The perils of inconsistency between shareholders’ agreements and constitutions

A company’s constitution is the set of rules by which the company operates. It is a contract that governs the company’s internal management and regulates the relationships between a company’s directors and shareholders.

A shareholders’ agreement is a contract between the shareholders of a company (and usually the company) which regulates, principally, the shareholders’ relationships, rights and responsibilities.

The shareholders’ agreement and constitution of a company (together the Governing Documents) occasionally deal with the same subject matter. This overlap can, unless carefully co-ordinated, result in inconsistencies between the Governing Documents. In other cases the separate way in which the same or similar subject matter is addressed in a company’s Governing Documents may in fact serve entirely different purposes; a situation we consider in more detail below.

In order to address possible inconsistencies in Governing Documents, it is common practice to include in a shareholders’ agreement an ‘inconsistency clause’ which typically stipulates that, in the event of inconsistency, the relevant terms of the shareholders’ agreement will prevail over those in the constitution.

This reliance on inconsistency clauses can lead to laziness in the preparation of Governing Documents.

The issue is well illustrated in Cody v Live Board Holdings Limited [2014] NSWSC 78 (Cody), which highlights the risks involved in relying solely on inconsistency clauses.

Cody v Live Board Holdings Limited [2014] NSWSC 78


The board of Live Board Holdings Limited (LBH) resolved to raise around $1 million in capital by issuing a class of preference shares to new shareholders and ordinary shares to existing shareholders.

Following the share issue a number of shareholders challenged the board’s actions, arguing that the issue was invalidated by the board not having authority to approve the issue.

The shares were issued in reliance on a power in the shareholders’ agreement (SHA). However, certain shareholders claimed that the share issue did not comply with LBH’s constitution (Constitution).


  • the Constitution provided that any share issue that directly or indirectly varied the rights or obligations of an existing class of shares required the approval of a 75% majority of holders of shares in the relevant class; and
  • the SHA provided that the issue of any LBH securities required the approval of a simple majority of all shareholders.

The SHA contained an inconsistency clause. It provided that in the event of a conflict between LBH’s Governing Documents, the SHA would prevail.

The dispute

LBH’s Governing Documents are a good example of two competing rules addressing the same power but in a way which is neither clear nor complete.

The shareholders argued that the share issue was invalid due to a failure to obtain the requisite 75% majority required by the Constitution on the basis that the issue of preference shares varied the rights of the existing ordinary shares.

LBH’s directors argued that, because each of LBH’s Governing Documents dealt with issue of shares in an inconsistent manner, the SHA clause applied with the effect that the share issue required only simple majority approval to be effective.

The court considered whether there was in fact an inconsistency in LBH’s Governing Documents capable of triggering the inconsistency clause in the SHA.

The decision

The court held in favour of the shareholders, finding that there was no inconsistency between LBH’s Governing Documents regarding the issue of shares.

In coming to its decision the court noted that while the Governing Documents included provisions dealing with the same subject matter – i.e. the issue of new shares by LBH – the separate provisions served entirely different purposes.

The purpose of the 75% majority voting requirement in the Constitution was to protect the interests of existing shareholders when a new issue of shares would, in effect, alter the rights attaching to those shares, whereas the purpose of the simple majority voting threshold in the SHA was to vest in shareholders the decision-making power to issue shares. The court held that these different purposes meant that the Governing Documents could be read together and were therefore not inconsistent.

It followed that a proposed share issue which had the potential to affect existing share class rights required the approval of at least 75% of the affected class to be passed. This didn’t happen and so the court declared the purported issue of the preference shares invalid.

A separate issue not otherwise considered by the court here was that the Corporations Act 2001 stipulates that class rights may be varied in a manner set out in the constitution, or to the extent the constitution doesn’t set out such a procedure, then in accordance with the procedure set out in the Corporation Act 2001 itself. In this regard, even if the provisions of the Governing Documents referred to in Cody had served the same purpose, then our view is that the court would ultimately have had to come to the same conclusion because class rights can only be varied in accordance with a procedure set out in the company’s constitution or the Corporations Act. A shareholders’ agreement does not typically satisfy the requirements of a company’s constitution.

Drafting tips

The decision in Cody shows us that including an inconsistency clause in a shareholders’ agreement isn’t enough to ensure that provisions of the shareholders’ agreement will prevail over those in the company’s constitution dealing with the same subject or power.

It is therefore critical when preparing a shareholders’ agreement to read it together with the company’s constitution, and focus on ensuring that they deal consistently with like subject matter. Achieving consistency may require a company’s constitution be amended to ensure that the intentions of the shareholders, as expressed in the shareholders’ agreement, are not undermined by the constitution.

The message for lawyers is to encourage clients who use ‘off the shelf’ constitutions to invest in a co-ordinated approach to settling their Governing Documents rather than focussing entirely on the shareholders’ agreement and hoping that the inconsistency clause will save the day.