Shareholder’s inspection allowed despite distrust

The case of Rasley (Singapore) Pte Ltd v Financial & Energy Exchange Ltd [2020] FCA 1462 involved an application to the Federal Court by a shareholder (Rasley (Singapore) Pte Ltd) (Rasley/Plaintiff) to inspect the books of the defendant (Financial & Energy Exchange Ltd) (Financial/Defendant) pursuant to section 247A of the Corporations Act 2001(Cth) and at common law because of its standing as a shareholder. Section 247A provides that the Court may only make orders if it is satisfied that an applicant is acting in good faith and for a proper purpose.

At the core of the application for access to the books was Rasley’s concerns about certain shares issues which were made by Financial and various other related party transactions that were entered into.  The application was opposed by Financial on the grounds that the application was not made in good faith and for a proper purpose.  The application was also opposed on the grounds that the categories of documents sought were too broad.

The disputed transactions

There were three (3) share issues that Rasley was concerned about as follows:

• two (2) involving the issuance of 583,583,333 new shares for which no consideration was paid; and
• one (1) involving the issuance of 35,000,000 new shares at $0.03 per share.

The overall effect of the share issues was to almost double the number of shares on issue in Financial.  It was alleged that the issues diluted Rasley’s shareholding, whilst increasing those of Financial’s directors.

Lawyers for Rasley wrote to Financial outlining their concerns, asking a number of detailed questions and asking for a number of categories of documents in relation to the share issues and the related party transactions.   In response, Financial’s lawyers provided only one document – Financial’s constitution.  It was said that it would be too onerous to collate responses to the categories and that if it agreed to provide the documents it would divert resources away from fundraising and ongoing obligations of the directors to ensure solvency.

Legal principles considered

Jackson J provided a useful summary of the applicable principles associated with the precondition of the making of orders under section 247A to 247D from paragraphs 23 to 37 of the Judgement.  It was said by Jackson J at 24 that:

“the words ‘proper purpose’ mean a purpose reasonably connected with the proper exercise of the rights of a shareholder as a shareholder, as opposed to a purpose connected with some other interest, such as an interest as a bidder under a takeover scheme, or as a litigant in proceedings against the company”^[1]

The onus of proving that the application was made for a proper purpose is on the applicant.^[2]   It is not necessary for the applicant who initiates the proceedings to sufficient evidence to commence proceedings or establish liability.

It is enough if the issue raised by the applicant “is substantive and not fanciful, artificial, specious or contrived”.^[3]

Jackson J concluded that the “cases demonstrate that more than curiosity or general suspicion of a company’s management is required”.^[4]  Various cases were cited where access to the books were granted at 29.

Hostility towards a company’s management

It was said at 32 that hostility in of itself towards a company’s management was not an improper purpose.  The dominant purpose needs to be a proper purpose.

The questions considered by Jackson J in light of the principles associated with the Courts grant of the discretion were therefore whether Rasley:

• had a right to view documents associated with the share issues; and
• whether it had a right to view documents relating to the allegedly related party funding agreements and option agreements.

The result of the application for inspection of the books

His Honour held that Rasley had established that it sought inspection of the books in relation to the above transactions for a proper purpose and in good faith.  Therefore the following questions had to be answered:

• what documents may be inspected?;
• who should be authorised to inspect?; and
• what conditions on inspection should be imposed?

What documents may be inspected?

Rasley, through its lawyers had sought ‘all documents relating to each of the share issues it wishes to investigate’.  Financial had objected to this category as being too wide.  Jackson J agreed and despite saying that it was not possible on the current state of the evidence to determine an appropriate description of the categorise to be ordered said at 97 that:

“the categories should be such as to be capable of addressing the legitimate concerns that Rasley has about the transactions. In the case of the share issues, those concerns are why the issues were made, to whom and on what terms, how the consideration for the various issues was determined or otherwise set, and whether that consideration was fair in all the circumstances. In the case of the leases from FMI, the concerns are how the rent was determined or otherwise set and whether it is, or was at the time the lease was made, a fair market rent“.

Who should be authorised to inspect?

It was held that the solicitors for the Plaintiff and a Director of Rasley, Mr Tomlinson were entitled to inspect the books.

What conditions were imposed on inspection?

Section 247B(a) permits the making of orders which limit that use of inspected documents.  However, s247A(6) allows an authorised person to make copies unless the Court orders otherwise.  Further section 247A provides that the inspector must not disclose the documents discovered to anyone other than ASIC or the applicant.

Jackson J agreed with the submissions of Counsel for Financial that any disclosure should be subject to the condition limiting use to “allaying concerns or the consideration of potential litigation such as derivative action oppression applications”.

Costs

Because each party was partly successful Jackson J agreed to hear the parties on costs.

Takeaways

Making an application to the Federal Court seeking an order to inspect the books pursuant to section 247 of the Corporations Act 2001(Cth) can be a useful tool for the oppressed where a company refuses to provide access to information.  That said care needs to be taken to ensure that categories of documents sought are not too wide and that they are sought for a dominant proper purpose.

Links and further references

Legislation

Corporations Act 2001(Cth)

Cases

Cescastle Pty Ltd v Renak Holdings Ltd [1991] 6 ACSR 115

Hanks v Admiralty Resources NL [2011] FCA 891

Knightswood Nominees P/L v Sherwin Pastoral Company Ltd [1989] VicSC 106

Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237

Rasley (Singapore) Pte Ltd v Financial & Energy Exchange Ltd [2020] FCA 1462

Style Limited, in the matter of; Merim Pty Ltd v Style Limited [2009] FCA 314

Further information about making an application under s247A of the Corporations Act 2001(Cth)

If you need advice on shareholder oppression or obtaining access to a company’s books in relation to any transactions that you consider oppressive, contact us for a confidential and obligation-free discussion::

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Knightswood Nominees at 156‑157; Cescastle Pty Ltd v Renak Holdings Ltd (1991) 6 ACSR 115 at 118; and Hanks v Admiralty Resources NL [2011] FCA 891; (2011) 85 ACSR 101 at [32(3)].

[2] Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237; (2009) 76 ACSR 236 at [36]; and Mesa Minerals at [22(3)].

[3] Jackson J at 27 citing Praetorin at [40]; and Style Limited, in the matter of Merim Pty Ltd v Style Limited [2009] FCA 314; (2009) 255 ALR 63 at [66]‑[67].

[4] Jackson J at 28.

---

Related insights into shareholder oppression