CORPORATE CONSTITUTION NOTES PDF

Preview

Summary

complete notes on corporate constitution...

Description

Corporations Law Company Constitution notes What is a Company Constitution (CC)?  Company Constitution = company's set of 'internal rules'  Historically, memorandum& articles of association required by companies to explain purpose and objectives  MEMORANDUM: name of company, who was responsible, amount of capital that could be raised and limit of liability on the members  ARTICLES: internal document made publicly available by requirement of public companies to lodge articles with ASIC — internal rules regulating operation of business, shareholders rights, regulations of meetings, appointment of directors, other internal management issues — commonly referred to as "by-laws"  Corporations Law Simplification Task Force: memorandum and articles abolished  Company Law Review Act 1998 (Cth) — simplify and modernise company law, amended legislation, existing memorandum and articles to "corporate constitution"  Important rules included in articles of association now exist in Corp Act but with an option to opt out, now called replaceable rules (RR) (company free to adopt or reject in determining internal rules) listed in table under s 141

CREATING THE CORPORATE CONSTITUTION 



Replaced need for two separate constitutional documents (memo and article) with optional single document called CORPORATE CONSTITUTION Companies formed before July 1998 prob have memorandum and articles of association, now known as corp constitution unless they decided to repeal them. Alternatively, company can completely rely on replaceable rules included in CA

   

Only public companies required to lodge corporate constitutions ASIC can request copy from pty company to be lodged — s 138 Member of the company can request a copy — s 139 Can be a hybrid of own internal rules and some of the replaceable rules in the CA



Company Law Review Act 1998 — IMPACT: COMPANIES BEFORE JULY 1 1998

COMPANIES AFTER JULY 1 1998

1.

1.

DO NOTHING — existing memo and articles incorporated and become CC 2. REPEAL— repeal CC and accept RR 3. ADOPT — special resolution passed to create and adopt CC

DO NOT REGISTER CC — RR automatically apply 2. CREATE CC — will automatically displace RR in entirety/part (if expressly stated)

1

Corporations Law Company Constitution notes

Types of companies to whom general rules above apply differently: 1. NO LIABILITY COMPANIES — must have a CC as still a requirement for mining purposes objects clause — s 112(2), objects clause mandatory — s 125 2. SOLE MEMBER/DIRECTOR PTY COMPANIES — if same person both member and director , RR do not apply — s 135(1) 3. LISTED COMPANIES — ASX Listing Rules (LR 15.11) require certain provisions to be contained within a CC, therefore these companies cannot rely solely on RR

1. OBJECTS CLAUSE Historical position  Also known as "scope of business" clause was part of memorandum describing long list of business activities in which company might engage.  Two purposes: to protect investors to know how money invested, and protect creditors so that company capital not spent in unauthorised activities  Issues due to common law concept of Ultra Vires ("beyond power") — if company exceeded powers in objects clause, contract was void.  Very restrictive when new business opportunity arose.  Objects clause no longer mandatory with abolition of Ultra Vires — s 125 Current Position  Objects clause now optional  Company has full capacity of an individual, which allows the corporation to engage in any lawful business activity — s 124  Removes Ultra Vires, and gives company full contractual capacity  Allowed to place a restriction on CC — s 125  EXAMPLE: preventing a cosmetic company from testing on animals  In a case like above, company retains (as separate entity) capacity to contract even where in breach of restriction despite s 125  Officers would be in breach of duties for failing to comply with CC, but company bound in contract still    

Corporations' freedom to contract supported s 128-129 Provide extensive rights of assumptions to those third parties who transact with a company Right to assume that a CC and RR have been complied with — s 129(1) Right of assumption may be lost where contracting third party knew/suspected their assumption was incorrect

2

Corporations Law Company Constitution notes

2. REPLACEABLE RULES   

 

   

  

