PART B: CORPORATIONS LAW

Week 8: Internal Rules of a Company, Management and

Contracting
Lecture Notes

Topics for week 8

Weekly textbook reading: Business and Corporations Law (BCL) chapter 8 pp
454-464 and chapter 9
The topics to be covered in this class are:
● What are the internal rules for companies and why are these important?
● What is “organic theory” in its application to how companies work and do business
● What are the rules around contracting with a company?
● What are pre-registration contracts and how do they work?
● What is “membership” of a company and how is this regulated?
● What is involved in being a company director?
● Company meetings

Internal Rules of a company: Constitution and Replaceable rules

Source:
https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-com
pany/constitution-and-replaceable-rules
Part 2B.4 of the Corporations Act 2001 (Cth) (ss 134-141) deal with replaceable
rules and constitution of companies)
A company’s internal management may be governed by:

● provisions of the Corporations Act 2001 that apply to the company - known as
replaceable rules
● a constitution, or
● a combination of both.

Constitution
The constitution is a contract between:

● the company and each member (s 140(1)(a))

● the company and each director (s 140(1)(b))
● the company and the company secretary (s 140(1)(b)), and
● a member and each other member (s 140(1)(c)).1

1
140 Effect of constitution and replaceable rules
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A company can adopt a constitution before or after registration. If it is adopted before
registration, each member must agree (in writing) to the terms of the constitution. If a
constitution is adopted after registration, the company must pass a special resolution
to adopt the constitution.
A company can change or repeal its constitution by passing a special resolution. A
special resolution needs at least 28 days’ notice for publicly listed companies and 21
days’ notice for other company types. For the resolution to pass, at least 75% of the
votes cast must be in favour.
Some not-for-profit companies must have specific clauses in their constitution for tax
concessions..
Which companies need a constitution?
The following companies must be governed by a constitution:

● 'No Liability' public companies

● 'special purpose companies' that want a reduced annual review fee.

A proprietary company (that is a special purpose company) must have a constitution.

It doesn’t need to be lodged with ASIC, but a copy must be kept with the company's
records.
A company must provide a current copy of the constitution to any member who
requests it within seven days. If a fee is charged, the constitution must be provided
within seven days of payment.
Replaceable rules (s 141 Corporations Act)

(1) A company’s constitution (if any) and any replaceable rules that apply to the company
have 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 constitution and rules so far
as they apply to that person.
(2) Unless a member of a company agrees in writing to be bound, they are not bound by a
modification of the constitution made after the date on which they became a member so
far as the modification:
(a) requires the member to take up additional shares; or
(b) increases the member’s liability to contribute to the share capital of, or otherwise to
pay money to, the company; or
(c) imposes or increases restrictions on the right to transfer the shares already held by
the member, unless the modification is made:
(i) in connection with the company’s change from a public company to a
proprietary company under Part 2B.7; or
(ii) to insert proportional takeover approval provisions into the company’s
constitution.

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Replaceable rules are in the Corporations Act and are a basic set of rules
for managing your company. If a company doesn't want to have a constitution, they
can use the replaceable rules instead.
Replaceable rules do not apply to a proprietary company if the same person is
the sole director as well as the sole shareholder..
If a company wants to change or remove a replaceable rule, they will need to have a
constitution that outlines the changes.
Replaceable rules outlined
Replaceable rules are in the Corporations Act and are a basic guide for managing a
company. If it is a proprietary company, they can be an easy way to manage a
company's governance.
Replaceable rules do not apply to a proprietary company if the same person is
the sole director as well as the sole shareholder.
The table below details the provisions outlined in the Corporations Act 2001.

