Phosphate Co-Operative Company of Australia Limited v Shears

[1989] HCATrans 56

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M2 of 1989

B e t w e e n -

THE PHOSPHATE CO-OPERATIVE

COMPANY OF AUSTRALIA LIMITED

Applicant

and

DOUGLAS STEPHEN SHEARS and

CITYFARM PHOSPHATES PTY LTD

Respondents

Application for special leave
to appeal

MASON CJ DAWSON J McHUGH J

Phosphate

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 17 MARCH 1989, AT 12.07 PM

Copyright in the High Court of Australia

MlT6/l/PLC 1 17/3/89

MR R.A. FINKELSTEIN ~C :  May it please the Court, I appear

with my learned	friend, MR J.A. MIDDLETON, for
the applicant.	(instructed by Arthur Robinson
& Hedderwicks)

MR J.D MER.RALLS, QC:  May it please the Court, I appear with

my learned friend, MR D. SHAVIN, for the respondents

to oppose. (instructed by by Baker & McKenzie)

MR FINKELSTEIN: If it please the Court, could I hand to the

Court three folders which contain photOCQpies of

some authorities and some extracts from some textbooks.

We will only make passing reference to them.

MASON CJ:	Yes.
MR FINKELSTEIN:	The article of association that was adopted

by the members of Pivot in February 1987 produced

this consequence: it deemed certain persons who were

not members of the Company to be members for the
purposes of the articles of association. It also had
the effect of disenfranchizing certain members of

the Company.

One finding that the Full Court made, so far

as that article was concerned, is that it is

impermissible for a company - that is to say, any
company - to adopt articles of association giving a

vote to a person who is not a member of the company,

that is to say, to a person who is not registered

in the register of members as the holder of shares.

That point, we submiL, i~ an iruportant point. So far

as we can gather, it is the first occasion, at least in Anglo-Australian courts that the point has been decided.

It has been the subject of textbook connnents from time

to time and most of the leading, I suppose, textbooks
that have dealt with the matter have concluded that

it is permissible for articles of association to

allow non-members the right to vote at company meetings.

And in our folder that we have handed to the Court,

we have got extracts from Gore-Browneand Palmer in the

practise volume, that is the precedent volume of Palmer

and Gower also in his work on company law accepts the

proposition that non-shareholders can be given the

right to vote.

So far as we have been able to tell in our researches,

the point received passing consideration by this Court

in a tax case, KOLOTEX HOSIERY V DEPUTY COMMISSIONER OF

TAXATION, (1975) 132 CLR 535. It is in the folder of

cases if the Court please. And Mr Justice Gibbs

, dealt with the point at page 569. His Honour there noted that the matter had not been considered before.

His Honour felt that the COMPANIES ACT 1961, which was

then in force, provided strong argument for the view
that non-members cannot be given the right to vote

but at the bottom of the page His Honour then referred

to the texts which dealt with the matter and put forward

a ·contrary view and said that it was not necessary

to express a concluded view at that time.

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Now, since the KOLOTEX case, Professor Ford, in his text on company law, which is also ln our bundle of texts and cases, has himself made comment on the

KOLOTEX case and expressed a contrary view. So that

so far as Anglo-Australian law is concerned, there is,

we submit, an important outstanding question on

the rights of non-members to be given a power to vote

in the affairs of the company. We have looked elsewhere.

We have looked at authorities in the United States and

last century there was a view put forward by
American courts that it was contrary to the public
interest to have split beneficial ownership of shares
and the right to vote in respect of those shares

but modern American cases seem to now discredit that

old view.	We hasten to add though that the American
cases do not deal with articles of association.	They

tend to deal with voting trusts where shareholders
voluntarily, by contract or deed, give up their righc

to vot~ in [avuur of a tru~tee.

So, we submit that there is, so far as

at least this aspect of the case is concerned, a matter

of general importance so far as corporate law is

concerned. It is likely that people - corporations

have ordered their affairs on the basis that non-members

can vote. So far as examples of that are concerned,

the most likely example is when debenture holders are

given the right to vote. That is the example referred

to in Palmer's work and we do have examples in the to vote. In other words, creditors of a company or

secured creditors of a company have been given the

right to vote at general meeting in order, no doubt, to protect their financial interests or investment in the company. So that there is that matter of general

importance.

