Legal Regulations of Business Structures: Compliance of Company Directors with Duties and Procedures

ACC520 LEGAL REGULATIONS OF BUSINESS STRUCTURE
Semester 2, 2018
Assessment Task 2
Name: Aliza Giri
Student I.D: 1100457
Course: Legal Regulations of Business Structures
Professor: Tony Tony

Solution 1
Introduction: Changes in the constitution; ability of the minor to keep a check on the changes and
contractual powers of the company
Kody and Ryder completed their graduation from USC. They want to carry on business of
exceptional handmade gifts and craft which they can sell online with the name Incredible Gifts
Pty Ltd.
Now, there are series of transactions that took place which has resulted in raising two prime
issues.
I. To make Salman aware of the procedure that is adopted by any company to bring
changes to its constitution and can Salman has the power to prevent the company to
incorporate a clause in the constitution that allow the directors to expropriate the
shares of Salman.
In Australia, there is no one single form in which a business can be initiated. The numerous
manners in which any interested party can carry on the business of his or her choice such as a
sole trader or as a partnership firm or as a company.
No comoany in Australia comes into existence of its own. There is a set procedure which is laid
down by Australian Securities and Investment Commission (ASIC) and the Corportaion Act
2001 which must be comply with to bring any comoany into existnece. As per section 124 of the
Act, any comoany upon its incorporation is consideed to be a separte legal entiuty in law. In
Salomon v A Salomon and Co Ltd1 and Lee v Lee’s Air Farming2, the court held that when a
company is registered then it is an artificial person and has its own inherent powers to act like a
normal person, that is, to make contract, to sue, to hold properties and is analyzed in Macaura v
Northern Assurance Co Ltd3, etc.4
Now, since a company is an artificial person then the rules upon which a company runs can
either be decided on its own in the form of constitution or it can run through the provisions
mentioned under the 2001 Act as replaceable rules or by both.
1 Salomon v A Salomon and Co Ltd (1897).
2 Lee v Lee’s Air Farming [1961] AC 12.
3 Macaura v Northern Assurance Co Ltd (1925) AC 619.
4 Peter Gillies, Business Law, Federation Press, 2004.

Now, while the comoany is carrying on its objectives, there are times, when the comoany feels
the need to bring changes in the constitution. The shareholdesr are granted power under section
136 of the Act according to which changes can be bought in the constitution (it can be modified,
repealed, etc) provided a special resolution is passed by the shareholders in a specail meeting
with 75% of the shareholders vote moving in favor of the alteration. The alteration bound all
major and minor shareholders of the comoany irrespective of the fact in whose favor the vote has
been cassted.5
At this point, it is important to note that,
Salman holds 10% shares in the comoany and the rest of the shares are hold by ryder and Kody.
Ryder and Kody wants to bring changes in the constitution and thus by availing their power
under section 136 of the Act, they have aclled a shareholdesr meeting wherein they pass the
resolution with a majoirty of 75% even thirugh Salman has voted agiant the resolution with 10%
votes. The resolution was passed to remove Salman from his solicitors post.
So, the alteration is valid and Salmna has to leave post. But, what if Salman wanst to challenge
the lateration. Does Salman have the power to prevent the company to incorporate a clause in the
constitution that allow the directors to expropriate the shares of Salman.
The basic rule is that any resolution passed by majority is binding on the shareholders of the
common y irrespective of the fact whether they like the amendment or not and is held in
Associated World Investments Pty Ltd v Aristocrat Leisure Ltd6. But, as per section 246B if the
alteration to the constitution is bought in so that variations or cancellation are bought in the class
rights of the shares or to bring changes to certain specific rules of the constitution which is not
allowed or when the alteration allows the expropriate shares of the minority shareholders then in
such cases alterations are not allowed at all. The High Court in Gambotto v WCP Ltd7 submitted
that if the important rights or expropriate shares of the minority shareholders are permitted by
bringing changes in the constitution, then, the same is not permitted and is also held in Shears v
Phosphate Co-op Co of Aust Ltd8 and Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd9.
5 Stephen Bottomley, The Constitutional Corporation: Rethinking Corporate Governance, Routledge, 23-Mar-2016.
6 Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1998) 16 ACLC 455.
7 Gambotto v WCP Ltd (1995) 182 CLR 432
8 Shears v Phosphate Co-op Co of Aust Ltd (1989) 7 ACLC 812.
9 Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd [2006] QSC 358.