Provisions that Section No

apply as
replaceable rules

Officers and Employees

1 Voting and 194 If a director of a proprietary company

completion of has a material personal interest in a matter
transactions – that relates to the affairs of the company
directors of and:
proprietary
companies (a) under section 191 the director discloses
the nature and extent of the interests and its
relation to the affairs of the company at a
meeting of the directors; or
(b) the interest is one that does not need to
be disclosed under section 191; then
(c) the director may vote on matters that
relate to the interest; and
(d) any transaction that relate to the interest
may proceed; and
(e) the director may retain benefits under the
transaction even though the director has the
interest; and
(f) the company cannot avoid the transaction
merely because of the existence of the
interest.
If disclosure is required under section 191,
paragraph (e) and (f) apply only if the

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 disclosure is made before the transaction is
entered into.
Note: A Director may need to give notice to
the other directors if the director has material
personal interest in a matter relating to the
affairs of the company (see s191)

2 Powers of directors 198A The business of the company is to be

managed by or under the direction of the
directors. The directors may exercise all the
powers of the company except any powers
that this Act or the company's constitution (if
any) requires the company to exercise in a
general meeting. For example, the directors
may issue shares, borrow money and issue
debentures.

3 Negotiable 198B Any two directors of a company that

instruments has two or more directors, or the director of a
proprietary company that has only one
director, may sign, draw, accept, endorse or
otherwise execute a negotiable instrument.
The directors may determine that a
negotiable instrument may be signed, drawn,
accepted, endorsed or otherwise executed in
a different way.

4 Managing director 198C The directors of a company may

confer on a managing director any of the
powers that the directors can exercise. The
directors may revoke or vary a conferral of
powers on the managing director.

5 Company may 201G A company may appoint a person as a

appoint a Director director by resolution passed in general
meeting

6 Directors may 201H The directors of a company may

appoint other appoint a person as a director. A person can
directors be appointed as a director in order to make
up a quorum for a directors’ meeting even if
the total number of directors of the company
is not enough to make up that quorum. The
company t must confirm the appointment by
resolution within 2 months after the
appointment by a proprietary company, or at
the next AGM for a public company.

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7 Appointment of 201J The directors of a company may
managing directors appoint 1 or more of themselves to the office
of managing director of the company for the
period, and on the terms (including as to
remuneration), as the directors see fit.

8 Alternate directors 201K With the other directors’ approval, a

director may appoint an alternate to exercise
some or all of the director's powers for a
specified period. The appointment and terms
of appointment must be notified to ASIC
(refer to s205B)

9 Remuneration of 202A The directors of a company are to be

directors paid the remuneration that the company
determines by resolution. The company may
also pay the directors’ travelling and other
expenses that they incur in attending
meetings and in conjunction with the
company's business. (Refer also to Chapter
2E for public companies)

10 Director may resign 203A A director of a company may resign as

by giving written a director of the company by giving a written
notice to company notice of resignation to the company at its
registered office.

11 Removal by 203C A proprietary company may by

members - resolution remove a director from office and
proprietary company appoint another person as a director instead.

12 Termination of 203F A person ceases to be managing

appointment of director if they cease to be a director. The
managing director directors may revoke or vary an appointment
of a managing director.

13 Terms and conditions 204F A secretary holds office on the terms

of office for and conditions (including the remuneration)
secretaries that the directors determine

Inspection of books

14 Company or 247D The directors of a company, or the

directors may allow company by a resolution passed at a general

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 member to inspect meeting, may authorise a member to inspect
books the books of the company.

Directors’ Meetings

15 Circulating 248A The directors of a company may pass

resolutions of a resolution without a directors’ meeting
companies with more being held if all the directors entitled to vote
than 1 director on the resolution sign a document containing
a statement that they are in favour of the
resolution set out in the document. Separate
copies of a document may be used for
signing by directors if the wording of the
resolution and statement is identical in each
copy. The resolution is passed when the last
director signs.

16 Calling directors’ 248C A directors’ meeting may be called by

meetings a director giving reasonable notice
individually to every other director. A director
who has appointed an alternate director may
ask for the notice to be sent to the alternate
director

17 Chairing directors’ 248E The directors may elect a director to

meetings chair their meetings. The directors may
determine the period for which the director is
to be the chair. The directors must elect a
director present to chair a meeting, or part of
it, if:

(a) a director has not already been elected to

chair the meetings; and

(b) a previously elected chair is not available

or declines to act, for the meeting or the part
of the meeting.

