Over the last 15 years the Corporations Act 2001 (Cth) (the Act) has been amended to provide an increasing range of remedies to shareholders who wish to challenge alleged breaches of law committed by company directors. Apart from simplifying the rules relating to when shareholders can bring representative actions (also known as derivative actions) against directors, in effect sidelining the decision in Foss v Harbottle (1843) 67 ER 189 by introducing the statutory derivative active provisions of the legislation (see Part 2F.1A of the Act).

The courts have also interpreted section 247A of the Act more liberally. This section enables shareholders to seek access to company (board) records where they believe that breaches of law may have occurred. The common law right, as evidenced by cases such as Edman v Ross (1922) 22 SR (NSW) 351, which had been given a narrow interpretation by the courts, has now been made relatively irrelevant as a result of a number of cases on section 247A, culminating in the most recent decision in the Full Federal Court in Mesa Minerals Limited v Mighty River International Limited [2016] FCAFC 16.

In this case, the Full Federal Court (comprising Justices Siopis, Gilmour and Katzmann) upheld the decision of Justice Barker in allowing the applicant company Mighty River International Limited (Mighty River), and its principal shareholder, access to the books of Mesa Minerals Limited (Mesa). Justice Katzmann in delivering the judgment provided a clear set of guidelines in interpreting the reach of section 247A.

While some decisions of the courts on this section have restricted shareholders’ access to confidential documents (or to providing them in limited circumstances), the general principles of access, which were interpreted narrowly by the courts at common law, are now more generously assessed.

They provide an important launching pad for shareholders who wish to challenge decisions of directors they believe are not in the best interests of the company, or which may provide evidence of alleged breaches of duties by directors.

The dispute

The basic facts arising in this case revolved around familiar disputes in companies. Mighty River and its sole director argued that the directors of Mesa had been acting inappropriately in relation to certain mining developments in Western Australia. They also alleged that the company was not being managed appropriately, and that the directors were pursuing policies and decisions for their own benefit, rather than for the benefit of the company. They further alleged that the interests of minority shareholders had not been taken into account sufficiently by the company. Takeover action had initially been taken by Mighty River but that had been discontinued. Alleged breaches of the takeover code in this earlier litigation were regarded as of no significance in the context of the matter.

Justice Katzmann indicated that it was the court’s view that the decision of Justice Barker should not be overturned. In reviewing the principles that a court should follow in evaluating how section 247A should be interpreted, he referred to a number of cases, the most important of which is Acehill Investments Pty Limited v Incitec Limited [2002] SASC 344 (a decision of the South Australian Supreme Court). In this article I will set out only in summary form the relevant principles, which were discussed by Justice Katzmann in interpreting section 247A .

  • The major principle that had to be established in cases of this kind was that the application is made in good faith and for a proper purpose. This did not represent two rules – this was a composite rule.
  • Secondly, in determining whether the application is being made in good faith and for a proper purpose, the court should adopt an objective evaluation of the relevant facts; the evidence that is to be presented to the court will be evaluated in that context.
  • “Proper purpose” would be interpreted by the courts to mean a purpose connected with the proper exercise of the rights of a shareholder, in the shareholder’s position as a shareholder, and not as a litigant in proceedings against the company in say, takeover proceedings or similar situations.
  • The applicant shareholder would always bear the onus of proof in establishing the right to obtain access. A shareholder who holds a significant number of shares in the relevant company will normally be able to establish the onus of proof, but this would depend on the facts in each case.
  • It is unnecessary for the shareholder to establish that his, her or its interests are different to those of other shareholders in bringing in this particular application.
  • It is also not necessary for the applicant shareholder to establish sufficient evidence to bring a separate legal action independent of the reliance on section 247A. It is sufficient, for the purpose of an application under section 247A, for the shareholder to be raising a question that is “substantive and not factual”. It is not expected that the allegations to be brought will be “artificial, specious or contrived”.
  • It is appropriate for an allegation that the directors have breached relevant duties owed to the company to be the basis for pursuing a claim to have access to the papers of the company’s board of directors.
  • If the primary or dominant purpose of the particular applicant is to seek access, and this is regarded as a proper one, the fact that the applicant may also gain in his, hers, or its capacity as a shareholder, is irrelevant in determining whether access to the documents should be granted.
  • It is irrelevant that the applicant shareholder is seeking access and may have had other information at an earlier time, or could have obtained the important information needed in this case by other means, in assessing the proprietary of the current application.

Book inspection

For a proceeding under section 247A of the Act to be allowed to continue, it does not mean that there will be a wide range of discovery. The inspection of relevant books should be limited to those which relate to the appropriate decisions of the board of directors relating to the particular claims, rather than a broad inspection of all board papers.

As I have indicated earlier, these are questions that may be tackled in greater detail in other cases. At the end of the exercise the court enjoys an important discretion – it can decide whether it will or will not allow inspection to take place. The courts are very reluctant to refuse inspection if the principles which I have discussed above, are established.

There have been a number of cases over the years in which claims for access have been the centre of attention. The fact that we have not seen a recent High Court decision dealing with these issues may be influential in any application to seek special leave to have the High Court hear an appeal in this case. While it would be fascinating to see how the High Court deals with these questions of access, we may have to wait a while for that to occur.

As indicated earlier, the trend has been to provide a wider range of rights for shareholders and the courts have been generous in evaluating those rights. However, there is one area in which the courts have so far refused to provide more options for shareholders – the management of companies will usually be left to the board of directors and we will await with interest the decision of the Full Federal Court in the Commonwealth Bank case (Australian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2015) 107 ACSR 489). In this case, Justice Davies in the Federal Court refused an application of the complainants that they should be able to direct discussion of various matters at the annual general meeting of the company.

Professor Bob Baxt AO FAICD
Life Emeritus Partner, Herbert Smith Freehills and author of Duties and Responsibilities of Directors and Officers