The Corporations Act 2001 (Cth) is the key legislation which governs the companies operating in Australia. Section 140 (1) of the act provides the provisions regarding forming of a company’s constitution in which various rules and regulations are given which corporations have to comply with while managing their operations (Austlii 2018). These rules govern the operations of the company to ensure that it did not act outside its scope which could adversely affect the interest of its stakeholders. The governing document of a registered company is its constitution which provides key rules and regulations regarding its operations. The internal management of the company is governed by such a constitution which creates a contract between the company and its members, director, company secretary and members with other members. Before 1 July 1998, the memorandum of association and article of association were the two key documents which governed the company and its contract with its directors, members and other members (Baxt 2017). However, after 1 July 1998, corporations did not have to prepare these two documents, and they can establish a constitution which provides key provisions regarding a company’s operations. The purpose of a company’s constitution is that it governs that internal management and the business activities of the enterprise. Another purpose of the company’s constitution is that it establishes the relationship between the company’s directors and shareholders since a company is a separate legal entity as given in Salomon v Salomon & Co Ltd (1897) AC 22 case. Similar views were given in Lee v Lee’s Air Farming Ltd (1960) UKPC 33 case.
After 1 July 1998, the corporations did not have to prepare memorandum of association and article of association, however, the Corporations Act as established a model set of key rules which replace the model of memorandum and articles of association, thus, they are called the replaceable rules. Section 136 (1) provides the ways in which company can adopt a constitution which include before the registration or after registration by passing a special resolution (Legislation 2018). Australian corporations can either comply with replaceable rules or the constitution or the combination of both while managing their operations. Many companies operating in Australia still have a memorandum of association and article of association but if they wanted they can change it to form a constitution. The rules given under the constitution governs the operations of a company, however, they cannot override the existing laws which are issued by the Corporations Act. As per the Australian Securities and Investment Commission (ASIC), the corporations operating in Australia has to choose between the constitution or the replaceable rules which are given under the Corporations Act or a combination of both. The decision of forming a constitution for the company or selection of the replaceable rules given under the Corporations Act must be made by parties before registering the company (Pathinayake 2015). While forming business policies or strategies, the directors have to comply with the guidelines given under the Constitution in order to ensure that they focus on the interest of the company and its stakeholders and form policies to achieve its corporate objective.
The corporation has the right to modify or repeal its constitution based on which terms can be removed, added or amended in the constitution. In order to modify or repeal the constitution, a special resolution must be passed by the shareholders of the company. The special resolution means that at least 75 percent of the shareholders must give the acceptance of the proposed changes in the constitution. Since the constitution forms a contract between the company and its shareholders and director and between members, it cannot be amended unless all the members agree to such changes. Thus, 75 percent majority must give their approval to amend the constitution of the company after which those amendments would result in binding the minority members of the company even if they have voted against the amendments which have made in the constitution (Tomasic, Bottomley & McQueen 2002). In case there is an additional requirement which is given in the constitution or statutory protections or common law, the minority shareholders did not have to comply with the amendment made under the constitution. The notice for the special resolution regarding making amendments to the constitution should be given before 21 days of the meeting (ASIC 2018). The notice should also contain information regarding the proposed changes which are made to the constitution. Section 136 (2) provides that the constitution of a company must not be amended pursuant to the provisions given under this section. This may include the requirements regarding fulfilment of an additional condition, passing the resolution by the shareholders unanimously or getting the consent of a particular person which is obtained.
In case any of such requirements are given under the constitution, then such additional requirements must comply by the members before they can be amended by the parties. The power of minority shareholders regarding negotiating such additional requirements can provide them protection against the decision taken by the majority shareholders. The choices of the majority shareholders which could have adverse financial consequences on the minority shareholders can be negotiated by the members between themselves to make it difficult to make such amendments in the constitution (Wolters Kluwer 2018). A corporation cannot restrict its statutory power which provides the members the power to alter the constitution of the company. A clause cannot be included in the constitution which provides that it cannot be amended. Any such restrictions which are included in the constitution will be considered as invalid. As per the requirements, there are certain amendments which cannot bind shareholders which include variation or cancellation of class rights, amendment of specific provisions and amendment regarding expropriating the shares of minority shareholders or their rights. However, these rights are not sufficient to protect the rights of minority shareholders in a company. The rights of minority shareholders can be protected by filing a suit in the court; however, it is not an effective remedy. Thus, in many cases, the majority shareholders misuse their powers to amend the constitution which resulted in adversely affecting the interest of minority shareholders.
The power of amending the constitution of a company is given to the shareholders of such corporations. Based on these powers, the 75 percent of shareholders can give their approval to make changes in terms of the constitution, and such changes apply over other members as well who did not give their approval in the voting. Thus, the majority shareholders of an organisation have the main power to influence of rights of other members as well. It increases the chances of misusing the position by the directors which could have adverse financial consequences on the minority shareholders (Kershaw 2012). Thus, there are various provisions given in the Corporations Act to limit the right of majority shareholders in order to protect the rights of minority shareholders in the company. Firstly, the amendments made regarding variation or cancellation of class rights of the shareholder did not bind the shareholders into its terms. Part 2F.2 of the Corporations Act provides provisions which limit the power of shareholders to make changes in the class right of shareholders. Thus, their power is limited based on which they cannot set out a process for varying or cancelling the class rights by passing a special solution which affects the class without written consent of 75 percent of shareholders.