The applicant lost the case before the Full Court·

on other grounds as well as the impermissibility of

having non-members given a right to vote. It lost

the case on the ground that the resolution passed by

members was a fraud on a power. It also lost the

case on the basis of the applicability of section 320

of the COMPANIES CODE. In dealing with the fraud on

the power question, that is, that the members acted

otherwise than for the benefit of the Company as a

whole and in good faith, the court accepted, as did

the primary judge, that the members were actuated by

good faich.- there were not acting in bad faith at all -

but nevertheless put forward these propositions as

vitiating the vote of the members.	The court, in
•	effect, concluded that it was a fraud on a power - a power that the members of the Company have to alter

articles of association - to give wide discretionary

powers to directors of a company; in particular, wide

discretionary powers to determine who may or who may

not have the right to vote. The court said that that

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was a fraud on a power even though the discretionary
power given to directors may be exercised in good faith.

The court also held that it was a fraud on a power to

introduce articles of association which were not

self-contained. The article that was adopted picked

up, incorporated by reference, provisions in an Act of

Parliament. The court said - weli, at least, one

judge of the court said, Mr Justice Nathan, that that

was impermissible, that articles of association have to

be self-contained; that articles of association cannot

incorporate by reference provisions of an Act of

Parliament which itself might be changed by Parliament.

The court also found that it was a fraud on a

power to introduce articles of association which made the administration of the company difficult by reason

of the fact that the article was difficult to construe
or the article introduced caused difficulties in the

construction of other articles.

MASON CJ:  Now, you might explain to me, by reference to your

draft notice of appeal, which of your grounds of appeal

go to the validity of the article, as such, and which

go to what might be described as purposes that are not

bona fide in the passage of the relevant resolution

that introduced the article into the Company:s articles

of association. The draft notice of appeal is at page 12.

MR FINKELSTEIN:  Yes. The last ground of appeal raises the first

point that I have mentioned:

The Full Court erred in holding that there

was no room under the COMPANIES (Victorian)

CODE for the rights of members to be exercised

by persons who are not registered shareholders

or their duly appointed agents.

It may not be as happily expressed as it should be.

MASON CJ:  No, it certainly is not.

MR FINKELSTEIN:  No, I understand that, Your Honour, but the

point that was sought to be attacked by that ground

was the decision of two members of the court, because

the third, Mr Justice O'Bryan, the presiding judge,

did not deal with the point, making the finding that

it was improper under the Code to give non-members the

right to vote.

MASON CJ: Well now, (k) raises the same point, does it not?

MR FINKELSTEIN:  Yes, it does.

MASON CJ: Notices of appeal in Victoria seem to be almost a

competition in expressing the same point in different

ways.

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MR FINKELSTEIN:  We will concede that it is not a happily

expressed notice of appeal and we were minded to,

in fact, prepare - if we were given leave, the

Court might not be confronted with this particular

form of document.

MASON CJ: Yes, but the problem is, you see, from time to time

we grant special leave and confine the leave to certain points and we do so by reference to the draft notice of appeal and if we attempt to do it

by reference to this draft notice of appeal, I can

see us heading into stormy seas. But my impression

was that when one looks at other grounds of appeal

they were also directed to the question of invalidity.

MR r-INKELSTEIN: Well, in this sense, yes, Your Honour, because

the principal finding made by the court was that the

article was invalid because it gave non-members the

right to vote or invalid because it was a fraud on a

power which goes to invalidity and the section 320

argument which was dealt with by two members of the

court and accepted by two members of the court as a

good argument was really the third and probably least

important finding made by the court.

The point that we desire to make about the fraud

on a power finding of the court is that in each case

the grounds relied upon by the court were novel; in

each case the grounds accepted by the court as giving

rise to a fraud on a power were very far-reaching.

