanctions can be made and convening could be done along with other goals. Although common law dictates that people should be personally present during meetings of the corporations, the use of technology to be able to facilitate a meeting in more than one location [8] . This allows members to participate and be heard in general corporate meetings despite geographical barriers (Cassidy, 2006).

Resolutions can also be formed in the absence of a meeting, thereby in the absence of the members in the meeting. If it is a proprietary company with more than one member, a resolution can be approved without the need to hold a meeting but in the presence what is called a circulating resolution. Under the Section 249A of the Corporations Act of 2001 there is a stipulation which reiterates that “a company may pass a resolution without general meeting being held if all the members entitled to vote on the resolution sign a document containing a statement that they are in favor of the resolution set out in the document. Each member of a joint membership must sign”. The members of the corporation are also entitled to appoint a proxy, if they wish, satisfying the requirements of the provisions of the Act. It has been stated that “each member may appoint a proxy. If the member is entitled to cast two or more votes at the meeting, they may appoint two proxies. If the member appoints two proxies and the appointment do not specify the proportion or number of the member’s votes each proxy can exercise, each proxy may exercise half of the votes [9] “. Furthermore, the next section provides that the proxy should be endowed and given with the same set of rights and privileges which is inherent upon the member which is being represented in the meeting [10] . This goes to show that the member can speak, vote, and join a poll during the meetings of the corporation (Gillies, 2004).

MAJORITY VERSUS MINORITY INTERESTS

One of the essential things to note in the discussion of the rights of members in an Australian corporation would be the minority in relation to the majority of the members who hold shares in the corporation. Members of the corporation, regardless of being on the majority or minority, should be endowed with the basic rights in which they can protect not only their individual and personal interests but also for the interest of the entire corporation. Because of their relatively smaller size as compared to the majority of the members, it has been called upon that the minority members of the corporation should be given legal avenues to be able to pursue their claims.

In the operations of a corporation, it is evident that decisions are arrived at based on the rule of the majority votes which form results of the general meetings which are called upon by the corporation. Majority members of the corporation are subject to certain privileges or rights which are exclusive of the minority members, for instance, allowing proxy votes subject to terms and conditions. With this, it is therefore very obvious that there is a very high possibility that the majority members who are endowed with a sufficient portion of voting power to alter the constitution to be able to serve their individual interests. If the majority of the votes would favor stipulations which can serve their individual interests, where do the rights of the minority members rest (Toamsic et al, 2002)?

The answers to the questions which were mentioned above are not straightforward. For one, it would be significant to note the principle which is evident in Northwest Transportation v Beatty stating that each individual shareholder is endowed with the freedom to exercise the power to vote in his or her own interest. However, this is in argument with another principle. This is the principle which states that the decision of the majority which is arrived at the end of the general meeting is reflective of the decision of the corporation. This, therefore, goes to show that members of the majority must be able to exercise the utility of their joint voting power to be able to decide what would be best for the corporation in general (Tomasic et al, 2002).

As discussed, the minority members of the corporation are also endowed with their set of rights and protection for such [11] . However, it is also important to note that the common law provides only a limited scope of rights to the minority members of the corporation. They are often constrained with specific boundaries with regards to being able to legitimately voice out their opinions and concerns about the management of the corporation. To be able to potentially provide a solution on the existence of such limitations, statutory remedies and procedures were enacted overtime, and some were practically results of previous cases which have been heard and ruled regarding corporate management. Aside from the rights which have been mentioned earlier, along with the statutory rights and rights which have emanated from various cases which will be discussed earlier, one of the rights which is bestowed upon the minority members of the corporation would be their right to sue to be able to provide protection for a personal rights which is bestowed upon them either by statute of the constitution of the corporation (Tomasic et al, 2002).

CASES CONCERNING MEMBERS RIGHTS

Foss v Harbottle

The rule of Floss v Harbottle is a term which has been used over the years to be able to refer to the principle which dictates that the majority of the members or shareholders of the corporation in a general meeting must be able to take the decision on litigation concerning the misconduct and other appropriate actions which were undertaken by the board of directors. The origin of this rule can be traced from as early as the 18th and 19th century in cases of businesses which were established as a partnership [12] . One of the underlying principles with this is the rule of majority which necessitates that the majority of the corporation’s members or shareholders are given the privilege and the legal right to be able to control the operations of the company through voting during their general meetings (Hirt, 2004). The rule which is set out in the Foss v Harbottle is seen to be the starting point of the remedies for the rights of the minority members of the corporation. This has paved way fro more stipulations and amendments which led to the current laws which govern corporations.

