Types of Governance Documents
- Types of Corporate Governance Documents
The Corporations Act 2001 stipulates that a company should be governed by two types of documents: a company constitution and replaceable rules (Tomasic, Bottomley, and McQueen, 2013, p. 190). The purpose of each of these documents is to ensure that the company operates in accordance with the law to safeguard the interests of all involved stakeholders. The Corporations Act 2001 also allows companies to use both types of governance documents as long as they meet the set requirements (Asic.gov.au, 2018, p. 11). It is, in fact, necessary in some companies that have complex internal organizations structures.
- The Corporate Constitution
A constitution can be adopted before or after the company’s registration (Asic.gov.au, 2018, p. 11). Members are required to agree to the terms of the constitution in writing if they decide to pass it before registration. Those that adopt their constitution after registration are required to pass a special resolution to that effect.
A corporate constitution is defined as an agreement between several parties in the company: the company and each member; the company and each director; the company and its secretary, and every member with another. These agreements cover a wide range of factors that mostly touch on the company’s internal organization. Although not all companies are required by law to have a constitution, for some it is mandatory. Non-liability companies are required to have a constitution lodged with the Australian Securities and Investments Commission (Asic.gov.au, 2018, p. 12). Proprietary companies (special purpose companies) are also required to have a constitution, but it is not mandatory to have it lodged with the ASIC. These companies are also required to provide their constitution to anyone who requests it within 7 days.
- Replaceable Rules
Replaceable rules can be used instead of the constitution depending on the company’s category and preference. These rules are guidelines set down by the Corporations Act 2001 to govern how companies operate (Tomasic, 2016, p. 1). These rules are preferable over constitutions as they are always up to date with the law – constitutions have to be updated whenever the law is amended. They are also easy to find since they are in the Corporations Act 2001, and they are sophisticated enough to govern internal operations (Asic.gov.au, 2018, p. 12). Some of the issues covered in these rules include the appointment and removal of directors, transfer of shares, payment of dividends, and organization of members’ meetings, among others. There are 39 replaceable rules in total. It is important to note that sole proprietorships in which the sole proprietor is the director as well as the only shareholder are barred from using replaceable rules as a form of governance.
- Effectiveness of Corporate Governance Laws
Adopting a Corporate Constitution
Australia has taken considerable measures to improve its corporate governance policies over the years. However, Tomasic (2016, p. 1) writes that these theories are effective only in theoretic terms. Tomasic writes that companies need to adopt a substantive rather than formal compliance to these laws if any positive change is to be achieved. This can be evidenced by the high number of corporate fraud cases that have hit Australia when compared to other developed industries. For now, however, the government has resolved to go on amending its corporate governance laws in a bid to bring order to the corporate scene.
The decision of the Australian High court on the above case is highly debated because of its controversial nature. The decision was viewed by some as a radical move that would alter the power balance in corporate law by providing the minority partners with powers to halt sales acquisition thus causing an impediment to beneficial commercial transactions. Some people were concerned that the High Court decision on compulsory shares acquisition would precipitate corporate constitution amendment thus causing a further impediment to corporate transactions. Gambotto was particularly considered in about 50 subsequent judgments thus providing most judges with an opportunity of extending the principles of Gambotto into new areas. In response to this, the parliament enacted new corporation legislation provisions that would facilitate compulsory shares acquisition and limit Gambotto application.
The constitution of a company can be amended if the stakeholders find it necessary to either remove or add aspects that are relevant to its respective existence (Lipton, Herzber and Welsh, 2014, p. 24). The following are the grounds that may call for the amendment of a company’s constitution. If a new subsidiary company is introduced, then, there is the need to amend the constitution. For a subsidiary company that does not have books of accounts or any financial records of its own, it is assumed that its activities and actions are pegged on those of the parent company. If any legal responsibly, should they arise from the operations of the directors or the employees, the parent company would assume responsibility (Mortensen, Herzberg and Keyes, 2016, p 77). Here, the corporate veil cannot be lifted since the subsidiary organization depends on the parent company for most of its operations, it not all. Therefore, there is the need to amend the constitution.
If the company’s product and services have enormous exit capacity and extreme levels of excess capacity, the constitution may be amended. This might act as a motivation for the shareholders because of the nature of the assets being highly specialized which might be hard to relocate or sale in case of an exit (Chun et al., 2016, p. 111). On the other hand, the risk of not effectively generating profits and capturing markets may lead to colossal exit blockage related costs, making it hard for the company to grow. First mover advantage is an empirical relationship between the market share and the order of the market order. It is as strong as the empirical relationship between the profitability and the market share.
