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INTERNAL GOVERNANCE Flashcards

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1
Q

What is corporate governance?

A
  • Corporate governance may be viewed as being about the management of business enterprises organized in corporate form – and the mechanisms by which managers are supervised
  • Usually corporate governance is a topic that includes examining corporate governance rules, the organizational structure of the company, and the duties of those involved in its management
  • Corporate mangers hold immense power in being able to deal with other people’s money; funds provided by shareholders, creditors and other stakeholders in the company
  • With that power comes responsibility and also legal obligations through various duties placed on directors and managers
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2
Q

Internal Stakeholders

A

› Employees
› Manager
› Owners

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3
Q

External Stakeholders

A

› Suppliers
› Society
› Government
› Creditors
› Shareholders
› Customers

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4
Q

INTERNAL MANAGEMENT PRIOR TO JULY 1998

A
  • Prior to July 1998, every company was required to have a memorandum of association and articles of association
    › These documents were developed in the UK from 1844 and explained to the outside world the company’s purpose and objectives:
     Memorandum of association was the external document
     Articles of association was the internal document
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5
Q

CHANGES IN 1998

A
  • The Company Law Review Act 1998 (Cth) amended legislation to simplify and modernise company law
    › Separate documents dispensed with; memorandum of association and articles of association formed into a ‘corporate constitution’
    › Alternatively, a company could rely on Replaceable Rules that have been included in the Corporations Act
  • What Changed in 1998?
    › For companies that existed (incorporated) Prior to 1 July 1998
     3 choices:
  • Do nothing. In that existing memorandum and articles are consolidated and become the Corporate Constitution;
  • choose to repeal their corporate constitution and accept the replaceable rules of the Corporations Act; or
  • adopt a Corporate Constitution by passing a special resolution. The Constitution adopted may include replaceable rules and/or their own draft individual provisions
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6
Q

Types of companies to whom general rules automatically apply differently

A
  1. No liability companies – these must have a corporate constitution as there is still a requirement for a mining purposes objects clause: s 112(2)
  2. Sole member/director proprietary companies – if the same person is both a director and member of the company, then the replaceable rules do not apply: s 135(1) (these types of companies have their own specific provisions in the Corporations Act, such as ss 198E, 201F and 202C)
  3. Listed companies – ASX Listing Rules (LR 15.11) require certain provisions to be in a corporate constitution, these companies cannot rely solely on the replaceable rules
    - Further, there are mandatory provisions in the Corporations Act which cannot be excluded, modified or replaced by the company making a different provision, for instance the right of a member to inspect free of charge certain registers kept by the company: s 173
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7
Q

Objects Clauses

A
  • The only remnant from the previous memorandum of association that may continue today is the objects clause
  • An objects clause (known as a scope of business clause) was part of the memorandum which described a long list of business activities in which the company might engage
  • The Corporations Act makes an object clause mandatory for No Liability companies, but any company is able to place such a clause into its corporate constitution: s 125
  • The objects clause had two purposes:
    1. to protect investors who would know their money would be invested; and
    2. to protect creditors so that the company’s capital was not spent in unauthorized activities
  • The object clause suffered a number of problems due to the common law concept of ultra vires
  • The legal meaning of ultra vires is exceeding the powers of the entity
  • If a company exceeded its contractual powers as stated in the object clause, the resultant contract was void; this meant that the company could only carry on the business activities that were stated in the objects clause in the memorandum
  • Through statutory amendments in 1984, the object clause is now optional
    › S 124 of the Corporations Act, the company has full legal capacity of an individual; this effectively removes the the whole concept of ultra vires for corporations and gives the company full contractual capacity
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8
Q

