Case note: Cody v Live Board Holdings Limited [2014] NSWSC 78

Beware of inconsistency between shareholders’ agreements and constitutions: a NSW court has found both the constitution and shareholders’ agreement must be followed despite supremacy clause


It is common, when a shareholders’ agreement is entered into, not to amend the company’s constitution to replicate the provisions of the shareholders’ agreement that cover the same topics.  Instead, the parties will often rely on a clause in the shareholders’ agreement that provides that if there is any inconsistency between the shareholders’ agreement and the company’s constitution, the shareholders’ agreement will override the constitution. The company may (or may not) amend its constitution to include a corresponding clause.

A judge in a recent case in the Supreme Court of New South Wales, Cody v Live Board Holdings Limited, has thrown this practice into question. In mid-February, the judge refused to make a declaration that particular shares were validly issued by Live Board Holdings Limited (Company), on the basis that the shareholders of the Company had not approved the share issue by special resolution as required by the Company’s constitution. The Company’s shareholders’ agreement, in contrast, required only that the issue of those shares be approved by a simple majority of shareholders.

Case summary and analysis

In August 2013, the board of the Company resolved to issue about 5.2 million preference shares to new shareholders and about 3.3 million ordinary shares to existing shareholders in connection with a capital raising. A director of the Company challenged the share issues, asserting that, among other things, certain provisions of the Company’s constitution and/or a shareholders’ agreement between the Company and its shareholders had not been complied with.

The other directors of the Company believed that the share issues were valid and applied to the Supreme Court of New South Wales for a declaration that the board of the Company had the power and authority to issue those shares.

The constitution of the Company specified, in summary, that the directors of the Company were entitled to cause the Company to issue shares with such preferred, deferred or other special rights to any person, in such proportions or numbers and for such consideration, as the directors determined, except that in circumstances where an issue of shares would directly or indirectly vary the rights or obligations of an existing class of shares, the variation would need to be approved by at least 75% of the votes cast by members entitled to vote.

The shareholders’ agreement (which was entered into about 18 months after the Company adopted its constitution) provided that certain powers of the Company were reserved for decision by the shareholders. In particular, the shareholders’ agreement required that ‘the issue of any shares or other securities of the Company or the grant of rights over any shares or other securities of the Company…’ must be approved by a simple majority of shareholders.

The shareholders’ agreement also included a standard conflicts clause, which said that in the case of any conflict between the provisions of the shareholders’ agreement and the constitution of the Company, the provisions of the shareholders’ agreement would prevail.

Interestingly, in his opinion, the judge expressed some doubt that a shareholders’ agreement could control the constitution in the way provided by the conflicts clause (even though the parties to the litigation all agreed that it could). Despite the judge’s reservations about the conflicts clause, he did not go so far as to say that the clause was unenforceable. Instead, the judge found a way to read the shareholders’ agreement and the constitution so that they would be consistent with each other.

The judge did this by finding that the purposes behind the requirements of the shareholders’ agreement and constitution were different even though the action (the issue of shares) was the same.  The purpose of the constitutional provision was to protect the interests of the holders of the class of shares being varied, while the purpose of the shareholders’ agreement was to reserve to the shareholders the power to issue shares. As these purposes were not inconsistent with each other, the judge did not find there to be any conflict between the provisions of the constitution and the shareholders’ agreement, and both requirements had to be complied with in order for the shares to be validly issued.

The outcome of this case may surprise practitioners in this area.  It would be common, in our experience, for the parties to a shareholders’ agreement (and their lawyers) to assume that if the subject matter of the clause (such as the issue of shares) in the constitution and the shareholders’ agreement is the same, then the inconsistency clause would mean that only the shareholders’ agreement has to be complied with. This court opinion shows that an assumption of that kind can be dangerous (at least in NSW). Accordingly, the parties to a shareholders’ agreement should make sure that its inconsistency clause expressly covers the case where the subject matter or action under the agreement and the constitution are the same.

Practice points

  • Review inconsistency clauses: Companies should review the inconsistency clauses in their constitutions and shareholders’ agreements to ensure that they expressly provide that an inconsistency will be considered to exist if the subject matter of the particular clause, or action to be taken, is dealt with in both the shareholders’ agreement and the constitution.
  • Amend constitution to remove any inconsistency or include the same inconsistency clause: In addition, it would be prudent for companies to amend their constitution so that the clauses in the constitution are the same as the corresponding provisions of the shareholders’ agreement or, at the very least, to include the same inconsistency clause that is in the shareholders’ agreement.  This may address the doubt expressed by the judge in Cody as to whether a shareholders’ agreement can override a constitution.


Deborah Chew

Deborah is a leading commercial transaction lawyer with extensive experience in mergers and acquisitions, and capital markets.

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