LexisNexis Practical Guidance®

A company may have a distinctive name or may simply rely on its Australian Company Number (ACN) as its name. If a distinctive name is desired, the applicant may reserve the name with ASIC prior to registering the company at a later date. A company is required to use words or abbreviations, such as "Pty" and "Ltd", as part of its name depending on the type of company. If a company carries on business under a different business name from its corporate name, then it is required to register that business name under the national business name legislation.

A proprietary company is required to have at least one director (resident in Australia) and a public company is required to have at least three directors (at least two of whom are resident in Australia). All directors are required to be at least 18 years old. Prior to becoming a director, the person is required to provide written consent and certain personal details to the company.

A proprietary company is not required to have a secretary, but a public company must have at least one secretary. The secretary must be a resident in Australia. Prior to becoming a secretary, the person is required to provide written consent and certain personal details to the company.

A company must have at least one member, which may be an individual or another company or entity. For companies limited by shares, the member would also have a proprietary interest in the form of shares in the company. A person becomes a member in a company on registration if the application for registration specifies that such member has given their consent. On registration, the application is required to set out the number and class of shares held by the member and the amounts paid and unpaid on the shares held by the member.

A company is also required to have a registered address for correspondence and a principal place of business, which may not necessarily be the same. If the company does not occupy the registered address, then the occupier of that address must give its consent prior to registration of the company.

See Name, directors, secretaries, registered office and place of business.

A company may rely on the replaceable rules in the Corporations Act 2001 (Cth) to govern the relationship between itself, its members and its officers. Alternatively, a company may adopt a constitution as a separate document that sets out the rules that govern those relationships.

There are a number of reasons why relying on the replaceable rules may not be appropriate for a particular company, including where additional details on the governance rules are required, where certain replaceable rules are not appropriate, or where it is desired to displace or modify some or all of the replaceable rules. In those circumstances, it may be more appropriate to adopt a constitution instead.

A constitution may be adopted on or after registration. If a constitution is adopted on registration, then each of the members specified in the application for registration must consent to the constitution before the application is lodged. If a constitution is adopted on registration by a public company, then that constitution is required to be lodged with ASIC on registration. If a constitution is adopted after registration, the company may do so by passing a special resolution.

There may also be older companies with memorandum and articles of association, and companies that have displaced some but not all of the replaceable rules, or others that have adopted a constitution that simply restates the replaceable rules.

See Constitution and replaceable rules.

The relevant form for the reservation of name is Form 410 (Application for reservation of name), and the relevant form for the application for registration of a company is Form 201 (Application for reservation of an Australian company). Prior to November 2015, the relevant form for notifying ASIC of changes to to company details following its registration was Form 484: Changes to company details (for Australian companies) However these changes are now made using ASIC’s online company portal.

See ASIC forms.

The corporate governance rules are essentially the rules that govern the activities of the company and the relationships between the company and each member, between the members themselves, and between the company and each of its officers. These rules are derived from a number of sources, with the central source being the company's constitution, as supplemented by the Corporations Act 2001 (Cth) (CA) and the common law.

The constitution operates as a statutory contract and members have the right to enforce such statutory contract.

Members are able to modify the constitution and such rights cannot be altered by the company or by contract. That said, it is possible for shareholders to agree amongst themselves in a shareholders' agreement to exercise their voting rights in a particular manner, including agreeing not to alter the constitution except in certain circumstances.

Once a member ceases to be a member of the company, the corporate governance rules will no longer apply to the member.

See Corporate governance rules.

The board of directors is responsible for managing the company. A board may appoint a managing director who is appointed to oversee the day to day operations of the company, and such managing director is able to exercise powers delegated by the board.

The role of the company secretary is generally to perform an administrative role and their primary duties are to ensure the company fulfils its reporting requirements.

See Role of board and secretary.

Directors are under a duty imposed by the CA and general common law to exercise their powers and discharge their duties with a degree of care and diligence that a reasonable person would exercise in that position with the same responsibilities.

