A recent decision handed down by the NSW Court of Appeal in
Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd 
NSWSCA 326 has affirmed the right of a shareholder to receive fixed
and mandatory dividends from the profits of the company in
circumstances where the company's constitution has been amended
to account for such. This is distinct from the traditional approach
where a shareholder's expectation of receiving a dividend is
limited by the discretion of the board of directors.
In this alert, Senior Associate Alex Davies and Solicitor Andrew
Clements look at the key takeaways from the case.
In 2001 Sumiseki Materials Co Ltd (Sumiseki)
was issued with 25 million B class securities in Wambo Coal Pty Ltd
(Wambo) under the terms of a restructure
agreement, which converted a $25 million debt owed to Sumiseki by
Wambo's sole shareholder, Hunter Coal Pty Ltd (Hunter). As part
of the restructure, Wambo's constitution was amended to set out
the rights attached to the B class securities. This entitled
Sumiseki to receive a fixed and mandatory dividend in respect of
every six month period of an amount equal to 25% of "the
profit of the Company available for dividend
When the B class securities were issued to Sumiseki, all the
ordinary securities in Wambo were held by Hunter. In 2006, Peabody
Energy Corporation (Peabody) gained control of
Hunter, and in 2009 all the assets of Hunter became the assets of
Peabody Australia Mining Limited (PAML) under a
scheme of arrangement. PAML also entered into a loan agreement with
Wambo which amended the constitution and, in part, led Wambo to
believe that the payment of dividends was again at the
Between December 2009 and December 2011, Wambo's directors
decided not to pay B class shareholders a dividend in respect of
the 6 month periods, even though Wambo's accounts disclosed an
after tax profit from which dividends could have been paid.
Sumiseki brought proceedings against Wambo in the NSW Supreme
Court alleging an entitlement to dividends in respect of those
profits based on the proper construction of Wambo's
constitution. Sumiseki also asked the Court to consider whether
Wambo's decision amounted to conduct that was oppressive within
the terms of section 232 of the Corporations Act 2001
(Cth) (Corporations Act).
In 2013, the NSW Supreme Court found that Sumiseki was entitled
to the outstanding dividends and that withholding the dividend
payments from Sumiseki amounted to oppressive conduct. Wambo
appealed the decision, however the Court of Appeal upheld the
original decision. The Court of Appeal confirmed that the meaning
of the phrase contained in Wambo's constitution that
"the profit of the company available for dividend
purposes", was that the profits were undiminished by the
directors' discretion to declare dividends, capitalise profits,
set aside reserves or provisions, or carry forward profits. The
Court of Appeal said that specifying a fixed amount and date for
the payment of a dividend gave Sumiseki the "right" to
receive a dividend regardless of the discretion afforded to the
Importantly, the Court of Appeal found that together with the
construction of Wambo's constitution and the application of
section 140(1)(a) of the Corporations Act, it had the effect of
making the constitution a contract "between the company
and each member".
The Court of Appeal made comments that Wambo's constitution
may depart from the traditional form which gives directors the
discretion under section 254U of the Corporations Act regarding
when and in what amounts dividends are to be paid to shareholders.
The constitution therefore removed those matters from the scope of
Wambo's internal decision making.
The Court of Appeal also confirmed that the decision of Wambo
not to pay the dividends to Sumiseki amounted to oppressive
Key take away points
Company boards should be aware that changes to the constitution
around dividend payments may affect their internal decision making
Denying a shareholder an express right provided for in a
constitution may be deemed oppressive and unfairly prejudicial to
Shareholders should be mindful of their rights and how they are
affected where the company enters into restructure or finance
Shareholders may consider utilising the constitution as an
additional form of security to reinforce their rights pursuant to
agreements made with a company.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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