Legal Regulations and Business Structure

Running head: LEGAL REGULATIONS AND BUSINESS STRUCTURE
Legal Regulations and Business Structure
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1A.....................................................................................................................................2
Alteration of the constitution of a company as per the Corporations Act...................................2
Advise to Salman.........................................................................................................................3
Question 1B.....................................................................................................................................4
Contracts formed before registering the company.......................................................................4
Advice to Melanie........................................................................................................................5
Question 2A.....................................................................................................................................7
Director’s duties and its provision under the Corporation Act....................................................7
Advise to Archibald.....................................................................................................................8
Question 2B.....................................................................................................................................9
Director’s duty to disclose intricate details to individual shareholders.......................................9
Advice to Faizah..........................................................................................................................9

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Question 1A
Alteration of the constitution of a company as per the Corporations Act
The provisions for the incorporation of a constitution of a company is laid down under
the Corporations Act 2001 (Cth)1. Along with incorporation, it also provides the provisions to
add and alter the constitution the corporation as well. The members are tied together by the
constitution of the company, which also binds them regarding their dealings with their clients
and third parties. Section 136 of the Corporations Act (CA) states the provision to add or alter the
constitution of a corporation2. While, section 136(2) of CA lays down the rules to pass a special
resolution for changing the constitution of a company3. However, such changes made in the
constitution will not have an effect unless the regulations laid down under section 136(3) are
complied with4. It is to be noted that under section 136(4), a company has the power to change
its constitution unless otherwise mentioned5.
In the given case study, Kody and Ryder, holding 45% of shares each (total 90%, which
make them the major shareholder) changed the constitution of the company, as they
comprehended that Salman has been indulging in a competitor company and influencing Melanie
to supply her work to that competitor company. Sensing the threat to their company, the directors
(Kody and Ryder) passed a resolution, changed Astounding Gift’s constitution and added the
clause of ‘buy back shareholdings’ of less than 12% from the minority shareholders at their
discretion.
In Gambotto v WCP Limited6, it was observed that buying back shares of the minority
shareholders by the ones holding the major portion of shares for changing the constitution of the
company was not permissible. The court held that it was unjust and ‘oppressive’ to buy back
shares of the minority shareholders as they already hold a miniscule amount of shares, therefore
buying back their shares would leave them with nothing. It was not granted by the court at the
point, unless the majority shareholders could support their claim with some special purpose. It
1 Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00328>.
2 Corporation Act 2001 (Cth) s 136
3 Corporation Act 2001 (Cth) s 136(2)
4 Corporation Act 2001 (Cth) s 136(3)
5 Corporation Act 2001 (Cth) s 136(4)
6 [1995] 182 CLR 432

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was held that buying back shares would only be permitted if it were proved that such buying
back of shareholdings would save the company from material injury, monetary or otherwise. The
plaintiff needed to prove that the minority shareholder would be making use of the company
shares for personal interest or gain to make the court grant the permission to change the
constitution.
Advise to Salman
A special resolution is the essential requisite to change the constitution of the company
and such alteration needs 75% of the shareholders to vote in order to ratify such change, as per
section 136 of the Corporations Act 2001 (Cth). In this case, Kody and Ryder held 90% of the
total shares that judiciously allow them to pass a resolution to change the company’s constitution
and add the clause of buyback minority shares, as stated by the section 136(2) of the CA 2001. In
addition to, Salman held only 10% of the total shareholding, which proved to be an advantage for
the majority shareholders to amend the constitution to insert the clause for buying back shares, as
section 136 (3) and 136 (4) states the provision for this matter7. Therefore, the action of Kody
and Ryder to change the constitution of the company cannot be questioned and it is just and
proper as per the provisions of the Corporations Act 2001. They can clearly prove that their
action was bona fide and for the benefit of the corporation, like it was stated in Lindley MR in
Allen v Gold Reefs of West Africa.8
Even though the provisions of the Act allow the majority shareholders to pass a special
resolution excluding the minority shareholders who hold less than 11% shares. Nonetheless, the
court is always in the favour of looking into the matter whether the minority shareholders are
being oppressed with the decision of the directors or majority shareholders. It is vital for the
directors to prove that the intention behind changing the constitution not for oppressing the
minorities, but for the best interest of the company. Therefore, the intention and purpose for the
alteration of constitution is important. In the given case, Salman was secretively working with
Incredible Gifts Pty Ltd, a competitor company and inducing Melanie to sell her work to that
competitor company, which is completely unethical and harmful for Astounding Gifts Pty Ltd.
7 Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00328>.
8 [1900] 1 Ch 656 at 671