Phosphate Co-operative Company of Australia Limited v Shears

[1989] HCATrans 205

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No Mll of 1989

B e t w e e n -

THE PHOSPHATE CO-OPERATIVE

COMPANY OF AUSTRALIA LIMITED

Appellant

and

DOUGLAS STEPHEN SHEARS

First Respondent

CITYFARM PHOSPHATES PTY LTD

Second Respondent

MASON CJ
BRENNAN J
DEANE J
DAWSON J
TOOHEY J
GAUDRON J

Phosphate(2)

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 13 SEPTEMBER 1989, AT 9.47 AM

(Continued from 12/9/89)

Copyright in the High Court of Australia

ClT 1/ 1/JM 29 13/9/89

MASON CJ: Yes, Mr Finkelstein.

MR FINKELSTEIN: If the Court please, if we could summarize

what we say is the effect of article SA. So far

as the first sentence is concerned we say that

it produces this result: whenever in the articles

there is a reference to shares held that reference

includes shares in which a relevant interest

is held. The effect of the second sentence is

this: that if the directors make a request for

information of the relevant type in the absence

of satisfactory evidence that no person has a

relevant interest - let me just go back one step.

The request that is made by the directors in the

second sentence is a request made of a shareholder,

that is to say, a person who is registered in

the register of members as a holder of shares.

In the absence of satisfactory evidence from a

shareholder that no person holds a relevant

interest in his - the shareholder's - shares,

the right to vote is lost by that shareholder.

TOOHEY J:  Mr Finkelstein, do you use the expresssion "includes"

in respect of the first sentence? Not "means",

but "includes"?

MR FINKELSTEIN:  Not "means", but "includes". We would say

that in the proper construction if you pick up
somewhere in the articles a reference to "hold",

take for example article S immediately preceding:

The maximum number of shares to be held by

any one person shall be -

in its original form, "60". That would take

with it those shares actually held and those
shares that are deemed to be held so that in total

one is not to hold in fact or by deeming provision

more than the maximum permitted.

GAUDRON J:  Does that mean, Mr Finkelstein, that if no

request is made there is multiple voting of the

shares?

MR FINKELSTEIN:  No, what it means is that i:fi no request is

made by the directors under the second sentence

of article SA no vote is lost by anybody, the
operative part, or the substantive part of the

second sentence does not come into play.

(Continued on page 31)

CITl/2/JM	30
Phosphate(2)

GAUDRON J: Yes, but what about the substantive part of the

first sentence? What stops it coming into operation

on your construction?

MR FINKELSTEIN:  The way that it would work, on the question

of voting, in relation to article 52 which governs

the question of voting, is this:

On a show of hands every shareholder present

shall have one vote.

The reference in the first line of article 52 to
"shareholder" is a reference to the person

registered in the register of members as holding

one or more shares. So, that is a reference to an

actual shareholder.	He shall have one vote on a
show of hands:

upon a poll any shareholder holding -

and that is when you get into working out what the
word "hold" means -

less than five shares shall have no vote - and then the formula:

One vote if he hold five shares.

When you come to work out how many votes a

shareholder has, being the only person permitted to

vote, you look to see how many he holds. To determine

that question you aggregate - if it is necessary to

aggregate - those shares in which he is registered
as the holder and those shares which, by the first

sentence of article SA he is deemed to hold, it

would produce this result: there may be shareholders

who might only be entitled to three votes because

by operation of article 52 they would hold actually

between 20 shares and 39 shares. That would

entitle that holder to three votes. If that holder,

that is to say an actual shareholder, is deemed to

be given additional shares, by the first sentence

of SA, then he may well, for the purposes of

article 52, hold more than the category that he first

fell in of giving him three votes and he can take

his right to vote up to five, but no more.

(Continued on page 32)

ClT2/l/DR 31

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GAUDRON J: But, for that result, do you not have to say that

the first sentence only comes into operation after the

second sentence has been complied with?

MR FINKELSTEIN:  They would have effect at the same time because

what would happen in the example that I gave was that a

person in the voting example would be deemed to hold an

additional five shares - might give him one further

vote - but because a registered shareholder would have

a person who has a relevant interest in his shares,

that shareholder would have no vote. So, it is not a

cumulative effect. It would work simultaneously on

both sides of the equation. It would mean that there

would still not be one person who would be entitled

to more than five votes and that person would always

be a shareholder.

MASON CJ: Mr Finkelstein, I must say that it now occurs to me

that if this case is to be resolved by reference to the

construction of this quite extraordinary article of

association, it hardly seems appropriate to engage

the attention of this Court let alone seven members

of this Court. In other words, where is the question

of principle that is involved in this case if it all

ultimately founds on the construction of this

particular provision which is not an article in
standard or general form but a particular article

designed to meet the exigencies of this commercial

situation?

MR FINKELSTEIN:  We would perceive there to be at the outset tNo

questions of principle, in each case depending upon

the proper meaning of the article, I suppose.

(Continued on page 33)

C1T3/1/SH	32	13/9/89
Phosphate(2)

MR FINKELSTEIN (continuing): There was, of course, the

question of whether non-members can be afforded the
right to vote by articles, but there is another question
of principle as well, which is: in what circumstances

are members entitled to alter articles which have the

effect of prejudicing other members·, the question of
principle being whether or not the disadvantage suffered,

or the adverse effect produced by the alteration is to be judged objectively, which is the way that the Full Court, we would say, looked at the question,

but erroneously, or whether that is an issue for the

members themselves, because what we would say is that

what the Full Court did here on the question of how

they viewed the article, is by corning to the conclusion
that, as a matter of objective analysis, they, the Court,

did not regard such a provision as being in the interests

of the members or in the interests of the company as a

whole, including its members, and we would say that, as

a matter of principle, that is an incorrect test.

The test is: did the members themselves regard it as

in the interests of the company? And, if the answer to

that is, "yes", subject to one qualification, it

becomes, in effect, unreviewable by the Court because -

well, not absolutely unreviewable, there is a qualification, the

qualification being that if the position could be

found to be that no reasonable members could ever

regard such a provision as being in the interests of

the company as a whole, then a court probably could

review it in those circumstances.

But, that is not the test that the Full Court

adopted, we would say. We would say that the Full

Court looked at the question, from their mind judging

it objectively, saying objectively, "This is not for

the benefit of the company, therefore it is bad

and reviewable by the court".

McHUGH J: Do those submissions apply to the section of the

case dealing with section· 320 of the Code? Is not

that an objective test?

MR FINKELSTEIN:  Yes. It is more objective than the fraud on

the power question, we would accept that, but we would

say that the question of reviewability has to be

judged very carefully when the evidence is that the

shareholders acted in good faith. In other words, that

even when one looks at section 320, it is not a

question of a court who is asked to exercise jurisdiction

under 320 sitting as a court of appeal, saying that

objectively, "We would not have done this and, therefore,

we will reverse it".

So that, we would say, once a question a good faith

comes into play, once the motive of the shareholder

is not coloured by ulterior purpose, the court has a

very limited role to play, and the Full Court, in both

of those cases, ignored what we would say is that

correct principle, and that is a matter of importance.

ClT4/l/FK	33
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MASON J: Yes. Well now, I think in the first instance you

should conclude your submissions on the construction

question before you approach the next question that

you say does involve these matters of general

principle.

