DIVISIONS OF POWER & CORPORATE GOVERNANCE
Directors
DIVISION OF POWERS WITHIN A COMPANY
Members
 S 231: A person is a member of a company if they:
 (a) are a member of the company on its registration;
 (b) agree to become a member of the company after its
registration and their name is entered on the register of
members; or
 (c) become a member of the company under s 167
(membership arising from conversion of a company
from one limited by guarantee to one limited by shares).
 Leaney v Olmstead: An unregistered beneficial owner of
shares is not a member.
 Norman Baker v Baker: Within a reasonable time of
becoming an adult, the member may repudiate the
membership contract – but remains liable for any obligations
that accrued prior to the repudiation.
Number of members
 S 114: All companies must have at least 1 member.
 S 113: A proprietary company must have no more than 50
non-employee shareholders.
Powers of members
 Normally, members act collectively at general meetings to
make binding decisions.
 S 201G [RR] & ASX LR 14.9: Members of a company may
appoint a director by a resolution passed in general meeting.
 S 203C [RR]: Members of a proprietary company may
remove or replace a director by resolution.
 S 203D(1): Members of a public company may remove a
director by resolution.
 S 202A(1) [RR]: Directors’ remunerations are determined by
resolutions passed in a general meeting.
 S 136(2): Members may modify or repeal a constitution by
special resolution.
Limits on powers of general meeting over directors’ decisions
 John Shaw & Sons v Shaw: Where management powers are
vested in the directors, members in a general meeting cannot
override management decisions made by the board.
 Power to decide matters of litigation belongs solely to
directors.
 NRMA v Parker: Resolutions passed by members in general
meeting will not interfere with powers of directors conferred
by s 198A or the constitution.
 *Board selected a returning officer, who decided
whether ballot papers for election of directors were
separately mailed to members, or published in the
Association’s journal.
 *Members proposed a resolution to direct the Board to
select a particular returning officer to use the postal
ballot system.
 Power to appoint a returning officer lay with the Board,
& members have no say on it  The proposed
resolution was invalid.
 But members can control directors’ decisions indirectly by:
 Removing directors and replacing them (by ordinary
resolution); or
 Altering the constitution (by special resolution) to vest
the relevant power in the general meeting rather than the
board of directors.
 S 9: “director” means:
 (a) a person who is appointed to the position of:
 (i) a director; or
 (ii) an alternate director and is acting in that
capacity;
regardless of the name given to their position; and
 (b) unless the contrary intention appears, a person who
is not validly appointed as a director if:
 (i) they act in the position of a director (“de facto
director”); or
 (ii) the directors of the company are accustomed to
act in accordance with the person’s instructions or
wishes (“shadow director”).
A person is not a shadow director merely because
directors act on advice given by him in the proper
performance of functions attaching to his professional
capacity, or his business relationship with the directors
or the company.
 Executive directors carry out day-to-day management of the
company; Non-executive directors monitor the performance
of internal company management objectively/independently.
Number of directors
 S 201A(1): A proprietary company must have at least 1
director who ordinarily resides in Australia.
 S 201A(2): A public company must have at least 3 directors.
At least 2 must ordinarily reside in Australia.
Appointment of directors
 S 201G [RR] & ASX LR 14.9: Members may appoint a
director by a resolution passed in general meeting.
 S 201H [RR]: Directors may appoint a director (eg. to fill a
casual vacancy).
 Proprietary company  company must confirm the
appointment by resolution within 2 months after the
appointment is made.
 Public company  company must confirm the
appointment by resolution at the next AGM.
 S 201B(1): A person under 18 yrs old cannot be appointed as
a director.
 S 201C(8): A person over 72 yrs old may, by special
resolution, be appointed as director of a public company
until the next AGM, if:
 (a) the resolution states the person’s age; and
 (b) the notice of meeting states that the person is a
candidate over 72, and states his age.
[If the company is a subsidiary of a public/proprietary
company, see ss 201C(9)-(10)]
 S 201D: Before a person can be appointed as a director, he
must give the company signed consent.
 S 117(2)(d): Initial directors will be those consenting persons
who are named in the company’s registration application.
 ASX LR 14.5: A listed company must hold an election of
directors each year.
 ASX LR 14.4: A listed company’s director (except MD)
must not hold office, without being re-elected, beyond the 3rd
AGM following the director’s appointment, or 3 years –
whichever is longer.
Removal of directors
 S 203C [RR]: Members of a proprietary company may
remove or replace a director by resolution.
