Corporate Law Assignment: Shareholder Rights, Contracts, and Loans

This report provides a detailed analysis of several key aspects of corporate law. Part A examines two critical issues: the enforceability of constitutional alterations affecting shareholder rights and the validity of share expropriation. The analysis focuses on the Corporations Act 2001 (Cth) and relevant case law, such as Ding v Sylvania Waterways Ltd and Gambotto v WCP Ltd, to determine whether alterations imposing additional financial burdens or share expropriation are permissible. Part B shifts focus to company contracts and director's duties. It evaluates whether a company is bound by a loan agreement, considering the rules of corporate authority and the application of statutory assumptions under the Corporations Act. The report also explores the scope of directors' duties, including the duty to act in good faith and exercise powers for a proper purpose, considering the context of corporate governance. The report also discusses internal management rules and the implications of actions taken by corporate officers, referencing cases like Royal British Bank v Turquand and Morris v Kanssen. The analysis provides a comprehensive legal perspective on corporate governance, shareholder rights, and contractual obligations, offering valuable insights into the responsibilities of companies, directors, and shareholders.

Running head: CORPORATE LAW
Corporate Law
Name of the Student
Name of the University
Author Note

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Part A
Issue 1
Whether the first constitutional alteration requiring Pearl and Marina to repay their initial share
price can be enforced against them.
Rule
An alteration of the terms of the constitution can be carried out by a company in compliance with
the provisions in s 136(2) of the Corporations Act 2001 (Cth) (CA)1, which requires a special resolution
to be passed to that effect. A special resolution requires 75 percent of the votes casted by members to be
in favour of the same for the purpose of being valid. As per the provisions contained in s 249L(c) of the
CA2, the meeting needs to be notified by way of a notice which contains the intentions that are to be
proposed in the special resolution and needs to state the details of the resolution to all the members of the
company.
However, the alteration of the constitutional terms can be restricted even if the special resolution
has been complied with all the requirements by virtue of s 136(3) of the CA3. The company does not have
the authority to carry out and alteration to make the member bound by encouraging for the liability of
either acquiring new shares for increasing the liability with respect to the contribution towards the shares
by virtue of s 140(2) CA4. This can be supported with the case of Ding v Sylvania Waterways Ltd [1999]
46 NSWLR 4245. The company also does not have the right to make the minority shareholders to give up
their shares by way of sale as has been seen in the case of Gambotto v WCP Ltd [1995] 182 CLR 4326.
1 The Corporations Act 2001 (Cth), s 136(2)
2 The Corporations Act 2001 (Cth), s 249L(c)
3 The Corporations Act 2001 (Cth), s 136(3)
4 The Corporations Act 2001 (Cth), s 140(2)
5 Ding v Sylvania Waterways Ltd [1999] 46 NSWLR 424
6 Gambotto v WCP Ltd [1995] 182 CLR 432

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The minority shareholders being subjected to such treatment has the option of availing oppressive
remedy against the company by virtue of s 232 of the CA7.
Application
In the present situation, Calamari Music calls a Special General Meeting to alter the constitution.
The alteration would require all shareholders that hold less than 15% of the company’s shares to repay the
initial purchase price of their shares as additional capital once each year. This alteration of the
constitution can be carried out by the passing of a special resolution as per s 136(2) CA8, which requires
75 percent of the votes casted by members to be in favour of the same for the purpose of being valid.
Moreover, it required proper notice to be given to the members as per the requirements set out in s
249L(c) CA9, which has been duly complied with in this situation.
The resolution has been passed accordingly but there are certain restrictions upon the passing of a
special resolution that needs to be adhered to for the purpose of avoiding liability. This requires the
company from passing any resolution that has the effect imposing additional liability upon the minority of
the shareholders. The company in this case has been compelling the minority shareholders namely Pearl
and Marina to make additional payments with respect to repayment of the initial purchase price. This
needs to be restricted as per the provisions contained in s 140(2) CA10. This can further be illustrated with
the case of Ding v Sylvania Waterways Ltd [1999] 46 NSWLR 42411.
Conclusion
Hence, the first constitutional alteration requiring Pearl and Marina to repay their initial share
price cannot be enforced against them.
7 The Corporations Act 2001 (Cth), s 232
8 The Corporations Act 2001 (Cth), s 136(2)
9 The Corporations Act 2001 (Cth), s 249L(c)
10 The Corporations Act 2001 (Cth), s 140(2)
11 Ding v Sylvania Waterways Ltd [1999] 46 NSWLR 424

