Shareholders' rights in private and public companies in Australia

A Q&A guide to shareholders' rights in private and public companies law in Australia.

The Q&A gives an overview of types of limited companies and shares, general shareholders' rights, general meeting of shareholders (calling a general meeting; voting; shareholders' rights relating to general meetings), shareholders' rights against directors, shareholders' rights against the company's auditors, disclosure of information to shareholders, shareholders' agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.

John Williamson-Noble and Tim Gordon, Gilbert + Tobin
Contents

Types of limited companies and shares

1. What are the main types of companies with limited liability and shareholders? Which is the most common? Which type do foreign investors most commonly use?

The main types of limited liability companies used in Australia with share capital are:

  • Proprietary companies.

  • Public companies.

Other types of companies with limited liability and share capital also exist in Australia, but these are not as common. These are:

  • Companies limited by guarantee.

  • No liability companies.

Foreign investors incorporating a company in Australia will commonly use proprietary companies, which have the benefit of a limited liability structure and are subject to fewer restrictions than public companies.

 
2. What are the minimum share capital requirements for companies?

Unlisted companies must have at least one share on issue. There are no other minimum share capital requirements.

The Australian Securities Exchange Listing Rules impose a "share spread" requirement in respect of listed companies, requiring that the main class of shares must be widely held so as to maintain a liquid market. At the company's listing, it must meet one of the three spread requirements (the shareholder requirement being 300 shareholders holding a parcel of shares with a value of at least AUD2,000, and with 50% or more holders of the main class of shares not classifying as "related parties" of the company). The initial issue price of each share must be at least 20 cents.

 
3. Briefly set out the main types of shares typically issued by a company and the main rights they provide. Set out the other main financial instruments (for example, bonds) and participation instruments that can be issued by a company.

Ordinary shares

Ordinary shares are the most common type of share issued by companies, and do not carry special or preferred rights. Ordinary shares entitle a shareholder to vote and participate in dividends or distributions of assets on the same terms as the other ordinary shareholders.

Preference shares

Preference shares typically entitle a holder to priority in relation to dividends or distributions of the company's assets on winding up. Preference shares issued by an unlisted company may or may not have voting rights. Preference shares issued by a listed company must allow the shareholder to vote on certain matters.

Preference shares can be redeemable, in which case the shares can be redeemed in accordance with the terms of their issue. Once a redeemable preference share has been redeemed, the share is cancelled (together with any rights attaching to the share).

Partly paid shares

Partly paid shares are issued to a shareholder without the company requiring full payment of the issue price at the time of issue. The company can call on the shareholder for the outstanding amount unpaid on the share at a future time. A partly paid shareholder's rights are typically proportional to the amount paid on the share (for example, a share paid up to 50% would give the holder a right to 50% of a vote).

Other financial instruments

In addition to the shares discussed above, a company can issue debentures and grant options over unissued capital.

 
4. What is the minimum number of shareholders in a company?

An unlisted company must have at least one member. A listed company must have a minimum of 300 shareholders at the time of listing (see Question 2).

 

General shareholders' rights

5. What are the general rights of all shareholders? How can shareholders' rights be varied (for example, additional rights attaching to a class of shares, or limitations on shareholders' rights)? Are such variations generally provided in the company's bye-laws and shareholders' agreements?

A shareholder's rights generally include:

  • The right to attend meetings of the company.

  • The right to receive annual reports.

  • The right to receive dividends.

  • The right to participate in decisions of the company that are reserved for shareholders (either under the company's constitution or by statute).

  • The right to inspect the company's minute books and securities registers.

Some of these rights can be varied by:

  • The company's constitution (depending on whether the company is a proprietary, public or listed company).

  • The terms of the shares issued to the shareholder.

  • The terms of a shareholders' agreement.

 
6. Briefly set out the rights of minority shareholders and the shareholding required to exercise such rights.

Shareholders have a number of statutory protections and rights available to them, regardless of the quantity of shares they hold. These include:

  • The ability to bring legal proceedings in the company's name, including against the directors of the company, with the permission of the court.

  • The ability to inspect the company's books, with the permission of the court.

  • The ability to apply to the court for orders in cases where the company has been run in a manner that is unfairly prejudicial to a member, or contrary to the interest of the members as a whole.

  • The ability to call a meeting of the company and propose resolutions (see Questions 13 and 14.)

The right to apply to the court for orders in cases where majority shareholders, or the directors, act in an oppressive or unfairly prejudicial manner towards a single shareholder does not have a minimum shareholding requirement, and can result in a broad range of orders, including:

  • The winding up of the company.

  • Modification of the company's constitution.

  • Any other order the court determines to be appropriate.

 
7. How influential are institutional investors and other shareholder groups in monitoring the company's actions (for example, corporate governance compliance)? List any such groups with significant influence in this area.

Shareholder groups can be highly influential in monitoring a company's actions. The shareholders' ability to call meetings of the company and propose resolutions (see Questions 13 and 14) means that dissatisfied shareholders have a powerful tool at their disposal for keeping directors accountable. Shareholders who amass enough support to call a members' meeting and propose a resolution may be able to remove directors or pass other resolutions that affect the operation of the company.

 

General meeting of shareholders

Calling a general meeting

8. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved? Which decisions must be approved by the shareholders in a general meeting?

