Corporations LAW Assignment example 2 PDF

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Assessment Details: Research Assignment

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LAW00527 — Corporations Law 2,400 words 50%

Topic The assignment statement is as follows: Section 140 of the Corporations Act 2001(Cth) enshrines the long-time position that a company’s constitution forms a statutory contract between, amongst others, the company and each member and the company and each director. We are informed that (a) a corporate constitution should be read “not as commercial rights but as the government of the corporation and the exercise of the constitutional powers of the corporation” 1 and (b) a corporate constitution should “be regarded as a business document, and construed so as to give them reasonable business efficacy.2 While many do, not all corporations have a commercial focus. Required With reference to the above statement, relevant Australian case law and legislation, answer the following: (1) What is a company’s constitution and what is its purpose? In your answer address whether or not legislation should require mandatory provisions, for example corporate social responsibility requirements, within all corporate constitutions. (15 Marks) (2) Discuss and conceptualise the term ‘statutory contract’ as it is used in relation to a company registered under the Corporations Act 2001 (Cth). In your answer discuss how the Courts interpret and construct a corporation’s constitution. (25 Marks) (3) With specific reference to (a) and (b) of the assignment statement, are the prescriptions within (a) and (b) compatible? (10 Marks) Total (50 marks)

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Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 Lion Nathan Australia v Coopers Brewery [2006] FCAFC 144 Weinberg J at [26]

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Introduction Historically, corporations have been considered ‘invisible, immortal’ and existing ‘only in intendment and consideration of the Law’1. Centuries later, Australian companies remain a creation of the law; coming into existence through a process of registration 2 , given the status of separate legal personality 3 and ceasing to exist when deregistered. 4

Whilst all companies share certain

fundamental characteristics5, each company’s specific ‘personality’ comes from its constitution which, alongside the replaceable rules set out in the Corporations Act 2001 (Cth) (‘Corporations Act’), provides the rules of internal management.6 1. The purpose of a company’s constitution The replaceable rules encompassed by the Corporations Act apply 7 unless displaced or modified by the company’s constitution8 and are set out in section 141.

The replaceable rules do not apply to single director/shareholder

proprietary

companies

9

whilst

some

companies,

such

as

ASX-listed

companies 10 , ‘no liability’ mining companies 11 and registered charitable companies 12 limited by guarantee omitting ‘Limited’ from their name 13 are 1

Case of Sutton’s Hospital (1612) 10 Co Rep 1, 32 (Sir Edward Coke). Corporations Act 2001 (Cth) s 119. 3 Corporations Act 2001 (Cth) s 124. 4 Corporations Act 2001 (Cth) s 601AD(1). 5 Corporations Act 2001 (Cth)s 124(1) provides the registered company with separate legal identity and the legal capacity and powers of an individual and those of a body corporate. As such companies are capable of suing and being sued, acquiring, holding and disposing of property. Additionally companies have perpetual succession. 6 Whilst the Corporations Act 2001 (Cth) does not define ‘internal management’, section 134 provides that a company’s ‘internal management’ may be directed by the replaceable rules, by a constitution or a combination of both. It may also include separate agreements amongst the shareholders, setting out rights and obligations (Elders Forestry Ltd v Bosi Security Services Ltd (2010) 80 ACSR 122 [110]–[114] cited in Robert P Austen and Ian M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths, 16th ed, 2015) 202 [6.010]). 7 For companies formed after 01 July 1998. The replaceable rules do not apply to a company registered before 01 July 1998 unless it repeals its constitution; Corporations Act s 135(1)(a)(ii). 8 Corporations Act 2001 (Cth) s 135(2) by operation of s 135(1). 9 Corporations Act 2001 (Cth) s 135(1) but see, eg, regulation under ss 248B and 249B. 10 Australian Securities Exchange, Listing Rules (at 14 April 2014) r 1.1 Condition 1A and Condition 2, r 15.11, Appendix 15A and Appendix 15B. 11 Under Corporations Act 2001 (Cth) s 112(2) the constitutions of ‘no liability’ mining companies must limit their objects to mining purposes. 12 Under the Australian Charities and Not-for-profits Commission Act 2012 (Cth). 2

obliged to have a constitution and cannot rely on the replaceable rules as their internal governance rules. Otherwise, companies may either adopt a constitution on registration 14 or at any time after 15 and may amend or repeal their constitution. 16

A court may order a company to modify or repeal its

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constitution.

