For an emerging start-up or transitioning family company, growth in shareholder numbers is usually a great sign. More members often bring in more capital for the company or reflect an exciting change in the company structure.
However, directors of private companies must be conscious of the 50-shareholder limit contained in the Corporations Act 2001 (Cth) (“the Corporations Act”) and the severe consequences that breaching this rule may have for their company.
What is the 50-shareholder limit?
Under section 113(1) of the Corporations Act, a proprietary company may have a maximum of 50 shareholders. When counting individual shareholders, employee shareholders and crowd-sourced funding (CSF) shareholders are not counted as shareholders. While section 113(1) of the Corporations Act does limit the number of shareholders, no such limit is placed on the number of shares issued in a proprietary company.
The 50-shareholder limit does not just apply to a company at the registration stage. On the contrary, a proprietary company must not exceed the 50-shareholder limit if it is to retain its status as a proprietary company and avoid a range of regulatory and legal consequences.
What are the consequences of exceeding the 50-shareholder limit?
Three of the key risks associated with a private company exceeding the 50-shareholder limit are:
- Compulsory conversion by ASIC;
- Liability for penalty provisions
- Share sales subject to takeover regime.
Compulsory conversion by ASIC
Transitioning from a private to a public company can be a complex undertaking with new Shareholders Agreements to draft and regulatory consequences to prepare for. However, if a proprietary company exceeds the non-employee member limit of 50 shareholders, ASIC may order that the company convert to a public company under section 165 of the Corporations Act.
Upon receiving such a notice, the proprietary company must comply within two months or ASIC will change the company into a public company.
Public companies attract much greater regulatory oversight, including the obligation to:
- Have at least three directors and one secretary, in contrast with proprietary companies which can function with only one director who also serves as secretary;
- Prepare and lodge with ASIC a financial report and directors’ report;
- Hold an AGM within 18 months of registration and thereafter within 5 months of the end of its financial year;
- Only pass resolutions in general meetings;
- Have its directors removed by a general meeting; and
- Appoint an independent auditor.
To avoid last-minute scrambling to prepare your company to transition, it is important to be aware of your current shareholder count and any upcoming transactions which may cause your company to exceed the 50-shareholder limit.
Liability for breach of penalty provision
There can be serious legal consequences for companies and their directors when the 50-shareholder limit is not adhered to. Under the Corporations Act, exceeding the shareholder cap or failing to convert to a public company when ordered by ASIC are offences which both carry a penalty of up to 50 penalty units, 1 year imprisonment, or both, for individuals and an even greater penalty for companies.
In light of these heavy penalties, it can definitely pay to take a proactive approach when it comes to monitoring shareholder numbers and engaging the help of professional legal advisors when needed.
Key Takeaways
As this article has demonstrated, more shareholders are not always a good thing for a proprietary company.
Whether you are considering the transition to a public company, have received an ASIC conversion or infringement notice, are a concerned director or shareholder or would like more information on this area of law, Rouse Lawyers have a team of business-savvy transactional and disputes lawyers who can assist.
Disclaimer
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.
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