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.
(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?
Internal Management of Corporation
It has been provided by the Corporations Act, 2001 (Cth) that the internal management of a corporation is going to be governed by:
- The relevant provisions of Corporations Act;
- The constitution of the company; or
- By both.
In this regard, the constitution of a corporation provides the rules that govern the company. These rules can be used for managing the relationship that exists between the corporation, its directors and shareholders. These rules have not been mentioned in the Corporations Act, even if generally the rules are based on the replaceable rules mentioned in the Act. However, these rules governing the corporation are customized and the shareholders of the corporation agree regarding these rules (Anderson et al., 2012). Generally, help is taken from compliance experts or lawyers. Hence, the Constitution of corporation works jointly with the shareholder agreements.
The purpose of the Constitution is to deal with the individual operations of corporation. As a result, there was mentioned in the Constitution provide certainty, as well as flexibility to the governance of the corporation. In the same way, the Constitution provides for more control on the company as it grows and undergoes changes. The replaceable rules are very simple and in some instances, they can be too simple. The result is that in most of the cases when the companies that purchase online with replaceable rules have to go for changes very soon (Mitchell et al., 2010). Because the law allows that replaceable rules can be replaced, a constitution is required for outlining the changes. On the other hand, adopting a constitution as a part of the registration of a company is usually more cost-effective. On the other hand, if the company decides to adopt a constitution after it has been incorporated, the company hasn't passed a special resolution for this purpose. According to the rules prescribed by the ASIC, notice of at least 28 days, has to be given for special resolution in case of a public listed company and a notice of 21 days has to be given in case of other company types. For the purpose of causing such a relation, at least 75 percent members of the corporation are required to give their vote in support of the resolution. As a result, may be expensive and time-consuming process to adopt a constitution after the registration of a company.
The Constitution also plays a role in helping the company in amending the balance of power among the shareholders and the directors of the corporation when a clear gap exists in the control over the corporation. For instance, the Constitution may allow the shareholders to give directions or to turn over the decisions of the directors. In this way, the Constitution of corporation plays an important role in the governance of the company.
Role of Constitution in Governance
The Corporations Act, 2001 mentions that company’s constitution can be amended with the help of this resolution passed by the shareholders. At least 75% of the shareholders should cast their vote in favor of such resolution. It is compatible with other contracts in which the law requires that all parties to the contract should agree to the amendment. In this way, the majority of 75% is necessary for amending the constitution of the company (Schmidt and Spindler, 2002). The amendments made in the constitution of the company are binding for the minority shareholders even if such shareholders voted not in favor of the amendment except if there are extra obligations prescribed by the Constitution or legal protection provided by the common law. The Constitution cannot be amended according to the powers mentioned in s136(2) if additional requirements have been imposed by the constitution of the company that have to be fulfilled before any amendment made in the Constitution may be treated as effective. Among these requirements is the requirement that additional conditions may need to be satisfied or the resolution needs to be approved unanimously by all members or that the consent of a particular person should be obtained for this purpose. Hence, where the Constitution of the company provides for at least the requirements, these additional requirements have to be complied with first of all before the amendment made in the Constitution may be considered as effective (Lele and Siems, 2007).
Even if the chance given to the minority shareholders for negotiating the extra obligations may offer some security to minority members against the resolutions of majority, which may cause financially unfavorable effect for the minority shareholders and make it more hard to introduce any changes in the Constitution, the corporation cannot restrict the statutory power, which provides for the amendment in the Constitution. It is not possible to provide in the Constitution that it cannot be amended in any case.. The reason is that any such provision will not be treated as valid. Hence it is important that while describing the additional requirements for this purpose, no restrictions should be imposed on the power of amending the Constitution.
The power that has been granted to the majority shareholders of altering the rights related to the class of shares is limited by Part 2F, Corporations Act, as it has been provided that if the constitution of the company:
Does not provide any procedure to vary or cancel class lives, then the rights can be canceled or varied only by the shareholders of the affected class by passing a special resolution or by getting written consent from 75% of these shareholders;
Replacing Replaceable Rules
Provides a procedure to cancel or vary class rides, then such procedure has to be used for canceling or varying such rights.
Hence the provisions that have been discussed above, provide an opportunity to the minority shareholders, particularly regarding closing and private companies, for mentioning a procedure in the Constitution for the purpose of protecting their interests by making it harder for the majority to alter the Constitution of the corporation (AWA Ltd v Daniels, 1992). This type of situation is particularly important in cases where wide range of transactions take place that have a direct or indirect effect on class rights.