18 Quorum at directors’ 248F Unless the directors determine

meetings otherwise, the quorum for a directors’
meeting is two directors and the quorum
must be present at all times.

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 For resolutions of single director proprietary
companies without meetings see s248B.

For special quorum rules for public

companies, see s195.

19 Passing of directors’ 248G A resolution of the directors must be

resolutions passed by a majority of the votes cast by
directors entitled to vote on the resolution.
The chair has the casting vote, if necessary,
in addition to any vote they have in their
capacity as a director.

Meetings of Members

20 Calling of meetings 249C A director may call a meeting of the

of members by a company's members
director

21 Notice to joint 249J(2) Notice to joint members must be

members given to the joint member named first in the
register of members.

22 When notice by post 249J(4) A notice of meeting sent by post is

or fax is given taken to be given three days after it is
posted. A notice of meeting sent by fax, or
other electronic means, is taken to be given
on the business day after it is sent.

23 Notice of adjourned 249M When a meeting is adjourned, new

meetings notice of the resumed meeting must be given
if the meeting is adjourned for one month or
more

24 Quorum 249T The quorum for a meeting of the

company's members is two members and
the quorum must be present at all times
during the meeting.

For single member companies, see s249B.

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25 Chairing meetings of 249U The directors may elect an individual
members to chair meetings of the company's members

26 Business at 249W(2) Only unfinished business is to be

adjourned meetings transacted at a meeting resumed after an
adjournment.

27 Who can appoint a 249X A member of a company who is

proxy? (proprietary entitled to attend and cast a vote at a
co. only) meeting of the company's members may
appoint a person as the member's proxy to
attend and vote for the member at the
meeting.

28 Proxy vote valid 250C(2) Unless the company has received

even if member dies, written notice of the matter before the start or
revokes appointment resumption of the meeting at which a proxy
etc votes, a vote cast by the proxy will be valid
even if, before the proxy votes:

(a) the appointing member dies; or

(b) the member is mentally incapacitated; or

(c) the member revokes the proxy’s

appointment; or

(d) the member revokes the authority under

which the proxy was appointed by a third
party; or

(e) the member transfers the shares in

respect of which the proxy was given.

A proxy's authority to vote is suspended

while the member is present at the meeting
(see s249Y(3)).

29 How many votes a 250E Subject to any rights or restrictions

member has attached to any class of shares, at a meeting
of members of a company with a share
capital.

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 (a) on a show of hands each member has
one vote; and

(b) on a poll each member has one vote for

each share they hold.

30 Jointly held shares 250F If a share is held jointly and more than
one member votes in respect of that share,
only the vote of the member whose name
appears first in the register of members
counts.

31 Objection to right to 250G A challenge to a right to vote at a

vote meeting of a company’s members may only
be made at the meeting and must be
determined by the chair, whose decision is
final.

32 How voting is carried 250J A resolution put to the vote at a

out meeting of a company’s members must be
decided on a show of hands unless a poll is
demanded. Before a vote is taken the chair
must inform the meeting whether any proxy
votes have been received and how the proxy
vote must be cast.

On a show of hands, a declaration by the

chair is conclusive evidence of the result
provided that the declaration reflects the
show of hands and the votes the proxies
received. Neither the chair nor the minutes
need to state the number or proportion of the
votes recorded in favour or against.

33 When and how polls 250M A poll demanded on a matter other

must be taken than the election of a chair or the question of
an adjournment must be taken when and in
the manner the chair directs. A poll on the
election of a chair or on the question of an
adjournment must be taken immediately.

Shares

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33A Pre-emption for 254D Before issuing shares of a particular
existing shareholders class, the directors of the proprietary
on issue of shares in company must offer them to the existing
proprietary company holders of the shares of that class. As far as
practicable, the number of shares offered to
each shareholder must be in proportion to
the number of shares of that class that they
already hold.

To make the offer, the directors must give the

shareholders a statement setting out the
terms of the offer including the number of
shares offered and the period for which it will
remain open.

