The rain pounded the tin roof and she watched bolts of golden lightning lance across the sky through the small shack’s sole window. As she watched the inky sky, a dark, hulking shadow passed outside. With a sharp clap of thunder, the light above the table fizzled and went out, making her jump. As she reached for the flashlight, the heavy wooden door creaked open slowly on its rusted hinges. She turned and let out a terrible scream…

If only all company documents started like this, we'd read them.

But let's be honest. Most are never going to grip us like the next Harry Potter novel.

Take your company's constitution for example. When you initially set up your company, chances are you clicked the Yes box on the online questionnaire asking you "Do you need a constitution?" and then promptly forgot about it.

However, a recent decision of the NSW Supreme Court is a timely warning that all businesses need to keep their company's constitution up-to-date and consistent with their shareholders' agreement.

The Rules

In the matter of Lesso Building Material Trading (Sydney) Pty Limited (administrators appointed) [2018] NSWSC 1486 considered conflicting quorum provisions:

  1. The constitution provided that a board meeting could proceed so long as any two directors attended.
  2. The shareholders’ agreement also required two directors to be present but specified that at least one needed to be a representative of the majority shareholder and at least one needed to be a representative of the minority shareholder.

The shareholders’ agreement also contained the usual clause that required the parties to take whatever steps necessary to ensure consistency between the constitution and shareholders’ agreement. In the event of any inconsistency the shareholders’ agreement would prevail.

The Challenge

A board meeting was called and held. Two directors, both of whom were appointees of the majority shareholder were present and resolved to appoint voluntary administrators. The director appointed by the minority shareholder was not present.

The minority shareholder commenced proceedings arguing that all business that took place at the meeting was invalid because its nominee director was not in attendance.

The court ruled against the minority shareholder. It found that the appointment of the administrators was valid because the requirements in the constitution had been satisfied.

The shareholders’ agreement required the parties to amend the constitution to ensure consistency. However, this did not itself amend the constitution in the manner required by section 136 of the Corporations Act 2001.

So...?

Bottom line, if the minority shareholder or its legal team had kept the company’s constitution and shareholders’ agreement consistent, some expensive litigation could have been avoided.

So next time you find yourself preparing a shareholders’ agreement, don’t forget to also review and (if necessary) amend your constitution!