ESSAY QUESTION EXAMPLE
Companies cannot make decisions themselves. This function is divided
between organs of the company: members and directors. How is decisionmaking normally divided between directors and members? What are the
types of members’ meetings? Who calls a members’ meeting? Explain the
difference between a meeting convened under s 249D and a meeting
convened under s 249F. Explain the notice requirements for a members’
meeting. Explain the difference between an ordinary resolution and a
special resolution. Give an example of a members’ meeting not being held
for a proper purpose, and cite a case.
Answer: A fundamental principle of corporate law is the concept of the separation
between ownership and management. The members of the company are traditionally
seen as the owners and the company is managed by the directors. Unless the
constitution provides otherwise, members have no right to interfere in the management
of the company (except in very limited circumstances). This concept is reflected in
s 198A of the Corporations Act 2001 (Cth) (a replaceable rule), which gives the
directors broad powers and discretion to manage the company. See In the seminal
case of Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906] 2 Ch 34
and NRMA Ltd v Parker (1986) 6 NSWLR 517. [LO 6.1.3]
Answer:
• Annual general meeting: public companies only must hold AGM:s250N.
• General meeting: any members’ meeting that is not an AGM is a general
meeting or extraordinary general meeting (EGM).
• Class meetings: s246B.
Any of these members’ meetings may need to be adjourned, for examples, if the
members vote by a majority to direct the chair of the meeting to adjourn: s249U.
[LO 6.2.1]
Answer:
• Directors – any director can call a members’ meeting: s249C & CA.
• Shareholders’ request – the directors of a company must call and arrange a
meeting on the request of members holding 5 per cent of the voting shares. The
request must be in writing and state the resolutions which the members
propose: s249D.
• Shareholders – shareholders with 5 per cent of the vote can call a meeting
without first requesting the directors to call a meeting. The shareholders are
liable for the costs of such a meeting: s249F.
• Court. A court can order a meeting: s249G.
[LO 6.2.2]
Answer: S 249D provides that the board must convene a meeting of members when
requested to do so by members with at least 5% of the voting power; whereas under
s 249F members holding at last 5% of the voting power may convene a meeting
themselves and at their own expense. [LO 6.2.2]
Answer: S 249L requires that the notice set out:
• the place, date and time for the meeting;
• the general nature of the meeting’s business;
• details of any special resolution proposed; and
• information regarding the appointment of proxies.
S 250R provides that the business of an AGM may include the following even if not
referred to in the notice of meeting:
• approving the financial report, directors report and auditors report;
• electing of directors;
• appointing the auditor; ad fixing the auditor’s remuneration.
[LO 6.2]
Answer: An ordinary resolution is passed by more than 50% of those members
present (in person or by proxy) and voting on the resolution. A special resolution
requires the votes of at least 75% of those present and voting. See s9 & s249L. [LO
6.2.3]
Answer: See s 249Q that requires that a meeting of members must be held for a
proper purpose.
Proper purpose, for example, the purpose of the meeting is to vote on some matter
which would amount to interference with management decisions, it is improper for
members to vote on it: see Automatic Self-Cleansing Filter Syndicate Co v
Cunninghame [1906] 2 Ch34.
For example, a meeting requisitioned to consider resolutions to remove and appoint
directors is for a proper purpose, whereas a resolution to undertake a share capital
reduction is a management decision and hence improper purpose: see Re Molopo
Energy Ltd; Molopo Energy Ltd v Keybridge Capital Ltd [2014] NSWSC 1864.
[LO 6.2]
SHORT-PROBLEM QUESTION EXAMPLE
The shareholders of Zedzee Pty Ltd are Sufyaan (10 shares), Shahedah (10
shares), Hilton (10 shares) and Sue (10 shares). The directors are Sufyaan
and Shahedah. Upon registration, Zedzee adopted a constitution that
replaces all the replaceable rules. Clause 10 of the constitution provides:
(10) The maximum number of directors shall be three (3).
Clause 11 of the constitution provides:
(11) Directors can remove other directors from office by majority
vote, except that Shahedah can only be removed by members’
resolution approved by 95 per cent of the members voting.