The case of Foss v Harbottle initiated when two of a company’s minority shareholders filed legal actions to the director of the company, among others. The claim of the two minority members is that the directors of the organization wrongly applied the assets of the corporation. In the ruling, it is evident in the decision that the claim was dismissed and it was ruled out that when a company is wronged by the directors, it is only the corporation or the company which has the standing to sue. This makes the company the proper plaintiff in such cases. This, the proper plaintiff, and the majority rule, as earlier discussed, are among the important stipulations of the judgment in Foss v Harbottle (Ottley, 2002).

Greenhalgh v Arderne Cinemas Ltd

The Greenhalgh v Arderne Cinemas Ltd [13] is a United Kingdom law case in which it is argued that if the effect of the alteration is to deliberately make evident discrimination between the majority and minority shareholders of the corporation, with the objective of giving the majority members a relative advantage, the alteration should then be not given permission to take place (Bourne & Pillans, 1999). Therefore, in this case, in Greengalgh could have established that there is an understanding that the current majority members will have the first option on the shares which are made available for sale the alteration would have been prejudicial primarily because it fails to consider the minority members of the company (Goo, 1994).

The articles can be altered through the power of special or written resolutions provided that it is limited by the following: the presence of special protection for class rights; it must not contravene or prove to be inconsistent with other existing company or corporate laws; it cannot force members to be able to purchase one or more shares or to contribute share capital in an unwilling manner; and the alteration can be amended or totally cancelled if it proves to show discrimination between majority and minority shareholders. The last condition is also evident in the case which was earlier discussed. The condition reiterates that the alteration can only be considered as valid if it is done in good faith taking into consideration the interest of all the corporation’s shareholders. If the rights of the member are seen to have improved because of the alteration, then the alteration is recognized to be a valid common law, as in the case of Greengalgh v Arderne Cinemas Ltd (Mead & Sagar, 2006).

Gambotto v WCP Ltd

The case of Gambotto v WCP Ltd is reflective of the alteration of rights which affect both members of the corporation, showing an advantage to the majority while a disadvantage on the minority. On this note, WCP has engaged into a meeting with its shareholders at which a decision has been arrived to provide for alterations or amendments on the constitution of the corporation. With the alteration taking effect, members who hold 90% of more of the issued shares can compulsory acquire the residual share. Because of this, it is said that the majority shareholders of the company were able to acquire at least 99.7% of the issued shares of the corporation. The shares which were remainder from such alteration, which was very minimal, were left to the minority shareholders [14] . Gambotto filed a complaint on this reiterating that the said move of the majority members of the corporation is oppressive towards the minority members. Such alteration is seen to be invalid as it ahs given rise to conflict of interests and advantages, specifically among the majority and minority members of the corporation (Cassidy, 2006).

It is evident from the case discussed above that there is a deliberate attempt from the majority members of the corporation to be able to acquire the shares of the minority members through fair compensation. The minority leader, the plaintiff in this case, said that the modification was beyond the scope of the power to alter. It has been argued that there was an abuse of power and absence of good faith in the alteration which has been done. The court declared that this alteration has been invalid showing favor to the plaintiff in the case. It ahs been ruled out that an alteration which aims to create a provision for expropriation can only be classified as valid if such is created for the proper purpose and if it is not oppressive especially against the minority members of the corporation. The party which seeks to make changes and relative appropriation must be able to do so while being reflective of fairness on the price paid for the shares, the procedures undertaken should be justifiable, and there should be appropriate discretion. The case of WCP, however, failed to satisfy such recommendations when they made the alteration of rights (Hossain & Malbom, 1998).

Wayde v NSW Rugby League Ltd.

