A recent decision of Judge Black of the NSW Supreme Court provides some useful reminders for entrepreneurs in relation to the ongoing administration of a company’s constituent documents.
In this case, SecureNet Technologies (ST) and SecureNet Monitoring Services Pty Ltd (SM), a subsidiary of ST, brought proceedings against a major shareholder and director, Andrew Wilson.
Conditional Resignation
Mr Wilson (through his investment entity) held a significant interest in the capital of ST.
Under the terms of ST’s shareholder agreement, Mr Wilson’s investment entity could appoint a director to the board. It nominated Mr Wilson as that director.
On 22 October 2020, Mr Wilson gave notice, addressed to the ‘SecureNet Board’ that he was:
- resigning from the board of ST; and
- appointing Alan Fink in his place.
ST accepted Mr Wilson’s resignation. However, it did not act on the request to appoint Mr Fink in his place.
Mr Wilson argued that his resignation was not effective because:
- the condition he had imposed (the appointment of Mr Fink) was not met; and
- clause 2 of the company’s Shareholder Agreement (which contained the provision for a means to remove and replace a director by a shareholder) overrode clause 24.5 of the company’s Constitution which contained the customary provision that the position of a person as director ceases if that person resigns in writing.
The court found that:
- the notice of resignation was effective; and
- clause 24.5 of the company’s constitution was not excluded by the language of clause 2 of the company’s Shareholder Agreement.
Resignation from Subsidiaries
Another term of ST’s Shareholder Agreement provided that the board composition of any of its subsidiaries would be identical to that of ST.
When Mr Wilson resigned as a director of ST, he was removed by ST from the board of each of its subsidiaries.
ST argued that, due to the operation of the relevant clause in the Shareholder Agreement, in giving notice of resignation from the board of STPL, Mr Wilson had also given notice of resignation from the board of its subsidiaries.
It was found that Mr Wilson’s notice of resignation did not effect his resignation as a director of any subsidiary of ST.
The Court found that, despite the provisions of the Shareholder Agreement, Mr Wilson’s resignation as a director of any subsidiary of ST was not effective without further action of the remaining shareholders taken in accordance with those companies’ constitutions or other constituent documents – action which they had not taken.
‘Undefined’ Defined Terms
ST’s Shareholder Agreement included a capitalised term ‘CEO Director’. The term was not defined.
For a time, Mr Wilson was both a director and CEO of ST and took the title ‘CEO Director’.
This became an issue when Mr Wilson was removed as CEO and continued to represent himself as the ‘CEO Director’ and because, under ST’s Shareholder Agreement, certain decisions could not be made without the approval of the ‘CEO Director’.
The judge ultimately did not find it necessary to define the term ‘CEO Director’ as it appeared in the Shareholder Agreement BUT nine possible interpretations were considered, with a ninth one considered ‘the most plausible’. This interpretation was that the reference to CEO Director was void for uncertainty.
What lessons can be learned from this case?
- Do not rush to exercise rights under a shareholder agreement to resign as director where you want, at the same time, to achieve the appointment of another person in your place. Consider the interaction between the Shareholder Agreement, the constitution and the Corporations Act. Consider whether resignation as a director of the holding company is in fact an effective resignation as a director of a subsidiary company.
- Conversely, do not rely on provisions, such as those that state the board of a subsidiary must be identical to that of the holding company, to automatically effect a removal of a director. Even where a shareholder loses a right to appoint a director, further actions need to be taken to effect the removal of that director.
- Review your Shareholder Agreement – and not just in relation to director appointment and resignation. Consider the need to address overlapping provisions of the constitution of a company and its shareholder agreement while relations among shareholders are harmonious.
- The dangers of not defining terms in any agreement – even if it had no bearing on the outcome of the case, time will have been spent postulating the nine possible interpretations and arguing which one should have prevailed. Read agreements carefully before signing.