MR FINKELSTEIN: All I was going to do, if the Court pleases,

was to outline - I think I have probably completed

it in relation to how the second sentence operates,

which is to say that the second sentence is only

triggered if a request is made by the directors for

information about relevant interests, and, either

in the absence of evidence that no person has a

relevant interest, or if there is positive evidence

that a person does have relevant interest, then

the right to vote is lost, but if the director or
the directors make no request for information at

all, then the right to vote is unaffected.

(Continued on page 35)

ClT4/2/FK	34
Phosphate(2)
BRENNAN J:	Who is the judge of satisfaction?

MR FINKELSTEIN:  The directors. They are the only persons who

are entitled to form a view on the matter and they have
to act reasonably discharging their duties of office,

but it is for them. It is not to be delegated to

anybody else, and we would say, in that regard, it

is no different to very many other functions of

board of directors when they have to make decisions

about things, including important decisions under

these articles. For example, under these articles

directors have the power to forfeit shares in certain
circumstances. If they regard shareholders' conduct
as unacceptable in various ways they have the right

to forfeit those shares. That is a decision for the

directors. The articles vest that decision in the

directors for the time being and this would be no

different _to any other decision which is vested

in the directors for the time being.

The only other thing that we want to deal with on

this question is we have taken the liberty of just

identifying the particular articles in question

which would be affected by our reading of the first

sentence in the way that we have described it and if

I could hand that up. It has been typed up so that

we do not have to go through it article by article.

That is picking up those of the articles that make

it necessary to decide how many shares are held for

a particular purpose. So that you will see from that

that the principal effect of the first sentence is

to provide additional dictionary or definition for

the remainder of the articles.

(Continued on page 36)

ClTS/1/HS	35	13/9/89
Phosphate(2)

MASON CJ:  Yes.

MR FINKELSTEIN: That is all we wish to address on the

question of construction.

MASON CJ: Yes, now you are approaching the next question.

MR FINKELSTEIN: Yes, Your Honour. Dealing with the validity

of the resolution itself, the purpose which
seems to have been accepted by both courts, the
trial court and the Full Court was, in the language

of the trial judge at page 151:

to preserve is the essential co-operative
nature of Pivot by ensuring that no person

can own or become beneficially entitled to

own more than 500 shares -

The first point that we want to make about that

is that the purpose or desire of shareholders to

buttress the existing articles,to remedy what

they saw to be a defect in the existing articles,

is a permissible purpose permitting them to alter articles of association. We will not read any of the cases, but if we could refer the Court to them

as being examples of instances where it has been

said by courts that shareholders and directors can

act to protect themselves from outsiders, as it

were, the following cases:  SAVOY CORPORATION

LIMITED V DEVELOPMENT UNDERWRITING LIMITED (1963)

NSWR 138, the decision of Mr Justice Jacobs, the relevant conclusion is at 147.

(Continued on page 37)

CIT6/l/CM	36
Phosphate(2)
MR FINKELSTEIN (continuing):	The case of RIGHTS AND ISSUES

INVESTMENT TRUST LTD V STYLO SHOES LTD & OTHERS, (1964)

3 All ER 628, a case of articles being amended to make

sure that existing management stays in place, relevantly

at page 631 in the judgment of Mr Justice Pennycuick.

There is an unreported decision in England, CAYNE V

GLOBAL NATURAL RESOURCES PLC, 56 ALJ 600, an unreported

decision of Vice Chancellor Sir Robert Megarry, of

12 August. We do not have a copy of the case itself

but a short statement or extract from His Lordship's

judgment appears in the Australian Law Journal note.

The important Canadian case of TECK CORPORATIION LTD V MILLAR, (1972) 33 DLR (3d) 288; the general discussion commences at 309; the relevant conclusions at 315 and

we have provided copies of each of those cases in the

red folder that we have handed to the Court and, also,

two American cases - most of these cases deal with

the duties of directors who occupy fiduciary positions

and their duties, of course, would be more onerous than

the rights of shareholders - but the two American cases,

relatively recent, that bear upon the question, one

going for directors and one going against, UNOCAL

CORPORATION V MESA PETROLEUM CO, 493 A.2d. 946, a

decision of the Supreme Court of Delaware,

Mr Justice Moore delivering the judgment of the court

and the other American case, REVLON INC V MacANDREWS

& FORBES HOLDINGS, 506 A.2d 173.

(Continued on page 38)

C 1T7 /1 /SH	37
Phosphate(2)
MR FINKELSTEIN (continuing):	So that the first point is

that the purpose for which the members were

acting, which is to buttress the articles of

association to prevent concentration of

voting power in one hand, is a legitimate purpose.

The classic test for determining the validity

of alterations to articles of association

relevantly is found in ALLEN V GOLD REEFS OF

WEST AFRICA LIMITED, (1900) 1 Ch 656. The

relevant passage appears in Lord Justice Lindley's

judgment at page 671 in the last paragraph on the

page, about four lines into the paragraph:

Wide, however, as the language of s.50 is -

and that is our section 76, the power to amend

articles of association by special resolution -

the power conferred by it must, like all
other powers, be exercised subject to

those general principles of law and equity

which are applicable to all powers

conferred on majorities and enabling them to
bind minorities. It must be exercised, not

only in the manner required by law, but also

bona fide for the benefit of the company as

a whole, and it must not be exceeded.

What we say the Full Court did in this case

was to roll up the matter, or deal with the matter

as two separate questions. First, whether the

members acted bona fide, as one question, and

secondly, objectively whether the court believed that

what the members did was for the benefit of the

company. Each of the members of the court

accepted that what the members did was bona fide;

Mr Justice O'Bryan at page 343, Mr Justice King at page 351 and Mr Justice Nathan at page 363.

BRENNAN J: What does that mean, that it was bona fide?

MR FINKELSTEIN:  I think in this context that the members

were actuated not for ulterior purpose; they were

not seeking to gain an improper advantage for

themselves; they were not seeking to improperly deprive somebody of property or property rights.

BRENNAN J: Is that right though? I mean, is not the effect

of this to stop the shareholders from getting

their rebates and dividends under articles 97 to 99?

MR FINKELSTEIN:  We do not accept that that is the proper

construction. They would not lose their rebates;

they would still be entitled to rebates under

article 97 because that is to be apportioned by

the directors amongst members who have purchased

the manufactured products. So that looks to what

really happened in a trading sense.

CIT8/l/JM	38
Phosphate(2)

BRENNAN J: That is the whole purpose of the company,

is it not?

MR FINKELSTEIN:	Yes, it is.
BRENNAN J:	And is it not to entitle them to the quotas

in article 99?

MR FINKELSTEIN:  Yes, each member shall be entitled to

quotas based on shares held.

BRENNAN J: Well, now, you take away from them their

right to get a quota?

MR FINKELSTEIN:  No, because on our construction the

shares that you hold include those shares

in which you are still registered as the holder,

so you would not lose your right to quota.

In other words, it does not renlace actual holding

by deemed holding. -

BRENNAN J:	I see.
MR FINKELSTEIN:	The criticism that was made of the article

principally by Mr Justice O'Bryan, with whom

Mr Justice Nathan agreed, and the reasons that

led him to say and conclude that the article was

beyond power, were these, that -

(Continued on page 40)

CIT8/2/JM	39
Phosphate(2)
DAWSON J:	Mr Finkelstein, I do not want to stop you, but can

we just go back. Article 99 is one that

is affected, according to the list that you handed

1n.