Adopting a constitution allows the company to substitute different provisions for some or all of the replaceable rules to more accurately reflect the company’s ‘personality’ and to address matters inadequately covered by the replaceable rules.18 It may also prove to be a convenient vehicle to assemble all the internal governance rules together in one document and prevents reliance on a replaceable rule that would leave a company vulnerable to an amendment of that rule by the legislature. Decisions made under a replaceable rule (that is ‘under an enactment’19) could be reviewed under principles of administrative law20 and this may introduce undesirable legal uncertainty.

Mandatory constitutional provisions and Corporate Social Responsibility (CSR) CSR includes the accountabilities corporations have to the societies in which they function, by incorporating the values and needs of stakeholder groups in the company’s decision-making.21 The power of management of a company is usually vested in the board of directors.22 Currently, directors have no legal obligation to consider non-shareholder interests in their own right; their duty 13

Corporations Act 2001 (Cth) s 150(1) requires the constitution to prohibit the company paying fees to the directors and requires directorial approval of all other payments to directors. 14 Corporations Act 2001 (Cth) s 136(1)(a). 15 By special resolution under Corporations Act 2001 (Cth) s 136(1)(b). 16 Corporations Act 2001 (Cth) s 136(2) by special resolution and satisfaction of further requirements if specified in constitution, s 136(3). 17 Corporations Act 2001 (Cth) s 233(1)(b). 18 See, eg, variations in rights attached to a class of shares under Corporations Act 2001 (Cth) s 246B or precluding/restricting share buy back under s 257A. 19 Robert P Austen and Ian M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths, 16th ed, 2015) 205 [6.011]. 20 Such as Administrative Decisions (Judicial Review) Act 1977 (Cth). 21 Egyptian Corporate Responsibility Center, A Guide to Corporate Social Responsibility (CSR) . 22 Corporations Act 2001 (Cth) s 198A(1). 1

extends to the company itself, generally considered to be the members of the company as a whole23. In certain circumstances, such as insolvency, directors may have a duty to take the interests of non-shareholders, specifically creditors, into account.24 The courts consistently have held that no duty is owed to the public or to employees,25 although amendments to the Corporations Act protect employees from transactions intending to defeat their entitlements.26 Legislation other than the Corporations Act imposes duties on companies to consider the welfare of employees 27 , consumers 28 , competitors 29 and the environment. 30 Directors’ decisions breaching these laws would result in a breach of the directors’ duties to the company31. There has been no appellate decision in Australia as to the extent to which directors may consider interests of non-shareholder stakeholders. 32 English case law holding gratuitous payments to other stakeholders to benefit the interest of the company33 and has been followed in Australia34 suggesting that the interests of stakeholders can be included in the consideration of the continued wellbeing of the company35. Mandatory replaceable rules permitting directors to take account of the interests of stakeholders other than shareholders have been proposed to amend the duties of directors under the Corporations Act.36 Introducing such a rule would

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Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286. Brunninghausen v Glavanics (1999) 46 NSWLR 538. 25 Parke v Daily News Ltd [1962] Ch 927. 26 Pt 5.8A 27 See, eg, Workers Compensation Act 1987 (NSW). 28 See, eg, Competition and Consumer Act 2010 (Cth) sch 2. 29 See, eg, Competition and Consumer Act 2010 (Cth) pt IV. 30 See, eg, Environmental Protection and Conservation Act 1999 (Cth). 31 Austen and Ramsay, above n 19, 454 [8.120]); directors may be negligent in their duties at common law, in breach of their duties of good faith as fiduciaries or in breach of their duties of care and diligence under s 180 and acting in good faith in the best interests of the company under 181 of the Act 32 Ibid 454 [8.120]). 33 See, eg, Hutton v West Cork Railway Co (1883) 23 Ch D 654; Parke v Daily News Ltd [1962] Ch 927; In Re Lee, Behrens & Co Ltd [1932] 2 Ch 46. 34 See, eg, Woolworths v Kelly (1992) 4 ACSR 431. 35 Senate Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Company Directors’ Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors (1989) 83. 36 Corporations and Markets Advisory Committee, Australian Government, The Social Responsibility of Corporations (2006) 110 [3.11.4]. 24

