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26 Jul 2010

Blood on the boardroom floor

by Jonathan Algar, John Elliott

The Ace Developments decision illustrates the consequences of getting a notice of meeting wrong, and also provides clear rules to follow.

Most boardroom stoushes are resolved out of the public eye. Occasionally, however, they make it into court and, when they do, provide useful lessons for directors and their advisers.

The recent fall-out among the directors of Ace Developments was no exception. Among other things, the resulting court case showed that:

  • a board meeting can be hamstrung if the notice of meeting is too detailed;
  • being disqualified as a director doesn't prevent you voting your nominees onto the board.

This briefing on the case highlights points which will be relevant to corporate counsel and company secretaries.

How did it start?

Mr Dhami had been one of Ace's three directors, until he became disqualified under the Corporations Act. A disqualified person cannot be involved in the management of a company.

Despite being disqualified as a director, Mr Dhami still had his 50% shareholding in the company. Acting as a shareholder, he convened a general meeting. At the meeting, he used his shareholding to appoint his accountant and his ex-wife (Mrs Dhami) to the board. The other two directors, who were hostile to Mr Dhami, remained in office.

Following her appointment, Mrs Dhami called a board meeting. The notice of meeting said that the meeting would "discuss" specific aspects of the management and business of the company. Mrs Dhami and the accountant went to the meeting, but the original two directors didn't (because they disputed the validity of Mr Dhami's actions). At the board meeting, Mrs Dhami and the accountant passed a resolution to appoint Mrs Dhami as the company's agent in negotiations with a debtor.

The notice of meeting hadn't said anything about such a resolution.

Both sides went off to the NSW Supreme Court.

No such thing as a disqualified shareholder

The Corporations Act says that a general meeting can only be held for a "proper purpose". Mr Dhami's opponents argued that his appointment of Mrs Dhami and his accountant to the board was not a "proper purpose". According to them, it was an attempt to get around the ban on Mr Dhami, by appointing two "mere puppets".

The Court resolved this aspect of the dispute by looking at the professional activities of Mrs Dhami and the accountant. Mrs Dhami had her own separate business interests and, although she had invested in some of Mr Dhami's businesses, was no longer a director of any of those. Similarly, the accountant had a number of commercial clients other than just Mr Dhami.

The Court concluded that both Mrs Dhami and the accountant were persons with "independent financial capacity". There was no reason to find that either would be Mr Dhami's puppet.

Saying too much in a notice of board meeting?

The Court then dealt with the board meeting which had appointed Mrs Dhami as the company's agent.

At issue was the wording of the notice that Mrs Dhami had used when calling the meeting. The notice had listed a number of specific items for discussion. It had not said anything about a vote to appoint an agent.

The Court held that, if the notice of a board meeting includes a detailed statement of the purpose of the meeting, the meeting cannot transact any other business. It followed that the board meeting in question could not pass a resolution to appoint an agent.

Does this mean that a notice of a board meeting has to list every possible item of business that might be discussed at the meeting?

No, said the Court. It is perfectly allowable to convene a board meeting with a notice that says that the meeting will "transact such other business as may lawfully be brought forward" (or similar wording). Indeed, you can call a board meeting without stating any purpose at all.

What you can't do is to call a board meeting, give the impression that only a limited range of matters are to be dealt with and then use the meeting to pass completely different resolutions.

It followed that the resolution to appoint the agent was void.

What about general meetings of shareholders?

The Court noted that the position is slightly different with general meetings of shareholders.

That's because shareholders have a choice about whether to attend a general meeting. The purpose of the notice is, therefore, to give them a clear indication of the purpose of the meeting so that they can make an informed decision about whether to attend. That means that:

  • just like a board meeting, a general meeting can't go beyond the business specified in the notice of meeting;
  • unlike a board meeting, a general meeting can't be called with an open-ended notice of meeting.

But aren't directors supposed to attend all board meetings anyway?

A general meeting of shareholders can't go beyond the business specified in the notice of meeting, because shareholders must be able to decide whether to attend the meeting.

But directors, unlike shareholders, don't have the freedom to pick and choose which board meetings to attend - so why should the contents of the notice of a board meeting be an issue for them?

The Court itself admitted that, as a general principle, directors should attend board meetings "without any expectation of being told why". However, it thought that this was a "highly unusual" case:

  • the other directors thought that attending the meeting would compromise their stance that Mr Dhami's actions were invalid; and
  • they were entitled to believe that their non-attendance would not have any effect other than their non-participation in the discussions specified in the notice of meeting.

Implications

The law about notices of meeting - particularly for board meetings - is fairly sparse. This decision is therefore very welcome. Not only does it illustrate the consequences of getting a notice wrong, but it also provides clear rules to follow.

On the other hand, directors should not take this case as permission to skip some directors' meetings, even if there is a split in the board. Boycotting a meeting in the belief that a court will overturn any unfavourable decisions is a major gamble - let alone being a potential breach of duty in contravention of the Corporations Act

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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.