In the not-for-profit sector there are a number of common legal structures that are employed. Depending on the structure adopted the regulations and legal controls applicable will vary:
- A company limited by guarantee – Corporations Act 2001 (Cth);
- Incorporated association – Associations Incorporation Act 1987 (WA) or the equivalent state legislation for those incorporated outside WA;
- Unincorporated association; and
- Other bodies corporate – Incorporated by royal charter (i.e. Chartered Accountants Australia New Zealand, Governance Institute) or Incorporated by specific legislation (e.g. Scout Association Act 1932 (Vic))
This article will discuss the power of members in a company limited by guarantee.
A company limited by guarantee
A company limited by guarantee is established and governed under the Corporations Act and has members rather than shareholders; because it can’t make a profit for individuals and the liability of the members is limited by the amount of the guarantee.
The 3 divisions of any company include;
- The Company (itself a legal entity with decisions made by a board or delegated to an executive);
- A Member of the company – including any affiliated bodies (which are entitled to exercise membership powers and vote at general meetings including AGMs); and
- Each of the individual directors who should act collectively as the board.
These three individual groups can enforce their rights which are contained in the organisation’s Constitution. (See s140 Corporations Act)
What exactly can members enforce?
Interestingly each individual member can take action to enforce that member’s constitutional rights against;
- another member; or
- the company.
Likewise each individual director can take action against the company but not against another fellow director.
If you are a member of such an organisation you may be interested to know that you cannot take action against any individual Director to enforce any of your rights.
What does this mean for members?
This leaves only one avenue of recourse that any member may have against any individual Director. That recourse is your power to vote at a general meeting. The real issue to examine is just how extensive that power is.
The answer is that this power to vote at a general meeting (or the AGM) is extremely extensive.
Resolutions by members
- Calling a meeting
Section 249D of the Corporations Act compel the directors to call and arrange to hold a general meeting at the request of enough members representing 5% of those who can vote at a general meeting. The request must be in writing and state the proposed resolution for the meeting.
Regardless of whether the directors approve of the resolution proposed by the members, they have no choice but to call the meeting demanded by the members within 21 days of receiving the notice – except for the resolution to remove a director. S249D (5)
- Removal of a director by the members
S203D of the Corporations Act prescribes that a director can be ‘removed from office’ by a resolution of the members regardless of anything to the contrary written in the Constitution.
Importantly then, if you want a director to be removed, you can call a meeting and remove him (or her) regardless of what the Board or the management actually thinks!
The only requirement is that notice of this specific resolution is communicated by the members to the company at least two months before the meeting to remove the director is actually held.
For the directors who are appointed by the membership at the AGM (although appointed directors are not exempt either), section 203E of the Corporations Act actually stops the rest of the board of directors from voting another director off the board (who presumably doesn’t necessarily agree with them).
Clearly this requirement in a public company reflects the importance in the legislation which is given to the decision of the members who decide about who they choose to sit on the Board of Directors; whether or not this person is approved by other directors, or not.
- Other resolutions by the members
It is the members who ultimately decide whether the Constitution of any organisation should be altered. Directors may propose alterations to the Constitution but these cannot be enacted without a resolution called a ‘special resolution’ at a general meeting.
Where is the fine line of resolutions that members can propose?
Ultimately the members have every right to bring any resolution which doesn’t impact upon the running (the management) of the company.
Clearly the management needs to be left in the hands of the board and any paid staff that they delegate this power to.
But the members can prescribe things that aren’t to do with management such as:
- What the members want and don’t want in terms of information and reports provided to them regarding performance against financial or non-financial KPIs;
- What they approve of or don’t approve of in terms of the general strategy of the organisation which the board has set.
If you are a member of such an organisation, you are encouraged to think carefully about your rights, and to use your extensive voting power for the overall good of the governing organisation. The next AGM will be your chance to do just that!
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