The directors may issue any shares not

taken up under the offer as they see fit.

The company may by resolution passed at a

general meeting authorise the directors to
make a particular issue of shares without
complying with the requirement of offering
them to existing shareholders section.

33B Other provisions 254U The directors may determine that a

about paying dividend is payable and fix the amount, the
dividends time for payment, and the method of
payment.

The methods of payment may include the

payment of cash, the issue of shares, the
grant of options and the transfer of assets.

34 Dividend rights for 254W(2) Subject to the terms on which

shares in proprietary shares in a proprietary company are on
companies issue, the directors may pay dividends as
they see fit.

Transfer of shares

35 Transmission of 1072A If a shareholder who does not own

shares on death shares jointly dies, the company will
recognise only the personal representative of
the deceased shareholder as being entitled

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 to the deceased shareholder's interest in the
shares.

36 Transmission of 1072B If a person entitled to shares because

shares on of the bankruptcy of a shareholder gives the
bankruptcy directors the information they reasonably
require to establish the persons entitlement
to be registered as holder of shares, the
person may, by giving a written and signed
notice to the company, elect to be registered
as the holder of the shares; or by giving a
completed transfer form to the company,
transfer the shares to another person.

37 Transmissions of 1072D If a person entitled to shares because

shares on mental of the mental incapacity of a shareholder
incapacity gives the directors the information they
reasonably require to establish the person's
entitlement to be registered as the holder of
the shares

(a) the person may:

(i) by giving a written and signed notice to
the company, elect to be registered as the
holder of the shares; or
(ii) by giving a completed transfer form to the
company, transfer the shares to another
person; and
(b) the person is entitled, whether or not
registered as the holder of the shares, to the
same rights as the shareholder.

38 Registration of 1072F A person transferring shares remains

transfers the holder of the shares until the transfer is
registered and the name of the person to
whom they are being transferred is entered
in the register of members in respect of the
shares.

39 Additional general 1072G The directors of a proprietary

discretion for company may refuse to register a transfer of
directors of shares in the company for any reason.
proprietary
companies to refuse
to register transfers

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Companies dealing with outsiders: Contracting with companies

A company is regarded as a legal entity separate and distinct from its members and
directors. This means that a company can only be represented by, or act through,
individuals. Most companies carry on business and inevitably they will enter contracts with
other people or other companies.
A company is made up of two organs: the general meeting of shareholders and the board of
directors. The “organic theory” operates on the basis that the acts of these two organs
that are authorised by the company’s constitution or replaceable rules are acts of the
company itself. The “organic theory” also identifies people who are the “directing mind
and will of the company”. These people are the “brains” of the company and have power
to act independently and without instructions from others. The acts, knowledge and
intentions of the “brains” of the company are taken to be the acts, knowledge and intentions
of the company itself.

Organic theory in case law:

Leonard’s Carrying Co v Asiatic Petroleum [1915] AC 705
Per Lord Haldane:
“A corporation is an abstraction. It has no mind of its own any more than it has a body of its
own; its active and directing will must consequently be sought in the person of somebody
who for some purposes may be called an agent, but who is really the directing mind and
will of the corporation, the very ego and centre of the personality of the corporation. That
person may be under the direction of the shareholders in general meeting; that person may
be the board of directors itself, or it may be…that that person has an authority to coordinate
with the board of directors given to him under the articles of association…”
HL Bolton Engineering Co v TJ Graham & Sons [1957] 1 QB 159
Per Denning LJ:
“A company may in many ways be likened to a human being. It has a brain and nerve
centre which controls what it does. It also has hands which hold the tools and act in
accordance with directions from the centre. Some of the people in the company are mere
servants and agents who are nothing more than hands to do the work and cannot be said to
represent the mind or will. Others are directors and managers who represent the
directing mind and will of the company, and control what it does. The state of mind of
these managers is the state of mind of the company and is treated by the law as such…. So
here the intention of the company can be derived from the intention of its officers and
agents. Whether their intention is the company’s intention depends on the nature of the
matter under consideration, the relative position of the officer or agent and the other relevant
facts and circumstances of the case.”
● Directors and senior managers may be regarded as the directing mind and will of the
company, and their knowledge may be attributed to the company.
● The ats of a company secretary are regarded as acts of the company where the
secretary is acting in relation to everyday affairs of the company and administration.

