Research Note 18 2001-02

How Many Shareholders Should it Take to Call a Meeting?

Mark Tapley
Law and Bills Digest Group
12 February 2002

Shareholders have rights not only to share in the profits of an enterprise but also to influence the management of the company and hold directors accountable. This note discusses one feature of the corporate governance framework: the ability of shareholders in listed public companies to requisition company meetings.

The Existing Law

Under section 249D of the Corporations Act 2001 (Cwlth) directors of a company must arrange and hold a meeting within 2 months⁽¹⁾ of being requested to do so by:

• members with at least 5 per cent of the votes that may be cast at a general meeting⁽²⁾ (the share capital test), or
• at least 100 members⁽³⁾ who are entitled to vote at a general meeting (the numerical test).⁽⁴⁾

The company bears the cost of calling a requestioned meeting. Directors have the right to refuse to call a meeting if it is not for a proper purpose. For example members cannot, by resolution, make decisions on management matters that are exclusively vested in the directors by the company constitution. A meeting may also be refused if its purpose is to harass the company or its directors or to consider matters outside the competence of the company. In practice however, these grounds provide directors with little scope to avoid calling a meeting.⁽⁵⁾

Concerns

Under section 249D a relatively small number of shareholders can requisition an extraordinary general meeting (EGM) to raise questions of corporate responsibility in relation to a broad range of issues including labour practices, executive remuneration and environmental standards. No other country employs a numerical test for calling company meetings.⁽⁶⁾ The Government and business groups have argued that the provision is open to abuse by 'vigilante' groups with political agendas.⁽⁷⁾ Large companies can be forced to incur considerable costs in notifying members of an EGM. It is also argued that such meetings distract management from its core responsibilities.

Recent Uses of the Requisition Procedure

Despite these concerns, it has been relatively uncommon for shareholders to invoke the requisition provision. Alarm about the potential use of the provision seems to stem from two cases in 1999 involving North Ltd⁽⁸⁾ and Wesfarmers.

In the case of North, a group of 122 shareholders, calling themselves the North Ethical Shareholders Group, requisitioned an EGM to amend the company constitution to insert principles of responsible development. The Group was concerned about the company's participation in the Jabiluka uranium mine. After some litigation, the company and the shareholders agreed that the meeting should be held on the same day as the annual general meeting (AGM). North argued that the meeting would have otherwise cost the company $186 000. The motions were supported by only 6 per cent of votes at the EGM.

In the case of Wesfarmers, 166 shareholders requisitioned a meeting to consider resolutions about the company's involvement in the forestry industry. At the EGM, 98 per cent of votes were cast against the resolutions. Wesfarmers estimated that the cost of the EGM was in the order of $80 000.

NRMA Insurance has also been subject to a number of attempts to requisition EGMs. However in contrast to the cases discussed above, the issues related to more conventional corporate governance matters and have consequently featured less prominently in the campaign to change the law. Earlier this year, 237 NRMA Insurance shareholders requisitioned a meeting to consider an amendment to the company constitution prohibiting the payment of retirement benefits to directors without the approval of shareholders. This meeting was held on the same day as the AGM. The resolution attracted 30 per cent support. The company estimated that the cost of holding such meetings separately from the AGM would be around $1.4 million.

Proposals for change

In October 1999, the Parliamentary Joint Statutory Committee on Corporations and Securities⁽⁹⁾ recommended that the numerical test be repealed so that the sole test to requisition an EGM would be that shareholders hold at least 5 per cent of the issued share capital of the company. The Companies and Securities Advisory Committee also endorsed this approach.⁽¹⁰⁾

Taking a different path, the Government introduced a regulation in April 2000 to increase the threshold for the numerical test from 100 shareholders to 5 per cent of shareholders. The Senate disallowed the regulation in June 2000. While Green, Democrat and ALP senators acknowledged the potential for the abuse of the requisition procedure, they felt that the proposed threshold was too high and would prevent small shareholders from raising legitimate issues.⁽¹¹⁾

In December 2000, the Minister for Financial Services and Regulation proposed an alternative approach called the 'square root' rule. Under the Minister's proposal a share capital and numerical test would remain. While the share capital test would remain the same, the numerical threshold for calling a meeting would be calculated by determining the square root of the total number of company shareholders.⁽¹²⁾

The Opposition has criticised the square root proposal arguing that for large companies it would restrict the ability to call meetings to institutional investors. It has supported consideration being given to: imposing a cap on the square root rule; requiring shareholders to have a marketable parcel of shares; and applying a more liberal regime where an EGM is to be held on the same day as an AGM.⁽¹³⁾

The table below illustrates the impact of different proposals on the ability of shareholders to call a meeting by reference to some prominent Australian companies.