It is not a case where the finding of the court will

be limited to the particular article in question.-

it was no more chan a vehicle for raising these

Lssues - but questions of giving directors wide

discretionary powers has application in circumstances quite different from the one that was confronting the

court here. The question of introducing articles

which are not self-contained but pick up by reference

from elsewhere definitions or provisions is a far-reaching

finding, a novel finding, in our respectful submission.

Likewise, that an article should be a fraud on a

power because it is	difficult of construction -
creates difficulty in construction. It does not mean

that members of the Company have to be draftsmen -

parliamentary draftsmen or lawyers and adopt that

form of precission but the court seemed to accept

the proposition that it was an invalid exercise of

power if what the members do is to create difficulty

in construction, difficulty in administration. And our

point is that each of those propositions is novel,

far-reaching and prima facie wrong.

The section 320 point probably adopted the same

grounds for giving relief under the section as were

applied by the court in corning to the decision on the

fraud on the power. It is probably true to say though

that only two of the members of the court directed

themselves expressly to the section 320 argument.

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Mr Justice O'Bryan had dealt with it specifically.
Mr Justice Nathan, who agreed with the learned

presiding judge, and Mr Justice King rested his

decision on other grounds, the fraud on the power,

and the - - -

MASON CJ:	And which ground of appeal is directed to section 320?
MR FINKELSTEIN:	The first ground, 2(a):

prejudicially and discriminately against

a particular shareholder -

picks up the language of section 320 which is:

unfair discrimination, unfair prejudice or

oppression.

and, in fact, adopts the language of the court in

deciding the point rather than the language of the
section. Well, for those reasons we say that the

case is special and important, if the Court please.

MASON CJ: Thank you, Mr Finkelstein. Yes, Mr Merralls?

MR MERRALLS:  If it please the Court, we submit that special

leave ought not to be granted in this case, however
important from a theoretical point of view some of

the matters raised by my learned friend may appear

to be. I say "appear to be" because, in our

submission, all that this Court would be able to

do, if it were to hear an appeal from a decision of

the Full Court in respect of those matters, is

to produce a series of interesting obiter dicta because, in our submission, the appeal would be

bound to fail because of the text of the added article.

My learned friend addressed the Court as though

the added article merely affected voting power.	In
fact, it does not.	We invite Your Honours to inspect
it and to note the -

MASON CJ: What page is it set out in the - - -?
MR. MERRALLS:	It is all over the place. It is on page 14 of the

articles of association. It is printed on the side.

I am sorry, does Your Honour have the appeal book?

MASON CJ: Yes, I have.

MR. MERRALLS:  Does Your Honour not have a copy of the articles of

' association?

MASON CJ:	No.
MR. HERR.ALLS:	I thought they had been handed up to the Court.
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MASON CJ:	But on page 19 SA is set out.
MR MERRALLS:	Page 19, yes.
MASON CJ:	The foot of page 19.
MR MERRALLS:	"For the purposes of these Articles" -

not 11 for the purposes of voting":

For the purposes of these Articles a

per:son :shall be deemed to hold a share

if he has a relevant interest in the share

for the purposes of s. 9 of the COMPANIES

(ACQUISITION OF SHARES) (Victoria) CODE.

That is the takeover. That is the first part of

the article. The second part is that:

The Directors may at any time and from

time to time require a shareholder to

furnish to the Company satisfactory

evidence that no other person has a

relevant interest in the shares held by

him and in the absence of such evidence the

shareholder shall not be entitled to vote

in respect of the shares held by him.

Now, there is a problem with construction in the last
sentence because it is not clear whether that is
intended to relate only to the actual shareholder,
the person who is on the register or whether
it includes a deemed shareholder in the.first line,
but it could lead to all sorts of complications

if it included a deemed shareholder because you

would be going round and round in circles and, in

our respectful submission, special leave ought not

to be granted merely to resolve that question.

