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4025LAW / 7725LAW - Corporations and Associations Law Lecture - Week 4 Internal Management Rules The Distribution of Corporate Power THE PURPOSE OF INTERNAL MANAGEMENT RULES: 1. The purpose of internal management rules is to govern ‘internal’ relations between the...

4025LAW / 7725LAW - Corporations and Associations Law Lecture - Week 4 Internal Management Rules The Distribution of Corporate Power THE PURPOSE OF INTERNAL MANAGEMENT RULES: 1. The purpose of internal management rules is to govern ‘internal’ relations between the company (as a separate legal entity), members and officers. 2. The company can adopt a ‘personalised’ set of rules to suit its particular circumstances e.g. a large, public company vs a small, family company. OPTIONS FOR INTERNAL MANAGEMENT RULES: SINGLE MEMBER / DIRECTOR COMPANIES: 1. Replaceable rules do not apply. (s 135) 2. Single director/shareholder companies are not bound by replaceable rules but instead. by particular sections of the Corporations Act 2001 (Cth). 3. All decision-making powers rest with the sole director/shareholder. (see s 198E) OTHER COMPANIES: A company’s internal management may be governed by provisions of the Corporations Act as replaceable rules, by a constitution; or by a combination of both. (s 134) REPLACEABLE RULES: 1. Replaceable rules apply to those companies that do not have a constitution (except single director/shareholder companies) and to areas in which the constitution does not extend. 2. s 141 provides a table of replaceable rules. 3. Certain replaceable rules: a. Apply only to proprietary companies: ss 194, 203C, 254D, 1072G. b. Are mandatory for public companies: s 249X. CONSTITUTION: 1. If the constitution excludes all replaceable rules, replaceable rules do not apply except for any mandatory replaceable rules applicable to public companies. 2. If the constitution does not exclude all replaceable rules, replaceable rules apply to the extent they are not modified by the constitution. (see s 134) 3. A company can adopt a constitution: a. On registration - if each person consenting to be a member agrees in writing to the terms of the constitution; or b. After registration - by special resolution or court order. s 136 of the Corporations Act 2001 (Cth). 4. Generally there is no guidance in the Corporations Act as to what to include in the constitution. 5. Public companies must lodge a copy of the constitution with ASIC (as well as any special resolution adopting, modifying or repealing its constitution) within 14 days. (s 136(5)) 6. Members can make a written request for the company to provide a copy (must be provided within 7 days). (s 139) OBJECTS CLAUSES: 1. An objects clause may be included in the constitution. 2. This clause identifies the type of businesses and activities in which the company may engage in. 3. The clause also indicates to shareholders the nature of the activities for which their funds will be used. PRIOR TO 1984: 1. All companies were required to have an objects clause. 2. The company was only capable of engaging in the businesses and activities specified in the objects clause of its constitution. 3. Transactions outside the scope of the company’s objects clause were invalid – i.e. ‘ultra vires’. They were beyond the power of the company and, therefore, void and of no legal effect. (Ashbury Railway Carriage & Iron Co v Riche (1875) LR 7 HL 653) 4. The Doctrine of ‘Ultra Vires’ operated together with Doctrine of ‘Constructive Notice’. POST 1984 (CURRENT POSITION): 1. The requirement to have an objects clause was removed. 2. The Doctrine of ‘Ultra Vires’ has now been abolished by combined effect of ss 124 and 125. 3. s 124(1) provides that a company has the legal capacity and powers of a ‘body corporate’. 4. Under s 125, companies with a constitution can: a. State objects (s 125(2)); and b. Limit their powers by stating an express restriction/prohibition (s 125(1)). 5. That said, s 125 provides that: (1) … The exercise of a power by the company is not invalid because it is contrary to an express restriction or prohibition in the company’s constitution. (2) … An act of a company is not invalid because it is contrary to or beyond any objects in the company’s constitution. See Hillig v Darkinjung Pty Ltd NSWSC 594. 6. The Doctrine of ‘Constructive Notice’ has been abolished by s 130(1): A person is not taken to have information about a company merely because the information is available to the public from ASIC. 7. Although no longer an independent cause of action, an ultra vires act may, however, be a relevant factor in other actions under the Corporations Act. For example: a. Breach of a duty by a director under Part 2D.1; b. Oppression under a Part 2F.1 winding up application; or c. Winding up by a court under s 461(1)(k) (on the basis that it is just and equitable to do so). ENFORCEMENT OF A COMPANY’S CONSTITUTION AND/OR APPLICABLE REPLACEABLE RULES: UNDER THE STATUTORY CONTRACT PRINCIPLE: 1. The constitution (if any) and the replaceable rules that apply to the company have the effect as a contract between the company and each member (s 140(1)(a)), the company and each officer (s 140(1)(b)) and members and each other member (s 140(1)(c)). 