Intention or Effect: Are Conflicts of Interest in Directorial Positions Always Oppressive?
A 7-year long case heard in the Federal Court of Australia may show that the answer is not as obvious as it might seem.
The Facts
In the case of RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756, fund manager, Perpetual Limited, acquired shares in two Australian listed companies – Brickworks Limited and Washington H Soul Pattinson, via RBC Investors, a major institutional investment company. Brickworks Limited and Washington H Soul Pattinson were cross shareholders of each other, and the same individuals have taken overlapping positions in the senior leadership team in both companies.
RBC Investors endeavoured to demonstrate that the cross-shareholding was oppressive conduct as it allegedly allowed the entrenchment of the board; the disenfranchisement of minority shareholders; and the depression of each company’s share price. RBC Investors, on behalf of Perpetual, contended to dismantle the companies’ cross-shareholding on these grounds.
In this case, Justice Jagot noted the decision of Brennan J in Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459 at 472-473 which remains the “most succinct statement of the overarching principles” in the field of oppression. The central principles being:
- proof of mere prejudice to or discrimination against a member is not enough;
- in the case of a discretionary power, the scope of the power must be considered (does it contemplate that advancement of the object of the power might entail prejudice or discrimination?);
- at a minimum, oppression imports unfairness; and
- the test for unfairness is one of fact and degree to be determined by the court but with due regard to the skills, knowledge and acumen of the directors.
Further, it was held that:
The test of unfairness is objective and it is necessary, though difficult, to postulate a standard of reasonable directors possessed of any special skill, knowledge or acumen possessed by the directors. The test assumes (whether it be the fact or not) that reasonable directors weigh the furthering of the corporate object against the disadvantage, disability or burden which their decision will impose, and address their minds to the question whether a proposed decision is unfair. The court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.
The Outcome
The Federal Court of Australia held that RBC Investors were unable to prove or substantiate their claims. More remarkably, the court held quite the contrary. That is, it was held that the company cross-shareholding facilitated financial stability and a capacity for long term decision-making. Evidence suggested that the cross-shareholding structure resulted in great overall performance.
Further, it was found that the cross-shareholding structure had been maintained for over 40 years, and during that period, legislation had not prohibited such arrangements and Perpetual was aware of these arrangements prior to their initial acquisition of its shares.
When weighing all of these circumstances, it was held that reasonable directors would not consider the cross-shareholding to be unfair or oppressive. If anything, the Court found that the directors of each company have diligently considered the structure of their companies within fulfilling their duties to act in the best interests of the respective companies firmly in mind. In light of these considerations, the Court concluded that Perpetual’s claim must be rejected.
Key Takeaway
This case is often cited to raise the point that the Courts must carefully consider the effect of directorial conflicts of interest, notwithstanding that the intention of such company arrangements may seem unfair or oppressive at first glance. Further, so long as a conflict of interest is disclosed, the Courts will examine the circumstances involved when evaluating whether the conduct is oppressive.
If you have concerns regarding oppressive conduct or conflicts of interests in holding our your responsibilities as a director, or the acts of another director, we invite you to reach out to us for expert legal advice and support. Our experienced team is dedicated to helping you assert your rights and ensure your interests are fully protected.
If you are interested in discussing your options, please contact our office for a free consultation at (02) 9262 5495 or contact Mr Murdock at dmurdock@mclp.com.au, or subscribe to our newsletter by visiting https://mclp.com.au/publications/