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 ● In the case of very large companies, control of the company’s business is delegated
to many people. In this case the actions and intentions of senior management are
significant in determining the determining the “directing mind and will”, which may
include more than one person.
● In certain cases multiple pieces of information known by several people can be put
together and attributed to a company.

Contracting with a company

Companies enter into contracts only through the intervention of people. Whether a company
is bound by a contract made on its behalf is determined by the law of agency and the
Corporations Act 2001 (Cth).
A company can enter into a contract directly if its common seal is affixed to a document and
it is witnessed by appropriate officers (s 127(2)) or as a deed (s 127)2.
Usually, companies contract using an agent acting with the company’s authority and acting
on its behalf s 126(1) Corporations Act 2001 (Cth) 3. An agent who makes a contract on
behalf of a principal binds the principal to the contract if it is within the scope of the agent’s
express or implied actual authority. An agent’s apparent authority comes about when a
principal gives the impression that an agent has authority to act on the principal’s behalf.
However, a principal is not bound by a contract just because an agent represents that he/she
is an agent. A company contracts either through an organ such as its board of directors or by
means of an authorised agent such as an officer or employee.

Part 2B.2 of the Corporations Act deals with assumptions people dealing with
companies are entitled to make

2
127 Execution of documents (including deeds) by the company itself

(1) A company may execute a document without using a common seal if the document is signed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary—that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in
subsection 129(5) for dealings in relation to the company.

(2) A company with a common seal may execute a document if the seal is fixed to the document and the fixing of
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary—that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in
subsection 129(6) for dealings in relation to the company.

3
126 Agent exercising a company’s power to make contracts

(1) A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with
the company’s express or implied authority and on behalf of the company. The power may be exercised
without using a common seal.

(2) This section does not affect the operation of a law that requires a particular procedure to be complied with in
relation to the contract.

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Under s 129 of the Corporations Act 2001 (Cth)4 a person who is dealing with a company is
entitled to rely on 7 assumptions about the regularity of dealings. However, a person who is
dealing with a company cannot rely on an assumption if they knew or suspected that the
assumption was wrong (s 128)

The statutory assumptions are as follows:

4
129 Assumptions that can be made under section 128

Constitution and replaceable rules complied with

(1) A person may assume that the company’s constitution (if any), and any provisions of this Act that apply to the
company as replaceable rules, have been complied with.

Director or company secretary

(2) A person may assume that anyone who appears, from information provided by the company that is available to
the public from ASIC, to be a director or a company secretary of the company:
(a) has been duly appointed; and
(b) has authority to exercise the powers and perform the duties customarily exercised or performed by a
director or company secretary of a similar company.

Officer or agent

(3) A person may assume that anyone who is held out by the company to be an officer or agent of the company:
(a) has been duly appointed; and
(b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind
of officer or agent of a similar company.

Proper performance of duties

(4) A person may assume that the officers and agents of the company properly perform their duties to the company.

Document duly executed without seal

(5) A person may assume that a document has been duly executed by the company if the document appears to have
been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may
also assume that anyone who signs the document and states next to their signature that they are the sole
director and sole company secretary of the company occupies both offices.

Document duly executed with seal

(6) A person may assume that a document has been duly executed by the company if:
(a) the company’s common seal appears to have been fixed to the document in accordance with
subsection 127(2); and
(b) the fixing of the common seal appears to have been witnessed in accordance with that subsection.
For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing
of the common seal and states next to their signature that they are the sole director and sole company
secretary of the company occupies both offices.

Officer or agent with authority to warrant that document is genuine or true copy

(7) A person may assume that an officer or agent of the company who has authority to issue a document or a
certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a
true copy.