2. This allows enforcement of the constitution/replaceable rules by the company against members and vice versa in certain circumstances. (Hickman v Kent or Romney Marsh Sheep-​ Breeders’ Assoc 1 Ch 881) 3. A statutory contract is different from other contracts: a. Remedies are more limited (declaration or injunction only); b. Can be modified without the consent of every party. (See NRMA Ltd v Snodgrass NSWSC 76) c. The contract is a written contract but not signed; and d. No consideration is provided. See Lion Nathan Australia Pty Ltd v Coopers Brewery Limited (2006) 59 ACSR 444. ENFORCEMENT BY THE COMPANY: 1. The practical effect of s 140(1)(a) it that the company may take action against members to enforce compliance with the provisions of the constitution (or applicable replaceable rules) where members refuse to comply voluntarily. 2. An appropriate remedy is an injunction or a declaration. Hickman v Kent or Romney Marsh Sheep-Breeders Association 1 Ch 881. ENFORCEMENT BY THE MEMBERS: 1. Likewise, a member may take action against the company to enforce compliance with certain provisions of the constitution (or applicable replaceable rules) where the company refuses to comply voluntarily. 2. An appropriate remedy is an injunction or a declaration. 3. That said, not all provisions in the constitution will have contractual effect. (per Astbury J in Hickman v Kent) 4. Members can only enforce those provisions in the constitution that confer rights on members in their capacity as members. This is because of the wording of s 140(1) which states ‘so far as they apply to that person’. (Eley v Positive Government Security Life Assurance (1875) 1 Ex D 20) 5. Specific further provisions which will not have contractual effect include: a. Provisions entitling members to have their votes counted at a general meeting (Pender v Lushington (1877) 6 Ch D 70; also see s 250E); b. Provisions entitling members to the payment of a declared dividend. (Wood v Odessa Waterworks (1889) 42 Ch D 636) ENFORCEMENT BETWEEN MEMBERS: 1. The practical effect of s 140(1)(c) is that a member may take action against another member to enforce compliance with the constitution (or applicable replaceable rules) in certain circumstances. 2. This includes for example, when there is a breach of a preemptive rights provision. (Re Caratti Holding Co 1 ACLR 87). Also see the Replaceable Rule s 254D. 3. An appropriate remedy is an injunction or a declaration. 4. Under s 140(1)(c), members can only enforce those provisions in the constitution that confer rights on them in their capacity as members. (Andy Kala Pty Ltd v EJ Doherty (Northcote) Pty Ltd (1995) 13 ACLC 1630) OTHER MECHANISMS FOR ENFORCING / REDRESSING BREACHES OF THE CONSTITUTION: REMEDIES FOR PROCEDURAL IRREGULARITIES UNDER SECTION 1322: In addition to relying upon the statutory contract principle, members can seek remedies under s 1322 on the basis that there has been a procedural irregularity that causes a substantial injustice. Examples: absence of quorum at a general meeting, deficiency of notice/time. Chew Investment Australia Pty Ltd v General Corp of Aust Ltd (1988) 6 ACLC 87; Bell Resources Ltd v Turnbridge Pty Ltd (1988) 6 ACLC 970; Jordan v Avram (1998) 16 ACLC 867. OPPRESSIVE OR UNFAIR CONDUCT UNDER SECTION 232: 1. An order under s 232 is wider than relying upon the statutory contract under s 140. 2. Members do not have to establish that the breach of the constitution (or replaceable rules) affects them in their capacity as members (s 234). (See for example, the Eley v Positive Government Security Life Assurance case) 3. Members must establish that the breach is contrary to the interests of the members as a whole, oppressive or unfairly prejudicial or unfairly discriminatory. ALTERATION OF A COMPANY’S CONSTITUTION: 1. A special resolution is required. (s 136(2)) 2. A special resolution is a resolution passed by at least 75% of votes cast by members entitled to vote on resolution (see s 9 definition). 3. The notice of meeting must set out the intention to propose the special resolution and state the resolution. (s 249L(c)) 4. A public company must lodge a copy of the special resolution with ASIC within 14 days of passing. (s 136(5)) LIMITATIONS ON ALTERATION RIGHTS UNDER THE CORPORATIONS ACT: ENTRENCHED PROVISIONS: 1. The constitution may impose additional requirements for alteration over and above special resolution. (s 136(3)) 2. Entrenched provision may also be entrenched. (s 136(4)) CERTAIN MODIFICATIONS POST-MEMBERSHIP: 1. Under s 140(2), a member is not bound by certain modifications to the constitution made after becoming a member that: (a) requires the member to take up additional shares; or (b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the company; or (c) imposes or increases restrictions on the right to transfer the shares already held by the member, unless the modification is made: (i) in connection with the company's change from a public company to a proprietary company under Part 2B.7; or (ii) to insert proportional takeover approval provisions into the company's constitution. 2. Under s 140(2), members will still be bound however, if they agree to the modification in writing. 