Shareholders’ agreements and inconsistency clauses

The case of Cody v Live Board Holdings Limited [2014] NSWSC 78 (Cody) highlights the need for careful drafting of Shareholders’ Agreements to ensure that there is no duplication of clauses in company constitutions. Shareholders’ agreements usually contain what’s known as an “inconsistency clause”. Such inconsistency clauses attempt to resolve ambiguity between overlapping or conflicting clauses in Constitutions and Shareholders Agreement in favour of the Shareholders’ Agreement. Cody provides guidance on the applicability of inconsistency clauses.

The company constitution

Section 134 of the Corporations Act 2001(Cth) (Act) provides that a company’s internal management may be governed by the provisions in the Act designated as “replaceable rules” or by a constitution (Constitution) or a combination of both.   Section 136 provides that a company may adopt a Constitution on registration or after registration by passing a special resolution. The term Constitution means…in relation to any other kind of body as:

  • the body’s charter or memorandum; or
  • any instrument of law, other than the Act, constituting or defining the constitution of the body, or governing the activities of the body or its members.

What is the effect of the Constitution?

Section 140 of the Act provides that a company’s Constitution and the replaceable rules (if applicable) have effect of a contract between:

  • the company and each member;
  • the company and each director;
  • between a member and each other member.

Therefore the Constitution defines the contractual relationship by which the conduct between the director(s) and members is regulated.

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is a contract that attempts to regulate the rights and obligations of shareholders (or members) in the context of their ownership of securities in a company. One of the key differences between a Shareholders Agreement and the Constitution is that unlike the Constitution which only requires 75% of the members to vote in favour to an amendment, all Shareholders must agree to an amend the Shareholders Agreement.   That said, a Constitution and a Shareholders Agreement (Governing Documents) both regulate the same sorts of activities.

What happens in the event of an inconsistency?

Cody came before Breton J of the New South Wales Supreme Court to decide the question of whether the board of the Board Holdings Limited (LBH) had the power to issue preference shares based on a proper construction of the Constitution and its Shareholders’ Agreement. It was also pleaded in the alternative that the share issue was oppressive pursuant to section 232 of the Act. The basis of the allegations was that the requirements of the Constitution and the Shareholders’ Agreement were not complied with in issuing the preference shares.

The governing documents

In Cody, the governing documents which controlled the relationships were adopted as follows:

  • the LBH Constitution, adopted by special resolution on 8 August 2011; and
  • the Shareholders’ Agreement which was adopted on 3 February 2013.

The objectionable conduct

The Directors of LBH resolved to proceed with a capital raising. Subsequently, on 3 September 2013, LBH issued 5,226,550 preference shares in exchange for share subscription funds and 3,323,324 ordinary shares to existing shareholders pursuant to the anti-dilution provisions (3 September Issue).

The inconsistencies

Powers contained in the Constitution

Clause 3 of the Constitution reserved the power to vary class rights with the members as follows:

 “…the directors may cause the company to issue and allot securities, with such preferred, deferred or other special rights referred to in clause 3.1 “or otherwise” to any person, whether a member or not, in such proportions or numbers (clause 3.2), and for such consideration (clause 3.3), as the directors determine, but not so as to directly or indirectly vary the rights or obligations of an existing class of shares unless clause 6 is satisfied”.[1]

 Clause 6 stated, interalia that a class of shares may only be varied if the variation is approved in writing by the holder of 75% of that class eligible to vote or by a class special resolution.

Relevant provisions of the Shareholders’ Agreement

Clause 4.6(a) of the Shareholders Agreement stated, interalia ‘the board will be responsible for the overall direction and control of the management of the company and the formulation of the policies to be applied in the conduct of the business ….[2]

Clause 4.6(b) provided that a decision in relation to any matters referred to in the schedule C must be made by the Shareholders. Matters referred to in Schedule C included:

  • a reconstruction of the share capital of the Company;
  • the issue of shares of other securities of the Company or the grant of rights over any shares or other securities…..

Clause 5.1(b) provided “that…notwithstanding clause 5.1(a), any decision on a matter referred to in Schedule C must be approved by a simple majority of Shareholders”.

Clause 7.1(d) provided that ‘the company will enter into a binding commitment with Bligh Capital (or such other financier as agreed by the Board) appointing it to raise at least $1 million in capital for the company by 1 April 2013 (Initial Fundraising)’.

