Typically, shareholders' agreements contain a provision to
the effect that any inconsistency between the agreement and the
company's constitution will be resolved in favour of the
shareholders' agreement. Parties to such documents may assume
that multiple governing documents will always be inconsistent, and
the document that takes precedence is the only binding governing
This is a dangerous assumption to make. A recent case from the
New South Wales Supreme Court, Cody v Live Board Holdings
Limited, serves as an important reminder that the fact that
two different governing documents deal with similar but not
identical matters does not mean that the documents conflict.
In 2013, the board of Live Board Holdings resolved to proceed
with a capital raising. The company issued approximately five
million preference shares to new shareholders and three million
ordinary shares to existing shareholders. An existing shareholder
challenged the share issue, and so the board applied to the Supreme
Court of New South Wales for a declaration that it had the power
and authority to issue the shares.
The company's constitution provided that directors could
issue and allot shares with such preferred, deferred or other
special rights as determined by the board. Where the board sought
to vary the rights of a particular class of shares, the written
approval of 75% of the shareholders of that class was required.
The shareholders' agreement, executed before the capital
raising, reserved certain powers of the company for decision by the
shareholders. Among these reserved powers was the issue of shares
and other securities, which, under the agreement, only required a
50% majority approval. Additionally, the shareholders'
agreement specified that it would prevail over the company's
constitution to the extent of any inconsistency between the two
Positions and decision
The existing shareholders argued that, pursuant to the company
constitution, the board could not issue the preference shares
without the approval of 75% of the shareholders. The directors
contended that the shares issue was caught by the shareholders'
agreement and therefore only required a 50% majority decision of
The Court did not have to decide this question, holding instead
that there was no conflict between the two documents in this
Although both documents dealt with the issue of shares, the
Court held that the purpose behind the constitution and
shareholders' agreement was different. The constitution was
aimed at protecting the interests of the holders of the class of
shares being varied whereas the shareholders' agreement was
designed to reserve the power to issue shares generally.
As such, it was necessary to show that both the constitution and
shareholders' agreement had been complied with in order to
establish the validity of the issued of preference shares.
Cody v Live Board Holdings Limited serves as a valuable
reminder of the importance of carefully reviewing the terms of
ostensibly conflicting documents. It may be possible to read a
company constitution and shareholders' agreement together, and
a court will do so as far as possible with the consequence that
both documents must be complied with.
Inconsistent clauses in company constitutions and
shareholders' agreements should be carefully reviewed to ensure
that the actual existence of any inconsistency can accurately be
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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