BTF5955 · Business and Company Law
Corporate Governance & Company Management
Topic 8 explains how a company is governed and how it acts in law: the constitution and replaceable rules, the statutory contract they create (s 140), the division of power between the board and the members in general meeting, the company's legal capacity and powers (s 124), and how the statutory assumptions protect outsiders dealing with a company. It is examinable in the open-book final as short-answer and IRAC problems on 'who holds which power' and whether a company is bound.
What this chapter covers
- 01Corporate governance: the system of rules, practices and processes by which a company is directed and controlled
- 02Separation of ownership and control: members own the company; directors manage it
- 03The two organs: the board of directors and the members in general meeting
- 04Division of powers — s 198A (replaceable rule): the directors manage the business; some powers are reserved to the general meeting
- 05The constitution and replaceable rules; the statutory contract — s 140 (binds the company and members, and members to each other)
- 06Directors and officers — s 9 definitions: appointed (executive/non-executive), de facto director, shadow director
- 07How the company contracts: capacity s 124, execution s 127, and the statutory assumptions ss 128–129 (the indoor management rule; Royal British Bank v Turquand)
- 08The ASX Corporate Governance Principles and Recommendations (4th ed): the 'if not, why not' disclosure regime for listed entities
IRAC on the division of powers: can the members override a board decision?
- +1Issue. Can the members in general meeting, by ordinary resolution, override a management decision of the board and direct the directors on a matter within the directors' management power?
- +2Rule. Under the replaceable rule in s 198A, the business of a company is managed by or under the direction of the directors, who may exercise all the powers of the company except those the Act or the constitution requires to be exercised in general meeting. Where management power is conferred on the board, the general meeting generally cannot simply overrule the directors on those matters by ordinary resolution; the members' avenues are to alter the constitution (special resolution), or to remove/replace directors, not to give day-to-day management directions.
- +2Application. Entering a supply contract is an ordinary management decision, which s 198A places within the board's power. The shareholders' ordinary resolution purporting to 'direct' the board therefore does not, by itself, override a decision properly within the directors' management authority. The members cannot use an ordinary resolution to seize a power the constitution has allocated to the board.
- +1Application — the members' real options; Conclusion. The shareholders' genuine options are to amend the constitution by special resolution to reallocate the power, or to remove and replace directors under the applicable procedure so a new board makes a different decision. Conclusion: the ordinary resolution does not bind the board — the supply contract is a management matter within the directors' s 198A power, and the members must use constitutional amendment or director removal rather than an ordinary directing resolution.
Key terms
- Corporate governance
- The system of rules, practices and processes by which a company is directed and controlled, balancing the interests of shareholders, management, creditors and other stakeholders. For listed entities, the ASX Corporate Governance Principles set 'if not, why not' disclosure expectations.
- The two organs of the company
- The board of directors (which manages the business) and the members in general meeting (which exercises the reserved powers, such as amending the constitution). Corporate decisions are allocated between these two organs by the Act and the constitution.
- Replaceable rules & constitution
- A company's internal management may be governed by the replaceable rules in the Corporations Act, by a constitution it adopts, or by a combination. Key replaceable rules include s 198A (directors manage the business).
- Statutory contract (s 140)
- Section 140 provides that the constitution and any replaceable rules have effect as a contract binding the company and each member, the company and each director/secretary, and the members among themselves. It gives the internal rules contractual force.
- De facto and shadow directors (s 9)
- A de facto director acts as a director without valid appointment; a shadow director is a person on whose instructions the board is accustomed to act. Both can owe directors' duties even though not formally appointed.
- Statutory assumptions (ss 128–129)
- Provisions protecting outsiders dealing with a company: they may assume the constitution has been complied with, that officers are duly appointed and perform their duties properly, and so on — the statutory form of the indoor management rule (Royal British Bank v Turquand).
Corporate Governance & Company Management FAQ
Who manages a company — the shareholders or the directors?
The directors. Although the members own the company, the standard replaceable rule s 198A gives the board the power to manage the business and exercise all the company's powers except those reserved to the general meeting by the Act or the constitution. This separation of ownership and control means shareholders cannot generally overrule a management decision by ordinary resolution; to change course they must alter the constitution by special resolution or remove and replace directors.
What is the statutory contract under s 140?
Section 140 gives the company's constitution and replaceable rules the force of a contract. It binds the company and each member, the company and each director and company secretary, and the members among themselves. That is why a member can, in principle, enforce the constitution's terms — the internal rules are not just administrative arrangements but contractual obligations, subject to the limits the courts have placed on which provisions are enforceable and by whom.
How do the statutory assumptions protect someone dealing with a company?
Sections 128–129 let an outsider dealing with a company make certain assumptions — for example that the company's constitution and the replaceable rules have been complied with, that anyone who appears from ASIC records to be an officer has been duly appointed and has authority, and that the officers and agents properly perform their duties. This is the statutory version of the indoor-management rule from Royal British Bank v Turquand, and it means the company usually cannot escape a contract by pointing to an internal irregularity the outsider could not have known about.
Can Sia help me with corporate-governance problems?
Yes, as a study aid. Sia can walk you through the division of powers under s 198A, explain the s 140 statutory contract and the ss 128–129 assumptions, and check whether your IRAC answer correctly identified where a decision properly sits and how members can change it. It explains the method and checks your reasoning; it does not do your graded assessment, and Monash academic-integrity rules apply.
Exam move
Topic 8 is about who holds which power and how a company is bound, so build a clear mental map of the two organs and the division of powers. Memorise s 198A (directors manage), the members' reserved powers, and the crucial point that shareholders change a management outcome by special resolution or by removing directors, not by an ordinary directing resolution — the most common exam trap. Know the s 140 statutory contract and be able to explain the ss 128–129 statutory assumptions (the Turquand indoor-management rule) for a 'is the company bound?' question. Keep the s 9 definitions of de facto and shadow directors handy, because they matter for duties in Topics 10–11. Practise on fresh 'who has the power' scenarios by writing visible IRAC answers. When a step won't click, ask Sia to explain it a different way and to set you a fresh governance problem; it teaches the method and checks your reasoning, and it never substitutes for your own graded work.
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