Corporation Law for Constitution and Replaceable Rules

Describe about the Corporation Law for Constitution and Replaceable Rules.

1:

According to Section 134 of the Corporation Act, 2001, a company is governed by the constitution or by the provisions of the Corporation Act, 2001 that are applied to the Company as replaceable rules or by a combination of both the constitution and replaceable rules.

According to Section 136, a Company may adopt a constitution either at the time of its registration or after registration. Such constitution may be modified or repealed by the Company through a special resolution passed by the Company. 

According to Section 140 of the Act, constitution and the replaceable rules which apply to the company bind:

each member of the company with another member

the company with each company secretary and director

iii. the company with each of its member

The constitution of the company is a very helpful document as it binds the company and makes the company accountable for their actions. Thus, it may be said that the constitution of the company imposes restriction of the organisation as a whole. At the time of formation of a constitution, the rights and responsibilities of each of the members of the constitution are discussed especially the rights and responsibilities of the shareholders and the directors. Thus, it may be said that the constitution is one of the most important document of the company as it makes each member of the company accountable for their actions[1].

Common law case: Hickman vs Kent or Romney Marsh Sheep Breeders Association

In this case, the articles of a company provided for that if any dispute arises between any members of a Company, then the matter has to be referred to an arbitrator and if the matter is not solved by arbitration, then a court proceeding would begin. Hickman initiated a court action without taking the matter to arbitration.

According to Astbury J,  “An outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating them as contracts between themselves and the company to enforce those rights ... No right merely purporting to be given by any article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter, director, can be enforced against the company .”

The Court held that the articles of the Company bind each member of the Company with the Company and such contract can be enforced both by the members as well as the Company.

The same position has also been taken by the provisions laid down under the Corporation Act where the constitution binds each and every member of the Company with the Company. 

2:

Yes, a company’s constitution is amendable if a special resolution is passed having 75 percent majority votes. The shareholders pass the resolution by majority votes and the process of amending the constitution is very different unlike other contracts. In the case of other contracts, the parties to the contract need to agree to the proposed amendment. If both the parties agree to the proposed amendment, the contractual terms may be amended. However, for amending a constitution, 75 percent majority vote is required as general criteria[2]. The minority shareholders have the right to vote against the proposed change. The minority shareholders, however, are not bound by the amendments made in the constitution if there are separate provisions already stated in the constitution[3].

The constitution of the company cannot be amended in a different way if the procedure is already laid in the constitution. This is enumerated in Section 136 (2) of the Corporations Act, 2001. The requirement may be related to the fact that an additional condition be fulfilled before making changes in the constitution or consent of a particular individual must be taken before amending the constitution or consent must be taken from the shareholders[4]. If any special requirement is stated as part of the constitution, the requirement should be complied with before proceeding with the amendments[5].

The minority shareholders of the company have the possibility to negotiate with the terms of the constitution and this raises the possibility of the minority shareholders for protection against the majority shareholders. It is very important that minority shareholders be protected as it may save them from severe financial consequences and make the amendment of the constitution difficult. There is no obligation on the company to make changes in the constitution depending on the statutory requirement. If changes are made as per the statutory guidelines then such an amendment cannot be held invalid[6]. The only thing that needs to be taken care of is that no restrictions are laid on the statutory guidelines for changing the constitution[7].

The common law rule provides protection to shareholders of a company against cancellation and variation of rights, expropriation of shares of the minority shareholders and changes to precise provisions of the company.

Part 2F.2 of the Act deals with the rights of the majority shareholders in relation to cancellation or variation of rights relating to certain class of shares. As per part 2 of the Corporation Act, if the constitution of the company does not state the procedure for cancellation of shares then the changes with regard to cancellation and variation of class shares shall be made by passing a majority vote of 75 percent of the shareholders[8]. However, if the constitution has already stated the procedure for cancellation or variation of shares then the cancellation or variation of shares shall be preceded with in accordance with the procedure laid in the constitution. This procedure provides protection to the minority shareholders by making it more difficult for the majority shareholders to make changes in the constitution[9].

Case law: Allen v Gold Reefs of West Africa Ltd

In this case, Lindley MR made the following observation:

"The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company's memorandum of association.  Wide, however, as the language of sec 176 Corporations Law is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities.  It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.”

