A Proper Purpose – Federal Court Upholds Shareholder Application To Inspect Books, Despite Hostility And Threats - Shareholders

This week's TGIF considers the recent case of Rasley (Singapore) Pte Ltd v Financial & Energy Exchange Ltd [2020] FCA 1462, where the Federal Court of Australia allowed an application for the inspection of a company's books despite the applicant's hostile attitude and threats against the company.

Key takeaways

Section 247A of the Corporations Act 2001 (Cth) (Act) is remedial legislation which confers a broad discretion on the Court to permit inspection of books and records.
A hostile (and even threatening) shareholder can still succeed in an application to inspect books under s 247A.
When determining whether to grant an order to inspect books under s 247A, the Courts will have regard to the overriding and predominant purpose of the application.

Background

The proceeding involved an application by Rasley (Singapore) Pte Ltd (Rasley) to inspect the books of Financial and Energy Exchange Ltd (Company).

The Company's principal activities related to the development and operation of financial market infrastructure platforms. Rasley held approximately 0.5 percent of the Company's shares.

The application was made in response to a number of transactions entered into by the Company. The transactions included a lease agreement with a related party and several share issues.

The application

The application to inspect the Company's books was brought pursuant to s 247A of the Act. As a precondition to the making of an order under that provision, a Court must be satisfied that the applicant is acting in good faith and for a proper purpose.

Rasley's arguments

To demonstrate its bona fides, Rasley pointed to three categories of transactions entered into by the Company:

Between 3 June 2017 and 5 April 2018 the Company conducted a number of share issues which increased the Company's total number of shares by 85%. These share issues significantly diluted Rasley's shareholding in the Company, and the consideration paid for these shares was negligible.
Rasley raised concerns about a number of related party transactions disclosed in the Company's annual reports.
The Company's annual reports revealed that it was paying rent under two leases entered into with a related party. Rasley submitted that it was concerned about whether the rent paid by the Company was at market value.

Company's arguments

The Company opposed the application on the basis that it was not made in good faith and for a proper purpose. In doing so, it relied on several examples of Rasley's director's conduct. This alleged conduct included:

Rasley's director's failure to accede to a request by the Company's in house lawyer to discuss his concerns about the Company; and
a series of combative emails sent by Rasley's director, one of which stated that "[he] will ensure that this company never trades".

Decision

The application raised two issues.

The first was whether the three categories of transactions identified by Rasley supported an inspection for a proper purpose. This was an objective inquiry, in respect of which Jackson J made the following findings:

Rasley was entitled to investigate the Company's documents in circumstances where the share issues significantly diminished its shareholding in return for potentially infinitesimal consideration.
There was insufficient evidence to make out a case for investigating the Company's various related party transactions.
Rasley successfully pointed to a concrete basis for its suspicion that the Company may have paid above market rent under the related party leases.

The second issue was whether Rasley's director's interactions with the Company indicated that he had not acted in good faith and sought inspection for a proper purpose.

His Honour observed that, while the question of good faith and proper purpose must be objectively assessed, evidence as to subjective purpose is relevant and admissible.

His Honour held that:

Despite the "angry, perhaps spiteful, attitude" shown by Rasley's director towards the Company, hostility alone does not preclude the making of an order under s 247A.
Rasley's director's threat to "ensure that this company never trades" was "merely an exasperated and frustrated response" to the Company's conduct.

Accordingly, Jackson J was satisfied that Rasley's investigation of the share issues and the lease provided a proper basis upon which to grant an order for inspection under s 247A.

However, his Honour limited access to only those documents which were capable of addressing the legitimate concerns raised by Rasley.

Comment

The Court in this case emphasised that s 247A is remedial legislation, which confers a broad discretion on the Court to order the inspection of books and records.

The Court will not shy away from granting an order to inspect books under s 247A simply due to the existence of hostility or ill-will on the part of a member of a company. Provided there is a proper basis for the application, a disgruntled shareholder might well find relief under s 247A.

That said, when determining whether an applicant is acting in good faith and the inspection is for a proper purpose, a Court will have regard to evidence of both objective and subjective intentions.

Ultimately, an application will be allowed in circumstances where the applicant's predominant purpose is connected to the proper exercise of the rights of a shareholder as a shareholder.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.