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The Corporate Constitution And Decision Making By The Board Of Directors Notes

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Class 4: The Corporate Constitution and Decision Making by the Board of Directors Corporations Act ss 134-141. Pay particular attention to the Table of replaceable rules in s 141. CORPORATIONS ACT 2001 - SECT 134 Internal management of companies A company's internal management may be governed by provisions of this Act that apply to the company as replaceable rules, by a constitution or by a combination of both. Note: There are additional rules about internal management in ordinary provisions of this Act and also in the common law. CORPORATIONS ACT 2001 - SECT 135 Replaceable rules Companies to which replaceable rules apply (1) A section or subsection (except subsection 129(1), this section and sections 140 and 141) whose heading contains the words: (a) replaceable rule --applies as a replaceable rule to: (i) each company that is or was registered after 1 July 1998; and (ii) any company registered before 1 July 1998 that repeals or repealed its constitution after that day; and (b) replaceable rule for proprietary companies and mandatory rule for public companies
--applies: (i) as a replaceable rule to any proprietary company that is or was registered after 1 July 1998; and (ii) as a replaceable rule to any company that is or eas registered after 1 July 1998 and that changes or changed to a proprietary company (but only while it is a proprietary company); and (iii) as a replaceable rule to any proprietary company that is or was registered before 1 July 1998 that repeals or repealed its constitution after that day; and (iv) as an ordinary provision of this Act to any public company whenever registered. The section or subsection does not apply to a proprietary company while the same person is both its sole director and sole shareholder. Note 1: See sections 198E, 201F and 202C for the special provisions that apply to a proprietary company while the same person is both its sole director and sole shareholder. Note 2: A company may include in its constitution (by reference or otherwise) a replaceable rule that does not otherwise apply to it. Company's constitution can displace or modify replaceable rules (2) A provision of a section or subsection that applies to a company as a replaceable rule can be displaced or modified by the company's constitution. Failure to comply with replaceable rules (3) A failure to comply with the replaceable rules as they apply to a company is not of itself a contravention of this Act (so the provisions about criminal liability, civil liability and injunctions do not apply). Note: Replaceable rules that apply to a company have effect as a contract (see section 140). CORPORATIONS ACT 2001 - SECT 136 Constitution of a company (1) A company adopts a constitution: (a) on registration--if each person specified in the application for the company's registration as a person who consents to become a member agrees in writing to the terms of a constitution before the application is lodged; or (b) after registration--if the company passes a special resolution adopting a constitution or a court order is made under section 233 that requires the company to adopt the constitution. Note: The Life Insurance Act 1995 has rules about how benefit fund rules become part of a company's constitution and about amending those rules. They override this Act (see section 1348 of this Act). Consequential amendments to the rest of the company's constitution can be made under that Act or this Act (see Subdivision 2 of Division 4 of Part 2A of that Act). (2) The company may modify or repeal its constitution, or a provision of its constitution, by special resolution. Note: The company may need leave of the Court to modify or repeal its constitution if it was adopted as the result of a Court order (see subsection 233(3)). (3) The company's constitution may provide that the special resolution does not have any effect unless a further requirement specified in the constitution relating to that modification or repeal has been complied with. (4) Unless the constitution provides otherwise, the company may modify or repeal a further requirement described in subsection (3) only if the further requirement is itself complied with. (5) A public company must lodge with ASIC a copy of a special resolution adopting, modifying or repealing its constitution within 14 days after it is passed. The company must also lodge with ASIC within that period: (a) if the company adopts a constitution--a copy of that constitution; or (b) if the company modifies its constitution--a copy of that modification.