Public companies with more than one member must hold an annual general meeting (AGM) each calendar year, within five months after the end of its financial year. There is no such requirement in respect of proprietary companies.

The following items must be presented at a public company's AGM (each in respect of the last financial year):

  • The company's financial report.

  • The directors' report.

  • The auditors' report.

A motion to approve the company's remuneration report must also be put to members of a listed company at its AGM.

Some corporate actions can only be taken if approved by shareholders in a general meeting. For example, listed companies require shareholder approval in respect of:

  • Significant changes to the nature or scale of the company's activities.

  • Changes to the company's main undertaking.

  • The disposal of a substantial asset to a related party of the company, a substantial holder of securities in the company, or an associate of any of the preceding parties.

  • The issue of equity securities to related parties.

For further examples of corporate actions requiring shareholder approval, see Question 12.

 
9. Can a general meeting be held by telecommunication means or written/electronic approval?

A company can hold a general meeting in two or more locations using any form of technology that gives the members as a whole a reasonable opportunity to participate in the meeting.

 
10. What are the notice, information, and quorum requirements for holding general meetings and passing resolutions?

Notice of a general meeting must be given to members at least:

  • 21 days before the meeting of an unlisted company.

  • 28 days before the meeting of a listed company.

Generally, the members of an unlisted company can consent to a meeting being held on short notice if:

  • Members holding 95% of the votes that can be cast at the meeting provide their consent beforehand.

  • All members agree (in the case of an annual general meeting).

Notice must be given to each member entitled to vote at the meeting, each director and the company's auditor.

The notice of meeting must contain the following information:

  • The place, date and time of the meeting.

  • The meeting's business.

  • Any intention to propose a special resolution (and its contents).

  • The members' right to nominate a proxy.

  • An item moving a resolution approving the company's remuneration report (in the case of a listed company's annual general meeting).

The notice of the meeting must also be accompanied by, or contain, sufficient information relating to each resolution to allow shareholders to make an informed decision on how to vote.

The quorum of a meeting can be set by a company's constitution. If the constitution is silent on this point, the Corporations Act provides for a quorum of two members.

 

Voting

11. What are the voting requirements for passing resolutions at general meetings?

Typically, voting is conducted by a show of hands, with the option to demand a poll under certain circumstances. A poll can be demanded by:

  • At least five members entitled to vote on the resolution.

  • A member with at least 5% of the votes that can be cast on the resolution.

  • The chair of the meeting.

The percentage of votes required to pass a resolution varies depending on the object of the resolution. Most resolutions can be passed by ordinary resolution (being a vote in favour of the resolution by 50% of shareholders entitled to vote on the resolution). Other resolutions can only be passed by a special resolution (being a vote in favour by 75% of shareholders entitled to vote on the resolution) or a unanimous resolution. The type of resolution required will depend on the relevant instrument requiring the resolution (for example, the company's constitution, legislation or regulatory materials). See Question 12 for the voting requirements that apply to certain types of resolution.

Voting rights can vary by share class, depending on the terms attaching to the shares under the constitution or a shareholders' agreement.

Voting by proxy is common practice. While proprietary companies are not required to permit proxy voting under their constitution, public companies must allow shareholders to vote by proxy and must adhere to the rules set out in the Corporations Act 2001 (Cth).

Proprietary companies can pass resolutions in writing without holding a meeting, provided that the company's constitution does not contain provisions to the contrary. The written resolution must contain all information that the company is required to provide to shareholders in relation to the resolutions, and is passed if all members entitled to vote sign their approval.

In addition to the public company requirements discussed above, listed companies must comply with the Australian Securities Exchange Listing Rules that relate to share rights and voting. Holders of ordinary or preference shares in a listed company must be entitled to vote on a show of hands and on a poll (in the case of a poll, in proportion to the amount paid up on the shares held by the member).

Members can aggregate their shares for the purpose of exercising their voting rights, but must be careful of breaching the statutory provision against acquiring a relevant interest in 20% or more of the voting rights in a listed company or an unlisted company with more than 50 members. A breach can arise where an agreement to vote a certain way on a resolution creates an "association" between the members in question.

 
12. Are specific shareholder approvals/resolutions required by statute for certain corporate actions? What voting requirements and majorities apply?

Certain corporate actions require shareholder approval, with approval levels varying depending on the action in question. Some examples of actions that require shareholder approval are:

  • Amending or replacing the company's constitution, which requires a special resolution of the shareholders.

  • Approval of certain types of share buyback. Shareholder approval requirements vary, depending on the type of buyback proposed. Generally, an ordinary resolution of shareholders entitled to vote will be required if a company buys back a number of shares that exceeds the statutory threshold. Selective buybacks require a special resolution of shareholders (excluding shareholders whose shares are being bought back) or a unanimous resolution of ordinary shareholders, regardless of the quantity of shares bought back.

  • Reductions of share capital. An ordinary resolution of shareholders is required for an equal share capital reduction, and a special resolution of shareholders (excluding shareholders who would receive consideration, or whose liability to pay unpaid shares would be reduced) or a unanimous resolution of ordinary shareholders is required for a selective share capital reduction.

  • The removal and approval of the election of the directors of a public company, which requires an ordinary resolution of the shareholders.

