Removal of Directors of Public Companies by Shareholders: When Do Companies Contract Out of the Corporations Act?

Abstract

When are shareholders empowered to remove directors from office? This is an important governance issue and is related to the balance of power between shareholders and directors. In the case of a public company, s 203D(1) of the Australian Corporations Act 2001 (Cth) provides that shareholders may by ordinary resolution remove a director from office. Section 203D also provides for certain due process protections for directors. For example, a director who is under threat of removal is permitted to circulate a statement to shareholders and to speak at the meeting which will vote on the removal of the director. In a series of judgments, the majority of courts have concluded that companies are able to have provisions in their constitutions that allow shareholders to remove directors but without the due process protections for directors provided by s 203D. Where companies do this, the balance of power between shareholders and directors shifts towards shareholders and away from directors. How many companies choose to have such a provision in their constitution? We endeavour to answer this question by researching the constitutions of a sample of companies listed on the Australian Securities Exchange. We focus on three issues. First, the extent to which companies in our sample have provisions in their constitutions that allow shareholders to remove directors. Second, for those companies that have such provisions, to what extent do they allow for the removal of directors by shareholders without the procedural requirements and due process protections for directors in s 203D. Third, whether the answer to the first two questions varies according to the size of the company measured by market capitalisation.