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Shareholders and the right to inspect company books
The holders of shares in a company do not generally have an automatic right of access to the company’s books and records. However, the Corporations Act 2001 (Act) does provide shareholders the right to seek access to books of the company in certain circumstances. If a shareholder wishes to compel the company to provide access to the company’s books, an action for an order to inspect the books can be brought under section 247A of the Act.
Section 247A empowers the court to make an order authorising the shareholder, or another person on the shareholder’s behalf, to inspect the books of the company if the court is satisfied that the shareholder is acting in good faith and that the inspection is for a proper purpose.
The decision of Mesa Minerals Limited v Mighty River International Ltd (Mesa Minerals) considers the scope of section 247A, and in doing so applies and summarises the principles laid down by the Federal Court of Australia in Hanks v Admiralty Resources, which in turn developed the reasoning in the decision from the Supreme Court of South Australia in Acehill Investments Pty Ltd v Incitec Ltd.
In Mesa Minerals, a shareholder (Mighty River) applied to the Court for an order that its director and solicitors be permitted to inspect certain books and records of Mesa, which it said were relevant to protecting its rights and interests as a shareholder in Mesa gin light of concerns that Mesa had been allowing third parties to use an asset to which it had exclusive rights, without receiving any benefit from those third parties. Mesa Minerals argued that the request for inspection was not made in good faith and for a proper purpose, essentially on the basis that it did not accept Mighty River’s stated reasons for requiring access to the books and records to be genuine.
Ultimately, the primary judge ordered that Mighty River be permitted to access the relevant books and records and Mesa appealed to the Full Court of the Federal Court of Australia.
In the appeal, the Full Court set out a number of relevant principles to be considered by the Court in connection with applications pursuant to section 247A:
- The requirement that an application to inspect the books of a company be made in good faith and for a proper purpose does not impose two distinct and separate requirements. The requirements are a composite notion. The reference to good faith reinforces the requirement of proper purpose. To act in good faith and inspect company books for a proper purpose means to act and inspect for a “bona fide proper purpose”.
- The requirement that an application be for a “proper purpose” means that the application must be for a purpose connected with the proper exercise of shareholder rights and exercised by a person in their capacity as shareholder and not, for example, solely as a litigant in proceedings against the company or as a bidder under a takeover scheme.
- The requirements of good faith and proper purpose must be proved objectively, rather than relying on the subjective belief of the applicant.
- The onus of proof to establish good faith and proper purpose falls on the applicant shareholder.
- An applicant who has a significant shareholding and who has been a shareholder for a considerable time will have an easier time discharging the onus than a shareholder who has only recently acquired a token shareholding
- Applicants do not necessarily lack a proper purpose merely because they are hostile to other directors.
- Provided that the applicant’s primary or dominant purpose is a proper one, it is not necessarily relevant that an inspection might benefit the applicant for some other purpose.
- A shareholder seeking to investigating a reasonable suspicion of breach of duty by a director is a proper purpose.
- It is not necessary that the applicant shareholder show that their interests are different to those of other shareholders.
- It is not necessary that the applicant shareholder have sufficient evidence to bring or make out an action against the directors. It is enough that the issue(s) raised by the applicant shareholder is “substantive and not fanciful”, and not “artificial, specious or contrived”.
- It is not detrimental to an application under section 247A that the applicant may have had sufficient information earlier to satisfy their inquiry, or that the applicant may have other means of obtaining the required information.
Ultimately, the Full Court found that the primary judge’s evaluation of the circumstances of Mighty River’s request was not deficient and his exercise of discretion to allow the inspection was not flawed, dismissing Mesa’s appeal.
Though the Court always retains a residual discretion to allow or refuse to allow access on an application under section 247A to inspect the books and records of company, the principles set out in Mesa should serve as a useful guide for shareholders wishing to make such an application.
As a practical matter, a shareholder applying for an order for access will need to identify the specific documents, or categories of documents, to which access is sought and to articulate why access to those documents or categories should be granted. Likewise, a company seeking to resist providing access to particular documents or categories of documents should be prepared to set out just why those documents or categories of documents should be kept from the shareholder.
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