Company constitution – The basics.

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Table of Contents

• Replaceable Rules
• Company Constitution
• What Does my Company Need?
• Conclusion

By-laws are rules adopted by the shareholders of American companies that govern their operation.  In Australia, equivalent provisions are found in a number of places, including your company constitution.  These are discussed in more detail below.

In Australia, the shareholders of a company have considerable flexibility in documenting their relationship and the rules that govern the operation of their company.  The Corporations Act 2001 (Cth) allows a company’s internal management to be governed by the provisions of the Corporations Act that apply as replaceable rules, by a company constitution or by a combination of both.  In addition, some or all of the shareholders of a company may enter into a separate contract, known as a shareholders agreement.

Replaceable Rules

A replaceable rule is a provision of a section or subsection of the Corporations Act that can be displaced or modified by a company’s constitution.  These provisions are listed in the Corporations Act and deal with matters relating to officers and employees, inspection of books, director’s meetings, shareholders meetings and issue and transfer of shares.

Any replaceable rules that apply to a company have effect as a contract between the company and each shareholder; shareholders with each other; and each director and company secretary.  This means that they agree to observe and perform the rules so far as they apply to them.

Company Constitution

A company may adopt a constitution either on registration of the company or at any time after registration, which could be weeks, months or years later.

The Corporations Act does not prescribe the rules that must be included in a company constitution, but if a company constitution is adopted then it will generally specify the replaceable rules that are modified and set out rules governing the relationship between and activities of the company, its directors and shareholders.

A company constitution is therefore a special form of contract as it binds the company, shareholders who initially agreed to adopt a constitution (e.g. upon registration) and any future shareholders.  This means that a company constitution is unlike other forms of contract, which only bind those who are parties to it.

Like the replaceable rules, a company constitution has effect as a contract between the company and each shareholder; shareholders with each other; and each director and company secretary.  This means that they agree to observe and perform the rules so far as they apply to them.

What Does my Company Need?

Each company is different, but the replaceable rules in the Corporations Act may not be appropriate for your company as they are designed to apply to all companies.  There is no hard and fast rule about whether a company should adopt the replaceable rules, a standard company constitution (that may come with your company when you set it up) or a company constitution tailored to your company.  It is therefore important when you setup your company to read the replaceable rules or standard company constitution to check that they are appropriate for your company.  If not, then you should change them by either adopting a company constitution (if you are relying on the replaceable rules) or changing your company constitution (if you have a standard company constitution).

Conclusion

If you need legal advice or assistance then ask for it.  It is better to get things right at the beginning than to realise that you have a problem down the track, but it’s too late to fix it.