Clause 11 (Shareholders Meetings) provided notably that a decision of any of the shareholders for any of the matters set out in Schedule C will be by simple majority decision.

The inconsistency clause in the Shareholders’ Agreement

Clause 18.1 provided:

 ‘Where there is any conflict between the provisions of this Agreement and the Constitution of the Company, the provisions of this Agreement prevail and upon a written request being referred from any party, all parties must cause the Constitution of the Company to be amended in order to remove the conflict’.[3]

 Breton J stated at 16, that the prevalence clause was not disputed by the parties, however he doubted that such a clause could work as intended, but noted that the parties accepted that it could. Breton J went on to say that:

‘ seems to me that, so far as possible, the shareholders’ agreement should be read together (our emphasis) with the constitution, so as to be consistent with it’.[4]

 The Plaintiffs raised three objections to the 3 September 2013 issue:

  • that it was improper; and
  • that it was oppressive; and
  • that it was invalid it was inconsistent with both the Constitution and the Shareholders Agreement.

Ultimately the improper purpose and oppression questions were not determined.

The basis of the dispute

The defendants submitted that clause 6.1 of the Constitution which required a 75% resolution of the members in general meeting was not superseded by clauses 4.6(b) and 5.1(b) of the Shareholders’ Agreement. In other words the clause in the Shareholders Agreement that attempted to vary the motion from a special resolution to an ordinary resolution was not valid.

Did the shareholders unanimously agree to the 3 September issue?

The Plaintiffs said that the 3 September 2013 issue was valid because:

 “clause 7.1(d) of the shareholders’ agreement, together with the confirmation of 8 January 2013; and the consent of 19 April 2013 manifested the unanimous agreement and approval of the shareholders for LBH to make the 3 September share issue.[5]

 Clause 7.1(d) of the Shareholders’ Agreement provided that ‘the company will enter into a binding commitment with Bligh Capital (or such other financier as agreed by the Board) appointing it to raise at least $1 million in capital for the company by 1 April 2013”.

Breton J decided that the Board of LBH did not have the power to complete the 3 September Issue based on Clause 7.1(d) – the difference being that an agreement to enter into an agreement to raise capital was not the same as a resolution of the members to issue shares pursuant to Schedule C of the Shareholders’ Agreement.

Therefore, on a proper construction of the Constitution and the Shareholders’ Agreement the Plaintiffs failed to satisfy Breton J that the 3 September 2013 share issue was valid exercise of the Board’s power.


The case of Cody highlights the need to remove inconsistent clauses in company Constitutions and Shareholders’ Agreements and to ensure that both documents do not offend the provisions of the Corporations Act 2001 (Cth). The actions of Directors must be unambiguous and clear drafting of clauses is required to avoid misinterpretation. Inconsistency clauses resolving to amend a Constitution in favour of a Shareholders’ Agreement may not be sufficient as both documents must be read together to ensure compliance.

Links and further references


Corporations Act 2001 (Cth)

Useful cases

Cody v Live Board Holdings Limited [2014] NSWSC 78

In the matter of Live Board Holdings Limited (Administrators Appointed) [2014] NSWSC 161 (3 March 2014)

Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11

Other articles by Dundas Lawyers

What is a Shareholders Agreement?

Drag along rights enforceable;

Top 7 mistakes in Shareholders Agreements;

What do Shareholders Agreements protect against;

Tailored Constitutions vs Shareholders Agreements;

Convertible notes in capital raising

Further information

If you need further information on drafting a Shareholders’ Agreement or a bespoke constitution, please contact us for an obligation free and confidential discussion.







Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.

Legal Practice Director
Telephone: (07) 3221 0013
Mobile: 0419 726 535


This article contains general commentary only.  You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.


[1] Cody v Live Board Holdings Limited [2014] NSWSC 78 at 5.

[2] Cody v Live Board Holdings Limited [2014] NSWSC 78 at 8.

[3] Cody v Live Board Holdings Limited [2014] NSWSC 78 at 15.

[4] Cody v Live Board Holdings Limited [2014] NSWSC 78 at 16.

[5] Cody v Live Board Holdings Limited [2014] NSWSC 78 at 21.

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