Shareholder Protection in Complex Capital Markets

Shareholder protection in increasingly complex capital markets proved a timely focus for the ninth Supreme Court of New South Wales Annual Corporate Law Conference, held in Sydney on 29 July 2014.

Shareholder Protection and the Law

Sydney Law School’s Professor Jennifer Hill and Dr Olivia Dixon, in a session chaired by President of the Court of Appeal, Justice Margaret Beazley, considered the utility of the statutory oppression action and the statutory derivative action as mechanisms for shareholder protection.

Professor Hill observed that, contrary to expectations following the legislative enactment of s 232 of the Corporations Act 2001 (Cth), the remedy most frequently ordered in an oppression action has been the winding up of the subject company: see e.g. Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 (HCA); Hillam v Ample Source International Ltd (No 2) (2012) 202 FCR 336 (FFC) and Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55. This compares, arguably unfavourably, with the UK position, where buyout orders are more routinely made, thereby promoting the ongoing operation of the economic entity. Professor Hill welcomed a kind of compromise stance in Catalano, in which the Full Court deferred the operation of its orders by a week to allow the parties (who had opposed winding up) an opportunity to reach a commercial resolution.

A s237 decision is only about management and control of an aspect of a company’s affairs, not a decision which affects the substantive right(s) alleged. Perhaps unsurprisingly, leave can be difficult to obtain (see Justice Black J’s decision refusing leave on the eve of conference in Australian Mortgage & Finance Company Pty Ltd v Rome Euro Windows Pty Ltd atf Rome Euro Windows Unit Trust [2014] NSWSC 996). It is not unusual for appellate courts to refuse to intervene (see e.g. Couer de Lion Investments v Kelly (2013) 302 ALR 771 (QCA) and True Value Holdings v Fernandez [2013] VSCA 27 (VCA)).

Dr Dixon correctly identified costs as a real impediment to more shareholders seeking leave. It is now common practice for applicants to be required to proffer an undertaking to meet the costs of the action (and any adverse costs order). Dr Dixon urged a reconsideration of decisions such as Wood v Links Golf Tasmania [2010] FCA 570, where Finkelstein J ordered the company to indemnify the applicant.

Shareholder protection in takeover offers and schemes of arrangement

Guest speaker Professor Jennifer Payne, Professor of Corporate Finance Law at the University of Oxford, observed that schemes of arrangement, originating in 19th century England, have spread as a popular alternative to a takeover offer for effecting a corporate change of control, especially for large transactions. She regarded it as ‘striking’ that schemes are now the mechanism of choice for recommended bids in the UK and in many other jurisdictions.

Professor Payne lauded the UK approach, where the courts and the Takeovers Panel have adopted a neutral stance as to parties’ choice of transactional route. By contrast, s 411(17) of the Corporations Act 2001 (Cth) requires the Court to be satisfied that the arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the takeover provisions. That said, in his commentary, Chief Justice Bathurst expressed his view that s 411(17) was ‘not a worrying impediment in practice’.

Although schemes bring with them apparently lower levels of minority protection than takeover offers, Professor Payne regarded this as justified by the different structures of these mechanisms, including the important role of Court scrutiny at the sanctioning hearing.

Economic activism: re-thinking directors’ duties and governance structures in the activist context

Next was a lively double act. In a session chaired by Judge of Appeal Justice Reg Barrett, King + Wood Mallesons M&A Partner, David Friedlander, and Goldman Sachs MD and Investment Banking Division Head Christian Johnston, candidly and robustly advanced their opposition to the arrival in Australia of organised, professional and well-funded “economic activists”, who present a new set of challenges for boards of our publicly listed companies.

Both commentators pointed to value destruction attributable to economic activists who had pressured for short term share value increase (by e.g. removal of an underperforming CEO, sale of a division, payment of a dividend or a share buy back), over the promotion of long term corporate interests. They expressed their concern that even a successful defence may come at a significant cost requiring substantial time and distraction for boards.

Friedlander and Johnston agitated for a series of governance and regulatory reforms to diminish the risk of short-termism including:

  • abolishing the uniquely Australian “2 strikes” rule (see s 250U, s 250V by which a 25% ‘no’ vote for a remuneration report at two consecutive AGMs forces a board spill);
  • tempering a strict application of Advance Bank v FAIInsurances of Australia (1987) 9 NSWLR 464 (which requires balanced disclosure to shareholders, and precludes directors using company funds to defend their own interests);
  • creation of independent committees; and
  • requiring disclosure of derivative holdings.

More controversially, they proposed adopting US rules on minimum holding periods and implementing “short-swing” profit capture to create disincentives to economic activists. Friedlander suggested requiring independent expert reports/fairness opinions (as provided under ASX Listing Rules r 10.10.2) so as to provide an informed basis for an assessment of the strengths/weakness of activist proposals.

Shareholder Protection and Class Actions

Chaired by Court of Appeal Justice Julie Ward, featured UNSW Associate Professor Michael Legg, who contended that it remains unclear that class actions are actually providing a good mechanism of shareholder protection. Although invariably resulting in a settlement, he regretfully noted that Australian Court approvals seldom expose analysis of the compensation to be paid to shareholders, as measured against their estimated or at least claimed losses. With well-funded claimants increasingly widening the class of shareholders, he called for the rigorous application of the Court’s scrutiny to avoid any unfairness in compensation between different sub-classes.

Panel Discussion

Led by Dr Austin, the concluding panel discussion evaluated some of the key strategies or options for shareholder protection:

  • reliance on the efficient allocation of capital
  • mandating disclosure as a form of disinfectant
  • the role of gatekeepers
  • the concept of stewardship
  • the place of self-help remedies (such as the power to convene meetings)
  • the establishment of direct legal norms (such as directors’ duties).

Those protections must operate in a market where the amount of investment in public companies by retail investors is roughly 30% of market cap, held directly not even though self-managed funds (this compares to less than 10% in the USA and UK).

Professor Hill presciently observed that with superannuation in Australia being now a ‘means of forced capitalism’, there was an increasing need to evaluate not only protections for direct investment (disclosure etc) but investment through intermediaries (which, for example, raised issues such as licensing).

Perhaps that poses a neat segue for a focus for next year’s conference.

– Dominique Hogan-Doran, CommBar profile

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