Internal Governance Rules

A
  • Regulation of a company’s internal management may be done by the replaceable rules that apply to a company, by a constitution, or by a combination of both
  • The internal governance rules have effect as contractual obligations on the company, its members and officers; changes generally require a special resolution of members
  • However, regulation of a company’s internal management is not limited to the corporate governance rules; can include eg. a separate agreement among the company’s shareholders: Elders Forestry Ltd v Bosi Security Services Ltd (2010) 80 ACSR 122
  • Replaceable Rules and Constitution: Part 2B.4 Corporations Act
    › Replaceable Rules are listed in a convenient summary table found in s 141 of the Corporations Act
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9
Q

WHAT INTERNAL GOVERNANCE DEAL WITH

A

› the appointment, removal and powers of the company’s officers (directors and secretary) (ss 201G and 203C);
› The procedure for convening and conducting directors’ meetings (ss 248A-G);
› The procedure for convening and conducting members’ meetings (including voting rights) (ss 249C and 250J);
› Any special rights attaching to classes of shares;
› Rules relating to dividends (s 254U);
› Rules relating to the transfer and transmission of shares (ss 1072A-B, 1072D, 1072F-G).

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10
Q

WHEN DO THE REPLACEABLE RULES APPLY

A
  • A company may choose to have its internal management governed by the replaceable rules as et out in the Corporations Act
  • If a company was formed on or after 1 July 1998, it may make the election for the replaceable rules to govern simply by not adopting a constitution
  • If a company was formed prior to 1 July 1998, it can invoke the replaceable rules by repealing its existing memorandum and articles of association: s 135
  • The replaceable rules apply to a company unless displaced or modified in accordance with s 135(2) by operation of s 135(1) (the way in which replaceable rules may be displaced/modified by company constitution is discussed below)
  • If the replaceable rules are amended by parliament, those amendments apply automatically to the company
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11
Q

WHEN IS IT APPROPRIATE TO USE THE REPLACEABLE RULES

A
  • Its important for the company, its participants and their advisors to look closely at each replaceable rule to determine whether, in the individual circumstances of the company, that rule is appropriate for the particular company
  • Potential advantages of Replaceable Rules:
    › Rules are located in relevant sections of the Act;
    › Reduction or elimination of expenses in keeping corporate constitutions up-to-date;
    › Replaceable rules will always be up-to-date on statutory change;
    › Replaceable rules provide basic standards required for a company to function
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12
Q

DISADVANTAGES OF REPLACEABLE RULES

A
  • No flexibility
  • Not exhaustive
    › Many companies will need to add additional provisions to the RR.
    › i.e. companies that wish to have partially paid shares.
  • May not be commercially desirable i.e. s 254D
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13
Q

COMPANY CONSTITUTIONS

A
  • Instead of relying on the replaceable rules, a company may choose to adopt a different set of rules in the form of a ‘constitution’
  • Members of public companies that have adopted a constitution can obtain a copy of that constitution from company: s 139
  • Because public companies must lodge their constitutions and any amendments with ASIC, any person can obtain a public company’s constitution by conducting a search of ASIC’s records
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14
Q

WHY AND HOW TO ADOPT A CONSTITUTION

A
  • A company may want to substitute different rules for some or all of the replaceable rules; to supplement the replaceable rules, to address matters not covered by them
  • Collect internal governance matters into a single document; meet the requirements of ASX Listing Rules (for public companies); to ensure that if parliament amends a replaceable rule that it does not affect the company unless specifically adopted, etc
  • A company can choose to adopt a constitution on registration; each person who is becoming a member must agree in writing to the terms of the proposed constitution before the application is lodged: s 136(1)(a)
  • In passing a resolution to adopt a constitution the members of the company will be bound by the rules that govern the exercise of their voting rights
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15
Q

AMENDING OR REPEALING A CONSTITUTION

A
  • If a company has a constitution, it may wish to amend it from time to time (s 136); alternatively, it may wish to repeal that constitution and rely on the replaceable rules (s 137)
  • Generally, amending or repealing a company’s constitution requires a special resolution of its members (and may make further requirements to be satisfied before the special resolution takes place, such as requiring the written consent of all members: s 136(3))
    › The corporate constitution can be legally altered by passing a special resolution, which requires 75% majority vote by the members and following a basic procedure
    › Additional requirements could be needing approval of members (i.e. for a sml company).
  • If a company has passed a resolution to amend or repeal a constitution, that resolution will take effect on the day it is passed or on a later date specified in the resolution
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16
Q

