Shareholder agreements and company constitutions will at times deal with the same issues. It is therefore common practice for shareholder agreements to contain an inconsistency clause stating that the shareholder agreement prevails to the extent of any inconsistency with the company constitution.

Relying on an inconsistency clause is easier than exhaustively amending the documents to remove all potential inconsistencies. However, this may not be the best practice. The recent case of Cody v Live Board Holdings Limited [2014] NSWSC 78 (Cody) demonstrates the risk with relying on inconsistency clauses which have not been carefully drafted or considered.


The company constitution sets out the broad rules which form the basis for how the company operates and regulates relationships between the company, the directors and the shareholders. It will often deal at a high level with issues that are more extensively addressed in a shareholders’ agreement.


The Cody decision warns of the dangers of relying on an inconsistency clause in a shareholders’ agreement.

The Court will favour reading shareholder agreements and constitutions together rather than reading the constitution “down” in favour of a shareholder agreement.


The board of directors of Live Board Holdings Limited (LBH) issued ordinary shares to its existing shareholders of and preference shares to a new shareholder. Some existing shareholders disputed the share issue, and the board of directors of LBH sought a declaration from the NSW Supreme Court that it had the authority to issue the shares.


The company constitution provided that the directors could issue securities with whatever rights they determined (including preference shares), but if this directly or indirectly varied share class rights (in this case the rights of the ordinary shareholders), it required the approval of a special majority (at least 75%) of that class of shareholders.

The shareholder agreement provided that while the board was responsible for the management of the company, any decision concerning the issuing or granting of rights over “any shares” or other securities must be approved by a simple majority of all shareholders (more than 50%).

An inconsistency clause in the shareholder agreement provided that to the extent of any conflict between the two documents, the shareholders agreement would prevail.


The shareholders’ primary argument relied on the company constitution to claim that the board could not issue the shares without the approval of a special majority of ordinary shareholders as the issue of preference shares (which would rank above their own) would vary their class rights.

The board relied on the shareholders’ agreement and claimed that the inconsistency clause operated so that the simple majority requirement in the shareholders’ agreement prevailed over the special majority requirement.


The court determined there was no inconsistency between the documents and the shareholders agreement could be, and needed to be, complied with. Although on plain reading there was an apparent conflict, the underlying purposes behind the relevant provisions allowed them to be read together.

The special majority requirement in the company constitution was aimed at protecting the interests of existing shareholders in the relevant class of shares when there was a proposed issue which would alter their voting rights. The purpose of the simple majority requirement in the shareholders’ agreement was merely to reserve the power to issues shares in the shareholders, rather than have that power exclusively controlled by the board of directors.

As the directors of LBH had proceeded with the issue of shares only in reliance on the shareholders’ agreement, the issue of preference shares was formed to be invalid.


  • The common assumption that an inconsistency clause will allow the shareholders agreement to always prevail in the event of a conflict with the constitution may be incorrect.
  • Courts will, wherever possible, attempt to interpret the constitution and the shareholders agreement so that there is no conflict, which means that both documents must be complied with.


  • Ensure an inconsistency clause clearly articulates the specific issues which will be governed by the shareholder agreement and identify the provisions of the company constitution which do not apply in respect of those issues.
  • Carefully review the company constitution to determine if any amendments are needed to ensure that the documents, if read together, reflect the same intentions and are not inconsistent with each other.