Phosphate Co-operative Company of Australia Limited v Shears

[1989] HCATrans 202

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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 <3J
BRENNAN J
DEANE J

Phosphate(2)

DAWSON J

TOOHEY J

GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 12 SEPTEMBER 1989, AT 3 .14 PM

Copyright in the High Court of Australia

ClT 1/1/CM 1 12/9/89

t1R R.A. FINKELSTEIN, QC:  May it please the Court, I appear

with my learned friend, t1R J. E. MIDDLETON, for

the appellant. (instructed by Arthur Robinson &

Hedderwicks)

t1R F. H. CALLAWAY, ~C:  May it please the Court, I appear with

my learne friend, t1R J. H. KARKAR, for the

respondents (instructed by Baker & McKenzie)

MASON CJ:	Mr Finkelstein.
t1R FINKELSTEIN: May it please the Court.	Can I hand to the

Court our outline of submissions.

MASON CJ: Thank you.

t1R FINKELSTEIN:  If the Court pleases, this is an appeal

from a decision of the Full Court of the Supreme
Court of Victoria, 15 December, 1988. Pivot was

established some 70 years ago as a co-operative company. It was established for the purpose of

enabling farmers to co-operate by sharing profits

and benefits to be gained from the manufacture

of fertilizer. Its principal objects, found in

the appeal book in its memorandum of association

article III and subarticles	1 and 2 at page 120,
volume 1 of the appeal book:

1. To provide or supply fertilisers and

similar products for or to farmers .....

2.      To make and carry out arrangements for carrying

on all or any of the business or trading

objects of the Company on a co-operative basis by sharing profits with or giving

rebates .....

and the like.

(Continued on page 3)

CITl/2/CM	2	t1R FINKELSTEIN, QC 12/9/89
Phosphate(2)

MR FINKELSTEIN (continuing):  What the memorandum and

articles of association of a company do is establish

corporation that has three principal objects, to

create a union of producers whose interests are the

same, to operate as a co-operative and, importantly

for the purposes of this appeal, to ensure that there

is no concentration of either voting power or

shareholding. The articles of association of Pivot

have imposed limitation on voting power and

shareholding.

We have provided to the Court, for the

Court's convenience, a folder which contains just

the articles of association. Before the introduction

of the article that is the subject of this appeal,

article 5 and article 52 were the relevant articles.

The second sentence of article 5 provided that:

The maximum number of shares to be held by any one person shall be 60 shares and

the minimum number of shares to be held

by any one person shall be five shares.

That was changed on 27 August 1964 by increasing the

maximum from 60 to 500 shares. The relevant

resolution is in the appeal book at page 38.

Article 52 deals with the question of voting.

It provides that, depending upon the number of

shares held, a member of Pivot can have either one

vote or a maximum of five votes. The actual

shareholding of the company is important. As at

the time of the introduction of the article, perhaps
not with absolute precision, but as near enough as

once can tell, the shareholding was held as follows;

there were 21,900 people who held five shares, 13,000

held between six and 100 shares and 97 held between

101 and 500.

(Continued on page 4)

ClT2/l/HS	3	12/9
Phosphate(2)

MR FINKELSTEIN (continuing): Those figures are set out

in a schedule that was tendered at trial, appeal

book page 128. What that shows is that

approximately, about 950 are corporations arid there are some shareholders

approximately 99.72 per cent of the members of shareholders

who hold their shares in their capacities as

trustees or executors of deceased estates, the

precise number does not appear from the evidence.

Mr Shears himself owns 380 shares in Pivot. The

other respondent, Cityfarm, acquired a beneficial

interest in about 27,000 shares, again the

precise number is not there, with a stated

intention of taking its holding up to 19.9 per cent

presently but ultimately 51 per cent, and also

with the objective of altering the articles by

removing the restriction on maximum shareholding.

Shortly before the trial Cityfarm had acquired a

beneficial interest in about 22,000 shares. It

gradually went up to about 27,000 shares. The

figures come from the appeal book at pages 104 and 116.

As a consequence of the acquisition by

Cityfarm of beneficial interest in the shares

that it was picking up in the market, the members

of Pivot introduced article SA. The article

itself deals with two discrete subject-matter.

The first sentence deals with the holding, loosely

the ownership of shares.	The second sentence deals
with the voting of shares.	The trial judge found

that the purpose for the introduction of the

article was to preserve:

the essential co-operative nature of Pivot

by ensuring that no person can own or

become beneficially entitled to own more

than 500 shares in the company.

Mr Justice Beach at page 151 of the appeal book. (Continued on page 5)

CIT3/l/JM	4	12/9/89
Phosphate(2)

MR FINKELSTEIN (continuing):  Its obvious purpose was to

make good deficiencies in the existing articles.

