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Constitution of the Company: Corporations Act

KENT INSTITUTE

Assessment - 3 

Unit: Corporate law 

Unit Code: BO1CLAW314 

Learning outcomes addressed: a) Understand the principles of Australian company law within the context of the prescribed readings. b) Identify and analyse relevant facts, problems and legal issues from a given scenario and develop an argument in response, discussing available options in the context of company law. c) Interpret company law legislation and relevant case law. d) Appreciate the role of compliance and the requirement that organisations and individuals must follow the laws that apply to their industry areas. 

Assessment Description:

We recommend a minimum total of TEN statute and case references per question. Work that includes sources that are not properly referenced according to the "Harvard Referencing Workbook" will be penalised. Refer to the Academic Learning Skills handout on Report writing. Please see Academic Learning skills staff for assistance with this, or any assignment.

The assignment statement is as follows:
Section 140(1) of the Corporations Act 2001 (Cth) enshrines the long-time position that a company's constitution forms a statutory contract between, amongst others, the company and each member and the company and each director.
Required :
With reference to the above statement, relevant Australian case law and legislation, answer the following: (1) What is the governing document of a company registered under the Corporations Act 2001 (Cth) and what is its purpose?
(2) Can a company's constitution be amended and, if so, what are the requirements? Do you think the requirements are sufficient to protect minority shareholders?
(3) In regard to amending a company's constitution, are there limits on the power of the majority shareholders regarding the variation of member rights? 

Answer


1.

The Corporations' Act, 2001 provides that the internal management of a company may be governed by: (i) provisions of Corporations Act applying to the company and which are known as replaceable rules; (ii) by the Constitution of the company; or (iii) by both. 

The Constitution of the company specifies the governing rules of the company that can be used to manage the relationship between the activities of the company, its directors and shareholders. These rules are not prescribed by the Corporations Act (although generally they are modified versions of replaceable rules). But instead these rules are customized and agreed upon by the shareholders of the company with guidance provided by lawyers on compliance experts (Hoad and Ramsay, 1997). In this way, the Constitution of the company works along with the shareholder agreements. 

The purpose of Constitution: the Constitution of the company is tailored according to the individual operations of the company. This means that the Constitution provides greater certainty and flexibility in the governance of the company. Similarly, it also allows for more control over the company as grows and changes with the passage of time. The replaceable rules are simple, but in some cases they can be too simple. Generally it has been seen that the companies that are purchase online with replaceable rules soon need changes (Lipton and Herzberg, 2004). As it is possible to replace the replaceable rules, a constitution is needed for outlining any changes. Prescribing the Constitution is a part of the registration of the company is generally more cost-effective. The reason is that in cases where the Constitution has been adopted after its registration, the company is required to pass a special resolution. In this regard ASIC provides that at least 28 days notice is required for a special resolution for publicly listed companies and 21 days notice regarding other types of companies (Grantham, 2004). In order to pass a resolution, at least 75% members of the company should cast their votes in favor of the resolution. Therefore it can be time-consuming and expensive process. 

The corporations' law provides that the following types of companies are required to be the one by a constitution. These include: (i) no liability public companies and (ii) special-purpose companies that require reduced annual review fee.

The Constitution of the company also help in amending the balance of power that is present between the owners/shareholders and the directors of the company when an evident or perceived gap is present in the control over the company. For example, with the help of the Constitution, shareholders of the company can be empowered for providing directions or to overturn the decisions taken by the directors of the company (Austin and Ramsay, 2010). Due to the reason that the flexible rules are not applicable in case of proprietary companies, where the sole director of the company is also its sole shareholder, in such cases, a constitution is also required. 

2. 

