Following Section 134 of the Corporation Act, 2001, a corporation is regulated by its charter, by the Corporation Act, 2001 provisions that are applied to it as replaceable rules, or by a combination of the charter and replaceable rules.
A Corporation may adopt a constitution during its registration or later, as per Section 136. With a special resolution adopted by the Corporation, such a constitution may be changed or abolished.
In accordance with Section 140 of the Act, the company's charter and replaceable rules are binding:
A highly useful document is the company's constitution, which ties the organization and holds it responsible for its deeds. Consequently, it may be claimed that the company's charter limits the organization as a whole. The rights and obligations of each constitution member are considered during the constitution-making process. However, the shareholders' and directors' rights and obligations are particularly important to debate. As a result, it may be argued that the company's constitution is one of its most crucial documents since it holds every employee accountable for their activities.
The case under common law: Romney Marsh Sheep Breeders Association v. Hickman
In this situation, the articles of a corporation said that if a dispute arose between any members of a Company, the subject had to be sent to an arbitrator. If the matter could not be resolved through arbitration, a court process would be initiated. Hickman filed a lawsuit without first engaging in arbitration.
An outsider who claims to be granted rights by the articles in his role as such an outsider, whether he is or afterward becomes a member, cannot sue on the articles, considering them as contracts between themselves and the business, to enforce those rights, according to Astbury J. No right that is only impliedly granted by any article to a person, whether a member or not, in a role other than that of a member, as, for example, a solicitor, promoter, or director, may be enforced against the business.
The court ruled that the company's articles bind each member to the company and that the members and the company can enforce this contract.
The Corporation Act's provisions, which state that the company's constitution binds every company member, have adopted the same stance.
2: A company's constitution may be changed if a special resolution is approved with a 75% majority of votes. By a majority vote, the shareholders approve the resolution, and unlike other contracts, there is a distinct procedure for revising the constitution. Some contracts need the consent of all parties before a change may be made. The contract's terms may change if both parties consent to the proposed modification. Nonetheless, the normal standard for altering a constitution is a 75% majority vote. Minority shareholders have the option to reject the suggested modification. However, if there are already distinct requirements expressed in the constitution, the minority owners are not obliged by the revisions made.
If the method is already outlined in the constitution, it is impossible to alter the company's constitution differently. The Companies Act of 2001 lists this in Section 136(2). The requirement may be connected to the fact that another condition must be satisfied before making changes to the constitution or that approval must be obtained from the shareholders or a specific person before changing the constitution [4]. Before moving forward with the modifications, any requirements the constitution specifies must be met.
The minority shareholders of the firm have the option of negotiating with the provisions of the constitution, which increases the likelihood that they will be protected from the majority shareholders. Minority shareholders must be safeguarded since failing to do so might result in dire financial ramifications for them and make amending the constitution challenging. The firm is not required to amend the constitution in response to a legislative requirement. Such an adjustment cannot be declared illegal if modifications are made in accordance with statutory requirements. The only issue that has to be addressed is ensuring that there are no limitations placed on the statutory requirements for altering the constitution.
The common law norm shields company shareholders from revoking and modifying rights, the seizure of shares held by minority shareholders, and modifications to specific company laws.
The Act's Section 2F.2 addresses the rights of the majority shareholders with regard to the cancellation or modification of rights pertaining to a particular class of shares. Suppose the company constitution does not specify the process for canceling shares. In that case, part 2 of the Corporation Act mandates that modifications to the cancellation and modification of class shares be approved by a majority vote of 75% of the shareholders. Nevertheless, suppose the method for canceling or changing shares has already been specified in the constitution. In that case, the procedure specified in the constitution must be followed before canceling or changing shares. The minority shareholders are protected by this mechanism, which makes it more challenging for the majority shareholders to amend the constitution.
Gold Reefs of West Africa Ltd. v. Allen, a legal case
Lindley MR noted the following in this situation:
"Despite the broad language of section 176 of the Corporations Law, the power conferred by it must be exercised in accordance with the general rules of law assignment help and equity that apply to all powers conferred on majorities and enumerated in the company's memorandum of association.
3: Part 2F.2 of the Corporations Act of 2001 deals with the powers of the majority shareholders for the cancellation or variation of different classes of shares. According to the given section, it is held that if the company's constitution does not lay the procedure for cancellation or variation of the class of shares, then the procedure for making changes should be decided by passing majority votes of 75% of the shareholders. However, if the procedure is already laid out in the constitution, then the procedure for making changes should be decided by majority votes of the remaining 25% of shareholders.
A wide range of freedom is granted to shareholders in an organization, which means that they have the power to add clauses to the agreement for their own protection. Some rights granted to the majority shareholder for their protection as a shareholder in the company include nomination rights and veto rights. If shareholders successfully include these modifications in the constitution, then it shall be binding on all.
The doctrine of fraud imposes restrictions on the majority shareholder's right to vote in a general meeting. However, the fundamental rule of voting at a general meeting is that shareholders have the right to vote as long as their voting authorities are within the scope of their power. Nevertheless, there are associated risks with voting at general meetings, such as the possibility that the majority shareholder will use their vote to harm the company or the minority shareholders.
The Corporation Law of Australia assists a person whose interests have been harmed due to the majority shareholder's actions by allowing the minority shareholder to complain to the court about the majority shareholder's actions.
According to Section 247A of the Act, shareholders have the right to inspect the company's financial records. It is important to inspect the company's financial records so that shareholders become aware of their rights and obligations towards the company.
The rule of majority vote had inherent risk to it, which was determined in the case of Foss v. Hartbottle, where it was decided that the wrong actions of the company should be addressed in this name and not in the name of the shareholders. Traditionally, companies followed the doctrine of majority rule, where the decision of the Board was determined by a simple majority vote of 75%.
The class rights are divided into many shares based on the Corporations Act, such as classes of shares as specified under section 197 of the Act and share capital under section 199 of the Act, as stated in section 246 of the Corporations Act, 2001. According to section 246B of the Corporations Act, 2001, if the company's constitution has not specified any procedure for changing the class of rights.
As a result, it may be said that the company's constitution is its most crucial document; without it, the shareholders may not have any authority. As a result, it is advised that the constitution be carefully drafted to ensure that the member's powers are distributed evenly.
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