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Published online by Cambridge University Press: 01 January 2025
The central hypothesis of the paper is that bit by bit and largely unnoticed Australian corporate law has undergone a profound change. Australian corporate law, and particularly the Corporations Act 2001 (Cth), has moved from an essentially private law, substantive rights model, to one that seeks to regulate the company and those involved in its affairs through the prescription of processes and procedures by which corporate decisions may be made and by which the procedural correctness of those decisions is assured. The paper will also seek to demonstrate, by an analysis of the changes in the patterns of corporate case law, that this proceduralising trend has effected a fundamental change in the nature of corporate law and the role of the courts and may now claim to be a, if not, the principal characteristic of Australian corporate law. The paper concludes by highlighting some of the wider implications of this trend and the risk it poses to the intellectual heart of corporate law.
The modern registered company owes its immediate creation to the legislature. Historically, however, the nature of the corporate form and the content of what is now known in Australia as corporate law has been very much more the work of the courts. It is thus the case that the decision of the House of Lords in Salomon v A Salomon & Co Ltd is more often cited as the foundation of modern corporate law than are the Joint Stock Companies Act 1844 (UK) or the Limited Liability Act 1855 (UK). It is also the case that the building blocks of corporate law were predominantly taken from the private law. Within the open girders of the statutory framework, corporate law was built out of the concepts of contract, property, and trust. It is thus not surprising that the company was, and is still, regarded as a fundamentally private legal and economic institution.
I am grateful to the anonymous referees for their comments. The usual caveats apply.
1 Ramsay, Cf Ian, ‘Corporate Law in the Age of Statutes’ (1992) 14 Sydney Law Review 474.Google Scholar
2 [1897] AC 22.
3 This was the first grant of a general right to seek incorporation by registration.
4 This was the first general grant of limited liability. This Act remained in force for only a few months before being replaced by the Joint Stock Companies Act 1856 (UK).
5 Manning, Bayless, ‘The Shareholder's Appraisal Remedy: An Essay for Frank Coker’ (1962) 72(2) Yale Law Journal 223, 245 n 37.CrossRefGoogle Scholar
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12 Plessis, Jean du, McConvill, James and Bagaric, Mirko, Principles of Contemporary Corporate Governance (Cambridge University Press, 1st ed, 2005) 178.CrossRefGoogle Scholar The same comments appear in the second edition: Plessis, Jean du, Hargovan, Anil and Bagaric, Mirko, Principles of Contemporary Corporate Governance (Cambridge University Press, 2nd ed, 2011) 216.Google Scholar
13 Corporate law is an accretion of doctrines and principles that reflect particular conceptualisations of the company over time. Although the dominant conceptualisation changes over the course of history there is rarely if ever a clearing out of those doctrines that reflected the now abandoned conceptualisation. See also Jordan, Cally, ‘Unlovely and Unloved: Corporate Law Reform's Progeny’ (2009) 33 Melbourne University Law Review 626, 635.Google Scholar
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18 The most recent swings in the cycle began in the early 2000s with the Enron scandal and continued with the Global Financial Crisis in 2008. Internationally, the Enron-era scandals led to the knee-jerk adoption of prescriptive legislation in the form of the Sarbanes-Oxley Act 2002, Pub L No 107–204, 116 Stat 745 in the US and CLERP 9 in Australia. The GFC produced its own wave of knee-jerk regulation: Dodd-Frank Act 2010, Pub L No 111–203, 124 Stat 1376. However, there is little evidence that the 2008 GFC was caused by corporate governance failures: Cheffins, Brian R, ‘Did Corporate Governance “Fail” During the 2008 Stock Market Meltdown? The Case of the S&P 500’ (2009) 65 Business Lawyer 1, 2.Google Scholar
19 Whincop and Keyes, above n 7, 54.
20 Ibid 77.
21 (1995) 183 CLR 501. The case concerned the then statutory duty of propriety: Companies (South Australia) Code s 229(4).
22 (1995) 182 CLR 432. The Court held that whether the expropriation of shares was oppressive or not turned on whether a proper procedure was followed.
