When deciding how to govern your company’s internal management, you should consider some important questions including, should your company have a constitution or defer to the replaceable rules? Below, we set out the difference between the two and when they apply.
What is a Constitution?
A company constitution is a document setting out the rules that govern the relationship between the company and each shareholder, director and company secretary (if there is one). There is no prescribed form a constitution must take.
A company formally adopts a constitution when it formally agrees by special resolution that it will govern the business (although, it can decide to adopt a constitution at a later date). To do this, the company will need to pass a special resolution requiring at least 21 days notice (28 days for a public listed company) and the agreement of 75% of the votes cast. Changing how the business will run is an important decision and why only a special resolution can modify the constitution.
What are the Replaceable Rules and Do They Apply to My Company?
The Corporations Act 2001 (Cth) (the Act) contains the replaceable rules that intend to provide companies with the flexibility to rely on an established set of rules, rather than entering into a new constitution. Each company decides whether to rely on the replaceable rules, the standard constitution provided on incorporation or a tailored constitution. Importantly, if a company decides not to have its constitution setting out its internal management, then the replaceable rules automatically apply. Additionally, if a company decides to adopt its own constitution but omits particular sections, then the replaceable rules apply to those matters to the extent that the constitution has not modified or amended them. Section 141 of the Act contains 39 provisions that can apply as replaceable rules, and deal with the management and operation of the company including:
- The powers, appointment and removal of directors;
- How to call a meeting of directors, how many directors need to be present for a valid meeting and other matters (also known as a quorum);
- How to call a shareholders meeting, quorum requirements and voting; and
- Issuing new shares including pre-emption rights for existing shareholders, rights which may attach to a certain class of shares and the rights to a payment of dividends.
Evident from the above list, some of these replaceable rules are integral to the management of a company and it would be unusual for a company constitution to remain silent on these requirements. Importantly, the replaceable rules will not apply to a proprietary company where there is a sole director and/or shareholder meaning, if there is no constitution, these companies will have no formal internal governance. Subject to the company adopting a constitution, the replaceable rules automatically apply to a sole director/shareholder proprietary company if and when another shareholder/director joins the business.
Where to Next?
As no two companies are the same, no two company consitutions are the same. When deciding how to govern your company, remember that the generic replaceable rules may not be appropriate for your business’ needs. As a starting point, we would encourage you to consult the Act and the standard constitution you received upon incorporation to see if either suit. If they don’t, you should tailor the document to address your company’s unique needs 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 which requires modifications).
If you are trying to decide whether your company needs a constitution and if so, what should go into it, get in touch with our commercial lawyers on 1300 544 755.