Definition of Constitution and its Importance

Constitution in terms of body corporates which are registered under the Corporation Act 2001 is defined as the document which guides the working of the body corporates. In other words, it is the document which defines rules and regulations which organizations need to follow, and it also defines the behaviour of the outsiders while dealing with the organization.

Constitution mainly defines the relationship between the organization with its directors and members, and it also defines the relationship between the members of the organization also. This is the document which prepares the base for the organization or the structure which defines the way in which organization conduct its activities. It is considered as most important guidance which guides the management on how to deal with both insiders and outsiders of the organization. In Australia, Corporation Act 2001 is the legal structure which regulates all the provisions and procedures of the organization, and it also states the meaning and working of the constitution of the company (ASIC, n.d.].

Organization’s constitution is the document which not governs the organization but also states the manner in which each and every operation of the business organizations are conducted. It is the document which defines the behaviour of the organization, its members, its directors, and also the outsiders. This document is also defined under the Corporation Act 2001, as this Act states that constitution is the prime document which creates the structure on which organization runs its business. This Act further defines that constitution is a contract between the organization and directors or members. It is possible for the company to develop this document at any time, which means, company can create it before or after the registration (Law ath, 2016].

Numbers of section are there under the corporation Act 2001 which defines the terms related to the constitution.  Section 136 defines the provisions related to the adoption of the constitution by the members of the company. This section states that if company adopts the constitution before registering itself with the ASIC then members need to put their signature on the constitution of the company, and they also required agreeing with the regulations of the constitution in writing. If this document is adopted after the registering of the company with the ASIC then organization must pass the special resolution for the purpose of adopting the same.

Section 233 states the Courts power in terms of adoption of the constitution of the company. As per this section, Court can use their power by make order to the organization in lieu off adoption of the constitution of the company.

Legal Provisions for Constitution under Corporation Act 2001

It is possible for the company to make changes in the constitution and cancel the constitution of the company. Company can do this by passing the special resolution in the organization, and for this company needs to give the notice period of 28 days in case of the public listed organization. However, in case of other organizations only 21 days’ notice period is required. In terms of passing the special resolution, it is necessary for the organization to get at least 75% votes in the favour of the resolution.

It is also important for the company to know that it is possible for them to develop their own constitution which reflects the rules created by the organization, and this power is given to them by the corporation Act 2001. In other words, company can frame their constitution by adhering the replaceable rules. Constitution is needed for implementing the replaceable rules in the organization, as there are no rules and regulations defined by the Act in terms of the creation of the constitution but replaceable rules are deemed those rules which must be reflected in the constitution of the company. It is allow to the business organizations to modify the replaceable rules as per the activities and nature of the business conducted by company.

It is clear after discussing all the provisions of the Corporation Act 2001 and general terms that the most important document of the company is constitution, and because of this it is the considered as governing document of the organization. Constitution is deemed as the contract which defines the relationship between the company and its directors, officers, and members of the company. It also makes the existing and future shareholders of the company, and defines the behaviour of the insiders and outsiders of the company.

Organization holds the power to make changes in the constitution of the organization, and this is only possible if such changes according the regulations stated under the section 136 of the Act. This section defines the provisions which are required to be followed by the organization while making changes in the constitution.

According to this section, changes occurred in the constitution of the company can be made by the company only on the ground that organization required the 75% favourable votes in terms of the special resolution passed by the organization. This section clearly states that in case 75% shareholders of the cast the vote in the favour of the special resolution then company holds the authority to make changes in the constitution.

Modification of Constitution and Special Resolutions

It must be noted that, these changes occurred in the constitution of the company is applicable on every member, director and officer of the company. In other words, it is applicable on both majority shareholders and minority shareholders of the organization, and on those minority shareholders also which cast vote against the special resolution which proposed those changes.

It is necessary to understand that company cannot use its power to make changes in the constitution in case any extra term is stated under the constitution, and such extra term required the organization to comply with any extra requirement which is needed to make changes in the constitution of the company. This also shows the duty of the organization members in terms of complying with this extra requirement. There are number of examples of these additional requirements such as unanimous approval is required for passing the resolution (Legal Vision, 2018].

In different situation, directors and shareholders hold majority shareholding in the organization make changes in the constitution for taking advantage for them. As these changes give advantage to the directors and shareholders hold majority shareholding but cause harm to shareholders holding minority shares. Such kinds of acts of directors and majority shareholders are fall under the conduct of the oppression.

