ENT Pty Ltd v Sunraysia Television Ltd (2007) 61 ACSR 626
Introduction
If the board of directors of a company convenes a general meeting at which the shareholders are asked to consider a resolution, the directors have a fiduciary duty to provide the shareholders with sufficient information about the subject matter of the resolution to enable them to make a decision as to whether to vote for or against the resolution. The New South Wales Supreme Court case ENT Pty Ltd v Sunraysia Television Ltd (2007) provides useful guidance on the nature and extent of the information that must be provided by directors in order to fulfil this duty of disclosure.
Facts of the case
- ASX listing rule 11.2 requires that before a listed company disposes of its main undertaking, it must get the approval of its shareholders. The directors of Sunraysia convened a general meeting for this purpose and distributed a notice of meeting and an explanatory memorandum providing information in relation to the proposed transaction.
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ENT Pty Ltd (ENT) held 26.7% of shares in Sunraysia. ENT’s ultimate holding company was WIN Corporations Ltd (WIN). Companies associated with WIN held an additional 17.9% of shares in Sunraysia, taking the total holding of the WIN Group to 44.6%. Eva Presser, chairperson of Sunraysia, held in her own name and through corporations in which she had voting power, a little over 49.7% of shares in Sunraysia. Accordingly, only a small percentage of Sunraysia shares were held by persons not associated with ENT or the chairperson.
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ENT sought an injunction from the Supreme Court preventing the general meeting from going ahead on the basis that the directors of Sunraysia failed to comply with their fiduciary duty of full and fair disclosure to their shareholders or that the documentary disclosure that was made constituted misleading and deceptive conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth).
Directors’ duty to inform
Justice Austin granted the injunction on the basis that the explanatory memorandum failed to provide all of the material information required by the shareholders in order to make their voting decisions. Accordingly, the directors of Sunraysia failed to satisfy their duty to properly inform the shareholders. In reaching this decision, he made the following points:
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The director’s duty to inform shareholders requires that directors make full and fair disclosure of all matters within their knowledge which would enable the shareholders to make a properly informed judgment on the matter in question.
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A proper discharge of the duty may also require directors to take reasonable steps to ascertain relevant information that is not already known to the board. In doing so the directors may take into account the time and cost of acquiring and preparing such information, and the delay involved in doing so.
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Directors are not obliged to give shareholders every piece of information that might conceivably be relevant to the issue being voted on. For instance, shareholders do not need to have all of the information required by the directors in making their decision to proceed with the proposal. The adequacy of the information disclosed is to be assessed in a practical, realistic way having regard to the complexity of the proposal. The range of information to be provided is limited by the need to present a document that is understandable to ordinary shareholders.
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The directors must ensure that the information presented is not likely to mislead or deceive shareholders in contravention of section 52 of the Trade Practices Act 1974 (Cth). If the information given is not full and fair disclosure of all material facts to enable the shareholders to make a properly informed decision, the combination of what is said and what is left unsaid may be likely to mislead or deceive the shareholders.
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The style and level of disclosure is influenced by the nature of the decision that the shareholders are required to make. As Sunraysia shareholders were asked to approve or reject the proposed sale of Swan TV, they were entitled to be given material information to enable them to assess:
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whether the sale is at a fair price and whether the terms of the sale are disadvantageous; and
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how and when the shareholders will benefit from the proceeds of sale, in terms of the distribution of the proceeds and the tax effect of the distribution.
Accordingly, the directors’ duty of disclosure requires Sunraysia’s directors to disclose the basis upon which they formed their opinion as to the fairness of the price, and their basis for their decision to commit the company to the proposal. The directors are not required to obtain an external expert report as to the value of Swan TV, however, if they choose not to provide an expert’s report, their duty of care and diligence requires the directors to identify some other proper basis for their decision
The tax effect of the buy-back is an essential component of the shareholders’ assessment of the likely benefit of the proposal as a whole. Even if the board intended to subsequently obtain a tax ruling on the buy-back, the directors should have provided general information on the tax issues. General tax advice is capable of being informative and of assistance to the shareholders for the purpose of deciding whether to approve the sale, and should be qualified with a statement to the effect that shareholders should obtain their own tax advice in assessing the outcome in their particular circumstances.
Conculusion
In order to fulfil their fiduciary duty to inform shareholders about a matter to be voted on at a general meeting, directors are faced with a number of potentially difficult issues including the extent of the information that should be disclosed, the manner in which the information should be presented and whether external expert reports should be obtained. While each situation must be assessed in the light of its own circumstances and the purpose for which shareholder approval is sought, the judgment of Justice Austin in this case provides some helpful, practical guidance on a number of key issues.
For further information please contact:
Sarah Matthews | Lawyer
T: 61 2 8233 9801