For the purposes of our appeal, it is necessary to work out the precise ambit and operation of

article SA. Both the trial judge and the Appeal

Court treated the-article as being divided into a

substantive provision, the first sencence, and a

procedural provision, the second sentence. Whilst the second sentence is partly procedural, that is the means by which one ascertains how a shareholder

has a relevant interest in shares, the second

sentence is, of course, substantive, because it

was by means of the second sentence that the

members thought they could limit the voting power

that was being aggregated in one hand. It is

substantive because the second sentence is, I suppose

to speak loosely, a disenfranchising provision.

The first sentence deems a person:

to hold a share if he has a relevant
interest in the share for the purposes of

Section 9 of the COX?ANIES (ACQUISITION

OF' SHARES) (VIC'IORIA) CODE.

as the principal definition:

One of the criticisms of the article is the complexity
of such a definition, but if I could take the Court
to it, it is to be found in, as the article says,

section 9 of the COMPANIES (ACQUISITION OF SHARES)

A person has a relevant interest in a

share ..... if that person has power -

either -

to exercise ..... the right to vote attached

to that share; or

has power: 

to dispose of, or to exercise control over the

disposal of, that share -

in each case a voting share.

But the definitwn is not limited to the person has

that actual power. There are various deeming provisions

which widen the description of the person who would,

for the purposes of the take-over Code have a relevant

interest. I should draw the Court's attention to

subsections (2) and (3) which make it clear that the

word "power", when used in subsection (1 ), is given very wide operation, implied arrangements, formal, informal arrangement, enforceable arrangements and

ClT4/l/FK	5
Phosphate(2)

the like. That deals with the nature of the power.
Subsection (4) is the first of the "extension"
provisions of describing a person who has relevant

interest. It deals with the case of a "body corporate"

and provides that if a body corporate has relevant

power, that is to say to exercise the right to vote

or exercise control over disposition, and if:

the body corporate is, or its directors -

this is subsection (c) -

are accustomed or under an obligation,

whether formal or informal, to act in

accordance with the directions,

instructions or wishes of a person in

relation to the exercise of the power; or

(d) a person has a controlling interest

in the body corporate,

th-£1.t person shall ..... be deemed to have the

same power -

therefore deemed to have a relevant interest in the

share that the body corporate has a relevant interest

in directly.

So that really gives two extensions; a person

who can control the board, I suppose, and a person

who has a controlling interest in the body corporate

itself. It is extended further in suhsectioz1 (5),

again it deals with the case of bodies corporate:

Where a body corporate has, or is ..... deemed to have -

relevant power -

a person (in this sub-section referred to

as the "relevant person") shall, for the

purposes of this section, be deemed to have

the same power ..... if -

either the relevant person, an associate of the

relevant person~ or the two together, are able to

control the voting power in the body corporate to

an extent which is described as the "prescribed

percentage" - this is innnediately following (f) ~ and -

the "prescribed percentage" is 20 per cent, so that

if a person has 20 per cent of the shareholding in a

company which either has power under subsection (1) or

is deemed to have the subsection (1) power, then the

person who has the 20 per cent interest in such a company

is also deemed to have a relevant interest.

MASON J:  To what extent is it necessary for us to follow all the

consequences of the application of these detailed provision

ClT4/2/FK	6	MR FINKELSTEIN, QC 12/9/89
Phosphate(2)

MR FINKELSTEIN:  One of the substantial arguments that

was made against the validity of the article is

that picking up a statutory definition such as

is found in the Code leads to dramatic results;
leads to impossibility for the company to work

out who does or who does not have a relevant

interest and it was a substantial part of the

attack made on the validity of the article and

was accepted as a valid attack by the Full Court.

So that I think the answer is that the Court

probably does not have to concern itself with
the precise operation. It is probably sufficient
for the Court to know that the provision itself

in the take-over Code is complex but, we would say

at the end of the day, comprehensible and we would

accept that it brings under its umbrella a relatively

wide class of person but, ultimately, controllers of

corporations.

MASON CJ:	Yes.
MR FINKELSTEIN:	The only other part of the section which

is relevant and we will make comment about it in

passing is subsection (6) which deals with options.

If you have an option to acquire a share or entered

into an agreement which would produce the consequence

that you will, on the exercise of the option have a

relevant interest, you are deemed to have it as well
and that is, again, extended somewhat in subsection (7).

If we could just refer the Court relevantly to section 7(5) because the Court will recall that in section 9(5) there was introduced the concept of

an associate; that is to say, an associate is a

person who is defined as a relevant person.

Section 7(5) defines associates and we would

imagine that, for all practical purposes, the

relevant parts of the subsection would be limited

to subparagraph (a), directors of corporations,

secretaries of corporations or directors or secretaries

of related corporations and probably subsection (c);

that is, 7(5)(c), persons acting in concert in relation

to the matter in respect of which the reference relates;

which is if you have two people acting together in

relation to voting or disposal of relevant shares,

their shareholding becomes relevant for the purposes

of 9(5).

