Adoption of a Company Constitution

Section 134 of the Corporations Act provides the manner in which a company is internally managed. A company may apply the replaceable rules provided under the Act or the company may decide to adopt a constitution to govern its operation. However, the company may also decide to adopt a constitution and also apply the replaceable rules to manage its internal operations. Section 136 of the Act provides the manner in which a company constitution is adopted.

A company constitution can be adopted at registration by all proposed members consenting in writing. However, after registration the company can only adopt constitution through a special resolution or court order. At registration, all the members have to consent to adopt the constitution, however, after registration it only needs 75% of members votes to adopt a constitution. Where a company has adopted a constitution it can decide to restrict the powers of its officers or provide objects limiting the company’s powers as per s 125 of the Act. However, restrictions on the objects and powers of the officers of the company do not invalidate dealing merely where they have been violated. This might be due to the presumptions provided under s 129 of the constitution. However, dealing will be invalidated where the third party was aware or suspected the defects in the authority of the officer or the violation of the objects of the constitution, 128 (4) of the Act (Tomasic, Bottomley and McQueen, 2002, 211).

The purposes of the constitution as provided under s 125 of the Act include restricting the powers of the corporation’s officer and limiting the objects of the company. Even though the violation of objects or articles of the constitution has no effect on dealings with the third parties, the directors violating the constitution can be held liable as was stated in ANZ Executors and Trustee Company Ltd v Qintex Australia Ltd (1990) 8 ACLC 980. The directors can also be held to have violated ss 180 and 181 of the Act where they violate the company’s constitution (Cassidy, 2006, 105). Breach of the company’s object is a contract breach as per s 140 of the Act and innocent party has a right to seek remedy in court. This could be the common ready of breach of contract such as damages and injunction (Gillies, 2004).

The company constitution can also be used to protect the interest of members in a small company who intend to retain control of the company. Since there can never be term in the constitution prohibiting amendment or repealing constitution as was stated in Peter’s American Delicacy Co Ltd v Heath (1939) 61 CLR 457, members can, thus, adopt an article in the constitution requiring higher threshold or condition to amend an article of the constitution appointing board of directors, s 136(3). The company can also be used to provide the structure of the company. The company also provides the voting rights in the company meeting as well as meeting notice period.

Restrictions on Powers and Objects of a Company

Conclusion

The Act, therefore, provides the constitution as the document which governs a company registered under the Corporations Act

Is it possible to amend a company’s constitution?

Section 136 Corporations Act 2001.

A company’s constitution can be amended in accordance with s 136 (20 of the Act. The provision provides that the constitution of the company can be amended by members of the company passing a special resolution. Section 1.5.1 provides the manner in which a special resolution is passed. It is considered to have been passed where at least 75% of members present in the meeting vote to pass the resolution. This might be members voting in person or through their proxies.

The amendment or alteration of a company’s constitution under s 136 (2) cannot be limited by the articles of the constitution as was provided in Peter’s American Delicacy Co Ltd v Heath (1939) 61 CLR 457. In Allen v Gold Reefs of West Africa [1900] 1 Ch 656 the court stated that any term in the constitution limiting members right to amend or alter the constitution is ineffective. The shareholders right to amend the company constitution is therefore absolute. However, members can adopt a term requiring further condition before a term is amended. The court in Allen stated that the power to amend should the constitution should comply with Act, the constitution of the company and the any other condition adopted under s 136 (3) of the Act. Where the company amending the constitution is a public company there is a further requirement under s 136 (5) that the resolution must be lodged with ASIC. This must be done within 14 days of passing the resolution.

The company’s constitution can also be amended through a court order under s 233 (1) (b). This is provided the grounds provided under s 232 of the Act is proved by a person qualified to make an application for such orders under s 234. Under s 234 of the Act, the persons who can apply for such an order include among other a member of the company. The ground upon which an amendment order can be sought include where a particular resolution or action do not accord with the interest of the company. Where an amendment is effected by a court order under s 233 (1) (b) the company’s power under s 136 (2) to amend the constitution is limited in accordance with s 233 (3) of the Act and the amendment can only br valid where it is consistent with court order or where company has sought leave of the court to amend the clause.

Violation of Company’s Constitution and Director’s Liability

The amendment of the company’s constitution under s 236 (2) is not fair as it is based on the power of the majority. It is the votes of the majority which count. This can be seen in Allen v Gold Reefs of West Africa [1900] 1 Ch 656 where majority shareholders voted to amend the constitution affecting the rights of a minority shareholder. Zuccani a former shareholder had both fully-paid and partly-paid shares. The company constitution provided that the company was to have lien over partly-paid shares for debts owed to the company. However, the lien was not able to fully settle his debts and therefore, the shareholders proposed an amendment extending the lien to the fully-paid shares to the detriment of the estate of Zucanni.

Conclusion

A company can be amend its constitution through a special resolution

Are the powers of the majority shareholders limitless?

Corporations Act 2001

S 232

233

234

Cases

Gambotto v WCP Ltd (1995) 182 CLR 432

The power to amend the constitution by the shareholders is not absolute and is subject to certain limitations as provided the Act and the court decisions. The Corporations Act under part 2F.1 provides remedies for shareholder offended by the acts of the majority shareholders. Section 232 provides grounds upon which the application can be brought while section 233 provides the remedies available to a successful applicant. Any person provided under s 234 of the Act can apply to court for orders under s 233 of the Act where the person is not satisfied with the manner in which the affairs of the company are being conducted, where a proposed act or resolution is not in the interest of the shareholders as a whole or is oppressive. The provision can be used to limit the powers of the majority shareholders and even to overturn some of the resolutions passed by the majority shareholders.  

