Legal Regulation of Business Structure

This document discusses the legal regulations surrounding business structures and their impact on minority shareholders. It explores the validity of amendments to a company's constitution and the liabilities of individuals in contract agreements. The document also provides insights into relevant case law and sections of the Corporations Act 2001.

Running head: LEGAL REGULATION OF BUSINESS STRUCTURE
LEGAL REGULATION OF BUSINESS STRUCTURE
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1LEGAL REGULATION OF BUSINESS STRUCTURE
PART A
AMAZE Ltd
Two issues can be raised in relation to the proposed amendments of the constitution of
AMAZE Ltd. The first issue in the case is whether the first alteration of the constitution of
the company could be considered as legally valid towards the minority shareholders. The
second issue that can be raised in the case is whether the second alteration to the company’s
constitution for the expropriation of the shares of minority shareholders would be valid.
Corporations Act 2001
Section 136 of the Corporations Act1 describes the provisions required for the
adoption of a constitution of a company. Section 136 (1) provides that a company can adopt a
constitution during the company’s registration if all the members give written agreement
towards the terms mentioned in the constitution before the application for the same is made;
the section further provides that after the registration of the company, constitution can be
adopted by passing a special resolution. Section 136(2) provides that by way of special
resolution the constitution or any part of it can be modified or repealed. Section 136(3)
provides that unless the requirements for the modification or repeal mentioned under the
company’s constitution are completed, such modification or repeal would not be complete.
The effects of a company’s constitution and the replaceable rules have been provided
under section 140 of the Corporations Act 20012. Section 140 (1) of the Act states that each
member of the company is required to agree, observe and perform accordingly following the
constitution or replaceable rules as the constitution or the replaceable rules would be effective
towards the members as a contract. Section 140(2) any modification that requires the
1 Corporations Act 2001, s.136
2 Ibid, s.140

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members for taking up additional share, imposes any restriction of shares or increase the
members’ liabilities would not be binding to the members unless previously agreed in
writing. The provisions of section 140 were seen as being discussed in the case Hickman v
Ding v Sylvania Waterways Ltd (1999)3.
Section 232 of the Corporations Act 20014 states that a court has the power to be
making an order under the provisions of section 233 if any actual or proposed conduct or act
or omission of the company that has been made by way of any actual or proposed resolution
is either oppressive, prejudicial or discriminatory in an unfair way or can be seen as in
contradiction to the interests of any of the members of the company.
In the case Gambotto v WCP (1995)5 it was held by the court that a company’s
constitution can provide for the expropriation of shares if it can provide that the power has
been exercised for a proper purpose and the exercise of it is fair in every circumstance.
The tests provided in the Gambotto case can be applied for the restriction or removal
of the voting rights of the shareholders as has been judged in the case Shears v Phosphate
Co-Op Co of Aust Ltd6.
Validity of the First Amendment
In the given scenario it is seen that Hannah, a 5% shareholder of the shares of
AMAZE Ltd., used her position in the company to gather information and use it for the
benefit for the company’s main competitor Hedge Fun where she is a CEO. Hannah
influenced the other shareholders to tie the vote twice regarding the decision for the contract
with Sunshine Botanical Gardens and used the opportunity for Hedge Fun Ltd to get the
contract. The first amendment of the contract was laid down by Ada and Bob in relation to
3 Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424
4 Corporations Act 2001, s.232
5 Gambotto v WCP Ltd (1995) 182 CLR 432
6 Shears v Phosphate Co-Op Co of Aust Ltd (1989) 7 ACLC 812

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this conduct of the shareholders which stated that the rights of any shareholder to be voting
for the matters of the company having less than 10% of the shares would be revoked. Only
Ada and Bob were seen as voting for the amendment.
Following subsection 1 of s 136 of the CA it can be observed that at the time of the
AMAZE Ltd’s incorporation the constitution of the company was also created. Applying
section 136 of the Act in given scenario, it is seen that the first amendment was proposed to
the other shareholders, Kanak, Hannah, Elle and Otto by the directors of the company Ada
and Bob by way of special general meeting. Thus the amendment is according to the
subsection 2 of this section.
Applying the judgment of the case Hickman v Ding v Sylvania Waterways Ltd (1999)
it can be said unless agreed in writing the shareholders would not be bound by the
constitutional amendments under the provisions of section 140 of the Act. As in the case no
mention of any written agreement of the shareholders can be found for being bound by the
future amendments of the constitution therefore they are not required to be following the first
amendment of the AMAZE Ltd’s constitution.
By the application of section 232 of the Act in this scenario it can be seen that the first
amendment to revoke the voting rights for all shareholders having less than 10% share would
be oppressive towards them and would further be contradictory to the interests of the
minority shareholders like Otto, Kanak, Hannah and Elle.
By applying the judgment of the Shears case where the judgment of the Gambotto
case was used for the alteration of the constitution for removal or restriction of the voting
rights of the shareholders it can be seen that the restriction of the voting rights of all the
shareholders in AMAZE is not fair as Elle, Otto and Kanak had not done any action towards
the company that could cause severe detriment to the company. Applying the judgment of the

