Proposing and voting upon resolutions (and therefore making decisions) is an essential responsibility of any board of directors. Company boards must be able to definitively and efficiently make decisions regarding the affairs of a company. However, the procedure for passing resolutions is subject to strict legal requirements aimed at the maintenance of good corporate governance. Last month, the Supreme Court of Queensland was asked to consider the validity of resolutions passed at a last-minute meeting of directors.
Career Employment Australia Ltd -v- Shepley & Ors [2021] QSC 235
At 3.39pm on 3 February 2021, the directors of Career Employment Australia Ltd (the Company) were each emailed a notice informing them that a directors meeting was to occur at 5.00pm the following day, on 4 February 2021.
The board meeting on 4 February 2021 was attended by five out of the eight directors of the Company. The remaining three directors all sent apology emails in advance of the meeting. All stated that they could not attend the board meeting on such short notice.
At the 4 February 2021 board meeting, the five directors who attended passed a resolution purporting to adjourn the annual general meeting (AGM) of the Company that was scheduled to be held six days later, on 10 February 2021.
The validity of the 4 February 2021 meeting was disputed by the three directors who did not attend, who also maintained that the AGM was to proceed as planned.
Despite attempts by the five incumbent directors to prevent the AGM from occurring (including changing the locks at the Company’s premises), the AGM was convened outside the premises by the other three directors on 10 February 2021 and a number of new directors were elected to the board by the members of the Company. None of the five directors who had convened the 4 February 2021 board meeting were re-elected.
The Company applied to the Court for a declaration that the 10 February AGM was valid and that the directors elected at this meeting were duly appointed board members of the Company.
The five ousted directors also applied to the Court for a declaration that the directors’ resolution passed at the board meeting on 4 February 2021 (adjourning the AGM) was valid.
‘Reasonable notice’
The central question before Justice Flanagan was whether ‘reasonable notice’ of the board meeting on 4 February 2021 had been given to directors, as required by the Company’s own constitution. His Honour determined that this question was to be ‘determined by reference to notions of fairness to all parties’ and was a ‘context-specific inquiry that accounts for the nature and urgency of the business to be done and the practicability of providing longer notice.’[1] His Honour considered a number of principles, derived from previous case law authorities on the question of what constituted ‘reasonable notice’, including:
- The fact that the non-attending directors could, practically speaking, have attended the meeting did not mean the notice period was reasonable;
- a failure to make a request to adjourn the meeting did not impact the question of reasonableness;
- the amount of notice which is typically given for similar meetings of the company is relevant to an assessment of reasonableness; and
- the amount of notice required may be informed by the nature of the business to be done at the meeting, with more serious matters typically requiring a longer period of notice.
Justice Flanagan ultimately found that the notice of the board meeting on 4 February 2021 was insufficient to allow certain directors to properly consider or take legal advice on the resolutions. Relevantly, His Honour found that the resolutions passed at the board meeting had an unprecedented and ‘profound impact’ on the management, operations and personnel of the Company. In the circumstances, the directors were not afforded the opportunity to position themselves so as to make informed decisions on the subject matter of the board meeting (including the resolutions to be voted upon). His Honour further found, perhaps unsurprisingly, that it would have been reasonably practicable to have given longer notice of the meeting.
‘Substantial injustice’
Upon a finding that ‘reasonable notice’ of the board meeting on 4 February 2021 had not been given, the Court was then required to determine whether the lack of reasonable notice in fact invalidated the resolutions passed at the meeting. Notably, section 1322 of the Corporations Act 2001 (Cth) (Corporations Act) provides that such an irregularity (i.e the failure to give reasonable notice) would only invalidate the resolutions passed at the meeting if ‘substantial injustice’ had or would occur.
Justice Flanagan determined that had reasonable notice of the 4 February 2021 meeting been given, the resolutions may not have been passed, and to deny directors an opportunity to speak to resolutions and address any risks associated with passing the resolutions caused a substantial injustice. Accordingly, section 1322 of the Corporations Act could not be used to cure the irregularity.
Concluding thoughts
In the present situation, it might be said that the Company’s constitution should have reflected a more unambiguous requirement for the minimum amount of notice to call a board meeting. For example, ‘at least three business days’ could have been used rather than simply ‘reasonable notice’. Whilst there is some logic in such a suggestion, procedural requirements such as notice periods (or methods of giving notice) will always be a matter for the particular company in question to adopt and revise to best fit its own particular requirements.
Ultimately, the decision of Justice Flanagan serves as a timely reminder of the importance of adhering to good corporate governance principles in all dealings of a company’s board. With respect to board meetings, a company (and by extension, its shareholders) is entitled to receive the collective wisdom and contribution of all directors. There is, therefore, a strong public interest in prohibiting majority directors simply calling meetings at short notice with the intention of pushing through resolutions, the effect being that some directors may be excluded from the decision-making functions of the board, such that they are unable to ‘make the necessary representation of the interests he or she has in his or her hands’.[2]
[1] Career Employment Australia Ltd v Shepley & Ors [2021] [79].
[2] Bell v Burton (1993) 12 ACSR 325.