Legal Regulation of Business Structures

LEGAL REGULATION OF BUSINESS STRUCTURES
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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

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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