Provisions Regarding Company Constitution

The constitution of a company is the key governing document which provides regulations that apply to the directors and shareholders. The provisions regarding the constitution of a company are given under section 140 (1) of the Corporations Act 2001 (Cth). The act provides that the constitution of a company include various regulations which its members or directors have to comply with while taking business decisions (Legislation 2018). The actions of a company are bound by its constitution, and it cannot act outside the scope of its constitution. The constitution of a company forms a contract between (a) the company and its shareholders, (b) the company and its directors and (c) the member and other members. All these parties are bound by the regulations given under the constitution based on which their actions are governed by these policies. The purpose of the constitution of the company is to govern its activities to achieve the organisational goals which also include the activities and relationships between the directors and shareholders of the enterprise. The corporations operating in Australia before 1 July 1998 have to form the memorandum of association and article of association which governs the internal management of the enterprise. However, changes were brought by the government based on which corporations did not have to prepare these two documents while registering the company (Bottomley 2016). The companies can form a constitution to manage their internal operations while registering under the Corporations Act.

However, this is not a mandatory requirement, the company can choose between forming a constitution to comply with replaceable rules which are given under the Corporations Act. The replaceable rules are provisions given under the Corporations Act which companies have to comply with if they did not want to form a contract. Section 136 (1) provides provisions regarding this matter which gives a choice to the company. Based on this section, a company can adopt a constitution at the time of its registration (Austlii 2018). During registration, it is necessary that all people must specify in the application and provide their consent about being the member of the company. They should also jointly agree in writing that they will comply with the terms written in the constitution of the company. This application must be given before the application for registration is lodged in the Australian Securities and Investments Commission (ASIC). The act also provides that the company can be registered in the ASIC without forming a constitution; however, it can later adopt a constitution by passing a special resolution. After its registration, the enterprise becomes a separate legal entity which is different from its members as given in Salomon v Salomon & Co Ltd (1897) AC 22 case. Thus, the corporation gains the right to enter into a contract with its directors and shareholders as given in Lee v Lee’s Air Farming Ltd (1960) UKPC 33 case and such contracts are formed based on the constitution (Hudson 2017).

Amendment of Constitution

The policies regarding governance of a company’s operations and activities are included in its constitution. While taking business decisions and managing its operations, the shareholders and directors have to comply with the provisions given in the constitution to ensure that they comply with them and avoid taking business decisions which could adversely affect the company or its stakeholders. Thus, it is important that the provisions of the constitution be rigid and it complies with every member equally. However, this does not mean that these policies cannot be changed in the company. The guidelines given under the constitution of a company can be modified or repealed by its members. They can make changes in the constitution by amending, adding or removing its terms. The shareholders are required to pass a special resolution in the company in order to make changes in its constitution. The special resolution requires that at least 75 percent of the members have to give their approval to the changes which are made in the constitution (Duffy 2011). The constitution creates contractual relationships between the corporation and its shareholders, thus, their approval is necessary while making changes in the same. Thus, as per the provisions gave under section 136, the changes in a constitution can be made after passing a special resolution by the majority shareholders. However, section 136 (2) provides that the constitution of the company cannot be changed unless specific additional requirements are given in the constitution (Austlii 2018).

The requirements which can stop the shareholders from amending the constitution include passing of the resolution unanimously by all shareholders, the consent of a specific party or compliance with additional requirements. In case any of such requirements are included in the constitution of the company, then compliances with these regulations are important before any amendments are made to the constitution. Based on these provisions, it is hard to say that the minority shareholders have sufficient protection of their interest in the company. The Corporations Act provides various opportunities to the minority shareholders based on which they can negotiate the terms of the changes in the constitution in order to protect their interest in the company (Van Der Laan & Dean 2010). The minority shareholders can stop the decisions which could have a potentially negative impact on the interest of the minority shareholders, but the protections are not sufficient. The statutory power of a company to make changes in its amendments cannot be terminated based on which imposition of such restriction would be invalid. Thus, appropriate care is needed by the members to provide protection to the minority shareholders since the current regulations are not enough to protect their interest in the enterprise.

Limits on the Power of Majority Shareholders

The shareholders of a company have the right to amend the constitution of a company by passing a special resolution in which approval of at least 75 percent of members is necessary. However, there are various restrictions imposed by the Corporations Act on the power of shareholders to make changes in the constitution of the firm. There are certain amendments which are not binding on the shareholders even if they are passed by the majority shareholders by passing a special resolution (Cassidy 2006). These restrictions define various impositions on the power of shareholders regarding making changes in the rights of other shareholders which were given under Part 2F.2. The act influences the power of the majority shareholders of a company to make changes regarding varying or cancelling the rights of the shareholders and limits such powers. The act provides that the majority shareholders cannot establish a process in order to vary or cancel the class rights based on passing a special resolution. Such changes will not be approved until a special resolution is passed with those class members or with the written consent of 75 percent of shareholders. This concept is introduced to limit the power of amendments in the constitution and avoid giving such powers to a single party based on which the party can make changes in the constitution for personal advantage which resulted in causing negative impact on the interest of other shareholders and members of the company.