Advantages: reduction/elimination of expenses in keeping CC up to date Where company decides not to draft CC, RR s 135 provide basic standards required for a company to function EXAMPLE: no CC, unsure on minimum number of members required to attend shareholders meeting. S 129T minimum number is two — RR therefore a corporation with CC can set their own minimum number (eg — 5) S 141 Table that lists 39 different replaceable rules EXAMPLES: o Appointment/removal of directors ss 201G and 203C o Powers of directors s 198A o Inspection of books s 247D o Directors meetings ss 248A-G o Members meetings ss 249C and 250J o Transfer of shares ss 1072A,B,,D,F,G o Procedure for payment of dividends s 254U Convenient summary of RR Advantage of reliance on RR: always abreast of statutory change and will save companies difficulty and expense in updating CC HOWEVER, bias towards Pty companies rather than public (but doubtful many would rely on such rules, usually capable of funding cost of CC) One RR MANDATORY for public companies but not Pty: — members right to appoint a proxy (authorised agent) — s 249X Internal management of company regulated — s 134 Company must comply with RR, CC or combo of both ^^ Combo of RR and CC creates contract between members and company — s 140(1)

SECTION 140 STATUTORY CONTRACT  

The terms of the CC bind the company and all its members with the terms of a deemed special statutory contract. — s 140(1) Contract can be enforced by the company against its members, the officers against the company and between members themselves

Has the effect of a contract: S 140 — effect of a contract between:  The company and its members  The company and its directors and secretaries  Between members themselves

3

Corporations Law Company Constitution notes

Operation of the CC:  However, Any of these parties can orally or implicitly vary the operation (rather than the terms) of the corporate constitutional contract — Re Aero Marine Consulting Pty Ltd [2003] FCA 1016.  EXAMPLE: where CC requires director's resignation to be in writing in order to be effective, these formalities can be dispensed with by the company by agreement with the director — Latchford Premier Cinema Ltd v Ennion [1931] 2 Ch 409. Distribution of powers:  Effect of CC as binding contract: — constitution sets out distribution of powers between members, directors and company.  Common for CC to adopt RR s 198A, conferring managerial authority of the corporation onto board of directors  Once formed with this provision in CC, members not permitted to tell directors how to manage company — because members already given up power by purchasing shares in a company with CC providing for directors to exercise managerial power.  Only way for members to direct BOD is to alter CC to change distribution of authority  EXAMPLE: may involve amendment to CC to require member approval for certain transactions (eg — contracts in excess of $50,000)  Automatic Self-Cleaning Filter Syndicate Co Ltd v Cuninghame [1906] — inability of members to force directors to comply with their wishes o The majority shareholder passed resolution directing company to sell an asset to another company that he controlled o Directors refused to transfer asset o HELD: to make the order to complete the transaction would take away the management power of BOD, which under CC had only been given to BOD. If Majority shareholder wanted to change allocation of power could only do so through altering CC by special resolution

1. COMPANY v MEMBERS Enforcing rights:  Various parties can also enforce any of the rights contained in CC  Often relates to issues such as: o Voting rights o Pre-emption rights (right to be offered any company shares first if they are for sale) o Reliance on dispute resolution clause rather than litigation — Hickman case

4

Corporations Law Company Constitution notes

Hickman v Kent [1915]  FACTS: sheepbreaders association concerned with quality control of breeding thoroughbred sheep in UK.  One of articles of association of company included provision where if a dispute arose between member & company, should be referred to arbitration before going to court  Dispute arose by expulsion of Hickman from the company and he tried to sue in court  Company wished to rely on statutory contract in CC for the matter to be resolved by dispute resolution rather than litigation  HELD: statutory C contract enforceable by the company against the member. Halt on legal proceedings until Hickman completed the arbitration of the dispute  Followed in AUS — Carew-Reid v Public Trustee (1996) Contractual rights and remedies:  CC is a contract meaning all parties to the contract (members, company and officers) have an additional range of rights and remedies based on contractual law principles  Typically involves the grant of injunctions to prevent a breach of statutory contract from continuing — Andrews v Queensland Racing Ltd (2009) pg 201  



