On average, adults make more than 35,000 decisions a day. What to wear. Where to eat. Would you like sugar in your coffee?
But as a company director, some of your daily decisions carry a lot more weight. They can make or break your success. For this reason, company directors must be crystal clear on their powers and obligations when making decisions. Let’s dive in.
There are 3 key places where a director’s decision making power comes from:
1. Legislation: Corporations Act 2001 (Cth) (“Corps Act”)
2. Constitution: (that is, if the company has one)
3. Shareholders’Agreement: if there is one between the shareholders ofthe company.
There are no legal obligations for your company to have a Constitution or Shareholders’ Agreement. But in saying that, companies can adopt a Constitution so they get to control how decisions are made. A no-brainer for most. And where there is more than one shareholder, prudent companies will have a Shareholders’ Agreement.
So, let’s look at each in turn.
The Corps Act has a set of rules that govern how companies’ decisions are to be made – they’re appropriately named the replaceable rules. And these rules apply to all companies that don’t have a Constitution.
In relation to directors’ powers, the replaceable rules deal with:
- What powers directors have (s198A);
- How to call a directors’ meeting (s248C);
- The minimum number of attendees required at ameeting (quorum) (s248F);
- How a resolution of a directors’ meeting ispassed (s248G); and
- Directors’ ability to call a meeting of shareholders (249C). The Corps Act also has several other obligations relating to directors that are not replaceable (in other words, they apply regardless ofwhether the company has a Constitution or not). For example, all directors must discharge their duties with due care (s180); directors must disclose to the other directors any conflicts of interest (s191); the appointment of directors must be notified to ASIC (s201L); and directors have a duty not to trade the company while insolvent.
Finally, additional obligations apply if the company is a public company. For example, only shareholders can remove directors (s203E) and directors cannot be present or vote at meetings where the director has a material personal interest (s195)). If a company becomes a listed company, the stock exchange will also add rules and regulations regarding corporate decision making - but that’s another story for another day.
Now a word of warning: failing to get decision making right can often lead to costly shareholder disputes or decisions being determined to be invalid. And who wants that?
In the case of Bentley Capital Ltd v KeybridgeCapital Ltd  FCA 1675, the specific purpose of the board meeting was not adequately disclosed to all directors, as required under law. So, the court held that the resolutions that were purported to be passed at that meeting were invalid. Moral of the story: know your obligations when making decisions.
This is a contract between the shareholders and the company, which operates in tandem with the Corps Act. We say in tandem because a constitution only has the power to replace the replaceable rules (suddenly, the name makes more sense). It cannot override any other requirements of the Corps Act.
So, to determine if the constitution is intended to replace the replaceable rules in their entirety, you should look for a clause that sounds something like this, “none of thereplaceable rules set out in the Corporations Act apply to the company.”
If the constitution does not have a clause like this, then the replaceable rules will only be modified to the extent that the constitution deals with the same provisions.
Want an example? Say the Corps Act states that reasonable notice must be given for board meetings. However, the Company’s constitution might override this by stating that 5 business days’ notice is required for board meetings.
So, it’s important to read both to see how they work together.
A shareholders’ agreement is a binding contract between the shareholders and the company, most commonly found in companies with more than one shareholder.
The shareholders’ agreement will often set out:
1. the specific matters which are required to be determined by the directors;
2. circumstances in which the director is required to resign (for example, the shareholder appointing them is no longer a shareholder or doesn’t hold the minimum % of shares in the company).
Make sure you are clear about your decisions
As a company director, you can’t go around making decisions willy-nilly. There are rules – and rightly so.
So, make sure you are clear on what the Corps Act requires – as well as your Constitution and Shareholders’ Agreement (if you have them). Your future self will thank you for it.
Need help with your corporate governance? Whether it’s a constitution, shareholders’ agreement or drafting resolutions - we’ve got you covered. Call us on (02 8880 9383) or email us at metis_at_metislaw.com.au. Now that’s an easy decision.