 

Shareholder rights relating to general meetings

13. Can a shareholder require a general meeting to be called? What level of shareholding is required to do this? Can a shareholder ask a court or government body to call or intervene in a general meeting?

The directors of a company must call a general meeting on the request of members holding at least 5% of votes that can be cast at the general meeting.

Members, or groups of members, meeting the above requirement can also call and hold a general meeting themselves. However, the cost of holding that meeting must be borne by the members who called it.

On application by a member or a director, the court can also order a meeting of the company's members if it is impracticable to call the meeting in any other way.

 
14. Can a shareholder require an issue to be included and voted on at a general meeting? What level of shareholding is required to do this? Can a shareholder require information from the board about the meeting's agenda?

A resolution can be put to a general meeting by:

  • Members holding at least 5% of votes that can be cast at the meeting.

  • A group of 100 members entitled to vote at the general meeting.

Shareholders proposing a resolution can require the company to circulate a statement to other members about the resolution, provided the statement is less than 1,000 words long and is not defamatory.

 
15. Do shareholders have a right to resolve in a general meeting on matters which are not on the agenda?

Shareholders do not generally have a right to resolve matters that are not contained in the agenda of a general meeting.

At common law, the business of a general meeting is restricted to the business specified in the notice of the meeting. However, if the notice of the meeting is not sufficiently specific as to the scope of the meeting or the resolutions being put at the meeting, shareholders can be entitled to put motions to the general meeting that fall within the scope of general business being conducted.

Members' rights to put resolutions to a general meeting under statute are also discussed at Question 14.

 
16. Can a shareholder challenge a resolution adopted by a general meeting? Is a certain shareholding level required to do this? What is the time limit and procedure to challenge a general meeting resolution?

Aside from arguments going to the validity of a resolution, shareholders may be able to apply to the court for relief in certain circumstances, on the basis that a resolution of the company is contrary to the interest of the members as a whole, or oppressive to, unfairly prejudicial to or unfairly discriminatory against a member.

 

Shareholders' rights against directors

17. What is the procedure to appoint and remove a director?

Appointment of directors

Proprietary companies. Directors of proprietary companies can be elected by a resolution of:

  • The shareholders at a general meeting.

  • The directors.

In each case, a simple majority of votes elects the nominee.

If a director is elected by a resolution of the board of directors, the shareholders must confirm the election at a general meeting within two months.

The company's constitution can vary or exclude these rules.

Unlisted public companies. Directors of public companies are appointed in the same way as proprietary company directors. However, if the current directors elect the director, shareholders must confirm the election at the company's next annual general meeting.

Listed companies. A listed company must hold an election of directors each year in addition to complying with the public company requirements.

A director of a listed company must stand for re-election if he or she intends to hold office beyond the later of either:

  • The third annual meeting since their appointment.

  • Three years from the date of their appointment.

This rule does not apply to sole managing directors of the company, but does apply if there is more than one managing director.

Removal of directors

The board of directors or the shareholders of a proprietary company can remove a director by ordinary resolution. The company's constitution can alter or exclude this rule.

Directors of public companies (both listed and unlisted) can only be removed by a resolution of the members. They cannot be removed by the other directors.

 
18. Can shareholders challenge a resolution of the board of directors? Is there a minimum shareholding required to do this?

Aside from disputing the validity of a directors' resolution, shareholders may be able to apply to the court for relief on the basis that the conduct of the company's affairs is, as a result of the directors' resolution in question, contrary to the interest of the members as a whole, or oppressive to, unfairly prejudicial to or unfairly discriminatory against a member. There is no minimum shareholder requirement for seeking such relief provided that the applicant holds at least one share.

Shareholders can also use their ability to convene a general meeting and propose a resolution to remove one or more of the directors if the shareholders consider that the directors are not acting in their interests. The circumstances in which shareholders can call meetings and propose resolutions are discussed at Question 13 and Question 14.

 
19. Briefly set out the main directors' duties to the company and its shareholders. What is the potential liability of directors to the shareholders? Can their liability be limited or excluded? On what grounds can shareholders bring legal action against the directors?

The directors of a company owe duties to the company and its shareholders based on the principles of fiduciary duty and the requirement for a director's loyalty to the company. Directors' duties exist at common law and statute.

Common law

At common law, directors have a duty to:

  • Act in good faith.

  • Act in the best interests of the company.

  • Act for a proper purpose.

  • Give adequate consideration.

  • Not fetter discretions.

  • Avoid conflicts of interest.

  • Act in the interest of the shareholders taken as a whole.

  • Not make a secret profit.

Statute

Under the Corporations Act 2001 (Cth), directors have a duty to:

  • Act with the care and diligence of a reasonable person.

  • Act in good faith and for a proper purpose.

  • Avoid conflicts of interest.

  • Avoid improper use of position.

  • Avoid improper use of information.

  • Avoid insolvent trading.

  • Comply with financial reporting and disclosure obligations.

Companies cannot exclude liability for breaches of directors' duties, and cannot indemnify directors for such breaches. However, the company can take out insurance protecting the director from liability and pay the relevant insurance premiums (with the exception of liability arising from the director's improper use of position or information).

Directors' duties are owed to the company as a whole, and do not extend to individual shareholders. As such, standing to pursue directors for breaches of their directors' duties attaches to the company in the event of a breach, and not the shareholder. However, a member can bring proceedings against a director who has breached their duties on behalf of the company with the approval of the court.