MR FINKELSTEIN:	Yes.
DAWSON J:	Would that mean then that everyone with a relevant

interest would be entitled to a quota?

MR FINKELSTEIN:  Yes. That says that every member shall be

entitled:

to purchase from unsold stocks at the

prices and on the terms fixed by the

Company a quota of manufactured

products -

based on, amongst other things, shares held by him,
but it gives a right to a shareholder and that right

is to purchase a portion of the unsold stock. The

right is not given to an outsider. It is given to

an insider, a member.

BRENNAN J:	How is article 99 affected?
MR FINKELSTEIN:	A member may be entitled to purchase more

unsold stock by reference to his actual and deemed

shareholding.

BRENNAN J:  Well that means that, in the instant case, for

example, the respondent would be entitled to purchase

not only stock based upon the shareholding in respect

of which he is registered, but also the shareholding

in which he has a relevant interest.

MR FINKELSTEIN:  Yes. Mr Shears, in the instant case, who

is a member, can purchase stock if it is available

to that extent.

GAUDRON J:  And likewise those registered holders in whose

shares he has a relevant interest?

MR FINKELSTEIN:  Yes, because the shareholders themselves are

still shareholders and entitled to purchase unsold

stock, subject to availability.

BRENNAN J:	What about dividends, are they affected?
MR FINKELSTEIN:	Article 97 deals with the distribution of

surplus earnings and it is divided amongst those

who have purchased product so that it works, in

e f f e c t, a s a true re b a t e . To the extent th a t the

company has surplus funds available to it,
it gives those surplus funds back to purchasers
of product so that at the end of the year those

purchasers would have, in effect, a discount.

ClT9/l/HS	40	13/9/89
Phosphate(2)

BRENNAN J:  This is "according to their individual

purchases and shareholdings". What does that mean?

MR FINKELSTEIN:  It is not clear how they would do the

apportionment even without the deeming provision because it has to be distributed amongst members

who have purchased product - for example, there

are thousands of members who in a particular year

will not purchase anything - so that the rebate or the surplus must be distributed according to their

individual purchases and shareholding in that year.

BRENNAN J:	The problem I have, if I might say so, is that articles 97 and 99 seem to go to the heart
of the commercial purpose of the organization.
· MR FINKELSTEIN:	Yes, it does.

(Continued on page 42)

ClT9/2/HS	41	13/9/89
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BRENNAN J:  And the amendment introduced by article SA

alters radically either objects of the distribution

or the entitlements under one or other of those
provisions. If that is so, how does one come to

the conclusion that an exercise of the power to

insert SA is bona fide?

MR FINKELSTEIN: Well, for this reason amongst others. The

Court does not know this fact, but at the meeting when the members adopted the resolution they were told that there were difficulties with the operation

of the amendment which would have to, over a period

of time, be remedied. In other words, they knew

have to be taken to fix what might be difficult.

that certain difficulties were going to be created.

That statement does not appear from what is

presently in the appeal book but part of the evidence

that was tendered in the case, which did not find

its way into the appeal book, establishes that.

We have copies of certain exhibits that were part

of the evidence at the trial which have been

omitted, in error, from the appeal book. If I

could hand the Court the relevant exhibits, I will

take the Court to one paragraph of the chairman's

address at the meeting which explains to the

members the difficulties, saying that things will

have to be done in the future.	If I could hand
that up.

BRENNAN J: What is the relevance of that to the test of

bona fide?

MR FINKELSTEIN:  Because the question of bona fides 1is

whether the members were genuinely acting in what

they regarded, in their honest opinion, as the

best interests of their company and that they

were not being motivated by considerations that
were substantially beyond that. That is what we

would say bona £ides means in this context.

In other words, if they were, for example, regarding

this as an exercise of expropriating property to

themselves, that would not be conduct in good faith.

But if they honestly believed that this step was

in the interests of the company, it does not matter

whether other people might say, objectively, "that

is not the case", if the fact was that they honestly believed that it was in the interests of the company then they are acting in good faith and not subject,

except to the very special exception, to challenge.

In other words, it is really for the company

itself to decide how the company should conduct

its affairs and it is for the company itself to

decide what its rules and regulations should say.

If it produces results which the members did not
foresee, or if it produces results which the members

decide the next week or the next month are unacceptable

ClTl0/1/DR	42
Phosphate(2)

to them, then the remedy is in their hands. They

can, by further amendment, cure any deficiencies

which they perceive to exist but it is for the
members to undertake that task. It is for them to

say, "Well, what we did last month, or last year,

we thought would have effect A, it turns out that

we might be wrong about that and it turns out that,

for the better administration of our company, we

think a different result should be produced."

It is for the members to say, "Well, we will

produce that result, by whatever means are necessary

and a necessary means might be amending the articles."

DAWSON J: Well, that is very strange because that means that

they may do something which is not in the interests

of the company but, provided they think it is, it

is all right. When they realize it is not, they
could correct it.

MR FINKELSTEIN:  We would accept one qualification to the

statement of principle, that it is for the members
to decide what is in the interests of the company,
the qualification being that if no reasonable
member could ever think that the conduct, or the

proposition, was in the best interests of the

company, then it may be that their decision is

reviewable or challengeable in proceedings to set

aside the article.

(Continued on page 44)

ClTl0/2/DR	43
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DAWSON J:	What if you had come to the conclusion they

did not know what they were doing?

MR FINKELSTEIN: It is possible, and the authorities indicate,

I think, that it is permissible for the Court,

if an article is so extraordinary that the members

could not have turned their mind to its operation to say that they were not, at the end of the day, acting bona fide in the best interests of the

company.

DAWSON J: There is	authority for that, is there?
MR FINKELSTEIN:	Yes.
DAWSON J:	What is it?
MR FINKELSTEIN:	Sir John Latham in PETERS AMERICAN DELICACY

CO LTD1 61 CLR 457 at 482. Actually it mentions

it in two passages. At 481 firstly. What

His Honour does is sets out some general principles

which he says are applicable to alterations of

articles. He says in (4) which is at page 480:

The power to alter articles must be exercised bona fide.

And then quotes from ALLEN's case. And then in

(5), over the page,481, His Honour says:

It is not for the court to impose upon a

company the ideas of the court as to what

is for the benefit of the company. It is for

the shareholders to determine whether an

alteration of the articles is or is not for

the benefit of the company, subject to the

proviso that the decision is not such as

no reasonable man could have reached.

And there is reference to SHUTTLEWORTH V COX BROTHERS

And it goes on to say:

This is not an absolute rule, but it is the prima-facie general rule.

And then at 482 he takes up the point again, in

the last paragraph. It says at the beginning of

that paragraph:

that the special resolution altering the articles

cannot be declared to be invalid merely -

because people lose rights.	And then in the last
sentence:

CITll/1/CM	44
Phosphate(2)

If, however, the resolution was passed

fraudulently or oppressively -

which is generally speaking a different class

of case. They are the true expropriation of

property cases or their equivalent -

or was so extravagant that no reasonable person could believe that it was for the benefit of the company, it should be held

to be invalid.

