Constitutions and replaceable rules PDF

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Constitutions and replaceable rules...

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Problem solving: 1. Is the company a proprietary company or a public company? Constitutions and replaceable rules Section 134: a company’s internal administration may be governed by replaceable rules contained in the Corporations Act or by a constitution or a combination of both. Replaceable rules (think of these as optional). These rules govern the internal administration and corporate governance of companies. These apply to companies formed after 1998 or those formed before 1998 but have repealed their constitutions: s 135(1)(a)(i) and (ii). The rules can be replaced in a company’s constitution that replaces or modifies any of the replaceable rules: s 135(2). Section 135: some replaceable rules only apply to proprietary companies and some that must apply to public companies. Section 141 lists out the provisions in the Corporations Act that apply as replaceable rules. One person proprietary companies A proprietary company with a single shareholder who is also the director does not need formal rules to govern its internal administration. 

They do not need a constitution

However, the Corps Act has basic rules that apply specifically to single director proprietary companies. When there is more than one shareholder or director, then the replaceable rules apply. Companies limited by guarantee These companies cannot be solely governed by replaceable rules and should have a constitution. However, their internal rules may be governed by a combination of both the rules in their constitution as well as selected replaceable rules. No liability companies Section 112(2) requires these companies to have a constitution that states that:  

Its sole objects ae mining purposes The company has no contractual right to recover calls made on its shares from a shareholder who fails to pay them

Its internal rules may be governed by a combination of the rules in their constitution as well as selected replaceable rules. Statutory requirements for a constitution Companies may adopt a constitution in any one of three ways: 

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A new company may adopt a constitution on registration if the persons named in the application for the company’s registration as having consented to become members, agree in writing to the terms of the constitution before the application is lodged (s 136(1)(a)) A company that is registered without a constitution may adopt one by passing a special resolution (s 136(1)(b)).

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A court order is made under s 233 that requires the company to adopt a constitution (s 136(1)(b))

Public companies that have a constitution are required to lodge a copy with ASIC.  

Copy of constitution and special resolutions must be lodged within 14 days of company adopting or modifying constitution: s 136(5). If a member makes a written request, a company must send a copy of its constitution to that member within seven days: s 139.

Content of constitution. The Corps Act does not lay out what information must be contained in a company’s constitution. If a company limited by guarantee wishes to omit the word “Limited” in its name:  

S 150 states that the company must be a registered charity as defined in s 25(5) of the Australian Charities and Not-for-Profits Commission Act 2012 Its constitution must: o Prohibit the company from paying fees to its directors o Require the directors to approve all other payments the company makes to directors.

Listed companies must have a constitution that is consistent with the ASX Listing Rules. What is a constitution?  

They are considered business documents by the courts They are interpreted similarly to contractual documents to give them a business like interpretation: Dome Resources NL v Silver

Objects clause: 

This identifies and restricts the businesses and activities which the company may engage in: s 125(2).

Ultra Vires:  

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Where a company’s contract or transactio goes beyond the scope of the company’s object o Any such contract or transaction is void and has no legal effect. Doctrine abolished by ss 124 and 125. o Objects clause is not required under these sections o Companies have the legal capacity and powers of a person and may do as they please Section 125(2): a company’s act is not invalid, when it has an objects clause, merely because said act is beyond or contrary to its object. o Members can sue the directors if they act beyond the scope of their objects clause.

Effect of constitution and replaceable rules Contractual effect: Section 140(1): a company’s constitution and any replaceable rules that apply to a company have effect as a contract between:  

Company and each member (s 140(1)(a)) Company and each director and company secretary (s 140(1)(b))

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Member and each other member (s 140(1)(c))

And each person agrees to observe and perform the constitution and rules as far as they apply to that person. Differences with normal contracts:   

No consideration of surrounding circumstances Company constitutions can be altered without the consent of all parties A company can modify or repeal its constitution by special resolution: s 136(2). o Terms of s 140(1)(a) and (1)(c) contracts are binding on those who vote against the modification. Similarly with s 140(1)(b).

