Responding to shareholder activism: when can directors properly delay an EGM?

Section 249F of the Corporations Act allows shareholders with 5% of a company’s capital to ‘call and arrange to hold’ an Extraordinary General Meeting (EGM).

Whether directors can postpone such a meeting has been uncertain. Courts have upheld postponement decisions in limited circumstances, but faced criticism that this undermines shareholder rights.

These matters were considered and clarified in Wun v CellOS Software Ltd [2018] FCA 1947 (Wun v CellOS),[1] a decision which provides important guidance to directors and shareholders.

In short, the validity of a postponement decision depends on:

• an express constitutional power;
• the surrounding context; and
• most importantly, evidence about the reasons for the directors’ decision to postpone an EGM.

The facts

CellOS Software is an unlisted public company with a history of shareholder ‘activism and intervention’. Ten shareholders with 7% of CellOS’ capital issued a notice of meeting seeking to remove and replace CellOS’ directors. The directors, acting in accordance with an express constitutional power, decided to postpone the EGM for approximately two months, to a date when they proposed to hold CellOS’ AGM.

Crucially, the directors recorded their decision in meeting minutes, which noted their consideration of irregularities with the notice, impacts on litigation and affected parties and CellOS’ upcoming AGM. These minutes were the only evidence before the Court about the postponement decision – their validity was unchallenged.

The claim

The convening shareholders sought declarations that the postponement was invalid.

First, they argued that because the meeting was to be held with the AGM (and new meeting notices issued), the directors had actually cancelled the EGM. Second, they argued that the directors’ constitutional power to postpone the EGM was invalid. Third, they argued that any decision was made in bad faith, unreasonably or for an improper purpose.

The shareholders were entirely unsuccessful. The Court held, on the basis of the minutes, that the directors had not intended to cancel the meeting, and had acted reasonably and for a proper purpose. Moreover, the director’s power to postpone the meeting was consistent with a correct reading of s 249F of the Corporations Act. That provision allows shareholders to ‘call and arrange to hold’ an EGM – not to hold a meeting. This contrasts with the Court’s power to make orders about the ‘convening, holding or conduct’ of a meeting and is ‘a preliminary course of conduct in preparation for a future event, namely the holding and conducting the meeting itself’.

Under the Corporations Act, the Company retains the power – and the obligation, in sections 249R and 249F(2) – to ensure that the meeting is held:

• at a convenient time and place; and
• in the same way (so far as possible) to the way the Company would conduct an AGM.

This decision in Wun v CellOS confirmed the previous decision of Beach J in Pinnacle VRB Ltd v Ronay Investments Pty Ltd (Pinnacle)[2] and other cases, which had permitted postponement to:

• ensure two competing AGMs could be held on the same day; and
• postpone consideration of matters to another already called meeting.

Like Pinnacle, Wun v CellOS emphasises the consistency between 249F and postponement powers – rather than emphasising, as other cases have, the stringent limits said to apply to such decisions.

Lessons for directors and shareholders

Directors considering postponing an EGM need to carefully consider and record their reasons for their eventual decisions. It is likely that future challenges would be resolved, as Wun v CellOS was, on an urgent basis – with no time for detailed oral evidence or preparations. The decision will likely stand or fall on the minutes.

Further, directors need not necessarily have another meeting arranged or announced. However, this will be powerful evidence of the inefficiency and costs of proceeding with multiple meetings in a short period and the good faith basis for delay.

Finally, shareholders seeking an EGM must carefully consider the potential and the consequences of a postponement decision. A challenge brought on the basis favoured by some commentators—that postponement is simply inconsistent with s 249F—now seems foreclosed. A challenge to the good faith basis of a decision will likely require a basis to impugn the purposes listed in the minutes recording the decision.

Disclosure: Corrs acted for CellOS Software in the proceeding.