Shareholder activism: Update on the status of ‘advisory’ environmental resolutions in Australia

In its recent decision in Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016] FCAFC 80, the Full Court of the Federal Court (Full Court) dismissed an appeal by the Australasian Centre for Corporate Responsibility (ACCR). This decision has effectively ended the prospect of shareholder activists proposing ‘advisory’ resolutions relating to the management of a company.

Background

The ACCR is a not-for-profit association promoting shareholder engagement and advocacy.

In this case, the ACCR sought for the directors of the Commonwealth Bank of Australia (CBA) to propose one of 3 alternative shareholder resolutions at CBA’s annual general meeting (AGM). CBA refused to allow two of the resolutions. These resolutions required the CBA board of directors to report annually to shareholders on the quantum of greenhouse gas emissions CBA ‘is responsible for financing’, the risks posed to CBA from climate change, and the strategies adopted by the bank to mitigate those risks.

CBA agreed to include the third alternative resolution for consideration at the AGM. This resolution sought the amendment of CBA’s constitution to require the directors to report to shareholders on the directors’ ‘assessment of the quantum of greenhouse gas emissions [CBA is] responsible for financing’.

The ACCR brought the case to the Federal Court. After the Federal Court ruled against it, the ACCR appealed to the Full Court.

Implications of the decision

The case was run as a test case by the ACCR to bring Australian law more in line with the law in the US. In the US, shareholders routinely pass non-binding resolutions to express opinions as to the management of companies. The Full Court rejected this approach and emphatically denied the existence of a general power under Australian law to allow shareholders to pass such ‘advisory’ resolutions regarding issues of management.

The decision comes soon after the repeal of the provisions under the Corporations Act 2001 (Cth) that entitled 100 or more shareholders to demand that a company call a general meeting. The combination of the repeal of these legislative provisions and the Full Court’s decision leaves boards of directors in a better position to refuse a requisition by shareholder activists of ‘advisory’ resolutions.

Despite these developments, the level of shareholder activism is unlikely to decline. For example, the ACCR has had some success in raising awareness of its campaigns by requisitioning special resolutions to amend the constitutions of large Australian banks, energy and mining companies. None of these resolutions have so far been successful in Australia, considering they require 75% of shareholders to vote in favour in order to pass. They do, however, bring attention to, and force boards to comment on, the issues raised.

In this context, another point reinforced by the Full Court was a board’s ability to comment on proposed resolutions by shareholders. The ACCR argued that the CBA board had acted beyond its power by recommending against the proposed amendment to the CBA constitution because the board did not consider the resolution to be in the best interests of the company. The Full Court rejected the ACCR’s argument in this regard.

Costs

The ACCR argued that it should not be liable for CBA’s costs on the basis that the case was in the public interest and may have far reaching implications on shareholder participation or corporate governance. The Full Court did not accept the ACCR’s argument, noting that an applicant which is established to pursue a particular public interest should not be exempted from the usual costs order where litigation brought in pursuit of that purpose fails.

For further information, please contact Mary Boittier, Executive Counsel or your usual Herbert Smith Freehills contact.