(8) Without limiting the generality of this section, the assumptions that may be made under this section apply for the
purposes of this section.

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 1. A person may assume, in relation to dealings with a company, that its
constitution and any applicable replaceable rules have been complied with.
2. A person is entitled to assume that persons named as directors and secretary
in ASIC-lodged documents have been duly appointed and have authority to
exercise the powers and duties usually exercised by those officers.
3. A person is entitled to assume in relation to dealings with a company that
anyone who is held out to be an officer5 or agent has been duly appointed
and has authority to exercise the powers and duties of such an officer or
agent.
4. A person may assume that a company’s officers and agents properly perform
their duties.
5. A person may assume in relation to dealings with a company that a document
has been duly executed if the document appears to have been signed in
accordance with s 127(1)
6. A person may assume that a document has been duly executed if the
company’s common seal appears to have been fixed to the document in
accordance with s 127(2) and the fixing of the seal appears to have been
witnessed in accordance with s 127(2).
7. A person may assume that an officer or agent of the company who has
authority to issue a document or a certified copy of a document has authority
to warrant that the document is genuine or is a true copy.

Promoters and pre-Registration contracts

A promoter is a person who is involved, actively or passively, in forming a company, raising

its capital and establishing its business: Twycross v Grant (1877) 2 CPD 469
Promoters owe fiduciary duties to their company. When someone has a fiduciary duty to
someone else, the person with the duty must act in a way that will benefit someone else,
usually financially. The reason that a fiduciary duty arises in relation to promoters is that

5
S 9 Corporations Act 2001 (Cth): 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
(c) a receiver, or receiver and manager, of the property of the corporation; or
(d) an administrator of the corporation; or
(e) an administrator of a deed of company arrangement executed by the corporation; or
(f) a liquidator of the corporation; or
(g) a trustee or other person administering a compromise or arrangement made between the corporation and
someone else.
Note: Section 201B contains rules about who is a director of a corporation.

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there is a chance that a promoter might misuse his/her position to make a personal profit or
cause detriment to the company or the shareholders.
A promoter’s duties require the promoter to act in the best interests of the company,
disclose their interests in contracts with the company and not make undisclosed
profits.
Case law on promoters: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
Gluckstein v Barnes [1900] AC 240 (see textbook pages 480-482)
The nature and extent of a promoter’s interests in the company’s formation and any property
acquired by it must also be disclosed in a prospectus if the company seeks to raise capital
form the public. The company may rescind a contract if promoters fail to disclose their
personal interest in it.

Pre-registration contracts may be enforced by outside contracting parties against a

company after its registration if it ratifies the contract after its registration (s 131)6.
Ratification means that the company confirms the pre-registration contract.
A person who makes a pre-registration contract for a proposed company is liable to pay
damages to the other contracting party if the company is not liable (S131(2)).

Membership of a company

There are various ways in which a person can become a member of a company. In most
cases, the person must agree to become a member and have their details entered on
the register of members: s 231(b) Members of a company with share capital are called

6
131 Contracts before registration

(1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it
is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a
company that is reasonably identifiable with it, is registered and ratifies the contract:
(a) within the time agreed to by the parties to the contract; or
(b) if there is no agreed time—within a reasonable time after the contract is entered into.

(2) The person is liable to pay damages to each other party to the pre-registration contract if the company is not
registered, or the company is registered but does not ratify the contract or enter into a substitute for it:
(a) within the time agreed to by the parties to the contract; or
(b) if there is no agreed time—within a reasonable time after the contract is entered into.
The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the
party if the company had ratified the contract and then did not perform it at all.

(3) If proceedings are brought to recover damages under subsection (2) because the company is registered but does
not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it
considers appropriate in the circumstances, including ordering the company to do 1 or more of the following:
(a) pay all or part of the damages that the person is liable to pay;
(b) transfer property that the company received because of the contract to a party to the contract;
(c) pay an amount to a party to the contract.

(4) If the company ratifies the pre—registration contract but fails to perform all or part of it, the court may order the
person to pay all or part of the damages that the company is ordered to pay.