 
20. Are directors subject to specific rules when they have a conflict of interest relating to the company? Are there restrictions on particular transactions between a company and its directors? Do shareholders have specific rights to bring an action against directors if they breach these rules?

Directors have a duty to avoid putting themselves in a position where their own personal interests are in conflict with their duty to the company. Conflicts can also arise where the director has duties to two companies that require the director to take conflicting courses of action, or put the interests of one company before the other.

The courts take a practical approach in assessing the existence of a conflict. The courts require a "real sensible possibility of conflict", not merely a theoretical conflict, before finding that a director has breached the duty to avoid a conflict.

Directors can act despite the existence of a conflict provided that the director fully discloses the particulars of the conflict to the company, and the company provides its fully-informed consent for the director to act.

In the case of public companies, the conflict rule is reinforced by prohibitions on directors from voting at, or attending, meetings if they have a material personal interest in the subject of the meeting. The other directors can resolve to include the conflicted director in the meeting if they are satisfied that the potential conflict will not affect the judgement of the director.

There are restrictions on public companies granting financial benefits to related parties, including its directors. Any such benefit granted to a director must be on arm's-length terms, fall within an exception relating to the employment and remuneration of employees and officers, or otherwise be approved by shareholders.

The Australian Securities Exchange Listing Rules also regulate a listed company's transactions with persons in a position of influence, including directors. Shareholder approval is required for the following transactions:

  • The acquisition or disposal of substantial assets to a person in a position of influence.

  • The acquisition of securities in the company by a person in a position of influence (with limited exceptions).

  • Remuneration of non-executive directors.

  • Termination benefits for company officers.

 
21. Does the board have to include a certain number of non-executive, supervisory or independent directors?

The Australian Securities Exchange Corporate Governance Council Principles and Recommendations make a non-binding recommendation that listed companies should have:

  • A board composed of a majority of independent directors.

  • A chairman who is an independent director and who does not hold the position of Chief Executive Officer.

If a listed company does not follow these recommendations, it must explain why this is so. See Question 27 for a discussion of the Australian equivalent of the "comply or explain" regime.

There is no requirement that unlisted companies have any independent directors.

 
22. Do directors' remuneration and service contracts have to be disclosed? Is shareholder approval of directors' remuneration required?

There is no general requirement that directors' service contracts be disclosed. However, listed companies must present a remuneration report, containing details of the remuneration of executives and directors, at the company's annual general meeting.

Members of a company holding at least 5% of votes that can be cast at a meeting of the company, or a group of 100 members entitled to vote at a general meeting of the company, can direct the company to disclose the details of all remuneration paid to the directors at any time. The company must comply with such a direction by:

  • Preparing a statement of directors' remuneration in the previous financial year.

  • Having the statement audited.

  • Sending the audited statement to each person entitled to receive notice of a general meeting of the company.

In unlisted companies, the directors’ remuneration is determined by resolution of the members – however, this rule can be altered or varied by the constitution.

In listed companies, the members pass a resolution to approve a "remuneration pool", comprising the total amount of remuneration the company can pay to its non-executive directors. The executive directors' pay must be reasonable, and must not include a commission or percentage of operating revenue.

 

Shareholders' rights against the company's auditors

23. What is the procedure to appoint and remove the company's auditors? What restrictions and requirements apply to who can be the company's auditors?

Procedure for appointment and removal of auditor

The directors of a proprietary company can appoint an auditor if the company has not done so in a general meeting.

The directors of a public company must appoint the company's first auditor within one month of registration, unless an auditor has been appointed at a general meeting. An auditor elected by the directors holds office until the first annual general meeting after registration. The position of auditor is filled at the first and all subsequent annual general meetings by a resolution of the members. If there is a casual vacancy in the position of auditor, the directors must appoint a new auditor within one month.

A proprietary company's auditor can be removed by an ordinary resolution of shareholders at a members' meeting. The auditor must be given two months' notice of the intention to pass the resolution removing the auditor.

If a public company's auditor is removed at a meeting of members, a new auditor can be appointed at the same meeting by special resolution if the replacement auditor has been nominated in accordance with the requirements of the Corporations Act 2001 (Cth). If the nomination requirements have not been complied with, the meeting can be adjourned, notice of nomination provided to the nominee, and the nominee appointed by ordinary resolution when the meeting is reconvened.

Listed companies must rotate their auditors. A person who plays a significant role in the audit of a listed company for five successive financial years is ineligible to play a significant role for the next two financial years. The board of directors or the Australian Securities and Investment Commission can extend the eligibility term in certain circumstances.

Restrictions and requirements relating to auditor appointment

A company can appoint an individual, audit firm or audit company as auditor. Public companies must appoint a registered auditor, while proprietary companies are exempt from this rule if the Australian Securities and Investment Commission provides its approval.

There are general requirements that auditors be independent of the company they audit. Auditors are not permitted to act if there is an unresolved conflict of interest, defined in the Corporations Act. It is a defence that the auditor utilises a quality control system that provides reasonable assurance that the auditor is not in breach of its independence obligations.

The Corporations Act 2001 (Cth) sets out a series of relationships that should be considered when determining whether a conflict exists (for example, relationships between the auditor and the company, current or former directors and current or former members of management). There are also specific requirements imposed for the independence of individuals, audit companies and audit firms.