This also applies to a proprietary company that has applied under Part 2B.7 to change to a public company, while its application has not yet been determined. (6) An offence based on subsection (5) is an offence of strict liability. Note: For strict liability , see section 6.1 of the Criminal Code . CORPORATIONS ACT 2001 - SECT 137 Date of effect of adoption, modification or repeal of constitution If a new constitution is adopted or an existing constitution is modified or repealed, that adoption, modification or repeal takes effect: (a) if it is the result of a special resolution: (i) on the date on which the resolution is passed if it specified no later date; or (ii) on a date specified in, or determined in accordance with, the resolution if the relevant date is later than the date on which the resolution is passed; or (b) if it is the result of a Court order made under section 233: (i) on the date on which the order is made if it specifies no later date; or (ii) on a date specified by the order. CORPORATIONS ACT 2001 - SECT 138 ASIC may direct company to lodge consolidated constitution ASIC may direct a company to lodge a consolidated copy of its constitution with ASIC. CORPORATIONS ACT 2001 - SECT 139 Company must send copy of constitution to member (1) A company must send a copy of its constitution to a member of the company within 7 days if the member: (a) asks the company, in writing, for the copy; and (b) pays any fee (up to the prescribed amount) required by the company. (2) An offence based on subsection (1) is an offence of strict liability. Note: For strict liability , see section 6.1 of the Criminal Code . CORPORATIONS ACT 2001 - SECT 140 Effect of constitution and replaceable rules (1) A company's constitution (if any) and any replaceable rules that apply to the company have effect as a contract: (a) between the company and each member; and (b) between the company and each director and company secretary; and (c) between 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) Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became a member so far as the modification: (a) requires the member to take up additional shares; or (b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the company; or (c) imposes or increases restrictions on the right to transfer the shares already held by the member, unless the modification is made: (i) in connection with the company's change from a public company to a proprietary company under Part 2B.7; or (ii) to insert proportional takeover approval provisions into the company's constitution. CORPORATIONS ACT 2001 - SECT 141 Table of replaceable rules The following table sets out the provisions of this Act that apply as replaceable rules. Provisions that apply as replaceable rules Officers and Employees 1 Voting and completion of transactions--directors of proprietary companies 2 Powers of directors 3 Negotiable instruments 4 Managing director 5 Company may appoint a director 6 Directors may appoint other directors 7 Appointment of managing directors 8 Alternate directors 9 Remuneration of directors 10 Director may resign by giving written notice to company 11 Removal by members--proprietary company 12 Termination of appointment of managing director

194 198A 198B 198C 201G 201H 201J 201K 202A 203A 203C 203F

Provisions that apply as replaceable rules 13 Terms and conditions of office for secretaries Inspection of books 14 Company or directors may allow member to inspect books Director's Meetings 15 Circulating resolutions of companies with more than 1 director 16 Calling directors' meetings 17 Chairing directors' meetings 18 Quorum at directors' meetings 19 Passing of directors' resolutions Meetings of members 20 Calling of meetings of members by a director 21 Notice to joint members 22 When notice by post or fax is given 22A When notice under paragraph 249J(3)(cb) is given 23 Notice of adjourned meetings 24 Quorum 25 Chairing meetings of members 26 Business at adjourned meetings 27 Who can appoint a proxy
[replaceable rule for proprietary companies only]
28 Proxy vote valid even if member dies, revokes appointment etc. 29 How many votes a member has 30 Jointly held shares 31 Objections to right to vote 32 How voting is carried out 33 When and how polls must be taken Shares 33A Preemption for existing shareholders on issue of shares in proprietary company 33B Other provisions about paying dividends 34 Dividend rights for shares in proprietary companies Transfer of shares 35 Transmission of shares on death 36 Transmission of shares on bankruptcy 37 Transmission of shares on mental incapacity 38 Registration of transfers 39 Additional general discretion for directors of proprietary companies to refuse to register transfers

204F 247D 248A 248C 248E 248F 248G 249C 249J(2) 249J(4) 249J(5) 249M 249T 249U 249W(2) 249X 250C(2) 250E 250F 250G 250J 250M 254D 254U 254W(2) 1072A 1072B 1072D 1072F 1072G

Redmond [3.145]-[3.150]; [5.95]-[5.110]. The Corporate Constitution

* The English companies statute of 1856 introduced two distinct constitutional documents, the memorandum of association and the articles of association. The memorandum contained fundamental matters such as the company's capital structure.

* Table A articles adopted by companies usually contain detailed provisions such as the division of corporate powers between the BOD and the general meeting of shareholders, proceedings of the board and general meetings, the appointment and remuneration of directors, the transfer and transmission of shares, declaration of dividends and the winding up of the company.

* All registered companies were required to lodge their memorandum and articles of association with a state official so that they might be publically accessible. From the early 1990s in Australia this obligation applied only to public companies.

* In 1998 the requirement to have a constitution was abolished. There are sections headed replaceable rule for proprietary companies and mandatory rule for public companies: section 135. A table of replaceable rules in section 141. If a company adopts its own constitution that will displace the application to the company of any inconsistent rule except in the case of a public company, a rule which is expressed to

be mandatory and which operates therefore as an ordinary provision of the Act of the Company.

* Companies have three options: o They may elect to function without a constitution and rely on replaceable rules. o They may adopt their own constitution to displace or modify the replaceable rules in section 136.
? Many companies do this. o If they were incorporated before July 1998 they may retain their memorandum and articles of association as the constitution of the company to the exclusion of inconsistent replaceable rules. Under section 135 if they are a public company then the provisions of the act are mandatory rules.

* A company may vary the terms of a constitution by special resolution under section 136(1)-(2). It must have at least 75% support of the votes and there must be a notice of intention to purpose the special resolution and of its terms under section 9. There is scope for entrenchment of a constitutional provision against alteration by a special resolution by specifying the in the constitution a further requirement for its alteration which provision may not itself be repealed unless the further requirements are satisfied under section 136(3),(4). Such a further requirement might be one requiring that the special resolution be passed with a greater majority than 75% of the votes cast, the consent of the particular person or a particular condition to be fulfilled.

