Corporate Law: Constitution, Amendments and Shareholders' Rights

The constitution of a company governs its operations and creates the relationship between shareholders, directors, and the company. This article discusses the formation of a constitution, its purpose, and the ways in which it can be amended. It also explores the limitations on the power of majority shareholders and the importance of using their powers for proper purposes. The article concludes by discussing the protection of minority shareholders' rights and the equitable limitations on the voting power of majority shareholders.

Corporate Law

Executive Summary
The constitution of a company governs its operations, and it also creates the relationship
between the shareholders, directors and the company. The objective of establishment of
the constitution is to ensure that the corporation focuses on the interest of its members
while at the same time directors should form business strategies to achieve the corporate
goals of the company. The constitution of the company is not rigid, and it can be amended
by passing a special resolution in the company. The rights of minority shareholders are not
protected based on the requirements given under the Corporations Act. Furthermore, there
are various restrictions imposed on the majority shareholders regarding amendment in the
constitution in order to ensure that they are not able to vary the rights of other members
due to which they face financial consequences. Thus, shareholders should use their powers
for proper purposes and avoid causing harm to the company and minority shareholders or
gaining a personal advantage.
Page 1

Table of Contents
Part 1..........................................................................................................................................3
Part 2..........................................................................................................................................4
Part 3..........................................................................................................................................5
References..................................................................................................................................8
Page 2

Part 1
The Corporations Act 2001 (Cth) is the key legislation which governs the companies
operating in Australia. Section 140 (1) of the act provides the provisions regarding forming
of a company’s constitution in which various rules and regulations are given which
corporations have to comply with while managing their operations (Austlii 2018). These
rules govern the operations of the company to ensure that it did not act outside its scope
which could adversely affect the interest of its stakeholders. The governing document of a
registered company is its constitution which provides key rules and regulations regarding its
operations. The internal management of the company is governed by such a constitution
which creates a contract between the company and its members, director, company
secretary and members with other members. Before 1 July 1998, the memorandum of
association and article of association were the two key documents which governed the
company and its contract with its directors, members and other members (Baxt 2017).
However, after 1 July 1998, corporations did not have to prepare these two documents, and
they can establish a constitution which provides key provisions regarding a company’s
operations. The purpose of a company’s constitution is that it governs that internal
management and the business activities of the enterprise. Another purpose of the
company’s constitution is that it establishes the relationship between the company’s
directors and shareholders since a company is a separate legal entity as given in Salomon v
Salomon & Co Ltd (1897) AC 22 case. Similar views were given in Lee v Lee’s Air Farming Ltd
(1960) UKPC 33 case.
After 1 July 1998, the corporations did not have to prepare memorandum of association and
article of association, however, the Corporations Act as established a model set of key rules
which replace the model of memorandum and articles of association, thus, they are called
the replaceable rules. Section 136 (1) provides the ways in which company can adopt a
constitution which include before the registration or after registration by passing a special
resolution (Legislation 2018). Australian corporations can either comply with replaceable
rules or the constitution or the combination of both while managing their operations. Many
companies operating in Australia still have a memorandum of association and article of
association but if they wanted they can change it to form a constitution. The rules given
Page 3

