Shareholders' agreement or constitution - which document prevails?

You could be forgiven for assuming that a company’s shareholders’ agreement, that includes a conflicts clause, will automatically prevail over the terms of its constitution.  However, this is not always the case as was recently demonstrated by the decision of Cody v Live Board Holdings Limited.

This case highlights the possibility that the provisions of a shareholders’ agreement and a constitution dealing with the same issue may both be able to apply (despite any conflicts clause) if it can be shown that the relevant clause in the constitution does not conflict with the relevant clause in the shareholders’ agreement. This may lead to unanticipated consequences.


A board of Live Board Holdings Limited resolved to issue new preference shares to new shareholders and new ordinary shares to existing shareholders.

A director of the company disputed the issue of the new shares on the basis that the board had not complied with relevant provisions of the company’s constitution and shareholders’ agreement when issuing the shares.

The remaining directors argued that the share issues were valid and applied to the NSW Supreme Court for a declaration that the board had the requisite power to issue the shares under the constitution.

The company’s constitution provided that the directors of the company were entitled to issue new shares with such rights and in such numbers as the directors determined unless the issue of the shares directly or indirectly varied the rights or obligations of an existing class of shares.In the latter event, the constitution required that 75% of holders of that class of shares (present and entitled to vote at the meeting) voted in favour of the share issue.

The shareholders’ agreement provided that all new share issues had to be approved by a simple majority of shareholders.

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


The Judge was not convinced that the conflicts clause in the shareholders’ agreement could operate to override the relevant provisions of the constitution where there was no clear conflict.

The Judge found that the relevant provisions of each of the shareholders agreement and the constitution had different purposes even though the result (i.e. the issue of new shares) was the same.Specifically, the Court found that:

  • the role of the clause in the constitution was to protect the interests of the holders of specific classes of shares where a share issue is contemplated;

  • the effect of the clause in the shareholders’ agreement was to remove from the directors, and reserve to shareholders, the power to issue shares; and 

  • the clause in the shareholders’ agreement did not have the effect of removing the prohibition on varying class rights without the approval of holders of 75% of the shareholders of the affected class.

What should you do?

Do not assume that including a conflicts clause in your shareholders’ agreement will serve to resolve all disputes as to the application of two slightly different clauses in each of your constitution and your shareholders’ agreement on the same subject matter.

Accordingly, you should take steps to review your constitution and your shareholders’ agreement to ensure that the intention of the terms of the shareholders’ agreement is not frustrated by a provision of the constitution.

Unless you intend for the provisions of both your shareholders’ agreement and your constitution to apply, we suggest that you consider amending your constitution to reflect the provisions of your shareholders’ agreement.

Taking such steps will mean that your company is able to clearly set out its intentions in respect of the other activities and operations of the company and to minimise the risk of disputes between shareholders moving forward.

Please contact us if you would like assistance with the review of your constitution and shareholders’ agreement.