HOW DOES A CONSTITUTION OPERATE TO DISPLAY OR MODIFY REPLACEABLE RULES

A
  • s 135(2) of the Corporations Act states that:
    › ‘a provision of a section or subsection [of the Corporations Act] that applies to a company as a replaceable rule can be displaced or modified by the company’s constitution’
  • The constitution should make clear the company’s intention to displace or modify one or more of the replaceable rules
  • For example, a difficulty may be created where a company’s constitution does not expressly exclude a particular replaceable rule but deals with a matter covered by a replaceable rule, in a manner that is inconsistent with that rule
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17
Q

ADVANATAGES OF CONSTITUTION

A
  • Wide range of companies
  • Tailored
  • Flexible
  • Shareholders can amend (special resolution of shareholders)
  • Single document
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18
Q

DISADVANTAGES OF CONSTITUTION

A
  • Expensive to draft and maintain
    › i.e. legislative changes
  • Disagreements over clauses
  • Special resolution to make changes
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19
Q

LEGAL EFFECT OF INTERNAL GOVERNANCE RULES

A

S 140 - Statutory Contract:
- A company’s internal governance rules operate as a contract
- This contract is created, not by all parties signing it, but by statute
› Each person involved is taken to have accepted the contract.
- s 140 is important in determining the manner in which the internal governance rules are to be interpreted, the rights of the company, its members and officers to require compliance with the rules and the consequences of failure by some who are bound to comply with them

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20
Q

S 140

A

› ‘a company’s constitution (if any) and any replaceable rules that apply to the company have the 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 rules so far as they apply to that person.’

21
Q

how are internal governance rules interpreted

A
  • Because internal governance rules apply as a contract, courts will interpret them according to the rules of construction applicable to contracts generally
  • In interpreting the replaceable rules as they apply to a particular company, the court would not rely on the rules of interpreting the Corporations Act itself, but instead on principles of contract law; this includes interpreting internal governance rules to give them business efficacy: Rayfield v Hands [1960] Ch 1
  • The corporate constitution will be interpreted as a commercial document so as to give effect to business efficacy; the meaning of the constitution is to be objectively assessed
    › The document must be read as a whole, and where appropriate, have regard to the purpose that, from an objective perspective, it was intended to serve
    › The surrounding circumstances that led to the formulation of the constitution may be relevant to assist with interpreting ambiguous clauses (in the constitution)
22
Q

How are the rules enforced

A
  • Unlike many other provisions in the Corporations Act, a failure to comply with the replaceable rules that apply to a company is not itself a contravention of the Corporations Act; this means that civil and criminal liability provisions in the Corporations Act, or allowing for statutory injunctions against the breach of the Act, do not apply: s 135(3)
  • A company’s constitution may include restrictions on its objects; if a company acts outside its objects, or breaches a restriction or prohibition on the exercise of its powers contained in the constitution, those participants that caused the company to breach its constitution may be liable to other participants in the company (see corporate capacity wk 5)
23
Q

3 ways - How can the statutory contract be enforced

A
  • Enforcing the statutory contract
    › Can only be enforced by a person listed in s 140(1)(a)-(c)
    › Outsiders do not have a right to sue: see Hickman v Kent or Romney Marsh sheep-Breeders’ Association [1915] 1 Ch 881B and Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 20
    › Members can enforce constitution as against another member: Carew-Reid v Public Trustee and others: (1996) 20 ACSR 443.
24
Q

LIMITATIONS TO ENFORCING STATUTORY CONTRACT

A
  • cannot be enforced by outsiders
  • only allowed to sue in their capacity as a member
  • member cannot enforce compliance by the company with a procedural requirement, where failure can be validly excused by a majority of members in general meeting.
  • member may be limited to rules that confer rights that are personal to the member in its capacity as such
25
Q

