Corporate Law Notes

LAWS4112 Corporate Law Mid Semester Notes Semester 1, 2015 Jasmine Kwong

LAWS4112CORPORATE LAW

MID SEMESTER EXAM NOTES

Jasmine Kwong


Lecture 1: Introduction and History of BusinessOrganisations

INTRODUCTION A company is recognised as a legal person with its own rights and

liabilities A corporation includes – a company, a body corporate or an

unincorporated body: s57 o A company is a separate entity distinct from its shareholders,

directors, officers and employees: s124(1) therefore it has thepower to:

Issue and cancel shares Issue debentures Own property Enter into contracts Commit torts Run a business Sue and be sued in its own name

o It has a lifespan that is potentially unlimited – the directorsand shareholders may change but this does not affect thecompany’s existence as a legal person

The company is controlled by two distinct organs:o The directors (s198A) have capacity to control the company and

owe legal, fiduciary and statutory duties to the corporateentity (normally identified with the interests of theshareholders), and by default, manage the company’s business

o The shareholders receive a bundle of rights in relation to thecompany:

The right to vote The right to a dividend The right to appoint and remove the board: s203C and 203D


o Creditors may contract for control rights (security in theform of a fixed or floating charge) where necessary.

Most companies have limited liability – the shareholders are notpersonally liable for their company’s debts.

o They are only limited to paying the issue price of the sharesthat they own which includes any unpaid amount on partly paidshares

General rule shareholders are able to transfer/sell their sharesfree of any restrictions

o They do not need to obtain approval from other shareholders orthe company’s directors

o NOTE: most closely held companies with few shareholdersrestrict the transfer of their shares by provisions in theirconstitutions which require approval of the directors beforeshares can be transferred

SOURCES OF RULES THAT REGULATE COMPANIES 1. Legislation – the Corporations Act and the Australian Securities and

Investments Commission Act 2001 (Cth) which established the AustralianSecurities and Investments Commission (ASIC) as the main governmentauthority responsible for administering and enforcing theCorporations Act

2. Case law 3. The constitution of each company (which sets out the rules that

regulate their internal management)

HISTORY OF COMPANY LAW Earliest bodies with characterises of legal personality in England

were monasteries and local government authorities o They required that ownership of property be conferred on a

legal entity separate from individuals and that this legalentity continued to exist beyond the lifespan of individuals

o They were incorporated by Royal Charter o Business enterprises that enabled individuals to pool together

their resources were conducted as partnership whereby eachpartner was an agent of the other partners with unlimitedliability

Commercial companies were formed to undertake businesses thatrequired pooled investment from large numbers of shareholders


o Most of these companies in England were involved in overseastrade and the development of infrastructure e.g. canals,railways, roads and water supplies

o These businesses were often risky and required large amount ofcapital and it is usually long before they generated revenueand profits therefore they were unsuited to familybusinesses or partnerships

From early times, business enterprises were created either by Act ofParliament or Royal Charter or were formed by adapting thepartnership form so they possessed the main characteristics ofcorporations and so were suited to pooled investment

o Incorporation by charter – enabled a separate legal entity(corporation) to come into existence

Shareholders usually had their liability limited to theextent of their investment

The business was entrusted to a board of directors andits capital was divided into tradeable stock or shares(joint stock companies)

By early 18th century – a large number of businesses were privatelyformed as unincorporated stock companies without direct legalrecognition

o The Bubble Act (passed in 1720) to prohibit the formation ofunincorporated joined stock companies so that only corporationsincorporated by charter could be formed

This legislation was a response to excessive speculationthat culminated in the bursting of the South Seas Companyspeculative “bubble”

Was also an attempt by chartered companies to removecompetition from unincorporated joint stock companies forinvestment capital

But in reality the Act did little to inhibit theformation of unincorporated joint stock companies

Many difficulties with regulating unincorporated joint stockcompanies:

o The law considered them as a form of partnership with largenumber of shareholders therefore it was legally difficult forthese enterprises to sue and be sued

This is because all partners had to be joined as partiesto the litigation this was practically impossiblewhere a joint stock company had large numbers of


shareholders whose membership changed constantly as itsshares were traded.

EARLY COMPANIES LEGISLATION A series of Acts were passed in England between 1844 and 1856 to

better protect investors, bring greater certainty to the operation ofjoint stock companies and encourage their formation.

o These Acts made a clear distinction between companies andpartnerships

They stipulated that more than 20 persons were requiredto incorporate as companies and that there must be aminimum of 7 shareholders

Limited liability was permitted after the passing of legislation in1855 and 1856

The various statutes dealing with companies were consolidated in theEnglish Companies Act 1862 (UK).

o It enabled all registered companies as separate legal entitiesdistinct from their shareholders

Late 19th century – many family businesses and partnerships used thecompanies legislation to gain the advantage of limited liability

Australian colonies soon passed legislation closely modelled on theEnglish Companies Act.

DEVELOPMENT OF AUSTRALIAN COMPANY LAW First half of 20th century – lack of uniformity from State to State

because the Cth Parliament was not given a clear power by theAustralian Constitution to make laws with respect to all companies

o The closest power s51(xx): which gives the Cth the power tomake laws with respect to “foreign corporations, and tradingand financial corporations formed within the limits of theCth).

Early 20th century, the HC adopted a narrow interpretation of thesection so as to deny the Cth power to make laws with respect to theformation of companies: Huddart Parker v Moorehead

o This was based on the strict interpretation of the word“formed”, meaning already in existence

o It was also regarded as questionable whether mining, investmentand charitable companies were “trading or financialcorporations”.


o Result the Cth had limited jurisdiction under theConstitution to make laws with respect to the incorporation andregulation of companies – it’s a State matter

This was followed by HC in New South Wales v Commonwealth o New South Wales v Commonwealth : the issue considered was

whether or not the provisions in the Corporations Act 1989(Cth) concerning company incorporation were constitutionallyvalid.

Held: the Cth did not have the power under s51(xx) of theConstitution to pass laws providing for the incorporationof trading and financial corporations and thereforeprovisions that related to company formation were invalid- The HC interpreted this phrase as referring to

corporations that had already been created inAustralia and excluded the process of formation itself

The Uniform Company Acts passed by each Australian State in 1961 and1962 largely achieved the aim of attaining uniform companieslegislation throughout the country.

o However, over time, amendments were adopted in some States butnot others, and differences between States began to reappear

o There was also a lack of administrative uniformity – a companyincorporated in one State was regarded as “foreign” company inother States therefore had to comply with complex laws andregulations applicable to foreign entities

The Co Operative scheme was developed in the 1980s to establish bothuniform legislation and uniform government administrative of the law

o This was achieved when the Cth passed legislation that appliedonly in ACT and each State passed legislation applying the Cthlegislation as its own law

o It established the National Companies and Securities Commission(NCSC), a predecessor of ASIC – responsible for formulatingpolicy, administering company law and regulating securities andfutures industry

o But during late 1980s, the scheme came under increasingcriticism

Therefore, the Cth passed the Corporations Act 1989 (Cth) in anattempt to take over sole control of companies and securitiesregulation from the States


o The Cth’s attempt to takeover provoked intense politicalcontroversy and several States challenged the constitutionalvalidity of the Act in the HC. <see NSW v Commonwealth>

The Cth and the States negotiated a new arrangement that establishedthe Corporations Law scheme

o It was a complex legislative framework of Cth legislationapplied as State law

o It had the characteristics of, and was treated for practicalpurposes as if it was Cth law

o There was increase power and control over corporate regulationgiven to the Cth

o The Australian Securities Commission (ASC) was established asthe sole government authority (replacing the NCSC andrespective State Corporate Affairs Commissions)

It was accountable only to the Cth Parliament with theCth AG as the responsible Minister

It was subsequently renamed the Australian Securities andInvestments Commission (ASIC) in 1998 with the CthTreasurer as the responsible Minister

The Cth passed the Corporations Act 2001 (Cth) and the AustralianSecurities and Investments Commission Act 2001 (Cth)

o The Corporations Act replaced the previous Corporations Act1989 (Cth) as well as the eight versions of the Law of thevarious States and Territories

o It became operative on 1 July 2001 and now applies throughoutAustralia

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION It is the main Commonwealth authority responsible for administering

the Corporations Act It is a body corporate with between 3 to 8 government appointed

commissioners headed by a chair person: ASIC Act ss 8-10 The objectives of ASIC:

o Maintain, facilitate and improve the performance of thefinancial system and the entities within that system in theinterest of commercial certainty, reducing business costs, andthe efficiency and development of economy

o Promote the confident and informed participation of investorsand consumers in the financial system


o Administer the law that confer functions and powers on iteffectively and with a minimum of procedural requirements

o Receive, process and store, efficiently and quickly, theinformation given to the Commission under the laws that conferfunctions and powers on it

o Ensure that information is available as soon as practicable foraccess by the public

RECENT REFORM There have been numerous amendments to the legislation aimed to

modernise corporate regulation by simplifying the law, making it moreefficient and responding to recommendations of law reform bodiesafter deficiencies were identified

TYPES OF BUSINESS STRUCTURE

A. Sole trader B. Partnership: s115C. Incorporated association D. Companies

a. Proprietary - limited by shares**b. Proprietary - unlimited by share capital c. Public - limit by guaranteed. Public - limited by shares**e. Public - unlimited by share capitalf. No liability public company (mining companies)

Companies limited by shares – comprise approximately 99% of all companies registered in Australia o These companies have the ability to raise funds (share capital) by

issuing shares to investors o S9: a company formed on the principle of having the liability of

its members limited to the amount, if any, unpaid on the shares respectively held by them

o Once shareholders’ details are entered on a company’s register, they are regarded as members: s231

o In the event of a liquidation, members are to contribute to the company’s property an amount sufficient to pay the company’s debtsand liabilities and the costs, charges and expenses of the windingup


However, a member need not contribute more than the amount, if any, unpaid on the shares in respect of which the member is liable as a member: s516

They need not contribute if they were not members within one year of the commencement of winding up: s521

Past members are only liable if the court is satisfied that the existing shareholders are unable to satisfy the contributions they are liable to make: s522

Past members will not be liable for any debt or liabilityof the company contracted after the past member ceased tobe a member: s520

PUBLIC COMPANIES A public company means a company other than a proprietary company: s9 Public companies have more onerous disclosure and investor protection

obligations than proprietary companies because there are largernumber of shareholders o And also because there is a separation of ownership and control

and shares are offered to the public

Members: o Must have at least 1 member: s114o No maximum number of shareholders

Directors:o Must have a minimum of 3 directors: s201A(2)

At least 2 of the directors must ordinarily reside in Australia

o Directors must be individually appointed unless a general meeting of members unanimously agrees to appoint two or more directors by a single resolution: s201E(1)

o A company can appoint a director by resolution passed in general meeting: s201G

o Shareholders can remove director by resolution and appoint someoneelse as director: s203C

This is a replaceable rule – shareholders do not have a legally entrenched right to remove directors therefore the constitution or a contract can remove this power

o Director cannot be removed by other director: s203E

Secretary: o Must have at least 1 secretary: s204A


At least one must ordinarily reside in Australia AGM:

o Must hold an annual general meeting at least once a year unless ithas only one member: s250N

o The first AGM must be held within 18 months of incorporation: s250N(1)

Purpose – give shareholders an opportunity to consider the company’s audited financial report

Auditors :o Must appoint an independent auditor to audit their financial

reports o It must satisfy the general requirement for auditor independence

in ss324CA – 324CD, as well as the specific independence requirements in ss324CE – 324CG

Registered office: o Must keep their registered office open to the public during the

opening hours: s145 o Must also display their name and the words “registered office”

prominently at their registered office: s144

PROPRIETARY COMPANIES

NOTE: SMALL proprietary Company 45Ao (2) Has consolidated revenue of <25m, <50 employees or, 12.5m in

assets.

