Family Ties - Not always a guarantee for corporate harmony!

If you are a director or shareholder of a company that is predominately family owned or closely held, keep reading!

The importance of following procedures set out in a company’s constituent documents (which most commonly include a company’s constitution and shareholder agreement) or under the Corporations Act 2001 (Cth) (Act) can often be overlooked by family owned or closely held companies.

This is because there may be an assumption, given the family connection, or the small number of shareholders, that any dispute will be able to be easily resolved.  It is also reflective of the fact that changes to shareholding and officers can often be seen as more of an administrative task that a company will ‘get around to’ eventually.

The recent NSW Supreme Court decision of In the matter of Motasea Pty Ltd emphasises the importance of complying with legal requirements for appointment of directors and changes in shareholding.

Please note that for the purposes of this article, we have focussed on the corporate governance issues arising from the decision and not the associated estoppel issues.

Facts

Bill and Joyce Gooley established Motasea Pty Ltd (Company). Their children, Brett and Janine, were involved in the management of the Company. Bill, Joyce, Brett and Janine each claimed that they held one share in the Company.   Janine also claimed that she was a director of the Company.

A dispute arose between the family members as to whether or not Janine was ever a director of the Company or if she ever held any shares in the Company.

Despite the evidence that the Company had notified ASIC of Janine’s appointment as a director and shareholder, the Court was not satisfied that:

• Director meetings to approve Janine’s appointment as a director had been held. In this regard, the Company was not able to produce signed minutes of meetings of directors recording the resolutions. Further, neither Janine nor the Company was  able to produce a signed copy of her consent to act.

• The Company had adhered to the legal requirements for the transfer of shares to Janine. Neither Janine nor the Company was able to produce a signed copy of the share transfer form(s).

• Director and/or shareholder meetings had been held to record the transfer of shares to Janine. The Company was not able to produce signed copies of minutes recording the resolution approving the transfer of shares.

• The Company’s corporate register had been updated to include Janine’s appointment as a director or her shareholding.

Having regard to the above factors, the Court found that Janine was never a shareholder or a director of the Company. 

What can we learn?

Lessons to be learned from this decision for all family owned or closely held companies include:

• Despite a company’s size, or the relationship between officers and shareholders, a company is not exempt from complying with the requirements of its constituent documents and the Act in order to give effect to changes to its officers, shareholding or structure.

• Procedures for giving effect to, and approving, changes to the officers, shareholding or structure of a company should not be seen as an administrative task but an important legal step.  A failure to comply could mean that the changes are not valid.

• Timing requirements for approval of changes to a company’s officers, shareholding or structure should be followed to avoid late fees and any suggestion that the changes have not taken legal effect. 

• Minutes of meetings of directors or shareholders should always be prepared to record the approved resolutions and then signed by the chairman, ideally within a month of the meeting taking place.

• New directors must consent to their appointment in writing.  We note that the Act requires that the appointment of a director of a proprietary company must be confirmed by resolution within two months of that appointment.  If the appointment is not confirmed within two months, the director’s appointment will automatically cease at the end of the two month period.

• Share transfers should be documented in writing.  Depending on the jurisdiction, stamp duty may be payable.  In NSW, stamp duty is still payable on transfers of shares in proprietary companies.  A NSW company is prevented from updating its corporate register until it has received satisfactory evidence that stamp duty has been paid.

• Share transfers also usually require the approval of the directors or the shareholders of a company (depending on what the company’s constituent documents say) before they are effective.  Most standard constitutions give directors the discretion not to approve a transfer if other legal requirements have not been met.

• Notifying ASIC of a purported change will not be enough to prove that the change has legally taken effect.  ASIC notifications only serve the administrative purpose of updating ASIC’s records.