Legal Regulation of Business Structures

This article discusses the legal regulation of business structures, including the company constitution, director duties, and shareholder rights. It also includes case law examples to illustrate key concepts. The subject is relevant to business and law courses, and the content is suitable for college and university students.

LEGAL REGULATION OF BUSINESS STRUCTURES
<Your Name here>
<Course>
<Professor>
<Date Here>
Word count: 2646

Surname 2
Question 1
The Constitution is a document that is in most cases drawn up preceding the
registration of the business although in some instances it is drawn after the registration
process. A firm’s constitution is a set of regulations that provide with a framework through
which governs the directors and officers in the operation and internal management of the
company. The constitution in essence has the same legal bearing of a contract between all the
entities within the company1.
The process of modifying or repealing a company constitution follows the procedure
of a special resolution of the shareholders. The special resolution of the shareholders takes
place when the shareholders hold a meeting to discuss various changes that are to be effected
in the company constitution. The procedure involves a call to shareholders through a notice
of the special resolution issued 21 days in advance prior to the day of the meeting. The memo
of the meeting must also include information regarding the proposed resolution, the proposed
venue of the meeting, the time, and date of the meeting. The resolution will be considered
effective only if it is adopted by 75% of the shareholders after which the resolution will be
binding to all shareholders including those who voted against the changes.
The constitution of a company is different from a contract by the way, in which the
changes are adopted by the various stakeholders. The difference between the two is that any
modification in the contract must be adopted unanimously if the changes are to be effected
whereas the changes in a company constitution require only 75% of the shareholders voting
in favor of. Decisions made by the majority in regards to the organizations’ constitution
provide with several issues in relation to the rights of shareholders2.
The constitution of a company covers the powers, rights, and duties of the firm, the
executives, the board, and those of the different shareholders. It is a pact between the firm
and its members, company and its secretary, the organization and each director, and amongst
the company members. According to the Corporations Act 2001 sect. 136, a company is
allowed to implement a constitution before or after the company is registered. When
embraced prior to the registration process, all members must in form of writing agree to the
terms set forward by the constitution. In a case where the adoption of the constitution comes
after the registration process, a special resolution of the adoption is passed3.
1 Buchanan, C., 2017. What should my Company have in its Constitution? | Company Bureau Formations
Ireland.
Company Bureau Ireland.
2 (Commonwealth of Australia), 2012e.
Volume 5
3 (Commonwealth of Australia), 2012a.
Volume 1

Surname 3
Section 136 (2) of the Corporations Act states where the constitution has a provision
governing modifications, the amendments must foremost comply with the required provisions
prior to making any changes. For example, there may be a provision in the constitution
requiring that for any amendment to take effects they first must be approved by a specific
individual or the resolution must be voted for unanimously. In such a case where the
constitution has specified requirements, the specific requirements must first be fulfilled prior
to the amendment takes effect4.
Such additional requirements can be negotiated by the minority as a means to offer
some form of protection from resolutions made by the majority shareholders bearing
extensive financial consequences. As such, these requirements make it difficult for majority
shareholders to amend the constitution. Nevertheless, a company cannot limit its statutory
powers to change its constitution and the constitution cannot have a statute that bars the
company from making any changes to the constitution, as such, restrictions or provisions
would be void. The Corporations Acts and the common law however shields the company’s
shareholders from the variations or annulment of class rights, various modifications to
sections of the firm’s constitution that may impact of seizing the shares of the minority or
rights ascribing to those shares; and revisions to precise provisions of the firms constitution5.
Gambotto v WCP Ltd (1995) 182 CLR 432: expropriation of shares
99.7% of the shares of WCP ltd were controlled by Industrial Equity. Gambotto was a
minority shareholder in WCP Ltd. Industrial Equity intended to change the ownership
structure of WCP by making it a wholly owned subsidiary in order to attain savings through
taxes and administrative costs. IEL proposed to purchase 50590 shares from Mr. Gambotto
and Ms Eliana Sandri who were the minority shareholders. The notice of meeting also
contained information regarding the financial assessment of shares owned by WCP Ltd
prepared by the accounting department. The offer price to purchase the shares was valued at a
premium. The minority shareholders filed a legal suit arguing that the amendments were
invalid, as they were not done in good faith6.
The special resolution meeting resolved to amend the articles of association in order
to effect changes that empowered the shareholders controlling more than 90% of the issued
shares to acquire forcibly shares controlled by the minority for a specified amount. There
4
Corporations Act 2001 sect 136
5Tomasic, R., Bottomley, S., McQueen, R., 2002. Corporations Law in Australia. Federation Press.
6
Gambotto v WCP Ltd (1995) 182 CLR 432