Membership:o 50 is the maximum number of shareholders a proprietary company can

have: s113

Directors: o Must have at least 1 director: s201A

One must ordinarily reside in Australia o The company’s constitution governs who can remove directors o Members can remove/appoint the directors by resolution: s203C

(this is replaceable)

Secretary: o No requirement to appoint a secretary

But if it chooses to appoint secretaries, at least one must ordinarily reside in Australia: s204A(1)

Raising funds:


o Proprietary companies are prohibited from engaging in any activitythat would require disclosure to investors under Ch6D: s113(3)

A proprietary company cannot raise funds by offering its shares or debentures to a large number of people (i.e. cannot offer shares to the public: s113(3)), although they can make offer to existing employees and shareholders or make personal offers: s708

Breach of this limitation is a criminal offence, whichdoes not invalidate the transaction but ASIC may require it to convert to a public company under s165.

AGM:o A proprietary company with more than one shareholder may pass a

resolution without a general meeting being held IF all the shareholders sign a document stating that they approve of the resolution set out in the document: s249A

This procedure cannot be used to pass a resolution to removean auditor

Auditors: o Large proprietary companies must appoint an independent auditor to

audit their financial reports o Small proprietary companies are not required to produce annual

financial reports or appoint an auditor unless shareholders holding 5% require it, or ASIC directs it: ss293(3)(c), 294

Although they must maintain written financial records that correctly record its position and would enable true and fairfinancial reports to be prepared and audited, and to maintain them for 7 years: s286

Registered office: o While all companies must have a registered office, proprietary

companies are not obliged to keep it open to the public

CONVERSION FROM PROPRIETARY TO PUBLIC COMPANY A proprietary company may wish to convert to a public company as a

preliminary step in either an application for listing on the stock exchange or to raise capital from the public o A proprietary company can convert to a public company by passing a

special resolution and lodging an application with ASIC: ss162, 163


ASIC may direct a proprietary company to change to a public company if it is satisfied that the company has contravened s113 >> the maximum membership of proprietary companies + prevents them from engaging in an activity that would require disclosure to investors.

CONVERSION FROM PUBLIC TO PROPRIETARY COMPANY A public company limited by shares may wish to convert to a

proprietary company to reduce its financial disclosure obligations o A public company can convert to a proprietary company by passing a

special resolution and lodging an application with ASIC: ss163, 163

o The special resolution must alter the company name so as to include “pty”

o The company must also comply with s113: Requires the company to have a share capital and a maximum

of 50 shareholders

REGISTRATION

A company comes into existence on the day it is registered with the name specified in its certificate of registration: s119 o It means that after application for registration has been lodged

with ASIC and a certificate of registration has been issued, a newlegal entity is created .

Effect of registration a company has the legal capacity and powersof an individual and a body corporate: s124o Powers of an individual applicable to companies include:

Power to acquire and dispose of property Right to sue

o Powers of a company as a body corporate: s124(1) Issue shares and debentures Grant options over unissued shares Distribute the company’s property among its members Grant a security interest in uncalled capital Grant a circulating security interest over the company’s

property Do anything it is lawfully authorised to do


Registration Procedure in order to register a company, a person MUST lodge an application with ASIC using the prescribed form (form 201): s117(1) o It must state the following information: s117(2)

The type of company The company’s proposed name Names and addresses of persons consenting to be members Name, addresses and date and place of birth of persons

consenting in writing to be directors and company secretary Address of registered office and hours of opening Address of principal place of business Details of issued shares (incl. whether fully paid and

beneficially owned by the member on registration) Prescribed information regarding issues of shares for non

cash consideration by public company o An applicant must have the consents and agreements in respect of

persons becoming directors, secretary or members when the application is lodged: s117(5)

If an applicant is lodged, ASIC may: o Allot the company an ACNo Register the company; and o Issue a certificate stating the company’s name, ACN and type of

company. The certificate states the date of registration and that the company is registered under the Act: s118(1)(c)

A certificate of registration is conclusive evidence that all requirements for registration have been complied with and the company was duly registered on the specified date: s1274(7A)

IMPORTANT: A company comes into existence as a body corporate at the beginning of the day on which it is registered: s119 – the company remains in existence until it is deregistered by ASIC: s601AD(1)


LECTURE 2: ECONOMICS AND CORPORATEGOVERNANCE

INTRODUCTION

Corporate governance the rules and practices put in place within a company to deal with the relationships between the board of directors, the management and the shareholders and other stakeholders

o It deals with the CONTROL of corporations and the ACCOUTNABILITY mechanisms put in place + the various checks andincentives put in place to ensure that directors and managers act in the interests of shareholders and other stakeholders

WHAT IS CORPORATE GOVERNANCE?

It is the system by which companies are directed and controlled/managed

o It influences how the objectives of the company are set and achieved, how risks are managed and assessed and how performance is optimised.

o Power is divided between owners and controllers of the company by way of corporate governance rules, the Corporations Act and the ASX listing rules.

Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system,within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.

3 sub concepts


1. Allocation of control rights right to control the company + who has the right to control/run the company/make decision? o e.g. who gets to decide who the directors are? (shareholders),

company directions (directors), internal rules (shareholders)

2. Accountability + Responsibility holding those who have rights and responsibilities accountable o e.g. directors given right to decide how the company is run but

they are accountable personally for those decisions through fiduciary duties

3. Efficiency whether the institutional structure (i.e. rules) facilitate in the most efficient way in dealing with the business – not really a legal concept (reflect through things like who are the best people to make decisions, who to have in the board)

Mechanisms in which the above is implemented 2 sources of corporategovernance

Hard law: Corporations Act, common law Soft law : things we would not regard as law, not enacted by the

Parliamento E.g. Australian Stock Exchange Code – sets out 8 core principles

as to what is good governance, how the board should conduct itself, importance of diversity of experience – sets out in NON BINDING WAY what the best way of doing things is – NO DIRECT LEGALCONSEQUENCE

lay solid foundations for management and oversight companies should establish and disclose the respective roles and responsibilities of the board and management

structure the board to add value companies should havea board of an effective composition, size and commitmentto adequately discharge its responsibilities and duties

promote ethical and responsible decision making companies should actively promote ethical and responsible decision making

safeguard integrity in financial reporting companies should have structure to independently verify and safeguard the integrity of their financial reporting

make timely and balanced disclosure companies should promote timely and balanced disclosure of all material matters concerning the company

respect the rights of shareholders companies should respect the rights of shareholders and facilitate the


HISTORY OF CORPORATE GOVERNANCE

1929 Wallstreet crash – (Prior to Berle and Means) we had moved from an assumption that companies are owner operated (relatively small number of shareholder), but Berle and Means said that’s not true – but that companies had large number of shareholders and each held proportionately very small stake. The directors were no longer the large shareholders but professional managers – people who knew about business. o No effective control because their stake in the business was very

small – no point in getting involved + can’t get involved because company getting complicated

o Because there were so many of them, they were unknown to each other, there was no effective way for them to effect their controlright (if there’s dispute, not practical to all have a meeting)

o Ownership is vested in the shareholders, control is vested in the small number of managers this is important because it tells us where the governance’s tension points are. In the closely held model, the few shareholders will monitor what the director is doing and have the ability and power to get rid of the director ifhe’s not doing what they want him to do. But under the separation of ownership and control model, the shareholders don’t know what’sgoing on and it’s no use and impractical to get involved thereforethe directors are able to pursue their own interest free from shareholders’ control.

Identifies a problem the directors might not have the interest of theshareholders

Late 1920s – Early 1930s The company as a ‘black box’ – opening up the box


Black box didn’t know how to control company and not what’s reallyinvolved

But Berle and Means offered a solution manageralism

Mangeralism: make it even more free – directors use professional skills to find out what’s best for society

1970s – financial economist explored more into the black box and they relied on things by Ronald Coast his concern: to explain why we have a firm (i.e. a business) instead of a market in some sectors.

- His answer was that it’s all about transaction cost – when I enter into contract with a financier – it takes time and effort and I lose time and it’s a cost. Firms arise where they represent lower transaction cost as opposed to market transaction (e.g. it’s easier to borrow money from a financier cf. marketing and delivery – can be the border of a firm) having it in the firm is CHEAPER than getting it from the MARKET

Agency Cost analysis to expand and explain Berle and Means separation ofcontrol – in a particular type of transaction cost that applies to firms isthe cost of EMPLOYING someone else to manage your business

- Separation of ownership and control is a COST – it reduces the net return because it’s diverted away from shareholders (e.g. directors paying themselves big salary)

- Transaction cost as to what the shareholders trying to find out what the directors are doing

- Transaction cost involved with bonding i.e. if you’re the directors and you’re entering into negotiation with shareholders and directors promise to not steal from shareholders by offering bonding

Nexus of Contracts analysis says that company is not actually a separateperson but it’s just a series of contracts (economists mean price allocation of resources instead of legal contracts)

- Shareholders provide capital – they have a relationship with management, labour, finance and raw goods

- shareholders are residual risk holders and take what’s left over therefore shareholders have positive incentive to ensure there’s something left over (to generate most profits) shareholders get


paid if everyone else got paid. The interest of the shareholders are primary, it’s in their interest that the directors must act because it is through that way that it is in everyone’s best interest and ensure everyone gets paid.

- Transaction cost internal cost – the purpose of company law is to MINIMISE internal transaction cost

- Team production and director primacy are similar we got the company upside down – in many company it’s a case of directors coordinating other inputs, business is run for the benefit for ALL who provides an input

- Stakeholderism companies ought to be run and managed for all the benefit of the stakeholders in the business

The purposes and mechanisms of regulating companies

• Why do we regulate companies – what do we hope to achieve?

• Efficiency, propriety, legitimacy?

• Is (and should) company law ‘enabling’ or ‘mandatory’?

• How do we regulate companies -

• Law

• Markets (e.g. takeovers – low cost mechanism to deal with: if directors didn’t raise good profits then someone would come in and vote director out so directors have incentive to get good profits)

• “Responsive Regulation” about creating processes and instructions which entice and guide those getting regulated to do what the regulators want them to do)

• Who regulates companies?

• ASIC monitor and enforce the Corporations Act


• The Parties parties can set their own constitution

The Courts last resort – pricey, complicated

LECTURE 3: CORPORATE PERSONALITY, CIVIL ANDCRIMINAL LIABILITY

LIMITED LIABILITY

Limited liability = shareholders are not personally liable for their company’s debts

o Members have limited liability: s516 – if the company is a company limited by shares, the member liability is limited to the amount unpaid on shares Shareholders who own fully paid shares have no further

liability to pay further amounts to the company Objects:


o encourages free transfer of shares. o encourages managers to take risks because shareholders can

diversify their investmentso creates wealth for companieso Permits efficient diversificationo Creates a ‘market price’ o Allows entrepreneurial ventures

Justification – limited liability is great on investors because the risk and cost of business failure is largely transferred from the company’s shareholders to its creditors

o Arguments in favour of limited liability – it achieves various economic goals: Facilitating enterprise: limited liability facilitates

investment and encourages economic activity by separating investment and management functions and shielding investorsfrom any corporate loss in excess of their equity capital. This protection for investors reduces the costs of raising capital

Reducing monitoring: limited liability decreases the need for shareholders to monitor the managers of companies in which they invest. The risk to those shareholders of a company’s failure is confined to the loss of the equity invested

Promoting market efficiency: limited liability promotes theliquidity and efficient operation of securities markets, asthe wealth of each shareholder of a public company is irrelevant to the trading price of its shares. This allows shares to be freely traded, as their price is set by factors other than their owners’ wealth. The free transfer of shares promote efficient management

Encouraging equity diversity: limited liability permits investors to acquire shares in a number of companies. This might not be possible for particular investors if the principle of unlimited liability applied and they could lose all or most of their personal wealth through failure of one company in which they held equity


NOTE: the argument in favour of limited liability is less compelling in thecase of closely held small companies and subsidiaries within corporate groups (e.g. proprietary companies)

They normally have small numbers of shareholders who typically also function as the directors and managers.Some of the benefits of limited liability (e.g. reduction on monitoring costs) are irrelevant as it isusual for a controlling company to monitor its controlled companies

Also, the benefit of promoting an efficient market forshares through limited liability is not applicable as there is no market for the shares of unlisted group companies. It is also arguable that limited liability is more likely to encourage excessive risk taking by parent companies because the benefit of a business risk will accrue to the company while if the risk falls, the burden falls on creditors.