Comparison of various thresholds for shareholder meetings

Source: Huntleys' Shareholder: The Handbook of Australia's Largest Public Companies, 20^th edition 2001.

Democracy

Appeals to democratic principles have characterised both sides of the debate about the threshold for calling company meetings. However, the requirements of 'democracy' in the context of a corporation are controversial. In the view of the Government, minority groups are imposing costs on the majority of shareholders. At the same time, proponents of shareholder activism claim that a higher numerical threshold will silence small shareholders. Moreover they argue that the success of a particular measure cannot be judged by whether or not the resolution is adopted. Shareholder and consumer awareness may be raised on an issue, which will in turn influence directors decisions.⁽¹⁴⁾

A way forward?

In August 2001, the Minister accepted that the 'application of the square root rule to large companies may, in some specific cases, result in an onerous threshold difficult to satisfy'. Accordingly, he said that the Government would proceed with the square root proposal amended by a 'cap' of 500 and a 'floor' of 100.⁽¹⁵⁾

It remains to be seen whether this proposal will solve the current impasse. More fundamental reform to corporate governance procedures may be required. This reform could focus on the AGM as the principal means for shareholders to hold directors accountable. While the law does contain provisions⁽¹⁶⁾ that are designed to promote shareholder involvement, both the Government and Opposition have acknowledged that small shareholders sometimes find it difficult to make any impact at AGMs.⁽¹⁷⁾ One manifestation of this problem is that while there must be a reasonable opportunity for shareholders to ask questions at AGMs, directors are under no legal obligation to respond to such questions.

AGMs which facilitate greater shareholder involvement may reduce the demand for shareholder requisitioned meetings.

1. This timeframe can be extended by the Court if it thinks fit-See Corporations Act 2001 subsection 1322(4).
2. In a poll held by a listed company each shareholder will generally have 1 vote for each share that they hold.
3. The 100 shareholder threshold has been part of Australian company law for a long period, however, prior to the Company Law Review Act 1998 the 100 shareholders had to have an average paid-up sum per shareholder of at least $200.
4. The numerical test can be changed by regulation.
5. Companies and Securities Advisory Committee, Shareholder participation in the modern listed public company: Final Report, June 2000, p. 9.
6. ibid.
7. The Hon. Joe Hockey, 'Vigilante bands should lose their votes', Australian Financial Review, 18 December 2000.
8. North Ltd has been subsequently acquired by Rio Tinto.
9. Parliamentary Joint Statutory Committee on Corporations and Securities, Report on Matters arising from the Company Law Review Act 1998, 1999.
10. op. cit., n. 5.
11. Commonwealth Parliamentary Debates, Senate Hansard, 28 June 2000, p. 15892-15901.
12. op. cit., n. 7.
13. Senator Stephen Conroy, 'Meetings: a call for balance', Australian Financial Review, 19 December 2000.
14. For example in the case of the Jabiluka uranium mine, Rio Tinto has since shelved plans to develop the mine citing community opposition.
15. The Hon. Joe Hockey, Address to the Australian Shareholders Association, Sydney, 16 August 2001.
16. For example, 100 members may place a resolution on the agenda for an AGM (s .249N). In 2000, shareholding union members used this provision to move resolutions in relation to corporate governance and labour practices at the Rio Tinto AGM. The motions attracted 17-20 per cent support.
17. In March 2001, the Government asked the ASIC Roundtable on Corporate Governance to look at measures to encourage small shareholders to raise issues at AGMs and vote. The Opposition has advocated the development of code of practice for company meetings.

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