Notes on Corporate Governance: Constitution, Replaceable Rules, and Members Meetings
Constitution
The lecture begins by contextualizing the constitution of a company as the set of internal governance rules that guide how the company is run, not merely a public-facing document. On registration, a company becomes a separate legal entity capable of suing and being sued. The constitution governs internal governance and is housed in the Corporations Act, which is large and organized in chapters and sections. A key feature is that the act provides replaceable rules: certain rules that can be replaced or varied by the company’s general meeting, while some rules cannot be altered. In particular, there are mandatory provisions that cannot be replaced or excluded; these hard rules anchor the company’s core structure. The concept of replaceable rules means that the company’s internal governance can be tailored to its needs through a special resolution, but there is protection for essential attributes of corporate life, such as the requirement to be registered to operate as a company.
The constitution may be modified or repealed by a general meeting, provided a special resolution is passed under section 136(2). A special resolution requires a higher threshold (75% of votes cast). Ordinary resolutions, by contrast, require a 50% majority. The constitution is “internal” to the company, and amendments are not typically enforceable against outsiders, but they bind members and directors within the company so long as the company remains compliant with the Act, lodging documents with ASIC, and adhering to stock exchange rules. There is also the concept that, subject to restrictions in the Act, the constitution can be adapted to reflect the changing needs of the business.
Two broad kinds of meetings govern corporate life: directors’ meetings, which handle management decisions, and general meetings of shareholders. All shareholders must be notified of general meetings, and improper notification can lead to resolutions being set aside on the balance of probabilities if the missing notice caused substantial injustice. A crucial idea is that the constitution can be altered, but changes must respect limits: modifications cannot increase liabilities or restrict share transfer rights unless shareholders consent in writing. A chocolate company example is used to illustrate how a change in purpose (e.g., switching from chocolate manufacture to hunting bilbies) would be subject to member protection since such a change could alter the fundamental nature of the company and the rights of its members. Courts are protective of members in matters that involve changes in purpose or expropriation of shares.
Historically, constitutions and governance rules have evolved. In Australia, replaceable rules and the shift from “ memorandum and articles” (pre-1998) to a modern corporates-act framework (reflecting the 1998 reform and the 2001 Corporations Act) mark a transition toward clearer internal governance structures. Section 134(1) indicates that internal governance is controlled by mandatory provisions; Section 135–136 deal with how rules can be replaced and amended, including the use of special resolutions. The effect of replaceable rules is that while some provisions must be observed, others can be altered to suit the company’s needs in a way that aligns with the company’s best interests. In practice, the enforceability of constitution provisions against outsiders is limited; only members can enforce internal member rights, and directors owe fiduciary duties to the company rather than to individual shareholders in their ordinary capacity.
The lecturer emphasizes that the common-law backdrop and statutory provisions interact: a director’s change in the constitution does not necessarily change a director’s rights if they have a separate service contract. The relationship between a member and the corporation, and between directors and the company, can be complex when contracts and constitutional rights intersect. For example, if a director has a separate service contract, constitution changes may not alter the director’s contractual rights. The case law cited (Shuttleworth; Hunt) illustrates how contracts and governance documents can diverge, and how the court will often look at whether changes are compatible with the director’s contractual rights.
Finally, the lecturer guides students to engage with the material by using visual prompts and short notes to make the constitution feel more alive, and to prepare effectively for exams by focusing on the core issues and the way the law is structured within the Corporations Act. The aim is to understand the “ground rules” of corporate governance: what is mandatory, what can be changed, how changes are made, and how protections for minority shareholders are treated in special contexts.
Replaceable Rules and Mandatory Provisions
The Corporations Act contains a set of replaceable rules that set out internal governance standards which can be varied by the company’s general meeting through a special resolution. However, there are mandatory provisions that cannot be replaced or excluded; these include core mechanics of the company’s existence and registration. Replaceable rules exist alongside common-law concepts and provide flexibility in structuring governance, subject to the overarching statutory framework. A pivotal point is that the replaceable rules do not apply to proprietary companies with a single shareholder who is also the single director; such a company can operate without a formal general meeting, since it essentially governs itself. Public companies, on the other hand, must adhere to a broader set of rules, including those about proxies (section 249X) and the need to publish information on governance and finances.
Constitutional amendments require a general meeting and a special resolution, and the threshold for a special resolution is 75% of votes cast. By contrast, ordinary resolutions require 50% of votes. The 75% threshold is reinforced by the definition section (Section 9) within the Corporations Act to provide consistent interpretation of “special resolution.” Changes to replaceable rules cannot infringe mandatory provisions; if a constitutional amendment contravenes the Act, it would still be subject to court scrutiny. In sum, replaceable rules provide flexibility for governance but operate within a framework of mandatory provisions and legitimate protections for the rights of members.