A corporation can amend or repeal its constitution by voting a special resolution by the shareholders by at least 75 percent of the votes. However in this regard certain protection have been provided to the minority shareholders by the Corporations Act and also by the common law against (i) radiation or annulment of class rights; (ii) amending certain specific provisions of the Constitution of the company; and (iii) making amendments to certain provisions of the Constitution of the company having the effect of procreating the shares of minority shareholders or the rights attached to such shares (Hoad and Ramsay, 1997).
The power enjoyed by the majority members to vary or cancel the rights related with the class of shares has been restricted by Part 2F of the Act, as it mentions that if the company's constitution:-
does not provide a procedure to vary or cancel class rights, then such rights can only be varied or canceled by passing a special resolution that has been passed in a meeting of the shareholders of acting class or after obtaining consent in writing of the 75% of such shareholders;
Provides a procedure to vary or cancel class rights, then such rights can be canceled or varied only according to such procedure.
In this way, these provisions allow a chance to the minority shareholders, particularly in case of close, private companies, to add a method in the Constitution for the purpose of protecting their interests as it makes more difficult for the majority shareholders to amend the company's constitution (Lipton and Herzberg, 2004).
The power enjoyed by the majority shareholders of the company to amend the constitution with a view to expropriate the shares of minority or the rights attached to these shares (for example, voting rights) has been significantly restricted after the verdict given by the High Court in Gambotto v WCP Ltd. In this case the court has clearly stated that an amendment that has been made to the company's constitution with a view to confer a power on the majority shareholders to expropriate minority shares will be considered as valid only if:-
Amending Constitution for Majority Shareholders
It is for proper purpose; and
It is not going to work oppressively regarding the minority shareholders (it should be fair under all circumstances).
It was stated by the court in its majority judgment that valid exercise of the power to expropriate the shares of minority needs complete disclosure of all significant information, evaluation by an independent spurred regarding initiatives to be expropriated and the payment of market value regarding these shares. After the verdict given in Gambotto, expropriation is allowed only where the continual shareholding by minority is going to be harmful for the corporation, or when the minority member is competing with the company or effect is necessary for the purpose of making sure that the company is going to comply with the regulations that govern the prime business carried on by the company or when it is required for protecting or promoting the interests of the corporation. On the other hand, expropriation is not allowed by the law where the majority shareholders of the company only want to secure a benefit for themselves of a new corporate structure on any other corporate advantage. In this way, the decision given Gambotto tries to offer some protection to minority by making sure that the majority cannot expropriate the shares held by the minority shareholders at a price less than the market value.
The interests of minority members are safeguarded against any amendments made to the position of the company as they are not bound by the alterations that have been introduced after the date they became a shareholder and need a shareholder to pick up additional shares, increase the liability of a shareholder to contribute to the share capital of the corporation or to impose on increase restrictions on the rights of transferring shares that are already held by the shareholders, unless the shareholders as agreed in writing to be bound by such an alteration made in the Constitution (Daniels v Anderson, 1995).
In cases where the shareholders have adopted a constitution amending the replaceable rules, such amendments are binding for the members of the corporation. There are several replaceable rules that can be amended for the purpose of granting considerable security to the minority shareholders, particularly in case of closely held private companies against the decisions taken by the majority shareholders that may result in adverse consequences for the minority shareholders.
Anderson H, Welsh M, Ramsay I and Gahan P, 2012, “The Evolution of Shareholder and Creditor Protection in Australia: An International Comparison”, 61 International and Comparative Law Quarterly 171
Gahan P, Mitchell R, Cooney S, Stewart A and Cooper B, 2012, “Economic Globalisation and Convergence in Labour Market Regulation: An Empirical Assessment”, 60 American Journal of Comparative Law 703
Hoad R and Ramsay I, 1997, “Disclosure of Corporate Governance Practices by Australian Companies”, 15 C&SLJ 454
Lele P and Siems M, 2007, “Shareholder Protection: A Leximetric Approach”, 7 Journal of Corporate Law Studies 17
Lipton P and Herzberg A, 2004, Understanding Company Law 12th ed, Law Book Co, Sydney, p 283
Mitchell R, Gahan P, Cooney S and Marshall S, 2010, “The Evolution of Labour Law in Australia: Measuring the Change”, 23 Australian Journal of Labour Law 61
Schmidt RH and Spindler G, 2002, “Path Dependence, Corporate Governance and Complementarity” , 5 International Finance 311
AWA Ltd v Daniels (1992) 10 ACLC 933
Daniels v Anderson (1995) 37 NSWLR 438
Gambotto vWCPLimited -  HCA 12