BRENNAN J: Now, in this context, if Mr Shears had procured

the passing of this resolution, whereby to enhance

enormously prospects of recovering bonuses, rebates

at least, dividends, then it would have been a

case, I suppose, where these are the kinds of

principles that would have been applied directly.

MR FINKELSTEIN:  No, Your Honour, because he does not get the

rebates or bonuses otherwise then by purchasing

the company's produce, so that all that happens is
that if there is product available, he may have

enhanced his ability to purchase, but the rebate

that he gets will, at the end of the day, be the

same as everybody else, by reference to the volume

of his purchases.

BRENNAN J:  Why will he not get twice an entitlement because

of his shareholding, once by reason of the

registered holding and once by reason of a relevant

interest?

(Continued on page 46)

CITll/2/CM	45
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MR FINKELSTEIN:	I think that article 97 is intended to effect

one distribution and the directors make an adjustment

on the question how they are to make a distribution of
surplus funds. It can only be to members who have

purchased, not to anybody else, so that the

non-participating members are not entitled to any

distribution and because this is intended to operate

as a rebate, in other words, to give those who have

purchased a discount on their purchases as the end
of a yea~ the way that it would be done properly

would be by reference to the volume of purchases.

It is just not clear how - even leaving aside the

question of deemed shareholding -- it would operate.

They still have to make a decision on the articles

as they were before SA was introduced.

BRENNAN J: Yes, I am sorry, I was thinking ma:inly cfarticle 99.

Why is it that under article 99 the quota would not be

one ton for the registered shareholder who is, of

course, a mere trustee and one ton for Mr Shears?

MR FINKELSTEIN:  Individual shareholders would, under the

article, still be entitled to purchase quota - would

have quota available to them to utilize and purchase

product.

BRENNAN J:	And Mr Shears in respect of the same share?
MR FINKELSTEIN:	The answer would have to be yes, on our

construction.

BRENNAN J:	Then, it is a radical alteration of the purpose for which the company was formed.
MR FINKELSTEIN:	Yes.

MASON CJ:  Can I ask you this question: was there anything

before the shareholders at the time the introduction

of article SA was to be considered, that would lead

a significant alteration in relation to quota and	them to believe that the inclusion of SA would work
rebate rights under article 99?

MR FINKELSTEIN:  No. In fact, the exhibit to which we refer

would have led the shareholders to have the opposite

view.

MASON CJ: Well, we had better have a look at that exhibit,

I think, Mr Finkelstein.

MR FINKELSTEIN:  Yes.

MASON CJ: What is it you want to refer us to in this exhibit?

MR FINKELSTEIN:  The bundle of documents that are there

constituted some of the exhibits at trial. The

C lTl 2/1 /SH	46	12/9/89
Phosphate(2)

last of them is an extract from the chairman's

address at the meeting. That is exhibit 0JS3

and if the Court goes to the second page, last
paragraph - well, the immediately preceding
paragraph sets the scene as it were. Reference
to persons buying shares or advertisements for

shares - last paragraph:

The proposed amendment will mean that

shares held by a member include not only

those shares registered in the name of that

member, but also include those shares in

which that member has a "relevant interest".

Then there is reference to the take-over Code. If

the Court goes over the page, there is further

discussion about the definition of "relevant interest",

then:

The definition of "relevant interest" has

(quite deliberately) a wide scope.

Your directors realise that some

bona-fide pivot shareholders with multiple

shareholdings may need to look at the way in

which their shares are held, to ensure that

they do not breach the 500 share limit or put

at risk their voting rights. We have had long

discussions with our legal and financial
advisers, and have established that changes

will be necessary only in a very few cases.

Lastly, and most importantly, the proposed

new article does not affect pivot's rebate system

in any way whatsoever. Rebates will continue to

be paid to the shareholder and in the manner

nominated by the shareholder.

(Continued on page 48)

ClT12/2/SH	47
Phosphate(2)
MR FINKELSTEIN (continuing):	What we say, if the Court

please, is that it has been clearly established
that the decision of what is in the best

interests of a company is not to be decided by the Court but is to be decided by shareholders

themselves .. I will not take Your Honours greatly
to the passages, but if I could refer to two

cases which may clear the point, one which

expressed a contrary view, DAFEN TINPLATE CO V

LLANELLY STEEL CO , (1920) 2 CH 124. It is the

first case in the red folder of cases that we

have provided the Court, a decision of

Mr Justice Peterson. The company in that case

introduced an article which permitted the directors to decide whether or not there should be compulsory

acquisition of any shareholders shares. They did

that because a particular member of the company

had in effect taken his business elsewhere to

another concern and it was thought by the directors

desirable to implement a means by which persons

who were part of the membership could be removed.

The article was struck down because Mr Justice Peterson

held that the article went much further than what

was required to give the company the protection that

it sought. That appears at page 137 at the foot of

the page, the last two lines. After looking at

what the object was, His Lordship said:

in this case the resolution which was passed

went much further than the protection of

the company from action by shareholders

which could be properly considered to be

detrimental to its interests.

The court made an objective assessment and

said in effect that perhaps some measure of

protection was necessary but the extreme

measure adopted by the company in this case was

impermissible. That decision was immediately

criticized in SHUTTLEWORTH V COX BROTHERS & CO

(MAIDENHEAD), (1927) 2 KB 9. Each of the members

of the Court in that case - a Court of Apneal

decision - disagreed with the approach of~

Mr Justice Peterson in DAFEN TINPLATE.

The facts of this case were that under the

articles of association directors were appointed

for life in effect with few bases for their
removal and because of the conduct of certain of

the directors a special resolution was passed

providing that a director would resign from office

if he was requested to do so by all of his

co-directors, and that was challenged. At page 19

Lord Justice Bankes deals with DAFEN TINPLATE and

says:

I cannot agree with what seems to have been

the view of Peterson J. in DAFEN TINPLATE

that whenever the Court and the shareholders

CIT13/l/JM	48
Phosphate(2)

may differ in opinion upon what is for the

benefit of the company, the view of the Court

must prevail. In the present case it seems

to me impossible to say that the action of these

defendants was either incapable of being for

the benefit of the company or such that no

reasonable men could consider it for the

benefit of the company.

DEANE J: That is not really the appropriate wording for here,

though, is it? I mean, what is here is what is
the situation if, looking at the article according
to its terms, the conclusion is unavoidable that

no reasonable men could have intended to adopt it

because it is almost impossible to work in the

context of the articles.

(Continued on page 50)

CIT13/2/JM	49
Phosphate(2)
MR FINKELSTEIN:	Yes. That is a proper question, if I might say

so, but that is not the question that the Full Court

asked itself, but -

DEANE J:  But it will not help you if the answer is - it is

obvious they did not mean what this says. Can I ask

you this: is there anything to indicate that they

would have meant more than for the purposes of

article 5?

MR FINKELSTEIN:	No.
DEANE J:	And, the whole of the objective that everybody is

talking about would have been achievedif, instead

of "For the purposes of these articles", it just says

"For the purpose of article 5"?

MR FINKELSTEIN:  Yes.

DEANE J: That would leave the problem that any shares held

beneficially for somebody else were disenfranchised,

but that would be the only problem?