23 Whincop and Keyes, above n 7, 87. This included the proposal for a statutory derivate action (now in Corporations Act 2001 (Cth) ss 236–42), which was felt to be akin to the reasonableness ground of review in administrative law: ibid 91. See also Bottomley, Stephen, ‘Shareholder Derivative Actions and Public Interest Suits: Two Versions of the Same Story?’ (1992) 15 University of New South Wales Law Journal 127.Google Scholar
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25 As with the Sarbanes-Oxley Act in the United States, the blame for the scandals of Enron and WorldCom in the US and One.Tel and HIH in Australia was laid principally at the door of the corporate ‘gate-keepers’, in particular the auditors. See generally, Bainbridge, Stephen, Corporate Governance after the Financial Crisis (Oxford University Press, 2012) 179–88.CrossRefGoogle Scholar
26 This is over four times the length of the whole of the first companies act, the Joint Stock Companies Act 1844 (UK).
27 du Plessis, McConvill and Bagaric, above n 12, 178. The same comments appear in the 2nd edition (2011) 216.
28 Ibid.
29 This is emphasised by the threshold requirements for the operation of the business judgment defence in s 180(2) of the Corporations Act 2001 (Cth). See also Corbett and Bottomley, above n 16, 80.
30 Corporations Act 2001 (Cth) ss 189, 190.
31 Corporations Act 2001 (Cth) s 212(3) defines how it is to be determined whether the granting of the indemnity to the directors is reasonable.
32 Corporations Act 2001 (Cth) s 237(3) establishes a rebuttable presumption that the decisions of the directors not to bring proceedings is in the best interests of the company, if the directors’ decision making-process satisfied certain specified criteria.
33 Cane, Peter and McDonald, Leighton, Principles of Administrative Law (Oxford University Press, 2nd ed, 2012) 112–76.Google Scholar
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36 See generally Parker, Christine, The Open Corporation (Cambridge University Press, 2002) 197CrossRefGoogle Scholar; Black, Julia, ‘Proceduralizing Regulation: Part I’ (2000) 20(4) Oxford Journal of Legal Studies 597CrossRefGoogle Scholar; Black, Julia, ‘Proceduralizing Regulation: Part II’ (2001) 21(1) Oxford Journal of Legal Studies 33.CrossRefGoogle Scholar
37 Black, above n 36, 601.
38 Corbett and Bottomley, above n 16, 61, also see the advent of a more regulatory approach as ‘transforming our understanding of the content of corporate law’.
39 Moore, above n 6, 324.
40 Although it is not just about decision-making within the company, current takeover regulation (Corporations Act 2001 (Cth) pt 6.5) provides for an enormously detailed set of procedures for the making of a takeover bid.
41 Frug, above n 34, 1323; Cane and McDonald, above n 33, 130.
42 Corporations Act 2001 (Cth) s 191(1) provides that a director with a material conflict of interest must disclose that interest to the other directors. They are then provided two means of making the disclosure: disclosure to the board of the particular conflict (s 191(1)) or through a standing notice (s 192). The contents of the disclosure are specified in s 191(3) for a particular notice and s 192(2) for a standing notice. Disclosure having been made, the conflicted director is then permitted to vote notwithstanding the conflict (s 194 in relation to proprietary companies and s 195 in relation to public companies if the other directors so agree).
43 The presence of ASIC as a backstop or enforcer is a feature of many of the processes now being imposed. In one sense, this suggests that Parliament does not completely trust the process solution, but equally ASIC may been seen as a participant in the process.
