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Module 2 · Internal governance: constitution, division of power and meetings

Internal governance is almost never freestanding: it is the tripwire inside other questions, the quoted constitutional clause with a dollar or duration threshold in the contracting hypotheticals, the s 136 amendment gateway to the Gambotto expropriation problems in Module 9, and the division-of-power tail on a members' resolution. It is also a recurring essay theme in its own right. Find the rulebook, then the organ, and most of what remains is mechanics.

Cases at a glance

Case	In a line
Lion Nathan Australia P/L	Constitutions are interpreted by ordinary contract rules, exclusivity a matter of construction
Hickman	The statutory contract is enforceable only by a person adversely affected as member, not as employee, creditor or agent
Bailey	The statutory contract is alterable without consent, cannot be rectified, and binds only where there are shares
Cuninghame	A 50 per cent holder had the general meeting direct the board to sell the assets to his new company. The board could refuse. Reclaiming the power needs a 75 per cent special resolution
Howard Smith	Directors may exercise an exclusive power even against the majority's wishes, but only for a proper purpose. The dilutive share issue there was improper and invalid
Stanley	An English holding company could not direct its German subsidiary's board
Mendes	With the votes at a general meeting, control and management inevitably converge
NRMA v Parker	Usurping management is not a proper purpose, and the directors may simply ignore the request
Aust Centre for Corporate Responsibility	No motions or meetings on matters of exclusive managerial power
Re Molopo Energy	Where the Act itself vests the decision in the board, members cannot meet on it
Dhami	"Do everything in [its] power" was improper. How to act is for the board. Directors' meeting notice may be standing but must specify business
Snodgrass	Amending the constitution is a proper purpose. That power belongs to the members
Shaw	The general meeting cannot stop the directors from initiating legal proceedings
Barron	Reserve powers arise where the directors are in inescapable deadlock
Tahourdin	Reserve powers arise where a quorum of directors cannot be mustered
Massey	Two feuding directors, a secret invalid appointment, a two-person "general meeting". Reserve powers confined to real urgency or where nobody will serve
Pavlides	The general meeting may condone breaches (absent fraud or oppression) and decline to sue
Sliteris	Notice to a fax machine several days ahead was reasonable
Poliwka	A directors' meeting must be an undertaking to meet as directors, not a coffee-shop catch-up
Gillfillan	Directors reach an individual view and vote for themselves, not by consensus
Empire Oil & Gas NL	A s 249D requisition must be actioned consistently; modifications are ineffective
NSX Ltd	Calling a meeting requires formality, not a mere announcement
MDA National Ltd	Hyperlinked notice materials suffice
Jenashare P/L	Notice must let a member decide whether attending is worthwhile
ENT P/L	Notice must be substantially true and complete, especially where directors benefit
Devereux	Notice must be intelligible to the ordinary shareholder who scans or reads it
Buttonwood Nominees	Notice must include what the average commercial person would obviously include
Fraser v NRMA	Trumpeting free shares without adverting to the rights lost was imbalanced notice
Chequepoint Securities	A recommended vote needs an informed choice, personal interests fully disclosed
Cleary	Reasonable steps to ascertain further information, weighing time, cost and delay
Cordiant Communications	Substantial injustice under s 1322 asks whether the irregularity caused injustice that cannot be cured by court order, such as whether a different result would have occurred
Weinstock	s 1322 applied remedially and pragmatically; innocent mistakes saved

Attack plan. Find the rulebook, then the organ. 1. The rulebook. What governs this company: replaceable rules, a constitution, or a combination (ss 134 to 135)? Check displacement before applying any replaceable rule. 2. The organ. Which organ holds the disputed power? Management vests in the board (s 198A), while control, appointing and removing directors, amending the constitution, belongs to the general meeting. 3. Enforce or direct. Is a member trying to enforce the rules (the statutory contract, s 140(1), test their capacity) or to direct the board (they cannot: Cuninghame)? 4. Meeting mechanics. Who called it, on what notice, with what quorum, and how were the votes counted? 5. Proper purpose. Any general meeting must be for a proper purpose (s 249Q), and usurping management fails. 6. The s 1322 sweep. Sweep for procedural defects and ask whether s 1322 saves them. Governance issues are usually planted inside another question: the quoted constitutional clause with a dollar or duration threshold is the signature move of the contracting hypotheticals.

