On 17 February 2014, the New South Wales Supreme Court in Cody v Live Board Holdings Ltd refused to declare that the directors of Live Board Holdings Ltd (“Company”) had validly issued shares on the basis that certain provisions of the Company’s constitution and shareholders’ agreement had not been complied with.

The proceedings were issued by the directors of the Company (“Board”) to address a dispute between the Board and an existing shareholder regarding the Board’s power to issue shares to raise capital.  The Board sought a declaration from the Court that, under the proper construction of the constitution and shareholders’ agreement, the Board had the power to issue shares to raise capital.  In this instance, the Board resolved to issue approximately 5.2 million preference shares to new shareholders and 3.3 million ordinary shares to existing shareholders. 

The constitution contained provisions empowering the Board to issue shares with such preferred, deferred or other special rights to any person.  However, in circumstances where the issue of shares would directly or indirectly vary the rights or obligations of an existing class of shares, the issue required a special resolution (at least 75% of votes cast by members entitled to vote).

Under the shareholders’ agreement, the Board was responsible for the management and control of the Company; however, certain actions were to be approved by a simple majority of shareholders, including the power to approve the issue of any shares or other securities of the Company.  The shareholders’ agreement also contained a conflicts clause specifying that, where a conflict exists between the provisions of the shareholders’ agreement and the Company’s constitution, the shareholders’ agreement would prevail.

The existing shareholder argued that the Board could not issue the preference shares without a special resolution as it would vary the existing rights of ordinary shareholders.  The Board sought to rely on the conflicts clause, arguing that the issue of preference shares was governed by the shareholders’ agreement and thereby only required a simple majority.

The Court disregarded the conflicts clause because the relevant provisions of the constitution and shareholders’ agreement were not inconsistent, as the purpose of each was different.  Namely, the constitution sought to protect the interests of ordinary shareholders, whereas the shareholders’ agreement aimed to reserve the power to issue new shares to existing shareholders.

The Court found in favour of the exiting shareholder, finding that the share issue was likely to vary the rights of existing shareholders, which required approval by a special resolution of the Company.

In light of this decision, companies and their legal advisors should take extra care when relying on conflicts clauses in shareholders’ agreement.  Companies should also review the terms of their constitution and/or any shareholders’ agreement to ensure they achieve the parties’ intentions.