Company Law : Section 140 Subsection

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Company Law : Section 140 Subsection

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Company Law : Section 140 Subsection

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Question:
Describe about the Report for Company Law for Section 140 Subsection.

Answer:
1: According to section 140 subsection 1 of the Corporations Act, 2001, the constitution of a corporation forms a contract between the corporation and each members and directors of the company. Thus, the constitution of the company helps the company in forming statutory link between the members of the company and the directors of the company with the company[1]. The governing document of a company registered under the Corporations Act, 2001 is constitution of the company. The company’s constitution is a certificate that states the relationship between the performance of the company and its shareholders and the directors[2].
The constitution of the company binds the company and its shareholders and especially those who have agreed to the terms of the constitution. The constitution of the company lays restriction on the power and functions of the directors and the shareholder[3]. It has been seen many times that the directors of the company misuse their power by relying on the constitution of the company hence it is important that the constitution of the company be formed in such a way so that the directors do not misuse their powers. With the formation of the constitution of the company, the rights and obligations of the shareholders become enforceable[4]. It does not only create enforceable responsibilities between the company and the shareholders but also between the company secretary and the director. Thus, the constitution is a helpful document as it restricts the shareholders and the directors in conferring personal rights[5].
2: Yes, a company’s constitution may be amended if a special resolution is passed having 75 percent majority votes. Shareholders of the company pass the resolution. The constitution of the company is amended in a different way unlike other kind of documents such as contracts in which parties to the contract need to agree to the amendment. Thus, a majority of 75 percent of votes shall amend the constitution of the company and the amendments shall become binding on the minority shareholders as well, though the minority shareholders may have voted against the proposed amendments[6]. Nonetheless, the minority shareholders may not be bound by the amendments done in the Constitution of the organisation if there are separate or other procedural requirements for the process of making amendments in the Constitution[7].
According to section 136 subsections 2 of the Corporations Act, 2001, the constitution of the company may not be amended if the constitution specifies requirements that need to be complied with before making an amendment effective. The requirement may be that an additional condition is fulfilled, consent of a particular individual must be obtained before making amendment effective or consent from the shareholders that needs to be taken unanimously[8]. If any special requirement is mentioned in the company’s constitution that needs to be complied with for making amendments in the constitution, the constitution needs to be followed before amendments can be made[9].
The minority shareholders of the company have the possibility to negotiate with the terms of the constitution and this may provide them with some protection against the rights of the majority shareholders. Protection of the rights of the minority shareholders is very important as it may restrict from adverse financial consequences and make it more difficult for the constitution of the company to be amended[10]. There is no restriction on the organisation to alter the constitution as per the statutory requirement and such an act of amendment, which is within the scope of statutory framework, cannot be held invalid. The only care that needs to be taken is to ensure that any additional requirements do not restrict the statutory framework of amending the constitution[11].
As per the common law, the Corporations Act provides protection to shareholders of a company against the following:

Cancellation and variation of rights
Certain changes in the company’s constitution that have the effect of expropriation of shares of the minority shareholders
Changes to specific provisions of the company[12]

The power of the majority shareholders to vary or cancel rights relating to class of shares is limited under Part 2F.2 of the Act. According to the given section, if the constitution of the company does not state the procedure for cancelling or changing class of shares then the changes in the cancellation or variation of the class of shares may be conducted by passing a majority vote of 75 percent of the shareholders[13]. Moreover, the section also states that if the constitution of a company lays the procedure for cancellation and variation of class rights then the cancellation or variation of class rights may be executed as per the procedure laid in the constitution. Thus, the above-mentioned section provides protection to the minority shareholders to include a procedure in the constitution that protect the interests of the minority shareholders by making it more difficult for the majority shareholders to make changes in the constitution[14].
The power of the majority shareholder in relation to expropriation of shares of the minority shareholder was restricted following the decision of the Australian High Court in Gambotto v. WCP Ltd. The High Court of Australia held in this case that an amendment to a constitution relating to expropriation of shares of minority shareholders would be lawful only if it is meant for a good purpose or it shall not act oppressively against the interests of the minority shareholders[15]. Moreover, the High Court also stated that if changes need to be made in the constitution of the company relating to expropriation of shares then the minority shareholder might demand for full disclosure of the material information. The majority shareholder may be bound with the demand of the majority shareholder. The decision of the Gambotto provides protection to a minority shareholder that the majority shareholders do not expropriate their share more than the market value[16].
Thus, depending on the sections and the relevant case law mentioned above, it may be held that with regard to making amendments in the constitution, the rights of the minority shareholders remain protected[17].
3: The power of the majority shareholders to cancel or vary rights related to class of shares is limited under Part 2F.2 of the Corporations Act. As per the summary of the given part, it is held that if the constitution of the company has not stated any procedure for varying or cancelling class of rights then the rights may be cancelled or varied by passing a special resolution in the meeting of the shareholders of at least 75 percent of the majority votes. However, if the constitution lays the procedure for making changes in the class rights then the rights may only vary or be cancelled in accordance to the given procedure[18]. This enables the minority shareholders to negotiate with the terms that may be included as part of the constitution or making it more difficult for the majority to make changes in the constitution. Thus, there are limitations on the rights of the majority shareholders in relation to variation of class rights.
The wide range of freedom of contract is handed over to shareholders in companies. This means that the shareholders are in a position to include provisions in the contract for their personal protection. Some of the rights that majority shareholders may include for their protection are veto rights, nomination rights and insertion of supermajority requirements[19]. If shareholders are able to include these changes in the constitution of the company then it becomes binding on all the members of the company to comply with those provisions.
Under the Australian corporation law, a majority shareholder should not be treated as a fiduciary body and he or she does not owe fiduciary duties to the company or to the minority shareholders. The doctrine of fraud imposes restraints on the majority shareholders use of voting rights in a general meeting. However, the basic rule was that the shareholder could use his voting right in his or her self-interest as long as the voting right is within the scope of the majority’s shareholder power. However, since the establishment of the general law, restrictions are imposed on the powers of the majority shareholder to change a company’s constitution to expropriate shares or valuable rights relating to shares. The principles of equitable distribution has laid restrictions on the majority shareholders for not dividing shares in an illegal manner or divide it in such a way that gives personal advantage to the majority shareholder.

