The Supreme Court decision in Ririnui v Landcorp Farming Ltd  NZSC 62, deliveredon 9 June, includes within the judgment of Justice O’Regan the expression of a view on an important company law issue.
In Justice O’Regan’s view, the common law principle that the informal unanimous assent of shareholders binds the company no longer survives.
While not expressed as a concluded view, it was nevertheless reached after full argument on the point. Justice O’Regan’s judgment accordingly provides a powerful steer on what is an important and controversial point of company law.
The principle of informal unanimous assent is often referred to as the Duomatic principle after the decision in Re Duomatic Ltd  2 Ch 365. The principle expressed in that case was where shareholders who have a right to vote at a general meeting of the company assent to a matter which a general meeting of the company could carry into effect, that assent is as binding as a formal resolution.
In the Ririnui case the applicant for judicial review challenged the sale of certain farm land by Landcorp. One of the applicant’s arguments was that shareholding Ministers could have used the Duomatic principle to intervene in the sale of the land, essentially instructing the directors to not proceed with the sale.
The Duomatic principle has usually been seen as a principle of ratification allowing shareholders informally to agree to matters where correct procedures have not been followed or to excuse directors from breaches of their duties.
In New Zealand the principle had been extended in Westpac Securities Ltd v Kensington  2 NZLR 555 to the situation where the holders of all voting shares agree to an action that would normally be exercised by the directors.
That extension is controversial. It is doubtful that the common law doctrine properly extends to allowing shareholders to usurp the powers of management.1
As a matter of general principle, where shareholders do not agree with management their remedy is to remove the directors or alter the constitution of the company.2 Farrar and Watson argue convincingly that “unanimous assent as applied in Westpac is contrary both to the [Companies] Act  and the underlying policy of the Act”3 (It should be noted that Westpac was a case decided under the common law as it applied at the time of the Companies Act 1955).
The Court of Appeal in Ririnui accepted that the purpose of the Duomatic principle was to permit corrections of technical non-compliance and rejected a more expansive approach to the principle allowing shareholders to make management or operational decisions normally reserved for directors.4
In the Supreme Court, Justice O’Regan did not revisit the question of the proper scope of the Duomatic principle. Instead he addressed the more fundamental question of whether the Duomatic principle survived the passing of the Companies Act 1993 at all.
That was a question on which academics had taken different views. Professor Watts in particular had suggested that it was arguable that the Act had “not done enough to abrogate such a longstanding general implication in company law”5 and expressed the opinion that it would be highly inconvenient if the informal unanimous assent principle did not survive the passing of the Act.6
Justice O’Regan, while not expressing a concluded view on the point, referred at  to three factors as suggesting that the Duomatic principle no longer applies under the Companies Act 1993. I discuss, and expand on, each of those reasons below.
Law Commission reports
First, Justice O’Regan noted that the Law Commission’s reports preceding the enactment of the Companies Act can be taken as indicating a rejection of the Duomatic principle.
That is certainly correct. The Law Commission in its original report considered whether to include a provision allowing shareholders acting by unanimous resolution to exercise powers of the company and expressly declined to do so. Instead it proposed a system that unless amended by the constitution would give directors the jurisdiction to manage, with “no residual power of decision” being left with the shareholders in general meeting.7
The Law Commission did consider that where unanimous shareholder resolution was effective as a waiver of rights that would still be available as a matter of general law. The Law Commission suggested that this did not need to be expressly provided for,8 but did originally propose that the new Companies Act not allow unanimous shareholder assent to ratify a breach of directors’ duties.9 However in this respect the Select Committee took a different view and instead added into the Companies Act a savings provision as s 177(4) stating: “nothing in this section limits or affects any rule of law relating to the ratification or approval by the shareholders or any other person of any act or omission of a director or the board of a company”.
Further, the Law Commission – after receiving submissions on its original report – accepted that a limited unanimous assent procedure was required for certain specific actions (such as the issuing of shares or repurchase of shares) where proper formalities had not been followed. It accordingly proposed in its second report a new s 78A that allowed unanimous shareholder assent to certain particular matters listed in the section subject to certain conditions being met.10 This new section became s 107 of the Companies Act 1993 as passed.
The presence in the Act of s 107 was the second factor referred to by Justice O’Regan. He noted that that the fact s 107 expressly provides for the unanimous assent of shareholders to certain specified actions “can be taken as an indication of a legislative intent that the Duomatic principle is now limited to those specified actions”.
In relation to that point it could also be noted that unanimous assent under s 107 must be in writing to be enforceable. Further, for many of the matters specified there is also a requirement for compliance with the solvency test (ss 107(4) and 108(1)).
It would seem inconsistent with the specific requirements of s 107 for a more general informal unanimous assent procedure (which does not require the assent to be in writing or to comply with the solvency test) to also survive.
Allocation of management powers
Thirdly, Justice O’Regan commented that the allocation of management powers to a company board by s 128 suggests that in the absence of a reallocation of such powers to shareholders by the company’s constitution, assent by shareholders to an action requiring a board resolution would not be effective. Section 128 provides that the business of a company must be managed by the board. That is subject only to the constitution under s 128(3).
Although Justice O’Regan does not specifically mention it, s 109 allows the shareholders to pass a resolution as to management which is expressly said to be not binding unless the constitution says otherwise.
The provision in the statute of a general default rule that shareholder resolutions as to management are not binding is important. It is inconsistent, in my view, with the unanimous shareholder assent rule surviving the Act in its widest form (suggested by Westpac) of allowing shareholders to exercise management powers.
The Court in Ririnui held that as a matter of fact it was not reasonably possible for the shareholding Ministers to intervene in relation to the sale of land by Landcorp at - and . Accordingly, the Supreme Court did not, as an essential part of its reasoning, have to decide the question of whether the unanimous assent principle survived the passing of the Companies Act 1993.
However, as noted by Justice O’Regan, the issue was both important and fully argued (at ). Further, the reasons of Justice O’Regan appear cogent.
The consequence is that the informal unanimous shareholder assent principle no longer survives the Act except as expressly preserved by the Act under the specific procedure in s 107 or in relation to ratification by the shareholders of the actions of a director or the Board under s 177(4).
Shareholders cannot exercise management decisions unless the constitution expressly permits that (under s 128(3)) or pass binding resolutions on management issues again unless the constitution permits that (under s 109(3)).
If the constitution does confer management powers on shareholders, however, the shareholders will be “deemed directors” under ss 126(1)(b)(iii), 126(2) or 126(3) and subject to the normal duties of directors.
If shareholders disagree with the management approach of directors, their primary remedy is to remove the directors.
John Land is a competition law specialist and commercial litigator at Bankside Chambers in Auckland and also teaching fellow at Auckland Law School, lecturing in company law. He can be contacted on 09 379 1513 or at email@example.com.
- Australasian Centre for Corporate Responsibility v CBA  FCA 785.
- Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame  Ch 34 and see now ss 128(3) and 109(3) of the Companies Act 1993.
- Farrar and Watson Company and Securities law in New Zealand (2013) 2nd ed at p274.
- Attorney-General v Ririnui  NZCA 160 at -.
- Watts, Campbell and Hare, Company Law in New Zealand (2015) 2nd ed at para 8.6.1.
- Peter Watts The power of a special majority of shareholders, or of all shareholders acting informally, to override directors – Attorney-General v Ririnui  CSLB 89 at 91.
- Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) at paras 161-162.
- Ibid at para 163.
- Ibid at paras 86, 219, 564 and 569 and s 136(3) of draft Companies Act proposed by the Law Commission.
- Law Commission Company Law Reform: Transition and Revision (NZLC R16, 1990) at para 45.