Question
Mr. Jack owns 8% of the ordinary shares in Southern Builders Pty Ltd (hereafter referred to as 'Company'), which specialises in executing building and infrastructure work for commercial construction. The Company has proposed two resolutions in its general meeting, which state that a person ceases to be a member of the Company if he actively engages in a similar business of the present Company and a member holding less than 10% of the issued share capital of the Companymust meet the 10% compulsory limit. Also, the Company's Constitution cannot be altered without the written consent of 90% of the shareholders. Jack feels these resolutions are unfair and wants to address the issues related to the constitution of the Company and the legal provisions involved related to the proposed resolution.
Recommendations/Advice
Issue 1: Dealing with the first issue, Southern Builders Ltd can be constituted either on registration or after registration. When a Company is constituted on registration, each person specified in the application for the Company's registration must give consent in writing to the terms of a constitution. In the case of the constitution, after registration, a Company passes a special resolution, or a court order is made under section 233 of the Act of 2001.
Southern Builders Ltd can modify or repeal its constitution or a provision of its constitution by special resolution. Such adoption of a new constitution or modification and repeal of provisions of the old constitution can take effect on the date on which the special resolution is passed if no later date is specified or on a date determined by the resolution if the selected date is later than the date on which the resolution is passed. After the Company's constitution, a copy must be delivered to all the Company members within seven days of its constitution after paying a prescribed fee.
Issue 2: Regarding the second issue, Southern Builders Ltd passes two resolutions, i.e., Resolution 1 and Resolution 2, which provide the reason for alteration in the constitution. Yes, alterations are subject to several statutory provisions, and common law safeguards to protect minority shareholders from majority shareholders.
Resolution 1: In this, Regulation 171A was adopted whereJack ceased to be a member of the Company because he was actively engaged in the business. He is one of the largest importers of construction materials in Australia. That business is like the CompanySouthern Builders Ltd is involved. This resolution falls under the legislative restrictions on alteration of the constitution because minority members are protected against the oppression or act of the majority in an unfairly prejudicially manner. These sections afford a variety of remedies to a member against the Company's affairs or an unfairly oppressive act.
Resolution 2: In this, Regulation 130A was adopted in which members holding less than 10% of the Company's issued share capitalmust meet the 10% limit. Jack is holding 8% of the issued share capital in Southern Builders Ltd and is forced to increase his limit.Under Section 140(2) of the Corporations Act 2001 (Cth), there is a prohibition of any imposition of further liability on members by requiring them to take up more shares, increase their liability, or agree to increased restrictions on share transfer unless a member agrees in writing.
Conclusion
The power to alter the constitution must be exercised bonafide in the Company's interests. The constitutional alterations should be assessed based on the nature of the proposed change. Where an alteration did not affect the property rights of members, the alteration should be evaluated according to the requirements of the Corporations Act were followed. Where an alteration sought to take away property rights, the majority suggested a two-step test, which was explained as constituting procedural and substantive fairness. The test provesthat the exercise of the power to amend the constitution was taken for a proper purpose. Would the exercise of the power operate oppressively to minority shares.