Can Shareholders Override Management Decisions of the Board?: Att-General v Ririnui in the New Zealand Court of Appeal

Can shareholders of a company override a management decision made by the board? In my paper I argue that the answer, at least since Automatic Self-Cleansing v Cuninghame [1906] 2 Ch 34 (CA), has been an unequivocal no. Cozens-Hardy LJ described the late consideration of such an interesting and important question as remarkable, but brought about simply because that question had not come before the courts until that date. And ‘no’ is surely the correct answer. When limited liability decoupled the fortunes of shareholders from the fortunes of the companies they held shares in, it, at the same time, shifted the role of the directors comprising the board from an agency relationship with shareholders to a role that necessitated consideration of the interests of the company as a separate legal entity from its shareholders. Shareholders cannot legitimately override management power allocated constitutionally to the board.

Given that this is orthodox company law, how surprising the outcome in the New Zealand High Court in Ririnui v Landcorp Farming Ltd [2014] NZHC 3402. Williams J said that: ‘if Landcorp were a privately owned company, its shareholders could have stepped in and imposed a decision on the Board’ at [30]. Although apparently overturned on the point by the Court of Appeal, (A-G v. Ririnui (unreported) CA 336/2014 [2015] NZCA 160, 12 May 2015), it was one of the grounds for appeal to the Supreme Court (A-G v. Ririnui (unreported) [2015] NZSC 72; SC 47\2015). There only one Judge discussed the issue in any detail qualifying his obiter statements by saying he was not expressing a concluded view on the point.

Why did an apparently long settled question of company law reach the New Zealand Supreme Court? One reason (not discussed in any depth in the paper) is the context: whether shareholding Ministers could intervene to stop a planned sale of land that was arguably subject to a Treaty of Waitangi claim by a state-owned enterprise. The wider issue may have muddied the company law issue. Another reason is that the authorities invoked were not the relevant authorities on the legitimacy of shareholders overriding directors, but rather cases that were authority on the secondary but related question concerning the effect on third parties if shareholders do in fact override management decisions made by the board.

This confusion of authorities arose because of two extant versions of the Duomatic principle (Re Duomatic Ltd [1969] 2 Ch 365). The narrower and less contentious version is as a form of ratification ‘that does not allow a company to rely on its failure to comply with constitutional formalities to justify it in resiling from a binding obligation lawfully assumed by its agent’ (Ririnui, CA at [52]). The Court of Appeal said that any authority for the broader principle, the proposition that ‘a company’s shareholders have the power to make management or operational decisions normally reserved to shareholders’ was found in Meridian Global Funds Management Ltd v Securities Commission [1995] 3 NZLR 7 (PC), where it was said that the unanimous assent of shareholders will bind the company. But Meridian was determined in a different context to Ririnui. The question in Meridian was whether the knowledge and actions of two managers could be attributed to the company in order to determine if the company had breached the Securities Act 1988. Lord Hoffmann took the opportunity to set out rules of attribution of knowledge and action to the company for the purpose of determining the obligations and liability of the company externally. Any Meridian principle, as the Court terms it, is not based on unanimous assent but rather is about the rules of attribution (and in particular the special rules of attribution for the purposes of determining statutory liability of a company). In contrast, the issue in Ririnui was whether a third party can demand that the shareholders intervene in the management powers of directors. Meridian assists on that issue only so far as confirming that it is possible for operational decisions of shareholders to bind the company externally (with those decisions attributed to the company by means of the primary rules of attribution). That point has been settled at common law since Duomatic.

Susan Watson is a Professor of Law at the University of Auckland.