Limited liability is a default rule. A 3rd party can require that directors provide directors guarantee

o Limited liability remains it place. It is circumvented with a separate agreement.

o It is the default because in most cases parties would bargain for limited liability so transaction cost incurred through bargaining is reduced by making the most commonly chosen terms,like limited liability, the default position.

SEPARATE ENTITY DOCTRINE

Separate entity = upon incorporation, a new legal person comes into being with rights and liabilities that are separate from its members:Salomon v Salomon

o In principle, it makes no difference that the company is owned and/or managed by one person

o This doctrine supports the limited liability principle – its value lies in its role in enabling limited liability to operateand in asset partitioning to be undertaken

By partitioning the assets of the company and its members, it ensures that the company’s creditors can onlyclaim the company’s assets and the shareholders’ creditors can only claim the shareholders’ assets


o It also enabled the development of the public share market in the 19th century

At that time, large private investment was sought to build the railroads in UK. If companies and their assets were separate from the shareholders and their assets, shares could be distinct forms of property these couldbe issued to more people and traded more easily among them

Salomon v Salomon & Co Ltd [1897] - SEPARATE ENTITY DOCTRINE

NOTE: The Corporations Act allows the formation of a public or proprietary companies with a single shareholder: s114

The principle has a number of implications: o Property owned by company does not belong to its members, even

where they have given it to the company in exchange for shares: Macaura v Northern Assurance Co Ltd

FACTS: Macaura owned land on which stood timber. He sold the land andtimber to a company he formed and received as consideration all thefully paid shares. The company carried on business of felling andmilling timber. A fire destroyed all the timber that’s been felled. Mhad earlier insured the timber against loss by fire in his own name.He had not transferred the insurance policy to the company. When Mmade a claim, his insurers refused to pay, arguing that he had no

FACTS: Salomon was sole trader of a business. He wished to give his sons a share each therefore he formed a company. The company purchased Salomon’s business in exchange for shares and debentures. Salomon was the major shareholder of the company. Then the company experienced financial difficulty so Salomon firstly advanced the company further funds from his own resources. When it was insufficient, he borrowed money from Broderip andas security, Salomon granted him a mortgage over his debentures and caused them to be reissued in Broderip’s name. Salomon defaulted and company went into liquidation. The liquidator found that the company’s realisable assets amounted to about £6000. This was sufficient to repay Broderip’s claim of £5000. The remaining £1000 was claimed by Salomon as beneficial owner of thedebentures. (he wanted to enforce his debentures over the unsecured creditors.) If these claims had been met, there would have been nothing leftfor payment of the unsecured creditors who were owed approximately £8000. Court upheld the separate legal entity doctrine. In the absence of fraud


o Corporate contracts are made by the company –the company is the contracting party and not the directors or members.

Causes of action belong to the company and not to members individually

o Company can make contract with shareholders, even controlling shareholders: Lee v Lee’s Air Farming

o Company can be liable in tort, either directly or vicariously (more common): Williams v Natural Life Health Foods

o Companies can act as trustees o Companies are persons under s6 of the Income Tax Assessment Act

1936

Therefore the consequences of that is that: companies have the legal capacity and the powers of an individual and body corporate – they can issue shares: s214 but note corporations can only act through human beings

SALOMON’S PRINCIPLE AND CORPORATE GROUPS

It is NOT a company – it’s a collection of companies that are relatedto each other through ownership and carry out a common and relatedenterprise.

Nowadays, companies can own other companies by either: o Acquiring all or some of another company’s shares (i.e. buy into

an existing company); or

FACTS: Lee was a pilot who conducted an aerial top dressingbusiness. He formed a company to conduct the business. Thecapital of the company comprised 3000 £1 shares, of which 2999were allocated to Lee. The remaining shares was taken by hissolicitor as nominee for Lee. Worker’s compensation insurancewas taken out, naming Lee as an employee. Lee was killed in aflying accident. His widow made a claim under the Workers’Compensation policy. His claim was initially rejected on theground that as Lee had full control of his company, he couldnot be a “worker” within the meaning of the Workers’Compensation Act. “Worker” is defined under the Act as a personwho has entered into or works under a contract of service… with


o Incorporate an entity in which own all or some of the shares They can create multiple subsidiaries – any of those

companies can in turn, create or acquire other companies

when this happens, the commercial enterprise is a corporategroup

The entities in the group use the terms: ‘subsidiaries’, ‘relatedbodies corporate’, and ‘control’.

o S46 defines the term ‘subsidiary’ for the purposes of s588V(used for liability of holding company for insolvent trading ofa subsidiary). A subsidiary is a body corporate for whichanother body corporate: controls the composition of the board(see s47); may cast or control the casting of more than halfthe votes at a general meeting; or holds more than half theissued share capital that carries a right to share in profits.

o S50 uses the broader concept of ‘related bodies corporate’ toencompasses holding company/subsidiary relationships as well asholding company/subsidiary-of-subsidiary (grandparent)relationships. (used to determine which company need to prepareconsolidated account) Related bodies corporate must produceconsolidated accounts and comply with a number of regulationsconsidered in later lectures (e.g., on financial assistance)

o S50AA defines ‘control’ by one entity of another as a ‘capacityto determine the outcome of decisions about the second entity’sfinancial and operating policies’. (used for financialbenefit)This broader concept is used in Pt2E CA 2001 onfinancial benefits by a public company.

Why form corporate groups?

Reducing risk or maximising returns by diversifying an enterprise’sactivities into various businesses, each of which is operated by aseparate group company

Acquiring existing companies to expand an enterprise or increasemarket power. The acquired companies may possess recognised brands orgoodwill

The group form can make complex operations easier to manage It can enable investment in different jurisdictions (think of the

multinational enterprises or MNEs). Most importantly, it can help apportion assets and liabilities so

that business ventures become (or remain) profitable.


What are the consequences of a group structure?

The companies in a group is regarded as a separate legal entitydistinct from other companies in the group: Walker v Wimborne

o The creditors of a company in a group can only enforce therights against the debtor company

o Shareholders of each group company have limited liability andtherefore cannot be held liable for the debts of the companyin which they are shareholders

o Directors owe duties to the particular companies of which theyare directors and not to the group as a whole

Therefore, in making management decisions, directors are supposed toconsider the interests of that company rather than of the group as awhole: Walker v Wimborne

Walker v Wimborne [1976]- ASSOCIATED COMPANIES

Industrial Equity Ltd v Blackburn [1977]- GROUP COMPANIES

FACTS: The directors had moved funds between the companies to enablevarious debts to be paid and used assets of one company as security for loans obtained by others. The companies went into liquidation and the liquidator brought an action under the predecessor of s598 on the grounds that the directors had been guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a corporation and the corporation had thereby suffered loss

Mason J rejected the argument that where companies were associated in a group, directors could disregard their duties to individual companies in the group provided their actions were undertaken for the benefit of the group as a whole

Directors of a company that is a member of a group cannot act in the best interests of the group and disregard the interests

FACTS: The consolidated accounts of a group of companies of which Industrial Equity was the holding company disclosed sufficient profits from which a dividend could be paid. These profits were actually made by the subsidiaries. Industrial Equity asserted that it could pay dividends to its own shareholders from the profits madeby its subsidiaries notwithstanding that the subsidiaries had not paid dividends to the holding company.

The HC rejected this approach – it regarded each company within the group as a separate legal entity.


Some special risks are associated with group companies: o The use of subsidiaries to insulate parent companies (i.e.

their investors) from the costs of high-risk activitieso Group structures may be very complex. Their complexity may

weaken the accountability of companies to particular commercialcreditors and increase the moral hazard that companies pose:Qintex Australia Finance Ltd v Schroders Australia Ltd

PIECING THE CORPORATE VEIL

The recognition that a company is a separate legal entity is often referred to as the “corporate veil”.

o It presents incorporation as a curtain that falls between the company and its members and directors. The veil protects and conceals their identities, motives

and assets o Once a company is formed, the courts usually do not look behind

the “veil” to inquire why the company was formed or who really controls it.

o Further, where the separate entity concept is coupled with limited liability, the corporate veil ensures that shareholdersare not personally liable to creditors for their company’s debts

BUT it has been recognised that the concept of a company as a separate entity and limited liability can result in undesirable consequences arising from the misuse of companies as shams and facades for deliberately dishonest purposes.

o Piecing the veil means that the separate legal personality of the company is disregarded – the company and its owners and managers are treated as one


When do the courts pierce the corporate veil?

The courts pierce the corporate veil under statute and at common lawo Under Statute

The corporate veil may be lifted where: 1. There is insolvent trading: s588G

Directors may become personally liable for debts incurred by their company where they have failed to prevent the company incurring debts when there are reasonable grounds for suspecting that it is insolvent

- They have duties to stop companies they manage (or control) from engaging in insolvent trading

IF BREACHED the corporate veil will be lifted and the director will be held personally liable to contribute to the assets available to the company’s creditors: s588J(1)

- Contravention of the s588G duty may also resultin the imposition of a civil penalty order pursuant to Pt 9.4B

- They may also commit a criminal offence under s588G(3) if their failure to prevent the company incurring the debt was dishonest

A holding company can be liable where – o A subsidiary incurs a debt while insolvent or becomes insolvent

as a result; and o There are reasonable grounds for suspecting insolvency; and o The holding company (or one or more of its directors) was aware

at the time that there were grounds for so suspecting and/or

(1) This section applies if:

(a) a person is a director of a company at the time when the company incurs a debt; and

(b) the company is insolvent at that time, or becomesinsolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as


looking at the nature and extent of control of parent, it isreasonable to expect that parent or its directors would beaware.

NOTE: Solvency (S95A) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. (2) A person who is not solvent is deemed insolvent.

o At common law Australian courts are generally reluctant to piece the

corporate veil. They have only done so in relatively rare situations to prevent the abuse of the corporate legal personality of a company where it is used as a façade or sham to evade the law or to frustrate its enforcement

The position is still quite unclear and the courts are still debating which of these cases involves genuine veil piecing

The corporate veil may be lifted where:

1. The company is used as a vehicle for FRAUD

Re Darby [1911]- FRAUD

2. Avoidance of legal obligations The court will also piece the corporate veil if a company has been

used as a sham so as to avoid a legal obligation under contract orstatute.

FACTS: Darby and Gyde formed a company of which they were sole directors and together with 5 nominees, were the shareholders. The company purchased a licence to work a quarry and then floated another company, WSQ for the purpose of purchasing the licence at asubstantial overvalue. WSQ paid the company formed by D and G for the licence. The profits were then divided between D and G. WSQ thenfailed and the liquidator claimed in the bankruptcy of D for the secret profit made by him. (this claim was on the basis that D was in breach of his duty as a promoter of WSQ)

It was argued that the profit was made by the company formed


Gilford Motor Co Ltd v Horne [1933]- AVOIDANCE OF LEGAL OBLIGATIONS

Jones v Lipman [1962]- AVOIDANCE OF LEGAL OBLIGATIONS

NOTE: Even if a company was not formed for the purpose of avoiding a legal obligation, it may lift the corporate veil if the company was a mere puppetof its controller: Ascot Investments Pty Ltd v Harper

3. Subservient companies as agents for their controllers In some cases, the courts looks behind the corporate veil where it

finds that a subsidiary has acted as an agent for its holdingcompany.

o If a company is financially and operationally subservient toits owners (i.e. where a parent company has exercised such adegree of control over a subsidiary) the courts may concludethat it is their agent and its acts deemed to be the acts ofthe parent comapny: Smith, Stone & Knight Ltd v Birmingham Corporation

FACTS: H was appointed managing director of GM for 6 years. The service agreement provided that he was not to solicit or entice awayfrom the company any of its customers during his appointment or after termination of his appointment. 3 years later, H resigned and started his own business in competition with the company. H formed acompany to conduct this business and started looking for business and customers from GM. GM brought an action seeking to restrain H and the company he formed from soliciting their customers.

Action was successful – an injunction granted against both H and the company, even though the company was not a party to

FACTS: L was a vendor of land who entered into a contract for the sale of the land to J. L then sought to avoid the contract by forming a company and selling the land to the company at undervalue in order to defeat J’s right to seek an order for specific performance of the contract.