under the constitution governs the operations of a company, however, they cannot override
the existing laws which are issued by the Corporations Act. As per the Australian Securities
and Investment Commission (ASIC), the corporations operating in Australia has to choose
between the constitution or the replaceable rules which are given under the Corporations
Act or a combination of both. The decision of forming a constitution for the company or
selection of the replaceable rules given under the Corporations Act must be made by parties
before registering the company (Pathinayake 2015). While forming business policies or
strategies, the directors have to comply with the guidelines given under the Constitution in
order to ensure that they focus on the interest of the company and its stakeholders and
form policies to achieve its corporate objective.
Part 2
The corporation has the right to modify or repeal its constitution based on which terms can
be removed, added or amended in the constitution. In order to modify or repeal the
constitution, a special resolution must be passed by the shareholders of the company. The
special resolution means that at least 75 percent of the shareholders must give the
acceptance of the proposed changes in the constitution. Since the constitution forms a
contract between the company and its shareholders and director and between members, it
cannot be amended unless all the members agree to such changes. Thus, 75 percent
majority must give their approval to amend the constitution of the company after which
those amendments would result in binding the minority members of the company even if
they have voted against the amendments which have made in the constitution (Tomasic,
Bottomley & McQueen 2002). In case there is an additional requirement which is given in
the constitution or statutory protections or common law, the minority shareholders did not
have to comply with the amendment made under the constitution. The notice for the
special resolution regarding making amendments to the constitution should be given before
21 days of the meeting (ASIC 2018). The notice should also contain information regarding
the proposed changes which are made to the constitution. Section 136 (2) provides that the
constitution of a company must not be amended pursuant to the provisions given under this
section. This may include the requirements regarding fulfilment of an additional condition,
Page 4

passing the resolution by the shareholders unanimously or getting the consent of a
particular person which is obtained.
In case any of such requirements are given under the constitution, then such additional
requirements must comply by the members before they can be amended by the parties. The
power of minority shareholders regarding negotiating such additional requirements can
provide them protection against the decision taken by the majority shareholders. The
choices of the majority shareholders which could have adverse financial consequences on
the minority shareholders can be negotiated by the members between themselves to make
it difficult to make such amendments in the constitution (Wolters Kluwer 2018). A
corporation cannot restrict its statutory power which provides the members the power to
alter the constitution of the company. A clause cannot be included in the constitution which
provides that it cannot be amended. Any such restrictions which are included in the
constitution will be considered as invalid. As per the requirements, there are certain
amendments which cannot bind shareholders which include variation or cancellation of
class rights, amendment of specific provisions and amendment regarding expropriating the
shares of minority shareholders or their rights. However, these rights are not sufficient to
protect the rights of minority shareholders in a company. The rights of minority
shareholders can be protected by filing a suit in the court; however, it is not an effective
remedy. Thus, in many cases, the majority shareholders misuse their powers to amend the
constitution which resulted in adversely affecting the interest of minority shareholders.
Part 3
The power of amending the constitution of a company is given to the shareholders of such
corporations. Based on these powers, the 75 percent of shareholders can give their approval
to make changes in terms of the constitution, and such changes apply over other members
as well who did not give their approval in the voting. Thus, the majority shareholders of an
organisation have the main power to influence of rights of other members as well. It
increases the chances of misusing the position by the directors which could have adverse
financial consequences on the minority shareholders (Kershaw 2012). Thus, there are
various provisions given in the Corporations Act to limit the right of majority shareholders in
order to protect the rights of minority shareholders in the company. Firstly, the
Page 5

amendments made regarding variation or cancellation of class rights of the shareholder did
not bind the shareholders into its terms. Part 2F.2 of the Corporations Act provides
provisions which limit the power of shareholders to make changes in the class right of
shareholders. Thus, their power is limited based on which they cannot set out a process for
varying or cancelling the class rights by passing a special solution which affects the class
without written consent of 75 percent of shareholders.
Based on this provision, the minority shareholders of a closely held private company can
protect their rights by including a procedure in the constitution by making it difficult for the
majority to amend the constitution. Section 140 (2) also provides that the majority cannot
pass a rule in which minority is required to take additional shares in a closely held private
company after they become the shareholders of such company. The section imposed
restrictions on the transfer of shares which shareholders of the company already held.
Furthermore, the power of majority shareholders is limited by the High Court in Gambotto v
WCP Ltd (1995) 69 AWR 266 case. In this case, the court imposed restrictions on the rights
of shareholders to make amendments in the constitution by for expropriating the shares of
minority shareholders or valuable rights which are attached with those shares (Talbot 2015).
The court provided in this case that these changes will only be valid if they are made for a
proper purpose, and other shareholders are not operating oppressively towards minority
shareholders. The actions of majority shareholders must be fair when they are amending
the terms of the constitution which can adversely affect their interest.
The equitable limitation is imposed on the voting power of majority shareholders in a
company in which if the court finds the that the majority has breached the provision of
equitable limitation, then such actions will be considered as invalid. The majority can be
held liable if the pass a resolution which no reasonable person would take in the particular
situation. In Ngurli Ltd V McCann (1953) HCA 39 case, the court provided that members
must not breach the equitable limitation by giving themselves any unfair or unjustified
advantages, rights or property which belongs to the company (Conaglen 2010). Similar views
were given by the court regarding the unfair use of majority rights in Menier v Hooper’s
Telegraph Works (1874) L. R. 9 Ch. App. 350 case. In Biala Pty Ltd v Mallina Holdings Ltd (No
2) (1997) FCA 165 case, the members of a company breach the provision of equitable
limitation by using their voting power unfairly in order to prevent the corporation from
Page 6