The Company’s General Meeting and Directors’ Meetings
There are two kinds of meetings: directors’ meetings (governance and management decisions) and general meetings (shareholders). Notice to all members is essential for any resolution to be valid, and any individual member missing a notice could undermine a resolution only under circumstances where it is proven by the balance of probabilities that the failure to notify caused substantial injustice. General meetings can be called by the board, and members can seek a court order to compel a meeting if the directors refuse to call one. In public companies, annual general meetings (AGMs) are mandatory, while private (proprietary) companies do not have the same mandatory requirement.
Proxies are a common feature of general meetings, enabling a shareholder to appoint someone to vote on their behalf. Public companies must provide a proxy mechanism (section 249X), whereas in private companies with a single shareholder, the proxy arrangement and general meeting mechanics are not strictly required. Share transfers and CHESS (the electronic transfer platform) have modernized how transfers are recorded, with CHESS integrating transfer information, bank details, and sign-offs into a centralized system. This modern approach contrasts with the older paper-based conveyancing processes and emphasizes the need for accurate information in the transfer and registration processes. The lecture also underscores the practical realities of corporate governance, including the role of the company secretary, whose statutory responsibility is to keep ASIC updated with current information about the company.
Membership, Shares, and Transferability
Membership rules hinge on the company’s structure. A company can be owned by shareholders or by guarantors (as in a company limited by guarantee). A person becomes a member on registration or by purchasing shares, and there is a register of members maintained by the company. A member ceases to be a member when they sell their shares or are removed from the register. The law recognizes that proprietary companies can limit the transfer of shares by provision in the constitution that allows directors to refuse registration of a transfer. Public companies, however, must avoid broad restrictions on share transfer, given their exposure on the ASX and the expectation of liquidity for investors. In a company limited by guarantee, members do not hold shares; their function is to guarantee the debts of the company. It is also noted that a company can be a shareholder of another company, and vice versa; there is no restriction on artificial persons being members. Members must be over 18, and there are special provisions for conversions or changes in the company’s status, such as conversion from a guarantee-based company to a share-based proprietary company, with proportional shares issued to guarantors. A key practical note is that transfer restrictions may apply to private companies but not to listed public companies.
The lecture provides examples and cases to illustrate how these rules operate in practice. The Hickman case (1915) from English law established the principle that disputes between a member and a company rely on the statutory contract, with arbitration provisions binding on a member where the constitution contains an arbitration clause. Ely’s case (1970s) demonstrates that a person who acts as a permanent solicitor and receives shares as consideration does not gain enforceable rights in the company in the capacity of solicitor unless a separate employment contract is present. Shuttleworth and Hunt illustrate that where a director does not have a separate service contract, their rights derive from the constitution, but the company may alter the constitution; yet, if the director has a service contract, the contract rights may survive constitutional changes. The Hunt case shows that a company can amend its articles to remove a subsisting contract, but damages for breach of contract may still be payable if the service contract is considered independent of the articles.
Provisions on Voting, Proxies, and Notice
Voting in meetings can be by show of hands or by poll. Each share generally carries one vote, although poll voting allows more votes for larger shareholdings. For companies without share capital, voting is by member, with a show of hands or a poll depending on the constitution. Proxies, where allowed, enable members to appoint others to vote on their behalf (section 249X). The act provides detailed rules about notice periods: ordinary business at AGMs can be conducted with shorter notice, but special resolutions require more stringent notice and a higher standard of procedural fairness. Notices must be given to individual members; joint owners may receive a single notice, but this can raise questions if one partner does not receive notice. The notice and meeting provisions are designed to avoid substantial injustice and ensure that directors act in a fiduciary capacity to inform members adequately about the business to be conducted.
Two sections (2 4 9 D and 2 4 9 F–N) lay out how members can require the directors to call meetings, propose resolutions, or raise matters for consideration. If directors fail to issue notices or call meetings, courts can order a meeting. If notice issues persist, the court can compel a meeting with notice of 21 days, or in certain circumstances, a shorter notice if all members consent. Costs associated with calling meetings in legitimate cases are borne by the company, with potential liability to directors if the meeting is improper. These rules aim to balance efficient corporate governance with sufficient protections for minority shareholders to participate in the governance process.
Minority Rights and Gambotto, and the Legislative Response
Gambotto v. Gambotto (1995) is a landmark case about amendments to a company’s constitution that expropriate minority shares. The High Court held that such amendments are valid only if made for a proper purpose and are fair in all the circumstances. A general expropriation of minority shares must not be oppressive, and the majority must demonstrate a proper purpose and fair treatment. The decision introduced a principled test for the legitimacy of constitutional amendments that affect minority shareholders: the majority’s power is not unlimited, and protections against discrimination against minority shareholders must be observed. The decision recognized that expropriation could be justified in cases where it prevents significant detriment or harm to the company but rejected expropriation motivated solely by cost savings or administrative convenience.