According to the corporations nor, company can amend its constitution by passing a special resolution of the shareholders. This resolution should be passed by at least 75% votes cast in the favor of the resolution. This can be compared with the other types of contract where all the parties are required to agree to any amendment. Therefore, the majority of 75% is required to amend the Constitution. Such amendments in the Constitution will be binding for the minority even though these minority shareholders have voted against these amendments in the Constitution unless there are additional requirements mentioned in the Constitution or the statutory protections for under the common law (Lele and Siems, 2007). The constitution of a company may not be amended in accordance with the power provided by section 136(2), Corporations Act in case additional requirements have been mentioned in the Constitution that need to be complied with before any amendment to the Constitution can be considered as effective. Such requirements may include the requirement that an additional condition needs to be fulfilled, the resolution should be passed unanimously by the shareholders of the company or the consent of a particular person needs to be obtained (ASIC v Rich, 2009). Therefore, in cases where such additional requirements have been prescribed by the Constitution of the company, such additional requirement in itself needs to be complied with the first of all before any amendment in the Constitution may be effective. 

Even if the opportunity provided to the minority shareholders of the company for negotiating such additional requirements may result in providing protection to some extent to the minority shareholders against any decision taken by the majority, which may result in adverse financial effect for the minority and to make it more difficult to introduce any amendment and was not the company, a company cannot restrict the statutory power according to which the Constitution may be amended (ASIC v Vines, 2003). It cannot be mentioned in the Constitution that such Constitution cannot be amended as any such provision organization will not be considered valid. Therefore it is important that while prescribing any additional requirements in this regard, the power to amend the Constitution should not be restricted (Routledge, 1998). 

The power provided to the majority shareholders to vary or cancel the rights related to a class of shares has been limited by Part 2F.2,. Corporations Act, as it provides that in case the Constitution of the company:

Does not prescribe the procedure for varying or canceling class rights then such rights may only be canceled or varied by a special resolution that has been passed by the shareholders of the affected class or after obtaining consent in writing from 75% of such shareholders;

Provides a procedure for canceling or varying class rights, then such rights may be canceled or varied according to such procedure only. 

In this way, the provisions mentioned above provide a chance to the minority shareholders in case of closely held private companies to add a procedure in the Constitution that can protect their interests as it makes it more difficult for the majority shareholders to amend the Constitution. Such a situation is particularly significant in case of the wide range of transitions that may directly or indirectly have an impact on class rights. 

3.

The power provided to the majority shareholders to amend the constitution of the company in order to expropriating the shares of minority shareholders or valuable rights that are attached to such shares, is restricted to the decision given by the High Court in Gambotto v WCP Ltd. illustrated by the court in this case that the amendment to the Constitution of the company with a view to confer a power on the majority shareholders to expropriate the minority shares will be valid only in the following circumstances.

If it is for a proper purpose; and 

If it will not operate oppressively, for the minority shareholders (it should be fair under all circumstances). 

In this judgment, the majority of the Court has stated that in order to validate exercise the power to expropriate the shares of minority shareholders, there is a need for full disclosure of all the information that is significant in this regard, the valuation of any shares that are going to be expropriated by an independent expert and the need to pay the market value for such shares. 

After the decision given in Gambotto, (Gambotto v WCP Ltd, 1995) expropriation of shares is allowed only where the continued shareholding by the minority will prove to be detrimental for the company, where a minority shareholder is competing with the interests of the company, where it is necessary not to make sure that the company continues to comply with the relevant regulations that govern the principal business carried on by the company or varied is necessary in order to promote or to protect the corporation's interests. On the other hand, expropriation is not allowed where the majority only wants to secure a benefit for themselves of a new corporate structure or a commercial benefit. In this way, it can be stated that the decision given in Gambotto provides some protection to the minority shareholders of privately held companies as it ensures that the majority does not expropriated shares at a value that is less than the market value.

According to section 140(2) the interests of minority shareholders of private companies are protected against any amendment made to the Constitution as they are not bound by any amendment that has been made after the date on which the minority shareholders became a shareholder and needs (S 140 Corporations Act 2001, Cth). The shareholders of data additional shares, increases the reliability of the shareholder contributed to the share capital of the cooperation or increases or imposes restrictions on the right passages that are already held by the shareholder unless the shareholder had agreed in writing that he or she will be bound by the amendment.

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