The Facts

General manager's faction vs chairman's faction

Trouble had been brewing for some time at a not-for-profit company.

The company operated a number of social enterprises, including the provision of training and support services to government programs.

Within the company there were two factions.

One was associated with the company's general manager, and the other with the chairman of the board, which consisted of eight directors.

Three of the directors were aligned with the general manager's faction, four were aligned with the chairman's faction and one unaligned director voted on an issue-by-issue basis.

Conflict erupts between factions over company finances and control of board

About ten years previously, the company had purchased a for-profit company that provided training opportunities and subsequently labour hire.

The intention was to use the profits made by the for-profit company to cross-subsidise the not-for-profit activities of other company entities.

Although originally profitable, the for-profit company began encountering financial difficulties, and divisions began to emerge between the company factions about how to deal with these financial challenges.

The chairman of the board had also become apprehensive that the general manager and his relatives, who held positions in the company, had ambitions to "take over" the company.

The general manager, on the other hand, claimed that the chairman boasted about having the board in the palm of his hand.

The company was in the process of collecting nominations for the election of directors to the board, with the election to take place at the next annual general meeting (AGM) on 10 February 2021.

Board meeting called to adjourn AGM where board elections to occur

Events came to a head in late in January 2021, when the chairman realised that at the upcoming AGM there would be more applicants than vacancies for positions of director. So, the board elections would be contested.

On 3 February 2021, the chairman prepared a list of motions for a board meeting to be held on the following day.

These included a motion declaring a couple of nominations for election to the board to be invalid. If adopted, this would have reduced the number of eligible candidates and hence obviated the need for an election.

The list also included a motion proposing adoption of a statement that the general manager and some of his allies had acted deceitfully.

Most importantly, there was a motion that the AGM set for 10 February be adjourned.

At 3:39 pm on 3 February the chairman sent an email to the board members, calling a board meeting by telephone for 5:00 pm on 4 February 2021.

The email did not include the motions.

In the late morning of the following day, the chairman met with the general manager and gave him the list of the motions.

There was a heated exchange, and the general manager tore the list up saying that he would resign.

The general manager did not in fact resign, however additional motions were added to the list of motions, including noting the supposed resignation of the GM, and appointing the chairman as an interim administrator.

Directors from general manager's faction do not attend board meeting

Less than an hour before the scheduled 5:00 pm start of the 4 February board meeting, the three directors aligned with the general manager's faction emailed the chairman saying that they could not attend due to lack of sufficient notice.

The meeting went ahead at 5:00 pm with five directors, only one of whom was not aligned with the chairman's faction and was in fact not closely aligned with either faction.

The number of attendees was one short of a quorum, but in the litigation that followed, the general manager's faction declined to rely on the lack of a quorum as a ground of challenge.

Board passes resolution to adjourn AGM and notifies company members

At the board meeting, all resolutions were passed unanimously, including the motion for the adjournment of the AGM.

This outcome was communicated by email to the 45 people who were members of the company and entitled to vote at the AGM for the election of the new board.

General manager's faction proceeds with AGM and new board purportedly elected

The battle lines were drawn.

In the ensuing days, the chairman authorised the changing of locks on the premises and started, through security staff, to exclude those associated with the general manager from the premises.

On 9 February, a director aligned with the general manager's faction emailed the company's members, notifying them that the 10 February AGM would be proceeding as originally scheduled.

At 5:50 pm on 10 February 2021, thirty of the forty-five people entitled to vote tried to enter the company's premises, but were turned away by security staff.

When they tried to meet in the car park, they were likewise ordered out by security.

They then convened on the footpath outside the company's premises.

At this meeting, nine people were purportedly elected to the board.

No votes were cast in favour of the chairman, or of the chairman's factional allies.

The unaligned director who had attended the board meeting on 4 February was elected to the board, but the chairman and the other three were not.

Parties litigate over whether new board duly elected

Both factions commenced litigation.

The general manager's faction brought its claim in the name of the company, on the basis that it controlled the board.

This faction asked the court to confirm that the nine directors elected at the 10 February AGM were the lawful board of the company.

The individuals comprising the chairman's faction asked the court to declare the purported election of the board on 10 February invalid.

case a - The case for the company (the general manager's faction)

case b - The case for the chairman's faction
  • The company's constitution requires that "reasonable notice" must be given of board meetings.
  • It is the usual practice of the company to give notice of board meetings well in advance, indeed by an annual calendar of proposed meetings sent out to directors at the start of the year.
  • The notice given of the 4 February board meeting was less than 25 hours, which was far too short given the usual practice, as well as the serious nature of the proposed resolutions to be considered.
  • Since reasonable notice was not given, the purported board meeting was not validly constituted, and any decisions made were void and of no effect.
  • In particular, the decision to adjourn the AGM had no effect, and so the meeting held on 10 February was a properly constituted AGM.
  • Since the AGM was valid, the court must declare that the directors elected at that AGM are the lawful board of the company.
  • The notice given of the board meeting was reasonable in the circumstances.
  • During at least the preceding twelve months it has been commonplace for board meetings to be held remotely by Zoom due to the Covid-19 pandemic. If a director is unable to attend online, they can telephone into the meeting. Short notice of board meetings held by telephone is not unusual and has never previously been identified as inconvenient or causative of any difficulty.
  • Further, the short period of notice given in this instance was unavoidable. We had only just recently learnt that the board election would be contested and were justifiably concerned about underhanded behaviour by the general manager and his family in relation to the election.
  • Since the notice given was reasonable, the decisions made by the board in the meeting of 4 February, including adjournment of the AGM, were valid decisions.
  • Therefore, the assembly on the footpath on 10 February was not an AGM, and the court must declare the purported election of the board at that assembly invalid.

So, which case won?

Cast your judgment below to find out

Geoff Baldwin
Directors' duties and legal obligations
Stacks Champion

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