Replaceable rules and constitutions

RULE. gateA company may be governed by the replaceable rules, by a constitution, or by a combination of the two (s 134, applied by s 135), and the constitution may displace a replaceable rule where s 135 permits (s 135(2)).

RULE. arrowBreaching a replaceable rule is a breach of the company's internal rules and not a contravention of the Act, so the remedy is contractual or internal rather than statutory penalty (s 135(3)).

Adoption and change: a constitution may be adopted on registration if all members agree, or after registration by special resolution or a s 233 oppression order (s 136). Modification and repeal likewise require a special resolution (s 136(2)), and changes take effect on the date of the resolution or order (s 137).
Interpretation: the usual rules of contractual interpretation apply to a constitution (Lion Nathan Australia P/L).
A member is not bound by a modification made after they joined where it requires them to take up additional shares, increases their liability, or imposes or increases restrictions on transferring their shares in certain circumstances (s 140(2)).

The statutory contract: s 140(1). The constitution and any applicable replaceable rules have effect as a contract (a) between the company and each member, (b) between the company and each director and company secretary, and (c) between each member and each other member. You are bound once you are in, but unlike an ordinary contract it can be changed without your consent (by special resolution), it cannot be rectified, and it is only binding where there are shares (Bailey).

Division of power between board and general meeting

RULE. gateUnder the replaceable rule, the business of the company is managed by or under the direction of the directors, who may exercise all the powers of the company except any that the Act or constitution requires to be exercised in general meeting (s 198A). Whether a power is exclusively vested in the board is a matter of construction of the constitution (Lion Nathan), constrained by context and law, because the constitution cannot oust the directors' duties.

RULE. arrowWhere a power is vested exclusively in the directors, the members in general meeting cannot override its exercise even by majority resolution, and even where the sole shareholder disagrees (Cuninghame, where a shareholder with just over 50 per cent of the votes had the general meeting resolve that the directors accept a contract selling the company's assets to his new company; the directors could refuse, because members who want the power back must take it properly, by the 75 per cent special resolution; Howard Smith; Stanley, the English holding company that could not direct its German subsidiary's board).

The general meeting cannot stop the directors from initiating legal proceedings (Shaw; Cuninghame).
The division is functional, not absolute: whoever has the votes at a general meeting can remove and appoint directors, so control and management will inevitably converge in a determined majority (Mendes). The lawful responses to a disagreement are removal, appointment, or constitutional amendment, never direction.
Members cannot pursue a general meeting, or move a motion (a proposal voted on at a meeting), on matters of exclusive directorial power, and the directors may disregard motions and petitions that attempt to usurp managerial power (NRMA v Parker; Aust Centre for Corporate Responsibility; Re Molopo Energy, where the Act itself vested the decision in the board).

The proper purpose limit: s 249Q

RULE. arrowAny general meeting must be called and held for a proper purpose (s 249Q). Usurping the board's management power is not a proper purpose (NRMA v Parker), nor is directing the board to "do everything in [its] power" toward an outcome, because how to act is the directors' decision (Dhami). Amending the constitution is a proper purpose because that power belongs to the members (Snodgrass), and making board decisions contingent on shareholder approval may be permissible.

If the purpose is improper, the directors can simply ignore the request (NRMA v Parker).

Members' reserve powers

RULE. keyringtwistIn exceptional cases the general meeting has reserve powers to act despite exclusive vesting in the board, namely where the directors are in inescapable deadlock (Barron) or a quorum of directors cannot be mustered (Tahourdin). No reserve power arises while the general meeting can still break the deadlock by removing or appointing directors, however long that takes (Massey, where one of two feuding directors invalidly appointed a third at a secret meeting and had a two-person "general meeting" ratify proceedings against the other; the court confined reserve powers to cases of real urgency or where nobody is willing to become a director).

The general meeting may condone breaches of duty (so long as no fraud or minority oppression is involved) and may resolve not to sue for a breach even where the board cannot decide (Pavlides).
Board stalemates resolve by new appointments, by winding up if just and equitable (s 461(1)(k), Module 9), or by residual member power in the rare Massey circumstances.

