The internal management of a company may be governed by replaceable rules, a Constitution or a combination of the two mechanisms. Section 141 of the Corporations Act 2001 (Cth) (the Corporations Act) contains the replaceable rules and apply to Australian companies registered after 1 July 1998 and companies registered before 1 July 1998 whose constitutions were repealed after that date.
Where a breach of the replaceable rules occurs, this does not constitute a breach of the Corporations Act. Under section 140, the replaceable rules have effect as a contract between the company and its members, a member and each other member, and the company and each director and company secretary. Each person agrees to observe and perform the rules so far as they apply and consequently, each shareholder has a personal right against other shareholders to require compliance with any relevant replaceable rules.
The replaceable rules, like a company constitution, govern the operation and activity of an entity. Below, we consider the differences between a company constitution and the replaceable rules as well as identify and explain the operation of some key rules.
As mentioned above, the replaceable rules automatically apply to Australian companies registered after 1 July 1998 and to companies that had their constitutions repealed after this date. In contrast, a company must adopt a constitution either:
- On registration, where each member specified in the application agrees in writing to its terms before lodgment; or
- After registration, if a special resolution is passed adopting a constitution.
Also, replaceable rules do not apply to special purpose companies or proprietary companies with a single shareholder where that person is also the sole director. Sole director companies do not need a formal set of rules, although they can choose to adopt a constitution.
Section 141 of the Corporations Act contains a summary table of the replaceable rules which govern areas such as:
- Officeholders’ appointment;
- Inspection of company’s books;
- Director’s and member’s meetings; and
- Dealing with company’s shares and dividends.
These rules are designed to apply to all companies, and as a result are broad and quite general. As the name suggests, they are “replaceable” and a company can adopt a constitution to replace part or all of them.
Generally speaking, where a company adopts a constitution, it will specify what replaceable rules to modify as well as set out rules governing corporate activities and the relationship between the company, its directors and shareholders.
The Corporations Act sets out the replaceable rules and their effect. They apply automatically upon registration, without further action required. The adoption of a constitution requires additional effort and has associated costs. Corporate constitutions are usually prepared professionally and can attract a fee. Additionally, the constitution must be updated to reflect any changes in legislation, and ASIC must be notified of any modifications. Finally, the company must ensure the constitution is accessible to both members and other relevant parties.
Key Replaceable Rules
There are numerous provisions of the Corporations Act that apply as replaceable rules. These fall under the following main headings:
- Officers and Employees;
- Inspection of Books;
- Director’s Meetings;
- Meetings of Members;
- Shares; and
- Transfer of Shares.
Officers and Employees – Appointment of Directors
Sections 201G and 201H govern the appointment of directors. Members can appoint an individual as a director by resolution passed at a general meeting, or the company directors may appoint a person as a director. Proprietary companies must confirm the appointment by resolution within two months after the appointment, or at the next AGM for public companies.
Officers and Employees –Removal of Directors
Similarly to the rules governing appointments, a number of replaceable rules address the removal of directors. Sections 203A and 203C provide that a director may resign by giving written notice to the company at its registered office or be removed by members of a proprietary company by resolution, respectively.
Notably, the power for shareholders to appoint and remove directors is often modified or replaced by a provision that gives a similar power to a majority of directors in private company constitutions. In these instances, minority shareholders of closely held private companies may choose to negotiate a company constitution to include sections 201G, 201H and 203C, which provide shareholders with the power to appoint and remove a director as their representative. In the alternative, these negotiations may result in the preclusion of these replaceable rules in exchange for provisions which empower shareholders to appoint and remove a director to represent their interest in the company.
Inspection of Books – Company or Directors May Allow Member to Inspect Books
Section 247D provides that the directors of a company may authorise a member to inspect the books of the company. The books of a company may include financial reports, information records or the company register. Section 247D does not include documentation evidencing how directors make a decision.
Meetings of Members – How Many Votes a Member Has
The number of votes a member has is subject to any rights or restrictions attached to any class of shares as well as the manner in which voting is carried out. When members vote on a resolution by show of hands, each member has one vote. One a poll, each member has one vote for each share they hold.
- The Corporations Act sets out the replaceable rules, and apply automatically upon a company’s registration, excluding special purpose companies and sole member/director companies;
- These rules are intended to apply to all types of companies, and so are quite broad and general in nature;
- Contravening the replaceable rules will not amount to a breach of the Corporations Act, but they do have a contractually binding effect upon the company, its directors and its shareholders;
- At registration, or at any point after registration, a company may adopt a constitution to modify or displace the replaceable rules should this be a better-suited governance mechanism.
If you have any questions about the differences between a company constitution and the replaceable rules or you need assistance drafting documents for your corporate governance, get in touch with our commercial lawyers on 1300 544 755.