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shareholders. A company only needs to have one member: s 114. A proprietary company
can have a maximum of 50 non-employee shareholders. There is no maximum number of
shareholders for a public company.7
A company must set up and maintain a register of members: ss 168 and 169. The register
of members is proof of the matters shown in it in the absence of evidence to the contrary: s
176. A person may apply to the court to have the register corrected: s 175. A company must
allow anyone to inspect its share register. The Corporations Act provides that some uses of
information from a share register are prohibited: s 177.
An unlisted company must generally issue a share certificate when shares are issued or a
transfer or shares has been lodged. A share certificate is evidence of the title of a member
to the shares specified: s 1070C(2).

7
S 113 Proprietary companies

(1) A company must have no more than 50 non—employee shareholders if it is to:

(a) be registered as a proprietary company; or
(b) change to a proprietary company; or
(c) remain registered as a proprietary company.
Note: Proprietary companies have different financial reporting obligations depending on whether they
are small proprietary companies or large proprietary companies (see section 45A and Part 2M.3).

(2) In applying subsection (1):

(a) count joint holders of a particular parcel of shares as 1 person; and
(b) an employee shareholder is:
(i) a shareholder who is an employee of the company or of a subsidiary of the company; or
(ii) a shareholder who was an employee of the company, or of a subsidiary of the company, when they
became a shareholder; and
(c) do not count as a shareholder any CSF shareholder of the company; and
(d) do not count as a shareholder an entity, in relation to a security of the company held by the entity, if:
(i) that security was originally issued to another entity pursuant to a CSF offer by the company; and
(ii) unless the circumstances (if any) prescribed by the regulations for the purposes of this subparagraph
exist—no securities of the company have been traded on a financial market (whether in
Australia or elsewhere); and
(iii) all the other requirements (if any) prescribed by the regulations for the purposes of this subparagraph
are met.

(3) A proprietary company must not engage in any activity that would require disclosure to investors under
Chapter 6D, except for:
(a) an offer of its shares to:
(i) existing shareholders of the company; or
(ii) employees of the company or of a subsidiary of the company; or
(b) a CSF offer.

(3A) An offence based on subsection (3) is an offence of strict liability.

Note: For strict liability, see section 6.1 of the Criminal Code.

(4) An act or transaction is not invalid merely because of a contravention of subsection (3).
Note: If a proprietary company contravenes this section, ASIC may require it to change to a public
company (see section 165).

S 114 Minimum of 1 member

A company needs to have at least 1 member.

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A share certificate may be relied on and if it contains errors the company is liable for any
loss arising out of the errors.
A transfer of shares occurs on a sale or gift and passes ownership from one shareholder to
another: s 1070A. Shares are presumed to be freely transferable although proprietary
companies in particular often restrict the transfer of shares by a provision in the constitution
that permits directors to refuse to register a transfer: s 1072G. Any restriction must be clear
and unambiguous. Directors may not be required to provide a reason for the refusal.
Directors must exercise their discretion consistently with their fiduciary duties. A court may
intervene where a refusal to register a transfer is without just cause or is oppressive.
The procedure for transfer of shares requires delivery to the company of an instrument of
transfer signed by the transferor and transferee and the share certificate held by the
transferor.

The Clearing House Electronic Subregister System (CHESS) is the electronic settlement
system used by the Australian Securities Exchange (ASX). CHESS has replaced the more
traditional paper transfer system. CHESS aims to provide faster settlement with reduced
risks, predictability of settlement obligations within a fixed time, and cost saving for market
participants.

Shares may pass from a shareholder to another person by operation of law. This can
happen on the death or bankruptcy of a member: s 1072A

Directors of a company.
All companies must have directors. Together, the directors are called the Board of Directors
Proprietary companies only need one director: s 210A(1). Public companies must have at
least three: s 201A(2). Directors must be over 18 years and natural persons (not
companies). A proposed director must consent in writing to being appointed to the position.
The definition of “director” in the Corporations Act 2001 is broad and includes persons
appointed to that position as well as de facto and shadow directors. There are different
types of directors reflecting the various roles played by directors on a board. A board may
form committees to which particular areas of responsibility are delegated.