One of the principal attacks, as I say, was

the confusion that would be likely to be caused by
the adoption of the article having regard to the

width of the definition of "relevant interest" but

there was another substantive attack that was made

and, again, accepted by the Court. It was this: that because a person who is not a member in the sense that his name appears on the register of

members of the company, is in the words of the

first sentence, "deemed to hold a share" , it

ClT5/1/SH	7 -	12/9/89
Phosphate(2)

was said, and accepted by the Full Court, that that

made the articles of association and, therefore, the
operation of the company itself unworkable.

For the purposes of that submission, it was assumed that the opening words of SA were to be given

their literal effect which is to say that "a person

will be deemed to hold a share for the purposes of

these articles, for all purposes".

(Continued on page 9)

..

ClTS/2/SH	8
Phosphate(2)

MR FINKELSTEIN (continuing): And it was said that if one

had regard to the articles and treated a non-member

as a member for the purposes of them absurd results

flowed and the particular articles to which attention

was drawn, if I could list them, were the following.

There may have been others, but I think I picked them

all up in the following articles. They were

9, 14, 16, 17, 18, 20, 21, 23, 24, 24(a), 24(c), 28,

28(a) and articles 97 to 100. And what was said

was that if you had regard to those particular

articles and observed the strict requirements of

the opening words of article SA, it produced

absurd consequences.	We would say, apart from the
question "What is the proper construction of	·
a.rticle SA?", that the analysis is false in any

event, that if one has regard to almost all of
the articles to which we have just referred, absurd

consequences do not come about with the strict or

literal reading of the article, substantially

because most of them deal with things like paying

instalments on unpaid shares; paying calls on

unpaid shares; forfeiting shares for non-payment;

rendering the shareholder liable for various sums

of money in various circumstances.

McHUGH J: What about article 52?

MR FINKELSTEIN: Article 52 is dealt with in another way.

article 52 is dealt with by the second sentence of

a.rticle SA. Article 52 limits the right to vote

from either one or up to five votes. The second

sentence of a.rticle SA takes away the right to

vote that is otherwise given in article 52, depending

upon what the relevant facts are, so that we do

not see any disconformity between SA and 52.

McHUGH J: That assumes, does it not, that the directors

exercise their powers under the second limb.

What happens if they do not? Can all those with

deemed interest turn up and vote?

MR FINKELSTEIN: That depends, I think, on the proper

construction of the article. Really, the question

involves deciding what a.rticle SA means first

of all. Article SA can have two possible constructions

as we understand it, one of which seems to have been

accepted throughout the course of this piece of

litigation. If it means for all purposes a person

shall be deemed to hold a share if he has a

relevant interest, then on that construction, that

is to say the literal construction, it would follow

that a person who is not a member of a company but

CIT6/l/CM	9
Phosphate(2)

holds a relevant interest, is entitled to vote at

meetings of the company on resolutions other than

special resolutions because the Code itself prohibits

or limits vote on special resolutions to members,

so that a non-member, on the literal reading of

this article, would be given a right to vote and

the operation of article 52 would limit him to five votes

(Continued on page 11)

CIT6/2/CM	10
Phosphate(2)
MR FINKELSTEIN (continuing):	So, in that sense, they

work together and what would happen is the deemed
holder of the share would be the person who would

exercise the vote and the actual holder of the

share, the registered holder, would, by virtue

of the last words of the second sentence, be

disenfranchised. His right to vote would be lost,

so that in respect of the parcel of shares which

would be aggregated in the hands of the deemed

holder, he would suffer the maximum of five.

McHUGH J:  There might be many deemed holders of the one

share, might there?

MR FINKELSTEIN:  There may be many deemed holders of the one

share and the way that these articles would read,

each deemed holder would be limited to five votes

which would produce the consequence, on the facts
of this case - it is not possible to say how many

votes there would have been because Cityfarm

bought 27,000 shares. The evidence does not tell

you whether it was bought from 10,000 or 12,000 or

15,000 members, so you do not know how many overall

votes are lost but it would have the result that either

one person would have five votes or if more than one

person had a relevant interest in the share there

might be five, 10 or 15 votes attaching to that one

bundle which may have, at an earlier stage, had

a value of 1000 votes.

DEANE J:	But that does not really answer the question.	What
if there were 20 deemed holders of each of five
shares, how many votes have they got?

MR FINKELSTEIN:	Each would have one vote under article 52.
DEANE J:	So those five shares carry 20 votes?
MR FINKELSTEIN:	Each deemed holder would have one vote.

DEANE J:  So the answer is those five shares carry 20 votes?

MR FINKELSTEIN:	Yes.
DEANE J:	So the object could be achieved by simply taking

one share and holding it in trust, or getting a sufficient number

of people with a deemed interest in it, or with a relevant int ere s t .