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Issue 2
Whether the second alteration to the constitution for the expropriation of the shares belonging to
Pearl and Marina is valid.
Rule
As per the provisions contained in s 249L(c) of the CA12, the meeting needs to be notified by way
of a notice which contains the intentions that are to be proposed in the special resolution and needs to
state the details of the resolution to all the members of the company.
It has been made evident with the principles established with the case of Associated World
Investments Pty Ltd v Aristocrat Leisure Ltd [1998] 16 ACLC 45513, that the constitution of a company
may provide for conditions mandating the expropriation of shares by way of disposal and the right of the
shareholders are to be restricted to conditions contained in the constitution.
However, this restriction upon the rights of the person can only be exercised by making alteration
in the constitution if it can be supported by the tests that has been provided in the case of Gambotto v
WCP Ltd [1995] 182 CLR 43214. In this case two tests for the validation of the expropriation can be
applied. Firstly, there needs to be a proper purpose behind the passing of the resolution effecting the
expropriation, which has the chief intention underlying to prevent any detriment being caused to the
company. Secondly, such a decision of expropriation should be fair that includes the fairness of the with
respect to the process that has effected the same and the price that has been provided to the shareholders
for the same. The application of this test can be illustrated with the case of Shears v Phosphate Co-op Co
of Aust Ltd [1989] 7 ACLC 81215.
12 The Corporations Act 2001 (Cth), s 249L(c)
13 Associated World Investments Pty Ltd v Aristocrat Leisure Ltd [1998] 16 ACLC 455
14 Gambotto v WCP Ltd [1995] 182 CLR 432
15 Shears v Phosphate Co-op Co of Aust Ltd [1989] 7 ACLC 812

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Application
In this present case, the expropriation has been mandated by Ink Records Ltd gets in contact with
Calamari Music Pty Ltd. Ink Records is the record label that owns the copyright to all of Callie and
Marie’s songs, imagery and branding that Callie and Marie have been using to promote Calamari Music.
Ink Records demand that Calamari Music contract for a license to use this material in the promotion of
their store. It required the Callie and Marie “to collectively or individually maintain at least 80% of the
shareholding in Calamari Music Pty Ltd”. Owing to the requirement with respect to the proposed
expropriation, the expropriation is justified for the purpose of ensuring interest of the company, but as to
the proper price of the shares being remitted, this has not been complied with by the company. Moreover,
proper notice of the meeting conducting the resolution for such appropriation has not been complied by
the company. This can be illustrated with the case of Shears v Phosphate Co-op Co of Aust Ltd [1989] 7
ACLC 81216. Hence, the second alteration to the constitution for the expropriation of the shares belonging
to Pearl and Marina is not valid. This is because it failed to comply with the requirement of the same.
Conclusion
The second alteration to the constitution for the expropriation of the shares belonging to Pearl and
Marina is not valid.
Part B
Issue 1
Whether Genki Ltd are bound by the loan agreement with BankWest.
Rule
As per the provisions contained in s 127 CA17, any document that has been executed under the
name of the company is required to be signed by atleast two of the directors of the company or one
16 Shears v Phosphate Co-op Co of Aust Ltd [1989] 7 ACLC 812
17 The Corporations Act 2001 (Cth), s 127

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director and a company secretary. The affixation of the common seal of the company is not to be held as a
requisite for the purpose of holding document to valid.
As per the provisions contained in s 12818, the individuals who are outsiders to the company has
the authority to make assumptions with respect to the management of the company while making dealings
with them. This can further be supported with the case Story v Advance Bank Australia Ltd (1993) 31
NSWLR 72219. This section also extends the outsiders dealing with the company with the authority to
make assumptions regarding the compliance of the internal rules of the company while dealing with the
same even if the person representing the company has been acting in a fraudulent manner or even makes
forgery with respect to a document that has been involved in the dealing of the outsider with the
company. However, this assumption will not hold good if the outsider had the idea of the fraudulent
behavior or has enough basis of suspicion for the fraudulent activity that has been committed by the
individual committing the forgery. This can be illustrated with the case of Correa v Whittingham [2013]
NSWCA 26320.
As per the provisions contained in s 129 CA21, the outsiders are allowed to make assumptions
regarding the compliance of the activities of the company with the internal rules they have. This can
further be supported with the case of ACT Pty Ltd v Minister for Transport & Community Services [1989]
7 ACLC 52522. The person who has been represented by the company to have the authority to act on
behalf of the company, provides the outsider to make assumptions regarding the correctness of such a
statement.
As per the legal principle that has been established in the case of Royal British Bank v Turquand
[1856] 6 E&B 32723, an outsiders are not supposed to peep through the internal management of the
company for the purpose of deciphering the compliance of the internal rules of the company by the
18 The Corporations Act 2001 (Cth), s 128
19 Story v Advance Bank Australia Ltd [1993] 31 NSWLR 722
20 Correa v Whittingham [2013] NSWCA 263
21 The Corporations Act 2001 (Cth), s 129
22 ACT Pty Ltd v Minister for Transport & Community Services [1989] 7 ACLC 525
23 Royal British Bank v Turquand [1856] 6 E&B 327