 
24. What is the potential liability of auditors to the company and its shareholders if the audited accounts are inaccurate? Can their liability be limited or excluded?

Auditors must comply with the auditing standards set by the Auditing and Assurance Standards Board when performing their duties as company auditor. Auditors are also subject to the provisions of the Corporations Act 2001 (Cth) that prevent a party acting as an auditor from making false and misleading statements or omissions.

In addition to the above, auditors can be directly liable to the company on a contractual basis. The auditor is engaged by the company through a contract, and it is therefore required to discharge its services in accordance with the terms of that agreement.

 

Disclosure of information to shareholders

25. What information about the company do the directors have to provide and disclose to its shareholders? What information and documents are shareholders entitled to receive?

All public companies and large proprietary companies are required to prepare annual financial reports and directors' reports for each financial year, and to lodge these reports with the Australian Securities and Investments Commission. "Disclosing entities" (for example, listed companies and companies with over 100 shareholders that have issued shares under a disclosure document under the fundraising provisions of the Corporations Act 2001 (Cth)) must also produce and lodge half-yearly reports. Small proprietary companies are only required to prepare financial and directors' reports when they are directed to do so by members holding at least 5% of the votes in the company.

A company must satisfy two of the following three criteria to quality as a small proprietary company:

  • Consolidated revenue for a financial year is less than AUD25,000,000.

  • The value of its gross assets, when combined with entities it controls, is less than AUD12,500,00.

  • The company and the entities it controls together have fewer than 50 employees at the end of the relevant financial year.

Financial reports include three elements:

  • Financial statements.

  • Notes on the financial statements.

  • A declaration by the directors regarding the statements and notes.

The directors' report must include general information about the business, in addition to specific information required by the Corporations Act 2001 (Cth).

Financial and directors' reports, or a concise report that complies with the requirements of the Corporations Act 2001 (Cth), must be provided to shareholders by either:

  • Sending them a hard or electronic copy of the reports.

  • Making the reports available online at a website.

Shareholders must be notified of the online location of the reports. If the company is required to produce an auditor's report, that report must also be provided to the shareholders.

Companies are required to keep members' registers, options registers and debentures registers. Members of the company can review that company's registers free of charge.

Companies are also required to keep minute books containing the minutes of general meetings, directors' meetings and all resolutions passed without a meeting. Members have a right to review the company's minute books free of charge.

 
26. What information about the company do the directors have to disclose under securities laws (where applicable)?

Listed companies are subject to continuous disclosure obligations under the Australian Securities Exchange Listing Rules (Listing Rules). The Listing Rules require listed companies to disclose information to the market that a reasonable person would expect to have a material effect on the price or value of the company's securities. There are a limited number of exceptions.

The continuous disclosure requirements in the Listing Rules are reinforced by the Corporations Act 2001 (Cth), which imposes civil liability on any person involved in a listed entity's contravention of the continuous disclosure requirements.

Listed companies are also required to undertake periodic disclosure in relation to half-year and annual reports. In addition to the Corporations Act 2001 (Cth) requirements, listed companies are required to include certain specific information in the reports (see Question 25).

 
27. Is there a corporate governance code in your jurisdiction? Do directors have to explain to shareholders in the company's annual report if they have not complied with it (comply or explain approach)?

The Australian Securities Exchange Corporate Governance Council Principles and Recommendations are a set of principles and recommendations that apply to the corporate governance practices of listed companies.

Compliance with the principles and recommendations is monitored on an "if not, why not" basis, similar to the "comply or explain" approach utilised in other jurisdictions. The annual report of a listed company must contain a corporate governance statement (or direct shareholders to an online location where the statement can be found) that explains whether the company is complying with the principles and recommendations and, if not, why not.

 
28. What information can shareholders request from the board about the company? On what grounds can disclosure of company information be refused? Are shareholders entitled to inspect the company's books and similar company documents?
 

Shareholders' agreements

29. Briefly set out the main provisions of a typical shareholders' agreement.

A typical shareholders' agreement contains some or all of the following provisions:

  • A description of the business of the company or the group, and forms of company conduct that require special board or member approval.

  • Terms relating to the appointment of directors and the composition of the company's board, which can include the right of certain shareholders to appoint a certain number of directors.

  • Terms relating to the appointment and removal of company officers and employees.

  • A mechanism for the adoption business plans that the company must follow.

  • Rights of shareholders and directors to access information.

  • A dividend policy.

  • Obligations regarding shares, for example:

    • restrictions on the transfer of shares under certain circumstances;

    • conditions on dealing with shares;

    • pre-emptive rights in favour of the other shareholders;

    • tag-along provisions and drag-along provisions in the event of a transfer of shares by a majority shareholder.

  • A power of attorney granted by each shareholder to the directors or the other shareholders in respect of actions contemplated by the shareholders' agreement.

Shareholders' agreements will also typically include a provision that describes the interaction between the company's constitution and the shareholders' agreement.

 
30. Are there circumstances where shareholders' agreements can be enforceable against third parties?

A shareholders' agreement is typically a contract between shareholders and the company. As such, the agreement can only be enforced against parties to that contract. However, it is common for shareholders' agreements to contain terms that have an effect on transactions with third parties (for example, a tag-along clause that requires a majority shareholder to negotiate with a potential purchaser of its shares on the basis that the remaining minority shareholders can elect to tag along and sell their shares into that arrangement).

