Understanding Company Constitution And Its Importance

Discuss about the Voluntary Administration Scheme Satisfy Its Legislative Objective.

What is a Company's Constitution?

According to the Corporations Act, 2001, the internal management of the company has to be governed by (i) the relevant provisions of the Act; (ii) the Constitution of the company; or (iii) By Both. The constitution of a company contains the rules that can be used for governing the company. These rules can also be used to manage the relationship that is present within the company, its members and directors. These rules are not present in the Corporations' Act also. Generally they are based on the replaceable rules that are present in the Corporations' Act. But it is possible to customize these rules and at the same time it is also necessary that the shareholders should agree regarding the rules going to be adopted by the company. In this regard, it is advisable to take help from compliance experts or lawyers. In this way, it can be stated that the company's Constitution works along with shareholder agreements.

The purpose of Company's Constitution: the purpose behind adopting it was before the company is the deal with the routine operations of the company. Due to this reason, the rules that are provided by the Constitution of the company provides certainty and also flexibility in the governance of the company. Similarly, the rules mentioned in the Constitution allow more control on the company as the company develops and undergoes certain changes (Mentha v GE Capital Ltd., 1997). The replaceable rules are very simple in nature. In fact, in certain instances, these rules can be too simple. Due to this reason, when a company has been purchased online with replaceable rules, the company goes for changes shortly. Under the corporations law, it is permissible that the replaceable rules can be replaced and the Constitution is necessary to outline these changes. But in this regard, adopting Company's Constitution as a part of his legislation is generally more cost effective. But if a company decides to a foreign Constitution after its incorporation, such a company is required to pass a special resolution in this regard. The rules that have been prescribed by the ASIC in this regard requires that for this purpose, the company should give a notice of at least 30 days in order to pass a special resolution by public listed company. On the other hand, the notice period is 21 days. For this purpose, in case of other types of companies. In order to pass such resolution, it is required that the reason the purpose of members should give their vote supporting the resolution. Due to this reason, it can be expensive, as well as time consuming to adopt a constitution after the company has already been incorporated.

Purpose of a Company's Constitution

The company's Constitution also plays a role in assisting the company in amending the balance of power that exists between the directors and the shareholders of the company, particularly their clear Is present in the control of the company. Therefore, for example, the company's consultation may allow the shareholders to give certain directions to the directors or even to turn over the decisions taken by the directors (Herzberg, Bender and Gordon-Brown, 2010). Hence it is clear that a significant role is played by company's Constitution in governing the company.

According to the Corporations Act, 2001, it is possible to amend the company's constitution by passing a resolution by the majority shareholders of the company. In this regard, it is necessary that 75% shareholders of the company should give the report favoring the resolution. This position can be compared with other contracts where it is required by the law that all the parties to the contract should agree regarding any amendment going to be introducing the contract. On the other hand, in this case, the resolution has to be passed by 75% of the shareholders in order to amend the company's constitution. However the amendments that have been introduced in the company's constitution of bindings for minority shareholders even if they have cast their vote against the resolution introducing the amendment unless the company's constitution or the statutory protections that have been mentioned in the common law described additional requirements (Routledge, 1998). For example, the company's constitution cannot be amended as per the powers that have been described by s136(2) in case the company's constitution imposes additional requirements that need to be fulfilled before an amendment introduced to the Constitution can be considered as effective. These requirements in this regard may include that each new conditions need to be fulfilled or resolution has to be passed unanimously by all shareholders or that consent has to be taken from a particular person in this regard. Therefore, when the company's constitution provides for the above-mentioned requirements, such requirements need to be complied with first of all before any amendment introduced in the company's constitution can be treated as effective (Standard Chartered Bank of Aust Ltd v Antico 1995).

Even in cases where a chance has been provided to the minority shareholders of negotiating additional requirements may offer some protection to such shareholders against the decisions taken by the majority shareholders which may result in some adverse effect for minority and make it more difficult to bring changes in the constitution, it is not possible for the company to restrict the statutory power, which provides for amending the Constitution. The reason behind this position of law is that any such provision is not going to be considered as valid. Therefore it is significant that, while prescribing additional requirements in this regard, it should be taken care that restrictions are not placed on the power of amending Constitution of the company.

Amending a Company's Constitution

Part 2F imposes certain restrictions on the power that has been provided the majority shareholders to alter the rights concerning the class of shares, as this part provides that in case the company's constitution:

Does not include procedure to vary or cancel class rights, then it is possible to cancel or vary such rights only by the shareholders of affected class. When there was a special resolution or by obtaining consent in writing from 75% of such shareholders;

If the Constitution provides procedure to cancel or vary class rights, then it is required that such procedures should be used for this purpose.