Replaceable Rules Instead of a Constitution
A threat in the substitute products is identified as a critical ground for amending the constitution of the company. In such a case, the extent of the danger of the substitute products and services will depend heavily on the respective performance and prices of competing products and services and therefore for the willingness of the consumers to substitute (Bottomley, 2016, p 107). The perceptions that customers hold of the company and its competitors whether they offer the homogenous roles or same prices for their products and services should be taken seriously (Du Plessis, 2017, p. 33). The company faces a lot of stiff competition from other existing firms across its location and among all of its products. In the case of the IDP Education, the court held that, in the distribution of ELTS competes with The British Council, 6here are a number of factors that have had a hand in the drop in the distribution or rather the profitability of ELTS exams that are offered by the IDP Education and this is the possible root cause of the adverse effect on the profit margins and financial position of the company (Pearson, 2017, p. 303). The court upheld the change in the constitution on the purview that it was done in the interest of the company to cut short the looming competition. It was reiterated that the actions of the stakeholders were informed by an increased number of centers that offer an alternative high stake for English tests. Also, the cost of sitting for the English tests is a bit lower than that of the ELTS as well as the acceptance of the education departments and the immigration societies.
Lastly, cessation of the objective of establishing a functioning company is one ground that can prompt the adjustment of the constitution to meet the new aims. In amending vital elements of the constitution, it is important to check the interests of minor shareholders (Coffee, Sale, and Henderson, 2015, p. 201). As it stands, the available requirements are sufficient to protect the interests of the minor stakeholders. All the stakeholders have a vote that is equal regardless of their powers in the company. The provision that members can vote either in person or proxy is sufficient enough to allow them to participate in the exercise actively.
Suffice it to say; there are limits on the power of the majority shareholders regarding the variation of member rights when amending the constitution. First, it is within the corporate strategy framework of a company to work in the interests of the members. This makes up the exact strategies incorporated by the organization in an aim to compete favorably in the industry (Lipton, Herzberg, and Welsh, 2014, p 75). There seems to be evidence of a well worked out adoption of a powerful organic growth strategy. The strategically designated intentions mainly leverage previous investment in the global network of the company (Coffee, Sale, and Henderson, 2015, p. 212). Based on their powers, it is possible for the majority of stakeholders to oppress the minority members regarding ownership. The directors ought to have disclosed who the owners of the organization were before the transaction was completed (Mortensen, Garnes, and Keyes, 2016, p 111). The placing of the company would be a fundamental illuminating factor for the reward for such outcomes since different articles of association characterize diverse types of companies.
Amending a Company’s Constitution
In such situations, the minor shareholders should note that the actions of the directors and dominate shareholders inculcate oppression. The position evidences this that the latter duped the other stakeholders of the purchase of another company, which happened to be owned by the directors. In this case, the other right that has been breached is that of disclosure (Chun et al., 2016). Here, courts have affirmed that the ASCI serve to establish the interplay amid the rights of the minority stakeholders and the somewhat oppressive directors. The remedies applicable in this case include damages and restitution. In the present times, significant deliberations have been placed as regards corporate insolvency and the roles set by the majority of stakeholders especially when adjusting clauses and terms on liquidation. Before companies are confirmed to be insolvent, new measures have been placed to ensure that the process is smooth, and meet the rights of all the associated parties (Du Plessis, 2017, p. 91). Like now, there is the establishment of receivers, which include companies with the capacity to complete the transactions, pay the given creditors preferentially, and even assign roles. As of now, this is solely the role of courts.
The minor stakeholders would also use the action of selling off the shares to be one adducing factor to the already gathered evidence. In the case of James Hardie v Hall, similar issues as those that characterize making changes to the constitution to oppress the minority stakeholders were noted (Pearson, 2017, p. 313). The court found that directors ought to act in good faith whenever they are serving the interests of their given organization (Bottomley, 2016, p. 54). Because of the fact that the defendant was found to be a fault, he was asked to pay for the financial loss that the company incurred as a consequence of their rather unprofessional conduct. The other case that denotes such a professional fault is the case of Equiticorp Finance v BNZ (1993) 11 ACLC 952.
Reference List
Asic.gov.au. 2018. Constitution and replaceable rules | ASIC – Australian Securities and Investments Commission. Retrieved from: https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/constitution-and-replaceable-rules/ [Accessed 7 Sep. 2018].
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance. Routledge.
Chen, V., Ramsay, I. and Welsh, M., 2016. Corporate law reform in Australia: An analysis of the influence of ownership structures and corporate failure.
Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation: Cases and materials.
Du Plessis, J.J., 2017. Disqualification of Company Directors: A Comparative Analysis of the Law in the UK, Australia, South Africa, the US and Germany. Taylor & Francis.
Floyd, L., Steenson, W., Coulthard, A., Williams, D. and Pickering, A.C., 2017. Employment, Labour and Industrial Law in Australia. Cambridge University Press.
Lipton, P., Herzberg, A. and Welsh, M., 2014. Understanding company law. Thomson Reuters.
McLaughlin, S., 2018. Unlocking company law. Routledge.
Mortensen, R., Garnett, R. and Keyes, M., 2011. Private international law in Australia. LexisNexis Butterworths.
Pearson, G., 2017. Current Issues for Consumer Protection Law in Australia. In Consumer Law and Socioeconomic Development (pp. 199-208). Springer, Cham.
Tomasic, R., 2016. The challenge of corporate law enforcement: future directions for corporations law in Australia. UW Sydney L. Rev., 10, p.1.
Tomasic, R., Bottomley, S. and McQueen, R., 2013. Corporations law in Australia. Federation Press.
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