Discussion

Advise what are the various legal issues and causes of action that are available to the shareholders arising from the directors conduct in the above circumstances. Students should answer this question with reference to the relevant provisions of the Corporations Act 2001 and the relevant case law.  

The business environment comprises of the different individuals, entities and concerns and as such different rules are enacted by the legal authorities so as to augment trade and commerce.  The Corporations Act 2001 is one such law enacted for dealing with companies and entities operating within Australia at federal and interstate levels. The Corporation Act is one of the prime laws governing the formation of the companies and their subsequent operation. This law also depicts the duties of the directors, officers, takeover of the companies as well as method of raising finance.[1] The paper will discuss the provisions of this Act and its applicability with the stated case study. The legal recourses available to the shareholders in respect to the directors’ conduct will also be discussed in the paper.   

Australian corporate law has its roots from the company law of UK. The source of corporation law is from the Corporations Act, 2001 that acts as a single national statute implemented by Australian Securities and Investments Commission (ASIC). The company rules as found in Australia are quite strong and can be found in other Commonwealth countries. The directors have no personal liability as a general rule since the company and the Directors are separate entities.  In spite of this, the Corporations Act has stated certain conditions under which the Directors can be held liable.[2] From the case study it can be understood that there is no clear chain of command and the majority shareholders and the directors are all acting in a manner that serves their purpose without showing concern to the other shareholders. The shareholders are the actual owners of the company and the Corporations Act spells out remedies for the distressed parties in case there is a breach of interest for the alleged parties. The Corporation Act contains scope where claim can be brought against the directors and they can be relieved of their duty if the company has suffered losses as a consequence of the directors’ actions or the directors have amassed personal profit or certain other conditions where the shareholders believe that there have been breaches or unlawful practices.[3] This provision has been listed under the clause of derivative action contained in Pt 2F.1A within the Corporations Act. Derivative action is described as an action brought on behalf of the company and in name of the company by a person other than the company itself. This usually means the shareholder. Derivative Claim gives more power to the shareholders and empowers them with the right to protect their rights. These rights are crucial and form a layer of protection for shareholders against poor management.  Being owner of the shares provides certain rights for the shareholders and the Corporation Act contains certain mechanism for redressing the grievances.[4]

The Corporations Act

A derivative action is often described as a twofold action that is brought on by a shareholder so as to redress any harm. Derivative action is also described as an action used for compelling the corporation to sue it. Crux of derivative action can be described to serve two purposes: First is against the directors and the second is established upon the right of belonging to an entity. Moreover the scope of derivative action is on allowing the shareholders to evaluate and rectify the blight on the corporation as a result of wrong management. In cases of wilful misconduct by the management it is unlikely that the management will rectify the mistake by itself and thus the derivative act seeks to address the anomalies.[5] From the case study given, it may be understood that the parties related to the dispute are James Lee and Jenny Lee (holding 60% of the shares) and the directors of MTL. It may be observed that the husband and the wife along with the directors are acting on their own without taking into account the interests of the other parties. There is hardly any cohesion among the different stakeholders and the directors are inclined to act on their own without consulting the other shareholders. The aim of the Corporations Act is on making sure that the various parties within a company are fairly represented and their interests are honoured thorough sound implementation of fair policies. Volume 1 under Chapter 2F deals with the rights of the members and remedies in case of a breach.[6] The derivative action is listed under this Chapter that seeks to address any conflict in interest among the members and the directors with specific remedies in the form of derivative action. Sections 236 to 242 of the Corporations Act 2001 spell out the procedures for invoking derivative action. As such the members of the MTL Ltd including Martin Lu can bring a statutory derivative action. It has been observed that most of the derivative actions have been brought on by existing shareholders.

The Corporations Act comprises of 5 volumes that have chapters from 1 to 10. These chapters deal with different intricacies that are involved in the function of a company along with the rights and responsibilities of the different members, formation and functioning of companies, merger, acquisitions and fund raising.[7] Directors regulate organisations on behalf of the shareholders. The directors have a prime role in the smooth functioning of a company and it may be opined that they have a greater onus since directors are elected by the shareholders. Some of the most important responsibilities of the directors include promoting the long-term success of the company, to take steps in conjunction with the constitution and power of the company, to exercise independent decision making and to exercise reasonable care and skill. Thus it may be observed that the prime role of the directors of a company is on undertaking decisions that promotes the best interests of the company rather than the interests of the majority of the shareholders.[8] From the case study it may be opined that the directors of MTL have acted in a manner that benefits their own interests and ignores the responsibility of the majority of the shareholders.  Among other rights bestowed upon the shareholders of a company oversight is one of the prime responsibilities and rights of a shareholder. This means that the shareholders have a right to oversee correct management of a company. Moreover they have a duty to direct the organisational management and to account for the performance of the directors. It is also the responsibility of the shareholders to ask for clarifications and to raise questions and objections to the decisions of the management in case they feel such an act is not in the best interest of the company.[9] The four instances as has been mentioned in the case study can be evaluated so as to understand the highhandedness with which the majority shareholders and the directors are conducting the affairs of the company.  

