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Brickworks decision appears to blunt one weapon in the armoury of shareholder activists
There was an apparent victory for board autonomy in the recent Federal Court decision in RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited  FCA 756. The Court rejected a claim by institutional investor Perpetual Investment Management Limited (Perpetual) that a long-standing cross shareholding between Brickworks Ltd (Brickworks) and Washington H. Soul Pattison & Company Ltd (WHSP) is “oppressive” to minority shareholders within the meaning of s 232 of the Corporations Act.
In 1969, Brickworks and WHSP acquired shares in each other under an arrangement known as a “cross shareholding”. Under this long-standing arrangement, Brickworks owns approximately 42.8% of the shares in WHSP and WHSP owns approximately 44.25% of the shares in Brickworks. Robert Millner is the chairman of both companies. The current directors of Brickworks include Mr Millner’s cousin, and the current directors of WHSP include Mr Millner’s son and brother-in-law. Mr Millner, members of Mr Millner’s family, and its associates (together, the Millner Family) hold approximately 3.83% of the shares in Brickworks and 8.55% of the shares in WHSP.
At the time of filing its cross claim in the proceedings, Perpetual held approximately 8.95% of the shares in Brickworks and 6.49% of the shares in WHSP. Since 2011, Perpetual has put forward a number of proposals to the boards of each company to undo the cross shareholding and (in its view) unlock the “true value” of each company, including:
- First proposal: the appointment of a ‘truly’ independent director to the board of WHSP;
- Second proposal: an in specie distribution of all shares held by Brickworks in WHSP to shareholders of Brickworks;
- Third proposal: a nil premium merger under which shareholders of WHSP would be issued shares in Brickworks in exchange for their shares in WHSP, and Brickworks would cancel the shares in it held by WHSP;
- Fourth proposal: a scheme for the unwinding of the cross shareholding, which included the cancellation of all shares held by Brickworks in WHSP in exchange for consideration paid by WHSP, and the appointment of a director to the board of Brickworks; and
- Fifth proposal: variants of the third proposal.
None of the proposals came to fruition, which Perpetual claimed was due to the existence of an agreement, understanding or arrangement between the directors of each company and members of the Millner Family to maintain the cross shareholding in order to preserve the incumbent boards and, thus, the control of the Millner Family over both companies.
In her 126-page judgment, Justice Jagot endorsed the established principle that it is the responsibility of directors, not the court, to weigh up competing considerations and determine what is in the best interests of the company as a whole. On the evidence presented in the proceedings, Justice Jagot considered that the directors of Brickworks and WHSP had diligently considered the range of potential effects of the cross shareholding — both positive (including earnings stability as a result of diversification, takeover defence, board stability and consequential capacity for long term decision making) and negative (including lack of liquidity, entrenchment of the boards, conflicts of interest, complexity and possible depression of share prices) — and had reached consensus that it was in the best interests to preserve the structure.
In considering the oppression claim under s 232 of the Corporations Act, Justice Jagot held the Court would not “lightly” draw an inference of serious dereliction of a director’s duties. As such, the Court was not willing to infer that the board of each company and members of the Millner Family had an agreement, arrangement or understanding to maintain the cross shareholding (and, consequently, the control of the Millner Family) from the mere fact that each board and member of the Millner Family had voted in the same way, or from majority shareholders exercising their majority voting power to defeat the wishes of minority shareholders.
Implications for shareholder activists
As we have noted before, activist shareholders have three main weapons in their armoury to influence the strategy, governance or performance of the targeted company: they can vote, sell or sue.
The Federal Court’s decision in the Brickworks case appears to blunt the last of these weapons, based on the principle that the Court will not intervene in commercial decisions by putting itself in the shoes of directors acting with the best interests of the company in mind.
Accordingly, shareholder activists seeking to bring an action for oppression under the Corporations Act (at least before the Federal Court) will need to adduce quite strong evidence of an unfair decision or conduct by a director or the board — raising what Justice Jagot referred to as “mere suspicion, speculation and innuendo”, it seems, will simply not do.
Are there other legal avenues that activists could take, to place a company under pressure? Oppression is only one remedy provided by the Corporations Act and arguably, one with a relatively high burden of proof. Other avenues could include:
- making an application to the Takeovers Panel for remedial orders – this requires a demonstration of “unacceptable circumstances” in relation to the control of the relevant company;
- with the leave of the Court, undertaking a statutory derivative action under s 236 of the Corporations Act on behalf of the company, claiming breach of directors’ duties or other relevant statutory or tortious duties (or perhaps even breach of an executive service contract in the case of an executive director); or
- applying to the Court for an order for inspection of books under s 247A of the Corporations Act – which although not providing a remedy in itself, might be sufficient to reveal a “smoking gun” in support of a substantive claim.
When it comes to deliberations in the boardroom, Australia has long been considered to have a “pro-director” legal regime. Some commentators see the Brickworks decision as a continuation of this trend. However, we do not believe directors can now relax. As activists become bolder, and increasingly well supported by other investors, we can expect to see the boundary of shareholders rights to sue (as well as vote or sell) being pushed out further and further through aggressive and creative litigation. We may in fact look back on the Brickworks decision as representing a high water mark for Board autonomy.