LAW00004 :Company Law - Section 140(1) - Corporations Act 2001 - Assessment Answer

Company Law Assignment

Assignment Task

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 Act2001 (Cth) and what is its purpose?

(2) Can a company’s constitution be amended and, if so, what are the requirements? Doyou 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 themajority shareholders regarding the variation of member rights?

1 .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.

What is the governing document of a company registered under the Corporations Act 2001 (Cth) and what is its purpose?

In Australia, normally, the internal management of the company is governed by three main sources. The same are:

2001. Replaceable Rules– These are the provisions under section 135 of the Corporation Act 2001.
2002. Constitution – Under section 136 of the Act;

• Both section 135 and section 136 of the Act.

When a company is registered under the Act, then, it must be governed by a constitution. Normally, a Constitution is adopted by a company before its registration or it can be adopted after registration if a special resolution is passed on this behalf. But, it is not every company that is governed under the constitution. The companies which require constitution for its governance are:

The company under section 112 of the Act - No Liability Public Company.

Public companies 'Limited by Guarantee' and such company is not using the word Limited as per section 150 of the Act.

• Special purpose companies.

A proprietary company is not under any obligation to file a constitution while getting registration under the Act. This is because a proprietary company is not an unlimited company. But, it is also governed by its constitution and must keep it as a record for its governance and must provide the same whenever required. Further, under section 139 of the Act, it is the duty of the company to provide the updated constitution within seven days of the request so made by a member. If the Corporations Regulations 2001 has imposed any fees, then, the company must provide the constitution within seven days of payment of the fees by the member.

Thus, Constitution is the governing document of a company registered under the Corporations Act 2001.

The main purpose of the constitution is that it has the effect of a contractual relationship amid the company and its directors; the company and its members; a member and every other member and the company and the secretary of the company.

(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?

The Constitution is a very important and the governing document of every company. However, there are provisions which are made part of the Corporation Act 2001 which has laid down the procedure and rules for the amendment of the constitution of the company.

As per section 136 of the Act, a company is authorized to amend/modify or repeal the constitution. As per the section, the shareholders must pass a special resolution by at least 75% votes. Once a 75% majority is undertaken then such resolution is capable to amend the constitution and such amendment is binding and is obligatory upon the minority shareholders. It does not make any difference whether the minority shareholders has voted in favor or against the amendments. Once an amendment is passed it is binding with full effect.

However, under section 136 (2) of the Act, if the amendment procedure of the constitution requires some other additional requirements, then it is necessary that such additional requirements must be comply with in order to make such an amendment legal and effective. Some of the additional requirements can be:

1. That the resolution must be passed with 100% voting of all the shareholders;
2. Some add on condition must be comply with;

• That the approval of some specific person is required.

Thus, if the additional requirements are necessary, then, it is the foremost task to comply with such additional requirement before proceeding with any other requirement to make an amendment effective.

However, it is important to be kept in mind that no additional requirement must be made which restricts the company power to amend the constitution. Any restriction which puts restrictions on the power of the company through which amendment is not possible, such additional requirements are invalid in law. At times, the minority shareholders try to negotiate the additional requirements thereby protecting their financial interest which may get affected by the

majority decisions, however, this negotiation can only make the amendment more difficult but cannot impose a full ban upon the emending power of the company. Thus, granting negotiating power to the minority shareholders can only provide some remedies to them but is not fully secure in nature.

Further there are few protections which are provided to the shareholders of the company under which the amendments are not binding the shareholders. But, it is important to understand whether such requirements are sufficient to protect minority shareholders?

The amendments are:

Related to cancellation or variation of class rights – Part 2F.2 of the Corporation Act has granted rights to the majority shareholders of the company under which they can cancel or vary the rights which are linked to a class of shares. As per Part 2F.2 if a specified procedure is provided in the constitution regarding the variation or cancellation of class rights then such procedure must be followed, but if no procedure is given then the same can be done only after passing a special resolution by the shareholders who are affected by such resolution or if a written consent is given by the 75% of such shareholders.