 DIVISIONS OF POWER & CORPORATE GOVERNANCE
 S 203D(1): Members of a public company may remove a
director by resolution, despite anything in (a) the
constitution; or (b) any agreement between the director and
the company; or (c) any agreement between the director and
any of the members.
 S 203D(2): Notice of an intention to move the resolution
for removal of a director must be given to the company
at least 2 months before the meeting.
 S 203D(3): The company must give the notice to the
director as soon as practicable.
 S 203D(4): The director may put their case to members
by giving the company a written statement for
circulation to members, and speaking to the motion at
the meeting.
 S 203E: A director of a public company cannot be removed
by other directors.
 S 201C(1)-(4): The office of a director of a public company,
or subsidiary of a public company, who turns 72, is vacated
at the conclusion of the next AGM.
Powers of directors
 S 198A(1) [RR]: The business of a company is managed by
or under the direction of the directors.
 S 198A(2) [RR]: Directors may exercise all the powers of
the company, except any powers that the CL or the
constitution requires the company to exercise in general
meeting.
 S 198C [RR]: Directors may confer any of their powers on a
managing director. They may revoke or vary this.
 S 198D(1) [RR]: Directors may delegate any of their powers
to:
 (a) a committee of directors;
 (b) a director;
 (c) an employee of the company; or
 (d) any other person.
Managing director
 S 201J [RR]: Directors may appoint one or more of
themselves as managing director, on the terms as they see fit.
 S 203F(2) [RR]: Directors may revoke or vary the
appointment of a managing director.
 S 203F(1) [RR]: A person ceases to be a managing director
if he ceases to be a director.
Company secretaries
 S 204A(1): A proprietary company is not required to have a
secretary; but if it has one or more, at least 1 of them must be
ordinarily resident in Australia.
 S 204A(2): A public company must have at least 1 secretary
who ordinarily resides in Australia.
 S 204B(1): Only an individual aged at least 18 may be
appointed a secretary.
 S 204C(1): A person must give the company consent in
writing before being appointed a secretary.
CORPORATE GOVERNANCE RULES
S 134: A company’s internal management may be governed by
replaceable rules, a constitution, or a combination of both.
 ASX LR 15.11: Listed companies must have a constitution.
Constitution
 S 136(1): A company adopts a constitution:
 (a) on registration – if each person specified in the
registration application who consents to become a
member, agrees in writing to the terms of a constitution
before the application is lodged; or
 (b) after registration – if the company’s general meeting
passes a special resolution to adopt a constitution; or if a
s 233 court order requires the company to adopt a
constitution.
 S 1415: Memorandum and articles [which have not been
excluded] immediately before 1 July 1998 are taken to make
up the company’s constitution on and after 1 July 1998.
[unless the constitution is repealed in its entirety: see
s135(1)]
Lodgement requirements for adoption on registration
 S 117(3): If the company is to be a public company with a
constitution on registration, a copy of the proposed
constitution must be lodged with the application.
Lodgement requirements for adoption by special resolution
 S 136(5): A public company must lodge with ASIC a copy
of a special resolution adopting (modifying or repealing) its
constitution, and a copy of the constitution or modification,
within 14 days after it is passed.
Validity
 Victorian Onion & Potato Growers’ Assn v Finnigan: A
provision of the constitution is invalid if:
 It is contrary to public policy;
 It purports to limit statutory rights or obligations of the
members; or
 It is expressly/impliedly rendered void by legislation.
Replaceable Rules
 S 135(1)(a): A section whose heading contains “replaceable
rule” applies as a replaceable rule to:
 (i) each company registered on or after 1 July 1998; and
 (ii) any company registered before that date that repeals
its constitution on or after that date.
 S 135(1)(b): A section whose heading contains “replaceable
rule for proprietary companies and mandatory rule for public
companies” applies as:
 (i) a replaceable rule to any pty company registered on
or after 1 July 1998;
 (ii) a replaceable rule to any public company registered
on or after 1 July 1998 that changes to a pty company;
 (iii) a replaceable rule to any pty company registered
before that date that repeals its constitution on or after
that date; and
 (iv) as an ordinary CL provision to any public company.
 S 135(1): No replaceable rule applies to a pty company while
the same person is both its sole director & sole shareholder.
[see ss 201F and 198E for non-replaceable rules applying]
 DIVISIONS OF POWER & CORPORATE GOVERNANCE
 S 135(2): A replaceable rule can be displaced or modified
[impliedly] by constitution.
 S 135(3): Failure to comply with a replaceable rule is not of
itself a contravention of the CL.
