by John Wojtowicz (Director - Law Central Legal)

Shareholder disputes are a common occurrence, especially when it comes to voting on changes to the company. Voting on changes to a company usually occurs during a company’s general meeting. A general meeting has strict requirements for it to be valid, including that the quorum must be met.  

What is a Quorum? Why is it necessary?

A quorum is the minimum number of people that must be present at a meeting for it to be valid. For a company general meeting, this is the minimum number of shareholders (also referred to as members) that need to be in attendance. If there is no quorum, the meeting has no legal effect which means that any agreements reached or resolutions passed are unenforceable.

The number of members that need to be present for a general meeting to be quorate can be determined by the company in the company’s constitution. If the company does not have a constitution or if the constitution is silent on the quorum, it is two members: section 249T Corporations Act 2001 (Cth).

This can be an issue if there are only two shareholders. If one of the two shareholders is continuously absent at general meetings, then decisions about the company cannot be made. In some circumstances a shareholder may deliberately not attend a meeting in order to block resolutions proposed by the other shareholder. In these circumstances, if multiple attempts to contravene a meeting are unsuccessful, a member can apply to the Court for the Court to order a general meeting under section 249G of the Corporations Act. This is what happened in the recent case of Laine Commodities Pte Ltd (Receiver Appointed) v CS Agriculture Pty Ltd [2021] FCA 635.

Laine Commodities Pte Ltd (Receiver Appointed) v CS Agriculture Pty Ltd

In Laine, there were two shareholders in Lempriere (Australia) Pty Ltd. Laine Commodities Pte Ltd (with Emerald Jade appointed as a receiver) held 51% of shares, and CS Agriculture Pty Ltd held 49% of the shares. After Emerald Jade was appointed as receiver, Emerald Jade sought to replace some of Lempriere’s directors with its own and called meetings to do this. The majority shareholder called a meeting five times, but the minority shareholder did not attend. As a result, the majority shareholder sought an order from the Court for a meeting to be called under section 249G of the Corporations Act.

Section 249G gives the Court the discretionary power to call a meeting ‘if it is impracticable to call a meeting in any other way’ on application by a member or a director. The two issues discussed in Laine were, what does ‘call’ a meeting mean under section 249G and when will Courts exercise this discretionary power.

What does ‘calling’ a meeting mean under section 249G of the Corporations Act 2001?

It was found that the meaning of ‘call a meeting’ under section 249G refers not only to the process of calling the meeting (notifying the members that a meeting will occur) but also the convening of the meeting, the gathering of members and discussion of issues. The meaning of the word ‘call’ under section 249G for a quorum dispute is significant, because if the meaning of the word ‘call’ includes the meeting being convened, then the Court will be able to resolve the quorum issue by ordering the meeting to occur. They can also provide directions under section 1319 of the Corporations Act as to how the meeting should occur, such as modifying the quorum needed. However, if the word ‘call’ is limited to just notifying the members that a meeting is to be held, the Court would not be able to resolve the quorum issue.

The minority shareholder argued that the meaning of the word ‘call’ under section 249G did not include the actual convening of the meeting because ‘calling a meeting’, ‘arranging to hold a meeting’ and ‘conducting a meeting’, all have specific definitions. The word ‘call’ refers to the process of notifying the members that a meeting will be held, ‘arranging to hold a meeting’ is to organise the practicalities of the meeting such as where it will be held, and ‘conducting the meeting’ is discussing issues in the meeting once the members have gathered.

However, this construction was not upheld. The Court applied the case of Beck v Tuckey Pty Ltd [2004] NSWSC 357 and found that the modern meaning of the word ‘call’ can include the process of convening the meeting for several reasons. The use of the word ‘call’ was to allow the section to be more succinct.  Additionally, predecessors to this section and similar provisions included the word ‘convene’, suggesting this provision is designed to include the convening of the meeting.

Finally, as highlighted earlier, if this limited definition of ‘call’ is enforced, then section 249G would be ineffective. For instance, in Laine, the issue was obtaining quorum for the meeting not the process of calling the meeting. If section 249G was limited to merely notifying the members, the provision would not be effective. Therefore, the Court held that the meaning of the word ‘call’ under section 249G includes the convening of meetings.

As the Court found that ‘call’ included the convening of meetings, they ordered a date for the meeting to occur and made a direction under section 1319 that the meeting would have a quorum if there was one shareholder with more than 50% of shares. This means that even if the minority shareholder did not attend, then the majority shareholder can still pass resolutions at the meeting.

When will the Court use their discretionary power to call a meeting?

Once it has been established that it is impracticable for the parties themselves to call the meeting, the Court has discretion as to whether they call a meeting or not.

In Laine, the minority shareholder argued there were reasons that the Court should not order a general meeting, such as that the Court should be concerned about a receiver possessing 51% of shares as their interest would be in the ‘value of the debt, rather than promoting the interest of the company as a whole.’

However, these reasons were not considerations the Court needed to make when exercising this discretion. The Court took the approach in Turnbull v National Roads and Motorists’ Association Ltd [2004] NSWSC 577, that Courts are typically unwilling to interfere in proceedings in a company that are yet to occur. This is because when determining what is in the best interests of the members as a whole, those who are part of the company are in the best position to make that assessment. Based on this approach, the Court ordered a meeting.  If the matters the minority shareholder raised had not been considered in the meeting or voted on yet, the Court could not determine if it is in the best interests of the members as a whole.

If the Court did not exercise their discretion and order a meeting, the minority shareholder would have continued to not attend meetings and the majority shareholder would have been unable to make decisions. As the majority shareholder had already called multiple meetings and attempted to modify the Company Constitution but was still unable to hold the meeting, there was little else they could do to call the meeting.  

What does ‘impracticable’ mean under section 249G of the Corporations Act?

Whether it was ‘impracticable’ for the parties to call the meeting themselves was not an issue in dispute in Laine. However, it is still important to define ‘impracticable’ as it is a criterion that must be met before a Court can exercise its discretion. Based on a provision similar to section 249G, for a Court to determine whether it is ‘impracticable’ for a party to call the meeting themselves, the Court must examine the situation and determine, practically, if the company meeting can be convened and held. There are a wide range of situations where it is ‘impracticable’ for the parties themselves to call the meeting including cases ‘where all the corporators have been killed in an aircraft accident, down to situations where it is extremely inconvenient for a meeting to be called’: Hence, if it is impossible or extremely inconvenient to hold the meeting, then it is ‘impracticable’ for the purposes of section 249G. While this was not an issue in Laine, the Court ordered a meeting, meaning the repeated lack of a quorum met this impracticability requirement.

Takeaway

If a quorum cannot be achieved, one avenue available to directors or shareholders is that they can apply to the Court for an order for a meeting under section 249G of the Corporations Act. The meaning of ‘calling’ under section 249G includes the convening of the meeting.

For a Court to make an order under section 249G of the Corporations Act, it must be impracticable for the parties to call the meeting themselves. The Court then has discretion as to whether it calls the meeting or not. The minority shareholder’s reasons were not sufficient for the Court to not order there to be a meeting as they were not in the best position to assess what was in the best interest of the company.

Platinum members please continue on to read our platinum section where we discuss the quorum requirements for making decisions in a partnership.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.