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case it can be said that the first amendment of the revocation of the voting rights of Elle,
Kanak and Otto is not fair neither is done for a proper purpose.
Validity of Second Amendment
Following the loss of the contract with Sunshine Botanical Gardens Ada and Bob,
when found out that the contract was given to their competitor company Hedge Fun,
proposed along with the first amendment for another amendment to the company’s
constitution. This constitution was seen as stating that the shares of a minority shareholder
involved in management of any competitor company of AMAZE would be expropriated by
the majority shareholders. During the SGM of the company everyone except Hannah was
seen as voting for the second amendment.
By the application of section 232 of the Act in this scenario it can be seen that the
second amendment to expropriate the shares for any of the shareholders being in the
management of any competitor company would be oppressive towards them and would
further be contradictory to the interests of the minority shareholders like Otto, Kanak,
Hannah and Elle.
However, applying the judgment in the case Gambotto v WCP (1995) in the current
scenario it can be seen that the conduct of Hannah to use the company’s information relating
to the transaction for sharing it with the competitor company was detrimental towards
AMAZE Ltd as the company lost contract worth millions of dollars. As per the judgment of
the Gambotto case any amendment for the expropriation of the shares of a minority
shareholder by the majority shareholders would be valid if it can be apprehended in a
reasonable way that the continuation of the shareholder of the minority in the company would
be detrimental towards the company. Ada and Bob had knowledge about the actions of
Hannah where she had used the information acquired to give the company she is CEO in a

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competitive advantage; however, as she had a minority shareholding in the company the
directors tolerated her actions. Since her recent action has caused a major loss to the company
therefore it would be said that the expropriation would be for a proper purpose in a fair way.
Hence the expropriation of the shares of Hannah is valid.
Advice
Concluding from the discussions above it can be advised to Otto, Hannah, Elle and
Kanak that the first alteration to the constitution is not legally valid as it is contradictory to
their interests.
It is advised to Hannah that the second alteration is legally valid as the expropriation
of her shares is done by the company because her actions caused detriment to the company.
Part B
Cattuccino Ltd
Two issues can be raised in the given case. The first issue is in relation to the liability
of Kitty for her contract with Commercial Café. The second issue is in relation to the
liabilities of Poppy for her contract with Tom.
Corporations Act 2001
Under section 131 of the Corporations Act 20017 the provisions regarding the
contracts entered before the registration of a company have been mentioned. Under
subsection 1 of section 131 it is provided that if any person enters into any contract for the
benefit of or on behalf of a company before its registration the company would be bound by
the contract and would be entitled to the benefits after its registration if the ratification is
done within time limit. Under subsection 2 of the section if the registration of the company is
7 Corporations Act 2001, s.131

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not done within the time limit of the ratification or if the company refuses to ratify the
contract the party making the contract on behalf of the company before its registration would
be liable to be paying the compensation for the damages incurred. Section 131 (3) provides
the court can order the individual to pay all or part of damages, transfer of property that the
company had received because of entering into the contract, pay required amount to the party
of contract as a recovery for damages. The provisions of this section were observed to be
discussed in the case Bay v Illawarra Stationary Supplies Pty. Ltd (1986)8.
In the case Whaley Bridge Calico Printing Co v Green & Smith9 a promoter is a
person who sums up all the business operations for bringing into existence of a company, like
the preparations of a constitution, raising of funds and organizing registrations. However, the
individuals acting in a professional capacity on behalf of the promoter for the registration of a
company would not be termed as a promoter.
The promoter of any company has the fiduciary duty to be acting in good faith for the benefit
of the company and avoiding any position where there is a possibility of conflict in their
personal interests and the duty they owe towards the company as held in the case Aequitas v
AEFC10.
In the case Kelner v Baxter (1866)11 it was held the advocate signing a contract on
behalf of an unregistered company would be liable for the contract.
As per the section 198A of the CA 2001 the management of any business is required
to be done under the direction of the directors. This direction cannot be overridden by the
shareholders as mentioned in the case John Shaw & Sons (Salford Ltd) v Shaw12.
8 Bay v Illawarra Stationery Supplies Pty Ltd (1986) 4 ACLC 429
9 Whaley Bridge Calico Printing Co v Green & Smith (1879) 5 QBD 109
10 Aequitas v AEFC [2001] NSWSC 14, (2001) 19 ACLC 1006 [392]
11 Kelner v Baxter (1866) LR 2 CP 174
12 John Shaw & Sons (Salford Ltd) v Shaw [1935] 2 KB 113