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allow (but not mandate) directors to take the interests of stakeholders other than shareholders into account. Shareholders would be able to accept the rule or introduce a revised form in the constitution. This ‘subtle but profound change to the dynamics of decision making’37 would make a CSR approach the default position with companies having to decide to deliberately exclude it. However, allowing shareholders to remove the rule effectively assigns the right to remove the directors’ capacity to consider the interests of other stakeholders to shareholders. Such a ‘one size fits all’ legislative approach to CSR has been considered as failing to recognise the diversity of companies governed by the Corporations Act and the multiplicity of needs of stakeholders.

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And since replaceable

rules/constitutions operate as private rather than public law obligations (as contractual terms between the company, its members and officers by operation of s 140 and not by ‘force of law’39) non-compliance is not a contravention of the Corporations Act and provisions relating to criminal and civil liability and injunctions do not apply.40 Non-shareholder stakeholders are not party to the statutory contract. Non-compliance may represent procedural irregularity, but cannot be invalidated unless the Court finds it has caused substantial injustice that cannot be remedied by an order of the Court.41 Explorations of directors’ abilities to consider other stakeholders in their decision-making rejected amending the current law,

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considering the

Corporations Act sufficiently flexible to permit directors to take stakeholders’

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Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Corporate Responsibility: Managing Risk and Creating Value (2006) 62 [4.70]. 38 Australian Bankers’ Association, Submission 106 to Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Corporate Responsibility: Managing Risk and Creating Value, 21 June 2006, 41 [3.104]. 39 Pamela Hanrahan, Ian Ramsay and Geof Stapledon, Commercial Applications of Company Law (CCH, 15th ed, 2014) 109 [5-660]. 40 Section 135(3). 41 Corporations Act 2001 (Cth) s 1322. 42 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Corporate Responsibility: Managing Risk and Creating Value (2006) 56 xiv. 3

interests into account.43 An earlier Senate inquiry considered the possibility of imposing duties on directors towards stakeholders and concluded that: [I]t is appropriate that matters external to the company be dealt with in separate and specific legislation … because companies legislation should deal only with corporate structure and organisation and matters arising as and between the constituents of the corporate body.44

2. Constitutions as ‘statutory contracts’ Unlike contracts created by agreement of the parties to be bound, company constitutions are given contractual force by virtue of section 140 (1) of the Corporations Act.

This section represents a continuation of pre-existing

legislative provisions45 which dealt with memorandum of association (setting out the company’s objects and powers) and articles of association46 (setting out the internal rules now represented by the replaceable rules or constitution).

At

common law the articles of association were regarded as creating a contract between the company and the members, enforceable by both the company and the members. 47 Section 140(1)(a) codifies this view. In addition, the common law 48 and s 140(1)(c) acknowledge that the constitution creates a contract between the members themselves. Section 140 provides for these internal governance rules to have effect as a contract only between the company and each member, the company and each director and secretary, and each member and each other member. They do not operate as a contract between a member and an officer, or between officers and cannot

be

enforced

by

outsiders,

including

stakeholders

other

than

43

Corporations and Markets Advisory Committee, Australian Government, The Social Responsibility of Corporations (2006) 7. 44 Senate Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Company Directors’ Duties – Report on the Social and Fiduciary Duties and Obligations of Company Directors (1989) 99 [6.55] 45 See, eg, Table A and Table B provisions of First Schedule to Corporations Law scheme (in force prior to 01 July 1998) and prior to that in Schedule 3 of Companies Code 1981 (Cth). 46 Former s 180, which operated to give articles of association effect as a contract under seal. Hanrahan, Ramsay and Stapledon, above n 39, 107 [5600]. 47 Hickman v Kent or Romney Marsh Sheep-breeders Association [1915] 1 Ch D 881. 48 Rayfield v Hands (1960) Ch1. 4