Directors are also under a duty to exercise their powers and discharge their duties in good faith in the best interests of the company, and to act for a proper purpose. Furthermore, directors are under a duty not to improperly use their position to either gain an advantage for themselves or someone else, or to cause detriment to the company, as well as not to improperly use information gained by virtue of being a director.

Further, directors have a general duty not to place themselves in a situation of real or possible conflict and not to have their discretions fettered.

See Directors’ duties.

The role of members is not to manage the day to day operations of the company, but rather act as owners of the company. Members are able to exercise their powers and rights in general meeting.

For example, members in general meeting have the power to change the constitution, approve certain reductions of share capital, and remove a director (particularly in the case of a public company). The division of powers between directors and members is usually set out in the company's constitution.

Members also have a statutory right to propose resolutions, call meetings to consider those resolutions, and distribute statements at general meetings of the company.

There are also other rights and powers available to members such as bringing an action to prevent the majority from improperly exercising the votes (based on the fraud on the minority principle), initiating statutory derivative actions, and seeking a winding up of the company.

See Role of shareholders.

Companies are obliged to comply with a number of financial reporting requirements under the CA and different requirements apply to different types of companies.

Every company regardless of type must keep written financial records that correctly record and explain its transactions and financial performance and position, and that would enable true and fair financial statements to be prepared and audited.

If the company is obliged to provide financial reports, it would need to comply with the content and ASIC lodgment requirements in the CA.

See Record keeping and financial reporting.

A company has the legal capacity and powers of an individual, and is able to engage in any business or activity in the same way as a natural person.

The Corporations Act 2001 (Cth) (CA) abolished the historical doctrine of ultra vires, so that a company's act is no longer invalid merely because it is contrary to, or beyond, any of the objects in its constitution.

However, a company's exercise of certain corporate powers may be subject to the CA, such as a company's power to cancel or acquire its own shares.

The CA provides that a company may ratify a contract entered into by its agent prior to its formation or registration.

See Corporate capacity.

As a company is an artificial legal entity, it can only act through individual persons.

Some of these persons, due to their control over the company, are identified as being a company's directing mind and will. Where these persons act, their acts are deemed to be the acts of the company itself.

For other persons who are not deemed to be a company's directing mind and will, their capacity to bind a company stems from agency.

An agent may be able to bind a company by having express actual authority, implied actual authority, or apparent or ostensible authority.

If an agent has acted outside its authority, but the company wishes to be bound by the agent's act, the company is able to ratify the agent's actions.

See Who can bind the company?

Unlike other business structures, such as partnerships and trusts, a company as a separate legal entity may be subject to criminal and civil liability for its actions.

Companies may be vicariously liable for the acts or omissions of certain individuals, or have primary liability where certain persons' actions or omissions are imputed directly to the company.

A company may have primary criminal liability if the elements set out in the Criminal Code Act 1995 (Cth) are satisfied. The CA provides for strict and absolute liability offences where there is no need to even prove the fault element of an offence.

It is generally only under statute that a company may be found guilty of vicarious criminal liability, with the wording and intentions of the statute relevant as to whether or not vicarious criminal liability may be imposed on a company.

Companies may have primary civil liability for civil wrongs they commit. Under the CA, the mental state of the company's directors, employees or agents are attributed to the company, and the act is taken to have been engaged by the company itself.

Companies may also be vicariously liable for civil wrongs committed by its employees and agents under common law and the CA and other statutes.

Further, under the CA companies may:

• •be guilty of criminal offences;
• •liable for civil penalties; or
• •liable for compensation orders.

See Criminal and civil liability.

Companies are able to obtain finance from mainly two sources: equity finance and debt finance.

Equity finance may be summarised as broadly the provision of capital from the company's owners, and usually takes the form of the issue of shares in the company in exchange for the owner contributing cash or other assets. Equity finance can be sought in a number of scenarios, such as share placements, an initial public offering, rights issues or bonus offerings.

Shares may be subscribed for cash or non-cash consideration, and shares may be partly paid or fully paid. In addition, options over unissued shares and other convertible securities may be issued to investors. Shares may be issued with different rights and in different classes, such as preference shares issued with preferential dividend rights.