Contractual Effect of Constitution & Replaceable Rules
 S 140(1): A company’s constitution (if any), and any
replaceable rules that apply to the company, have effect as a
contract:
 (a) between the company and each member; and
 (b) between the company and each director and
company secretary; and
 (c) between a member and each other member;
under which each person agrees to observe and perform the
constitution and rules so far as they apply to that person.
Membership rights
 Bailey v NSW Medical Defence Union Fund:
A [company]/[member] may only enforce against a
[member]/[company] those constitution provisions which
[impose obligations]/[confers rights] on the member in the
capacity of member.
 *Company was formed for the central purpose of
providing insurance for doctors.
 *Constitution provided that the company indemnifies its
members against liability arising from their professional
practices.
 *B was sued for professional malpractice while B was a
member.
 *Company altered constitution to reduce members’
indemnity entitlements.
 The indemnity provision conferred entitlement on B as
an insured person, rather than as member  B cannot
enforce the constitutional provision.
 But a separate extrinsic contract of insurance implicitly
arose between B and Company, with terms found in the
constitution.
 Parties did not agree that Company can unilaterally
reduce the indemnity entitlement retrospectively 
alteration of constitution does not affect the contracted
indemnity for the claim  Company must indemnify.
 Bailey v NSW Medical Defence Union Fund:
In the absence of contrary agreement, a person is not bound
as a member by any constitutional provision that would not
normally be expected to be found in the constitution of such
a company.
 Eley v Positive Govt Security Life Assurance:
A member cannot enforce a provision of the constitution
which confers rights on the member in a capacity other than
that of member [unless it has expressly/impliedly been
incorporated in a contract independent of the constitution].
 *Company’s constitution provided that P was to be its
permanent solicitor, dismissible only for misconduct.
 *No separate employment contract was entered into.
 *P received shares in consideration for his work.
 *Company then ceased to appoint him as solicitor 
breach of statutory contract?
 Although P was a member, the constitution’s provision
conferred a right on P in the capacity of solicitor, not
member  P cannot enforce the provision.
 Cumbrian Newspapers Group v Cumberland &
Westmorland Herald Newspaper & Printing Co: A right
given as part of the bargain to become a member is a
membership right – even if only one member has it.
 Ardlethan Options v Easdown: Breach by company of a
membership provision in constitution  member recover
damages from company, or seek declaratory/injunctive
relief.
 But Bailey v NSW Med Defence: A member cannot sue
a company for breach of contract without seeking
rescission of the membership contract.
Construction of Constitution
 Tosich v Tosich Construction: If alternative constructions are
possible, the most business efficacious construction is
preferred.
 Bailey v NSW Med Defence: If no reasonable construction
can be given, the court cannot rectify it.
 Simon v HPM Industries: A corporate constitution is more
strictly construed than other contracts because many 3rd
parties might rely on it.
 Stanham v National Trust of Australia: Courts are reluctant
to imply a term into a corporate constitution because:
 Parties have spelt out their rights & obligations in an
extensive set of provisions;
 Companies adopt very precisely worded constitutional
provisions; and
 Companies can alter their constitution.
 Re Westbourne Galleries: For companies with few members,
equity may interpret a constitution consistently with the
mutual understandings of the members when they became
members.
ALTERING A CONSTITUTION
 S 136(2): A company may modify or repeal its constitution
by special resolution passed by members in general meeting.
 S 9: “Special resolution” means a resolution passed by
at least 75% of the votes cast by members entitled to
vote on it, after they have been given notice stating the
resolution and the intention to pass it as a special
resolution under s 249L(c).
 S 249B(1), s 251A(1)(c): A special resolution may be
passed if the company only has 1 member & that
member records its passage in the minute book & signs
the record.
 S 249A(2): A special resolution may be passed if all
members of a proprietary company entitled to vote on
the resolution sign a document stating that they are in
favour of the resolution set out in the document.
 S 136(5): Public company must lodge with ASIC a copy of
the special resolution modifying its constitution, and a copy
of the constitution or modification, within 14 days after it is
passed.
 Peters’ American Delicacy v Heath: A company cannot
alienate its statutory power to alter its constitution.
 Russell v Northern Bank Development Corp: Members may
contract among themselves (outside the constitution) as to
how they shall vote on a resolution to alter the constitution.
 S 137(1): A special resolution modifying a constitution takes
effect on the date on which it is passed, unless a later date is
specified in it.