44 See generally the collection of essays on directors’ duties in (2012) 35 University of New South Wales Law Journal 248. See also Lumsden, Andrew, ‘The Business Judgment Defence: Insights from ASIC v Rich’ (2010) 28 Company and Securities Law Journal 164Google Scholar; Hooper, Matthew, ‘Directors’ Duties and Corporate Governance: The Business Judgment Rule: ASIC v Rich and the Reasonable-Rational Divide’ (2010) 28 Company and Securities Law Journal 423.Google Scholar
45 The net position is usefully summarised by Gibson, Belinda and Brown, Diane, ‘ASIC's Expectations of Directors’ (2012) 35 University of New South Wales Law Journal 254.Google Scholar
46 Ibid 259.
47 ASIC v Healey [2011] FCA 717; (2011) 83 ACSR 484 [174]; Gibson and Brown, above n 45, 259.
48 ASIC v Adler (2002) 168 FLR 253 [396]–[453]; Gibson and Brown, above n 45, 263.
49 ASIC v Citrofresh International Ltd [No 2] [2010] FCA 27; (2010) 77 ACSR 69; Gibson and Brown, above n 45, 263.
50 (2009) 236 FLR 1. Beach J applied Austin J's analysis in ASIC v Marnier Corporation Ltd [2015] FCA 589 to uphold reliance by the directors on s 180(2). See generally Austin and Ramsay, above n 15, [8.310]. This is true also of the rules on delegation and reliance on advice in Corporations Act 2001 (Cth) ss 189–190.
51 See Lumsden, above n 44; Hooper, above n 44. Austin J's approach to the ‘rational belief’ element, as being a rational belief, not necessarily an objectively reasonable one, in particular suggests a focus on the decision-making process, not the outcome of the decision.
52 Corporations Act 2001 (Cth) s 180(2)(a), (b).
53 Ibid s 180(2)(c).
54 Ibid s 180(2)(d).
55 Golding, Greg, ‘Tightening the Screws on Directors: Care, Delegation and Reliance’ (2012) 35 University of New South Wales Law Journal 266, 271Google Scholar; Young, Neil, ‘Has Directors’ Liability Gone too Far or Not Far Enough? A Review of the Standard of Conduct Required of Directors under Sections 180–184 of the Corporations Act’ (2008) 26 Company and Securities Law Journal 216.Google Scholar
56 The proposition that Healey imposes a demanding standard of care must, however, be seen in the context of the seemingly undemanding penalties that were imposed: ASIC v Healey [No 2] (2011) 196 FCR 430. Hill, Jennifer, ‘Centro and the Monitoring Board — Legal Duties Versus Aspirational Ideals in Corporate Governance’ (2012) 35 University of New South Wales Law Journal 341Google Scholar offers a principled justification of the apparently different standards applied to the issues of liability and penalty. Equally, however, the difference in approach may simply reflect Middleton J's recognition of the widespread criticism about the liability standards imposed.
57 In response to the heightened risk of personal liability for directors, the Australian Institute of Company Directors, A Proposal for Reform: The Honest and Reasonable Director Defence (August 2014) <https://www.governanceinstitute.com.au/media/681519/the-honest-reasonable-director-defence-a-proposal-for-reform_august-2014_f.pdf> has advocated the introduction of a defence for the honest and reasonable director. This defence would be broader than the current business judgment defence.
58 Corporations Act 2001 (Cth) pt 2E.1. Division 3 of pt 2E.1 sets out the ‘procedure for obtaining member approval’.
59 Hill, above n 10. As Hill notes, the issue of whether shareholders are in fact able to function as a supervising regulator is a very different question.
60 Corporations Act 2001 (Cth) ss 236–7.
61 Smith v Croft [No 2] [1988] Ch 114. This is also the preferred solution in the United States: Cox, James D, Hazen, Thomas L and O'Neal, Forest H, Corporations (Aspen Law and Business, 1997) 208.Google Scholar
62 See, eg, Ghabrial v Romolly Pty Ltd (1991) 5 ACSR 611; Toole v Flexihire Pty Ltd (1991) 6 ACSR 455; The New South Wales Henry George Foundation Ltd v Booth (2002) 41 ACSR 288; NRMA Ltd v Bradley (2002) 42 ACSR 616; Weinstock v Beck (2013) 251 CLR 396.