MR FINKELSTEIN:	And they would each come and vote.
McHUGH J:	..... Cityfarm. They might be able to achieve their object withitr:these articles.
DEANE J:	And a lot more cheaply.
MR FINKELSTEIN:	That might mean that the intended result has

not been perfected and it might mean that other st~ps

may have to be taken to perfect the result, and it

ClT7/l/HS	11	12/9/89
Phosphate(2)

is probably the case that no matter how tight the

articles are drawn, a certain amount of ingenuity

would find a way round them.

BRENNAN J:  Mr Finkelstein, I am having difficulty in putting

together a provision such as SA with the general

structure of the COMPANIES CODE. What happens to

the statutory contract in a SA clause? What is

the relationship between the company and its members?

Have you severed the rights of a shareholder, or the

rights which were attached to a share so that a

member no longer has them?

MR FINKELSTEIN:  We would say, "No", Your Honour. It was the

view of Mr Justice King that article SA had the

effect of literally transferring from a registered

shareholder all of the rights and obligations of

shareholding to a non-member.

(Continued on page 13)

ClT7/2/HS	12
Phosphate(2)
MR FINKELSTEIN (continuing):	We say that that is an

error in the sense that it misconstrues the
article. What we say is the proper construction

of the article is that so far as the contractual

rights that subsist between company and members

by virtue of the Code,with registered members

that contractual relationship still subsists;

it is unaffected by the article. So that whatever

provisions are enforceable against members -
take, for example, a case if there were shares

issued and they were issued partly paid and a

call was made, then the member to whom those

shares were issued would be liable on the call

and the contractual right of the company would still be there and any rights inter se amongst shareholders - by which I mean registered members -

would still be enforceable between them pursuant
to the contract created by the articles. What

would not happen would be there coming into

existence a contract between the company and the

new deemed member, or the existing members -

registered members - and a deemed member. There

would be no contract at all. They would be

deemed to be shareholders for certain purposes.

They would not have all the rights of shareholders

in the sense that they do not have an agreement

which they can enforce. At the same time

they are not subject to all of the liabilities

of shareholders because there is no agreement

which can be enforced against them.

BRENNAN J:  But the opening words of article SA say

that the deeming is for the purpose of these

articles, which is, of course, one of the

constating documents of the relationship between

the company and its shareholders.

MR FINKELSTEIN: That.is so.

DAWSON J: And the articles provide for calls to be made,

take the example you mentioned.

MR FINKELSTEIN:  Yes, they do. It would follow though

by being deemed shareholders, rather than actual

shareholders, they could not be actually bound

by an agreement constituted by one of the

constituent documents of the company, nor would

the provision of the COMPANIES CODE,which makes

the document contractually binding as between

members and as between members and company,

binding on persons who were only deemed to be

shareholders unless of course they happen to

be registered for some shares in their own right.

BRENNAN J: What are the purposes then which a person is

to be deemed to be a shareholder?

MR FINKELSTEIN:  We would say that on the proper construction

of the article, having regard to what it was

intended to do which was -

CIT8/l/JM	13	12/9 /89
Phosphate(2)

BRENNAN J: Was it intended as a matter of construction,

or as - - -

MR FINKELSTEIN: Intended as a matter of construction,

yes, Your Honour. As a matter of construction

it deals with two subject-matter, holding
shares, first sentence, voting shares, second
sentence. We would say that as a matter of
construction the purpose of the Article was

to prevent the acquisition of more than 500 shares

and to prevent the person voting more than five

votes, in other words, to maintain the existing

effect of the articles and if that is accepted

as the proper - - -

BRENNAN J: That is nowhere to be seen in article SA.

MR FINKELSTEIN:  In part from the language of article SA

itself, Your Honour, in part also from the

position where one finds it. It follows

innnediately article 5 which deals with

shareholding, limitations or prescriptions on

the number of shares to be held, between five and

60 until amended so that it came between five and
500 and it deals - so that you have its position

in the articles, which I suppose by itself might

not be all persuasive, but you also have the

subject-matter with which it deals.

(Continued on page 15)

CIT8/2/JM	14
Phosphate(2)
MR FINKELSTEIN (continuing):	We would say that it is intended,

by its words, to deal with only two subject-matter:

the actual holding of shares, ownership of shares

on the one hand and voting on the other.

DAWSON J: It is really the latter, is it not?

MR FINKELSTEIN: Principally the latter, yes.

DAWSON J: Then you would expect to find it after article 52

not article 5.

MR FINKELSTEIN: Except that article 5, itself, is the article

which sets out the maximum number of shares to be

held and the first sentence does deal with that.

McHUGH J: How does SA work with 28a, because a shareholder

is not entitled to hold any less than five shares

in number?

MR FINKELSTEIN: Well, article 5, itself, provides that the

minimum number of shares to be held shall be five and article 28a, which deals with the transfer of

shares, repeats in part the minimum holding. It

is picked up in 5 as well.

McHUGH J:  I appreciate that, but does that mean that 5A

does not operate in a case of a person who is

deemed to have less than five shares?