MR FINKELSTEIN:	Yes.
DAWSON J:	The same object could have been achieved by - - -
MR FINKELSTEIN:	I am sorry, Your Honour?
DAWSON J:	The same object could have been achieved by requiring
votes  to be cast personally, by people present.

MR FINKELSTEIN: Yes. There is a difficulty with that though.

Under the COMPANIES CODE members are entitled to

attend by proxy and I do not think that it is

permissible for articles of association to take

away the right to vote by proxy. I think that

articles of association can take away the right to

vote by attorney, but not by proxy.

DAWSON J:	I see.
DEANE J:	Has it ever been ar~ued that SA, read in context,

should be read as ':for the pur];Joses of article 5"?

MR FINKELSTEIN:  We sought to articulate that yesterday

afternoon by reference - the Court will recall that

in our - - -

DEANE J:  I did not mean here. There does not seem to be any

reflection of it in any of the judgments below.

MR FINKELSTEIN:	No.
DEANE J:	So it has not been suggested?
ClT14/l/FK	50
Phosphate(2)

?IR FINKELSTEIN:  No. I come back to the question of construction,

but, by reference to - - -

DEANE J:	I was not trying to lead you back to construction, I
was amply focussing on the appropriate question if

SA, in the various senses that seem to have been

canvassed in the courts below, is so obviously

unworkable that it is inconceivable that a reasonable

body of men could have intended to have put it in its

articles - in the articles of their company.

MR FINKELSTEIN:  At the end of the day it would depend on which

way you read the article. We had,in our outline,

attempted to suggest that, because you may have,

depending upon which way you read it, peculiar

consequences, or in the language of cases like

COOPER BROOKES, absurd consequences, that it should

be confined to dealing with acquisition - the first

sentence should be confined to dealing with article 5

for I think the points that we tried to articulate

yesterday, ofit dealing with that subject.,..matter and::

being immediately after article 5.

(Continued on page 51)

ClT14/2/FK	51
Phosphate(2)
MR FINKELSTEIN (continuing):	Looking at the content of the

article itself it was intended to have that result

and it was intended to have that operation, that is

to say limited operation of stopping a congregation

of votes which means affecting only article 5 and

taking away other people's votes which it does in

a self-contained fashion by the second sentence.

DEANE J:  Then putting the problem against you, as it strikes

me - and this is just by way of question - what if

one were of the view that article SA is simply

unworkable in any practical sense unless you read

"for the purposes of these articles" as meaning "for

the purpose of article 5" and that by reason of the

way matters have proceeded in the courts below

• that construction is simply not open in this Court?

Would there by anything more to be said in the case on your side of it?

MR FINKELSTEIN:  Do I take as part of the question that it

would not be permissible to have the article construed

in some other way?

DEANE J:  What I said to you was, what if one were of the view

that bearing in mind the multiplicity of relevant

interests in each share that could exist, you can

not give a workable effect to article SA in a

practical sense unless you construe the opening

words as meaning for the purposes of article 5

and that that construction is simply not open in

this Court in the light of the way proceedings were

conducted in the courts below.

MR FINKELSTEIN: There is one point that might be made and

that is	what the power of the court is to deal with
such an	article in those circumstances.
Section	320 - - -

DEANE J:  In that case, do not let me take you out of your

course. You take it as you see it.

MR FINKELSTEIN:  Yes. It is also a point that has not ever

been raised in any of the courts below. It goes

to remedy, but we would say that if the Court is

clearly of the view that the article is unworkable

in any sense at all and if the Court is equally

clearly of the view that what was intended, looking

internally at the document itself in its amended

form, that is to say the articles of association and

also taking into account what the Court can

permissibly take into account which are the

circumstances which gave rise to the introduction
of the article, then it is permissible to read the
first sentence as "for the purposes of article 5",

rather than "for the purposes of these articles"

and the fact that that is not the way that it has

been put in any of the courts below should not act

ClTlS/1/HS	52	13/9/89
Phosphate(2)

as a deterrent because at the end of the day it is

not a question which would be affected by evidence one way or the other; it is a question of what is

the proper construction of the article.

MASON CJ:  But we would normally never grant special leave

to appeal, Mr Finkelstein, if it appeared on

the hearing of the application for special leave

that the applicant wanted to agitate a construction

of an article that had never been put to the

courts below.

MR FINKELSTEIN:	I understand that, Your Honour.
MASON CJ:	Therefore the question now presents itself that

if this construction of the article becomes

critical, should not the Court consider the rescission

of the grant of special leave?

MR FINKELSTEIN:  We would still say, as Your Honour asked me

earlier whether there are any other points of principle

inthecase, we would still say there are.

MASON CJ:  Yes, but then you approach those questions on the

footing that they have been dealt with by the courts

below perhaps on an entirely artificial footing,

namely a construction of the articles that normally

one would not accept.

MR FINKELSTEIN:  In part that is so, Your Honour, but whatever

led the court to approach the matter on a wrong

footing it still, we would say, produced the

consequence that they erred in their approach, as
a matter of law, to the issue, and whatever the

catalyst may be, if the approach is wrong, then

it can be set right.

(Continued on page 54)

ClTlS/2/HS	53	13/9/89
Phosphate(2)

MASON CJ: Yes.

MR FINKELSTEIN:  So far as the Full Court on the first

question is concerned, we desire, in addition to

indicating - I have not quite finished the

quotes from SHUTTLEWORTH on DAFEN TINPLATE to

show where the error was. I think I had only taken

the Court the one of the judgments, that is

Lord Justice Bankes. Can I also refer the Court to

Lord Justice Scrutton at page 22 and the paragraph

which begins in the middle of the page.

It deals with Mr Justice Peterson's approach,

that is, whether there were two tests and says

that that is erroneous. And, although not dealing

with it in terms, Lord Justice Atkin comes to the

same view, at pages 26 and 27. At the bottom of

page 26, a passage that we would emphasize and

rely on:

It is not matter of law for the Court

whether or not a particular alteration is

for the benefit of the company; nor is it
the business of a judge to review the decision
of every company in the country on these

questions.

His Lordship says:·

it must be a question of fact. In this

case there is a finding of fact by the

jury that the alteration was for the benefit

of the company ..... In my view the question

is solely for the shareholders acting in

good faith.

Finally, on this issue, if we could refer

generally to PETERS' AMERICAN DELICACY V HEATH, especially Sir John Latham at 479 to 482, where His Honour deals with various general principles,

but makes the point, at page 480, that an

alteration which prejudices somebody, a member,

by diminishing his rights or altering his rights,

is not sufficient ground for saying that the

alteration is improper. That point is made at

the paragraph which is numbered (3) at page 480,

where His Honours says:

It follows that where the rights of members of
the company depend only upon the articles it
is possible to alter the rights of members or

of some only of the members by altering the

articles. The fact that an alteration

prejudices or diminishes some of the rights
of the shareholders is not in itself a ground

for attacking the validity of an alteration.

C1Tl6/l/DR	54
Phosphate(2)

Then, towards the end of that paragraph,

paragraph (3) - - -

McHUGH J:  Does not that statement throw up the problem about

using the phrase "benefit of the company as a whole"

in this context because what you are really doing

is redetermining the rights of the shareholders?

MR FINKELSTEIN:  An alteration often does that - an alteration

to the articles.