63 See especially Teubner, Gunther, ‘Corporate Fiduciary Duties and their Beneficiaries’ in Hopt, Klaus J and Teubner, Gunther (eds), Corporate Governance and Directors’ Liabilities — Legal Economic and Sociological Analyses on Corporate Social Responsibility (de Gruyter, 1984) 149.Google Scholar See also Corbett and Bottomley, above n 16, 71; Whincop and Keyes, above n 7, 74.
64 The ‘no conflict’ and ‘no profit’ rules are sometimes viewed as separate rules and sometimes as variations on a theme, where the no profit rule is merely a special case of the no conflict rule. Both of these rules may be seen as a manifestation of, or derivation from, the overarching duty of loyalty. See Conaglen, Matthew, ‘A Re-Appraisal of the Fiduciary Self-Dealing and Fair-Dealing Rules’ (2006) 366 Cambridge Law Journal 390Google Scholar; Conaglen, Matthew, Fiduciary Loyalty (Hart Publishing, 2010)Google Scholar; Miller, Paul, ‘A Theory of Fiduciary Liability’ (2011) 56 McGill Law Journal 235, 257.CrossRefGoogle Scholar
65 Re Beloved Wilke's Charity (1851) 3 Mac & G 440, 448; 42 ER 330, 333: ‘The duty of supervision on the part of this Court will thus be confined to the honesty, integrity and fairness with which the deliberation has been conducted, and will not be extended to the accuracy of the conclusion arrived at.'
66 [1942] Ch 304.
67 Hindle v John Cotton Ltd (1919) 56 Sc LR 625, 630; Teck Corporation Ltd v Millar (1972) 33 DLR (3d) 288, 315 (Berger J); Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 835; Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242, 253. See Loxley, Kane, ‘“Unashamedly More Interventionist” Courts and the Fading Significance of a Director's State of Mind’ (2014) 32 Company and Securities Law Journal 486.Google Scholar
68 If the courts were in fact concerned with substantive outcomes, the formulation of the duty would look more like that adopted by Kirby P in dissent in Darvall v North Sydney Brick & Tile Co Ltd [No 2] (1989) 16 NSWLR 260, 282: ‘although not conclusive, the court can look at the declared intentions of directors in order to test their assertions (which will often be self-protective) against the assessment by the court of what, objectively, was in the best interests of the company at the relevant time.'
69 Corporations Act 2001 (Cth) s 588G.
70 It is a condition of liability that there were reasonable grounds for suspecting that the company was insolvent: Corporations Act 2001 (Cth) s 588G(1)(c). The director is thus held liable on the basis that a reasonable director would have known or would have found out. See Austin and Ramsay, above n 15, para 20.140.
71 The ultimate trigger for liability is that the directors failed to prevent the company incurring the debt (Corporations Act 2001 (Cth) s 588G(2) and s 588H(5). Whether the directors took all reasonable steps to prevent the debt being incurred is ultimately a judgement as to the merits of the actions the directors in fact took.
72 Hence, oppression claims are always lengthy and the judgments are highly factual in nature.
73 Sutherland v NRMA Ltd (2003) 47 ACSR 428; Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; Austin and Ramsay, above n 15, para 10.450.
74 The prohibition on insolvent trading has a long history, first being introduced in 1907 in the UK and in Australia in s 284 of the Companies Act 1931 (Qld). It is clear from the Harmer Report (Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) para 53) that the current iteration of the prohibition is driven largely by considerations arising from the law of insolvency. Likewise, the oppression remedy is of long standing and reflects concerns about the ‘over-kill’ of winding up as a remedy for internal disputes between shareholders.
75 Samuel, Geoffrey, ‘Is Law Really a Social Science? A View from Comparative Law’ (2008) 67 Cambridge Law Journal 288, 295.CrossRefGoogle Scholar
76 It is accepted that many, if not the majority of, disputes regarding companies will be settled before matters reach court. The proportion of disputes settled in this way may be increasing for the reasons outlined in section III below.
77 The Australian Corporations and Securities Reports are a continuation of the Australian Company Law Reports. These reports are published by LexisNexis.
78 Published by CCH Australia Ltd.
79 There is a substantial overlap in the cases reported in the two series, but equally there is a significant number of cases that appear in only one of the series.