MR FINKELSTEIN:  I think it works on this theory that

nobody will have less than five shares. It makes

the assumption: because it is a prohibition

imposed by the articles that no person should have

less than five shares, then it makes the assumption

that that will be so and so if there is a deemed

relevant interest there will only ever be a

relevant interest in five shares, minimum, but up

to 500.

McHUGH J: What if he sells one share? A registered shareholder

sells one share, what happens then?

MR FINKELSTEIN:  He might do that and then you can have a

relevant interest in one share. It is true to say that the article does not acconnnodate that

but then.the existing articles without the

amendment do not deal with the disposition of one

share out of a lot. It merely prohibits the

registration as a consequence of a transfer of one

share out of the lot.

We do submit that article SA, having regard to both subject-matter and purpose evidenced by

its content, can produce one of two consequences

on the question of construction, either that it

should be read this way:

ClT9/l/DR	15
Phosphate(2)

For the purposes of these Articles -

and after those words, inserting "(where appropriate)"

or - - -

BRENNAN J: That is not really a criterion at all, is it?

MR FINKELSTEIN: It is to this extent, Your Honour, it would

then require you to look to see the operation of

some other articl~ which deals with members, and

make a decision whether or not that other article,

relevantly, should deal with the rights or

obligations or position of members who are registered

or members who are deemed to be members.

BRENNAN J: How do you decide that? What is the reference

point of decision?

MR FINKELSTEIN: Merely content.

BRENNAN J: What does "appropriate" mean?

MR FINKELSTEIN: For example, one of the ones about which

criticism has been made - article 9, I think,

dealing with "instalments due on shares". If the

question was, whether or not article SA was

intended to make a non-member liable to a call on

a share not issued to him and, in respect of which

he is not registered then, we would say, that

properly construed, article SA would not apply to

that, as it were, class of member.

(Continued on page 17)

ClT9/2/DR	16
Phosphate(2)

MR FINKELSTEIN (continuing): It would not relevantly apply

to him because, as a matter of proper construction,

an article such as 9 would impose an obligation

to pay an instalment on the person who took the share and became registered as the shareholder,

so that it would have to be a question of

construct ion in each case, that is to say, in each

example in the articles where it became necessary

to decide whether the particular article had

relevance to only registered members or persons

who have been described as deemed members.

DAWSON J:  You would really mean that "where appropriate"

means for voting purposes?

MR FINKELSTEIN:  We would say that the proper construction

would lead to the result that it would only be

relevant for article 5.

BRENNAN J:	How would a non-member have any right to enforce his article SA rights against the company?
MR FINKELSTEIN:	The answer is he would not, unless there was

a separate contract between that non-member and the

company and in the absence of a separate contract

between the deemed member and the company it could

not be enforced at his suit. It could be enforced

at the suit of a member who could - by "member" I

mean a registered holder of the share - because he

could, for the benefit of a third party, enforce the
contract to which he is a party; but we would say that
it could not be enforced - we would accept that it

could not be enforced at the suit of the deemed

members.
It, I think, was one of the points that was made in Professor Ford's textbook on company law,

to which we have referred, on the question whether

or not articles can lawfully - I suppose 'va 1 idly"

ra'ther than "lawfully" - permit a person who is not

a registered holder of a share to have a vote.

At page 524 of Professor Ford's work~ it is the

fourth edition, Principles of Company Law -

paragraph 1809, after dealing with KOLOTEX (HOSIERY)
and the dicta of Mr Justice Gibbs expressing the

view that the tenor of the Code suggest~ that

non-members were not intended to have a right to

vote, Professor Ford says - this is about eight or

nine lines from the bottom of the page:

He noted -

a reference to Mr Justice Gibbs -

that some authors of text-books seemed

to accept that the articles may validly

ClTl0/1/HS	17	12/9/89
Phosphate(2)

confer on non-members, or at least

right of voting, although their votes could not be taken into account for the purposes of special resolution.	such as are debenture holders, the prevent the conferment of such power to
vote on a non-member it seems clear that a non-member could not enforce a 'right'
to vote if the only basis of his claim
is a provision in the articles. However,
any attempt to prevent the exercise of the power to vote would be a breach of the statutory contract as between the company
and the members and it is arguable that any
member would be entitled to have that
breach restrained.

We would accept that, as a matter of general legal

proposition, that would have to be so, that is to

say that the deemed member does not have standing to

enforce the right given to him but it could be at the

suit of company.