Furthermore, they cannot establish a process in order to vary or cancel the rights of class rights then such rights can only be changed in accordance with the procedure. Based on these regulations, the minority shareholders of a closely held private company can protect their interest in the corporation by making it difficult for the majority shareholders to amend the constitution. Section 140 (2) also provides that the amendments made by the majority shareholders of a closely held private company cannot bind minority shareholders that are made after the date they become the shareholders. This is a relevant section which focuses on protecting the rights of minority shareholders. The majority shareholders cannot make changes such as increased restrictions on the right to transfer of share, increase the liability of shareholders, take up additional shares or others unless the shareholders give their agreement in writing to bind themselves by such amendments (Bottomley et al. 2017). The power of making changes in expropriating the shares is also limited which also include making changes in valuable rights of the shares of the shareholders. This is a key restriction which is imposed in the case of Gambotto v WCP Ltd (1995) 69 AWR 266 by the High Court.

Protection of Minority Shareholders

Based on this judgement, the court established that the changes made by the majority shareholders would only be considered as valid if such changes are made for the proper purpose. While making such changes, the majority shareholders must not act unfairly or oppressively towards the interest of minority shareholders. The doctrine of equitable limitation is a key restriction which is imposed on the power of majority shareholders to ensure that they did not misuse their powers. The amendments made by majority shareholders by breaching these provisions will not be considered as valid by given by the court in the judgement of cases including Menier v Hooper’s Telegraph Works (1874) L. R. 9 Ch. App. 350 and Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1997) FCA 165 (Burgess 2017). Moreover, the equitable limitation doctrine provides that the members must not use their powers to gain an unfair advantage in the company. As given in Ngurli Ltd V McCann (1953) HCA 39 case, the majority shareholders must not take the property which belongs to the corporation for their personal benefits by misusing their powers. Furthermore, the term of improper purpose includes defeating a takeover off the company as given in Hogg v Cramphorn Ltd (1967) Ch 254 and Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666 case (Cassidy 2006).

Similarly, facilitating a takeover in the company by using majority power in order to weaken the voting power is also considered as an improper purpose by the court in the case of Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285. On the other hand, the court provided that using the majority shareholders power to raise capital for the organisation is considered as a proper purpose for which the majority power is used as given in Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 (Brazier 2012). Thus, these cases are good example which shows a clear difference between the uses of amendment power by majority shareholders for proper or improper purposes. It is their duty that they should only use the power of amending the constitution for a proper purpose, and they should not act unfairly towards the majority shareholders to negatively affect their rights (Worthington 2016). Therefore, the Corporations Act has imposed various regulations on the majority shareholders of a company based on which their powers to make amendments to the constitution are limited. The limit is imposed in order to provide protection to the interest and rights of minority shareholders of the company.

References

Cassidy, J 2006, Concise Corporations Law, Federation Press, Annandale.

Austlii 2018, Corporations Act 2001 – Sect 136, viewed 8 September 2018, https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s136.html

Bottomley, S 2016, The constitutional corporation: Rethinking corporate governance, Routledge, Abingdon.

Hudson, A 2017, Understanding Company Law, Routledge, Abingdon.

Duffy, MJ 2011, ‘Protection of Companies From Shareholder Class Actions Through Constitutional Amendment: Is This Possible Or Desirable?’ Bond Law Review, vol. 23, no. 1, pp. 69-87.

Van Der Laan, S & Dean, G 2010, ‘Corporate groups in Australia: State of play’, Australian Accounting Review, vol. 20, no. 2, pp. 121-133.

Bottomley, S, Hall, K, Spender, P & Nosworthy, B 2017, Contemporary Australian Corporate Law, Cambridge University Press, Cambridge.

Burgess, A 2017, Commonwealth Caribbean company law, Routledge, Abingdon.

Worthington, S 2016, ‘Directors’ Duties and Improper Proposes’, The Cambridge Law Journal, vol. 75, no. 2, pp. 213-216.

Brazier, G 2012, Insider Dealing, Routledge, Abingdon.

Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285

Hogg v Cramphorn Ltd (1967) Ch 254

Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666

Ngurli Ltd V McCann (1953) HCA 39

Menier v Hooper’s Telegraph Works (1874) L. R. 9 Ch. App. 350

Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1997) FCA 165

Gambotto v WCP Ltd (1995) 69 AWR 266

Lee v Lee’s Air Farming Ltd (1960) UKPC 33

Salomon v Salomon & Co Ltd (1897) AC 22

Corporations Act 2001 (Cth)

Legislation 2018, Corporations Act 2001, viewed 8 September 2018, https://www.legislation.gov.au/Details/C2015C00336