Surname 4
were advantages associated in the move in terms of the considerable tax benefits and
administrative reimbursements for WCP if it had converted to a wholly owned subsidiary7.
The court held that the constitutional amendment was invalid rejecting Allen’s test of
bona fide and in the interest of the firm as a suitable test for evaluating modifications in the
constitution. The court held that for such an amendment conferring upon the majority
shareholders powers to expropriate powers of the shareholders must first satisfy the
following; it is for an appropriate purpose and not meant to oppress the minority
shareholders. The court further held that the process require complete disclosure of key
information, an autonomous assessment of the value of the shares by an expert, and
imbursement of the shareholding at market value. Expropriation is only allowable because
minority has continued shareholding would be injurious to the firm. Other grounds include
where the minority shareholder is in direct competition with the firm, and by the act of
expropriation the company would be in a position conform with the principles governing the
principal business is involved in, or where the expropriation would be to protect the interests
of the firm8.
Application in the case law
Borrowing from the ruling in the Gambotto case, Amaya holds no legal grounds for
suing Oh My Pty Ltd as the changes effected in the constitution satisfied all the requirements
of the Corporation Act 2001 section 136. Combined, Sammy and Huw controlled over 75%
of the shares and they both voted in favor of the resolution. Furthermore, by accepting the
role of the company accountant in Gosh Pty Ltd, a company in direct competition with Oh
My Pty Ltd significantly affected the performance of Oh My Pty Ltd. Nevertheless, she was
also soliciting Gracey to leave Oh My Pty and join her at Gosh Pty Ltd. Here expropriation of
Amayas’ shares will be in the best interest of Oh My Pty and would further protect the
principal business of Oh My Pty Ltd.
Question 1B
Robinson v Harman (1848) 1 Ex Rep 850
Mr. Harman in writing conceded to issue Mr. Robinson tenancy on a house for a
duration of 21 years at a price of 110 euros annually. However, he went back on his word and
declined to honor the contract after it emerged that the house was valued beyond the price
stated in the contract. Prior to this, the solicitor associated with Mr. Robinson had asked
whether the will as the house was inherited had vested the property to trustees which Mr.
7 et al.
8 et al.

