Charities & Not for Profit

Charities and Not for Profit

Jul 172020

“She’ll Be Sweet” Says Queensland Sugar – As Long As It Serves The Interests Of The Members As A Whole

Private companies are occasionally caught up in “oppression” proceedings, where a shareholder alleges unfair conduct, and seeks court orders to remedy the unfairness. 

Charities and Not for Profits can also be caught up in oppression proceedings, where they are public companies limited by guarantee.

Under the Corporations Act, the court can order a wide range of remedies where a company acts contrary to the interests of the members as a whole, or where is oppressive, unfairly prejudicial or unfairly discriminatory to a member

The grounds for oppression are set out in section 232 of the Corporations Act

The court can order, for example, the purchase or sale of shares, that the company be wound up, or that the constitution be changed. These powers of the court are set out in section 233 of the Corporations Act.

Peter McNamara writes here about a shareholder deadlock resolved by a court ordered share sale.

Disputes cannot be resolved by share sales in companies limited by guarantee.  In those cases, any court orders must adjust the rights between members.  The complexity that can arise in these cases is illustrated in the series of cases involving Queensland Sugar Mills where the federal court reversed changes to voting rights because the changes were unfair and oppressive.

Queensland Sugar Limited (QSL) is a public company limited by guarantee – it operates on a not for profit basis.  It is made up of 30 members – 7 sugar mill owners, including Wilmar Sugar Australia Ltd (Wilmar) – the largest of the mill owners – and 23 sugar growers or growers reps. 

The background was a battle over marketing sugar sales.  In 2014 Wilmar, a large multi-national milling company, announced it would withdraw from the common marketing pool industry NPF marketing company QSL.  Willmar was joined by Tulley and MSF in announcing a plan to pull out of QSL.  In response to agitation by growers, the Queensland parliament passed laws in 2015 requiring that mills offer growers marketing choice.  Over the course of the litigation the federal government developed (and introduced in 2017) a Sugar Industry Code of Conduct that mandates arbitration of cane growing and marketing agreements and grower choice in marketing.

The First Sugar Hit

The first battle arose when on 8 December 2015 the other members of QSL removed the rights to appoint mill owner directors on the board. In February 2016 Justice Yates in the federal court agreed that the 2015 changes were oppressive and unfair per section 232( e) of the Act in the matter of Queensland Sugar Limited [2016] FCA 20 (2016).  This decision was upheld on appeal to the Full Court on 6 October 2016: Mackay Sugar Limited v Wilmar Sugar Australia Limited [2016] FCAFC 133.

The Second Sugar Hit

The second battle, the subject of this case note, arose out of changes to the Constitution made on 5 July 2016 .  On 3 October 2016 Wilmar lost and BIM Mills had won its case with an order that the resolutions were not oppressive to , unfairly prejudicial to, or unfairly discriminatory against Wilmar: Mackay Sugar Limited v Wilmar Sugar Australia Ltd (No 2) [2016] FCA 1179.

The changes on 5 July 2016 had weakened Wilmar’s voting position – they took away Wilmar’s votes, and gave BIM Mills “entrenched” votes.  Before the change, Wilmar could vote on the appointment of up to 4 “Mill Owner directors”.  After the change, Wilmar could only vote for one Mill Owner director.  Further, BIM Mills was given entrenched rights to appoint a director, that could only be unwound by a special majority.

The dispute

Wilmar asked the court for orders that the change to the constitution was oppressive of members as a whole and of Wilmar and that the constitution be varied to delete the amendments.

BIM Mills asked the court for an order that the change to the constitution was not oppressive.

The Sweet Spot

In the first decision Wilmar lost – it did not prove oppression.  The single judge said the change to the constitution was not oppressive.  The judge thought that the changes made the constitution less oppressive.  The judge applied an objective test of unfairness, that is

whether, objectively viewed, the hypothetical reasonable commercial bystander having regard to all the relevant circumstances would regard the amendments as unfair

Wilmar appealed to the full Federal Court.

Judgment was given on 2 March 2017 in favour of Wilmar. 

The three judges on the Full Court agreed that the first judge applied the correct test.  The single judge correctly stated that the unfairness test does not permit an answer by reference to a binary choice, or by comparing unfairness or whether a reasonable commercial bystander would have voted for the change.

However, the full court said that the first judge then went and applied the binary reasoning that he himself said was not permitted. 

The full Federal Court held that the changes to Wilmar’s rights to appoint directors:

  • were materially unfair compared to those held by BIM Mills.
  • were effective immediately and could only be changed by a special majority,
  • were oppressive pursuant to section 232 of the Corporations Act, and
  • should be deleted. 

The full court also said that Wilmar could have applied for relief before the changes. 

The full court also found that the objects in the constitution were relevant to the question of whether the constitutional changes were unfair to Wilmar.  The Objects set the context in which conduct occurs.

The result was that QSL had to terminate its industry group directors from its board.  The 6 industry group directors represented local sugar millers Bundaberg Sugar, Isis and Mackay Sugar Mill.  The company reverted to the original 3 independent directors and an MD.

“The lesson” says Peter McNamara, “is that whether you are a private company or company limited by guarantee, you should take care in changing member voting rights.  You should look carefully at the Objects of the company, and ensure the changes are consistent with those Objects.  As was the case in the Queensland Sugar case, the way directors are chosen and appointed in not for profits is often complex – the participants have different interests and varying capacities to influence the company – and this requires a careful weighing of those interests to ensure that they are overall fair, to all the members.  The last thing you want is for changes to trigger unfairness not anticipated by some members, and find yourself fighting an oppression suit by an aggrieved member.  The risk is particularly acute when a company is changing the rights of members to influence the appointment of directors.” 

If you are planning changes to your constitution and wish to protect against oppression claims, you should get good legal advice.  Contact Peter McNamara.

Read the full decision:

Court of Appeal

Wilmar Sugar Australia Limited v Mackay Sugar Limited [2017] FCAFC 40

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