Damages: — some doubt as to whether members can claim for breach of CC If members loss reflective of loss of share value (where breach lowers value of shares), claim prevented by "reflective loss" principles — Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) applied in AUS in Thomas v D'Arcy [2005] If member could prove breach caused them to suffer loss in their capacity as a member (not merely reflective of a lessening of the company's value) then it appears there is no reason this member could not obtain damages — McLaughlin v Dungowan Manly Pty Ltd

2. COMPANY v MEMBERS (IN ANOTHER CAPACITY)  



The CC does not create a legal relationship between the company and outsiders, and cannot be enforced by an outsider against the company — Eley v Positive Government Security Life Assurance Co: o FACTS: CC stated E was to be company's solicitor and could only be removed for misconduct. No director's/shareholder's resolution approved E's position as company solicitor. Worked as company solicitor for some time, given shares in company. Company stopped employing E as solicitor. He sued company for breach of contract for his position that was protected in the CC. o HELD: CC can only be enforced by member in so far as it affected their membership status. Constitutional provisions for E's status as solicitor did not affect him as a member of the company, thus no action to enforce CC to allow him to continue as company solicitor Followed in Morris v Hanley (2003) — court affirmed no authority to date which could justify the enforcement of a statutory contract by an outsider

5

Corporations Law Company Constitution notes

Hickman v Kent (Sheepbreaders case)  No article can constitute a contract between the company and a third person  No right merely purporting to be given by an article to a person (whether member or not, in a capacity other than that of a member as for instance a solicitor, promoter…) can be enforced against the company  Articles regulating rights and obligations of members generally as such do create rights and obligations between them and the company

INTERPRETATION OF THE CONSTITUTION    

Terms of CC take effect as a deemed statutory contract between the company and members Treatment of CC as a contract has influence on the interpretation of its terms Interpreted as a commercial document to give effect to business efficacy Meaning of CC to be objectively assessed

Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd  HELD: CC as "commercial documents" must be read as a whole and (where appropriate) having regard to the purpose that from an objective perspective they were intended to serve   

   

Surrounding circumstances that led to formulation of CC may be relevant to assist in interpreting ambiguous clauses in CC Difficult to imply terms in CC Australian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2016) o HELD: no basis to imply term into CC of CBA allowing members to make an advisory resolution to the board about how management reported on carbon emissions generated by projects funded by CBA Aiding interpretation of statutory contracts in companies is limited — HNA Irish Nominee Ltd v Kinghorn (2010) Because CC and RR can be amended at different times and in different circumstances Also members involved in making of CC at a time may change This means primacy must be given to objective intention gathered from language of CC rather than other features of surrounding facts — this approach favoured in Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd — o Emphasised unless words under consideration are ambiguous, regard may not be had to surrounding circumstances

6

Corporations Law Company Constitution notes

AMENDING THE CORPORATE CONSTITUTION  

Can be legally altered by passing special resolution, which requires 75% majority vote by members Alterations allowed subject to statutory/CL safeguards to protect minority shareholders from majority shareholders who may abuse power

Restrictions on alteration  Primary restrictions on alteration of CC Corp Act: o S 140(2) Prohibition of any imposition of further liability on members by requiring additional shares to be taken up or increasing a members' liability to contribute capital: members only bound by alteration if they agree in writing — Ding v Sylvania Waterways Ltd  FACTS: SW owned submerged land in adjoining residential development. Shareholders of SW consisted of owners of blocks adjoining waterway. SW CC originally provided that SW could charge a once only membership fee. CC amended to provide SW could charge membership fee as an annual levy to pay for the maintenance of the waterway. Ding a member prior to change and objected against annual levy  HELD: a shareholder is not bound to contribute more money than the initial price of their membership. Effect of s 140(2) was to overturn any special contract with regard to increased liabilities through a constitutional amendment without written consent o

S 232-234 protection of minority members against oppression or the majority acting in an unfairly prejudicial manner