Surname 5
Harman refused stating that the house was his property and that only he had the rights to rent
it out. However, the house had being placed under trustees and Mr. Harman authorization
was limited to the amount of rent collected for as long as he was alive as per the will. The
court in its ruling regarding the compensation of the damages for the breach of contract held
that,
“The rule of the common law is that where a party sustains loss by reason of a breach of
contract, he is, so far as money can do it to be placed in the same situation, with respect to
damages, as if the contract had been performed9.”
In as far as, Gracey is concerned; she has not bleached the contract yet. The contract
signed between the two parties gave Sammy and Huw exclusive rights to Gracey weekly
podcasts for which she would receive $4,000 monthly for a period of one year. By the mere
fact that Amaya was encouraging, her to offer her podcast to Gosh Pty Ltd. does not amount
to her breaching their contract. Gracey can sue for damages as a party found to be in breach
of contract is liable for losses incurred due to the breach. In the case Commonwealth of
Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 the court ruled that the afflicted
parties should be placed in a similar situation to what it would have been if the contractual
obligations were fulfilled. However, the plaintiff must prove that there was indeed a loss plus
the actual value of the loss or damages so that they could recuperate the compensations.
Therefore, the quantity of damages that is being demanded ought to be clear and must be
quantified10.
Question 2
Section 181 of the Corporations Act
The duties of a director are owed to the company as a whole. However, in delegating
their duties, directors often find themselves in fiduciary position vis-à-vis the creditors
especially when there is a major financial scandal or issue. The duties of a director are mainly
concerned with the governance of the relationship between the directors and the company
where they offer their services as the directors. The framework governing the duties of the
director is that, as a director one must conform to the Corporations Act 200111. Section 181 of
the Corporations Act executes a civic requirement on directors plus relevant officials in an
organization to implement their powers and discharge their duties in good faith, in the best
9
Robinson v Harman (1848) 1 Ex Rep 850
10
Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64
11 Section 181 of the Corporations Act

Surname 6
interests of the corporation and for a proper purpose12. The failure of a director to execute
their duties, the director is open for civil or criminal or a hybrid of the two offences13.
Hence, when discharging their mandate they should do so in good faith, work in the
best interest of the organization, and discharge them only for proper purposes. As such, it
requires them to discharge their duties without engaging in activities that would be
considered as conflicts of interests. While acting in good faith they must do so honestly in
such manner that is inspired by the firm’s best interest, as would be evaluated by an able
officer in the director’s position14. When discharging their duties for proper purposes mean
that, their actions cannot be defined by any reasonable person as a contradiction of the sole
purpose envisioned in the position by the company15.
Re Smith and Fawcett Ltd. [1942] Ch 304
According to the constitution of a company, Article 10 stated that the directors were
empowered to refuse to register share transfers. Mr. Fawcett died; he was among the two
directors and a shareholder to the company. Mr. Smith the remaining director declined to
catalog the handover of the shares of the Mr. Fawcett to his executors and instead opted to
sell them and the remaining ones were offered to the executors. In his ruling, Lord Greene
Mr. ruled that in the absence of mala fides Mr. Smith was allowed to act as he did. For a
private company, the restrictions are more severe as compared to public companies. In his
ruling, he stated that,
“The principles to be applied in cases where the articles of a company confer a discretion on
directors … are, for the present purposes, free from doubt. They must exercise their
discretion bona fide in what they consider - not what a court may consider - is in the interests
of the company, and not for any collateral purpose16.”
Applying the case law
The duties of a director are subjective as such they are dependent upon the director
executing their unrestricted authority bona fide in what they themselves would contemplate
as acting in the best interest of the company17. Directors have a responsibility to act in good
faith what they envisage as functioning in the best interests of the firm. If their intentions are
genuine and they justly believe that, what they are doing truthful for the company, directors
12 Section 181 of the Corporations Act
13 Tomasic, R., Bottomley, S., McQueen, R., 2002. Corporations Law in Australia. Federation Press.
14
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 per Isaacs J at 217
15 Section 181 of the Corporations Act
16 Re Smith and Fawcett Ltd. [1942] Ch 304
17 Treasury, 2018. Corporations Act 2001. Federal Registration Legislation. URL
https://www.legislation.gov.au/Details/C2017C00129/Html/Volume_1,
http://www.legislation.gov.au/Details/C2017C00129 (accessed 9.12.18)

