In State Street Australia Ltd in its capacity as Custodian for Retail Employees Superannuation Pty Ltd (Trustee) v Retirement Villages Group Management Pty Ltd [2016] FCA 675 the Federal Court of Australia rejected an argument that the provisions of section 203D(1) of the Corporations Act 2001 (Cth) provide an exhaustive codification of the requirements for the removal of a company director.

REST is the only remaining external investor in the Retirement Villages Group (RVG), holding approximately 27% of its stapled securities. Retirement Villages Group Management Pty Ltd (RVGM) holds 72.9% with an associated company holding the balance. RVGM is an advisor and manager of RVG under an advisory services deed. There has been a long-running dispute between the parties.

RVGM issued two separate notices seeking to convene a general meeting of securityholders in Retirement Villages Australia Ltd (RVAL) for the removal of two independent directors of RVAL.

REST sought to declare the notices invalid.

Justice Beach observed:

“REST has relied on the decision of Bryson AJ in Scottish & Colonial Ltd v Australian Power and Gas Co Ltd [2007] NSWSC 1266 … to assert that the provisions of s 203D provide the only mechanism by which the director of a public company can be forcibly removed to the exclusion of any mechanism in a company’s constitution. I do not agree and do not propose to follow that decision. In my view, although s 203D(1) is mandatory in the sense that it overrides a company’s constitution to the extent of any inconsistency, it does not provide an exhaustive codification of the mechanism for removal. …

In summary, Scottish & Colonial is not consistent with the prevailing view. As there are conflicting single instance decisions on s 203D, I do not need to decide that Scottish & Colonial is plainly wrong. It is not the preferable or prevailing view and I propose not to follow it. But if I also need to say it, I am not satisfied that any of Allied Mining & Processing, Dick, Bisan or Dalkeith Resources are plainly wrong.”

He concluded that section 203D does not operate to oust the mechanism in the RVAL Constitution, which was not inconsistent with section 203D.

Justice Beach referred to the rider in s 203D(1) which provides that “If the director was appointed to represent the interests of particular shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement to represent their interests has been appointed.”

REST contended that the independent directors were appointed to represent the interests of particular RVAL shareholders, being the external investors. Justice Beach decided that the rider did not apply.

He analysed the rider as follows:

“The text of the rider is expressed in the form of a conditional statement, namely, “[i]f the director was appointed to represent the interests of particular shareholders …”.

First, what does “to represent …” mean or entail? Strictly, once a director is appointed, he or she must act in the best interests of the company and comply with the applicable statutory and fiduciary duties owed to the company. In other words, the director on appointment is not principally acting as a representative of any shareholder. But as this can be said for each and every director regardless of the appointment mechanism, the statutory phrase “the director was appointed to represent the interests of …” must necessarily contemplate a lesser position of representation, but what precisely? One way to look at the phrase is that it speaks in futuro so that it does not matter that on appointment the particular director cannot act as such a representative. It is enough merely to consider how they were selected and nominated as sufficient to satisfy the representational component of the statutory phrase. Another way to look at the matter is to accept that for some Board decisions a director can in substance act as a representative on some occasions. For example, if a Board is considering making a decision and there are two possible options, both of which ceteris paribus would be in the best interests of the company, a director may in the exercise of his or her discretion be able to take into account the representational capacity underpinning his or her appointment. It is not unremarkable that fiduciary obligations can be tailored or modified by agreement between all relevant parties and in the context of considering directors’ duties and responsibilities (see Jacobs J’s discussion in Levin v Clark [1962] NSWR 686 at 700 and 701). But, of course, statutory duties are more rigid. But even then, the prescriptive and mandatory content of the statutory duties does not logically entail the exclusion of the consideration of secondary interests if to do so would not conflict with the primary statutory obligations and the director’s independent judgment and discretion is not otherwise fettered.”

Accordingly Justice Beach allowed the terms of the Constitution to be used.

He decided that RVGM was precluded from voting on the resolution.