Dividends are broadly payments made to members on their shares in return for their equity investment. Since June 2010, dividends no longer have to be paid out of profits but may be paid on satisfaction of a three part test.

See Equity finance.

Debt finance can be summarised as funding provided in the form of borrowings lent by creditors. Debt finance can take the form of loans to the company or in the form of the issue of debentures by the company.

The issue of debentures by the company is subject to specific rules under the Corporations Act 2001 (Cth) including the use of a trust deed and the appointment of a trustee.

It is also common for companies to raise debt finance by the use of quasi-equity or hybrid instruments. For example, some companies may use convertible/converting notes or equity-finance facilities to raise debt finance that is structured like equity finance.

The obligation to repay debt finance may be secured over the company's assets or unsecured. The practice of taking security interests and registering such interests under the Personal Property Securities Act by companies is common.

The Corporations Act 2001 (Cth) has in place a number of provisions to protect providers of debt finance, such as priority of repayment over members' claims, imposing of personal liabilities on directors for insolvent trading and restricting certain corporate transactions that could adversely affect creditors' rights.

See Debt finance.

One of the key aspects in the process of raising capital by the issue of shares is disclosure to investors. The general rule is that disclosure is required unless one or more exemptions apply. The more commonly used exemptions include the small scale offering and offers to sophisticated investors.

If a disclosure document is required, then an offer for shares must be accompanied by a disclosure document. The most commonly used disclosure document is a prospectus. If a disclosure document is not used, companies commonly provide investors with an information memorandum instead.

Failure to comply with the disclosure requirements may result in the company and its directors being exposed to criminal liability, as well as compensation claims. The availability of the due diligence defence means that companies and their directors ought to implement a formal due diligence and verification process as part of the capital raising process.

The practical process of capital raising broadly involves a consideration of the structure and offer, preparation of the documentation, lodgment with ASIC (if required), making of the offer, holding monies prior to the issue of shares, and the issue of shares.

There are also a number of circumstances in which the issue of shares is restricted, such as if the minimum investment or quotation conditions are not met, the expiry of the disclosure document, imposition of an ASIC stop order, providing financial benefits to related parties and deemed variation of rights.

See Capital raising.

There are various ways in which there may be a change of control of widely held entities.

Whilst the concept of control has various meanings in various circumstances, the Corporations Act 2001 (Cth) (CA) prohibits acquisitions that result in an increase in voting power to above 20%, or that further increase voting power that is already above 20% (but below 90%). There are a number of exemptions to this prohibition.

The most common exceptions to effect a change of control are acquisitions through a takeover bid and a cancellation or transfer effected by a scheme of arrangement.

A takeover bid may be an off-market bid or a market bid. A market bid can only be used where the bidder makes an unconditional cash bid for quoted securities. All other bids must be off-market bids.

To undertake a takeover, a bidder must issue a bidder's statement containing a significant amount of information, including the terms of the offer, the consideration payable, the bidder's intentions regarding the target and other material information.

The target responds with a target's statement which contains material information not otherwise provided and a recommendation whether or not to accept the offer.

See Takeovers.

A scheme of arrangement is a CA procedure between a company and its security holders that, when followed, binds the company and relevant security holders to a course of action.

A scheme may be a cancellation scheme or a transfer scheme.

In addition to using schemes to effect a transfer of control, a scheme is able to effect many other transactions.

To effect a scheme, the CA procedure must be followed precisely. This procedure includes meetings of security holders, an explanatory statement, court hearings and ASIC reviews.

See Schemes of arrangement.

Whilst takeovers and schemes are the most common methods of acquiring control of widely held entities, other methods include buy-backs, capital reductions, shareholder approved placements and compulsory acquisitions.

Each of these methods of altering control of widely held companies can do so in a way that does not result in the bidder holding 100% of the securities on issue.

Where a bidder has less than 100% after a control transaction and wishes to move to 100%, they may do so through another control transaction or, if they are a 90% holder, through compulsory acquisition.

See Buy-backs, capital reductions and other minority eliminations.