Surname 7
are safeguarded from accusation that they would have done something differently. From the
inference above, the directors of Drink It Up Pty did not breach s181 of the Corporations Act
2001 or any other duty18. Voting unanimously to split the business in two separating the
profitable spring water business from that of juice was in the best interest of the company.
That way the liabilities of the loss making department would not tamper with those of the
profit making unit that way the business unit dealing with the water was a going concern
having being saved from winding up. As a director, one must take relevant steps to help
reduce losses to the creditors in case the business became bankrupt19.
Question 2B
Dhruv
Kristofer a shareholder had the right to sell some or all his shares to whoever he
chose, but by the fact that he was a director he was further required to reveal the sale to other
directors. When trading with shares, directors are supposed to seek authorization from the
company secretary as a measure to ensure that the one intending to purchase or sell their
shares does not have any information that is not known by the public20.
Dhruve had stakes in the company Drink It Up by the mere fact that he was among
the minority shareholders. During a board meeting, Kristofer proposes a resolution to
incorporate a separate company H20 Pty Ltd and to transfer the profitable water business to
this company. This was a resolution that was unanimously passed. Once the process was
complete and all the relevant assets transferred, all relevant parties were informed of the
changes. Dhruv still went ahead and requested Kristofer to sell him some of his shares. I
would argue that for anyone intending to make any purchase additional shares in a company
where one is already a shareholder means that one has already performed due diligence on
the financial position of the company. This means that Dhruve was already aware of the
financial position of the company where he further purchased an additional 5% of shares.
Druve has no legal redress, as Kristofer did not in any way breach the directors duties21.
References
18 Commonwealth Consolidated Acts, 2018. CORPORATIONS ACT 2001 - SECT 181 Good faith--civil obligations.
URL http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html (accessed 9.12.18).
19 Parliament of Australia, C., 2018. Chapter Four - Directors’ duties [WWW Document]. URL
https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/
Completed_inquiries/2004-07/corporate_responsibility/report/c04 (accessed 9.12.18).
20 et al.
21 Australian Securities & Investments Commission, 2018. Directors’ liabilities when things go wrong. Directors
Liabilities Things Go Wrong. URL https://asic.gov.au/for-business/your-business/tools-and-resources-for-
business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-
wrong/ (accessed 9.12.18).

Surname 8
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 per Isaacs J at 217
Australian Securities & Investments Commission, 2018. Directors’ liabilities when things go
wrong. Directors Liabilities Things Go Wrong. URL https://asic.gov.au/for-business/your-
business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-
business-directors/directors-liabilities-when-things-go-wrong/
Buchanan, C., 2017. What should my Company have in its Constitution? | Company Bureau
Formations Ireland. Company Bureau Ireland. (accessed 9.12.18).
(Commonwealth of Australia), 2012a. Volume 1,
(Commonwealth of Australia), 2012b. Volume 2,
(Commonwealth of Australia), 2012c. Volume 3,
(Commonwealth of Australia), 2012d. Volume 4,
(Commonwealth of Australia), 2012e. Volume 5,
Commonwealth Consolidated Acts, 2018. CORPORATIONS ACT 2001 - SECT 181 Good
faith--civil obligations. URL
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html (accessed 9.12.18).
Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64
Corporations Act 2001 sect 136
Corporations Act 2001 sect 181
Gambotto v WCP Ltd (1995) 182 CLR 432
Hindle v John Cotton Ltd (1919) 56 Sc LR 625
Parliament of Australia, C., 2018. Chapter Four - Directors’ duties. URL
https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financ
ial_Services/Completed_inquiries/2004-07/corporate_responsibility/report/c04 (accessed
9.12.18).
Queensland Goverment, 2018. 7.3 Corporations Act 2001 (Cth) (the Corporations Act). URL
https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/
welcome-aboard/member-duties/corp-act-2001-c.aspx (accessed 9.12.18).
Re Smith and Fawcett Ltd. [1942] Ch 304
Robinson v Harman (1848) 1 Ex Rep 850
Tomasic, R., Bottomley, S., McQueen, R., 2002. Corporations Law in Australia. Federation
Press.
Treasury, 2018. Corporations Act 2001. Federal Registration Legislation. URL
https://www.legislation.gov.au/Details/C2017C00129/Html/Volume_1,
http://www.legislation.gov.au/Details/C2017C00129 (accessed 9.12.18).

Surname 9