Held that the company formed by L was a façade and J succeededin obtaining an order for specific performance against both L


The required degree of control that justifies a findingthat a subsidiary was an agent for its parent companyusually arises where the subsidiary lacks sufficientresources to act as an independent entity

Smith, Stone & Knight Ltd v Birmingham Corporation [1939]- SUBSIDIARIES AS AGENTS

FACTS: BC, a local government authority, sought to compulsorily acquire some land owned by SSK. To all outward appearances, the landwas occupied by, and the business conducted on it was operated by Birmingham Waste Co Ltd (a wholly owned subsidiary of SSK). BC refused a compensation claim for disturbance of business because thesubsidiary’s tenancy of the land was for less than a year and hence under the relevant legislation it was not entitled to compensation. SSK asserted that it in fact conducted the business on the land and was therefore entitled to compensation for the disturbance caused bythe compulsory acquisition. It argued that the subsidiary conducted the business as agent for the holding company.

This agency argument was upheld by the court because of the special circumstances that existed.

Atkinson J pointed out that the existence of an agency relationship was NOT always present between holding and

Test of determining agency

o Were the profits of the business treated as profits of the parent?

The profits of the subsidiary must be treated as the profits of the holding company

o Did the parent appoint the persons carrying on the business?

The persons conducting the business must be appointed by the holding company

o Was the parent the head and brain of the trading venture?

The holding company must be the head and brain ofthe trading venture

o Did the parent govern the venture, decide what should be done and what capital should be embarked on the venture


IN AUSTRALIA

Smith, Stone & Knight Ltd v Birmingham Corporation was followed in Australia in Spreag v Paeson Pty Ltd to hold a parent company liable for the misleading and deceptive statements made by its subsidiary and for breaches of implied terms of a contract by the subsidiary.

After considering the six factors, Sheppard J held that a subsidiary was carrying on business for its parent company and stood in the position of an agent acting for an undisclosed principal + the subsidiary was undercapitalised and had no bank account or available funds – a creditor of the subsidiary therefore had no chance of successfully recovering money owed unless the parent company agreed to fund the liability

o As a result, the Ps were able to recover from the parent company

HOWEVER in ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (reg) and Others, Besanko J doubted the 6 factors.

He pointed out that the first of the 6 questions identifies an issue which is important tot eh question of whether there is an agency

o But too much emphasis on the other 5 questions could lead to a result inconsistent with the decision in Salomon because each of those 5 matters relate to control and control of itself cannot be a decisive indicator of agency. If that was the case,there would often be an agency between a parent company and itssubsidiary or a sole shareholder and his company – this would be inconsistent with Salmon and the separate legal existence ofcompanies in a group found in Industrial Equity Ltd v Blackburn and Walker v Wimborne

CORPORATE TORTS AND CRIMINAL WRONGS


Normally, the Salomon’s principle has enabled holding companies to avoid liability to tort creditors of subsidiary companies because theholding company is a separate legal entity distinct from its subsidiaries and therefore not liable for the debts of its subsidiaries

o BUT There may be scope to lift the veil in torts cases to make the parent company liable for the torts of the subsidiary:Briggs v James Hardie (esp in cases where the subsidiary is under capitalised and cannot meet its tort liabilities)

Briggs v James Hardie & Co Pty Ltd[1989]- TORT LIABILITY

A number of policy arguments exist for lifting the veil, including: Parent companies obtain benefits from corporate group activities, but

do not bear any costs or risks associated with the activity. Tort creditors cannot bargain ex ante with the tortfeasor, cannot

obtain guarantees from the parent and do not have the opportunity tocheck for solvency of the companies

If a company has not adequately insured (and thus has adequatelyprotected themselves from the risk of extensive liability), thenthere may be a case for lifting the veil as the company has actedopportunistically by transferring risk of reasonably foreseeable lossto tort creditors

Limited liability should be limited to situations in whichshareholders have managed the business with due regard for bargainedfor expectations and potential victims of reasonably foreseeableaccidents

GENERALLY a parent (controlling) company may be held directly liable toan employee of its subsidiary’s tort if it is held that the parent owes aduty of care to the victims of the subsidiary’s negligence

It requires a foreseeability and a relationship of proximity between

FACTS: B suffered from asbestosis which he alleged he contracted while being employed by a subsidiary of JH. In a negligence action against both his employer and the holding company. B argued that thecorporate veil of the subsidiary could be lifted to make the holdingcompany liable.


the parties with respect to both the relevant class of act oromission and the relevant kind of damage

CSR Ltd v Wren[1997]- TORT LIABILITY- DUTY OF CARE

CSR Ltd v Young[1998]- TORT LIABILITY- DUTY OF CARE

James Hardie & Co Pty Ltd v Hall[1998]- TORT LIABILITY- DUTY OF CARE The NSW Court of Appeal took a stricter view than CSR v Young

Held: where a parent company directly or controlled its subsidiary’s operations and provided the subsidiary’s management, the parent company owed a duty of care to the subsidiary’s employees.

CSR owed a duty directly to W because even though he was employed by AP, a subsidiary of CSR, all the management staff who had operational responsibility for AP’s enterprise and

FACTS: The P was born in Wittenoom and was exposed to asbestos from birth to age of 27 months. Her father was employed by ABA, a subsidiaryof CSR, as a draftman and often returned home from work with asbestos fibres in his clothing. Tailings containing asbestos fibres were spreadin areas in which children played. The P contracted malignant mesothelioma at 34 and died soon after.

It was held that for the purposes of liability, CSR was in the same position as ABA as it conducted the overall operations at Wittenoom.

CSR owed a duty of care to the people living in the town which was co-extensive with that owed by ABA as an employer

FACTS: The P was a NZ resident who contracted mesothelioma as a result of exposure to asbestos dust the premises of his employer, a NZ subsidiary of JH. The action was brought in NSW against NSW registered companies which supplied and exported asbestos to the P’s employer because common law actions seeking damages were barred in NZ.

The holding company was not responsible for workplace safety at the NZ plant. All that could be said was that the holding companywas in a position to insist that proper workplace standards were


Civil and Criminal liability of companies

Civil wrongs these wrongs will be derivative, deriving from the act/omission of a natural person. Liability will then be vicarious, based on the relationship between the company and individual. The company is held liable as an employer.

Criminal wrongs rarely vicarious. More often a company is held directly/primary criminal liability where the offence is committed by its ‘directing mind’ and will: Tesco Supermarkets v Nattrasso Prosecution must show that the natural person in question had the

requisite mens rea for the offence, which is then attributed to thecompany: Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd

o It does not require that those at board level had knowledge of the wrongdoing.

LECTURE 4: INTERNAL STRUCTURE ANDOPERATIONS OF THE COMPANY; THE CORPORATECONSTITUTION; CORPORATE ‘ORGANS’, AND

MEETINGS

CORPORATE GOVERNANCE

Corporate governance is the system by which companies are directed and controlled. It influences how objectives of the company are set and achieved, how risk is monitored and assessed and how performance is optimised.

Corporations must deal with the separation of ownership (memberships in their capacity as risk bearers) and control (directors in their function as management)


Corporate governance principles are regulated under the Corporations Act and a variety of soft law mechanisms e.g. the ASX Listing Requirements and Codes of Conducts and Guidelines for best practice

THE CONSTITUTION & REPLACEABLE RULES

A company’s internal management may be governed by replaceable rules contained in the Corporations Act s141 (apply by default) orby a Constitution of the company or both: s134o Apply by default – i.e. when you incorporate a company (lodge

the application), then the internal governance rules for your company will be the replaceable rules from the Act

1. Replaceable Rules A replaceable rule applies to: s135(1)(a)

o Each company that is or was registered after 1 July 1998; and o Company registered before 1 July 1998 that repeals its

constitution after that day o NOTE: some replaceable rules only apply to proprietary

companies – e.g. s194 A provision of a section or subsection that applies to a company

as replaceable rule can be displaced or modified by the company’s Constitution: s135(2)

o This means that a company may be formed with a constitution that replaces or modifies any one or all of the replaceable rules

Failure to comply with the replaceable rules is not a contravention/breach of the Corporations Act therefore no criminalor civil liability

o A person affected by a contravention of a replaceable rule does not have standing to apply for a statutory injunction under s1324

S141 contains a list of replaceable rules


The following table sets out the provisions of this Act that apply as replaceable rules.

Provisions that apply as replaceable rules Officers and Employees 1 Voting and completion of

transactions--directors ofproprietary companies

194

2 Powers of directors 198A3 Negotiable instruments 198B4 Managing director 198C5 Company may appoint a director 201G6 Directors may appoint

other directors201H

7 Appointment of managing directors 201J8 Alternate directors 201K9 Remuneration of directors 202A10 Director may resign by giving

written notice to company203A

11 Removal by members--proprietary company

203C

12 Termination of appointment of managing director

203F

13 Terms and conditions of office for secretaries

204F

Inspection of books 14 Company or directors may allow

member to inspect books247D

Director's Meetings 15 Circulating resolutions of

companies with more than 1director248A

16 Calling directors' meetings 248C17 Chairing directors' meetings 248E18 Quorum at directors' meetings 248F19 Passing of directors' resolutions 248G Meetings of members 20 Calling of meetings of members by

a director249C

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#director


















http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s156.html#proprietary


Provisions that apply as replaceable rules21 Notice to joint members 249J(2

)22 When notice by post or fax is given 249J(4

)22A When notice under paragraph 249J(3)

(cb) is given249J(5)

23 Notice of adjourned meetings 249M24 Quorum 249T25 Chairing meetings of members 249U26 Business at adjourned meetings 249W(2

)27 Who can appoint a proxy

[replaceable rule for proprietary companies only]

249X

28 Proxy vote valid even if member dies, revokes appointment etc.

250C(2)

29 How many votes a member has 250E30 Jointly held shares 250F31 Objections to right to vote 250G32 How voting is carried out 250J33 When and how polls must be taken 250M Shares 33A Pre-emption for existing

shareholders on issue of shares

in proprietary company

254D

33B Other provisions about paying dividends

254U

34 Dividend rights for shares in proprietary companies

254W(2)

Transfer of shares 35 Transmission of shares on death 1072A36 Transmission of shares on

bankruptcy1072B

37 Transmission of shares on mental incapacity

1072D





Provisions that apply as replaceable rules38 Registration of transfers 1072F39 Additional general discretion

for directors ofproprietary companies to refuse to register transfers

1072G

2. Company Constitution Prior to July 1998, all companies were required to have a

constitution consisting of: o The memorandum of association; and o The articles of association

Companies formed after July 1998 have a choice regarding the rulesgoverning their internal management: s134

o The majority of companies adopt a constitution because some of the replaceable rules will be unsuitable for them

A public company must have a constitution: ASX Listing Rule 15.11 o A copy of the constitution and relevant special resolutions

must be lodged within 14 days of the company adopting or modifying the constitution: s136(5) The company must also lodge with ASIC within that period

a copy of that constitution (if it adopts a constitution)or a copy of that modification (if it modifies its constitution)

If a member makes a written request and pays any fee required by the company, a company must send a copy of its constitution to that member within seven days: s139(1)

Adoption of constitution: o A new company on registration may adopt a constitution as

long as signed and consented by each member before application is lodged: s136(1)(a)

o A company that is registered without a constitution may adopt one by passing a special resolution: s136(1)(b) A special resolution = a resolution of which:

- Notice as per s249L(1)(c) has been given; and - The resolution has been passed by at least 75%

of the votes cast by members entitled to vote on the resolution




o A court order is made under s233 (the oppression remedy) that requires the company to adopt a constitution: s136(1)(b)

Contents of constitution: o There are no mandatory content requirements for

constitutions – the Act does not prescribe what information must be contained Usually sets out the rules governing matters such as the

rights of members, the conduct of members’ and directors’meetings, powers of directors and their appointment and remuneration

Interpretation of constitution: o The courts interpret the provisions in a constitution in a

similar way to commercial contracts so as to give them a “business like interpretation”: Dome Resources NL v Silver In this case, a provision in the constitution conferring

a power on the directors was given as broad an interpretation as was reasonably available on the language of the provision so as not to impose procedural constraints on the directors

o Courts are reluctant to imply further terms or permit evidence of an intention to depart from or add to the written provisions as this increases uncertainty and detracts from the entitlement of shareholders and others to rely on the written constitution as containing the full and complete constitution: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd In this case, It was held that a shareholder could not

rely on pre-emptive rights contained in the company’s constitution to prevent a share buy back from proceeding because pre emptive rights did not extend to share buy backs. this was despite a clear statement in the constitution which prohibited any transfers of shares by shareholders and the registration of such transfers by the directors without compliance with the pre emptive rights

Objects clause o A company’s constitution may contain an objects clause that

identifies and restricts the businesses and activities in which the company may engage: s125(2)


EFFECT OF THE REPLACEABLE RULES & CONSTITUTION

A company’s constitution and any replaceable rules that apply to a company have effect as a statutory contract between: s140(1)

o The company and each member: s140(1)(a)o The company and each director and company secretary: s140(1)

(b); ando A member and each other member: s140(1)(c)

Under which each person agrees to observe and perform the constitution and rules as far as they apply to that person.

