HI5027: Corporations Law

HI5027: Corporations Law Holmes Institute: MBA Program SESSION 3

Summarising this session By the end of this Session, you will be able to understand the following topics: Constituting companies; and Managing companies.

Constituting companies • Registering companies • Pre-registration activities • Internal governance rules • replaceable rules and constitutions • legal effect of IGR • Single/director shareholder companies

Registering companies • Companies created through registration by ASIC • ASIC Form 201 – must include details of type of company, members, directors, secretary, registered office, internal governance rules and name

Pre-registration activities • What happens when someone wants to enter into a contract on behalf of a company that is not yet registered? (s131) • Promoters are in a fiduciary relationship with the yet-to-be-formed company, that prevent them abusing their power

What are the internal governance rules? • A set of arrangements (by-laws) agreed between the members to govern the internal workings of the company • Typically deal with appointment, powers and removal of officers, meetings, classes of shares, dividends, transfer of shares, inspection of books

Where are these rules? • Found in: • the company’s Constitution, or • the replaceable rules, or • a combination of the two • Section 134 of the Corporations Act: ‘A company’s internal management may be governed by provisions of this Act that apply to the company as replaceable rules, by a constitution, or by a combination of both.’

Replaceable rules • Introduced in 1998 • Companies may elect to rely on some or all of the replaceable rules contained in the Corporations Act • RRs apply unless they are displaced or modified by a Constitution (s135)

The replaceable rules (cont) • Listed in s141 and scattered through Chapters 2D, 2F, 2G, 2H and 7 of the Act • There are rules covering: • officers and employees • inspection of books • meetings • shares • share transfers

The replaceable rules (cont) • Most RRs are ‘default rules’ in that they can be displaced by the company in its constitution • Exception is s249X (proxies) which is mandatory for public companies • Section 203C is a RR for proprietary companies only (removal of directors by members)

Relying on the replaceable rules • Not all of the replaceable rules are suitable for all types of companies • Some companies may wish to do things not provided for in the replaceable rules, eg issue partly-paid shares • The particular rules may not suit, eg the pre-emption provision in s254D

Decision-making under the replaceable rules • Think about whether the rules for decision-making are appropriate • The replaceable rules assume “majority rule” • For example, provide for decisions of the board to be carried by the majority, with the chairperson given a casting vote

Constitution • As an alternative to relying on the replaceable rules, a company can adopt a Constitution • Contains customised internal governance rules for that particular company • Will override some or all of the replaceable rules (s135)

Pre-1998 companies • Companies formed prior to 1 July 1998 may still have their old memorandum and articles of association (which were required under the old law) • Many companies used “Table A” • If so, this will be their Constitution

Adopting a Constitution • Can be done when the company is registered, or later • Adopting, amending or repealing a Constitution after registration requires a special resolution of members • Listed companies must have a Constitution that is consistent with the Listing Rules

Legal effect of the internal governance rules • Section 140 – A company’s Constitution (if any) and the replaceable rules that apply to it have effect as a contract between: • the company and each member • the company and each director and secretary • a member and each other member

Effect as a statutory contract • Interpretation • Principles of contract law • Enforcement • Four constraints – see CACL ¶5-640 • Consequences of non-compliance • Consider contractual enforcement, procedural irregularity (s1322), powers (s125)

Single director/shareholder companies • Special type of company in which the only member is also the only director • Only allowed for proprietary companies (as public companies must have at least three directors) • Note this is different from other companies with only one shareholder (eg wholly owned subsidiary)

Single director/shareholder companies (cont) • Remember that the law recognises the company as a separate legal entity, despite no functional separation from the individual who is its manager and owner

Single director/shareholder companies (cont) • Replaceable rules do not apply (s135(1)) • Some special rules apply – ss198E (powers of director), 201F (appointment of director) and 202C (director’s remuneration)

Managing companies • Corporate governance • Decision-making and company management • Directors’ power of management • Members’ decision-making powers

ASX Corporate Governance Principles • What ASX Council considers to be the foundations of good corporate governance • See www.asx.com.au • Foundation of the good practice recommendations

Corporate governance • Various definitions – some broad, some narrower • “The way companies are directed and managed” • Aim is to understand the various forces at play in company management • Key tools – management structures, transparency and accountability, alignment of interest

Corporate governance and listed companies • ASX Listing Rule 4.10 • Listed companies adopt Corporate Governance Council recommendations, or explain why not • Examples – formalise and disclose the role of the board, have a majority independent board, have an independent chairman

Issues in corporate governance • Balancing different considerations – performance and conformance • Do particular corporate governance practices make companies more profitable? • Corporate governance mechanisms – not just law

Decision-making and company management • Making decisions about, among other things: • the capital structure of the company • its operations (its business and activities) • its internal structure and the relationship between participants • How does the law allocate that decision-making power and regulate its exercise?

Division of powers • Power to make decisions is divided between: • the members in general meeting • the board of directors • Division depends on the internal governance rules and general principles of company law

Directors’ broad power of management • Usually, directors have general power of management, eg replaceable rule in s198A • Confers power on the board to make decisions regarding all things not expressly reserved to the members in general meeting

Members cannot override directors • Two organs of the company • Members in general meeting • Board of directors • One cannot interfere with powers of other – Automatic Self-Cleansing Filter Syndicate v Cunninghame; John Shaw & Sons • What options are available to members who disagree?

Members’ decision-making • Certain decisions must be made by members (Lecture 7) • Also, members have residual decision-making power • Board unable to act • Suing directors • Ratification • The case of Massey v Wales is a good example

HI5027: Corporations Law