3. It does not apply to alterations that force minority shareholders to sell their shares to majority shareholders. (Gambotto v WCP Ltd (1995) 182 CLR 432) VARIATION OF CLASS RIGHTS: 1. Share capital may be divided into shares of different classes. 2. Rights attached to classes of shares are normally set out in the constitution. 3. The general rule is that class rights can be varied or cancelled only with approval by special resolution, of both the shareholders as a whole and holders of the affected class. (s 246B) THE OPPRESSION REMEDY: An exception to the general rule is an application by members under s 232 where a majority votes in favour of a resolution altering the constitution (or replaceable rules) that is contrary to interests of the company as a whole, oppressive, unfairly prejudicial or unfairly discriminatory. COMMON LAW LIMITS ON ALTERATION RIGHTS: 1. 2 common law tests are applicable for the validity of an alteration to the constitution. 2. The test to be applied depends upon whether the alteration involves: a. An expropriation (compulsory acquisition) of shares; or b. Another type of alteration. EXPROPRIATION OF SHARES: 1. The constitution may already provide for expropriation or compulsory disposal of shares. If so, the shareholders rights are limited by the constitution. (Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1998) 16 ACLC 455) 2. Where the expropriation requires alteration of the constitution, the test from Gambotto must be satisfied to be valid: a. The power must be exercised for a proper purpose. In other words, it must prevent the company from suffering significant detriment or harm; and  b. Its exercise must be fair in all the circumstances. Fairness involves elements of substantive and procedural fairness. The process of expropriation must therefore be fair and the price to be paid for the expropriated shares must be fair. 3. The test also applies to alterations attempting to remove or restrict shareholders’voting rights. (Shears v Phosphate Co-op Co of Aust Ltd (1989) 7 ACLC 812) Gambotto v WCP Ltd (1995) 182 CLR 432: A majority shareholder held 99.7% of issued shares of WCP. They sought to alter the articles of associations to allow a shareholder with 90% or more shares to compulsorily acquire minority shares. 2 minority shareholders objected. The High Court held that the alteration was invalid as it was not for a proper purpose. An expropriation to secure administrative and tax cost savings for majority shareholders was not a proper purpose. It must be to prevent the company from suffering significant detriment or harm See also Grey Eisdell Timms v Combined Auctions Pty Ltd (1995) 13 ACLC 965; Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd 2 Qd R 214. OTHER TYPES OF ALTERATIONS: Other type of alterations are valid unless it is beyond the purpose contemplated by the constitution or oppressive. Gambotto v WCP Ltd (1995) 182 CLR 432. THE DISTRIBUTION OF CORPORATE POWER: WHO HOLDS THE POWER IN WIDELY HELD PUBLIC CORPORATIONS: 1. Shareholders retain the capacity to remove directors from the board if they disagree with board decisions. (John Shaw & Sons (Salford) Ltd v Shaw 2 KB 113) 2. That said, Berle and Means (1932) have emphasized that there is: a. Marked separation between ownership and control;  b. Shareholders as a group have little impact on the control of corporate affairs in this type of corporation (at 4); and c. Directors will have effective control because of ‘normal apathy’ of the small shareholder when it comes to voting at general meetings. (at 74) Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (Macmillan, 1932). 3. Parkinson has emphasized in Corporate Power and Responsibility (Clarendon Press, 1995) that: a. With respect to minority shareholder apathy at 54- 55: It is unlikely that voting by a single shareholder will make much difference to the success of a resolution either way, and so it is not worthwhile for shareholders to evaluate proposals put to the general meeting b. In relation to managerial shirking at 63: It seems intuitively likely that in the absence of effective shareholder control or other forms of external discipline some managers will shirk, though the importance of a sense of professionalism and self-esteem should not be overlooked 4. Evans and Freeman in ‘A Stakeholder Theory of the Modern Corporation: Kantian Capitalism’ in Beauchamp Bowie, Ethical Theory and Business (4th ed, Prentice Hall, 1993) have emphasised at 82 that: The corporation should be managed for the benefit of its stakeholders: its customers, suppliers, owners, employees and local communities. The rights of these groups must be ensured, and, further, the groups must participate, in some sense, in decisions that substantially affect their value. … Management bears a fiduciary relationship to stakeholders and to the corporation as an abstract entity. It must act in the interests of the stakeholders as their agent, and it must act in the interests of the corporation to ensure the survival of the firm, safeguarding the long term stakes of each group. THE BOARD OF DIRECTORS: 1. The replaceable rule s 198A provides that: 1) The business of a company is to be managed by or under the direction of the directors. 