#10845 - The Corporate Constitution And Decision Making By The Board Of Directors - Business Associations 1

S 134 Internal Management of companies may be governed by provisions of the Act applying to the company as replaceable rules, by a constitution or a combination of both

S 135 – Replaceable rules

1. A section or subject whose heading contains the words

   1. Replaceable rule’ applies as a replaceable rule to (i) companies registered post 1/7/98; (ii) companies registered before 1/7/98 that repeals or repealed its constitution after that date

   2. Replaceable rule for proprietary company and mandatory rule for public companies applies

      1. As a replaceable rule to any proprietary company registered after 1/7/98

      2. As a replaceable rule to any company that is/was registered after 1/7/98 and changed to a proprietary company (but only while it is a proprietary company) and

      3. As a replaceable rule to any proprietary company registered before 1/7/98 that repeals…

      4. An ordinary provision of this Act to any public company wherever registered

BUT it does not apply to a proprietary company while the same person is both its sole director and shareholder (except s 198E, 201F, 202C

2. A provision of a section/subsection that applies to a company as a replaceable rule can be displaced or modified by the constitution

3. A failure to comply with the replaceable rule is not of itself a contravention of the Act

S 136 Constitution of a company

1. [When a constitution is adopted] A company adopts a constitution

   1. On registration – if everyone specified as a member agrees, in writing, to its terms before the application is lodged

   2. After registration if a special resolution adopting a constitution/a s233 order is made

2. [Modification/repeal] The company may modify or repeal its constitution or a provision of it, by special resolution

3. [Requirements for modification] The company’s constitution may provide that a special resolution doesn’t have effect unless a further requirement that is specified is complied with

4. [Further requirements] Unless the constitution provides otherwise, the company can modify/repeal the special requirement through compliance with that special requirement

5. [Public company must lodge resolution] A public company must lodge with ASIC a copy of an SR adopting, modifying or repealing its constitution w/in 14 days of passing it. It also has to lodge

   1. If it adopts a constitution, a copy of it or

   2. If the company modifies a constitution – a copy of that constitution

6. AN offence based on (5) is a strict liability offence

Modification or Repeal – Case Law/Rules

• Gambotto v WCP – In non-expropriation cases an alteration of the articles by special resolution will be valid unless ultra vires, beyond any purpose contemplated by its AOA. But for expropriation a power can be taken only if:

1. It is exercisable for a proper purpose

2. Its exercise will not operate oppressively in relation to minority shareholders

That is, it may be justified where it is reasonably apprehended that continued shareholding by a minority is detrimental to the company, resulting in detriment to the existing shareholders, and expropriation is a reasonable means of eliminating/mitigating that detriment

Fairness

• Gambotto v WCP – fairness has both procedural and substantive elements

  • Procedural element - the process used to expropriate must be fair, requires majority shareholders to disclose all relevant information leading up to alteration, and presumably requires shares to be valued by an independent expert

  • Substantive element – the terms of the expropriation itself must be fair. This is largely concerned with the price offered for shares; anything lower than market value is prima facie unfair, anything substantially higher would only in unusual cases be considered unfair. But price to market value is not the only consideration – it also involves other factors like company assets, market value, dividends, the nature and likely future of the corporation

    • But lots of cases have distinguished Gambotto and furthermore sometimes legislation specifically provides a power to acquire rights compulsorily

S 137 Date of effect of adoption, modification or repeal of constitution

When a new constitution is adopted or a constitution it takes effect

1. If it is the result of an SR (i) that date on which it passed if none is specified, ii) on a later date specified

2. If the result of a court order under s 233 i) the date of the order ii) a later date specified

S 138 ASIC may direct company to lodge consolidated constitution

S 139 Company must send copy of constitution to member

1. [Availability of constitution] A company must send a copy of its constitution to a member within 7 days if (I) the member asks and (ii) pays any fee required by the company

2. An offence based on (1) is strict liability

S 140 Effect of constitution and replaceable rules

1. [Contractual effect of constitution] A company’s constitution and any replaceable rules that apply to them have effect as a contract b/w a) the company and each member, b) the company and each director/secretary, c) a member and each other member

Under which each person agrees to observe and perform the constitution and rules so far as they apply to that person

2. [Agreement to be bound] Unless a member of a company agrees in writing to be bound, they are not bound by modifications made after the date on which they became a member as far as the modification

   1. Requires them to take up additional shares

   2. Increases their liability to contribute to share capital or otherwise pay money to the company

   3. Imposes/increases restrictions on the right to transfer the shares already held by the member unless the modification is made

      1. In connection with the company’s change from a public to proprietary company

      2. To insert a proportional takeover approval provisions into the company’s constitution

Increase in liability – Includes even amendments that introduce a new category of liability to contribute to share capital – e.g. amendments purporting to impose a liability to pay additional premium on shares already issued

Key Cases

• Morris v Hanley – the statutory contract doesn’t impose obligations on outsiders

• Bailey v NSWMDU – A special contract formed between the member and company will not necessarily be altered by the alteration of their constitution

• FICS v Deakin Financial Services – the constitution could not force members to submit themselves to a particular commercial arbitration scheme but a “special contract” could

• Cain v Aero Marine Consulting – The statutory contract embodies in the constitution can be varied orally or implicitly by conduct

• Ding v Sylvania Waterways – The circumstances surrounding entry into membership may imply that new members have entered into a special contractual relationship with the company under which additional pecuniary obligations are incurred – liability to perform being those of the contractor

• [Interpretation] Lion Nathan AU v Coopers – Constitutions should be given a businesslike interpretation and construed to give it reasonable business efficacy; such a construction is preferred to one that might prove unworkable

  • But the rules for construction of commercial contracts are not always applicable – e.g. implied terms

  • Stylis v United Medical Protection – If words in a constitution are ambiguous, the court should prefer a construction which will avoid a consequence appearing to be capricious, unreasonable, inconvenient or unjust

141 – Table of Replaceable Rules