The Corporations Act prescribes how a company constitution may be amended and the types of amendments that bind the shareholders of a company.

Power to Amend a Company Constitution

A company may modify or repeal its constitution by special resolution of shareholders, being a resolution passed by at least 75% of votes.  This is in contrast to other forms of contract, which require all parties to agree to any amendment. A 75% majority may therefore amend a constitution and those amendments would bind the minority, even though the minority may have voted against the amendments, unless there are additional requirements in the constitution or common law or statutory protections.

A company constitution may not be amended pursuant to the power in section 136(2) of the Corporations Act if the constitution specifies additional requirements that must be complied with before any amendment is effective.  This may include a requirement that an additional condition be fulfilled, the consent of a particular person obtained or the resolution be passed unanimously by the shareholders.  Where any such additional requirement is specified in a company’s constitution the additional requirement itself must first be complied with before it can be amended.

Although the opportunity for minority shareholders to negotiate such additional requirements may provide some protection to minority shareholders against decisions by the majority that may have adverse financial consequences for them and make it more difficult for a company constitution to be amended, a company cannot restrict its statutory power to alter its constitution and the constitution cannot state that it cannot be amended, as any such restriction or provision would be invalid.  Care needs to be taken to ensure that any additional requirements do not restrict this power.

Amendments That Do Not Bind Shareholders

The Corporations Act and common law provide protection to shareholders of a company against:

  • variation or cancellation of class rights;
  • certain amendments to provisions of a company’s constitution that have the effect of expropriating the shares of minority shareholders or rights attaching to those shares;
  • amendments to specific provisions of a company’s constitution.

Class Rights

The power of majority shareholders to vary or cancel rights attached to a class of shares is limited by Part 2F.2 of the Corporations Act, which provides that if the constitution of a company:

  • does not set out a procedure for varying or cancelling class rights then those rights may only be varied or cancelled by a special resolution passed at a meeting of shareholders of the affected class or with the written consent of 75% of those shareholders;
  • sets out a procedure for varying or cancelling class rights then those rights may only be varied or cancelled in accordance with that procedure.

These provisions provide the opportunity for minority shareholders of closely held private companies to include a procedure in the constitution that protects their interests by making it more difficult for the majority to amend the constitution.  This is particularly important as a broad range of transactions can directly or indirectly affect class rights.

Limitations on Expropriation

The power of majority shareholders to amend the constitution for the purpose of expropriating the shares of a minority shareholder or valuable rights attaching to those shares (e.g. voting rights) is limited following the decision of the High Court of Australia in Gambotto v WCP Ltd.  In that case it was held that an amendment to a constitution so as to confer on the majority power to expropriate shares of the minority will only be valid if:

  • it is for a proper purpose; and
  • it will not operate oppressively in relation to minority shareholders (i.e. fair in all the circumstances).

The majority judgment of the Court held that the valid exercise of a power to expropriate shares of the minority requires full disclosure of all material information, an independent expert’s valuation of any shares to be expropriated and payment of market value for the shares.

Following the Gambotto decision, expropriation is permissible where the minority’s continued shareholding would be detrimental to a company, a minority shareholder is competing with a company, it is necessary to ensure a company could continue to comply with regulations governing the principal business which it carries on, or is necessary to protect or promote the interests of a company.  Expropriation is impermissible where the majority is merely seeking to secure for themselves the benefit of a new corporate structure or commercial advantage.

The Gambotto decision provides some protection to minority shareholders of closely held private companies by ensuring that the majority cannot expropriate their shares at less than market value.

Section 140(2) of the Corporations Act

The interests of minority shareholders of closely held private companies are protected against amendments to a constitution as they are not bound by amendments made after the date on which they became a shareholder and requires a shareholder to take up additional shares, increases a shareholder’s liability to contribute to the share capital of a company, or imposes or increases restrictions on the right to transfer shares already held by the shareholder, unless the shareholder agrees in writing to be bound by the amendment.

Amendments that Bind Shareholders

Where the shareholders of a company adopt a constitution that amends the replaceable rules these amendments bind the shareholders of the company.

There are a number of replaceable rules that could be amended to provide significant protection to minority shareholders of closely held private companies against decisions of the majority that may have adverse financial consequences for them.

Conclusion

Amending a company constitution requires forethought and planning. It’s important that you work with an experienced lawyer to make any such amendments.

Next Steps

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