The recent court ruling for Thorn Group Limited1 leaves directors in Australia without any good alternatives when required to respond to an invalid shareholder meeting requisition notice.
Thorn correctly identified the invalidity of a notice it received from shareholders seeking to convene a shareholder meeting. However, on application to the Supreme Court of Victoria, the requisitioning shareholders obtained orders validating the deficiency in the notice on the basis that the deficiencies were a mere procedural irregularity. The court also ordered Thorn pay the requisitioning shareholders’ costs of the application.
This leaves directors in a difficult position when faced with an invalid shareholder meeting requisition notice. They can convene a shareholder meeting, resulting in their company incurring the costs of a meeting that has not been validly demanded. Or they can quite properly refuse to convene the meeting, only to find their company exposed to an application to cure the invalidity. This can then result in their company paying its own and the shareholders’ legal costs, plus the costs of the meeting.
The deficiencies in the notice given to Thorn
Section 249D of the Corporations Act 2001 provides a right for shareholders with at least five per cent voting power to force directors to call a shareholder meeting. Compared with the previous decade, the 2010’s saw shareholders increasingly exercising this right. This trend has accelerated further during the past three years. While shareholders are rarely successful at spilling the incumbent board, the time and cost involved in holding a shareholder meeting and getting out the vote has a substantial nuisance value for listed companies.
Shareholders can request a meeting by giving a signed notice to the company. There are relatively few formalities for the notice – but there are some. In particular, where multiple shareholders are needed to band together to achieve the five per cent voting power threshold, the notice needs to be either:
- a single document containing the text of meeting request and the required signatures; or
- a series of signed documents each containing the same meeting request.
In the Thorn case, the notice received comprised the text of the meeting request on the first page, followed by three pages with signatures from several shareholders who together had more than five per cent voting power in Thorn. All the pages were stapled together. The signature pages looked so different from each other that it was obvious they been compiled from separate documents, including some that were print outs of photos of signature pages. The signature pages had sequential numbering and consistent formatting but nothing else to tie them to the text of the notice on the first page.
The court found that the notice did not comply with the requirements of s249D, because the stapled bundle was neither one document signed by all required shareholders nor a series of the same document, each with a signature from a shareholder. Rather it was a composite document, made up of pages extracted from other documents.
Those other documents might have been a series of documents in the same form, each signed by a shareholder. However, it was not possible for Thorn to tell whether this was so, because only the signature pages from those documents were included in the composite notice. Importantly, the court held that it should not have regard to extrinsic evidence about the execution of the notice, but rather its validity must be assessed by reference to the physical document given to the company.
The fact that the notice had been stapled together was not sufficient to characterise it as one document signed by all required shareholders. Plainly, each signatory had signed a different document, rather than the one document.
The court was very clear that these deficiencies resulted in the notice being invalid. Thorn was perfectly correct to decline to convene a meeting.
The court remedied the deficiencies
Having found that the notice was unequivocally invalid, the court went on to consider whether the deficiency could be validated under section 1322(2) or 1322(4) of the Corporations Act.
Section 1322(2) automatically validates procedural irregularity under the Corporations Act, without the need for any court order. Its automatic effect must be reversed by a court, if the court considers that the irregularity may cause substantial injustice that cannot be remedied by any order of the court.
Section 1322(4) gives the court powers to make various orders to remedy procedural matters if the people concerned acted honestly, it is just and equitable that the order be made and no substantial injustice is likely to be caused.
In the Thorn case, the court found that the invalidity of the notice was a procedural matter, did not cause substantial injustice, that the notice givers acted honestly and that it was just and equitable for the court to make remedial orders. The court therefore declared that the notice was not invalid under section 1322(2) and that the notice givers would also be entitled to relief under section 1322(4).
Implications for directors
The court’s decision to validate an invalid meeting requisition notice leaves directors in a difficult position. When a company receives an invalid notice, should it nevertheless convene a meeting?
In Thorn’s circumstances, it was not clear from the document Thorn received that all signing shareholders had signed the notice. The shareholders had clearly signed some kind of document, but it was impossible to tell whether it was a meeting requisition notice or something else. That is, apart from the legal technicality of the shareholder requisitioners getting the form of the notice wrong, there was a more important question about whether the required number of shareholders had signed a notice at all.
Faced with this uncertainty, would it have been appropriate for Thorn’s directors to throw away their company’s resources by convening a meeting when this was not actually required? A meeting that, in any event, Thorn’s directors probably did not consider in the best interests of shareholders to hold. Evidence was put to the court that some of the requisitioning shareholders had been involved with a number of other unsuccessful board spill attempts and, if successful in replacing Thorn’s board, they intended to simply wind Thorn’s business up and return all surplus capital to shareholders. This would be an outcome entirely at odds with Thorn’s existing directors’ efforts to build shareholder value.
From a director’s perspective, a better result in the Thorn case would have been for the court to find that there is a substantial injustice involved when invalidating an invalid notice. The injustice is the impossible position it puts directors in when reacting to invalid notices. That injustice looms large compared with the trivial burden for requisitioning shareholders in giving a fresh notice. At very least, the court could have ordered the shareholder requisitioners to pay their own and Thorn’s costs of the application, given it was none of Thorn’s doing that the notice was invalid.
As the law stands now, it will be difficult for directors to identify when a court will rectify any deficiencies in a meeting requisition notice they have received. There have been a number of prior court decisions finding that notices are invalid and that meetings need not be convened.2 In the Thorn case, the defects in the notice were fundamental, so there is no easy way to differentiate Thorn-type deficiencies with the deficiencies in prior cases that led to the notice being struck down.
Directors facing an invalid meeting requisition notice will need to weigh the risks of the requisitioning shareholders succeeding in a remedial application against the undesirability of convening a meeting on the basis of an invalid notice. Norton Rose Fulbright commonly guides directors through these challenges when advising on board spills and shareholder activism more generally.