80 The classification of the principal issue in the case as core or non-core is based on the headnote to the report. Although headnotes are sometimes misleading, this offers the best chance of an objective and consistent classification of the issue before the court.
81 New Zealand Law Commission, Company Law: Reform and Restatement, Report No 9 (1989) [22]–[23]; Kraakman, Reinier et al (eds), The Anatomy of Corporate Law – A Comparative and Functional Approach (Oxford University Press, 2nd ed, 2009) 5, 16Google Scholar; Jordan, above n 13, 637; Davies, Paul, Introduction to Company Law (Clarendon, 2nd ed, 2010) 8.CrossRefGoogle Scholar
82 See the principles set out in the Harmer Report: Law Reform Commission, Harmer Report, Report No 45 (1988) [5]. See also Mokal, Rizwaan J, Corporate Insolvency Law —Theory and Application (Oxford University Press, 2005).CrossRefGoogle Scholar
83 The winding up and insolvency of companies are dealt with in separate legislation in the United Kingdom, Canada and the US.
84 Anderson, Helen et al, ‘The Evolution of Shareholder and Creditor Protection in Australia: An International Comparison’ (2012) 61 International and Comparative Law Quarterly 171, 180.CrossRefGoogle Scholar
85 Lele, Priya and Siems, Mathias, ‘Shareholder Protection: A Leximetric Approach’ (2007) 7 Journal of Corporate Law Studies 17, 25.CrossRefGoogle Scholar
86 For example, the results also show the rise of the Supreme Court of New South Wales as the principal corporate law forum in Australia. In 1991, 26 per cent of the reported cases were heard in New South Wales. In 2002, that number had risen to 52 per cent, and in 2013 it was 43 per cent.
87 Across the Common Law world there has been a very significant move away from court-based litigation, especially in civil and commercial matters. This trend, known as the phenomenon of the ‘vanishing trial’, first came to prominence with a study undertaken by the American Bar Association in 2003. This study found that between 1962 and 2002 the number of civil matters filed in US District Courts going to trial had dropped from 11.5 per cent to 1.8 per cent: Galanter, Marc, ‘The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts’ (2004) 1 Journal of Empirical Legal Studies 459.CrossRefGoogle Scholar In the United Kingdom, figures compiled by Hazel Genn suggest an equally massive drop in civil litigation: Genn, Hazel, Judging Civil Justice (Cambridge University Press, 2010) 27–78.Google Scholar A study in Australia of the New South Wales District Court suggests that the vanishing trial is apparent here too: Spencer, David, ‘The Decline of the Trial in Australia’ (2011) 30 The Arbitrator and Mediator 1.Google Scholar
88 Of the non-core cases, the majority are concerned with insolvency law issues: 1991 (47 per cent); 2002 (50 per cent); 2013 (51 per cent). Of the remainder, the most prominent issues are: practice and procedure, securities law, and, increasingly, general law claims (contract, tort, and consumer law).
89 It inevitably takes a number of years for issues concerning new provisions to arise and come before the courts.
90 For example, in relation to the approval of share buy-backs and the provision of financial assistance: Company Law Review Act 1998 (Cth) ch 2J.
91 The Corporate Law Economic Reform Program Act 1999 (Cth) made important changes to the rules on compulsory acquisition by significantly limiting the scope of the court's inquiry when approving an acquisition (see Corporations Act 2001 (Cth) ss 661E, 667C). In 2002, approval of compulsory acquisitions represented almost a quarter of all core corporate law cases reported. By 2013, compulsory acquisition approvals had fallen to less than 10 per cent.
92 In 2013, those cases involving core corporate law issues dealt with matters such as: granting leave to bring derivative actions, the validity of processes in calling meetings, appointing directors, paying directors remuneration, and oppression claims.
93 As with the whole of the corporate governance debate, the focus is exclusively on large and public companies.
94 Ian D F Callinan, ‘The Corporate Law Economic Reform Programme: An Overview’ (Paper presented at the Corporations Law Update Conference, Sydney, 26 October 1998) 1–2.