Contract between company and members: Companies can take action against their members to force them to comply with the provisions in the constitution if they are unwilling to do so voluntarily. Enforcement by members: members can only enforce provisions that confer rights on members in their capacity as members. 

Section 140(1)(a): members agree to observe and perform the constitution so far as it relates to that person in their capacity as a member of that company. [members cannot enforce provisions in the constitution that give them rights in any non-member capacity

Eley v Positive Government Security Life Assurance 

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The company’s constitution, drafted by Elegy, provided that he was to be its permanent solicitor and could only be dismissed for misconduct. He acted as solicitor for some time although no separate employment contract was entered into. He also received an allotment of shares in consideration of the work he did in forming the company. The company later ceased to employ him. Eley then brought an action for breach of contract against the company but failed.

Held: the constitution conferred no rights on a member where the member seeks to enforce a right in a capacity other than a member. Eley was seeking to assert a right as solicitor of the company, and to do so, there should have been a separate employment contract. Non-members: a constitution does not have the effect of an enforceable contract between a company and non-members. Contracts between the company and its directors and secretary Section 140(1): a company’s constitution and any replaceable rules that apply to a company have effect as a contract between: 

Company and each director and company secretary (s 140(1)(b))

Directors’ contracts of service: if the constitution has a provision for the appointment of a specific person as a director for a nominated period, this has the effect of a contract between the company and that director under s 140(1)(b). However, a company cannot be prevented from altering its constitution or displacing replaceable rules as long as the correct procedure for alteration is followed. Shareholders can then pass a special resolution removing the provision appointing the director and the director will be unable to enforce the appointment under the constitution. There will be a breach enforceable by the director if the company purported to terminate the appointment and correct removal procedures were not followed.

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If the constitution does not adequately provide a procedure for removal, the members can resolve to alter the constitution under s 136(2) to allow for removal.

Alteration of constitution and replaceable rules Shareholder approval is required to alter a constitution or displace a replaceable rule. Section 135(2): a company may displace or modify any replaceable rule that applies to it by adopting a constitution. Section 136(1)(b): a company adopts a constitution if it passes a special resolution to that effect. Section 136(2): a company can alter its constitution with a special resolution. Section 9: a special resolution is a resolution passed by at least 75 percent of the votes cast by members entitled to vote on the resolution. 

Section 249L(1)(c): notice of the meeting at which a special resolution is proposed to set out an intention to propose the special resolution and state the resolution.

Section 137(a): a special resolution adopting, modifying or repealing a company’s constitution takes effect on the day it is passed. Section 136(5): a public company must lodge a copy of a special resolution adopting, modifying or repealing its constitution within 14 days after it is passed. If a special resolution of a public company  

Displaces a replaceable rule with a constitution, it must also lodge a copy of the constitution with ASIC within that period Modifies the company’s constitution, it must lodge a copy of that modification with ASIC within that period.

Limits on right to alter constitution There are Corps Act and CL restrictions in place to ensure that shareholders do not abuse their power. Corps Act Entrenching provisions: section 136(3) recognises that a company’s constitution may have provisions that restrict the company’s ability to modify or repeal its constitution by imposing further requirements for alterations beyond that of a special resolution. Section 140(2): a member is not bound by the modifications of the constitution made after becoming a member so far as the modification:   

Requires the member to take up additional shares Increases the member’s liability to contribute to the share capital of or otherwise to pay money to, the company or Imposes a restriction on the right to transfer the shares already owned by said member.

A member is only bound by such a modification to the constitution where it is agreed to in writing. Variation of share capital rights: class rights can only be modified or varied upon special resolution of the company and the holders of the affected class: section 246B. 

Oppression remedy: Section 232 allows members to apply to the court for a remedy if the majority votes in favour of a resolution altering the constitution or replaceable rules that is

contrary to the interests of the members as a whole, oppressive, unfairly prejudicial or unfairly discriminatory to members. Common Law Alteration valid unless beyond any contemplated purpose or oppressive. On registration, a company’s constitution may provide for the expropriation or compulsory disposal of a member’s shares....