Sugar Mills Pty Case: Shareholder Rights and Director Responsibilities

This case study provides legal advice to Bridget regarding the actions of Francis at Sugar Mills Pty. The analysis examines whether Francis was justified in removing Bridget from the board, entering a profitable agreement to sell company waste, and excluding the company from partnership profits. It explores shareholder rights, particularly those of minority shareholders, and the responsibilities of directors. The assessment references legal principles like Foss v Harbottle and relevant case law. The analysis concludes that Francis's actions regarding the board removal, solo agreement, and profit exclusion were not justified, potentially constituting minority shareholder oppression. The document suggests remedies Bridget can pursue, including reinstatement to the board, a declaration of her rights, and restitution of profits, offering a comprehensive understanding of company law principles in a shareholder dispute context.

ADVISE TO BRIDGET

Advise to Bridget on whether Francis actions were justified in
relation to:
i). Voting her out of the board and replacing her with the
company solicitor.
ii). Entering a very profitable agreement with an associate to
sell the company’s waste as garden post all alone.
iii). Excluding the company from resulting profits with the
business in the partnership.

Question 1
Was the voting out from the board a justified move?
Majority shareholders have a dominant position with respect
to making decisions on who seat in a company board
(Jackson, 2017).
Minority shareholders are also protected from any act of
prejudice or oppression from the majority shareholders.
The question here is whether Francis acted within his rights
or Bridget was oppressed by his actions.

Majority shareholders
Who are they?
A person in the company who owns and controls more than
50% of the company’s outstanding shares.
In the foregoing, Francis qualifies as a majority shareholder.
He owns 10,000 shares of the possible 13,000 (which is
10,000+Bridget’s 2,500+ Mary’s 500). This is almost 77% of
the outstanding shares in Sugar Mills Pty.

Majority shareholders powers
What can they do?
They can control most aspects of the business operations.
In essence, a majority shareholder has greater say on almost
ebvery aspect of the business: the election of managers,
sharing of profits and dividends, company investment.
However, they cannot make decisions with complete
disregard of minority shareholders. They have a
responsibility of not engaging in minority shareholder
oppression.

What actions qualify as minority
shareholder oppression?
The following actions qualify as minority shareholder
oppression:
• Withholding information shareholders would ordinarily
receive.
• Withholding profits. for instance, by refusing to issue
dividends.
• Violating the rights of the minority shareholder as a
partial owner to the company.
• Acting to the contrary of the shareholder agreement.

In relation to the case at hand…
Bridget (as a minority shareholder) has the right to claim
ownership of the company and also be part of the board as
agreed by the three.
While Francis had a greater say on who formed part of the
board, the only action he had in relation to this right was to
solicit Bridget into selling her shares either to him or the
legal consultant since she had equal rights to be part of the
board as long as she was a shareholder in the firm.
Removing her from the board would result to oppression.

Protection of Minority Shareholders
Under common law
The principle in Foss v Harbottle where it was held that any act
i. which is ultra vires the company or illegal,
ii. which is fraud on the minority
iii. passed with simple majority which requires special majority,
iv. any wrong act done by those who are in control,
v. any act infringes the personal membership rights
vi. any act which amounts to breach of duty by directors,
vii. any act which amounts to oppression of minority or mismanagement of the
company…
Cannot be confirmed by the company.

Question 2
Whether it was appropriate for Francis to enter a very profitable
agreement with an associate to sell the company’s waste as garden
post all alone.
Ability to Own Property
The company also had the capacity to own property.
Company property was anything owned by the company including waste
that came from the sugar mills.
The doctrine of Separate Legal Entities
Companies are legal entities separate from the shareholders, directors,
managers and its agents.
Sugar Mills Pty Ltd was a separate entity with rights just like a person.

Position of the company as a separate
entity
As a separate legal entity, the company had –among other
rights- the right to own assets of the company (Davies &
Prentice, 2003).
Being a separate entity, the company owns assets on its
name and NOT even the shareholder can claim ownership.
Shareholders’ utilization of company assets can only be in a
contractual relationship with the company.
Therefore, shareholders have to enter a deal with the
company before using company assets.,

Right to own property and make
decisions
Being a separate entity and having the ability to own
property, decisions made by the company were to be made
by all directors and not just one of them.
Directors make decisions on behalf of the company.
Thus, Francis acted ultra vires by making a solo agreement
on behalf of the company.

Question 3
Was the exclusion of the company from resulting
profits with the business in the partnership justified?
Any profits gained by a company are shared by the
shareholders with respect to the contribution they have
made to the company.
Since the partnership was made on company assets, the
company and not Francis was the beneficiary.
Thus the exclusion of other shareholders (Bridget and Mary)
from the resulting profits was not justified.

Possible remedies
Bridget can take the matter before a national company law
tribunal and seek the following remedies:
• An order reinstating her to the company board.
• A declaration of her rights as a minority shareholder in
the company.
• Restitution for profits emanating from the partnership and
not given.

References
Davies, P. L., & Prentice, D. D. (2003). Gower's Principles of Modern
Company Law. (7th edn), London: Sweet & Maxwell.
Foss v Harbottle (1843) 67 ER 189
Jackson, D. (2017). Does a corporation owe fiduciary duty to
shareholders? (Online). Available from
https://smallbusiness.chron.com/corporation-owe-fiduciary-duty-
shareholders-70243.html
Practical Law Australia Team (2016). Practical Law Australia Company
Law Transfer of Shares Practice Note (Online). Available from
http://insight.thomsonreuters.com.au/resources/resource/transfer-of-
shares