It is common for shareholders to assume that where a shareholders’ agreement and a company constitution deal with the same subject matter, an inconsistency clause  in the shareholders’ agreement would mean that the provisions of the shareholders’ agreement prevail over those in the constitution. The decision in Cody v Live Board Holdings Limited [2014] NSWSC 78 highlights the shortcomings of this approach.


The directors of Live Board Holdings Limited (Company) resolved to issue ordinary shares to existing shareholders of the Company and preference shares to new shareholders.

The shares were purportedly issued by the Company pursuant to a shareholders’ agreement, which provided that any decision to issue shares in the Company must be approved by a simple majority of shareholders.

The Company’s constitution, however, provided that the directors could cause the Company to issue shares, including preference shares, but that if the share issue varied the rights attaching to an existing class of shares, then the approval of at least 75% of the shareholders of that class was required.

An existing shareholder disputed the validity of the share issue, asserting that the directors did not have the power to issue the shares on the basis that the issue varied the rights of the existing ordinary shareholders and therefore, approval of 75% of ordinary shareholders was required under the constitution.

As is commonly the case, the shareholders’ agreement contained an inconsistency clause, which provided that where there was a conflict between the provisions of the shareholders’ agreement and the constitution of the Company, the provisions of the shareholders’ agreement would prevail. Further it provided that upon written request from any party, all parties must cause the constitution of the Company to be amended in order to remove the conflict.

The parties agreed that, if there was an inconsistency  between  the  constitution and the shareholders’ agreement, the terms of the shareholders’ agreement would prevail. The issue in dispute however was whether there was in fact an “inconsistency”.

The directors sought to rely on the inconsistency clause in the shareholders’ agreement, to assert that the share issue only required approval by a simple majority of shareholders.


Justice Brereton rejected the directors’ argument regarding reliance on the inconsistency clause. His Honour reasoned that, whilst the relevant provisions of the constitution and the shareholders’ agreement both dealt with issues of shares in the Company, the relevant requirements were not inconsistent, as they each had a different purpose.

The purpose of the requirement for approval of at least 75% of ordinary shareholders in the constitution was to protect the interests of existing holders of shares. On the other hand, the purpose of the requirement for approval of the shareholders by simply majority in the shareholders’ agreement, was to reserve to shareholders the power to issue shares.

The share issue in question involved the variation of rights, as the rights attaching to the ordinary shares in the Company “would be varied, at least indirectly, by the issue of preference shares which would, at least in some respects, rank ahead of them”.

Having regard to the above, the Court held that the 75% approval requirement in the constitution had to be complied with, in addition to the requirement for approval by simple majority of the shareholders under the shareholders’ agreement. On this basis, the share issue was held to be invalid.

What does this mean for you?

This decision serves as a reminder that there are limitations on the ability to rely on an inconsistency clause in a shareholders’ agreement to override the provisions of a company’s constitution.

Parties to shareholders’ agreements should carefully review their agreement against the provisions of the relevant company’s constitution for apparent inconsistencies in relation to the same subject matter.

In order to minimise the risk of shareholders disputes, it may be prudent to:

  • Specify in a shareholders’ agreement where an inconsistency will be taken to exist.
  • Amend a company’s constitution to more closely reflect the provisions of any shareholders’ agreement, so that when the documents are read together, they reflect the intentions of the parties.
  • Where appropriate, use a company constitution as the sole document in which to embody many of the structural issues ordinarily dealt with in a shareholders agreement.