LIMITATION 1

A

› Despite the internal governance rules applying as a contract between those noted in s 140, s 140 of the Corporations Act is not so broad to give every person the right to have the company’s affairs conducted in accordance with the internal governance rules
› There are certain legal limitations that apply that may affect a person’s ability to require that another person do something that is required under the internal governance rules
› S 140 is limited in that in provides for the internal governance rules to have effect as a contract only:
 Between the company and each member;
 Between the company and each director and secretary;
 Between each member and each other member.
› Further, the contract cannot be enforced by outsiders.

26
Q

LIMITATION 2

A

› To the extent s 140 confers rights or obligations on a member, it does so only if (and while) the person is a member and only in their capacity as a member
› Generally, a person becomes a member on registration of the company if they are named in the application, or on their name being entered in the company’s register of members following issue to them of new shares, or transfer to them of existing shares from an existing shareholder
› For instance, if a provision of a company’s internal governance rules purported to impose some obligation on a person in their capacity as an employee of the company, and that person happened to be a member of the company, the company could not use the person’s status as a member to enforce the internal governance rules under s 140 against them in their capacity as an employee

27
Q

LIMITATION 3

A

› A member cannot enforce compliance by the company with a procedural requirement in the internal governance rules where failure to comply with that requirement can validly be excused by a majority of members in general meeting (discussed more in wk 6 and wk 9)
› (Because duties imposed on directors and other officers are owed to the company, it is the company that decides whether or not to sue the officer (in the case of statutory duties ss 180-184, these are enforced by ASIC, not the company))
› It is possible for a majority of members of a company to ratify an action of an officer that would otherwise be a breach of duty by that officer. The result is that officer cannot then be sued by the company as there is no longer a breach of duty

28
Q

LIMITATION 4

A

› A member’s right to enforce the internal governance rules under s 140 may be limited to those of the rules that confer rights that are personal to the member in its capacity as such
 The right to vote conferred under the replaceable rule in s 250E would be an example of such right
› S 140 would not appear to extend so far as to enable a member to sue to enforce every provision of the internal governance rules
› In Smolarek v Liwszyc (2006) 24 ACLC 512, at 664 the court said:
 ‘It is accordingly plain, from [s 140], that it imposes a duty upon each of the parties to that deemed contract to comply with the replaceable rules so far as they apply to that person… Of course, a provision of the statutory contract cannot be enforced unless it affects the member in his or her capacity as a member…If the act or omission complained of is a wrong to the company alone, the members’ standing to sue becomes doubtful’.

29
Q

WHAT HAPPENS IF NON-COMPLIANCE

A
  • If a provision of a company’s internal governance rules (replaceable rules or constitution) have not been observed, then the following may result:
    › In the case of non-compliance by the company, a member may be able to obtain a declaration of injunction requiring the company to comply, provided the rule is one that a member can enforce on the principles set out above. A director or the company secretary may also be able to enforce the internal governance rules on this basis.
    › In the case of non-compliance by a member, another member or the company may be able to obtain declaratory or injunctive relief, or damages.
    › In the case of non-compliance by a director or secretary, the company may be able to obtain declaratory or injunctive relief, or damages.
  • Apply to SC under CL, not as a breach of s 141.
30
Q

REMEDIES FOR BREACH OF THE STATUTORY CONTRACT

A

› What happens if you breach a replaceable rule?
 Not a breach of the Corporations Act: s 135(3)
 Also see Smolarek and another v Liwszyc and others [2006] WASCA 50
 Contravening conduct may be rendered void: see BI Constructions Pty Ltd v Shad [2010] NSWSC 484; BC201003519
› Can a member sue for damages?
 Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 affirmed in Australia in Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15
 Sons of Gwalia Ltd v Margaretic (2007) 232 ALR 232