(Continued on page 19)

ClT 10/2/HS	18	12/9/89
Phosphate(2)

MR FINKELSTEIN (continuing):  The only other case that

we have been able to discover is a recent

decision in New Zealand where note-holders were

given a right to vote. The case is RE ARAHI

PROPERTIES LIMITED, (1989) 4 NZ CLC 64884. We

have provided a photocopy of that case in a folder

of cases and it is behind tab 8. The note-holder

in this case was able to enforce the right given

to him to vote because a contract subsisted between

it and the company so that there was not a question

in the case about the ability as a matter of contract

to compel compliance with the right to vote that was

given but the case is instructive, at least, on this

issue: that at page 64888, the third-last page, the

question about giving non-members the right to vote

was considered and Mr Justice Tomkins saw no

disability in the New Zealand COMPANIES ACT or no

prohibition which prevented the right to vote being

conferred on a non-member and the Court will see in
the first column in the last paragraph on that page,

64~88, references to various sections of the New Zealand Act which were considered which,

generally speaking, specified rights of members but the Court came to the conclusion that there

was no barrier to a non-member being given the

right to vote and then decided, as an ancillary

question, whether or not the company in question

had power to make a contract giving a non-member

the right to vote and said, as a matter of power

vires, it did have that right and the sections that

are there referred to in the first column, one way

or· another find their way, sometimes not in identical
language but, certainly, in very similar language,

counterparts in our legislation. If it is of any

assistance, I can tell the Court that the various

sections that are there referred to - I can tell

the Court what the counterparts are - perhaps if

I start at the beginning.

In the first paragraph under the heading, there

is a reference to section 145 about passing

extraordinary resolutions. That is much the same

as section 248 of our Code but in the next paragraph,

section 136; that is the same as our 241; 140 is the

same as our 245; 141, I think, is the same as our 243

and 142 is the same as our 244(2).

DAWSON J:  I am sorry, the last one?

MR FINKELSTEIN: Section 142 is 244(2). I actually have them

written down in a little bit more detail than that.

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MR FINKELSTEIN (continuing):  I will hand to the Court in

the morning a sheet which does it on a subsection by

subsection basis but, the Court will see that the

provisions of - and, it is not surprising - the

New Zealand legislation is very much the same as our

legislation and it was clear enough that the court

accepted that a non-member could be given the right to

vote. Now, apart from our Full Court, we do not know

of any other Anglo Australian decision which touches on
the question of a non-member being given a right to

vote. The difference in RE ARAHI is there was a

contractual power to enforce but that is really not

the point of principle; the point of principle is,

can any non-member, whether he has a contractual right

to enforce or not, be given a right to vote? And, it

would be a second. subsidiary question whether if the

company can give him the right to vote, is it enforceable

at his suit.

This case stands as authority for the

proposition that one is able - a corporation is able to

confer voting rights on non-members. And, we would say

as a matter of principle, there is no reason why that

should not be so and there is no prohibition on that in
the COMPANIES CODE, which is really the point that is
made by the various textbook writers that deal with the

point and I will deal with it rather shortly. But,

those that we have collected and referred to in our

outline, Palmer's Company Precedents, Gore-Browne on

Companies as well as Ford's book, each make the point

that there is no prohibition on conferring a right to

vote and in the absence of a prohibition there is no

reason, in principle, why a right to vote should not be

given.

(Continued on page 22)

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MR FINKELSTEIN (continuing): One could instance various

examples of classes of person whom may well think it very much in their interests to be

given a right to vote, debenture holders would

be, I suppose, a straightforward example, but

note-holders as well, as in the New Zealand

case. So provided, we would say, there is no

statutory prohibition, there is, we would say,

no !-"'eason in principle why the right to vote

should not be conferred.

I did indicate that Mr Justice Gibbs doubted

the point and he did that in KOLOTEX HOSIERY V

FEDERAL COMMISSIONER OF TAXATION, 132 CLR 535.

At page 569, dealing with the construction of a

particular article and whether or not it conferred
a right to vote on a person in his capacity as
shareholder of the company or otherwise, His Honour

said, about two-thirds of the way down the page

in a sentence which begins with the word "Moreover"

towards the right-hand side. It is about the

middle of the large paragraph. His Honour says:

Moreover, it might be thought that the

general principle that the articles do

not constitute a contract between the

company and an outsider would be an

obstacle in the way of a non-member who

sought to enforce an article which

purported to give him a right to vote,

assuming it to be otherwise valid.

However, it seems to have been accepted,

by the authors of textbooks of high

authority, that the articles of a company

may validly confer on non-members, or

at least such as are debenture holders,

the right of voting, although their
votes could not be taken into account for

the purposes of a special resolution.

And textbooks are referred to. (Continued on page 23)

CIT13/l/JM	22
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MR FI.NKEI.SIEIN (continuing): His Honour continues:

The question does not seem to have been the

subject of discussion in any reported case,

and it is not necessary for present purposes

to express a concluded view -

because for one reason Mr Howie, the person in
question, was a shareholder, but we would say that
whilst the textbooks themselves, to which

reference is made, do recognize the right that

might be conferred on non-members and there could

not be a limitation of the type there described,

that is to say, one could not limit that right

merely to debenture holders.	The question must
be "Can a non-member vote?".	It would not make

any difference whether he was a debenture holder, a note-holder or a complete stranger. If you can

confer the right to vote on a debenture holder, if

that can be validly done, a debenture holder not

being a member of the company in the sense of owning any share, then, if the answer to that

question is "yes" it must follow that any person

can be given the right to vote.