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internal management of the company while dealing with the same and has been empowered to make
assumptions in relation to the same. This principle has been referred to as the rule indoor management of
the company. This can be supported with the case of Morris v Kanssen [1946] AC 45924.
Application
In the present situation, ‘Genki Ltd’ is a public company that sells high-end medical equipment
and machines to hospitals. Genki’s board of directors consist of 5 directors (Sam, Percy, Shali, Kenta and
Ryota). Sam, Percy and Shali are non-executive directors and have little to do with the day-to-day
running of the business. Kenta and Ryota Takayama, who are identical twins, are executive managing
directors of the company. Kenta and Ryota work well together in managing Genki however Ryota’s lack
of English skills has recently landed the company in trouble when Ryota signed a contract he did not fully
understand on behalf of the company. As a result, at the most recent board meeting, the board resolved
that Ryota must consult another director whenever entering into a transaction of more than $10,000 AUD.
Ryota is very upset and angered by this decision. All these were facts that have been occurring in the
internal management of the company and the outsiders of the company are not to be investigate into the
same while dealing with the company as can be supported with the case of Royal British Bank v
Turquand [1856] 6 E&B 32725.
Following this board meeting, Kenta requested that Ryota consult with Sam to organise a loan for
Genki from BankWest for $50,000, using a non-circulating interest in a piece of expensive factory
equipment as security for the loan. Kenta offered his brother this opportunity as he wanted to show that he
still had faith in Ryota’s judgment regardless of the board’s decision. Kenta calls ahead to the BankWest
to tell them that Ryota is coming to the bank to organise a loan and has the authority of the company. At
this point of time there has been a representation made by the company with respect to the Ryota to have
the authority to continue with the action under the name of the company. This has made the bank to make
24 Morris v Kanssen [1946] AC 459
25 Royal British Bank v Turquand [1856] 6 E&B 327

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an assumption regarding the correctness of the same as has been contended with the case of ACT Pty Ltd
v Minister for Transport & Community Services [1989] 7 ACLC 52526.
Moreover, Ryota and Kenta were identical twins and there was a clear authorization that has been
given by the Kenta regarding the authority of Ryota in availing the loan. The bank although has been
made the requirement of signing of the document by the two the directors of the company, but the same
has been successfully forged by Ryota and this has made the bank to avoid any liability and the
assumption made by the bank with respect to the company has been supported with the case of Correa v
Whittingham [2013] NSWCA 26327. Hence, it can be stated that Genki Ltd are bound by the loan
agreement with BankWest.
Conclusion
Genki Ltd are bound by the loan agreement with BankWest.
Issue 2
Whether Business Brothers Pty Ltd is a subsidiary of Genki Ltd.
Rule
The requirements that a company needs to comply with to be rendered a subsidiary of another
company has been provided in s 46 CA28. This requires the company to have been held by another
company, which needs to be referred to as the holding company. This section requires the holding
company to have the regulation as well as the control of the board of the company. This requires the
holding company to have the ownership over 50% or more of the voting rights in the company. The
holding company also needs a shareholding of 50% or more in the subsidiary company.
26 ACT Pty Ltd v Minister for Transport & Community Services [1989] 7 ACLC 525
27 Correa v Whittingham [2013] NSWCA 263
28 The Corporations Act 2001 (Cth), s 46

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Application
In this situation, ‘Business Brothers Pty Ltd’ has been a proprietary shelf company that was set up
by Kenta and Ryota when they first began working together but the company has never been used after
incorporation. It has no association with Genki Ltd beyond Kenta and Ryota each owning 50% of shares
in Business Brothers Pty Ltd and being listed as directors. This does not render the company to be a
subsidiary of the Genki Ltd. This is because the shares of the company has been held by Kenta and Ryota
the directors of the Genki Ltd and not the company itself. Hence, it can be stated that Business Brothers
Pty Ltd is not a subsidiary of Genki Ltd.
Conclusion
Business Brothers Pty Ltd is not a subsidiary of Genki Ltd.

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Reference
ACT Pty Ltd v Minister for Transport & Community Services [1989] 7 ACLC 525
Associated World Investments Pty Ltd v Aristocrat Leisure Ltd [1998] 16 ACLC 455
Correa v Whittingham [2013] NSWCA 263
Ding v Sylvania Waterways Ltd [1999] 46 NSWLR 424
Gambotto v WCP Ltd [1995] 182 CLR 432
Morris v Kanssen [1946] AC 459
Royal British Bank v Turquand [1856] 6 E&B 327
Shears v Phosphate Co-op Co of Aust Ltd [1989] 7 ACLC 812
Story v Advance Bank Australia Ltd [1993] 31 NSWLR 722
The Corporations Act 2001 (Cth)