A minority shareholder may complain to the Court if in his opinion, a resolution is passed by the company that is against the interest of the minority shareholder. Where such a complaint is made to the Court, the Court may pass an order against the company such that it may pass an order for the company to be wound up or the existing constitution of the company be wound up or changed regulating the management of the company[20].
A minority shareholder may approach the Court for winding up of the company, especially if the directors or the majority shareholders have acted in a way that seems to be unjust and unfair to the majority shareholder. For example, a decision by the board with majority vote, which in the opinion of the minority shareholder is against the interest of the minority shareholder, the Court may ask the company to be wound up. The Courts do not pass an order for winding up of companies when other remedies are available to them (Section 461 of the Corporations Act)[21].
The Corporation law of Australia allows a person, whose interests have been affected or contravened, apply to the Court for restriction on such conduct. If a person fails or refuses to do something that is bound under the statutory provisions of Corporations Act, he may apply to the Court for an appropriate remedy. The minority shareholders use this remedy, many times, as they often find themselves in a position where their interests are hampered by the majority shareholder (Section 1324 of the Corporations Act). The minority shareholders can make use of the statutory injunction to necessitate the company to follow the rights that are granted to them under the Corporations law. Some of the rights of the minority shareholder include to be part of the general meeting that is held and to vote on the general meeting of the company.
A shareholder may also apply to the Court for an order so that they are able to inspect the books of the company. The books may be inspected by the shareholders themselves or by their representatives. The term “books” includes financial reports, registers and other financial records. Inspection of the book is conducted to ensure that proper information is made available to shareholders so that they become aware of their rights and responsibilities towards the company (Section 247 A of the Corporations Act)[22].
Derivative actions mean legal proceedings that are started by a person other than the company itself. This action is started concerning an action of the company such as against the director of the company for breach of their duties. In Australia, derivative action may be commenced only with the statutory procedure that is adopted.
Historically, the company law follows the principle of majority rule. The decision of the shareholder and the Board is determined by a simple majority vote. This is the fundamental concept of the company law; however, this has the risk of abuse inherent to it. The risk was noted in the famous case of Foss v. Hartbottle. In this famous case, it was held that the wrong actions of the company should be redressed only in the name of the company and not in the name of members of the company. The Courts would not have the power to interfere with the internal dealings of the members of the company rather they had the authority to question the working and functioning of the company as a whole[23]. Nonetheless, formation of this rule, lead to oppression of the rights of the minority shareholders against the interests of the rights of the majority shareholder. Sections 246 B, C, D, E, F and G deal with class rights.
Section 246 of the Corporations Act deals with member rights and remedies class rights. The corporations act presently divides class rights into various shares depending on the company’s share capital such as classes of shares under section 197 of the Act, share capital under section 198 of the Act that is not divided into classes of shares and no share capital at all under section 199 of the Act. According to section 246B of the Corporations Act, 2001, it is held that if the constitution of the company has not stated any procedure for varying or cancelling class of rights then the rights may be cancelled or varied by passing a special resolution in the meeting of the shareholders of at least 75 percent of the majority votes[24]. However, if the constitution lays the procedure for making changes in the class rights then the rights may only vary or be cancelled in accordance to the given procedure. The company should give a notice to the shareholders for variation or cancellation of rights within 7 days of such cancellation or variation being made.
Additionally, individual shareholders have personal rights arising out of the general law related to corporations. Mostly, the remedies to individual shareholders are restricted to injunction and declarations rather than compensation. For example, shareholders have personal right to enforce provisions of the corporation’s internal governance rules against the organisation and other shareholders. Courts have also recognized the right of shareholders to receive notices for meetings and vote at the meetings. However, such a right may be taken away by formation of a constitution. Thus, minority shareholders should keep their rights protected by ensuring that the constitution of the company does not contain any provision that are against or in opposition to their rights[25].
Conclusively, it may be said that the constitution is the most important document in the company. With the constitution, shareholders become extremely powerful and without it, no powers remain with them. A constitution of the company is one of the lengthiest documents of the company; however, it contains the most important provisions of the company. The shareholders have the power to make changes in the constitution and the rights of the minority shareholders are protected with the help of the constitution. Hence, it may be said the the governing document of a company is constitution.

References:
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