(a) Sue is dissatisfied with the way Sufyaan and Shahedah are running the
company. She wants to alter clause 10 of the constitution to say that there
can be four directors. Can she do this? If so, how?
(b) Can Sue amend the constitution to remove clause 11? If this occurred,
could Sufyaan enforce clause 11 pursuant to s 140 of the Corporations
Act?
(c) Sufyaan and Shahedah are annoyed about Sue’s plans regarding the
constitution and want to remove her as a shareholder. Could they alter
the constitution to allow the company to compulsorily acquire her shares
at a stated price?
(d) Hilton is concerned that Sue might sell her shares to a competitor. If the
competitor owned the shares, Hilton is concerned this may adversely
impact Zedzee’s business. He proposes altering the constitution to
provide that shareholders cannot sell their shares to anyone in
competition with the company. Would such an alteration be enforceable?
Answer:
(a) Sue will need to change the constitution, to do this she will need to follow the
procedure in s136 of the Corporations Act (2001) Cth, which requires a resolution
passed by 75% of members who at a general meeting and entitled to vote.
(b) Sue will need to change the constitution, to do this she will need a resolution
passed by 75% of members who at a general meeting and entitles to vote.
However, this is an example of an entrenched clause. Sometimes company
directors may not want certain parts of the constitution to ever be changed.
Section 136(3) of the Corporations Act allows the company to entrench the
clause. ‘Entrench’ means the clause cannot be changed under the process in s
136 unless an additional condition is satisfied. See sections 136(3) and (4).
Shahedah can insist that the additional procedure is followed.
(c) If a change to a company constitution involves expropriation (taking) of minority
shares, then the change must be for a proper purpose and be fair in all
circumstances: WCP v Gambotto (1995). It does not seem that Sufyaan and
Shahedah could take this course. To be able to take this course they would need
to show that the change is “for a proper purpose” and be “fair in all the
circumstances”. This is unlikely on the facts present.
(d) To be able to take this course Gus would need to show that the change is “for a
proper purpose” and be “fair in all the circumstances”. It seems there would be
good prospects of the changes being enforceable. Prevent harm to the company
from a competitor is likely to be a proper purpose and the change fair as it does
oppress any individual shareholder, i.e. the change would impact all shareholders
in a like manner. The way Sufyaan and Shahedah are operating the company, Sue is dissatisfied with them. She seeks to change clause 10 of the constitution to allow for the appointment of up to four directors. Is she capable of doing this? If so, how would you go about it?
(a) Is Sue able to amend the constitution in order to have clause 11 removed? If this were to occur, would Sufyaan be able to enforce clause 11 in accordance with section 140 of the Corporations Act?
(c) Sufyaan and Shahedah are dissatisfied with Sue’s ideas for the constitution and wish to have her removed from the board of directors as a result. Were they able to change the firm’s constitution in order to force the corporation to acquire her shares at a predetermined price?
In (d), Hilton is apprehensive that Sue may sell her stock to a competitor. If the shares were owned by a competitor, Hilton is concerned that this will have a negative influence on Zedzee’s business. He proposes that the firm’s constitution be amended to prohibit shareholders from selling their shares to anyone who is in direct competition with the enterprise. Is it possible to make such a change legally enforceable?
Answer:
(a) Sue will need to amend the constitution, and in order to do so, she will need to follow the method outlined in Section 136 of the Corporations Act (2001) Cth, which requires a resolution voted by 75% of the members present and eligible to vote at a general meeting to be valid.
The constitution must be changed by a resolution passed by 75% of the members present at a general meeting who are entitled to vote. (b) Sue will be responsible for changing the constitution.
This, on the other hand, is an example of an entrenched provision. Certain provisions of a company’s constitution may be deemed unchangeable by its directors from time to time.
The clause can be enshrined in the corporation’s charter under Section 136(3) of the Corporations Act. The term “entrench” refers to the fact that the clause cannot be altered using the process outlined in Section 136 unless an extra requirement is met. See also sections 136(3) and 136(4). (4).
Shahedah can insist that the additional procedure is followed.