Directors' meetings

Appointment and departure, briefly: directors must be adults, not disqualified, and must consent in writing (ss 201B, 201D). Appointment is by general meeting resolution (replaceable rule, s 201G), by the other directors subject to member confirmation (s 201H), or by a sole director/shareholder recording it (s 201F), with public companies barred from bundled appointments (s 201E) and able to appoint managing directors (s 201J). Departure: resignation in writing (s 203A), disqualification (s 203B), removal by proprietary company members (replaceable rule, s 203C), removal by public company members despite anything in the constitution, with two months' notice, the director's right to circulate a statement under 1,000 words and speak (s 203D), but never removal by fellow public company directors (s 203E).

Meeting mechanics (replaceable rules unless noted):

Call: any director, by reasonable individual notice to every other director (s 248C, notice to a fax machine several days ahead sufficed in Sliteris). The board itself may also call meetings (s 198A). Notice may be standing but must otherwise specify the business (Dhami).
Attend: technology may be used with consent, withdrawable only a reasonable period before the meeting (s 248D). The setting is leniently judged but must be an undertaking to meet as directors, not a casual coffee-shop catch-up (Poliwka).
Run: a director chairs (s 248E), and quorum is two directors present at all times (s 248F; public companies face restrictions on personally interested directors being present, s 195). The chair must be unbiased and professional, allow sufficient debate and allow a vote, or risk breach of duty or minority oppression (see s 232).
Decide: simple majority, chair holding a casting vote if not conflicted (s 248G). Meetings are not for consensus: each director must reach an individual view and vote for themselves rather than withhold (Gillfillan).
Without a meeting: unanimous circulating resolutions, passing on the last signature (s 248A). A sole director signs a resolution to give it effect (s 248B(1)) but must still record it (s 251A).

Members' meetings

Only public companies must hold AGMs (s 250N; content s 250R). Proprietary companies need not but often do. Proprietary companies with more than one member may instead pass unanimous circulating resolutions, except to remove an auditor (s 249A). A director may call a members' meeting (s 249C) and the court has a power to order one (s 249G).

"Special resolution": s 9. The resolution grade required for constitutional change (s 136(2)) and conversions (s 162). It requires a 75 per cent majority of votes cast: the threshold the requisitioning majority lacked in Cuninghame.

The routes by which members force action

Route	Provision	Threshold	Cost falls on	Timing	Limits
Requisition a meeting (directors must call and arrange it)	s 249D	members with 5% of the votes	the company	meeting scheduled not later than 2 months after the request	signed, in writing, stating the resolutions; the request must be actioned consistently: modifications are ineffective (Empire Oil & Gas NL); improper purpose lets directors ignore it (s 249Q; NRMA v Parker)
Self-call after directors fail to act on a s 249D request	s 249E	more than half of the requisitioning s 249D votes	the company must pay reasonable expenses (an offence not to), recoverable from the directors unless they prove all reasonable steps were taken	after 21 days, held within 3 months	company must provide the members register
Call a meeting themselves	s 249F	members with 5% of the votes	the requisitioning members themselves	·	the call must be formal, not a mere announcement (NSX Ltd); proper purpose still applies
Propose a resolution for the next general meeting	s 249N	5% of the votes or 100 members entitled to vote	the company, unless the notice arrives too late to send with the meeting notice	must be considered at the next general meeting occurring at least 2 months after notice (s 249O)	in writing; the resolution's content must still respect the division of power (s 249Q: the 2023 trap)
Circulate a statement to members	s 249P	5% of the votes or 100 members	the company	distributed for the relevant general meeting	under 1,000 words, not defamatory; may concern any matter of the meeting including a proposed resolution

Manner, notice, quorum, voting

Manner: meetings must be held at a reasonable time and place, reasonableness judged against the main location, and may span multiple venues if the technology gives the members as a whole a reasonable opportunity to participate (ss 249R, 249S). Hybrid meetings are permissible, purely virtual ones more questionable though increasingly allowable.
Notice: at least 21 days (s 249H), shortenable for an AGM if all members agree or for other meetings by 95 per cent of votes (not where director or auditor changes are being put). Notice must be written and individual to each member and director, personally or to a nominated place, hyperlinked material suffices (MDA National Ltd), (s 249J), and must go to the auditor (s 249K). The content must set out, in a clear, concise and effective manner, the particulars, the business, the intention and text of any special resolution, and proxy rights (s 249L).