Oppression is defined as that concept under which any action taken by the majority shareholders of the company results in unfairness and disadvantage to the minority shareholders of the organization. Any act of the majority shareholders conducted for their own advantage and for causing disadvantage to the minority shareholders is known as the oppression.  Corporation Act 2001 states that any action which results in the oppression will considered as unfair action. Act also state the extra requirements through which members of the organization are get protected.

It must be noted that, it is not allowed the company to get itself prevented from making the modification in the constitution of the company by restricting the power given by the law.  In case any such rule is introduced by the constitution of the company which restricts the legal rights of the organization is deemed as invalid term. It must be noted that these additional provisions will give required protection to the minority shareholders, as it also ensure that directors and majority shareholders of the organization does not make any such amendment which result in the disadvantage to the minority shareholders and cause them harm.

Oppression and its Legal Definition

Therefore, it can be said that adequate provisions are introduced by the Corporation act 2001 in terms of giving the adequate protection to the minority shareholders.

Section 232 of the Corporation Act 2001 states the provisions related to the shareholders rights they hold as the member of the organization. According to this section, members of the organization can request the Court to intervene, in case any director and majority shareholders take any action which results in the oppression and unfairness.

It must be noted that, if any act of the director and majority shareholders results in the disadvantage for the shareholders with minority shareholding then such members hold the right to make application to the Court for the purpose of seeking orders from the Court in terms of set aside the actions of the directors and majority shareholders. Orders seek by the minority shareholders include order related to the winding u of the company, order related to the cancellation of the changes made by the directors and majority shareholders in the organization, order related to the confirming the changes made in the constitution, and any order which court thinks right.

However, it is not possible for the minority shareholders to make any amendments in the share capital structure or prevent the organization in making changes in the constitution. Act also states the exception under which minority shareholder members of the company can prevent the organization in making changes in the capital structure like buyback of shares and selective share capital reduction. Such things give the power to the minority shareholders to prevent changes made by the company.

Act 2001 and common law introduce the defences for the members in this context, and some of these defences are stated below-

• Amendments and ratification in terms of the rights related to class.
• Any particular changes which occurred in the constitution and affects the expropriating the shares.

It is important to recognize the organization power which is hold by the minority shareholders in context of making changes in the expropriating of the shares. This can be understood with the help of case law Gambotto v WCP Limited (08 March 1995) – [1995] HCA 12 (08 March 1995), as in this case Court consider the issue which deals with the expropriating of the shares. In this case, court stated that it was possible for the majority shareholders and directors to conduct expropriate of shares in case those shares result in the big loss for the company and also imose risk on the survival of the company (Austlii, n.d.].

Conclusion:

Constitution in terms of body corporates which are registered under the Corporation Act 2001 is defined as the document which guides the working of the body corporates. Constitution mainly defines the relationship between the organization with its directors and members, and it also defines the relationship between the members of the organization also. Organization’s constitution is the document which not governs the organization but also states the manner in which each and every operation of the business organizations are conducted.

Organization holds the power to make changes in the constitution of the organization, and this is only possible if such changes according the regulations stated under the section 136 of the Act. It must be noted that, these changes occurred in the constitution of the company is applicable on every member, director and officer of the company. In other words, it is applicable on both majority shareholders and minority shareholders of the organization.

If any act of the director and majority shareholders results in the disadvantage for the shareholders with minority shareholding then such members hold the right to make application to the Court for the purpose of seeking orders from the Court in terms of set aside the actions of the directors and majority shareholders.

References:

ASIC. Constitution and replaceable rules. Available at https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/constitution-and-replaceable-rules/. Accessed on 6^th September 2018.

Find Law. What is a company constitution?. Available at https://www.findlaw.com.au/articles/4798/what-is-a-company-constitution-.aspx. Accessed on 6^th September 2018.

Law ath, (2015]. What Is A Company Constitution?. Available at https://lawpath.com.au/blog/what-is-a-company-constitution. Accessed on 6^th September 2018.

Legal Vision, (2018]. What is a Company Constitution? What Does it Mean to Adopt a Company Constitution? Available at https://legalvision.com.au/what-is-a-company-constitution-what-does-it-mean-to-adopt-a-company-constitution/.

Corporations Act 2001- Section 136

Corporations Act 2001- Section 232

Corporations Act 2001- Section 233

Gambotto v WCP Limited (08 March 1995) – [1995] HCA 12 (08 March 1995).

Mitcchell, V. (1994). Gambotto and the Rights of Minority Shareholders. Bond Law Review, Volume 6(2).

Austllii. Oppression of Majority Shareholders by a Minority? Gambotto v WCP Ltd. Available at https://www.austlii.edu.au/au/journals/SydLRev/1996/6.pdf. Accessed on 6^th September 2018.