2) The directors may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting. 2. Shareholders cannot override management decisions. Automatic Self-Cleansing Filter Syndicate Co v Cunninghame 2 Ch 34; John Shaw & Sons (Salford) Ltd v Shaw 2 KB 113. s 198D provides that: (1) Unless the company's constitution provides otherwise, the directors of a company may delegate any of their powers to: (a) a committee of directors; or (b) a director; or (c) an employee of the company; or (d) any other person. 3. For decisions of the board to be valid, formalities governing the convening and conduct of meetings must be observed. THE CALLING OF MEETINGS: 1. Notice of a reasonable period needs to have been provided. (Re Homer District Consolidated Mines ex parte Smith (1889) 39 Ch D 546) 2. Notice can be verbal however, it needs to actually be notice of the meeting taking place, not merely the business to be conducted. (Compagnie e Mayville v Whitley 1 Ch 788) THE PHYSICAL PRESENCE RULE: 1. Under the common law, directors are required to be physically present at a board meeting (or at least linked by telephone conference) to vote. Re Portuguese Consolidated Copper Mines Ltd (1889) 42 Ch D 160; Re Southern Resources Ltd (1989) 7 ACLC 1130. 2. Replaceable rule s 248A can overcome this requirement allowing for a ‘circulating resolution’. 3. A directors’ meeting may be called or held using any technology consented to by all the directors. The consent may be a standing one. A director may only withdraw their consent within a reasonable period before the meeting. (s 248D) 4. Where all directors happen to be present at one time, this will only constitute a meeting where all parties are aware and do not object to the fact that the conversation to follow will constitute a meeting. (Petsch v Kennedy 1 NSWLR 494) POWERS OF SHAREHOLDERS IN GENERAL MEETINGS: 1. A Proprietary Company does not need to hold an Annual General Meeting (AGM) unless required by their constitution. 2. A Public Company must hold an AGM at least once in each calendar year and within 5 months after the end of its financial year. (s 250N) 3. The business of the AGM must be governed by the constitution. 4. Under s 250R, the business may include (even if not referred to in the notice of meeting): a. Consideration of annual financial report, directors’ report, auditor’s report; b. Election of directors; c. Appointment of auditor; d. Fixing of auditor’s remuneration. 5. Meetings must be for a proper purpose. (s 249Q) 6. s 249R provides that: A company may hold a meeting of its members: (a) at one or more physical venues; or (b) at one or more physical venues and using virtual meeting technology; or (c) using virtual meeting technology only, if this is required or permitted by the company's constitution expressly. WHO MAY CALL A GENERAL MEETING: 1. Under replaceable rule s 249C, a director may call a general meeting of the shareholders. 2. Under s 249D, directors must call and arrange to hold a general meeting on the request of members with at least 5% of the voting rights. Directors must call the meeting within 21 days and hold the meeting within 2 months. Under s 249E, if the directors fail to call the requested meeting, more than 50% of the requesters may call and arrange the meeting themselves. The company must facilitate this and pay the expenses of doing so. (s 249E(4) and see Humes Ltd v Unity APA Ltd (1987) 5 ACLC 15; NRMA v Scandrett NSWSC 1123; NRMA v Parker (1986) 54 ACLC 609; Woolworths Ltd v GetUp Ltd (2012) 90 ACSR 670) 3. Under s 249F, members with at least 5% of the voting rights can call and a hold a meeting at their own expense. 4. Under s 249G, the court may order a meeting if it is impracticable to call a meeting in any other way. NOTICE OF THE GENERAL MEETING: 1. A minimum of 21 days notice must be given. (s 249H(1) 2. Shorter notice may be agreed to by all members for an AGM, or 95% of members for any other general meeting (s 249H(2)) except where the meeting is in relation to removing or appointing a director (or removing an auditor). (s 249H(3)-(4)) 3. For listed companies, 28 days notice must be given. (s 249HA) 4. Notice must be written and given individually to each member entitled to vote and to each director. (s 249J) 5. The Notice must include under s 249L: a. The place, date and time for the meeting; b. The general nature of meeting’s business; c. The intention to propose the special resolution and the special resolution itself; and d. For listed companies, details in regards to resolutions on the remuneration report. PROCEEDINGS OF THE GENERAL MEETINGS: 1. Under s 249S, the company may hold the meeting at 2 or more venues using any technology that gives the members as a whole a reasonable opportunity to participate. 2. Under s 249T (replaceable rule), the quorum for a meeting of a company’s members is 2 members that must be present at all times during the meeting. 3. Under s 249U (replaceable rule), directors may elect an individual to chair meetings of the company’s members. 4. Under s 250E (replaceable rule), subject to the rights attached to different classes of shares, each member has one vote on a show of hands and one vote per share on a poll. 5. Under s 249X (a replaceable rule for proprietary companies and mandatory for public companies), members may appoint a proxy to vote for them at a general meeting.