What the authors of the textbooks no doubt had in mind would be it might be an unusual case

to want to give the right to vote to somebody other

than, say, a debenture holder or a note-holder, but it would not be limited as a matter of principle,

just to debenture holders. There would be no warrant

for that. Certainly not in the Code and in none

of the provisions. It is really a question of

member or non-member,not a particular class ofnon-meni:>er

if he c-an-~be given the right to vote.

BRENNAN J: You may go a bit deeper and it would be a question

of whether when there is a statutory corporation

created pursuant to statute and the statute

contemplates the reposing of the corporate powers

in certain bodies, whether they be directors or

the general body of members or a class of members,

it is open then to the conporation, by internal

regulation, to repose the powers in others.

MR FINKELSTEIN: We would say that it is true that the Code

generally, as the m1P~S <XlDE-· before it did,

contemplate that power would reside in members

who are registered as members, actual owners of shares.

CIT14/l/CM	23
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MR FINKELSTEIN (continuing): The Code makes that assumption.

It only expressly deals with votes on special

resolutions and limits that to "members". Where

that word is used in the Code it means the person

who is registered as the holder of the share in

the register of members. But, in the absence of a

prohibition in the Code, then it is for the members

of the company, itself, to decide where ultimate

power can repose because they are - I suppose not

the "organs of management", but the "organs of

power" at the end and if they decide that that

power can be spread amongst others of them who do

not happen to hold a share, then, if there is no

expressed prohibition against it, there is no

warrant for saying that that power does not exist.

DAWSON J:  It may not be a question of expressed prohibition. It may

be a question of the nature of the animal.	Can
the leopard change its spots?

MR FINKELSTEIN:  Yes, I understand, but I suppose it comes

back to the same question. It is a question of

principle. I was going to suggest that if you can vote

by proxy or by attorney that is divesting you of a

power. I suppose the question really is: is there

any point of principle why a non-member should be

given the vote if those who control the affairs of

the company think that it is appropriate to do so

and share what would otherwise be a power limited

to themselves.

We would say there is no reason why, as a

matter of principle, the control of the company,
the right to regulate the affairs of the company,

it is a piece of property - the share is a piece
of property - the shareholders can divide up, in
effect, their property, we say, in any way that they
see fit.subject to the rules of exercising their

powers according to law. But, provided that they

make their decision in a ,lawful way, it is, at the

end of the day, their property and they should be	free to deal with it in any way that they see fit.	If that means dividing up decision-making - on
either important or fundamental issues or whatever,
if it means dividing up decision-making amongst
themselves and conferring it to others then it
still works.
What cannot happen is that all power cannot be given by shareholders to non-shareholders
because at the end are special resolutions, and the
right to pass special resolutions cannot be given
away. The statute prevents that. But for ordinary
resolutions, because the statute does not prevent
that, we would say that there is no reason, in
principle, why that power cannot be given away.

C1Tl5/l/DR	24
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MR FINKELSTEIN (continuing):	So that it is partly,

Your Honour, a leopard changing its spots but not

completely because all power cannot be given away and

there are many decisions reserved for special

resolutions both by the Code, often by articles

themselves but, even if you leave aside

article~ often by the Code.

So that absolute power cannot be divested but some p~:

can be divested. There may be very many circumstances

where it would be sensible to do that, That is why the
texts have often instanced the example of debenture
holders; they often have just as much interest-

debenture holders might say greater interests -from time

to time in the affairs of the company and the conduct

of its activities as do the shareholders; at least

equal depending on the nature of their security and their

rights and so on. And, there may be very sound policy

reasons why it should be regarded as appropriate that

persons such as debenture holders should be given a

voice in certain circumstances. The right to vote at the

end of the day is a right which is conferred - there is

no absolute right on members to be given voting powers.

Some members have voting powers, some members do not

have voting powers; it often depends on the nature of the

share that one holds.

DEANE J:  Is the position that a registered shareholder would

always have a relevant interest?

MR FINKELSTEIN:  No, that would depend on what residual power

he retained over the share.

DEANE J:  Except, section 9(l)(a) says:

where the share is a voting share -

the right to exercise the vote. Would not that right

ordinarily be that of a member?

MR FINKELSTEIN:  Your Honour will see from section 9(8)

in certain cases if what is created is a true trust

between the registered proprietor or holder of the

share and another person - section 9(8)(c):

if the share is subject to a trust, the

relevant interest is that of a trustee and -

(i) a beneficiary is to be deemed, by virtue

of sub-section (6), to have a relevant

interest;

(ii) the trustee is a bare trustee;

then the relevant interest is disregarded. So that it

really depends on looking at what the precise relationship

is between shareholder and the other person who has the

relevant interest.