NOTE: There are no statutory contract between director and member (shareholders) that means that the shareholders CANNOT sue the director if the Constitution/replacement rules are not being complied with

The s140(1) statutory contracts have certain features that depart from ordinary principles of contract law

o Normally, only parties to a contract are bound by it o Under s140(1)(a) contract, the provisions of the constitution

have the effect of a contract not only between the company and the persons listed in the application for registration as the person who gave written consent to be members and to be bound to the terms of the constitution, but also between the company and any person who became a member after the company was registered

In the case of a company that is formed with only the replaceable rules, those rules have the effect of a contract between the company and its present and future members whether or not they consented to the replaceable rules

o Generally the construction of contracts takes into account the understanding of what a reasonable person would have taken the contract to mean require consideration of the surrounding circumstances and a determination of the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas

BUT the construction of a company constitution involves less consideration of surrounding circumstances because outsiders are more reliant on the written document and


will often have no knowledge of the surrounding circumstances: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd

o Ordinarily, contracts cannot be altered without the consent of all the parties

This is not the case for s140 contracts – a company may modify or repeal its constitution by special resolution: s136(2) - that’s at least 75% of the votes cast by members entitled to vote

This means that the terms of the s140(1)(a) and (c) contracts are alterable and the alteration will bind eventhose members who voted against the modification

The terms of the s140(1)(b) contract can be altered by special resolution of members and it will also bind the company’s directors and secretary: NRMA Ltd v Snodgrass

Purpose of s140:o To provide a way for the parties to the statutory contracts to

enforce compliance with a company’s constitution and any replaceable rules that apply

E.g. shareholders can assert a breach of the s140(1)(a) contract if the company does not comply with provisions in its constitution that apply to shareholders

The appropriate remedy is a court injunction or declaration to enforce compliance with the constitution or replaceable rules

S140 IMPLICATIONS

1. They cannot be enforced by outsiders: Eley v Positive Government Security Life Assurance Co confirmed in Marketing Advisory Services (MAS) v Football Tasmania Ltd

2. Members can sue to enforce rights BUT this right is limited to rights conferred on members in their capacity as members – they cannot enforce provisions in the constitution that purport to give them rights in some other capacity that that of a member, such as a solicitor or promoter: Eley v Positive Government Security Life Assurance Co


Eley v Positive Government Security Life Assurance Co[1875]- OUTISDE CAPACITY

3. Members are bound by the statutory contract in any disputes arising in relation to the affairs of the company: Hickman v Kent or Romney Marsh Sheep Breeders’ Assoc

Hickman v Kent or Romney Marsh Sheep Breeders’ Assoc [1915]- CONTRACT BETWEEN COMPANY AND MEMBERS

4. Remedy for breach of the constitution by the company is injunction or declaration, not damages: Webb Distributors (Aust) Pty Ltd v Victoria

FACTS: The company’s constitution, drafted by E, provided that he wasto be its permanent solicitor and could only be dismissed for misconduct. He acted as solicitor for some time, although no separateemployment contract was entered into. E also received an allotment ofshares in consideration of the work he did in forming the company. Subsequently, the company ceased to employ him. E brought an action for breach of contract against the company.

The action failed – it was held that the constitution conferredno rights on a member where the member seeks to enforce a rightin a capacity other than as a member.

E was seeking to assert a right in his capacity as solicitor ofthe company. In order to do so, he should have entered into a

FACTS: H was a member of the KRMSBA, an incorporated non profit makingcompany. He began a court action complaining of various irregularitiesin the affairs of the association. Clause 49 of the association’s constitution however, provided that disputes between it and its members should be referred to aribtuation. Relying on this clause, theassociation sought to prevent H’s court case from proceeding.

The court upheld the association’s case and stayed H’s court


s563A: if a shareholder has a claim against the company in their capacity as a member of the company, that claim for money owed has tobe postponed until after the creditors have been paid.

o But this position has been thrown into doubt by Sons of Gwalia case, which gave s563A a narrow interpretation. The case has now been overturned by legislation.

Sons of Gwalia Ltd v Margeraetic [2007]

As a result of this case, creditors (e.g. banks) were jumping up and down and there was pressure put on the government to reverse the decision.

o Therefore the Corporations Amendment (Sons of Gwalia) Act was passed in2010. the Act provides that any claims brought by shareholders relating to the buying, selling, holding, dealing of shares are ranked equally and after all creditor claims.

The bill provides three key measures:

FACTS: M purchased shares to the value of $20,000 in S. The company then became insolvent days later. M submitted that at the time he purchased his shares, the company was in breach of s674 of the Act by failing to disclose information to the market which is not generally avaialbe and isinformation that a reasonable person would expect to have a material effect on the share price. M further submitted that the company had engaged in misleading and deceptive conduct. M sought damages for losses incurred from the company’s conduct. If he won the case, his claim for damages would’ve been a debt owed to M in his capacity as a member

Under s263A, if a company becomes insolvent, there is a certain order of priority in which people are paid (usually secured creditors > unsecured creditors > shareholders) Note: if the debt was owed to M not in his capacity as member then section 263A would not apply.


i. All claims in relation to the buying, selling and holding or otherwise dealing with shares are to be ranked equally and after all other creditors claims

ii. Removes the right of persons bringing claims regarding shareholdings to vote as creditors in a voluntary administration or a winding up unless they receive permission from the court.

iii. Eliminates any restriction on the capacity of a shareholder to recover damages against a company basedon how they acquired the shares or whether they still hold the shares.

5. One shareholder should be able to recover damages from another shareholder

6. A member is confined to enforcing ONLY personal rights under s140(1). Rights that belong to the company MUST be enforced by the company

(e.g. right to sue the director for breach of duties, right to sue 3rd

parties for breach of contract/tort) Personal rights are rights fundamental to the nature of membership.

They include: o The right to vote; o The right to receive dividends once they are declared;o The right to certain information

7. Position of directors under s140? Ability to enforce rights in their capacity as directors and an obligation to observe the constitution

8. A member cannot complain of mere procedural irregularities at common lawor under s1322(2).

A procedural irregularity includes a reference to: o Absence of a quorum at a meeting o A defect of notice – failure to give the right amount of

notice Procedural irregularity are PRIMA FACIE automatically VALID unless

the court declared them not to be valid: s1322o The court will declare a procedural irregularity not valid if it

causes substantial injustice. (i.e. if anyone is prejudiced by the procedural irregularity then they can complain to the courtand challenge it – onus is on them is to prove that the irregularity causes substantial prejudice)


The irregularity need not be accidental, can be deliberate: Re Pembury Pty Ltd

A departure from the prescribed method of doing things will not be invalid unless they change the substance of the thing which is being done requires a nexus betweenthe irregularity complained of and the prejudice

However, in Re P W Saddington, Young J concluded that a deliberate decision to convene an invalid meeting was nota procedural irregularity within s1322(1)

Whitehouse v Capital Network : there was a directors meeting held without a quorum. Held: the lack of a quorum was a procedural irregularity, even where the meeting was called in the knowledge that it was extremely unlikely that there’d be a quorum. The purpose of the meeting was to attempt to circumvent certain order made by the FamilyCourt and the meeting proceeded in the full knowledge of those present but there was no quorum.

9. Validation of other non-procedural irregularities is possible under s 1322(4) Court must be satisfied that those concerned acted honestly and that

it is just and equitable to make the order: s1322(6)

ALTERATION OF THE CONSTITUTION

A special resolution of members is required to alter or repeal the constitution: s136(2)

A company adopts a constitution if it passes a special resolution to that effect: s136(1)(b)

o A special resolution = a resolution passed by at least 75% of the votes cast by members entitled to vote on the resolution: s9

Notice of the meeting must be given: o For an unlisted company: 21 days prior to the company, or a

longer period where the company constitution specifies: s249H(1)

o For a listed company: 28 days prior to the meeting, or a longer period where the company constitution specifies: s249HA(1) and (3)

The notice must set out: s249L


o The place, date and time of meeting: s249L(1)(a) o The general nature of the meeting’s business: s249L(1)(b) o If a special resolution is to be proposed at the meeting, an

intention to propose the resolution and state the resolution: s249L(1)(c)

o If a member is entitled to a proxy (representative), a statementsetting out their rights to a proxy: s249L(1)(d)

Alteration will thus bind ALL members even if they opposed the special resolution

Repeal may result in the replaceable rules becoming applicable to thecompany

It may also result in the breach of separate contracts made on the previous terms of the constitution: Bailey v New South Wales Medical Defence United Ltd

Bailey v New South Wales Medical Defence United Ltd[1995]

RESTRICTIONS ON ALTERATIONS

FACTS: it involved a claim by B against the NSWMDU which providedhis professional indemnity insurance in regards to a negligence claim re: treatment given to patient. B passed away. In the meantime, the NSWMDU has been changed. A special clause was inserted: clause 6 provided that after applying for membership and paying the entrance fee, an applicant is entitled to benefit of indemnity and assistance from the date of payment until the date of becoming a member or until notification of membership wasrejected. Members voted to reduce the amount of insurance cover.

Issue: whether B could enforce the insurance – whether the contract was a limited statutory contract or a special contract. If the contract is under s140, then it cannot be altered as it does not breach s140(2) therefore B should be able to recover under the original contract.

Because clause 6 purported to give rights to applicant who were not members, the entire relationship couldn’t be governed by the s140 contract. It was governed by a


A company cannot be so deprived of its statutory power to alter its constitution by contracting that it will not change its constitution.

However, the CA and the common law impose certain restrictions on rights to alter constitution, which seek to protect the individual members and ensure that those who voted in favour of the special resolution do not abuse their powers, they include:

Under the Corporations Act :

o Entrenching provisions: a company’s constitution may contain provisions that restrict the company’s ability to modify or repeal its constitution by imposing further requirements in addition to a special resolution – i.e. something else is required: s136(3)

E.g. further requirements include a greater majority than75% and obtaining the consent of a particular person A founder of a company may wish to ensure they retain

control after its formation – the constitution of such a company could contain an entrenching provision that confers weighted voting rights on a particular person or the holder of a particular classof shares

o Section 140(2): A member is not bound by a modification of the constitution made after becoming a member so far as the modification:

Requires the member to take up additional shares; or Increases the member’s ability to contribute to the share

capital of, or otherwise to pay money to, the company; or Imposes or increases a restriction on the right to

transfer the shares already held by the member

NOTE: A member is bound by such a modification to the constitution only where this is agreed to in writing.

Gambotto v WCP Ltd[1995] S140(2)

FACTS: After a successful takeover bid of WCP, the bidder acquired over 99% of its share capital and sought to alter the company’s constitution so as to allow any member entitled to over 90% of the issued shares to compulsorily acquire other issued shares. This alteration was justified by the bidder on the grounds of the potential taxation and administrative cost savings.

Held that the predecessor of s140(2) did not apply to an alteration of a company’s constitution that forced minority


o Modifications which are oppressive or unfairly prejudicial to members : s232 (see lecture 9)

o Variation of class rights (lecture 10)

Under common law:

o Modifications that offend the equitable limitation on majoritys/hers: Gambotto c ase (Lecture 9)

THE CORPORATE ORGANS

Companies must have directors and members There are two organs involved in corporate decision making:

o The board of directors; and o General meeting of members

Each of these two has the power to make particular decisions as determined by: Corporations Act The company’s constitution (internal rules) The general law ASX Listing rules

The business of the company is to be managed by or under the direction of the directors: s198A(1)

o This is a replaceable rule but companies invariably adopt it o It includes: making contracts, borrowing money, employing

people, suing in the company’s name, deciding whether to defend proceedings, issuing shares etc.