But concentrating upon the first sentence,

we draw Your Honours' attention to the width of its

expression, that it is:

For the purposes of these Articles a

person shall be deemed to hold a share

if he has a relevant interest -

within the meaning of the takeovers Code. Now,

that can lead to the position where, first of all,

a person who is not a member of the Company is

deemed to be a member and we say that that infringes

or contravenes section 35 and section 256 of the

COMPANIES CODE,. and that appears to be accepted by

this Court in MADDOCKS v D.J.E. CONSTRUCTIONS,

148 CLR 104 at 117 to 120. But the second point is

that it deems or may deem, in certain circumstances,

more than one person to be the holder of the same

share because the takeovers Code is not concerned

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with simply deeming one person to stand in the shoes

of another. The object of the relevant provision of

the takeovers Code, section 9 and those sections which

elaborate it, is to aggregate shares held

and interests in shares through a number of provisions
which deem interests to be held in certain circumstances

very remote from the actual holding of shares through trusts, through other companies, through partnerships, through the holding of options, through holding options

end-to-end or back-to-back so that you have got

an option in-respect-of-an-option, in-respect-of-an-

option on the same share. Each person is deemed to

hold a relevant interest. Not with the object ot

having 100 per cent relevant interests, persons holding

interests - that is, persons holding interests

including relevant interest to equal 100 per cent of
the company, but which provide for or allow for

hundreds of per cent of the issued shares of the

company to be deemed to be relevant interests.

So that in our submission the Company in this

case, whether or not it has acted bona fide in the

interests of the Company in the sense that it perceived

a problem or, rather, perceived a weakness of the

status of the Company that might be affected by the

activities of outsiders who wish to acquire shares,

it has adopted an article which fails on a number of

grounds: because it is contrary to law inasmuch as

if it is possible to deem a person other than - or to
give to a person other than a member a right in respect

of a share, it is certainly not possible and,_in our

respectful submission, not even arguable that it is

possible to give such a right simultaneously to more

than one person, so that it is contrary to law,

unreasonable, on the same basis and uncertain because
of the extent of the deeming, tracing and other

provisions of the takeovers Code labyrinthing in

their extent and operation that·would necessarily

be brought into the article by the first sentence.

We have copies of the relevant provisions of

the takeovers Code for the Court.

MASON CJ:	Thank you.
MR MERRALLS:	I apologize for not having handed them up before.

I thought they had been handed in. We also have

MADDOCKS' case which Your Honours may also wish to see.

McHUGH J:  Mr Merralls, could you just explain this to me: why

or how was it that the chairman was able to disallow the proxies by reason of this article? That is what

happened, was it not?

MR MER.RALLS:  I do not know. I did not appear in the case below.

I have not investigated that aspect of the evidence.

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McHUGH J:  I just have not got it clear in my mind how article SA

operates in this setting. Is its effect to increase the shareholding in respect of certain people but to

reduce the voting power in respect of Cityfarm?

MR MERRALLS:  I think that is what was hoped. The effective

voting power in respect of - yes, of someone who

was not registered as a member but who had some sort

of contractual right.	I think that is what was hoped
to achieve.	So that it would be deemed to be the

holder of shares over which it had a contractual right

and therefore would be affected by the ceiling on

voting power which otherwise would apply to an

individual shareholder.

McHUGH J:  It just seemed to me that it might actually increase

the voting power of some members?

MR MERRALLS: It would in some cases, yes. Of course, this does

operate only in respect of Cityfarm. It is here and

it is part of the charter of the Company until it is

removed. It certainly would. If you had people who

did not have other interests in the Company but who acquired options, it certainly would. In fact, you

could do it with the same shares.

So, in our submission, this case, whatever tse

interesting theoretical points that my learned friend raises through his textbook references, is hopeless -

simply hopeless, and should not be taken to the Court

for that reason.

My learned friend also made a point that the

terms of the article did not matter because it was

merely a vehicle for doing something. In our submission,

that is a most extraordinary submission because it is

the terms of the particular article upon which the case

depends. All he is saying is that - give the Court
an opportunity to expatiate upon the interesting

questions that he first raised if one could disregard

the rather inconvenient terms of this article.

It is true that in the Full Cotirt the reasons

for judgment of two of the judges were different or, rather, they proceeded along different paths but, in

our submission, that, in these circumstances, is no

ground for granting special leave. They do not override

the other considerations that we have mentioned. It is

perhaps not insignificant that the third judge,

Mr Justice Nathan, although he spent a considerable time

, examining the nature of co-operative companies which,

in our submissions, is not a necessary element of

the case, did agree with the reasons for judgment
of both the other members of the court.
For those reasons, if Your Honours please, we would

submit that it is not an appropriate case for special leave.