shareholders. 49 New members, directors and secretaries are subject to the terms by virtue of acquiring shares or being appointed. The law is intended to protect these legal relationships and to provide aggrieved parties with a remedy for any breach. Unlike commercial contracts, which generally require the consent of all parties to amendments, a constitution can be altered by special resolution of the members. 50 Previously, any change to the constitution was subject to the common law requirement that it was made ‘bona fide for the benefit of the company as a whole’. 51 The Courts adopted an inconsistent approach in determining whether this involved a subjective as well as objective assessment.52 Subsequently, the High Court in Gambotto v WCP Ltd53 rejected ‘as inappropriate the “bona fide for the benefit of the company as a whole” test in Allen v Gold Reefs of West Africa Ltd’ 54 and held that (except in cases involving expropriation of shares or their attached proprietary rights): an alteration of the articles by special resolution regularly passed will be valid unless it is ultra vires, beyond any purpose contemplated by the articles or oppressive as that expression is understood in the law relating to corporations.55 Under s 140(2), shareholders affected by proposed changes which would increase their liability to contribute to the share capital or to take up additional shares must agree in writing to the proposed change. Under s 140(1)(b) the constitution has effect as a contract between the company and each director and company director.

The constitution may include a

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Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex d 20. Corporations Act s 136(2); Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424, 437 [49]. 51 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, 672 (Lindley MR). 52 In Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9, 23 Scrutton LP held that the alteration would be considered to be for the benefit of the company ‘provided there are grounds on which reasonable men could come to the decision’ regardless of ‘whether the court would or would not come to the same or a different decision’. In contrast, in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, 291 (Evershed MR) the phrase was held to mean ‘that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole’ (emphasis added). 53 (1995) 127 ALR 417. 54 127 ALR 417, 424. 55 127 ALR 417, 424-5. 50

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contract of service for a managing director. Should the company replace a director appointed for a fixed term before the term expires, general law principles provide that no compensation for loss of office is payable as the constitution could confer no rights on outsiders and that there could be no unalterable provision.

In contrast, appointment may be under a separate

contract of service would attract damages at general law56 and pursuant to s 140. Articles of association have been held to override special contracts.57 Courts’ interpretation and construction Since the contract is not created by agreement between parties intended to be legally bound, but by statute, the courts traditionally have been reluctant to apply general principles of contractual interpretation to constitutions, given their ‘public dimension’; 58 being a deemed contract without the normal elements of a contract having to be established and the increased likelihood that it will be read and relied upon by a third party.59 However, the demise of the doctrine of ultra vires through the introduction of sections 124 and 125 of the Corporations Act has seen a decline in the support for a stricter approach to the construction of constitutions than for commercial contracts.60 The Full Federal Court in Lion Nathan 61 reflected on the principles of interpretation as applied to constitutions.62 The Court found that the principles of construction relating to commercial and business documents applied (with limitations) and therefore a constitution should be read and interpreted so as to give it business efficacy pedantically’.

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and should not be construed ‘narrowly or

A construction resulting in ‘reasonable business efficacy’ is

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Southern Foundries (1926) and Federated Foundries Ltd v Shirlaw [1940] 2 All ER 445. 57 Hunt v Carrier of Australasia Ltd (1939) 39 SR (NSW) 12, confirmed by the High Court on appeal, Carrier Australia Ltd v Hunt (1939) 61 CLR 534. 58 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 236 ALR 561 587 [123] (Kenny J) (‘Lion Nathan’) 59 Lion Nathan 572 [57] (Weinberg J). 60 Lion Nathan 585 [114] (Kenny J). 61 (2006) 236 ALR 561. 62 And subsequently approved in Oil Basins Ltd v Bass Strait Oil Company (2012) 297 ALR 261, 269 [32] (Gordon J). 63 Lion Nathan 605 [232]-[238] (Lander J). 64 Lion Nathan 608 [244] (Lander J). 6

preferred to that produces an ‘unworkable’ result.65 Company constitutions, like other commercial docu...