Therefore, the provisions mentioned above, provide a chance to the minority shareholders, particularly in case of private companies, to include a procedure in the company's constitution with a view to protect their interests and make it more difficult for the majority shareholders to amend the Constitution. These provisions are particularly significant when there are a wide range of transactions having direct or indirect effect on class rights.

It is possible for a company to amend or repeal its constitution. For this purpose, the company needs to pass a special resolution. 75% of the shareholders of the company should vote in favor of such resolution. But despite this provision, the Corporations Act, as well as the common law provide certain protection to the minority shareholders against (i) cancellation of class rights (ii) amending particular provisions of the Constitution and (iii) making amendments in certain provisions of the Constitution which have the effect of procreating minority shares or the rights attached with such shares.

Part 2F of the Corporations Act places certain restrictions on the power that is available to the majority shareholders to vary or cancel the rights attached with the class of shares. According to this provision, it has been provided that if the constitution of the company (i) does not provide any decision for varying for canceling class rights, then the special resolution needs to be passed by the shareholders of such class or after consent of 75% of such shareholders has been obtained in writing or (ii) if a procedure has been mentioned in the Constitution for varying or canceling class rights, then it is required that such procedures should be used for canceling or varying such rights (Daniels v Anderson (1995) 37 NSWLR 438). Hence the purpose of these provisions is to provide a chance to the minority shareholders, particularly in case of private companies to incorporate a procedure in company's constitution with a view to protect their interests by making it more difficult for the majority to amend the constitution of the corporation (Hoad R and Ramsay I, “Disclosure of Corporate Governance Practices by Australian Companies” (1997) 15 C&SLJ 454).

Restrictions on Amending a Company's Constitution

The power that is available to the majority shareholders for amending the company's constitution for the purpose of expropriating the shares of minority shareholders on valuable rights attached with such shares, is restricted positively after the decision of High Court in Gambotto v WCP Ltd. , because clearly mentioned by the High Court in this case that any amendment introduced to the Constitution of the company for the purpose of providing power to the majority shareholders to expropriate the shares of the minority has to be considered as valid only if the power is (i) for proper purpose; and (ii) . It is not going to be used oppressively against minority shareholders. (Therefore it is required that under all the circumstances, it should be used fairly).

The court is further stated in this case that in order to correctly exercise the power to expropriate the shares of minority, there is a need to fully disclose all material information, evaluation by independent experts concerning initiatives that I'm going to be expropriated as well as the payment of market value for these shares. In this way, in view of the decision given in Gambotto, expropriation can be allowed only where continuous shareholding by the majority will be harmful for the company or in order to make sure that the company complies with the regulations governing the principal business that is being carried on by the company or when it is needed in order to protect or to promote the interests of the company. However it needs to be noted that the law does not allow expropriation of shares, where the majority shareholders are looking for securing a benefit for themselves of a new corporate structure or some other corporate benefit. Therefore it can be stated that the decision in Gambotto makes an effort to provide certain protection to the minority shareholders as it makes sure that the majority shareholders are not allowed to expropriate shares held by the minority at a price less than their market value.

In this way, the law provides that where the Constitution has been adopted by the shareholders of the company by amending replaceable rules, these amendments are binding for the shareholders of the company. In this regard there are a number of replaceable rules that can be amended in order to grant significant security to minority shareholders, especially in case of closely held private corporations against the decisions that may be taken by the majority and when such decisions have adverse consequences for the minority (Australasian Oil Exploration v Lachberg, 1958).

The constitution of the company describes the rights and obligations of the company, its directors and members. Therefore through private tension that has been taken by the parties to it can be stated that the constitution works as a contract. It is possible to enforce a contract by action taken by the parties to contract. In this regard, certain rights have been provided to the members of the company. These include the right to inspect the register of the company free of charge and to get copies and under certain circumstances, make a request to the directors of the Corporation for holding a meeting of the members of the corporation.

References

Ford HAJ, 1978, Principles of Company Law 2nd ed, Butterworths, Sydney

Herzberg A, Bender M and Gordon-Brown L, 2010, “Does the Voluntary Administration Scheme Satisfy its Legislative Objectives? An Exploratory Analysis”, 18 Insolv LJ 181

Lipton P and Herzberg A, 2004, Understanding Company Law, 12th ed, Law Book Co, Sydney

Routledge J, 1998, “An Exploratory Empirical Analysis of Part 5.3A of the Corporations Law (Voluntary Administration)”, 16 C&SLJ 4

Case Law

Australasian Oil Exploration v Lachberg (1958) 101 CLR 119

Standard Chartered Bank of Aust Ltd v Antico (1995) 38 NSWLR 290

Mentha v GE Capital Ltd (1997) 27 ACSR 696

Gambotto v WCP Limited - [1995] HCA 12

S136 Corporations Act, 2001 (Cth)

Part 2F Corporations Act, 2001 (Cth)