Some matters are expressly reserved to the general meeting by the Act:

o E.g. altering constitution: s136; removing a director in a public company: s203D (this is a replaceable rule in private


companies: s203C

A. THE BOARD

GENERAL RULE the business of the company is to be managed by or under the direction of the directors: s198A(1)

o This includes the power to make contracts, borrow money, employpeople, sue in the company’s name, issue shares under s124(1)

The directors’ decision making powers extends to all things not expressly reserved to members by CA or the constitution: s198A(2)

They also have the power to delegate its powers to either committee: s198D or appoint a managing director: s198C

Who is a director?

A director is: s9o (A) A person who (i.) is appointed to the position of director;

or (ii.) is appointed to the position of an alternate director and is acting in that capacity

o (B) Unless contrary intention appears, a person who is not validly appointed as a director is also regarded as a director if:

They act in the position of a director (“de facto director”); or

The directors are accustomed to act in accordance with the person’s instructions or wishes (“shadow director”)

Type of Directors

Types of directors include managing, chair, executive, non executive, alternate, nominee, de facto and shadow

o De facto : persons who act in the position of a director even though they have not been appointed to that position: s9

Necessary condition of acting as a director is that the person exercised top level management functions

In a small company where a person has acted as the company in relation to important matters

In a large company many important matters are delegated to employees and the exercise of such


discretions does not necessarily indicate that the person is a director + important to consider how the person claimed to be a director is perceived byoutsiders who deal with the company where the person has been held out to be a director

May be regarded as a de facto director if the person is the driving force behind the company business despite nothaving been appointed to that position, or continues to participate in the management of the company after the expiration of the term of appointment as a director as ifstill a director: Corporate Affairs Commission v Drysdale

o Shadow directors: persons whose instructions or wishes are customarily followed by the directors of a company

A person is not regarded as a director merely because thedirectors act on advice given by the person in performance of the functions attaching to the person’s professional capacity, or the person’s business relationship with the directors

A body corporate can be a shadow director: Standard Chartered Bank of Australia Ltd v Antico

o Managing directors: are put in charge of managing the company’sdaily business

The replaceable rules allow the directors to appoint one or more of themselves to the office of managing director:s201J

A managing director may be conferred with any of the powers that the directors can exercise: s198C

The board may delegate any powers of the board to the managing director: s198C

Managing directors usually manage the daily business of acompany, however, important matters are reserved to the board: Shirlaw v Southern Foundaries (e.g. dividend declaration)

o Chair: The CA and replaceable rules provide that the directors

may appoint a director to chair directors’ meetings: s248E


An individual may be elected by the directors to chair meetings of the company’s members: s249U

Minutes must be signed by the chair of the meeting or thechair of the next meeting: s251A(2)

The chair has a casting vote at directors’ meetings: s248G(2)

JOB Exercises procedural control over a meeting including nominating who to speak, dealing with the orderof business, putting questions to the meeting, declaring resolutions to be carried or defeated, asking for generalbusiness and closing the meeting: Kelly v Wolstenholme

Ensures the board is properly informed, is familiar with the financial background of the company and is properly meeting its supervisory duties : AWA v Daniels, ASIC v Rich

Where no chair is appointed – there is no valid meeting at which resolutions can passed (unless those present areunanimous): Colardo Construction v Platus

o Executive and non executive directors: Executive directors – full time employees of the company

JOB take part in the daily management of the company’s business

Non executive directors – part time involvement in the company and participate in board meetings

JOB bring independent view and judgment to boardmeetings (they are people with special skills)

o Alternate directors: A director may, with the approval of other directors,

appoint an alternate to exercise some or all of the directors’ powers: s201K(1) – e.g. where director is unable to attend board meetings or exercise powers as a director

ASIC must be given notice of the appointment and termination of appointment of an alternate director: s205(B)(2), (5)

Where an alternate director exercises a director’s powers, this exercise of powers is as effective as if exercised by the directors: s201K(3)


o Nominee directors: A director is sometimes appointed to represent the

interests of a particular shareholder or creditor on the board of directors

Appointment of Directors

NOTE: A proprietary company requires at least 1 director and a public company requires at least 3 directors: s201A

Where the number of validly appointed directors falls below the minimum numbers, purported acts of the board such as passing resolutions, are invalid. But the court may validate such an irregularity under s1322(4): Gosford Christian School Ltd v Totonjian

Who may be appointed?

Persons under the age of 18 years old cannot be appointed as directors: s201B(1)

A director cannot be a body corporate but must be a natural person Ordinarily reside in Australia – 2 directors of a public company and

1 director of a proprietary company: s201A(1), (2) Can’t be the auditor of the company, must not have been the auditor

or a member of the audit firm for at least 2 years: s324C A director must consent in writing to being appointed to the position

INITIAL APPOINTMENT The application for registration of a new company must set out the name, address, date and place of birth of each person who consents in writing to become a director: s117(2)(d),(f)

o A company must lodge a notice with ASIC in the prescribed form,of the personal details of the new directors within 28 days after they are appointed: s205B(1)

It must include the director’s name, address, date and place of birth: s205B(3)

o Must lodge notices with ASIC within 28 days if a director’s personal details change or a person stops being a director: s205B(4), (5)


SUBSEQUENT APPOINTMEN T a company may appoint a person as a director by resolution passed in general meeting: s201G (replaceable rule) shareholders appointing directors

o A person who has consented to be a candidate for election as a director cannot withdraw their candidacy between the commencement of the ballot and the declaration of the result: Hedges v New South Wales Harness Racing Club Ltd

o In the case of public companies, where appointment of directorsis by the general meeting, each director must be individually appointed by separate resolution: s201E

More than 1 director may be appointed by a single resolution if the general meeting has first unanimously agreed to a resolution to that effect: s201E(1)

The replaceable rule in s201H make provision for the directors to appoint other directors to fill a casual vacancy

o A casual vacancy = any vacancy in the office of director arising otherwise than by retirement at the end of the term (e.g. if a director dies, resigns or unable to continue to act as director)

For proprietary company: the appointment of a director bythe other directors must be confirmed by resolution within 2 months after the appointment is made: s201H(2)

For public company: the appointment by the directors mustbe confirmed by the members at the company’s next annual general meeting: s201H(3)

Note these are replaceable rules - so companies may choose the methods for appointment

All appointments must be notified to ASIC: s 205B because you might want to do credit checks on directors, might want them to sign guarantees

Special rules for listed companies: o There must be board election every year o No director (apart from Managing Director) is to hold office

for more than 3 years without submitting for re-election o Directors appointed to casual vacancies must stand for election

at next AGM: LR 14.4

Terms of appointment of directors


The Act does not specify term but the constitution will usually specify:

o For proprietary companies: may be indefinite o Public companies: usually a system for retirement of directors

by rotation at AGMs, although usually can offer for re-election

Ceasing to be a Director

There are various ways one ceases to be a director: o Resignation: s 203A (notice in writing)

A director of a company may resign as director of the company by giving a written notice of resignation to the company at its registered office

o Retirement: at end of termo Removal

A proprietary company can remove a director only if they are given that right in the replaceable rules or constitution

Shareholders by resolution to remove a director from office and appoint another person as director by resolution: s203C

If the replaceable rule applies, a resolution of the board of directors to remove a director from office will be ineffective: BI Constructions Pty Ltd v Shad

A director of a public company can be removed by resolution in a general meeting: s203D

Notice to remove a director must be given to the company at least 2 months before the meeting is to be held: s203D(2)

A copy of the notice must also be given to the director concerned who is given the right to put their case to members: s203D(3),(4)

Section 203E : no removal by directors – directors can’t remove directors

o Disqualification (Part 2D.6)

Disqualifi cation from managing a corporation


Part 2D.6 of the Act contains a number of provisions under which a person may be disqualified from managing corporations.

A. Automatic Disqualifications S206B automatically disqualifies a person from managing corporations

if the person: o Is convicted of a serious criminal offences that: s206B(1)

Concern the making of decisions that affect the business of the corporation or concern an act that has the capacity to affect significantly the corporation’s financial standing: s206B(1)(a)

Are a contravention of the Corp Act that is punishable byimprisonment for 12+ months or other offence involving dishonesty that is punishable by imprisonment for at least 3 months: s206B(1)(b)

Is convicted of an offence against the law of a foreign country that is punishable by imprisonment for a period >12 months: s206B(1)(c)

If the person is imprisoned, the period of disqualification is FIVE YEARS from their release from prison. If the person did not serve a termof imprisonment, the period of disqualification is FIVE YEARS from the date of conviction: s206B(2)

ASIC may apply to the court before the expiration of the first year of automatic disqualification to EXTEND the disqualification period for up to a further 15 years: s206BA

o Becomes bankrupt: s206B(3)

o Is disqualified, under an order made by a court of a foreign jurisdiction that is in force, from being a director of a foreign company: s206B(6)

B. Court power of disqualification The court also has the power to disqualify a person from managing

corporations: o For contravention of a civil penalty provision: s206C

Applications for a disqualification order under s206C canonly be made by ASIC

The court must be satisfied that a disqualification orderis justified the court will have regard to the


person’s conduct in relation to the management, business or property of any corporation and nay other matters considered appropriate

NO FIXED duration of disqualification – it’s for a periodthat the court considers appropriate – factors that lead to the longest period of disqualification: Re HIH Insurance Ltd; ASIC v Alder

Large financial losses High likelihood that the D will continue to engage

in similar conduct The activities were undertaken in areas where there

was potential to cause great harm Lack of contrition or remorse Disregard of the law Dishonesty and an intention to defraud Previous contraventions

o If the person was an officer of 2 or more failed companies: s206D

Gives the court the power to disqualify a person from managing corporations for up to 20 years, IF within the last 7 years, the person has been an officer of 2 or morefailed companies + court is satisfied that the manner in which the corporation was managed was responsible for it failing

Application for a disqualification order under s206D mustonly be made by ASIC

S206D(2): a corporation is regarded as having failed if e.g. it is compulsorily wound up on grounds of its insolvency or it enters voluntary administration and its creditors are unlikely to be fully paid

Court must be satisfied that a disqualification is justified

o If the person repeatedly contravened the Act: s206E Gives the court the power to disqualify a person from

managing corporations if the person has at least TWICE: Been an offier of a body corporate that as

contravened the Act and each time the person failed


to take reasonable steps to prevent the contravention; or

Contravened the Act while he was an officer Application can only be made by ASIC No fixed duration of disqualification – what the court

considers appropriate

o If the person has been disqualified from managing corporations under the law of a foreign jurisdiction: s206EAA(1)

C. ASIC disqualification ASIC has the power to disqualify a person from managing corporations

if the person was an officer of 2 or more companies that became insolvent: s206F

o ASIC must give the person a “show cause” notice requiring the person to demonstrate why they should not be disqualified and an opportunity to be heard on the question: s206F(1)(b)

o If ASIC disqualifies a person, it must serve a notice on the person advising him of the disqualification which takes effect from the time the notice is served

o S206F proceedings do not require ASIC to apply to the court fora disqualification order

A person who is disqualified from managing corporations under Pt 2D.6 may only be appointed as a director of a company if the appointment is made with ASIC’s permission under s206F(5) or with court leave granted under s206G: s201B(2)

Purpose of disqualification provisions disqualification aims to: Rich v ASIC

o Protect a company’s shareholders against further abuse o Punish an offender o Generally deter improper behavior

Person who acts in breach of disqualification order commits an offence: s 206A (fined $5,500 and/or I years’ jail); may also be personally liable for company’s debts: s 588Z

DECISION MAKING OF THE BOARD

Board makes decisions collectively


s248G (RR): A resolution of the directors must be passed by a majority of the votes cast by directors entitled to vote on the resolution; chair has casting vote

s 248A (RR): decision may also be made by "circulating resolution“ – allows resolution to be passed without an actual meeting if all directors sign resolution

S 248B (RR): special rule for one director companies – sign a minute! Minutes of meetings must be kept, as well as resolutions passed

without a meeting: s 251A

How are meetings called?

s248C (RR): by a director giving ‘reasonable notice’ individually to every other director

o Directors must receive notice of board meetings: Petsch v Kennedy o The notice must contain a clear and full summary of the

business to be dealt with to enable recipients of notice to decide whether they should attend: Devereaux Holdings Pty Ltd v Pelsart Resources NL

In Jenashare Pty Ltd v Lemrib Pty Ltd: the proceedings of a boardmeeting were void because the notice of meeting made no mention of business considered by the meeting

s248D (RR): permits a directors’ meeting to be called or held using any technology consented to by the directors

How are meetings managed?

s248E (RR): directors may elect a chair s248F (RR): Unless the directors determine otherwise, the quorum for

a directors' meeting is 2 directors and the quorum must be present atall times during the meeting

o Quorum = the minimum number of directors required for a valid meeting

Irregularities: refer to s 1322

Procedural irregularities: presumed no effect unless substantial injustice caused. Interested person can apply for validation.