31
Q

WHAT OR WHO IS AN OFFICER

A
  • A typical Australian corporation has key corporate officers such as directors, the chief executive officer (CEO), the company secretary and senior managers (often called ‘executives’ within corporations)
  • The subject of corporate officers is one of the most important areas of corporate law and involves many complex and inter-linked issues; inter-relationships between the common law duties, the equitable fiduciary duties and the statutory duties
  • There are some laws that are applied to all corporate officers and some laws only to directors; thus, definitions help to assess the applicable law
32
Q

STATUTORY DEFINITION OF AN OFFICER

A

officer of a corporation means:
(a) a director or secretary of the corporation; or
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation’s financial standing; or
(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); or

33
Q

ASIC V KING

A

 The High Court affirmed in King that anyone in the company who can affect significantly the company’s financial standing is deemed an ‘officer’. The High Court rejected a narrower interpretation by the Queensland Court of Appeal in King v ASIC [2018] QCA 352, which required the person to be named an office holder.

34
Q

Practical Implications of Legal Distinction between officer and director

A
  • Part 2D.1 of the Corporations Act imposes specific legal duties on all officers, such as the duty of care and diligence
  • Some duties however are solely applied to directors – such as the duty not to trade while insolvent under s 588G
  • Thus, important to be aware of the statutory definition of ‘officer’ because it includes other senior officials of the company, including the directors, the executive employees, and the company secretary and all have the same primary duties found in ss 180-184 of the Corporations Act
35
Q

HOW IS DECISION MAKING DIVIDED

A
  • Board of directors:
    › Managerial power
     See s 198A, Scott v Scott [1943] 1 All ER 582
  • General Meeting of members
    › Member/Shareholder power
     ACCR v CBA (2016) 248 FCR 280
36
Q

CORPORATE ORGANS AND DIVISION OF POWER

A
  • Board of Directors
  • Company’s management
  • Shareholders
  • Management Power – ongoing direction and supervision of the company.
  • Day-to-day running of company – guided by Board of Directors
  • Shareholder Power – limited to decisions by resolution in a GM (ss 201E, 201G and 203D). See National Roads and Motorists’ Association v Parker (1986) 6 NSWLR 517 and Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34
37
Q

HOW DECISION-MAKING IS DIVIDED

A
  • Decision-making in solvent companies is divided between the directors and members
  • The basis on which decision-making is divided depends on the law and the company’s internal governance rules
  • The effect of the legal rules governing division of powers: a decision properly made by the appropriate body (that is, members or directors, as the case may be) is a decision of the company
  • Directors, acting collectively through the board, or the members, acting collectively through the general meeting, make decisions that are treated as a matter of law as decisions of the company – they are acting as what is referred to as organs of the company
38
Q

RELATIONSHIP BETWEEN DIRECTORS AND MEMBERS

A
  • Corporate law governs the allocation of authority and responsibility to two principal corporate organs:
    1. Directors acting as a board; and
    2. Members acting in general meeting.
  • The law states that under typical management provisions of a company’s constitution, the directors have the responsibility of seeing that the company is properly managed: s 198A(1)
  • Directors are accountable to members, in the sense that they are required to report to members and the members in general meeting have the power to remove them from office
39
Q

4 PRINCIPLES ABOUT MANAGEMENT STRUCTURE OF A COMPANY

A
  1. The board of directors and the members in the general meeting is each an organ of the company
  2. Each organ of the company has power to make particular decisions; each is sovereign with respect to those decisions, neither can take over the decision-making power of the other
  3. The respective powers of each organ are determined by the law and the company’s internal governance rules
  4. That power is a power to act as the company (therefore binding the company) or to delegate the power
40
Q

DIVISION OF POWERS BETWEEN BOARD OF DIRECTORS AND THE GENERAL MEETING

A
  • The Directors: Power of Management
    › In most companies, directors have a general power of management conferred upon them by the company’s internal governance rules
    › If a company has adopted the replaceable rules, the scope of directors’ power is determined by s 198A of the Corporations Act
    › Companies that have a constitution which displaces s 198A will usually have a provision in that constitution conferring a similar broad power of management on the board
41
Q