The general law adds a quality standard for notice, one authority per strand:

The notice must be	Authority
Sufficient to let a member decide whether attending is worthwhile	Jenashare P/L
Substantially true and complete, within reason, especially where the directors stand to benefit	ENT P/L; Devereux
Intelligible to the ordinary shareholder not versed in business who scans or reads it	Devereux
Inclusive of what the average commercial person would obviously include	Buttonwood Nominees
Balanced: trumpeting free shares without adverting to the rights lost is imbalanced	Fraser v NRMA
Where a vote is recommended, enough for an informed choice, including full disclosure of any personal interest	Chequepoint Securities
Backed by reasonable steps to ascertain further information, weighing time, cost and delay	Cleary

Quorum (the minimum attendance for a valid meeting): two members present at all times, counting proxies but not artificially multiplied ones, or the meeting lapses after 30 minutes (s 249T). The chairing of the meeting is dealt with by s 249U.
Voting: one vote per member on a show of hands, one vote per share on a poll (a formal count), with the chair holding a casting vote (s 250E). A show of hands decides unless a poll is demanded, and the chair's declaration is conclusive (s 250J). A poll may be demanded on any resolution, though the constitution may bar polls on the chair and adjournments, by five members, 5 per cent of votes, or the chair (ss 250K to 250M).
Proxies (appointed stand-in voters): a member may appoint one or two proxies (s 249X), who may speak, vote and demand a poll if the appointor is absent (s 249Y). A proxy who is chair must vote as directed (s 250BB(1)), and the appointment survives death, incapacity, revocation or transfer until the company receives written notice (s 250C(2)).

Procedural irregularities: s 1322

RULE. twistA procedural irregularity such as a lost quorum or defective notice of a directors' or members' meeting does not invalidate the proceeding unless it causes substantial injustice that cannot be remedied by any order of the court. Substantial injustice asks whether the defect had a material effect, in the sense that a different result would have occurred (s 1322(2); Cordiant Communications).

The provision is applied remedially, pragmatically and substantively: courts are not sticklers, and innocent mistakes should be saved (Weinstock).

Critical pitfalls and counter-arguments

Trap. Capacity limits enforcement. To enforce the statutory contract a person must be adversely affected in their capacity as a party to it, as a member, and being affected as an employee, creditor or agent of the company is not enough (Hickman). A constitution clause promising an outsider benefit (a named solicitor, a salaried role) is not enforceable by them through s 140(1). Ask in whose capacity the complainant sues before letting them sue at all.

Trap. The 2023 s 249N/s 249Q trap. The paper had a 70 per cent holder propose an AGM resolution "to require the directors … to pursue property development opportunities". Good answers "recognise[d] that Pocochoc could use s 249N but that the resolution was not for a proper purpose (s 249Q, Automatic/Shaw)". The procedural gateway is made trivially satisfiable so the marks sit in the substantive check: always test the content of the resolution against the division of power after confirming the machinery.

Trap. Do not stop at the defect. Finding a notice or quorum flaw is the start, not the conclusion: run s 1322(2) and ask whether a properly convened meeting would have decided differently (Cordiant). Where the votes were always there, the irregularity is saved. Where the defect silenced a member whose participation could have changed the outcome, it is not. Two conclusions, one section: the marks are in the second step.

Exam calibration. This module is almost never freestanding: it is the tripwire inside other questions, the quoted constitutional clause with a dollar or duration threshold in the contracting hypotheticals, the s 136 amendment gateway to Gambotto expropriation problems (Module 9), and the division-of-power tail on a members’ resolution. For essays, hold Cuninghame, NRMA v Parker and Massey as the doctrinal spine and argue the policy both ways: board supremacy against member democracy. In hypotheticals, calibrate short: identify the organ, apply the clause, and move to the substantive module the question is really about.

Take it to the practice bank

This module is drilled in the Corporations Law practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.

Practice prompts

Take any quoted constitutional clause with a dollar or duration threshold and write the two sentences that identify the rulebook (ss 134 to 135) and the organ that holds the power (s 198A).
Draft the paragraph you would give a majority shareholder who wants the general meeting to direct the board, applying Cuninghame and naming the three lawful responses: removal, appointment, amendment.
Take a s 249N members' resolution and test its content against s 249Q, writing the machinery conclusion and the proper-purpose conclusion separately.
List the five routes by which members force action, and for each state the provision, the threshold, and who pays.
Find a notice or quorum defect on any set of facts and run s 1322(2) to both possible conclusions, citing Cordiant on substantial injustice.

Check your understanding

Auto-marked drills. Answer, then see the authority in the feedback.