DIRECTORS’ RIGHT TO INFORMATION


A director has the statutory right to inspect the financial records of the company at all reasonable times: s290

They have a common law right to inspect company documents or access to company information

s198F : right of access by directors to company books (other than its financial records)in certain circumstances, introduced by CLERP Act (2004)- CLERP 9

REMUNERATION

Directors are not entitled to receive any remuneration from the company unless this is specifically permitted by the shareholders, the replaceable rules or the company’s constitution: Re George Newman & Co

The replaceable rule states that directors are to be paid the remuneration that the company determines by resolution: s202A

Members may obtain information about the directors’ remuneration o Accounting standards require details of directors’ remuneration

to be disclosed in the company’s annual financial report Unlisted companies details of remuneration and other

benefits paid to directors and other key management personnel must be set out in the financial statements of public companies and large proprietary companies: s296(1)

Listed companies as well as complying with the remuneration disclosures, the annual directors’ reports of listed companies must provide details of contracts to which directors are a party or under which directors are entitled to a benefit: s300(11)

B. GENERAL MEETING OF SHAREHOLDERS

Must ensure that: o that sufficient notice is given so that people can decide

whether to attend; o that sufficient information is provided as the basis for

decisions; and o that fair voting procedures exist.

Powers of the General Meeting under the Act: o Appointment/removal of directors: s 203C (Pty Cos – RR)/203D

(Public Cos)


o Alterations of the constitution (s 136) o Consolidating or subdividing company’s shares (s 254H) o Reducing the company’s issued share capital (ss 256B and 256C) o Altering rights attached to shares: Pt 2F.2 o Altering company’s status: Pt 2B.7 o elective buy-backs or buy-backs exceeding the 10/12 limit: s

257C o Certain management decisions where there is a conflict of

interests: Pt 2D.2, Ch 2E o Winding up the company (other than in insolvency)

Decisions are made by simple majority of votes (ordinary resolution -common law notion, not defined in statute) o Special resolution s9 (to protect minorities) 75% of votes

(notice as stipulated in s249L(c) is required) Voting by way of show of hands or a poll: s250L or written

resolution: s249A s249X - can appoint a proxy

o Voting may be informal if all agree: Re Express Engineering Works Ltd, Re Duomatic

However, if a member is excluded from a meeting then an informal vote will not be allowed (even if that member is not entitled to vote): Re Compaction Systems Pty Ltd

S1322 may make the informal resolution valid if there is noprejudice note: this rule may not apply where there is astatutory requirement to hold a meeting: Bodikian v Sproule

A number of matters are expressly reserved for the general meeting: o Altering the constitution: s136o Reducing capital: s256B, 256Co Altering company status and removing a director in a public

company: s203D

Types of Meetings Annual General Meetings public companies MUST hold an annual

general meeting (AGM)o The first must be held within 18 months after its registration:

s250N(1)


o Thereafter, an AGM must be held at least once every year and within 5 months after the end of a company’s financial year: s250N(2)

o Default in holding an AGM is an offence of strict liability: s250N(2A)

o NOTE: a public company that has only one shareholder is not required to hold an AGM: s250N(4) + proprietary company does not require to hold an AGM unless their constitution requires it

A company may apply to ASIC for an extension of the period within which an AGM must be held: s250P(1)

Application must be made before the expiration of time during which the AGM was required to be held: s250P(2)

ASIC may extend the time for holding the AGM for a specified period and may impose conditions: s250P(2), (4)

An extension will only be granted if, on balance, there is good cause to postpone an important right of shareholders to expect that an AGM will be held within the required time: Exicom Ltd v Futuris Corp Ltd

o The Board and auditors must be present at AGMo Annual reports must be made at AGM (public and large

proprietary). Listed companies must prepare half yearly financial reports: s302

Small proprietary are exempt, unless 5% of shareholders request it or ASIC directs it ss293-4

A meeting may be called by:o A director: s249C

An individual director of a listed Australian company hasthe right to call a shareholders’ meeting despite anything in the company’s constitution to the contrary: s249CA

o Director at request of shareholders holding at least 5% of thevoting shares or at least 100 shareholders who are entitled tovote at the general meeting: s249D(1)

NOTE: The regulations may prescribe a different number: s249D(1)(A)


The request must state any resolution to be proposed at the meeting and must be signed by the shareholders makingthe request: s249D(2)

Director must call the meeting within 21 days after the request is given to the company + the meeting must be held not later than 2 months after the request: s249D(5)

o Members if directors don’t comply with the 21 days request: shareholders holding more than 50% of the votes of all shareholders who made the request may call and arrange to hold a general meeting: s249E(1)

The meeting must be held within 3 months after the request is given to the company: s249E(2)

Directors may validly refuse to call a meeting requested by shareholdersif its sole purpose is to pass a resolution that interferes with the directors’ exclusive power to manage the company’s business: NRMA v Parker

NRMA v Parker[1986] WHERE DIRECTORS MAY REFUSE TO CALL MEETING

o By court order: s249G The court has power to order that a meeting be called if

it is impracticable to call a meeting in any other way: Re Totex-Adon Pty Ltd

The application may be made by any director or shareholder entitled to vote

Re Tortex-Adon Pty Ltd [1980]COURT ORDER MEETING

FACTS: A member requested the calling of a general meeting. The proposed resolution purported to direct the board over a matter that NRMA’s constitution exclusively vested in the directors

The directors were entitled to refuse to act on the request as

Held: it was impracticable to call a meeting because one of the two shareholders entitled to vote at meetings refused to co-operate in calling a meeting

It was ordered that a meeting be called and that the presence ofone shareholder holding voting shares would constitute a quorum


NOTICE OF MEETING

Shareholders must be given written notice of a forthcoming meeting o Failure to give notice is a procedural irregularity – it does

not invalidate a meeting unless substantial injustice is caused: s1322

o Notice of at least 21 days must be given of a meeting: s249H (note: the company’s constitution may specify a longer minimum period of notice)

Notice of the intention to move a resolution to remove a director or auditor must be given to the company at least 2 months before the meeting is to be held: s203D, 329

o HOWEVER if the company calls a meeting after the notice of intention is given, the resolution may be passed even though the meeting is held less than 2 months after the notice is given: ss203D(2), 329(1A)

Who must receive notice?

Written notice must be given individually to EACH shareholder entitled to vote and to each director: s249J(1)

o Notice to joint shareholders must be given to the joint shareholder named first in the register of shareholders: s249J(2)

Notice may be given personally, by post, fax or by electronic means (e.g. email) or any other means permitted by the company’s constitution: s249J(3)

o Notice by post is taken to be given 3 days after posting o Notice by fax or email is taken to be given on the business day

after it is sent

Shorter notice

A company may call a meeting on shorter notice than 21 days if it obtains shareholder approval to do so:


o If the meeting is an AGM all shareholders entitled to attendand vote at the AGM must agree to the shorter notice beforehand

o Other general meetings the holders of at least 95% if votes must agree beforehand

NOTE: shorter notice is NOT ALLOWED where the meeting is to consider a resolution to remove a director or appoint a replacement: s249H(3) + it is also not allowed where the meeting is to consider a resolution to remove an auditor: s249H(4)

Content of notice

A notice of meeting of shareholders must include specified information under s249L including:

o place, date, time of meeting and the technology used to facilitate a meeting that is to be held at 2 or more places

o the general nature of the meeting’s businesso the intention to propose a stated special resolution o if a shareholder has right to appoint a proxy

SHAREHOLDER INTERFERENCE A shareholder cannot interfere with board management or give the

board instructions: One organ of a company cannot interfere with the workings of another organ: Automatic Self Cleaning Filter Syndicate v Cuningham

Automatic Self- Cleansing Filter Syndicate Co v Cunninghame[1906] SHAREHOLDERS CANNOT OVERRIDE MANAGEMENT DECISIONS

FACTS: The directors of a company were ordered by a general meeting to sell the company’s property. The directors refused to do this, relying ona provision in the constitution similar to s198A. The members argued thatthe constitution was subject to the overriding rule that the directors, as agents of the company, were obliged to follow the instructions of their principal, the company.

Held that the directions of the general meeting was a nullity that


John Shaw & Sons Ltd v SHaw[1935] SHAREHOLDERS CANNOT OVERRIDE MANAGEMENT DECISIONS

Reserve/residual power of the shareholders: s195 Reserve powers can be exercised by the general meeting where the

decision would normally be a management matter, where the board is unable to act (e.g. where the board is deadlocked or incapable of exercising power – i.e. if there is a lack of quorum).

then the shareholders may have residual power to make that decision.o HOWEVER, this power is quite restrained. If the general meeting has

the power to appoint additional directors then this should be the method undertaken: Massey v Wales

o If the constitution provides for a method of breaking the deadlock, then the power will not revert to the general meeting.

In a public company S203D provides a procedure for breaking the deadlock, so power will not revert to the general meeting.

o Directors may pass a special resolution to alter the articles underS136(2)

This principle was applied to prevent the general meeting attempting to override a decision of the board to bring legal actions against some of the directors.

Held that the board of directors was properly exercising the powers of management vested in it by the constitution and the general meeting could not usurp this power


Lecture 5: Corporate Contracting

Companies are in same position as individuals in making contracts o S124 : companies have legal capacity to contract as a natural

person, with additional powers to: Issue shares Grant a floating charge or security interest over a

circulating asseto S124(2) A company’s capacity is unaffected by the act if it is not

in the company’s interest to do that thing A company can state their objects and limit contracting powers: s125o S125(1) The constitution may place limits on powers and objects,

however, acting outside these limits will not invalidate as against3rd parties

HOWEVER if limits are breached then it does not render the contact void, a contract is not invalidated because of inconsistency with an objects clause: s125(2) --> it may be enforceable by outsiders against the company!

it will be a matter of internal management (i.e. up to the company to take actions against the directors that have caused the company to act outside its objects – for breach its duties, breach of their employment)


Cf. historically, they were limited to what they do by their objects clause(the memorandum – all the things they could do)

Back then Under the law, if the company enters into a contract that was outside the company’s powers then they could plead ultra vire and escape their contractual liability. In addition to this, there was the doctrine ofconstructive notice which meant that there was certain information of the company e.g. objects of the company, even if outsiders of the company didn’t actually do a company search, and find out what the company’s powerswere, they were fixed with that knowledge of limitation of power. - it puts companies in a special position when it comes to contracting.

TODAY HOWEVER, companies are in much the same position as individuals.

Implied Intentions Implied limitations may be found in ‘the general intention and common

understanding of the incorporators, and may give rise to winding upon ‘just and equitable grounds’: s461(k) or via oppressionproceedings under Pt 2F.1

A general intention and common understanding will be found on thefollowing grounds: Strong v J Brough & Son (Strathfield) Pty Ltd

o Directors have the power to carry on the management of the companyin a wide sense (S198A), including changing the direction of thecompany – however if one can say that the substratum has gone, thena member may petition the court to wind it up, or get theirinvestment back.

o Companies tend to not stay in one locality – the nature of businesschanges.