APPOINTMENT OF DIRECTORS

A

ss 201G, 201H and 202A

42
Q

DIFFERENT TYPES OF DIRECTORS

A

 Director (validly appointed)
 Alternate director (validly appointed): s 201K
 De facto director (not appointed): Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 – see 201M and 204E
 Shadow director (not appointed). Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290
 Executive vs non-executive
 Managing director: see 198C(2), 201J and 203F
 Chairperson: s248G, 248E, also see AWA Ltd v Daniels (1992) 10 ACLC 933 & ASIC v Rich [2003] NSWSC 85

43
Q

OPERATION OF THE BOARD

A

› Disclosure of interests: ss 191-193, 195
› Reliance on information: s 189
› Delegation: s 198D, also see Adler v ASIC (2003) 46 ACSR 504 [372]
› Notice & quorum: s 248F, also see Mitropoulos v Greek Orthodox Church (1993) 10 ACSR 134, Toole v Flexihire Pty Ltd (1991) 6 ACSR 455
› Resignation & removal of directors: ss 203A, 203C, 203D(1)
› Disqualification
 Automatic: ss 206B(1) and 206B(3)
 Disqualification by court: ASIC v Adler (2002) 42 ACSR 80 and ASIC v Vizard (2005) 219 ALR 714
 ASIC

44
Q

DIRECTORS POWERCAN MEMBERS OVERRIDE DECISION OF BOARD

A

 General principle that the two organs of the company are sovereign with respect to their decision making was confirmed in: Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34

45
Q

Can members give instructions to the board?

A

 General principle that members are not permitted to interfere with a company’s board exercising any power that is exclusively vested in it was confirmed in: Australasian Center for Corporate Responsibility v Commonwealth Bank of Australia [2015] FCA 785

46
Q

MEMBERS DECISION MAKING POWER

A

› The Corporations Act reserves certain decision-making powers to the members in general meeting
› These include the power to adopt, modify or repeal a constitution, to veto certain reductions of capital and, in the case of public companies, to remove directors from office, approve the auditor, etc
› Members of public companies tend to have more extensive voting rights than members of proprietary companies, and members of listed companies are given more extensive voting rights than members of unlisted companies by the requirements of the ASX Listing Rules
› In addition to voting powers expressly granted by the Corporations Act and the company’s internal governance rules, the law recognizes shareholders’ reserve powers, for instance:
 Where the board is unable to act (Barron v Potter [1914] 1 Ch 895; s 195(4))
 To commence and prosecute legal proceedings, where alleged wrongdoers control the company (Kraus v JG Lloyd Pty Ltd [1965] VR 232)
 To ratify directors’ acts (essentially to make a decision that the company will not commence legal proceedings against a wrongdoer director).
› The scope of members’ reserve powers: Massey v Wales (2003) 21 ACLC 1

47
Q

MEMBERS MEETING TYPES

A
  1. Annual General meeting (AGM)
  2. Extraordinary meeting (EGM)
  3. Class meetings (not discussed).
48
Q

HOW TO CALL A MEMBER MEETING

A

› Notice: ss 249H, 249L
› Quorum: s 249T
› Resolution: special (s 9) and ordinary
› Voting: ss 250E, 250J
› Chairperson: s 249U

49
Q

WHAT ARE THE POWERS OF THE GENERAL MEETING

A
  1. Changes to company’s constitution, name or type: ss 136, 157, 162
  2. Variation of class rights: s 246B
  3. Changes to share capital: ss 256B, 257C, 257D, 254H
  4. Appointment and removal of directors: ss 201G, 201H; ss 203C and 203D
  5. Members’ voluntary winding up: topic 8 – external administration
  6. ASX listed companies: also see Australian Securities Exchange chs 7, 10. Listing Rule, generally see ASX LR 7.1, 10.1, 11.1 and 11.2.

CORPS LAW (8 decks)

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