Following Gambotto, Parliament enacted Part IIJ (often referred to as Part two J) within the Corporations Act. Parts 2J (two fifty six B and two fifty six C) were introduced to permit compulsory acquisition of shares from shareholders under prescribed procedures. This legislative response ensured minority protections by requiring proper procedures and a proper purpose when expropriation of shares is contemplated. The cases of Gray, Eisdell Timms, and Combined Auctions Pty Ltd extend Gambotto’s reasoning to specific factual scenarios, showing how courts assess whether expropriation is justified by the company’s best interests or whether it is an improper use of majority power to advance minority or conflicting interests. The overarching principle is that minority protections are essential, and any action that discriminates against minority shareholders must be justified by proper purposes and a fair assessment of the company’s interests.
Case Law Highlights: Hickman, Ely, Hunt, Gambotto, and Related Authorities
Hickman v. Kent and Romney Marsh Sheep Breeders Association (1915): An incorporated nonprofit entity; disputes between members and the association can be subject to arbitration clauses embedded in the constitution. This case illustrates the enforceability of constitutional arbitration provisions and the limits of outsider access to remedies.
Ely v. H. (1960s–1970s): An outsider who acts as permanent solicitor and receives shares may not obtain enforceable rights in the company based solely on the constitution; a separate contract is typically required to support such employment rights.
Shuttleworth: If a director has a separate service contract, constitutional changes cannot automatically alter their contractual rights; the contract remains enforceable unless renegotiated.
Hunt (1939): A service agreement terminated by altering the company’s articles; the court held that, despite the company’s power to alter articles, damages for breach of contract could still be awarded if the contract existed independently of the articles. The High Court ultimately supported the view that contractual rights may survive changes to governance documents; this underscores the separation between contractual obligations and governance rules.
Gambotto v. Gambotto (1995): The High Court’s development of the proper purpose and fair treatment test for expropriating minority shares; the majority must act with proper purpose and fairness, not merely to achieve efficiency or cost savings.
Gray, Eisdell Timms v. Combined Auctions Pty Ltd (1995): The court’s application of Gambotto’s principles to a case involving shareholding limits and expropriation; it held that expropriation would only be justified if the majority’s continued shareholding would be detrimental to the company and the expropriation would be a reasonable means to address that detriment.
Australasian Centre for Corporate Responsibility v Commonwealth Bank (2016): A modern decision illustrating the limited ability of shareholders to express opinions about how the board exercises its powers; emphasizes restrictions on shareholder influence over day-to-day governance, reinforcing the limited direct power of shareholders in some contexts. It also underscores a possible tension between a company’s constitution and statutory requirements, and the potential for governance documents to override or constrain the exercise of board powers.
The Assignment and ILAC Guidance (Lecture Prompt)
The lecturer provides practical guidance on writing the assignment. The recommended approach is to identify the first issue (e.g., whether there is a contract or a partnership) and then apply relevant law. For a partnership analysis, consider the elements of a partnership under the Partnership Act and common law: (1) an agreement between parties, (2) a business carried on with a view to profit, and (3) an intention to operate as partners. The scenario about wallpaper procurement is used to illustrate applying contract and tort law in a business context. The law of partnership, contracts, and tort will guide the analysis, with potential liability on the partners for contracts and for torts committed by the partnership.
The lecturer suggests a practical writing approach: present the issues at the top, then discuss the applicable law and apply it to the facts, and finally provide a concise conclusion that the law indicates whether a partnership existed and the resulting liability. If you prefer, you can present the law and application in a single integrated section rather than strictly separating the “issue, law, application” format. The key is to make the plan explicit and ensure you discuss sections and cases relevant to each issue. The lecturer also emphasizes that dot-point formatting should be avoided in legal writing; full sentences provide clarity and demonstrate understanding. Always reference the relevant sections and cases when applying the law.
For the practical exam context, the lecturer highlights that continuing to revise within 24 to 48 hours helps consolidate memory, and that visual aids (like the circular diagram of directors in the middle) can assist recall. The lecturer ends with encouragement for Thursday sessions to discuss the assignment and notes the upcoming focus on directors and directors’ duties in the next topic.
Membership Remedies, and Practical Implications
The discussion foreshadows topic 10 (members’ remedies) as the area where a shareholder’s rights in response to company actions are addressed. Members’ remedies address how a member who disagrees with a corporate decision (such as an amendment to the constitution or an expropriation of shares) can seek relief. The cases and statutory provisions build toward a framework in which members can challenge governance decisions that threaten their rights, subject to the standards of proper purpose, fairness, notice, and procedure.
Practically, the material links to the real-world relevance of governance rules, including how meetings are called, how voting occurs, and how minority protections operate in corporate life. The interplay between the constitution, replaceable rules, and the Corporations Act creates a layered governance mechanism designed to balance efficient management with protections for shareholders, especially minorities. The ethical and practical implications revolve around transparency, fair treatment, accountability of directors, and the willingness of courts to intervene when governance actions threaten the fundamental rights of members or create a meaningful imbalance in power between majority and minority shareholders.