The difference between majority and minority shareholders is important for purposes of ensuring fairness between the parties (McLaughlin, 2013, 127). Majority shareholding exists where a single shareholder or two have control of the company in terms of voting in the company’s meetings (Bottomley, Hall, Spender and Nosworthy, 2017, 129). For a private company the majority shareholders could be having aggregate shareholding of more than 50% in the company. However, in the public companies the majority shareholders could be having less than 50% but still have influence on the company voting. The minority shareholders cannot muscle enough numbers to outnumber the majority shareholders. The shareholders have a duty to exercise their voting right in the amendment of the constitution for a proper purpose (Sheikh, 2013, 375). Shareholders could be equated to directors of the company as they approve directors’ actions and give company direction through general meetings (Wallace and Pagone, 1990, 201). They should at all-time conduct themselves in good faith as was stated in Ngurli Ltd v McCann (1953) 90 CLR 425. In Allen v Gold Reefs of West Africa [1900] 1 Ch 656 it was stated that the alteration should be bona fide and in the interest of the shareholders as a whole.

Amendment of a Company’s Constitution

The court in Gambotto v WCP Ltd (1995) 182 CLR 432 the court discussed circumstances under which the majority shareholders powers will be limited with regard to amendment of the company’s constitution. In that case the majority shareholders proposed to introduce an amendment to the company constitution authorising the majority shareholders to acquire the shares of the minority shareholders. Some of the minority shareholders were opposed to the amendment and brought a suit to stop the resolution. The shares were being offered at higher price. However, the meeting was held and the resolution was passed by the minority shareholders present with majority shareholders absconding to vote. The court stated that the power of the majority shareholders will be limited where its exercise is beyond the contemplation of the company’s constitution objections. The power must also be exercised for proper purpose.

The power of the majority shareholders will be limited where it has the consequence of creating imbalance of advantages between the majority shareholder and the minority shareholders. The rights of the shareholders must always be weighed and the effect of amendment considered (Chivers and Shaw, 2008). It was stated in Gambitto that the power of the majority shareholders will not be interfered with where it is exercised in the interest of the company and it has no oppressive effect on the minority shareholders. The oppression is based on the effect it has on the minority shareholders. The exercise of the power should not be geared towards marginalising the minority shareholders. The majority shareholders powers to amend the constitution of the company are limited where the main objective of the proposed amendment is to bestow some gain on the majority shareholders to the detriment of the minority shareholders and the objects of the company.

The court discussed circumstances where the powers will not be limited even though they have the effect of disadvantaging the minority shareholders. This could be where the minority shareholding is considered to be detriment to the company and this is has effect on shareholders as a whole. In such a case the majority shareholder are permitted to propose an amendment likely to acquire the shares of the minority shareholders. The purpose of the amendment should be to mitigate the detriment to the company and at all times the minority shareholders should not be oppressed. The majority shareholders will also be permitted, without any limitation, to propose a resolution the result of which is to acquire minority shareholders shares where the purpose of the acquisition is to comply with the law or regulation requirements.

Where a shareholder is competing with the company, amendment to acquire the shares will not be interfered. This might because it is mean to protect the business interest of the company. The court emphasised that all the acquisition must be fair (Hannigan, 2018, 110). That is, the shareholders must be adequately notified of the intention to acquire the shares. The majority shareholders must also be open to the other shareholders and provide all information pertaining to the acquisition. The majority shareholders must also ensure that the shares are properly priced, that is having an expert value the shares for acquisition.

However, the courts have found the rule in Gambotto to be limited in application. In Arakella v Paton [2004] NSWSC 13 the rule was found not be applicable where the rights of both the parties was equally affected. In Australand Holdings Ltd [2005] NSWSC 835 the application was limited on the same grounds that the suggested amendment affected both the parties almost equally. It, therefore, possible to state that the rule develop in Gambotto is not applicable where there is no advantage or gain to the majority shareholders. Under those circumstances the powers are not limited.

Conclusion

Majority shareholders’ power can be limited.

References

Books/ Journals

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

Chivers, D. and Shaw B. 2008. The Law of Majority Shareholders Power: Use and Abuse. OUP Oxford.

Gillies, P. 2004. Business Law. Federation Press.

Hannigan, B. 2018. Company Law. Oxford University Press

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

McLaughlin, S. 2013. Unlocking Company Law 2^nd Edition. Routledge

Sheikh, S. 2006. A Guide to the Companies Act 2006. Routledge.

Tomasic, R., Bottomley, S. and McQueen, R. 2002. Corporations Law in Australia. Federation Press.

Wallace, J. and Pagone, T. 1990. Rights and Freedoms in Australia. Federation Press

Cases

ANZ Executors and Trustee Company Ltd v Qintex Australia Ltd (1990) 8 ACLC 980

Peter’s American Delicacy Co Ltd v Heath (1939) 61 CLR 457

Allen v Gold Reefs of West Africa [1900] 1 Ch 656

Australand Holdings Ltd [2005] NSWSC 835

Ngurli Ltd v McCann (1953) 90 CLR 425

Gambotto v WCP Ltd (1995) 182 CLR 432

Arakella v Paton [2004] NSWSC 13