* The companys constitution and replaceable rules are a contract between the company and its members, the company and its director and secretary and the members themselves. They agree to observe and perform the constitution and rules so far as they apply to that person: section 140. Failure to comply with replaceable rules is not itself a contravention of the Act (section 135(3)).

* A public company which adopts a constitution must lodge a copy with ASIC together with a copy of any special resolution altering its provisions: s 117(3), 136(5). It becomes publically available. A proprietary company who adopts a constitution must just send a copy of it to a member upon request under section 139.

* The exercise of power is not invalid against a restriction or prohibition in the constitution only if it contravenes it under section 125(1). A company may also include objects in its constitution although acts beyond those objects are not invalid section 125(2).

* Replaceable rules allow the company flexibility in its corporate character under section 198E, 201F and 202C. The Corporate Organs

* The corporation is an abstraction. It has no physical existence and exists only in contemplation of law. It requires the mediation of natural persons for the expression and execution of its will. Two groups of people have power- members in the general meeting and the BOD.

* There is a rigid demarcation between membership and management functions. The BOD manage the company and shareholders are prohibited from normal running of the company.

* Management powers are vested in the board under section 198A.

* Company constitutions commonly provide for the appointment of one or more managing directors and for the delegation to them of powers of the board: section 201J and 198C. The Act also requires the company to appoint a secretary: 204A. The Distribution of corporate powers between shareholder and directors: The derivation of the corporate organs

* The corporate will is identified through the decision of a majority of those present at the meeting. Directors must order, direct, manage and transact all and every the affairs and things of or belonging to the said Company except such matters ought to be ordered and done by a General Court of the said company. They have unfettered scope in action.

* The Joint Stock Companies Act 1844 UK was the first company legislation. There is a formal distinction between shareholder and director roles. The management structure

and allocation of power in Australia is left to incorporators. There is just a minimum size enforced. Three director minimum for public companies and one for proprietary companies under section 201A who must be Australian residents. Directors must be natural persons aged at least 18 years under section 201B. Original powers of the general meeting

* Shareholders may act by ordinary resolution for the company. However this residual authority is usually excluded by standard provisions which permit directors to exercise all the powers of the company except any powers that the Act or the company's constitution requires the company to exercise in relation to general meeting: see section 198A(2) (replaceable rule).

* Thus the general meeting may by special resolution alter the company's name (section157), adopt a constitution for the company and repeal or modify its terms (section 136) and change the company's type (section 162(1)).

* As regards to capital structure while directors commonly retain the power to issue shares the general meetins may convert all of its shares into a larger or smaller number of shares by ordinary resolution (section 254H), reduce share capital or approve a buy back of shares (256B, 256C, 257A, 257C and 257D) or alter rights attached to shares and the general meeting may declare dividends or capitalise proits.

* The general meeting is not given express powers with respect to the conduct of the company's business. The general meeting is given qualified powers over the composition of the board of directors in whom the management powers are commonly vested. Thus shareholders may appoint a person as director (201G) and remove a director at any time (203C-203D) and determine the remuneration of directors (202A).

* Shareholder approval is needed to appoint and remove company auditors (327A, 327B and 329), by special resolution resolve to wind up the company voluntarily (491) or resolve that it be wound up by the court (461(1)(a)), approve financial benefits given to related parties of a public company absent applicable exemptions (208(1)(a)) and approve termination payments of company officers (200B and 200C).

* A resolution must be put to vote for the adoption of the remuneration report that directors of such companies must prepare showing the remuneration of the 5 highest paid company executive and the 5 highest paid group executives. However the vote on the resolution is only advisory and does not bind the directors or the company under section 250R. The powers of the board

* With only minor exceptions the Act does not require that directors be given any specific corporate powers although replaceable rules confine to the BOD some specific powers that had been granted to company boards under Table A provisions. The replaceable rules provide that the company is to be managed by or under the direction of the directors (section 198A(1)) and directors may exercise all the powers of the company except any powers that the Act or the company's constitution requires the company to exercise in general meeting (198A(2)).

* A proprietary company where the same person is its sole director and shareholder: the business of such companies is to be managed by or under the direction of its director: section 198E.

* The general management article in section 198A is a prime source of power as well as the constitution.

* In Cambell v Rofe the PC said that the constitution delegated the directors power to do everything the company could do except where the authority of a general meeting is expressly prescribed. The provisions are reproduced in section 198A. e.g. directors cannot fix their own remuneration and they need a meeting to dispose of assets. Other variations and restrictions

* There are many variations upon the standard constitutional model. They can allocated all power to directors or to the general meeting.

* ASX listing rules restrict directors from exercising powers without approval like issuing new shares beyond 15% of its share capital in any 12 month period and the

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