Responsibilities of Directors

From decree of the courts in the cases involving derivative action it may be seen that the focus is on ascertaining whether a derivative action is in the best interests of the company. Moreover certain other enquiries are contemplated by the courts in matter relating to the breach of rights and responsibilities within the functioning of companies.[10] These considerations include understanding whether the claim of the applicants are speculative or not, what may be the possible ramification of such litigation on the business and performance of the company, what is the relationship that exists between the applicant and other members and directors of the company and so on. One of the prime considerations in cases involving derivative action is seeking alternative way of resolving the dispute. Overall aim of the judiciary is on making sure that the various stakeholders associated with a company receive fair treatment and the ruling benefits all and sundry associate with a company. Therefore any action arising as a result of bringing granting leave is minutely considered. Section 237 (2) (c), as such, states that the applicant needs to be given leave in the best interests of the company.[11] In Australia the best interests of a company is linked with the best interest of the group of shareholders. At times it has been also observed that the courts appoint an independent person for investigating the matters relating to inner dispute of a company and report independently to the court.  Business laws have been devised keeping in mind the growth of trade and commerce and therefore they seek to instil rules that are free from personal bias and prejudice. Moreover it is also ensured that no party is following a personal agenda that harms the best interests of all the shareholders.[12] Thus it may be stated that the case of MTL Ltd needs intervention from the court for ensuring that the different parties involved in the functioning of the company get their share of the due. The company laws strictly maintain that the directors need to avoid conflict of interest stringently. Under the Corporations Act 2001, ss 191-193 the directors need to provide full disclosure in case they have an interest in a transaction. Under schedule 3 of this act criminal penalty are enlisted in case there is any non-adherence. The act of the directors to sell off the television business of MTL is in stark contrast to this principle of duties of the directors.

Rights of Shareholders

Conclusion

The paper has shed light on one of the important legislations those dfine operations of the company in Australia- the Corporation Act, 2001. This act has been evaluated with special reference to MTL Ltd. Moreover the rights and responsibilities of the directors have been analysed and it was found that the directors in MTL are acting in a manner that serve their own interest without taking into account the interests if the shareholders.  Corrective provisions have also been discussed i.e. the derivative action and its applicability to MTL Ld have been analysed. From the discussion it has been concluded that the directors have a prime duty of putting the interest of the company ahead of their own interest.[14] In context to MTL Ltd this prime duty is said to be missing. The paper ends with recourses that are available to the shareholders with particular emphasis on shareholder rights and duties of the directors.    

Austin R.P. & Ramsay, I., Ford’s Principles of Corporations Law, Butterworths, Australia, 15th edition, 2012.

Baxt, R., and Fletcher, K.L., Fridman, S., Corporations and Associations Cases and Materials on, Butterworths, Australia, 10th edition, 2008.

Cassidy, J. Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013

Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition 2013

Fisher S, Anderson C, Dickfos, Corporations Law – Butterworths Tutorial Series, 3rd Edition Butterworths, Sydney 2009

Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. CCH 14th edition 2013

Harris, J. Butterworths Questions and Answers Corporations Law:, LexisNexis, 4th Edition Sydney 2013.

Harris, J. Corporations Law, LexisNexis Study Guide 2014

Harris, J. Hargovan, A.  Adams, M. Australian Corporate Law LexisNexis Butterworths 5th edition, 2015.

Latimer, P, Australian Business Law CC, 2016 Edition.

Li, G, Riley, S. Applied Corporate Law: A Bilingual Approach  LexisNexis 1st Edition 2009.

Parker, Clarke, Veljanovski, Posthouwer, Corporate Law, Palgrave 1st edition 2012

Redmond, P., Companies and Securities Law – Commentary and Materials, Law Book Co., Sydney, 5th, 2009.

Vermeesch,R B, Lindgren, K E, Business Law of Australia Butterworths, 12th Edition, 2011.

[1] Harris, J. Hargovan, A.  Adams, M. Australian Corporate Law LexisNexis Butterworths 5th edition, 2015. 

[2] Austin R.P. & Ramsay, I., Ford’s Principles of Corporations Law, Butterworths, Australia, 15th edition, 2012. 

[3] Baxt, R., and Fletcher, K.L., Fridman, S., Corporations and Associations Cases and Materials on, Butterworths, Australia, 10th edition, 2008

[4] Parker, Clarke, Veljanovski, Posthouwer, Corporate Law, Palgrave 1st edition 2012 

[5] Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. CCH 14th edition 2013 

[6] Redmond, P., Companies and Securities Law – Commentary and Materials, Law Book Co., Sydney, 5th, 2009

[7] Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition 2013 

[8] Li, G, Riley, S. Applied Corporate Law: A Bilingual Approach  LexisNexis 1st Edition 2009. 

[9] Cassidy, J. Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013 

[10] Harris, J. Corporations Law, LexisNexis Study Guide 2014 

[11] Harris, J. Butterworths Questions and Answers Corporations Law:, LexisNexis, 4th Edition Sydney 2013

[12] Fisher S, Anderson C, Dickfos, Corporations Law – Butterworths Tutorial Series, 3rd Edition Butterworths, Sydney 2009 

[13] Latimer, P, Australian Business Law CC, 2016 Edition. 

[14] Vermeesch,R B, Lindgren, K E, Business Law of Australia Butterworths, 12th Edition, 2011.