 
31. Do shareholders' agreements have to be publicly disclosed or registered?

Generally, shareholders' agreements do not need to be publicly disclosed. However, there may be some instances in which a shareholders' agreement will need to be provided to the Australian Securities and Investments Commission (for example, as one of a number of documents that the company must lodge due to its relevance to a particular type of corporate action).

 

Dividends

32. How can dividends be paid to shareholders and what procedures and restrictions apply? Is it possible to exclude or limit the right of certain shareholders to dividends? Is the payment of interim dividends allowed?

Dividends can be paid by a company to its shareholders if:

  • The company's assets exceed its liabilities (calculated in accordance with accounting standards in force at the time) prior to the dividend being declared, and the excess is equal to, or greater than, the dividend being declared.

  • The dividend is fair and reasonable to the company's shareholders as a whole.

  • The payment of the dividend does not materially prejudice the company's ability to pay its creditors.

A public company's constitution can provide that different classes of share capital have different dividend rights, as can a special resolution passed by the shareholders. The directors a proprietary company can pay dividends as they see fit (subject to the terms on which the shares were issued).

In the case of listed companies, the Australian Securities Exchange Listing Rules impose additional constraints on dividend rights. Holders of preference shares must be entitled to a dividend at a commercial rate in preference to holders of ordinary shares, and a listed company cannot remove or change a shareholder's right to receive dividends in respect of particular shares (with limited exceptions). Holders of partly paid shares are only entitled to the proportion of a dividend corresponding to the proportion of the shares they have paid up.

Companies can pay interim dividends to their shareholders.

 

Financing and share interests

33. Can shareholders grant security interests over their shares?

Shareholders can generally grant security interests over their shares, unless they are prohibited from doing so under some form of contractual agreement (for example, the company's constitution or a shareholders' agreement).

 
34. Are their restrictions on financial assistance for the purchase of a company's shares?

A company can only provide financial assistance to a person acquiring shares in the company or its holding company if:

  • The assistance does not materially prejudice the interest of the company or its shareholders, or the company's ability to pay its creditors.

  • The assistance is approved by a unanimous resolution of all ordinary shareholders or a special resolution passed at a general meeting (with no votes being cast in favour by the person acquiring the assistance or their associates).

  • The assistance falls within an exception such as the "ordinary course of commercial dealing" exception, the exception applying to financial institutions, the exception for approved employee share scheme, or another exception under the Corporations Act 2001 (Cth).

There are additional requirements for special resolutions to be passed by the holding company of the company providing the assistance where the holding company is a listed company or an Australian ultimate holding company.

The fact that the provision of financial assistance for the purchase of shares is approved by the shareholders or otherwise permitted by statute does not relieve directors from their directors' duties in relation to the transaction.

 

Share transfers and exit

35. Are there any restrictions on the transfer of shares by law? Can the transfer of shares be restricted? What are the rights of shareholders in the case of an issue of new shares (pre-emption rights)?

The Corporations Act 2001 (Cth) states that shares in a company are transferrable as provided by the company's constitution. However, restrictions on the transfer of shares do apply in certain circumstances.

Company under administration or winding up

A transfer of shares in a company under administration and after a company commences winding up is void, subject to any orders to the contrary made by the court or the transferor receiving written consent from the liquidator or administrator, as the case may be. Consent to the transfer of shares will only be given by a liquidator or administrator if they are satisfied that the transfer is in the best interests of the company as a whole. Such consent can be conditional.

Contractual restrictions

The constitution of a proprietary company can impose restrictions on the transfer of shares, as can a shareholders' deed or other contractual document.

Listed companies

Listed companies, in contrast to unlisted companies, cannot restrict the transfer of shares unless they are permitted to do so under the Australian Securities Exchange Listing Rules (for example, the imposition of a holding lock in certain defined circumstances) or required to do so by law.

Rights of pre-emption

The constitution of an unlisted company can provide for pre-emptive rights that require shareholders who sell their shares to offer their shares to the current shareholders, or otherwise participate in some form of share transfer process.

The constitution of a company can also require the company to offer shares to current shareholders in proportion to their current shareholding when the company issues additional shares to raise capital.

 
36. Can minority shareholders alter or restrict changes to the company's share capital structure?

Minority shareholders do not have an explicit power or right that allows them to alter the company's share capital structure or restrict changes to it. However, the rules imposed by the Corporations Act 2001 (Cth) relating to selective share buybacks and selective share capital reduction provide scope for minority shareholders to vote to prevent changes to the company's capital structure.

As noted at Question 12, selective share buybacks and share capital reductions require either a special resolution of members entitled to vote, or the unanimous agreement of all ordinary shareholders to proceed. Minority shareholders may have an opportunity to block these changes to the company's share capital structure as result of the high shareholder approval threshold set by statute.

 
37. When are shareholders required to notify changes to their shareholding to a regulatory authority?

In general, shareholders are not required to personally notify regulatory authorities of a change to their shareholding.

However, if a shareholder begins to have, or ceases to have, a "substantial holding" in a listed company, or there is a change of 1% of more to their substantial holding, that shareholder must:

  • Notify the company in question.