taking legal action against them. The court provided that they have acted unfairly in such
case. In Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd (2006) 24 ACLC 1550 case the
court provides the difference between procedural and substantive fairness in order to
determine that members did not oppress against others.
In Vatcher v Paull (1915) AC 372 case, Lord Parker defined “fraud” as actions which are
outside the scope of a conferred power rather than dishonesty. These factors are relevant
while proving a case of equitable limitation. Furthermore, in Peter’s American Delicacy v
Heath (1939) 61 CLR 457 case, the court provided that the reasonable opinion of a party
might differ regarding the fairness of an action which should be considered by the court
while evaluating the decision of majority shareholders. Thus, the example of these cases
shows that the power of majority shareholders is limited regarding making amendment in
the constitution of a company (Bottomley 2016). The law provides that majority
shareholders cannot misuse their power to amend the constitution or add new terms based
on which the minority shareholders have to suffer a loss or financial detriment. The majority
shareholders should properly use their power in a fair manner to avoid causing harm to the
minority shareholders. The majority shareholders should also avoid focusing on their
personal interests while making amendment in the constitution of the company. They
should use their powers in a fair and reasonable manner to ensure the interest of the
company and its shareholders.
Page 7

References
ASIC 2018, Constitution and replaceable rules, viewed 7 September 2018,
https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/
constitution-and-replaceable-rules/
Austlii 2018, Corporations Act 2001 - Sect 140, viewed 7 September 2018,
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s140.html
Baxt, B 2017, Corporations Legislation 2017, Thomson Reuters, Toronto.
Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1997) FCA 165
Bottomley, S 2016, The constitutional corporation: Rethinking corporate governance,
Routledge, Abingdon.
Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd (2006) 24 ACLC 1550
Conaglen, M 2010, Fiduciary loyalty: protecting the due performance of non-fiduciary duties,
Bloomsbury Publishing, London.
Corporations Act 2001 (Cth)
Gambotto v WCP Ltd (1995) 69 AWR 266
Kershaw, D 2012, Company law in context: text and materials, Oxford University Press,
Oxford.
Lee v Lee’s Air Farming Ltd (1960) UKPC 33
Legislation 2018, Corporations Act 2001, viewed 7 September 2018,
https://www.legislation.gov.au/Details/C2015C00336
Menier v Hooper’s Telegraph Works (1874) L. R. 9 Ch. App. 350
Ngurli Ltd V McCann (1953) HCA 39
Pathinayake, A 2015, Commercial and Corporations Law, Law Book Co, Australasia.
Peter’s American Delicacy v Health (1939) 61 CLR 457
Page 8

Salomon v Salomon & Co Ltd (1897) AC 22
Talbot, L 2015, Critical company law, Routledge, Abingdon.
Tomasic, R, Bottomley, S & McQueen, R 2002, Corporations Law in Australia, Federation
Press, Annandale.
Vatcher v Paull (1915) AC 372
Walters Kluwer 2018, Corporations Act 2001, Section 136 Constitution of a Company,
viewed 7 September 2018,
https://iknow.cch.com.au/document/atagUio485835sl14503904/corporations-act-2001-
section-136-constitution-of-a-company
Page 9