This case note details the issue recently canvassed in Lorebray Pty Ltd (2021) NSWSC 1533 (23 November 2021) when there is an inconsistency between the Constitution and Shareholders Agreement.
Constitution & Quorums
When a Company is established, the rules for the establishment and internal management of the Company are usually set out in writing in the form of a “Constitution”. Whilst some Company’s rely upon the ‘replaceable rules’ set out in the Corporations Act (Cth) 2001 (the “Act”) it is usual, esecially for ‘off the shelf’ companies, to have some form of written Constitution.
Essentially, a ‘Constitution’ is the set of rules between the company and each member and its directors as to the internal management of the Company. Rules are set which deal with, among other things, how directors are appointed, how directors make decisions and process for calling and holding such meetings.
Relevantly, a Constitution will often set a minimum requirement as to the number of directors who attend a meeting for the meeting to be valid (called a ‘quorum’). If there is no quorum, the meetings are typically rescheduled at a later date. Also, Shareholder Agreements can also set rules for corporate governance of a Company including setting quorum requirements for both director and shareholder meetings.
The purpose of a quorum is to ensure the integrity of the decision-making processes for the Company. By requiring a quorum, there is an assurance that there will be a minimum number of directors involved in decision making which should ensure that better decisions. By allowing a broader base of views to be involved in decision making its is likely that different perspectives and potentially different interests are involved in the making decisions.
Lorebray – The Case
The matter before the Court concerned a dispute as to various motions that were passed at a Directors Meeting. The aggrieved shareholder alleged that the minimum quorum was not present o pass the motions. The aggrieved shareholder alleged the motions invalid as the required a quorum of three directors was not present as there was only the two directors present at the meeting.
The shareholders of the Company had previous disputes which were resolved by way of a Deed of Settlement and Release. As part of the Deed, the shareholders agreed to a Shareholders Agreement.
Relevantly, the Shareholders Agreement provided that a meeting for the Board of Directors requires three (3) Directors “being all of the Company Directors”. Whereas, Section 73 of the Constitution provided that a quorum of Directors Meetings was two (2) Directors only.
The question became a live issue when the aggrieved shareholder had its board representative resign as a director leaving the directors of the Company at two (2). It was claimed by the aggrieved shareholder that any decisions made by the Board of Directors without a proper quorum of three (3) Directors was void as it was contrary to the provisions of the Shareholders Agreement.
The Court was required to determine if there was an inconsistency between the Constitution and the Shareholders Agreement and if so, what would be the consequences should such inconsistency exist.
The Court reviewed this matter by firstly looking at the provisions of both the Shareholders Agreement and the Constitution and construing both of the documents as a whole. In particular, the Court took the view that any review and construction of the relevant terms in the Shareholders Agreements should be based firstly upon the language used in the documents and should be discerned objectively from the language itself.
One of the key concerns raised in this issue is with the language used in the Shareholders Agreement which referred to “all of the Directors“. In making the decision, the Court found that there was no inconsistency between the Constitution and the Shareholders Agreement. Whilst the Constitution provides for a quorum of two (2) and the Shareholders Agreement provides for a quorum of three (3), the quorum provision of the Shareholders Agreement was qualified to state that the quorum was satisfied when “all of the Directors” were present.
The Court found that this reading of the Constitution and the Shareholders Agreement was consistent with the parties objectives taking into account the settlement that was reach which lead to the creation of the Shareholders Agreement in the first place. The Court reasonably thought that the parties would want their dispute to be resolved properly and not have decision making powers of the Company frustrated by a shareholder resigning as a director so as to render the decision making of the Board ineffective. The Court did not prefer such a course as it would essentially give a Shareholder a veto right which would be inconsistent with the purpose and effect of the Shareholders Agreement.
In the alternative and albeit unnecessary for the purposes of deciding this case, the Court was also of the view that Section 1322 of the Act would be capable of being relied upon by the company to validate the decisions made by the Board as it would appear that the quorum is characterized as a procedural irregularity that would not substantially cause injustice to any of the Shareholders given that the absence of the quorum was as a result of the Shareholders deliberate decision to resign as a Director.
As always it is important to craft any agreement but especially a Shareholder’s Agreement so that it is consistent with other documents (such as the Constitution) necessary for the internal management of the Company.
If you would like to discuss a Shareholders Agreement or require more information please contact: Heath Adams Director-Lawyer.
Written by Heath Adams.