3:

Part 2F.2 of the Corporations Act 2001 deals with the powers of the majority shareholders for cancellation or variation of various classes of shares. According to the given section, it is held that if the constitution of the company does not lay the procedure for cancellation of variation of class of shares then the procedure for making changes should be decided by passing majority votes of 75 percent of the shareholders[10]. However, if the procedure is already laid in the constitution then the given procedure has to be followed for making changes in the constitution relating to cancellation of variation of member shares. This gives the power to the minority shareholders to bargain with the majority shareholders regarding the changes in the constitution. Hence, it may be said that there are limitations on the rights of the majority shareholders relating to variation of member rights[11].

A broad aspect of freedom is given to shareholders in an organisation. This means that the shareholders have the power to include terms and conditions in the contract for their personal protection. Some of the rights that are given to the majority shareholder for their protection as a shareholder in the company include nomination rights and veto rights. If shareholders are successful in including these modifications in the constitution then it shall become binding on all the members to follow the provisions. Sections 246 B, C, D, E, F and G deal with class rights.

The Australian company law does not treat majority shareholder as a fiduciary body nor does he owe fiduciary duties to the company or to the minority shareholders. An imposition is laid on the majority shareholder rights of voting in a general meeting by the doctrine of fraud. The basic rule of voting at the general meeting is that, shareholders have the right to vote as long as their voting authorities are within the scope of their power. Nonetheless, there are associated restrictions that are imposed on the majority shareholder relating to expropriation of shares or cancellation or variation of member rights[12]. The doctrine of equitable distribution imposes restriction on the majority shareholders to make divide shares in a disadvantageous manner.

The minority shareholder always has the power to complain to the Court against the actions of the majority shareholder. If in the opinion of the Court, it is believed that the majority shareholder did not act in the best interest of the company, the Court may pass an order of winding up the constitution of the company or an order may passed for changing the management of the company. The Corporation law of Australia helps a person whose interests have been affected due to the unjust actions of other members of the company. If failure is seen on the part of the majority shareholder to fulfill the statutory provisions of the Act, the aggrieved person may file an application to the Court for appropriate remedy. The minority shareholders use this power of making an application to the Court if the majority shareholders affect their rights. This is laid in Section 1324 of the Corporation Act. The minority shareholders can also use their statutory injunction so that company abide by the rights that are granted to them under the Australian corporation law. One of the rights of the minority shareholder is to participate in the general meeting and to vote as part of the general meeting.

Additionally, a shareholder also has the right to apply to the Court for inspecting the books of the company. The “books” from a corporate perspective means financial report, registers and records. As per Section 247A of the Act,the shareholders have the right to inspect the financial records of the company. It is important to conduct an inspection to the financial records of the company so that shareholders become aware of their rights and responsibilities towards the company[13].

Traditionally, companies followed the doctrine of majority rule. The decision of the Board was determined by a simple majority vote by 75 percent. This is regarded as the fundamental concept of company law. However, the rule of majority vote had inherent risk involved to it. The risk was determined in the case of Foss v. Hartbottle. It was decided in this case that the wrong actions of the company should be addressed in this name and not in the name of the shareholders or the directors of the company. The Courts do not have the power to interfere with the working of the company and neither do the Courts have the power to make the majority shareholders accountable for their actions. This gave enough power to the majority shareholder for oppressing the rights of the minority. However, the decision of the case allowed the Courts to interfere with the internal working of the company[14].

According to section 246 of the Corporations Act, 2001, the rights and remedies of the class rights are stated. The class rights are divided into many shares based on the Corporations Act, for example, classes of shares as specified under section 197 of the Corporations Act, 2001 and share capital under section 199 of the Act. As per section 246B of the Corporations Act, 2001, if the company’s constitution has not specified any procedure for changing the class of rights then the rights of shares can be shared or cancelled by passing majority 75 percent votes. However, if the constitution the procedure for the same them the constitution of the company has to be followed.

Thus, it may be stated that the most important document of the company is the constitution. The shareholders become powerful with the existence of the constitution and without it they may have no powers at all. It is therefore advisable that the constitution be framed properly so that powers between the members are divided equally.

References:

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