Word Count (including footnotes):1997
Due Date: 16/4/2012
Name of Tutor: Michael Duffy
Name of Unit: Corporation law
Issue: can shareholders force the company comply with the replaceable rule and clause2.1?
Under s134, a company’s internal management may be governed by provisions of the Corporations Act that apply to the company as replaceable rules, by constitution, or by a combination of both. Orchard Downs Pty ltd’s internal management is governed almost exclusively by its own constitution. The only replaceable rules it uses are the replaceable rule in s201G and the replaceable ...view middle of the document...
Therefore, the shareholders can prove that the behavior of the board affect them in capacity as members, since the members have the voting right to appoint a director. (Pender v Lushington case) Section 1322(2) reinforces this right of members to enforce the constitution. It enables the court to invalidate a procedural irregularity that causes substantial injustice. (Chew investments Pty Ltd v General Corp of Australia Ltd case) The board of directors appoints a new director without holding a general meeting causes substantial injustice, since all shareholders are unsatisfied with the appointment.
Hence, the shareholders can sue the company breach the contract to obtain remedy. The main remedies are court injunction or declaration to enforce compliance with the constitution/ applicable replaceable rules.
Besides, one of the clauses in the constitution (Clause 2.1) states: ‘Orchard Downs Pty Ltd will only use suppliers of recyclable goods for the packaging of its products’. In fact, the board decided the company was no longer using recycled packing. Shareholders could argue that the company does not comply with Clause 2.1 under s140(1)(a). But members cannot enforce provisions in the constitution which purport to give them rights in some other capacity than that of a member.(Eley v Positive Govt Security case) Furthermore, under s198A directors can change the direction of the company and exercise all the powers except the Act or the company’s constitution (if any) requires the company to exercise in general meeting (John Shaw& Sons Ltd v Shaw case). Consequently, the company cannot be forced to comply with clause 2.1.
The shareholders can alter constitution to restrict director’s powers by special resolution (Shuttleworth v Cox case); or remove the board of directors under the replaceable rules s203(c), a proprietary company may remove a director by resolution.
Issue: Can Nick prevent the new clause inserted？
The process for inserting a new clause in the company’s constitution is
* Call a general meeting for inserting a new clause in the constitution of the company;
* Under s136(2), a company may modify or repeal its constitution or a provision of its constitution by special resolution, which is passed by at least 75% of votes cast by members entitled to vote on the resolution: s9.
* If any limits involved or a majority of 75% is not met, the motion of inserting a new clause will be failed.
In this case, s136(2) requires a special resolution to be passed for Teen Music Pty Ltd to insert a new clause in its constitution. However, as in this case the alteration of the constitution is related to expropriation of Nick’s shares, the other 3 shareholders must prove that the alteration of constitution is for a proper purpose and fair in all circumstance. Cite a case Gambotto v WCP Ltd. An expropriation of shares will be for a proper purpose, if the expropriation of shares prevents the company from suffering...