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MASON CJ: Thank you, ~r Merralls. Yes, Mr Finkelstein?

MR FINKELSTEIN:  May it please the Court. I was wondering whether

I would take the opportunity to answer some of the

questions that Your Honour Mr Justice McHugh raised.

The effect of the article, by picking up the definition

of "relevant interests" in section 9,which is basically

to identify who has the power to vote a share or who

has the power to dispose of a share, has the

effect of - if one can identify a person who has

that power to vote or disclose, deeming him co be

a shareholder - member - it will not have the effect

of increasing the vote because the last sentence of

the article takes away the right to vote from -

it uses the word "the shareholder" but Mr Justice King,

when he considered the meaning of the article, in our

respectful submission, correctly construed it as

meaning "the shareholder (on the register of members)".

So that what it is effectively designed to do is

take away from one and give to the other and then

the aggregation provisions in article 52 say that

one person can only exercise up to five votes.	And
the chairman, according to the evidence - the reason why the chairman was able to disallow the

votes of Cityfarm was because he had available to him

evidence that Cityfarm had acquired the beneficial title

and the right to vote the 20,000-odd shares

and therefore by application of the article the

registered members were deprived of the vote and

Cityfarm had a maximum of five votes. Probably the

chairman was in error by giving Cityfarm no votes

but I think that the learned trial judge, Mr Justice Beach,

said "five votes" and that is, by operation of the article,

we would say, a correct construction.

McHUGH J:  It may be not what was intended by the article but

supposing the shareholder does provide evidence that

other persons do have a relevant interest, then the

last limb of SA does not say anything, does it?

MR FINKELSTEIN: Yes, it does. If the evidence is provided

that somebody else has a relevant interest, then

the member, the person on the register book, is not

permitted to vote his shares.

McHUGH J:  The first paragraph says you:

shall be deemed co hold a share.

MR FINKELSTEIN:	Yes.
McHUGH Y:	Then the first limb of the second paragraph says - - -

MR FINKELSTEIN: That is the evidentiary limb.

McHUGH J: Yes. Unless you produce:

satisfactory evidence that no other person has a

relevant - - -

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MR FINKELSTEIN:

interest in the shares.

McHUGH J:

-in the shares.

Then:

in the absence of such evidence -

you -

shall not be entitled to vote.

But supposing you produce the evidence, then the last

part does not operate at all, does it?

MR FINKELSTEIN:  I suppose by express language, no, but by

clear implication, still the right to vote is lost.

I suppose that raises the question again: if it is an article which could have been drafted more

carefully it might produce difficulties in construction

but does the quescion of creating difficulties of

constructiong produce the result that if it is a fraud

on a power to pass the article.

The only other point that we would desire to

make in reply is that there is nothing in MADDOCKS'

case which makes this article illegal in the sense

that it contravenes the law or contravenes the Code.

It is clear that a member, which is a person who the

COMPANIES CODE itself would regard as a member, is a person who must be on the register book - on the

register of members. But this article does not

make outsiders members, it deems them to be members

for the purposes of the articles.	So that the articles
confer certain rights.	They might be exerciseable.

It might be difficulty at whose suit. Maybe not at

the suit of the person who is given the power but

at the suit of an actual member who can enforce the

contract created by the articles of association. But

there is nothing illegal about deeming a person to be

a member and conferring rights, even though they may

not be enforceable directly at his suit. So that

this is not a case where the applicant must fail

because the article is illegal, in that sense.	May it
please the Court.

MASON CJ:  Mr Finkelstein, the Court will consider submissions

, that have been made in this case and announce its

decision after the adjournment.

MR FINKELSTEIN:  May it please the Court.

AT 12.40 PM THE MATTER WAS ADJOURNED
UNTIL LATER THE SAME DAY

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UPON RESUMING AT 2.18 PM:

MASON CJ: The Court will grant special leave to appeal in this

case.

AT 2.18 PM THE MATTER WAS ADJOURNED SINE DIE

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