In this case, the cooperative society has issued an appointment to three of its directors of a textile company. It has been assumed that the said action should have not been undertaken by the management as the directors are wrong with their assumption that being nominees of the cooperative society, their primary responsibility was to the cooperative society. These three directors are said to have done nothing and resorted into inaction for the general welfare of the organization. Being nominees to the cooperative society, they have thought that their primary duty and responsibility is dedicated towards the society disregarding the welfare of their organization. In behalf of the textile company, the three directors could have protested against matters which they think will be oppressive. According to the ruling on this case, there will be no significant difficulty in the interests of all concerned parties were given consideration [15] . However, it is evident that the three directors did not do what they can for the company (Mantysaari, 2005).

Sanford v Sanford Courier Service Pty Ltd

In this case, the Supreme Court of New South Wales ruled out that the non-payment of dividends could possibly lead to oppression in certain cases and gave the member the desired relief (Baxt, 2005). The defendants were found out to have given themselves excessive remuneration. The plaintiff has been required to offer his shares to the defendant at a price which will be determined by the auditors of the corporation. The court went into the scene and ensure that the value of the shares were valued on the notion that the remuneration of the defendant was restated on a commercial basis. In this note, the issue which brought about the oppression action is the action of the majority which is asserted by the minority devaluating the latter’s interest.

OPPRESSION

In the discussion of the rights of the members of the organization, it would be very critical to dedicate enough attention to oppression. Oppression generally is inclusive of being unfair in the context and nature of the operations of a corporation. It commonly involves the imposition of a specific act which can prove to be discriminatory or one with impending bias to the interests of a member or a group of members. The degree of oppression should be gauged by the members of the corporation regardless from whichever level it has originated. Oppression can happen and take place in various forms but they normally come in the following scenarios: the directors diverting corporate opportunities for their own personal and selfish interest which might prove to be detrimental to the company and to the members; issuance of shares for purposes that might prove to be improper, especially to the members of the senior management or the board of directors in the absence of proper disclosure from the members; failure of the management or the directors to lead and manage the corporation for the best interest of all parties concerned, for instance, entering into binding contracts at which the company would not enjoy any significant benefit at all; and omission by the directors (Laundy, 2006).

Before the changes and the amendments which have been evident in the Corporations Act of 2001 the minority members of a corporation were protected with the presence of certain limitations and exceptions from the rule: the proper plaintiff rule and the internal management rule [16] . As discussed earlier, the proper plaintiff rule necessitates that it is the company itself which should be considered as the proper plaintiff and the aggrieved party. On the other hand, the internal management principle necessitates that the court has no obligation to interfere with the management unless there are grounds which have been provided for such thing to possibly happen. However, because such things are seen to be exclusive of the rights endowed upon the minority members, there were exceptions which were stipulated [17] (Laundy, 2006).

The remedies identifies for oppression has origins which stem back from as early as 1945. This originated from the arguments that the minority shareholders in proprietary companies are confronted with the difficulties in enjoying the necessary remedies. The persons who can apply for an order should be able to satisfy the recommendations or the stipulations in the Corporations Act of 2001 as mentioned in the earlier section of this research. The oppression remedy is said to be a popular remedy for two main reasons: there is no stipulation which requires the minority member to apply for leave of the court and the member will have the benefit of receiving the results of the action if it proved to be a success in the end (Sharar, 2010).

STATUTORY DERIVATIVE ACTION

The Statutory Derivative Action was introduced and included in the Corporations Law of Australia while simultaneously letting go of the right of a corporation’s individual member to bring a derivative action at common law. The statutory derivative action allows an individual to initiate proceedings on behalf of a company against the corporate insiders who have been considered as a threat in the operations of the organization in a case where the company has been able or has not been willing to execute the necessary action for it. These matters are stipulated in Sections 236 and 237 of the Corporations Act of 2001. This is referred to as an action undertaken in which a member either brings proceedings on behalf of or in the name or the company or the action of an individual in which in intervenes in any proceeding at which the company is a concerned party [18] . To qualify as a “member” in such category an individual must be a former or current member, or entitled to become a registered member (Macmillan, 2000).

It has been identified that the following conditions should be satisfied for the court to be able to grant the leave: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; (b) the applicant is acting in good faith; (c) it is in the best interests of the company that the applicant be granted leave; (d) if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and (e) either (i) at least 14 days before making the application the applica