McHUGH J: Well, exactly, but talking about the "benefit of

the company as a whole" is a pretty meaningless

inquiry, is it not, in this context, as opposed to

a share raising capital or share capital?

(Continued on page 56)

C1Tl6/2/DR	55
Phosphate(2)
MR FINKELSTEIN:	The inquiry in those circumstances

whilst along the same lines is really different. is to see whether or not it is being done for a proper purpose by itself; whether or not the

company needs capital or again whether there is

some ulterior purpose in the mind of those calling

up for furtl:er capital, or issuing or allotting further

shares. But the test of bona fide for the benefit

of the company bares in mind, I think we would say,

two separate issues. There is the fact that a

shareholder has a piece of property and generally

speaking the law says you can do what you. like

with your property. In other words, a

shareholder is entitled to exercise some self-interest

in relation to his act with his property and

that is a point that was recognized in the case

of PENDER V LUSHINGTON, (1877) 6 Ch 70. But when

a shareholder who can exercise some degree of

self-interest when he votes his shares, because

it is his property, he still must act in a way

which comes within the umbrella of his obligation

of co-operation with his other members and the

company. The Americans, I think, put it quite

differently. They say that shareholders are a

bit like directors and have fiduciary obligations

to other shareholders. Our laws never recognize

that but imposes limits which perhaps are not
that far removed from what in other areas might

be called fiduciary duties. It does limit,

and it limits it by imposing an obligation on

members to have regard to the activities of

the company, which is not just its business

activities but the activities of the members

inter se when they propose and pass changes to

the constituent documents. In other words, it

would be - - -

McHUGH J:  I follow that, but, I mean, you take the case

you referred to earlier, expropriating the

shareholding, it is very difficult to get

much assistance from a test about benefit of

the company as a whole. There must be a better

test, or better approach to the validity of

such an alteration than that. Is that explored

in any of the cases, or has there every been
any criticism of the benefit - - -

MR FINKELSTEIN: Yes. Sir Owen Dixon in PETERS' case

says that relying on a test bona fides is by

no means - it cannot always provide the answer

in much the same way as what Your Honour says.

If the Court has regard to PETERS AMERICAN DELICACY -

I think it is page 504 - fter general discussion

of most of the cases that dealt with the matter,

about one-third of the way down page 504,

His Honour said:

CIT17/l/JM	56
Phosphate(2)

But reliance upon the general doctrine that powers shall be exercised bona fide and

for no bye or sinister purpose brings its

own difficulties.

Then he goes on to explain that it is not

necessarily an absolutely helpful means of

answering the question, although he says, at

the foot of page 507, by way of conclusion in

part:

whatever may constitute bad faith, it is

evident that, if a resolution is regularly

passed with the single aim of advancing the
interests of a company considered as a
corporate whole, it must fall within the

scope of the statutory power to alter the

articles and could never be condemned as

mala £ides. A positive test was therefore

available, conformity with which necessarily

spelt validity.

Again, if I could take the Court to page 512, at

the top of the page:

The reference to "benefit as a whole" is but

a very ge'neral expression negativing purposes

foreign to the company's operations, affairs

and organizations.

(Continued on page 58)

CIT17/2/JM	57
Phosphate(2)
MR FINKELSTEIN (continuing):	Now, in that connection, what

His Honour seems to be saying and we would not

dissent from this as a general proposition, is that

the power to alter articles or the power given to

members to do anything, must be treated as a

power conferred by the constituent documents,

which is exercisable for particular purposes and

no others. And then it is always a question of

determining whether the power is being exercised

for a relevant, and therefore permissible,purpose

and in that connection, if it has got connection

with the company's general operations and activities,
that is a permissible purpose, would be exercisable

within power, not absolutely but prima facie,

because it still could be actuated by bad faith. It
still could be for an impermissible purpose in the

sense of seeking to obtain some improper advantage

and that would taint the exercise of the power, but

there is not probably a concise phrase or definition

that you could circumscribe around the acts of

members and say if you fall within the circle it

is permissible; if you fall outside the circle it

is impermissible, but - - -

BRENNAN J:  In the context of an article of the kind we

are considering here, must it not be that an
article which occasions detriment to some shareholder
or shareholders must find its justification in the
advancement of some corporate purpose and the

question whether it does find a justification in

the corporate purpose must be determined according

to the standards of reasonable shareholders?

MR FINKELSTEIN:  We would not aissent from that approach.

BRENNAN J: Well then, in this case the corporate purpose upon

which you would rely must be the preservation of

the co-operative nature of the enterprise.

MR FINKELSTEIN: In the sense that they saw it. What they

were attempting to preserve was the obligation which

they thought was in force which limited the number

of shares that could be held. Their purpose was

to prevent a means by which that part of the articles

could be circumvented.

BRENNAN J: But we are not looking perhaps at the subjective

intention of those who cast a vote. We are

concerned with the question of the validity of

the exercise of the power and in determining that

one must see whether the exercise of the power is

capable of affecting the purpose, which can alone

give it justification.

MR FINKELSTEIN:  If that is the criteria then the resolution

achieved that, because the evident purpose, what

precipitated the resolution was the concentration of

CIT18/l/CM	58
Phosphate(2)

shares in one hand and by reason of the amendment
it put an end to the ability, or at least the continued

ability for that to take place, so that that was,

we would say, a legitimate purpose producing an

effective result.

BRENNAN J: Subject to the effect that it also produced

on articles 97 and 99.

MR FINKELSTEIN:  But the purpose and object which the members

had in mind was a legitimate purpose and object and

worked and if it has unintended by-product then

that is a matter to be left for the members, because

you have satisfied, we would say, on whatever test

you posed to determine whether the members were

acting properly, it presupposes that the members

are entitled to take steps to stop one person

aggregating beneficial ownership.

But if the answer to that is yes, and if the

shareholders vote yes for that purpose, it is a
legitimate purpose, and if it has some other

consequence, then that is for the shareholders to

rectify.

(Continued on page 60)

CIT18/2/CM	59
Phosphate(2)

MR FINKELSTEIN (continuing): It is not for the Court to

say, "Well, it worked but it produced other results

and we will strike down what you have done because, we

the Court, do not like the other results" which is

what the Full Court said. The Full Court did not

say , in e f f e c t , "You cannot do i t " . The Fu 11 Co u r t said, "You can do it but you did other things which

you cannot do and, therefore, the exercise of the

power was wrong" but we say that if it was exercised

for a proper purpose and if it produces bad results

or unintended results, then it is not for a court to

interfere; it is for the shareholders to rectify

just like if an article is passed which, by mistake -

and let us say it is an unambiguous mistake - does

not record what the members wished it to record.

There is ample authority to say that that is not

capable of rectification by the Court. That is something that the members themselves must cure and they can only cure it by a further amendment to

the articles, even though the articles themselves

do not say precisely what it is the members wanted

it to say.	The Court does not have power to rectify
articles of association.	They do not strike down
the article.	They do not say - the article -

"because it does not record what you wanted it to

record, because it does not operate in the way that

you precisely wanted to operate, the whole thing

is bad". The Court leaves it to the members who

produced the result which they did not intend at

the outset, to rectify it in the way that they are
able to and that is why our submission is that,
provided that the shareholders are acting for a

legitimate purpose which is doing what they are

entitled to do, whatever the consequences are, it

is not the function of the Court to intervene.