Based on this provision, the minority shareholders of a closely held private company can protect their rights by including a procedure in the constitution by making it difficult for the majority to amend the constitution. Section 140 (2) also provides that the majority cannot pass a rule in which minority is required to take additional shares in a closely held private company after they become the shareholders of such company. The section imposed restrictions on the transfer of shares which shareholders of the company already held. Furthermore, the power of majority shareholders is limited by the High Court in Gambotto v WCP Ltd (1995) 69 AWR 266 case. In this case, the court imposed restrictions on the rights of shareholders to make amendments in the constitution by for expropriating the shares of minority shareholders or valuable rights which are attached with those shares (Talbot 2015). The court provided in this case that these changes will only be valid if they are made for a proper purpose, and other shareholders are not operating oppressively towards minority shareholders. The actions of majority shareholders must be fair when they are amending the terms of the constitution which can adversely affect their interest.
The equitable limitation is imposed on the voting power of majority shareholders in a company in which if the court finds the that the majority has breached the provision of equitable limitation, then such actions will be considered as invalid. The majority can be held liable if the pass a resolution which no reasonable person would take in the particular situation. In Ngurli Ltd V McCann (1953) HCA 39 case, the court provided that members must not breach the equitable limitation by giving themselves any unfair or unjustified advantages, rights or property which belongs to the company (Conaglen 2010). Similar views were given by the court regarding the unfair use of majority rights in Menier v Hooper’s Telegraph Works (1874) L. R. 9 Ch. App. 350 case. In Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1997) FCA 165 case, the members of a company breach the provision of equitable limitation by using their voting power unfairly in order to prevent the corporation from taking legal action against them. The court provided that they have acted unfairly in such case. In Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd (2006) 24 ACLC 1550 case the court provides the difference between procedural and substantive fairness in order to determine that members did not oppress against others.
In Vatcher v Paull (1915) AC 372 case, Lord Parker defined “fraud” as actions which are outside the scope of a conferred power rather than dishonesty. These factors are relevant while proving a case of equitable limitation. Furthermore, in Peter’s American Delicacy v Heath (1939) 61 CLR 457 case, the court provided that the reasonable opinion of a party might differ regarding the fairness of an action which should be considered by the court while evaluating the decision of majority shareholders. Thus, the example of these cases shows that the power of majority shareholders is limited regarding making amendment in the constitution of a company (Bottomley 2016). The law provides that majority shareholders cannot misuse their power to amend the constitution or add new terms based on which the minority shareholders have to suffer a loss or financial detriment. The majority shareholders should properly use their power in a fair manner to avoid causing harm to the minority shareholders. The majority shareholders should also avoid focusing on their personal interests while making amendment in the constitution of the company. They should use their powers in a fair and reasonable manner to ensure the interest of the company and its shareholders.
References
ASIC 2018, Constitution and replaceable rules, viewed 7 September 2018, https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/constitution-and-replaceable-rules/
Austlii 2018, Corporations Act 2001 – Sect 140, viewed 7 September 2018, https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s140.html
Baxt, B 2017, Corporations Legislation 2017, Thomson Reuters, Toronto.
Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1997) FCA 165
Bottomley, S 2016, The constitutional corporation: Rethinking corporate governance, Routledge, Abingdon.
Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd (2006) 24 ACLC 1550
Conaglen, M 2010, Fiduciary loyalty: protecting the due performance of non-fiduciary duties, Bloomsbury Publishing, London.
Corporations Act 2001 (Cth)
Gambotto v WCP Ltd (1995) 69 AWR 266
Kershaw, D 2012, Company law in context: text and materials, Oxford University Press, Oxford.
Lee v Lee’s Air Farming Ltd (1960) UKPC 33
Legislation 2018, Corporations Act 2001, viewed 7 September 2018, https://www.legislation.gov.au/Details/C2015C00336
Menier v Hooper’s Telegraph Works (1874) L. R. 9 Ch. App. 350
Ngurli Ltd V McCann (1953) HCA 39
Pathinayake, A 2015, Commercial and Corporations Law, Law Book Co, Australasia.
Peter’s American Delicacy v Health (1939) 61 CLR 457
Salomon v Salomon & Co Ltd (1897) AC 22
Talbot, L 2015, Critical company law, Routledge, Abingdon.
Tomasic, R, Bottomley, S & McQueen, R 2002, Corporations Law in Australia, Federation Press, Annandale.
Vatcher v Paull (1915) AC 372
Walters Kluwer 2018, Corporations Act 2001, Section 136 Constitution of a Company, viewed 7 September 2018, https://iknow.cch.com.au/document/atagUio485835sl14503904/corporations-act-2001-section-136-constitution-of-a-company
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