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In the case Salomon v Salomon & Co Ltd13 it was held by the court that once the
company had been incorporated it becomes a separate legal entity from its individual
shareholders and hence they would not be liable for the debts of the company.
Liabilities of Kitty
Before the registration of the company Cat Café Ltd, Kitty White was seen to be
entering into negotiation for a contract of some commercial café equipment with Commercial
Café Ltd. Kitty was seen as agreeing on behalf of the company that the company would be
purchasing four machines that are top-of-the-line, each for $20,000 and she further signs a
contract on behalf of ‘Cattuccino Ltd’, which required ratification within 1st October. After
the company was registered the directors were seen as accepting the contract, however they
are only able to be paying a part of the total payment.
By the application of the s 198(A) of the Act the directors of the Cat Café Ltd have
the power to the management of the company and Kitty cannot override any decisions taken
by them as was seen in the Salford case.
Applying section 131 (1) to the given scenario it can be said that Cat Café Ltd would
be bound by the contract and would be entitled to the benefits of the Commercial Café Ltd as
they are seen as agreeing for the ratification of the contract.
Applying the Salomon judgment in this scenario it can be said that since the company
has been incorporated, it has become a separate legal entity from Kitty and hence Kitty as a
shareholder would not be liable for the debts of the company, or in this case the remaining
payment towards the Commercial Café Ltd.
13 Salomon v Salomon & Co Ltd [1897] AC 22

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However, for the amount unpaid amount towards Commercial Café Ltd Kitty would
be required to pay if the company fails to pay for the same under the provisions of section
131 (3) of the Act if Commercial Café pursued litigation.
Applying the judgment in the Whaley case in this scenario Kitty can be considered as
a promoter of the company as she has worked for the organisation of the registration of the
company, raised funds from the potential shareholders, nomination of the directors.
By the application of the Aequitas judgment in this case it can be observed that the
Kitty’s action of agreeing to a contract with the Commercial Café was done in a good faith
and for the benefit of the company.
Liabilities of Poppy
Before the registration of the company Poppy is seen to be entering into a contract
with her brother Tom on behalf of Cattuccino Ltd before its registration for custom-made
costumes that are food and drink themed for the cats at the café. After the registration the
directors rejected the contract.
Applying the Whaley case in this scenario it can be seen that Poppy cannot be
considered as a promoter of the company when she acted as a solicitor for Kitty. However,
after she showed her interest in being personally involved in the project she could be
considered as a promoter along with Kitty.
Applying the judgment of the Aequitas case in this scenario it can be said that Poppy
was in breach of her fiduciary duty as a promoter when she made a contract with her Tom on
behalf of the company, when she already was under an agreement with her brother that she
would be receiving a part of Tom’s income in exchange for managing the legal and business
related issues. She did not inform the company about her interest in Tom’s business, and

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acted in a way that would potentially cause a conflict in her personal interest and her duty
towards the company.
Applying the provision of section 131 (2) of the Act it can be seen that Poppy would
be liable to pay for the damages that Tom incurred because the Cat Latte Ltd had refused to
ratify the contract with him as discussed in the case Bay v Illawarra Stationary Supplies Pty. Ltd
(1986).
Applying the judgment of the case Kelner v Baxter (1866) that Cat Café Ltd can held
Poppy liable for the contract she signed on behalf of the company before its registration.
Advice
In conclusion to the above discussion Kitty is advised that she is liable only for the
non-payment of the company to Commercial Café Ltd as the directors of Cat Café Ltd
accepted to ratify the contract with the Commercial Café Ltd. Poppy is advised that she is
liable for the breach of her duty as a promoter of the company and for the contract signed
with Tom as it has not been ratified by the company.

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Reference
Aequitas v AEFC [2001] NSWSC 14, (2001) 19 ACLC 1006 [392]
Bay v Illawarra Stationery Supplies Pty Ltd (1986) 4 ACLC 429
Corporations Act 2001
Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424
Gambotto v WCP Ltd (1995) 182 CLR 432
John Shaw & Sons (Salford Ltd) v Shaw [1935] 2 KB 113
Kelner v Baxter (1866) LR 2 CP 174
Salomon v Salomon & Co Ltd [1897] AC 22
Shears v Phosphate Co-Op Co of Aust Ltd (1989) 7 ACLC 812
Whaley Bridge Calico Printing Co v Green & Smith (1879) 5 QBD 109