Limits on Right to Alter a Constitution
 Variation of class rights: s 246
 Oppression remedy: s 232
 Consistency with Corporations Law
 DIVISIONS OF POWER & CORPORATE GOVERNANCE
Entrenching provisions: s 136(3)
 S 136(3): A constitution may provide that the special
resolution does not have any effect unless a further
requirement, specified in the constitution relating to that
modification or repeal, has been met.
 S 136(4): A company may modify or repeal this further
requirement only if it is itself complied with, unless the
constitution provides otherwise.
ASX LR compliance
 ASX LR 15.1.1: A listed company must not change its
constitution unless ASX is informed in advance & does not
object to the proposal.
 ASX LR 15.11.1: Alterations must be consistent with LRs.
Equitable constraints on voting power
 Gambotto v WCP
 *Majority shareholder in WCP effectively held 99.7%
of its share capital.
 *They sought to alter WCP’s constitution to allow WCP
to compulsorily acquire all other shares at a fair price.
 *The alteration would reduce taxation and
administrative costs.
 Expropriation was not necessary to avert harm from
WCP  Expropriation to merely secure taxation and
administrative advantages for the majority was not for a
proper purpose  alteration was invalid.
General alterations
 A special resolution passed that gives rise to a conflict of
interests between members is valid, unless:
 it is beyond any purpose contemplated by the
constitution; or
 is oppressive.
Expropriation of shares/rights attaching to shares
 A constitutional provision authorising the expropriation of
shares or rights attached to shares, can only be validly
adopted after a company’s incorporation if:
 it is exercisable for a proper purpose, in a manner which
would not be oppressive to minority shareholders; and
 is fair in all the circumstances.
“Proper purpose”
 Proper purpose if expropriation provision removes a
minority interest that can reasonably be thought to be
prejudicial to the company.
 Not proper purpose if expropriation provision merely
advances the interests of the majority or company.
“Fairness”
 All material information relating to the expropriation
provision must be made available to members prior to voting
on it.
 The right to be expropriated should be valued by an
independent expert.
Limits of Gambotto
 Winpar Holdings v Goldfields Kalgoorlie: Gambotto does
not apply where the expropriation occurs pursuant to a
special statutory procedure.
 S 664A: A person who holds at least 90% of a company’s
total voting power, and at least 90% of the securities in a
particular class, may compulsorily acquire the remaining
shares in that class. [This power applies despite anything in
the constitution.]
 S 664AA: This power can only be exercised within 6 months
of the person gaining sufficient securities to be able to
exercise it.
Effect of alteration on members
Modification after membership: s 140(2)
 S 140(2): A member is not bound by modifications made
after he became a member (unless he agrees anytime in
writing to be bound), so far as it:
 (a) requires the member to take up additional shares;
 (b) increases the member’s liability to contribute to the
share capital of, or otherwise to pay money to, the
company; or
 (c) imposes or increases restrictions on the right to
transfer the shares already held by the member, unless
the modification is made:
 (i) in connection with the company’s change from a
public company to a proprietary company under
Part 2B.7; or
 (ii) to insert proportional takeover approval
provisions into the company’s constitution.
Effect on existing contractual rights
 Bailey v NSW Med Defence Union
 An alteration cannot deprive a member of an existing
proprietary or contractual right, unless the member
expressly or impliedly consented.
 Alteration of a provision that is also a term of an
extrinsic/ordinary contract will not affect the
extrinsic contract, unless that is the parties’ mutual
intention.
 Even where the parties to an extrinsic contract intend the
incorporated provisions of a constitution to be alterable
unilaterally by the company altering its constitution, the
parties ordinarily intend alteration to only operate
prospectively.
Effect of alteration on employment contracts
 Carrier Australasia v Hunt:
An alteration to the constitution only alters a separate
employment contract if the employee agreed to the company
having unilateral power to do so. (even if the employment
contract was expressed to be subject to constitution)
 *C appointed H as MD for 5 yrs under an employment
contract.
 *Employment contract stated that:
 H’s appointment is terminated if he ceased to be a
director; and
 The contract was “subject to the constitution”.
 *Constitution stated that the company may remove a
director before expiration of his office - subject to the
provisions of any subsisting agreement.
 *C deleted the reference to the subsisting agreement,
and removed H from his office of director 
employment contract terminated.
 H cannot prevent the company from altering its
constitution.
 H had not agreed to the company having unilateral
power to alter the employment contract  Even though
the employment contract is expressed to be subject to
the constitution, alteration of the constitution does not
affect the employment contract  Company
 DIVISIONS OF POWER & CORPORATE GOVERNANCE
contractually liable in damages for breach of
employment contract.