S 9 director of a company or other body means:

(a) a person who:
(i) is appointed to the position of a director; or
(ii) is appointed to the position of an alternate director and is acting in that
capacity;
regardless of the name that is given to their position; and
(b) unless the contrary intention appears, a person who is not validly appointed as a
director if:
(i) they act in the position of a director (de facto director); or
(ii) the directors of the company or body are accustomed to act in accordance with
the person’s instructions or wishes (shadow director).

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 Subparagraph (b)(ii) does not apply merely because the directors act on advice given by
the person in the proper performance of functions attaching to the person’s professional
capacity, or the person’s business relationship with the directors or the company or body.
Note: Paragraph (b)—Contrary intention—Examples of provisions for which a person referred to in
paragraph (b) would not be included in the term “director” are:
∙ section 249C (power to call meetings of a company’s members)
∙ subsection 251A(3) (signing minutes of meetings)
∙ section 205B (notice to ASIC of change of address).

Types of director
● A managing director is in charge of managing the company’s daily business.
● A Chair of directors exercises procedural control over meetings of the Board. A
chair may be given special powers which go beyond the supervision of meetings.
● Executive directors are full-time employees to whom the board has delegated
management and administrative functions and include CEO, CFO.
● Non-executive directors are not involved in day-to-day management of the
company’s business. They are part-time.
● Alternate directors may be provided for in a company’s constitution. Eg s 201K(1) a
director may with approval of other directors appoint an alternate to exercise some or
all of a director’s powers.
● Nominee directors may be appointed to represent the interests of particular
shareholder or creditor.

The two organs of a company are the board of directors and the general meeting of
shareholders. The constitution, replaceable rules, Corporations Act 2001 (Cth) and the ASX
Listing Rules determine the respective powers of the board and the general meeting. The
board nearly always has the power of management of the business of the company
(replaceable rule s 198A) as well as a number of other powers.
The power of management of a company is very broad and the general meeting cannot
interfere with the exercise of this power. The board’s wide power of management is a
necessary consequence of the separation of management and ownership. Shareholders
may remove directors if they disapprove of them.
Directors exercise their powers collectively at board meetings. Generally, the directors
determine how board meeting are to be run. Because the legal rights of shareholders might
be affected, board meetings must comply with basic procedural rules and pass valid
resolutions which must be recorded. The most common committees are the audit,
remuneration and nomination committees.

The functions of a board of directors include formulation of strategy, policy making,

monitoring and supervising and providing accountability. The Board works with and through
the CEO.
ASX Corporate Governance Principles and Recommendations 4th ed
Principle 1 Lay solid foundations for management and oversight.
Principle 2 Structure the board to be effective and add value

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Principle 3 Instil a culture of acting lawfully, ethically and responsibly
Principle 4 Safeguard the integrity of corporate reports
Principle 5 Make timely and balanced disclosure
Principle 6 Respect the rights of security holders
Principle 7 Recognise and manage risk
Principle 8 Remunerate fairly and responsibly

Directors are generally appointed by resolution of the general meeting. A person may be
disqualified from acting as a director to protect the public from directors who have committed
offences or have been involved with insolvent companies.
Directors may only be removed in accordance with the constitution, and, in the case of public
companies, by resolution of the general meeting.
The company secretary is the company’s chief administrative officer with responsibility for
the company’s internal administration and compliance matters. A public company must have
at least one secretary: see sections 204A, 204B.
Section 188(1) makes a company secretary responsible for the following:
● S 142 requirement for the company to have a registered office;
● S 145 requirement for a company’s registered office to be open to the public;
● S 346C requirement to respond to an extract of particulars;
● S 348D requirement to respond to a return of particulars;
● Lodgment of various notices with ASIC under various sections of the Corporations
Act;
● Lodgment of financial reports with ASIC under s 319 and 320.

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