On the question of the inability of courts to

rectify articles of association if they create a

deficiency or if they are deficient, do not record

what members truly intended, we refer to two cases,

EVANS V CHAPMAN, (1902) 86 LT 381 and SCOTT V FRANK F.

SCOTT (LONDON) LTD, (1940) 3 Ch 508.

The Full Court relied to some extent on a

decision in New South Wales, AUSTRALIAN FIXED TRUSTS

PTY LTD AND OTHERS V CLYDE INDUSTRIES LTD AND OTHERS,

( 1 9 5 9 ) SR {NSW) 3 3 . I t i s the s econ d ca s e in the r e d

folder if the Court does not have it separately.

Mr Justice McLelland, in that case, struck down

articles which required a shareholder, the Australian

Fixed Trust Company, before it could exercise the right

to vote which attached to its shares that it held in

Clyde Industries to obtain, in effect, the approval
of all of its beneficiaries. Australian Fixed Trust,

the Court might appreciate, is a company that acts

as trustee for various investors and part of the

funds which investors subscribe is put into the

C 1 Tl 9 /1 /SH 60

Phosphate(2)

acquisition of shares in public companies so that

Australian Fixed Trust may hold significant parcels of shares in public companies but do so on behalf of

very many beneficiaries and Clyde Industries sought

to change its articles to require a member who is a
trustee to get the consent of its beneficiaries to

vote on particular resolutions in particular ways

and that was struck down because it was found that

the resolution worked discriminately, it having the

effect of taking away the right to vote that was

given to Australian Fixed Trust because, for practical

purposes, the court found it would be impossible or

impractical for the requisite consents to be obtained from

thousands of beneficiaries and so on.

(Continued on page 62)

C1Tl9/2/SH	61	MR FINKELSTEIN, QC 13/9/89
Phosphate(@)

MR FINKELSTEIN (continuing):  We do not deny in this case

that the effect of the article works a discrimination
in this sense, that it takes away the right to vote,
but the whole purpose of the article is to take

away the right to vote conferred on certain

shareholders, and it was, we would say, incorrect, to

rely on AUSTRALIAN FIXED TRUSTS for anything, apart

from its collection of the relevant authorities

because, we would say, it is not impermissible

merely to discriminate taking away the right to

vote from some people if that discrimination can be said

fairly to·te for a legitimate company purpose as

decided by the members.

Can we deal, finally, with section 320 of the COMPANIES CODE, which was the second ground of

attack made against the article? What we rely on is

four cases, I think the Court is probably familiar with some of them - some members of the Court are. There are the two New Zealand cases - I do not know

that I will need to trouble the Court to have the

volumes - but the two New Zealand cases that we

rely on are the THOMAS cases, re H.W. THOMAS LTD.

At first instance it is - - -

McHUGH J: What do you rely on them for? What is the proposition

that you say they stand for?

MR FINKELSTEIN:  We say that THOMAS and WAYDE established the

following propositions. First, that section 320

deals with conduct which is unfairly discriminatory

to a member. To determine whether conduct is

unfair, it is necessary to look to the overall

position of the company - that is to say weigh up

competing interests and competing rights.

Third, the fact that conduct may be discriminatory or

prejudicial is not, by itself, sufficient. We accept

as a fourthproposition that it is not necessary to

show that there has been an infringement of a legal

right, or lack of good faith, in order to attract
the operation of the section.	We accept that the

test of unfairness, for which the section provides,

is an objective test. We say that it would depend

upon the Court being satisfied that reasonable

members would have regarded the conduct so unfair

that it ought not to have been engaged in, that if

good faith is proved, and if members have not acted

without collateral motive, again such as to get a
personal advantage or appropriate company property

or the like, then the Court should not interfere, or be

very loath to interfere.

ClT20/l/FK	62
Phosphate(2)

In other words, the Court should not approach an application under section 320 on the basis that it, the Court, would have come to a different conclusion.

As with the issue of bona fides, or the exercise of

a power, the Court does not assume management of

companies; the Court does not sit as an appellate

tribunal over boards of directors or meetings

of members.

(Continued on page 64)

ClT20/2/FK	63
Phosphate(2)
MR FINKELSTEIN (continuing):	The court below found that

the conduct was unfair for the purposes of section 320

for a number of reasons, but principally these,

that the Cityfarm shares, in the words of one judge,
"were left in limbo", that the article operated
unfairly or discriminated against Cityfarm by

depriving shares which it had purchased of voting

power, that that imposed a very considerable burden

on a member and that it was inappropriate for a
company to incorporate the concept of relevant

interest found in the take-over Code because of

the width of the definition.

As to those reasons, one important error 1s

demonstrated, and that is that the court took into

account the rights of Cityfarm. Cityfarm is not a

member. Shears was the member, but Cityfarm, although

it had purchased 27,000 shares, was not registered as

the owner of any one of them and so that the court

acted quite incorrectly, we would say, in looking

to the interests of a person who does not come under

the umbrella of section 320. The members whose

shares had had their votes taken away were prejudiced, not in a real practical sense, in a theoretical sense, but none of them complained, but again we say that

there was nothing inherently unfair about removing

the right to vote in the circumstances of this

particular case, and just because the court thought

that it was unfair is again the court below imposing

its own standards and ignoring what the members

thought was an appropriate article to deal with a

particular position that confronted the members at

that time.

Again, if the members thought that the appropriate

way to deal with the Cityfarm acquisiton of shares was to take away the right to vote which attached to those shares, then it is not for the Court to

say because it by no means follows, by any

objective yardstick, that that is unfair conduct;

prejudicial, yes, discriminatory, yes, but unfair,

no. There are various other grounds upon which the

article is challenged in the judgment of

Mr Justice Nathan.	We will refer to them but say
that each one of them is incorrect.	He found

separately that articles of association can not

incorporate by reference outside words, I suppose,

he said that articles must be self-contained, but

we would say that there is nothing unusual about

any instrument picking up, by reference, concepts,

ideas, passages of other documents. He also said

that the article was bad because it adopted a

statutory definition and could have produced the

consequence that if the statute changed the

article w:,uld change.

ClT21/l/HS	64	13/9/89
Phosphate(2)

If it did that there would be nothing wrong.

In any event it would be a question of construction

in each case whether or not when a statutory

definition or statutory formula is adopted

whether that picks up with it any alterations
or any amendments to the statutory definition or
statutory formula. In other words, you might read

the article as picking up section 9 of the

take-over Code as it presently is, or you might

mean you pick up section 9 of the take-over Code

as it is from time to time. That is a question of
construction of the article, but whatever the
proper answer to that question is, in neither case

is it impermissible to adopt an external source,

even if it is capable of change.

(Continued on page 66)

ClT21/2/HS	65	13/9/89
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MR FINKELSTEIN (continuing):	So that we say that

Mr Justice Nathan erred on those separate grounds

of attack, that there is nothing inherently

wrong in adopting an article in the way that

it was adopted and there is certainly nothing

unfair about it if the members think that that

is a fair and reasonable way to proceed.

BRENNAN J: What order was made by the court below in

exercise of the power conferred by section 320?

MR FINKELSTEIN:	The article was declared invalid.
BRENNAN J:	I notice at page 367 there is an order.
MR FINKELSTEIN:	At page 368 of the appeal book, volume 2,

the order made:

Judgment be entered for the Defendant on

the claim. On the counterclaim declarations

made that Article SA ..... is and was at all

times void.