Facts : Shareholders were seeking an injunction to preventboard meeting to consider the sale of a company’s real estatebusiness. It was argued that the members understood thecompany to only carry on a real estate business. HELD: Thatevidence was not strong enough to indicate that the businessof real estate was the sole or primary purpose of thebusiness. No injunction granted.

Contraventions of a company’s constitution may have otherconsequences even though they cannot affect the validity of thecompany’s contracts.

Allegations that the company acted contrary to its objects or otherrestrictions or prohibitions in the company’s constitution, e.g.:


o may be an element in a legal action against the directors forbreach of their duty – duty of care and skill or fiduciaryduty to act in good faith for a proper purpose (given that theconstitution defines and sets limits to the company’sinterests);

o may also be in breach of their service contract;o provide grounds for a member to seek an oppression remedy

under ss 232-233; oro allow a member to obtain an order for the winding up of the

company on the just and equitable ground: s 461(1)(k)

HOW DO COMPANIES CONTRACT?

T

here are 2 ways companies can contract:

o Directly; or o Through an agent (through a company officer) – more common

Whether it will bind the company will depend on the authority(only if it’s actual or apparent authority that the companywill be bind)


A. CONTRACTING DIRECTLY A company contracts directly if the contract is made by one of its

‘organs’, ie, the members in general meeting or the board ofdirectors (sometimes governing director and [perhaps even CEO orcommittee as delegates]

S127 A company may contract with or without a corporate seal: o WITHOUT SEAL S127(1) A company may execute without a common

seal if the document is signed by: (a) 2 directors; or (b) a director and secretary (c); or the sole director for a proprietary company

o WITH SEAL S127(2) A company may execute with a seal if thefixing of the seal is witnessed by (a)(b)(c) as above

As well as proper signing/sealing procedure, there must also beauthority for the company to enter the contract

You need substantive AND formal authority: o Substantive authority: resolution approves the company entering

into the contract o Formal authority: resolution authorises the execution of the

documents in a specified way (e.g. authorises certain people tosign the documents)

Defective contracts - What if the company denies it is bound by acontract due to some lack of authority or defect in procedures ? (YOUNEED SUBSTANTIVE AND FORMAL AUTHORITY)

[Document duly executed without seal]: s129(5)o A person may assume that a document has been duly executed by

the company if the document appears to have been signed inaccordance with subsection 127(1) . For the purposes of makingthe assumption, a person may also assume that anyone who signsthe document and states next to their signature that they arethe sole director and sole company secretary of the companyoccupies both offices.

[Document duly executed with seal]: s129(6)o A person may assume that a document has been duly executed by

the company if:


the company's common seal appears to have been fixedto the document in accordance with subsection 127(2);and

the fixing of the common seal appears to have beenwitnessed in accordance with that subsection.

o For the purposes of making the assumption, a person may alsoassume that anyone who witnesses the fixing of the common sealand states next to their signature that they are the soledirector and sole company secretary of the company occupiesboth offices.

What can an outsider do about a defect in substantive authority ?

The outsider is protected by the ‘indoor management’ rule/rule inTurquand’s case (also embodied in s 129(1)): o the outsider can assume that company acts within its

constitution and powers have been properly and duly performedand is not bound to inquire whether acts of internalmanagement have been regular

A defect in substantive authority will only render the contractunenforceable if the exceptions to the indoor management ruleapply, ie, if outsiders ‘know’ or ‘put on inquiry’ <common law>

B. CONTRACTING THROUGH AGENCY s126 - A company’s power to make, vary, ratify or discharge a

contract may be exercised by an individual acting with the company’sexpress or implied authority and on behalf of the company.

o However, a person can only bind a company if they haveauthority to contract on the company’s behalf.

The company may be bound in 3 ways: o Actual authority – express or implied o Apparent authority - the company has previously held out the

individual as an agent o Ratification – the company subsequently ratifies the conduct of

someone who presumed to act as an agent for the company

Actual authority

If a person has actual authority, the company is BOUND


May be express or implied actual authority o Actual authority from a provision of the CA, e.g. 198A or

the company’s constitution

If an agent no express authority, or exceeds their express authority,the company may still be bound if the outsider can show that the agenthas either IMPLIED actually authority or APPARENT authority and the‘indoor management rule’ does not apply.

o Implied authority I. It can also arise when an agent is appointed to carry out

certain tasks – authority will be to do whatever isnecessary or incidental to perform those tasks(“incidental authority”)

II. Appointment to a position of a standard kind grantsauthority to do things usually performed by a person inthat position (“usual authority”) Directors and company secretary have customary/usual

authority for their position: ss129(2), (3)

Managing directors

Have the usual authority to deal with everyday matters, supervise thedaily running of the company, supervise other managers, and be incharge of the business of a company: Entwells v National and GeneralInsurance Co

o Borrowing money to deal with cash flow problems is within thescope of the everyday running of the company, however cannotborrow for capital purposes: Green v Meltzer

o They have the authority to authorize agents to make contractsof the kind a managing director can make: Crabtree Vickers

Do not have authority to enter into transactions which are not in theeveryday running of the business: Re Tummons

The court will look at what is usual for a CEO for a company of asimilar size carrying similar activities to the company in question

o Note : Where company has more than 1 director, a director,acting alone, has no implied actual authority to bind thecompany in contracts: Hely Hutchinson; Northside Developments Pty Ltdv Registrar-General

Individual Directors


Their only power is to join with other directors to make decisions They have no usual authority to bind the company: Northside

Developmentso In the absense of actual authority from the board, they do not

have individual authority to take action on behalf of thecompany

o The chairperson has no usual authority to bind the company:State Bank of Victoria v Parry

Company Secretary

S188 Keeps records and ensures that the company performs theirstatutory duties

Previously had limited authority (viewed as a mere clerk) but now hasusual authority to make contracts to do with the administrative (notmanagement) side of the business: Panorama Developments, Donato v LegionCabs

Other Agents

Involves a question of fact, when the court is approaching thequestion of authority, they will draw on commercial practice todetermine usual activities of persons in these positions

III. Can also arise from other conducts – i.e. acquiescence o If the board knows that someone is purporting to

represent the company, and does nothing to stopthat, then the board has ‘acquiesced’

o If the person has been doing ‘CEO type’ things, thenthey will probably have the implied actual authorityof a CEO in a similar company: Hely Hutchins; Brick andPipe case

Acquiescence: if a particular officer of the company is behaving in aparticular way (i.e. purporting to represent the company – tellingpeople that they are CEO/managing director of the company and they’renot and the board does nothing to stop them then the board creates anestoppel where the board is estopped from denying that the board has‘acquiesced’ in that person’s conduct.


o Brick and Pipe case : Brick and Pipe was a company that was part ofthe GoldBurke group of companies. BP has given an indemnity inrelation to a loan that was for $300M given by Oxydental life(financier) to another company in the GoldBurke group. Theindemnity document was signed by Mr G and his son in law (MrFurst) The GoldBurke group of company collapsed ultimately andOxydental life sought to enforce the indemnity against theBrick and Pipe company forcing them to enforce the guarantee.Brick and Pipe argued that they weren’t bound by the companyof contract of indemnity because it was an authorised document(wrong people signed it – lack of substantive authority)

Held : Mr G, even though he was only the director ofBrick and Pipe, he treated the GoldBurke company as hiscompanies and he behaved as managing director of thiscompany even though he hasn’t been formally appointed tothat position with the acquiescence of the board. On thebasis of him being a de facto managing director, Brickand Pipe was bound by the indemnity guarantee andOxyDental Life can enforce it.

<the board knew that he was acting as if he was the managing director butfails to stop him from doing this therefore contract can be enforced>

Apparent authority

can arise even where the principal has not actually authorised, bywords or conduct, the agent to act on the principal’s behalf

3 conditions which must be satisfied before a contract can be enforcedagainst a company where the purported agent did not have actual authority:Diplock LJ in Freeman & Lockyer v Buckhurst Properties (Mangal) Ltd

1. A holding out or representation (can be words or conduct) must have beenmade that the agent had authority to enter into a contract on behalf ofthe company

2. The representation must have been made by a person with actual authority– usually by the board

3. The contractor must have been induced by the representation to enter thecontract – reliance by the outsider

Freeman & Lockyer v Buckhurst Properties[1964] APPARENT AUTHORITY

FACTS: A company was set up to develop property – however it was contemplated that MD was never formally appointed. However K acted as one, and contracted with architects to draw plans. The relationship deteriorated and one party did not want to pay so argued that the companywas never bound as K was not an agent.


Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd [1975]APPARENT AUTHORITY

Pacific Carriers Ltd v BNP Paribas [2004] APPARENT AUTHORITY

Ratification Ratification by the company will bind the company to the contract

o Is performed by the board of the company or someone withauthority under S126

o may be by ordinary resolution of the General meeting o Must occur within a reasonable time

FACTS: A company was set up to develop property – however it was contemplated that MD was never formally appointed. However K acted as one, and contracted with architects to draw plans. The relationship deteriorated and one party did not want to pay so argued that the companywas never bound as K was not an agent.

FACTS: There was a two member board of a family company, with thethird family member acting as an employee. The board decided to buyoffice equipment however all board members had to agree to purchase.One family member told the third member to get office equipment sopurchased equipment using the board members order book. The companyattempted to exit the purchase contract by stating that the thirdperson to order was not an agent.

there was no apparent authority present – as the family member

FACTS: Concerned Mrs Dhiri (bank officer), who was manager of adepartment of the bank, she signed 2 letters of indemnity which wereaddressed to the charter of a cargo ship and fixed a special stamp tothe letters. Under these letters of indemnity, the bank in which shewas employed, agreed to indemnify the ship charterer in respect of anyloss the charterer might sustain as a result of delivering cargowithout proper documentation produced by the receiver of the cargo.And when the cargo was delivered without proper documents beingproduced, the ship charterer sued the banker under the letters ofindemnity and bank sought to not enforce the contract. Their defencewas that they’re not liable because Mrs D lacked the authority to bindthe bank.


If the company is in liquidation, the liquidator has power to ratify:Alexander Ward v Samyang Navigation Co Ltd

Binding the Company in Absence of Actual Authority

Indoor Management Rule

If s128 and 129 do not apply, then the common law rule applies. AT COMMON LAW Before the doctrine of ostensible authority, common

law deployed the ‘indoor management rule’, otherwise known as therule in Turquand’s case.

Third parties dealing with the company are entitled to assume thatinternal procedures have been complied with: Royal British Bank v Turquard

o A loan agreement had company seal affixed – however as per theconstitution the company was required to have a shareholderresolution. Despite the fact that the resolution had not takenplace, it was considered to be an internal matter and thereforethird parties could assume that it had been properly executed.

Rule continues to apply where Ss128 – 129 does not apply (relevant tointerpretation of S129(1).

However, IF there's actual knowledge that the company/person lackauthority OR there’s something in the transaction that should’vealerted them to inquiry, you cannot rely on the indoor managementrule: Northside Developments

o INQUIRY Has the outsider failed to make inquiries that wouldusually be made by someone in their position, or

o Would a reasonable person in the outsider’s position have beenput on inquiry and investigated?

FACTS: Contract for mortgage was granted over property.The mortgage was under seal, but it was not affixedproperly as the board had not given resolution, nor hadit been properly witnessed. HELD: That the bank was puton notice as the money was being distributed to othercompanies (not in line with terms of properly sealedmortgage) – therefore the indoor management rule did notapply.

If a party is put on inquiry by the circumstances surrounding thetransaction he cannot presume in his own favour that things arerightly done: Morris v Kansen


NOTE : Indoor management rule is onerous on the person attempting torely.

Assumptions

Sections 128 and 129 overlap to large extent with common law agency principles and the indoor management rule

Section 129(1) contains a statutory indoor management rule: co’s constitution and/or RR have been complied with

Section 129(2) contains an assumption about the authority of certain officers: Implied authority

Section 129(3) contains an assumption about apparent authority

Section 129(4) contains an assumption that agents and co officers properly perform their duties to the co

Sections129(5) and (6) – see earlier slides

Section 129 (7) contains an assumption about authority of co officer who issues a document warranting that the document is genuine or a true copy

Corporate Law Notes

Documents