Process of amending CC via special resolution  Statutory right to alter CC — s 136  A special resolution (75%) must be passed by the members entitled to vote at a general meeting  Company will put forward the motion in a notice of the meeting, at least 21 days in advance  Exact wording of change required  75% of votes cast at meeting (not members) required for change  Also includes proxy votes available to proxy holders (chair of company etc)  Public company MUST file amended CC with ASIC 

Sole member or director company wanting to amend CC need only sign a record of the amendment — s 249Be

7

Corporations Law Company Constitution notes

Protecting minority shareholders:  No specific statutory protection provisions for minority shareholders to prevent alteration to CC  General minority protection provision — s 232-234  Afford variety of remedies to member in the event affairs of the company or an act/omission are oppressive, unfairly prejudicial or unfairly discriminatory or operate against the interests of the company as a whole.  Company may be wound up for a similar reason — s 461  A member can imply a separate 'special contract' based on terms of CC successful in case below: Bailey v NSW Medical Defence Union Ltd  FACTS: Dr B member of the union (provided professional negligence insurance to members). Company limited by guarantee — CC had objects clause that provided purpose of company was to indemnify its members against claims. Dr B treated a patient who would sue him years later in negligence. Union amended CC to give the company the discretion to refuse to provide assistance to its members at any time. Dr B was later sued for previous negligence, and union assisted. Dr B died before case finished, union assistance ceased. Estate of Dr B ordered to pay patient over $500,000, and the executor Mrs Bailey sought to enforce Union CC to pay these costs  HELD: Union and Dr B parties to a contract of insurance (special contract) that required company to indemnify Dr B's estate.  "special contract" — CC of a company regulates relations between members and companies, existence of CC does not preclude member from contracting individually with the company upon terms which may/may not be defined by reference to CC.  Company can alter CC but in doing so cannot escape an action for breach of contract  " a company cannot unilaterally vary its contracts by altering CC unless that is the basis upon which the contract was made"  In this case, parties could not have intended that obligation to indemnify could be unilaterally withdrawn years after injury that gave rise to the claim actually arose Bona fide for the benefit of the company test  Need to protect minority shareholders from detrimental changes to CC identified — Allen v Gold Reefs o HELD: for an amendment to CC to be valid, it must be 'bona fide for the benefit of the company as a whole' o Followed in AUS — Peters' American Delicacy Co v Heath o BUT this concept is uncertain/imprecise: could cause ambiguities in law by way of interpreting what the artificial company collectively thought about an issue

8

Corporations Law Company Constitution notes

Peters' American Delicacy v Heath — Bona Fide FOR THE BENEFIT OF THE COMPANY TEST  FACTS: number of special resolutions passed at members meeting altering CC. they provided that dividend distributions could be paid to members with shares rather than cash. Value of each members' dividend distribution calculated in proportion to amount paid up on each member's shares, rather than according to value of shares held by the member. Several members challenegd validity of resolutions altering CC on the basis the amendments were not bona fide for the benefit of the company as a whole. Test had been used before in Allens Reef Case  HELD: chief reason for denying unlimited effect to widely expressed powers such as that of altering CC is the fear or knowledge that an apparently regular exercise of power may in truth be but a means of securing some personal particular gain (pecuniary etc), which does not fairly arise out of the subjects dealt with by the power, and is outside and even inconsistent with the contemplated objects of power 

HCA has since revisited principle and stated the appropriate standard for any amendment to a CC should be the 'proper purpose' test

Gambotto v WCP Ltd  FACTS: G minority shareholder with 0.1% interest in WCP. Brought an action to prevent amendment to WCP CC which would permit Industrial Equity Ltd (which owned 99.7% of WCP) to compulsorily purchase (expropriate) G's shares  HELD: rejected bona fide benefit of the company as a whole test. Rather held that amendment of WCP CC was invalid as it was not for proper purpose (even though WCP could show substantial saving in admin costs) Further held, alteration to CC to facilitate the expropriation of shares of the minority not valid simply because it was made for proper purpose — must also be fair in the circumstances. Proper to do this if it would save the company from significant detriment or harm (eg — where shareholder to be bought out competing with the company or where membership would result in loss of its business). For the majority shareholders ...