A general principle of the Companies Act 1993 (the Act) is that the board of directors is appointed to manage and control the day-to-day operations of a company without having direct interference or oversight by shareholders (the owners of a company). However, some decisions may substantially change the nature or direction of a company and accordingly, the shareholders are required to approve these decisions. These substantial decisions are known as major transactions.
Major transaction defined
A major transaction is where a company purchases or sells assets or incurs an obligation that has a value of greater than half of the company’s existing assets. For example, if a company was created to own a dairy farm and it subsequently sells the farm, this would constitute a major transaction as the farm was a significant company asset.
Requirements of major transactions
A major transaction must be approved by special resolution, which requires a majority of 75% of the shareholders of a company to approve the transaction.
A company cannot avoid the major transaction provisions set out in the Act; however, it can add requirements for passing a major transaction under its company constitution. For example, a company constitution could state that 80% of shareholder votes are required for a special resolution in relation to major transactions rather than 75% as provided for in the Act.
Breach of major transaction provision
Directors of a company may be personally liable if a major transaction is not approved by a shareholder special resolution.
Where a company has entered into a major transaction without passing a special resolution and the transaction is not yet complete, shareholders can apply for an injunction to stop the directors from completing the transaction.
If a major transaction is not approved by the required majority of shareholders, this is deemed to be unfair and damaging conduct by the directors and accordingly shareholders may seek remedies. Remedies may include:
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Requiring the company to buy the shareholders’ shares (this is discussed further below);
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Requiring the company or any other person to pay compensation;
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Regulating the future conduct of the company’s affairs;
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Altering or adding to the company’s constitution;
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Appointing a receiver of the company; or
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Putting the company into liquidation.
Notwithstanding the list above, it may be difficult for shareholders to seek remedies if they cannot show they incurred a financial loss as a result of the major transaction.
If the major transaction is entered into without a special resolution, this breach does not mean that the transaction is automatically invalid. It is possible for shareholders to later approve the major transaction if it was not entered into via a special resolution. This can be beneficial for the company and its directors as it would be more difficult for shareholders to later challenge the board of directors’ decisions.
Minority shareholders
If you are a shareholder who voted against the major transaction but the transaction was approved by the majority of the shareholders, you have the right to exercise minority buy-out rights i.e. require the company to buy your shares at a fair and reasonable price. The minority buy-out rights provisions provide an avenue for minority shareholders who do not agree with the majority shareholding and also allow for the majority shareholding to validly make changes to the company.
The company may apply to the court for an exemption from the obligation to buy the minority shares on the following basis:
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The purchase would be disproportionately damaging to the company;
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The company cannot finance the purchase; or
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It would not be fair to require the company to purchase the shares.
The major transactions requirements under the Act are vital for keeping directors accountable and allowing shareholders, as the underlying owners, to make decisions in the best interests of the company.