  • Provide the Australian Securities Exchange with information on its substantial holding.

A "substantial holding" refers to a shareholder having a relevant interest in 5% or more of the votes attaching to the voting shares of the company when combined with the relevant interest of its associates. A relevant interest includes ownership of the shares in question, the ability to control their disposal or the ability to control how the votes attaching to the shares are exercised.

Additionally, the company must inform the relevant regulatory authority of changes to a member's shareholding in the following circumstances:

  • Proprietary companies must notify the Australian Securities and Investments Commission of any changes to the composition of its top 20 shareholders (including changes in shareholdings).

  • Listed companies must notify the Australian Securities Exchange of any change to a director's notifiable interests, including any change to the director's shareholding in the company.

 
38. Can companies buy back their shares? Which limitations apply?

Companies can buy back their shares if they comply with the requirements set out in the Corporations Act 2001 (Cth).

A buyback of the company's shares must not materially prejudice the company's ability to pay its creditors. Additional requirements also apply, which vary depending on the type of buyback.

The 10/12 limit applies to employee share scheme buybacks, on-market buybacks and equal access scheme buybacks. These buybacks are limited to 10% of the smallest number, at any time during the last 12 months, of votes attaching to the voting shares of the company. If the 10/12 limit is exceeded, the buyback must be approved by an ordinary resolution of shareholders.

A 10/12 limit does not apply to selective share buybacks. Selective buybacks must always be approved by a special resolution of all members entitled to vote on the resolution (not including members whose shares will be bought back) or the unanimous resolution of all ordinary shareholders.

The company must notify the Australian Securities and Investments Commission of the proposed buyback not less than 14 days before the buyback takes effect. This notice must be accompanied by any information provided to shareholders (including the notice of the meeting) and, in the case of selective buybacks and equal access scheme buybacks, a document setting out the terms of the offer to buy back the shares and all documents relevant to the offer.

 
39. What are the main ways for a shareholder to exit from the company? Can shareholders require their shares to be repurchased by the company? Can shareholders be required to exit the company in certain circumstances? How are the shares valued in this case?

A shareholder will typically exit a company by:

  • Selling or transferring its shares to another party (under the terms of the relevant constitution and any other relevant contractual documents).

  • The company buying back the shareholder's shares or performing a reduction of share capital.

There is no general right for shareholders to put share capital back to the company or require the company to purchase its shares. However, shareholders can have a contractual option that allows them to put their shares back to the company and requiring the company to buy back the shares. The exercise of an option of this kind will require the company to comply with the buyback provisions of the Corporations Act 2001 (Cth). In the case of redeemable preference shares, the shares held by a member can be redeemed (and accordingly cancelled) in accordance with the terms of their issue.

Shareholders can be required to exit the company in some limited circumstances (for example, by the compulsory acquisition of minority holdings under the takeover provisions of the Corporations Act or as a result of contractual provisions, such as a drag-along clause in a shareholders' deed). In the case of a compulsory acquisition after a takeover, shares will be attributed the same value as all other shares subject to the takeover bid. In the case of a contractual exit requirement, the terms of the contract will typically set out how the shares are to be valued.

 

Material transactions

40. What rights do shareholders have in the case of material transactions, such as a sale of all or substantially all of the company's assets, and a company reorganisation such as a merger or demerger?

The shareholders of a listed company must approve the acquisition or disposal of any substantial asset by passing an ordinary resolution (that being an asset with a value equal to 5% or more of the equity interests of the entity) when the asset is being transferred to, or from, one of the following parties:

  • A related party of the entity.

  • A substantial holder of the entity, if that substantial holder has had a relevant interest in at least 10% of the total votes attaching to the voting shares in the entity at any time in the last six months.

  • An associate of any of the persons listed above.

  • A person whose relationship to the entity is such that, in the Australian Security Exchange's opinion, the transaction should be approved by shareholders.

Shareholder approval can also be required (at the discretion of the Australian Securities Exchange) if a listed company proposes to make a significant change to the nature or scale of its activities. If the significant change involves the entity disposing of its main undertaking, the approval of holders of ordinary shares will be required.

 
41. What rights do shareholders have if the company is converted into another type of company (consider if applicable, a European Company (SE))?

A company can only change company type by satisfying the requirements of the Corporation Act 2001 (Cth), which include the passing of a special resolution by the members in most cases, and the unanimous assent of the members in the case of a conversion to an unlimited company.

The rights of shareholders following a conversion to a new type of company will be varied to the extent necessary for the structure and operation of the company to satisfy the requirements that apply to the new company type. For example, the rights of shareholders on the conversion of a proprietary company by shares to a public company limited by shares will attract the rights applicable to the latter, and exclude the rights exclusive to the former.

A company limited by shares cannot be converted to a company limited by guarantee. This would require a complete restructure of the company and the unwinding of all share capital that was issued.

 

Insolvency

42. What rights do shareholders have if the company is insolvent?

The rights of shareholders once a company becomes insolvent depend on the insolvency regime that applies to the company. Generally, however, a shareholder's rights are limited in an insolvency scenario.

If a liquidator is appointed, the liquidator's primary duty is to the creditors of the company. The shareholders have limited rights to request a separate meeting of shareholders to decide whether a committee of inspection should be appointed to assist the liquidator. The liquidator can require shareholders with partly paid shares to pay the amount outstanding on those shares.