If a change to a company’s constitution entails the expropriation (taking) of minority shares, the change must be justified and equitable in all circumstances: WCP v Gambotto (1995). Sufyaan and Shahedah do not appear to be in a position to pursue this line of action. They would have to demonstrate that the modification is “for a lawful purpose” and that it is “fair in all the circumstances” in order to be permitted to proceed. On the basis of the information available, this is highly implausible.
As a condition of being permitted to pursue this option, Gus would have to demonstrate that the modification is “for a proper purpose” and “fair in all the circumstances.” It appears that the adjustments have a fair chance of becoming enforceable in the future. Prevent harm to the company from a competitor is likely to be a proper purpose and the change fair as it does oppress any individual shareholder, i.e. the change would impact all shareholders in a like manner.
LONG-PROBLEM QUESTION EXAMPLE
What type of company would be best suited for the following
organisations?
(a) a charity raising funds for cancer research
(b) a major domestic soccer federation
(c) three friends who wish to start a fashion business
(d) a group of 75 people who have agreed to pool money and invest in the
stock market
(e) a mining company that wants to invest in a speculative gold mining
venture with its own funds and funds raised from the public
(f) a start-up telecommunications company that needs $1 billion for its
infrastructure and intends to raise the funds from the public.
Answer:
This chapter focuses on companies registered under the Corporations Act 2001
(Cth). Recall that chapter 1 also looked at other types of incorporated business
entities.
Companies are distinguished by being a separate legal entity. They can be classified
into various types based on the liability of the members, whether they are proprietary
or public, and their listing status. Categorised by liability, companies may be as follows.
● Companies limited by shares — such a company is formed on the basis that
the liability of members is limited to any unpaid amount on the shares they hold.
● Companies limited by guarantee — a company limited by guarantee involves
the members of the company undertaking to contribute specific amounts to the
company in the event the company is wound up. This structure is often used
for clubs and charities.
● Unlimited companies — a company in which members are liable for all debts of
the company if it is wound up. In this way, the liability of members is similar to
that of partners in a partnership. While not providing access to limited liability,
the unlimited company form can still offer the other advantages of the company
structure.
● No liability (NL) companies — these companies only operate for mining
purposes (s 112(3) of the Corporations Act). They are distinguished from
companies limited by shares in that the company cannot force shareholders to
pay outstanding amounts of unpaid or partly paid shares (the shareholder will
simply forfeit the shares).
Companies may be proprietary or public.
● Proprietary companies — these are not public companies. They are limited to
50 members and have limits on their fundraising activities.
● Public companies — any company that is not a proprietary company is a public
company.
Public companies may be listed or unlisted:
● Listed companies — a listed company is a public company that has listed its
securities for trading on a public securities exchange such as the Australian
Securities Exchange (ASX).
● Unlisted companies — these are public companies that have not listed on a
securities exchange.
(a) Company limited by guarantee. This is what these types of companies are
designed for.
(b) This could be any type of company depending on the nature of the
organisation. If it were not for profit, it could be a company limited by
guarantee. If for profit, it could be a proprietary company or a public company
depending on factors such as the number of investors.
(c) A small proprietary company. A proprietary company as one in which there are no
more than 50 members and no fund raising activity is undertaken that would require
a disclosure document under the Corporations Act. For financial years
commencing on or after 1 July 2019, the tests are:
● The consolidated revenue for the financial year of the company and any entities
it controls is $50 million or more.
● The value of the consolidated gross assets at the end of the financial year of the
company and any entities it controls is $25 million or more.
● The company and any entities it controls have 100 or more employees at the
end of the financial year.
(d) If the individuals each wanted to be shareholders, it would need to be a public
company limited by shares as a proprietary company can only have a maximum
of 50 non-employee shareholders.
(e) It could be a public company limited by shares or a proprietary company, but
looking at the characteristics set out in the questions it could also be a No
Liability company. Indeed, no liability companies were designed for mining
businesses with all the characteristics mentioned in the question. If fund raising
from the public that required a disclosure document under Ch 6D was proposed a
proprietary company would not be permissible.
(f) This would be a public company limited by shares and in all likelihood would be
listed on a stock exchange such as the ASX.