08 Feb 2005

Shareholders' rights to inspect the company's books

by Ron Schaffer, Alastair Young

A shareholder can apply to the court to inspect the company's books, but the court will only make such an order if the shareholder is acting in good faith and that the inspection is to be made for a proper purpose. However, a recent decision of the Western Australian Court of Appeal shows that the court can limit the scope of the inspection.

Shareholders have various rights and remedies available to them under the Corporations Act 2001 against a company or its directors.

In order to exercise those rights and remedies, section 247A of the Act provides that shareholders can apply to the court for access to "books of the company". The "books" are broadly defined by section 9 of the Act to be:

  • a register;
  • any other record of information;
  • financial reports or financial records, however compiled, recorded or stored; and
  • a document; however

various documents relating to expert's reports in takeovers are excluded from the definition.

A recent decision of the Western Australian Court of Appeal indicates that the courts are cracking down on the rights of shareholders to inspect all of a company's books. In Majestic Resources NL v Caveat Pty Limited & Ors [2004] WASCA 201, the Court held that courts have the power to limit the scope of the "books" that shareholders can inspect.

The statutory framework

Section 247A of the Act (the shareholders' inspection right) is located in Chapter 2F of the Act which deals with shareholders' rights and remedies against a company. Pursuant to section 247D, the directors of a company, or the company by a resolution passed at a general meeting, may authorise a shareholder to inspect the company's books without the need for an application to the court. However, because that provision is of no use to a minority shareholder who may claim to be being oppressed by majority shareholders, section 247A provides a crucial mechanism whereby shareholders can get a court order allowing them access to information regarding the affairs of the company.

Section 247A(3) of the Act provides that the right to make an application to access a company's books is not limited to shareholders, but may be granted to persons who have already been granted leave, under section 237 of the Act, to commence or intervene in judicial proceedings on behalf of the company (such as a former shareholder).

Section 247A of the Act provides that if the court is to make an order that a shareholder be permitted to inspect a company's books, the shareholder must be acting in "good faith" and that the inspection is to be made for a "proper purpose".

Section 247B of the Act vests a wide discretion in the court to make orders ancillary to the primary inspection order. Such ancillary orders may include an order that the company's books be used for limited purposes, or an order that the shareholder have only limited rights to take copies of inspected documents.

In Majestic Resources, the Court held that, in the exercise of its discretion to allow inspection of a company's books, a court may limit the scope of that order to provide that only certain books are inspected.

Majestic Resources

Majestic Resources was an appeal by a company from a decision of a Master of the Court to allow a minority shareholder to have broad access to the company's books.

The minority shareholder sought access to the company's books because it was concerned about a number of transactions involving the company which had resulted in the company sustaining what the Court described as "substantial financial losses". Indeed, the company's share price had fallen from 33 cents to 10 cents in a short period of time. The minority shareholder believed that the company's directors had breached their duties to the company in relation to those transactions.

The minority shareholder sought leave from the Court, pursuant to section 237 of the Act, to commence proceedings in the company's name against the directors and former directors who where involved in the relevant transactions. The shareholder also sought, pursuant to section 247A of the Act, leave to inspect the company's books.

The company opposed the inspection application on a number of grounds, including that the list of documents that the minority shareholder wished to inspect was so extensive that it indicated a lack of good faith. The company argued that rather than pursuing the legitimate interests of the company, the minority shareholder was embarking upon nothing more than a fishing expedition.

The Act states that the court may authorise the inspection of "books of the company". The Master, in making an order for the general inspection of the company's books, construed those words to mean that there is no power in the court to limit the scope of the order for inspection.

The Court of Appeal decisively rejected that construction of the Act. It construed the words "books of the company" to vest a discretion in the court to order limited rather than general inspection. The Court found it to be "significant" that the legislature had used the words that it did and not the words "the books of the company". The Court held that the width of the application for inspection of the company's books by the minority shareholder was a "relevant consideration" that should have been taken into account by the Master.

Interestingly, the Court of Appeal did not rely on a court's broad discretion to make ancillary orders, pursuant to section 247B of the Act, in making its finding that courts have the power to limit the scope of inspection.

Analysis

The decision of the Court of Appeal in Majestic Resources indicates a departure from the reasoning in cases such as United Rural Enterprises Pty Limited v Lopmand Pty Limited [2003] NSWSC 405 where Justice Campbell declined to limit the scope of a inspection order on the basis that it was not possible for the applicant in that case to know, in advance, just what books and records the company had.

There is an established principle that intermediate appellate courts should not depart from the interpretation given to uniform national legislation (such as the Act) by another intermediate Court of Appeal (such as the WA Court of Appeal). Accordingly, the decision in Majestic Resources is expected to be followed in all other Australian States and Territories, and at the Commonwealth level, unless it is overturned by the High Court or if it is deemed in the future to be "plainly wrong" (Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492).

As pointed out by Terry Noble in his article Members' rights to inspect books: two recent cases (2002) 20(7) C&SLJ 409 (although in a slightly different context) the policy considerations relevant to an analysis of the scope of the court's power to order the inspection of books under section 247A is a balance between the necessity for shareholders to have a real and meaningful ability to keep their company (and its directors) honest, and the legitimate commercial requirement that a company be able to operate its business without being required to disclose potentially confidential documents to dissatisfied shareholders.

Wherever the line between a shareholder's right to inspect documents and a company's right to withhold them lies, it is clear that applicants for the inspection of a company's books must be prepared to argue why it is necessary for them to inspect those particular books. Similarly, companies opposing such applications should be prepared to argue why any books that it does not wish to disclose should be excluded from any inspection order.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.