A voluntary administrator, if appointed, assumes the power of the company and the directors. Shareholders do not have a right to vote on the future of the company once a voluntary administrator has been appointed. If the company's creditors approve a deed of company arrangement, the shareholders will be bound by that deed.

A receiver, if appointed, has a duty to the shareholders to take reasonable care to sell charged property for market value or, failing that, the best price the receiver can reasonably obtain.

 
43. Can shareholders put the company into liquidation? What is the procedure to do this?

Shareholders can instigate the winding up of a company by making an application to the court in the circumstances detailed in the Corporations Act 2001 (Cth) or by way of a special resolution of the shareholders at a general meeting.

 

Corporate groups

44. Is the concept of a corporate group recognised under specific legislation?

The concept of a corporate group is recognised under Australian tax legislation. Australian companies can form a tax consolidated group, under which a group of wholly-owned companies will be treated as a single entity for income tax purposes.

The Australian Securities and Investments Commission has published a Class Order that augments the provisions of the Corporations Act 2001 (Cth), allowing the wholly-owned subsidiaries of a parent company to enter into a deed of cross guarantee under which the company group is only required to produce one set of accounts (as opposed to a set for each of the individual group companies).

Notwithstanding the above, directors continue to owe their allegiance to the relevant company and not to the group as a whole.

 
45. Does a controlling company have any duties and liability to the shareholders of the company it controls? What are the rights of company shareholders if the controlling company carries out actions that are prejudicial to the shareholders?

A controlling company does not have duties or liability to the minority shareholders of a company it controls. However, minority shareholders do have the ability to apply to the court for relief in cases where the minority shareholders are being oppressed or subjected to unfair prejudice by a majority shareholder (in this case, the controlling company) or the directors of the company (which are likely to have been appointed by the controlling company). The court has a broad discretion as to the remedies it can grant in favour of oppressed minority shareholders.

 
46. What are the limitations on owning reciprocal share interests in companies?

A company must not acquire shares in itself except under a buyback, in relation to the acquisition of an interest (other than a legal interest) in fully paid shares if no consideration is given for that acquisition, or under a court order.

Further, a company must not take security over shares in itself or its holding company unless:

  • It does so in relation to an approved employee share scheme.

  • The company's ordinary course of business includes providing finance, and taking such security is in the ordinary course of business.

 

Online resources

Australian Government ComLaw

W www.comlaw.gov.au/

Description. Australian Government website that provides access to Commonwealth legislation. The information on this website is up to date.

Australian Securities Exchange

W www.asx.com.au/

Description. Exchange Listing Rules and the Corporate Governance Council's Corporate Governance Principles and Recommendations (3rd Edition). The information on this website is up to date.



Contributor profiles

John Williamson-Noble, Partner

Gilbert + Tobin

T +61 2 9263 4030
F +61 2 9263 4111
E jwilliamson-noble@gtlaw.com.au
W www.gtlaw.com.au

Professional qualifications. England and Wales, Solicitor; New South Wales (Australia), Solicitor

Areas of practice. Corporate advisory; mergers & acquisitions; private equity; capital markets; corporate governance.

Recent transactions

  • Hastings: the AU$2.3 billion Sydney desalination plant transaction.
  • GrainCorp: the proposed AU$3.0 billion takeover by Archer Daniels Midland.
  • SAI Global: the AU$1.1 billion approach from KKR and PEP.
  • UTA: the AU$1.25 billion HDUF bid.
  • TA Associates: the takeover of Nintex Group.
  • Bain Capital: the Retail Zoo acquisition.

Languages. English, French

Professional associations/memberships. Past-Chair of the Corporate and M&A Committee of the International Bar Association; member of the Investment Committee of the private equity fund, Crescent Capital Partners.

Publications

  • The Float Guide.
  • The Company Directors Checklist.
  • The Company Secretary Checklist.
  • The Corporate Governance Implementation Plan.
  • The Institute of Company Directors module on Board Performance.
  • Australian chapter of The Corporate Governance Review (LBR).
  • Joint editor of the IBA's Global M&A Guide and Float Guide.

Tim Gordon, Partner

Gilbert + Tobin

T +61 2 9263 4251
F +61 2 9263 4111
E tgordon@gtlaw.com.au
W www.gtlaw.com.au

Professional qualifications. Solicitor of the Supreme Court of New South Wales, 2005

Areas of practice. Corporate advisory; mergers and acquisitions; private equity; capital markets; corporate governance.

Non-professional qualifications. Master of Laws in Corporate and Commercial Law, University of New South Wales; undergraduate qualifications in Law and Commerce (Finance), University of New South Wales

Recent transactions

  • SAI Global: the strategic review following the AU$1.1 billion approach from PEP.
  • GrainCorp: the AU$3 billion takeover proposal from Archer Daniel Midlands.
  • Westpac: the AU$8 billion acquisition of the Lloyds Australia business.
  • China Kingho: the AU$70 million acquisition of Carabella Resources Limited.
  • TA Associates: the takeover of Nintex.
  • Alinta Energy: the AU$2.7 billion lender led de-leveraging solution.
  • Bain Capital: the Retail Zoo acquisition.

Publications. Australian chapter, The Corporate Governance Review (LBR).


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