95 Corporations Law Simplification Program, Task Force – Plan of Action (December 1993, Attorney-General's Department) 1.
96 The Treasury, CLERP – Policy Framework <http://archive.treasury.gov.au/documents/267/HTML/docshell.asp?URL=index.asp>.
97 Callinan, above n 94, 4.
98 Black, Cf Bernard and Kraakman, Reinier, ‘A Self-Enforcing Model of Corporate Law’ (1996) 109 Harvard Law Review 1911.CrossRefGoogle Scholar
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101 For example, the former prohibition on financial assistance in the purchase of the company's shares or the prohibition on insolvent trading.
102 Cheffins, Brian R, Company Law: Theory, Structure and Operation (Oxford University Press, 1997) 227Google Scholar; Ramsay, Ian M, ‘Models of Corporate Regulation: The Mandatory/Enabling Debate’ in Grantham, Ross B and Rickett, Charles E F (eds), Corporate Personality in the 20th Century (Northwestern University Press, 1998) 226Google Scholar; Corbett, above n 100, 301–5.
103 Black, ‘Proceduralizing Regulation’, above n 36, 601.
104 Berle, Adolf A and Means, Gardiner C, The Modern Corporation and Private Property (Harcourt, Brace and World, 1968) 312–3Google Scholar. See also the Berle-Dodd debate: Berle, Adolf, ‘Corporate Powers as Powers in Trust’ (1931) 44 Harvard Law Review 1049CrossRefGoogle Scholar; Dodd, Merrick, ‘For Whom are Corporate Managers Trustees?’ (1932) 45 Harvard Law Review 1145.CrossRefGoogle Scholar
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108 Corporations Act 2001 (Cth) s 140 defines the relationship between the company, shareholders and directors as being contractual. This is a hangover from the partnership origins of modern corporate law and is an illustration of the temporal contingency of corporate law.
109 One consequence of this is that historically company law has always accorded the participants in the company a good deal of scope for self-regulation. For example, the participants have always been able to tailor the company's constitution to suit their needs and the principle of majority rule has facilitated, through the doctrine of ratification, some level of internal dispute resolution,
110 Such a move is consistent with the general aims of the reforms to make corporate law more efficient and to reduce the regulatory burden.
111 See generally Jones, Renee M and Welsh, Michelle, ‘Toward a Public Enforcement Model for Directors’ Duty of Oversight’ (2012) 45 Vanderbilt Journal of Transnational Law 343.Google Scholar
112 For example, directors who act under the influence of a conflict of interest or who act to entrench their own positions against the wishes of shareholders clearly act improperly and may be said to have committed ‘equitable fraud’, but this is still a long way from actual dishonesty.
113 For example, in relation to related party transactions, Corporations Act 2001 (Cth) s 209 makes it an offence not to comply with the process set out in s 208.
114 New Zealand Law Commission, above n 81, [20]–[21].
115 The New Zealand Companies Act 1993 (NZ) is approximately 132 000 words in 397 sections, versus the Corporations Act 2001 (Cth) which is more than 750 000 words in 2600 sections.
116 Callinan, above n 94, 4.
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119 The traditional function of a court has been is to ‘resolve a dispute about the existing rights and obligations of the parties by determining what those rights and obligations are’ (Precision Data Holdings Ltd v Wills (1991) 173 CLR 167, 189). In so far as proceduralisation entails that courts are made part of a regulatory process, where their role is something other than the resolution of disputes about established rights, an issue arises as to whether the conferment of an essentially non-judicial function on the courts is consistent with constitutional judicial system. See Thomas v Mowbray (2007) 233 CLR 307; Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542; Wainohu v New South Wales (2011) 243 CLR 181.
120 Farrar, John, ‘Corporate Governance and the Judges’ (2003) 15 Bond Law Review 65CrossRefGoogle Scholar; Cheffins, above n 102, 309.
121 The question of whether the focus of corporate law and policy ought to be on ensuring proper process or whether it ought to be on generating wealth is an important question but one beyond the scope of this paper.
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124 Berle and Means, above n 104.
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