A recent matter before the Federal Court has highlighted the difficulties that shareholders may have in accessing the accounts and books of a company in which they hold a material interest.

The lesson to be learnt from the following case is that the terms of access to the books and accounts of a company should be made clear in a shareholders agreement.

If it is the intention of the parties to allow shareholders access to the relevant material, then that right should be established as an unfettered right rather than one conditional upon further action, conduct or approval by the Board.

If you are also a director of the company, you may consider entering into a Deed of Access & Indemnity to secure your rights. In this case, however, urgent injunctive relief was sought by a shareholder to obtain access to the books of a company in which the shareholder held 35% of the shares. 

The shareholder had become concerned as a result of the failure of the company to pay the shareholder dividends as and when due, and media reports that significant funds had been paid out of the company to third parties. In addition, proper accounts of the business had not been prepared or presented to the shareholder and no reasonable explanation had been advanced as to the reasons for the delay.

The shareholder made requests to the company to inspect the accounts and books of the company. That request was denied. The shareholder sought the court’s assistance to gain access to the company’s accounts. It did so on three grounds:

1. Clause 6 of the Shareholder Agreement gave the shareholder a right of access to the books and set out the procedure required. One of the requirements was that the person inspecting must sign a Confidentiality Agreement in a form approved by the Board. In this instance the Board refused to approve any form of any Confidentiality Agreement and accordingly denied access to the shareholder. The shareholder challenged this action;
    
2. The shareholder argued that Section 1324(4) of the Corporations Act entitled the shareholder to access the books and accounts in circumstances where, in the opinion of a Court, a person may be engaging or propose to engage in conduct which constituted a contravention of the Corporations Act. The shareholder alleged that the conduct of the company was or would contravene the Act;
    
3. The shareholder further alleged that Section 247A of the Corporations Act entitled a shareholder to inspect the books provided the inspection was being done in good faith and for proper purposes.

The first two grounds were successfully opposed by the company. A Court found that it was unable to make an Order based upon the terms set out in the Shareholder Agreement. It further found that it did not have jurisdiction to make an order under Section 1324(4) of the Corporations Act.

But the court did find it appropriate to make an Order under Section 247A of the Act and it allowed the shareholder the access the accounts This was only possible because of detailed evidence that the applicant had given that supported the finding that the purpose for the inspection was made in good faith and for proper purposes.

If you have a query relating to any of the information in this piece, and would like to speak with somebody in Holman Webb's Business, Corporate and Commercial team - please don't hesitate to get in touch with Tal Williams.

Disclaimer – The contents of this newsletter are general in nature and should not be relied on as legal advice. No reader should act on the information contained without first consulting us.