ClT16/l/JH	25	12/9/89
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MR FINKELSTEIN (continuing): If it is the case that

there is a pure trust, as would be the case,

we would say, if there was a contract for the

sale of the share with the consideration paid

so that the shareholder holds the share purely

as trustee for the benefit of the purchaser

of the share,the only thing outstanding being

the transfer from vendor to purchaser, then the

vendor of the share would not be regarded as

holding a relevant interest. But again it

would depend on the precise contractual

relationship. It assumes that there would be

no power left in the - - -

DEANE J:	Mr Finkelstein, as I read i4it assumes the.
exact opposite. It says he will have a
relevant interest but you disregard it for
the purposes - - -
MR FINKELSTEIN:	Of section 9.

DEANE J: But what my question was really aimed at

is why is it that you are not ·seeking to

avoid these difficulties by distinguising

between deeming a share as being held by

somebody and making somebody a shareholder

for the purposes of articles which speak

indifferently of shareholders and members?

There is obviously an answer.

as to why you are conceding that deeming

somebody to hold the share has the effect

of making him a shareholder for the purpose
of other provisions of the articles.

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

We say that that is unnecessary. We say that

it is only necessary for the purposes of

article 5.

(Continued on page 27)

CIT17/l/JM	26
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DEANE J:	But it is implicit in the way you interpret the
effect of SA.  I mean, if you read SA as dealing
only with restricting the voting rights of members
and not conferring rights on non-members by deeming
them to be shareholders for all the purposes of the articles, it would have a completely different
operation to the operation that you have given
it?  I mean, the non-member just would not get
any votes at all.

MR FINKELSTEIN: No, that is right, that is so,

Your Honour. That really assumes that the first

sentence would be limited in operation to dealing

with article 5.

DEANE J:	No.
MR FINKELSTEIN:	It does not deal with voting at all but

merely deals with aggregation of ownership.

DEANE J:	No, it would deem various persons to hold shares
if they have got relevant interests but it would not deem that they all became shareholders.
MR FINKELSTEIN:	No, we accept that, Your Honour.
DEANE J:	Your argument is quite contrary to that though, as to the effect of it?

MR FINKELSTEIN: It has been argued in the way that I have

been putting it. That has been an accepted

construction but it may well be an erroneous
construction.

DEANE J: Except that construction which may be the preferable

one would seem to me, for example, to have the

effect of disenfranchising every share that was

held in trust.

MR FINKELSTEIN: It would necessarily have that effect.

DEANE J: Which is?

MR FINKELSTEIN: It would have that effect until the share

was transferred to a perso~ registered in his name

and nobody else had a relevant interest in the

share, in which case the shares themselves were

not disenfranchised permanently but temporarily

until a relevant interest came to an end.

McHUGH J: It is a result of this article, is it not, that

every person who holdsa share, irrespective of

whether he has sold it to anybody else, is also

deemed to hold a share by reason of the operation

of 9(1)(a) of the (ACQUISITION OF SHARES) CODE?

C1T18/1/ND	27
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MR FINKELSTEIN: Subject to the operation of subsection (8).

McHUGH J:  (8) does not apply to him.

MR FINKELSTEIN:  Perhaps I misunderstood the question. When

you only use the word "hold" -

McHUGH J: What I was putting to you is that assuming I held

five shares in it?

MR FINKELSTEIN:	Yes.
McHUGH J:	By reason of 9(1) of the Code, am I not also deemed

to hold a share as well?

• MR FINKELSTEIN: If Your Honour was registered as the holder

of one parcel of five shares, for the purposes

of the Code you would actually have a relevant

interest; it would not be a deemed relevant interest,

it would be an actual relevant interest.

McHUGH J:  Yes. But that would mean then I would be deemed

to hold a share?

MR FINKELSTEIN:  You would be deemed to hold those shares

to the extent that it became relevant but you would

actually have a relevant interest in the share

and you would be deemed - I suppose it is difficult

to comprehend how you could actually hold the share

and be deemed to hold the share at the same time

because it is intended to aggregate but you would

fall within the first part of the sentence as well,

yes.

McHUGH J:	Yes, I see it.
DEANE J:	But the effect of that is that the shareholder will not be disenfranchised necessarily because
he has a relevant interest which supports a reading
of the overall articles as limiting the voting
rights of people who are members and not as
CCilferring .voting rights on people who are not
members.

18 MR FINKELSTEIN: Yes, and in that example there would be

no other person who would hold an interest so that

no right to vote would be lost.	I might have
forgotten the facts of the example.	I think

Your Honour might have said that the share was

sold as well.

MASON CJ:  Mr Finkelstein, it may be convenient to adjourn

now. We will adjourn until 9.45 am tomorrow.

AT 4.22 PM THE MATTER WAS ADJOURNED

UNTIL WEDNESDAY, 13 SEPTEMBER 1989

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