Shareholders Overriding Directors

The litigation that led to the decision issued on 9 June 2016 by the New Zealand Supreme Court in Ririnui v Landcorp Farming Ltd [2016] NZSC 62 had the potential to produce judgments of considerable interest as to the scope for shareholders to give directives to company directors on a business matter, and even to override a prior resolution of the board. It has turned out that the Court has avoided the issue, and much less is said on the subject than was said, obiter, in the Court of Appeal ([2015] NZCA 160).

The respondent company had a single shareholder, the Crown. The appellant was a representative of a Maori sub-tribe (hapu). He argued that the Crown as sole shareholder had the power to intervene to stop the directors of the company selling land which the hapu was asserting should be made available to it under the statutory process that deals with breaches of the Treaty of Waitangi 1840. Although the hapu had made its complaint to the Crown several times, the present injunction proceedings against the Attorney-General and the company were commenced very late in the day, just as the second of the necessary two signatures of company officers was about to be added to the contract of sale.

The appellant’s case on this aspect of his various causes of action required him first to show that there was a basis in public law under which the Crown might be required to exercise, or consider exercising, its powers as shareholder. While the majority of the Court found that various breaches of public law had occurred, the whole Court took the view that in the circumstances it could not have been wrong as a matter of public law for the Crown not to intervene as shareholder when the intervention would have to come so late in the sale process.

Only one of the five judges, O’Regan J (dissenting in part), discussed the company law issues, and then only in obiter dicta. The appellant’s argument had been that, as sole shareholder, the Crown could override the board using the old company law principle of informal unanimous assent, often called the Duomatic principle. O’Regan J, like the Court of Appeal below, considered that the Duomatic principle was not available when the relevant company was a state-owned enterprise to which not only the Companies Act 1993 applied but also the State-Owned Enterprises Act 1986. He also doubted whether the principle had survived the 1993 Act at all.

In an analysis of the Court of Appeal’s judgment, I argued, and maintain, that it is far from clear that the 1986 Act does exclude the Duomatic principle, and that the better view is that the principle does survive the 1993 Act. That principle is not only one that gives much needed protection to outsiders against procedural informality, but it is also a fitting recognition of the ultimate supremacy of shareholders implicit in traditional Commonwealth company statutes. The 1993 Act, like most Commonwealth corporation statutes, permits shareholders formally to give themselves power to make business decisions by inserting the relevant authority in their company’s constitution (it is less clear whether such a provision could take over the whole field of the directors’ powers, and it is clear that by exercising such powers shareholders expose themselves to becoming deemed directors). Dicta in a number of cases have recognised that such constitutional powers can in principle be deployed by shareholders in respect of an ad hoc business matter, in the face of directorial opposition (Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 at 38 (Ch), at 41 (Collins MR); Bamford v Bamford [1970] Ch 212 (Ch) at 220; Black White & Grey Cabs Ltd v Fox [1969] NZLR 824 (CA) at 832). In these circumstances, it is almost axiomatic that the same result can be achieved using the Duomatic principle (cf Companies Act 2006 (UK), s281(4)).

In relation to listed companies it may be undesirable for majority shareholders, even super-majorities, to be able to confer such powers on themselves, but that should be a matter for listing rules. Most company statutes have to deal with the generality of companies.

Peter Watts is currently the Leverhulme Visiting Professor at the University of Oxford, and a Professor of Law at the University of Auckland.