This provision gives an opportunity to the minority shareholders of the private company to set out a procedure that safeguards their own interest by making the process difficult. But, though the procedure is difficult but

Related to provisions of the constitution which will seize the shares or rights attached to the same of the minority shareholders – This provision is guided by the landmark decision provided in Gambottov WCP Ltd. The case held that the above actions of the majority shareholders are considered to be valid provided the same is not oppressive to the minority shareholders and is for the proper purpose. Further, it is necessary that proper disclosure of all relevant information, a valuation by independent experts of the shares which are to be seized and the market value of the shares must be paid in order to make the seizure or attachment of shares to be valid.

Also, post Gambottov WCP Ltddecision, seizure of the minority shares are permissible when the minority shareholdings is considered to be harmful and damaging to the company or the minority is in competence with the company or when

it is necessary to seize the minority shareholding in order to comply with the regulations that governs the main business of the company or it is essential to promote and protect the interest of the company.

But, if the seizure is only to gain benefit to the majority shareholders then, such seizure is not possible.

Thus, a limited protection is provided to minority shareholders after the decision of Gambottov WCP Ltd, but, the protection is limited in its scope as it is providing protection to only those companies which are private companies.

Section 140 (2) of the Act submits that the minority shareholders of the closely held private companies are safeguarded against any amendment that is made to the constitution as such shareholder are not bind by any changes that are made post the date when they became shareholders. It also requires the shareholders to take additional shares, enhances the liability of the shareholders to contribute to the share capital or enhances the limitations on the rights to transfer shares which are already held by the shareholders unless and until the shareholders agree to abide by the amendment in writing.

But, all the three restrictions which are imposed on the majority shareholders so that it does not affect the interest of the minority shareholders by amending the constitution is very limited in scope. This is because all the three restrictions are mainly for those companies which are closely held private companies. No major limitations are provided upon the majority shareholders and in such situations they are free to bring amendments to the constitution of the company and the same are binding upon the minority shareholders of the company.

In regard to amending a company’s constitution, are there limits on the power of the majority shareholders regarding the variation of member rights?

3 .In the leading decision of Gambottov WCP Ltd, there are two important observations that are made by the court. The same are, firstly, that, if the majority shareholders amend the constitution of the company with the main aim to compulsory acquire the shares of the minority, then, such amendment is invalid; secondly, there may be instances wherein there are conflict of interest when other kinds of amendments of the constitution takes place which necessary not involve the compulsory acquisition of the shares of the minority shareholders

associated to a particular class of shares. Additionally, it also requires that the shareholders whose rights are being cancelled or varied must pass a special resolution in regard to cancellation or variation OR may also give a written consent with almost 75% of the votes which are favor of the cancellation or variation by the shareholders of such class Lorenzi v Lorenzi Holdings Pty Ltd(1993).

The procedure set out under section 246B (2) must be followed even when the company is without share capital. As soon as the written consent is passed or written consent is obtained, then, the company has an obligation to inform the members who are so affected by the cancellation or variation if the class rights within seven days of passing of resolution or when the consent is obtained and is held under section 246B(3) of the Act.

Now, if any cancellation to the variation of class rights is undertaken by the majority of shareholders then such variation is challengeable under section 246D (1) of the Act.

When at least 10% of the members of the class whose rights are cancelled or varied are not in favor of such change, then, they may apply the court for setting aside the change under section 246D(1). The application for setting aside the change must be made within one month of the cancellation or variation of the class rights under section 246D(2) of the Act and the court will set aside if is of the view that the change is not fairly prejudice to the applicant and is mentioned under section 246D (5).

If no application is made by the affected class of shares then the change will take effect within one month as per section 246D (3) (a). However, if an application is made then the change will take place when the application is determined or withdrawn under section 246D (3)(b). However, as per section 246E of the Constitution, if the change is unanimously supported then the change will take place when the written consent is obtained or when the resolution is passed or at such date which is mentioned in the resolution.

Thus, these are the basic limits that are imposed on the powers of the majority shareholders regarding the variation of member rights.