Recent press indicates that many Telstra shareholders are unhappy about the reforms to the Australian telecommunications landscape announced by the Government on 15 September 2009 which could result in the structural separation of Telstra.
The Senate Committee enquiring into the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009, which includes the proposed reforms, has already received a number of submissions from Telstra shareholders complaining that the possible structural separation of Telstra will detrimentally affect the value of their shareholding. Examples of comments include:
" I bought my Telstra shares in good faith FROM the
government. I feel that it is quite immoral of you to now reduce
the value of that enterprise by forcing it to off load a major part
of it's operation."; and
"When my wife & I in good faith, bought shares from the Government some years ago, nowhere in the brochures did it say that the Government would continuously, over the years, do its best to limit the value of the shares, by legislating to handicap the company."
In a letter to the Telstra Board, signed by 8 fund managers holding over 500 million shares, they said:
"We are outraged by the government's draconian impositions on Telstra and believe the board should be as well....We urge the board to rally its 1.4 million shareholders to petition the government to cease its legislation which is clearly value- destroying for Telstra shareholders"
These comments beg the question: do Telstra shareholders have any legal rights against the Government or the directors of Telstra in relation to any action which may be taken pursuant to the reforms, including the structural separation of Telstra? The answer to the question, while in some respects relatively simple, should not be quickly dismissed.
It is a long held principle of corporations law that, although they may have ultimate control over a company because of their ability to alter the articles or remove the directors of a company, the shareholders cannot interfere in the conduct of company business where management is vested in the board. Shareholders have no general power to transact the company's business, or to give directions about its management.1
Shareholders are also hampered in their ability to bring actions, other than in their own names where their personal rights are concerned, in circumstances where it is the company's rights which have been affected. Part 2F.1A of the Corporations Act 2001 (Cth) sets out the circumstances in which a shareholder can bring an action, known as a statutory derivative action, on behalf of a company. They are limited to circumstances where leave of the Court has been granted and shareholder or shareholders can establish:
- it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
- the shareholder applicant is acting in good faith; and
- it is in the best interests of the company that the applicant be granted leave; and
- if the applicant is applying for leave to bring proceedings, there is a serious question to be tried; and
- the company has been given prior written notice of the applicant's intention to apply for leave.
Aside from a possible constitutional challenge to the Government's proposed legislation based on an argument that the legislation amounts to a breach of the constitutional guarantee that any acquisition of property must be on just terms (which has been discussed in a previous Alert), it is difficult to conceive of a situation where Telstra voluntarily agrees to structurally separate, pursuant to legislation enacted by the Government, in which its rights as a company would give rise to a legal right of action against the Government and in which a shareholder or shareholders could seek to bring a statutory derivative action.
Should Telstra as a company decide not to proceed with a constitutional challenge, however, it is not outside the bounds of possibility that shareholders could decide to take matters into their own hands and seek leave to bring such an action in Telstra's name pursuant to Part 2F.1A of the Corporations Act. Any such application would require the shareholders to satisfy the requirements of that Part including, importantly that it is in the best interests of Telstra that they be granted leave to bring the proceedings. This may present a conundrum where the effect of the alternatives under the proposed reforms on Telstra's interests may not necessarily be easy for anyone to assess. No doubt also, some shareholders (including perhaps the Government's Future Fund) would oppose any such application but, conceptually at least, the possibility should not be excluded.
And what if Telstra's directors do decide to offer a voluntary structural separation undertaking? It is this situation which many shareholders are saying may result in a loss in value of their shareholdings. If the terms of any such undertaking amount to action which is contrary to the interests of shareholders as a whole, or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders whether in that capacity or in any other capacity, such shareholders may seek orders under section 233 of the Corporations Act . The section provides for a wide range of orders from winding up of the company to orders requiring purchase of shares and an appropriate reduction in share capital and orders restraining a person from engaging in specified conduct or from doing a specified act, or requiring the person to do a specified act. Depending on the terms of any voluntary undertaking offered, the ability of a shareholder to seek relief pursuant to section 233 and the possibility of a court becoming involved in framing the terms of any such undertaking should not be discounted.
The possibility of shareholder action may not end there, though. Many shareholders are complaining that it was deceptive of the previous government to entice them to purchase Telstra shares without any warning that a successive government may legislate in a manner which affects the value of those shares. Individual shareholders who suffer loss as a result of reliance on any such misleading and deceptive conduct may seek to recover such loss, based on a claim of breach of the Trade Practices Act (1974) (Cth). Not only would such shareholders have to prove that the previous government's actions were misleading and deceptive but also that the conduct was engaged in by the government in the course of conducting a business. It is likely that both would prove difficult, and, in the case of the latter possibly an insurmountable hurdle to overcome. Then there is the effect of the general principle that one parliament cannot bind another. Whether this would preclude an action against a new government based on a misleading and deceptive representation of a previous government is, of itself, likely to be a whole new area of dispute, but the prospect of an enterprising group of shareholders exploring all the options and testing the reach of the law is, again, not impossible.
Whether shareholder unhappiness translates into shareholder action is, like so many things with the NBN at this time, a matter which will depend on how Telstra chooses to react to the proposed reforms. The devil is still in the details which will only be revealed over time.
1 See Winthrop Investments Ltd v Winns Ltd  2 NSWLR 666 at 683
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