That would follow on either head because the

court found that both on the exercise of the
power and under section 320 the article either was

void or should be declared invalid.

BRENNAN J: There is power to do that under section 320?

MR FINKELSTEIN:  Yes, I think it is clear that there is

power to do almost anything under section 320.

If the Court has a look at section 320(2).

BRENNAN J:  Certainly it is expressed in the widest of

terms.

MR FINKELSTEIN:  Yes:

may ..... make such order or orders as it

thinks fit.

There is some guide to that found in subsection (5),

which is a point I was going to come to really as

my last point.

BRENNAN J: Let me not take you out of order.

MR FINKELSTEIN: It is as convenient a time as any to deal

with it now, if Your Honour pleases. It is clear,
we would say that section 320(2) gives the court

very wide powers. They are certain specific

powers that are identified in subsections (c) to (k).

After declaring that the court can make any order

as it thinks fit, (k) is of enormous width:

an order requiring a person to do a

specified act or thing.

CIT22/l/JM	66
Phosphate(2)

But it does contemplate, although it does not say so in subsection (2), that there would be

alterations to either the memorandum or articles

because that is specifically provided for in

subsection (5). It says:

Where an order under this section makes any

alteration in or addition to the memorandum

or articles of a company -

therefore assuming the power can be exercised,

then - and it provide the consequence -

the company does not -

itself -

have power, without the leave of the Court,

to make further alteration.

So that subsection (5) would not make sense

unless the court had power to:

make any further alteration in or addition to

the memorandum or articles.

so that declaring articles void, we would assume,

comes within "making such order as it thinks fit".

It would in effect have the effect of amending

the article by deleting it. The result of

the order would be that the prohibition that is to

be found in subsection (5) would be imposed;

it cannot come back and do the same thing again

without leave of the court.

The only point about that is that if the

court was of the view that article SA was
intended to operate so that the opening words
would read "For the purposes of article 5" then
instead of striking down the whole article, as

well, finding by the trial judge and acceptance	the court did, in view of the court's finding -
by the Full Court of what the purpose of the
article was and the court not dissenting from the
view that that was an illegitimate purpose, but
merely saying that it went to far, then an
adequate remedy applying section 320 would be
to make what we would say is a permitted alteration
altering the articles under the wide power given
under subsection (2) contemplated by subsection (5)
rather than strike down the article in totality.

DAWSON J: Is that really possible, because the basis

on which you are doing it would be that it operated

unfairly.

MR FINKELSTEIN:  Yes.

DAWSON J: Unfairly to whom?

CIT22/2/JM	67
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MR FINKELSTEIN:	The court's power to make an order under

section 320 would only come into play if the

court was satisfied that the article operated

unfairly.

(Continued on page 69)

CIT22/3/JM	68
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MR FINKELSTEIN (continuing): If it does not operate unfairly

conclusion that it operated unfairl½ either generally or - - -

then the Court cannot do anything under the section.

DAWSON J: In its excesses.

MR FINKELSTEIN:  - - - in particular cases, then the Court

can do what it thinks fit to remedy what has produced

the unfair position. There would not be any power
to do it otherwise than consequent on a finding

of unfairness. But the Court has got a general

power, under section 320, to make any order that it

thinks fit and the only order that the Court should

make in those circumstances, if it can be made,

is to limit the operation of the unfair conduct.

DAWSON J: What I had in mind, why it seems unfair is it

removes certain voting rights. By making that

alteration you leave that removal of voting rights

in place. It has not said it is unfair because

it is incomprehensible because it does things that

no one understood at the time.

MR FINKELSTEIN: Yes, it will always depend on the ground

of unfairness.

GAUDRON J:  Mr Finkelstein, assuming such powers as you

contend for, would their exercise not be restricted

to proceedings brought by a person complaining as

to the unfairness, if you look at subsection (l)?

MR FINKELSTEIN: Yes, but there were such proceedings by way

of counter-claim.

GAUDRON J: Well, I do not know that you can make any

application in respect of the proceedings brought

by someone else by way of counter-claim.

MR FINKELSTEIN:  No, that it is only complaint about the

consequences of success. It is not the company

saying that'we would like to rectify the position"

but, if there is a successful suit against the

company saying that"This is an application made

under section 320 as a consequence of unfair

conduct, and we want a remedy which is to strike

out the article",) then the Court might say, and
should appropriately say, "We won't strike out the
article but we will remedy the position in another
way." In other words, give a form of relief to the

applicant for relief, not to the company.

GAUDRON J:  It is no part of your argument that this Court

should do anything?

ClT23/l/DR	69
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MR FINKELSTEIN:	No, but if it -in the sense that we are moving

the Court to do it, no but if the Court was of

the view that there was a legitimate complaint under

section 320 and that legitimate complaint was the

eccentric operation of the articles, then that is

a matter that can be remedied by the Court but it

depends on what the finding of unfairness is if

there is a finding of unfairness under section 320.

They are our submissions, if the Court please.

MASON CJ: Yes, thank you, Mr Finkelstein.

MR FINKELSTEIN: Sorry, Your Honours - - -

MASON CJ: Yes, thank you, Mr Finkelstein.

MR FINKELSTEIN:  - - - I did promise to provide the Court with

a comparative table of provisions in the

NEW ZEALAND COMPANIES legislation and in our Code,

if I could hand it up, it has been typed out.

MASON CJ: Yes, if you could hand those in. The Court

will take a short adjournment at this stage to

consider the course itshould take in this matter.

AT 10. 26 AM SHORT ADJOURNMENT

ClT23/2/DR	70
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UPON RESUMING AT 12. 13 PM:

MASON CJ:  The Court need not trouble you, Mr Calloway.

MR CALLOWAY: If the Court pleases.

MASON CJ:  As the argument of the appellant has been developed

before us, we have reached the clear view that	unless the words 111':'or the purposes of these Articles"
of Article 511 , the effect of article SA is so in article SA are read as meaning "For the purposes
extraordinary and impractical that it is
apparent that no reasonable body of shareholders
could have adopted it otherwise than through inadvertence to its effect.

It seems to us that that view will inevitably

lead to a dismissal of the appeal unless the Court
were to embark upon the question whether article SA

should be so confined as a matter of construction.

In circumstances where such a construction was not

advanced in the courts below, we do not consider it

appropriate that this Court should embark on the

question whether it is the correct construction

of the article or upon a consideration of the
consequences of that construction.

In these circumstances, we consider that the appropriate course is to revoke the grant of special

leave to appeal without dealing with the particular

issues of law which were considered in the judgments

in the courts below. The revocation of special

leave is not to be taken as an endorsement of what

was said in those judgments in relation to those

issues. The order of the Court is that the grant

of special leave be revoked.

MR CALLOWAY: If the Court pleases, would the Court order that

the appellants pay the costs of the appeal?

MASON CJ:  Yes. Do you oppose that, Mr Finkelstein?

MR FINKELSTEIN: No, we do not, Your Honour.

MASON CJ:  The Court will order that the appellant pay the

respondent's costs of the appeal.

AT 12. 16 PM THE MATTER WAS ADJOURNED SINE DIE

C1T24/1/SH	13/9/89
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