Minter Ellison Alert | Quorum - Busting: Busted

10 July 2012

Quorum - busting is the tactic of minority interests preventing a quorum being satisfied, thereby preventing the adoption of a proposed resolution they oppose.

In the corporate context it may involve a minority member of a company deliberately not attending a duly convened members meeting, with the hope that the quorum requirement will not be satisfied, thereby preventing other members passing some resolution, the minority member opposes.

However as demonstrated by a recent Western Australian Supreme Court case, there are limits on the effectiveness of a quorum - busting strategy. In Chalet Nominees (1999) Pty Ltd v Murray [2012] WASC 147 it was held that following the use of what looked like a quorum busting strategy by a minority shareholder, a meeting attended by a single majority shareholder was valid, even though the requirement of a quorum of two members entitled to vote was not present.

Facts

The Convening of the members meeting

Port 1 Pty Ltd (Port) held 53% of the issued share capital in James Point Pty Ltd (the Company). Chalet Nominees (1999) Pty Ltd (Chalet) held 23% of the issued share capital. On 1 December 2011 a director of the Company issued a notice convening a meeting of members to be held on 23 December 2011 which proposed resolutions for the removal of directors and the appointment of replacement directors.

The quorum requirement of 2 members being present

The Constitution of the Company stated that a quorum for a general meeting of members was "two members entitled to vote".

The Inquorate 23 December 2011 meeting

The 23 December 2011 meeting was attended by two proxy holders of the single majority shareholder, Port 1. Port had split its shares between its two appointed proxies. Representatives of no other shareholder attended.

It was declared at the meeting by the Chair that the quorum requirements were satisfied in his view because two proxies present constituted two members entitled to vote (even though they were proxies of the same member, being Port 1). In forming this view, the Chair relied on a deeming provision in the Constitution in relation to proxies which provided:

"For the purpose of determining whether a quorum is present the person attending as a proxy, or as representing a corporation that is a member, shall be deemed to be a member".

The Chair considered the effect of this provision at the meeting to be that two proxies appointed by a single member were deemed to be two members present for the purposes of satisfying the quorum requirement.

The two proxies of Port 1 then proceeded at the meeting to pass resolutions removing directors of the Company and appointing replacement directors.

The minority shareholder, Chalet, subsequently asserted that a valid meeting of members had not occurred on 23 December 2011 because no quorum was present.

What happened next

On 27 January 2012 Port 1 sought consent of Chalet to a short notice of a meeting of members of the Company to put the resolutions which were put to the 23 December 2011 meeting again. Chalet did not consent to the short notice.

Another notice of meeting to the Company's shareholders was then issued on 31 January 2012 to be held on 23 February 2012 to again put the resolution to remove and replace directors but this time, was only attended by one proxy holder appointed by Port 1 (and other persons who were not members of the Company).

The Chairman of that meeting declared that as only Port 1 had tendered a proxy and no other member was present there was no quorum and the meeting was adjourned. At the adjourned meeting held on 1 March 2012, Port 1 was again the only member present by proxy and the meeting was dissolved.

The court proceedings

Chalet sought declarations from the court that no valid meeting of the Company occurred on 23 December 2011 on the basis that a quorum of two members entitled to vote was not present.

Port 1 initially sought to contend that the two persons attending as its proxies at the 23 December 2011 meeting constituted a quorum of two members (under the proxy deeming provision outlined above), but conceded the point and did not continue to argue that in the proceedings.

Instead Port 1 argued that the absence of a quorum at the meeting was a procedural irregularity and that pursuant to section 1322(2) of the Corporations Act 2001 such procedural irregularity did not invalidate the meeting.

Chalet argued that section 1322(2) did not have the effect of making the 23 December 2011 meeting valid because the conduct of Port at the meeting to proceed without a quorum was deliberate (which it submitted was not a procedural irregularity) and that the absence of a quorum caused or may cause a substantial injustice that cannot be remedied by an order of the court.

The WA Supreme Court decision

 

The Court made an order that the meeting was not invalid by reason of contravention of the quorum requirements of its Constitution and that the resolutions passed were valid.

The court reviewed the case law and found that it did not need to decide whether or not a procedural irregularity deliberately achieved could be validated pursuant to section 1322 as the meeting had not been convened knowing it would be inquorate or held knowing it was inquorate. This was because the Chair of the meeting believed the meeting was quorate (because he concluded that one member who had appointed two persons with proxies satisfied the quorum requirements under the proxy deeming provision outlined above). That the Chair thought this was a legitimate position to take was held to mean that the actual lack of quorum was a procedural irregularity capable of validation under section 1322(2).

Chalet had argued that substantial injustice did arise because it was denied the opportunity to speak against the resolutions. However the Court held that a substantial injustice did not flow from the meeting having proceeded in the absence of a quorum.

The Court noted that the major rationale of having a quorum requirement was to avoid decisions being taken at a meeting by a small minority which may emerge to be objectionable to the vast majority. It referred to the tactic of 'quorum busting'. Quorum busting is causing a quorum to be prevented from meeting by minorities seeking to block the adoption of measures they oppose.

The court held that no substantial injustice had been or was likely to be caused by the procedural irregularity of there not being a quorum at the 23 December 2011 meeting.

Chalet and other members other than Port 1 had had the opportunity to attend the meeting but had chosen not to do so. Therefore no injustice would be caused by committing the meeting to proceed on 23 December 2011 in the absence of the quorum.

Some practical take-aways from the case

 

Some practical take-aways from the case are:

  • although not part of the decision, it seems accepted in the proceedings that a shareholder appointing two proxies and allocating their shares and corresponding votes to each of them does not constitute more than one single member being present at the meeting under proxy deeming provisions like that set out above,

  • do not assume that a minority shareholder can stymie a resolution it opposes by simply deliberately not attending a duly convened members meeting (if that minority shareholder's presence is needed to constitute a quorum). As occurred in the case, a resolution passed at that meeting, deliberately unattended by the minority shareholder at which a quorum is not satisfied, may still be valid under section 1322 of the Corporations Act 2001, and

  • to give adequate protection to minority shareholders, in joint venture structures, give careful consideration to and document in the shareholders agreement and constitution, any minority shareholder rights, particularly the matters for which, the approval of a super majority or a minority shareholder interest is required.

Author(s) Michael Brennan