This case illustrates the need for careful for drafting of nominee director appointment rights. Where a right to appoint a nominee director has not been exercised, and the maximum number of directors has already been reached, that right may effectively be lost. Further, where directors have the right to change the maximum number of directors, that right may be exercised to reduce the maximum number, even if it means that an existing director would need to resign (subject to the directors’ duties to act in good faith in the best interests of the company and for a proper purpose).
This case centred around clause 3 of the shareholders’ agreement for Mon Purse Pty Ltd (Mon Purse) which provided that:
- the maximum number of directors of Mon Purse was 5 unless otherwise decided by the Board (clause 3.1);
- a shareholder or group of shareholders acting together had the right to appoint one director for every 20% of shares held by that shareholder or group of shareholders (clause 3.2(a)); and
- certain specific shareholders had the right to appoint a director, with such rights being dependent on the percentage shareholdings of the shareholders (clauses 3.2(b) to (e)).
Upon execution of the shareholders’ agreement, Mr and Mrs Hopkins were the only 2 directors of Mon Purse and immediately prior to 17 August 2017, there were 4 directors. The question before the Court was whether a further 2 directors, Mr Wong and Mr Galansky, were also validly appointed directors.
After construing the terms of the shareholders’ agreement, Stevenson J found that:
- on 17 August 2017, Mr Wong was validly appointed as a director pursuant to clause 3.2(a) by a group of shareholders who gave notice that they were acting together for the purposes of clause 3.2(a). In this regard, Stevenson J found that the fact that certain directors associated with one of the shareholders (Can of Worms (Australia) Pty Ltd) were appointed upon incorporation of Mon Purse did not, on the terms of clause 3, mean that the rights under clause 3.2 to appoint additional directors did not apply to it; and
- as Mr Wong had become the fifth director, the maximum number of directors had been reached and the director appointment rights were in effect suspended until the position changed. As such, the purported appointment by Mr Galansky of himself pursuant to clause 3.2(d) on 22 August 2017 was of no effect.
Stevenson J then considered a proposed resolution in a notice of directors’ meeting of 22 August 2017 to reduce the maximum number of directors of Mon Purse from 5 to 4. If the resolution was passed, one of the current 5 directors would have to resign and no shareholder would be able to exercise its right to appoint a director under clause 3.2.
Stevenson J was not persuaded, as a matter of construction of clause 3 of the shareholders’ agreement, that the directors could not resolve to reduce the number of directors. His Honour did however note that the directors may not be able to exercise that power consistently with their duty to act in good faith in the best interests of Mon Purse and for a proper purpose (pursuant to section 184 of the Corporations Act 2001 (Cth)), although that would depend on the particular circumstances existing at the time of the proposed resolution.