The importance of proper procedure in shareholder activism

Even prior to the commencement of the COVID-19 crisis, there was an increasing trend developing of shareholders requesting that public companies convene meetings to remove members of the board of directors. Depending on how directors navigate the ensuing months to limit the impact on shareholders, there is every chance this trend will continue.

How can members request directors convene meetings? One of the ways in which meetings of a company can be requested is by virtue of section 249D of the Corporations Act 2001 (Cth) (Act). It provides that directors of a company must call and arrange to hold a general meeting on the request of members with at least 5% of the votes that may be cast at a general meeting.

The procedural requirements of a 249D request include that the request must:

1. be in writing;
2. state any resolution to be proposed at the meeting (if this includes removing or appointing directors, include the proposed directors. Also consider the requirements of section 203D of the Act);
3. be signed by the members making the request (if signed as a company, in accordance with section 127 of the Act);
4. be given to the company; and
5. be made for a proper purpose.

If any of the procedural requirements have not been met, the request may be challenged on the grounds that it is invalid and if successful the directors of a company are entitled to refuse to convene the meeting on that basis.

Once a valid request is issued, the directors must call the meeting within 21 days after the request is given to the company and the meeting must be held no later than 2 months after the request is given to the company.

For what purpose can a section 249D request be made? Section 249Q of the Act stipulates that a meeting of a company's members must be held for a proper purpose. The effect of this provision is that a 249D request can be invalidated if a member exercises its right under that section for a purpose other than for the passing of the resolution contained in the 249D request.

Such other improper purposes can include where the 249D request is issued:

1. to harass the company and its directors or other shareholders;
2. to instruct the company's directors how to exercise their powers; and
3. where 249D requests have been made subsequently after a meeting on substantially the same subject matter.

If directors form the view that a 249D request has been issued for an improper purpose, they may seek declaratory or injunctive relief from the Court seeking to invalidate a request and preventing meetings of members from taking place.

If you are considering issuing or have been issued with a 249D request, feel free to reach out to our specialist Aaron McDonald at aaron@pragma.law to discuss your rights and obligations. 

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