When your company incorporated, there is a good chance you put in place a company constitution. Your company’s constitution contains the rules and framework that govern how your company operates and conducts its business. If you did not adopt a company constitution, the Corporations Act provides a set of default rules that act in place of a constitution, known as the replaceable rules. Alternatively, if you put in place a constitution, you may want to displace the rules to establish your method of conducting elements of your business. This article will explain how you can displace the replaceable rules and what rules you cannot displace.
What Are Replaceable Rules?
The replaceable rules are a set of default provisions that apply to your proprietary company unless you expressly displace them in your company’s constitution. These rules establish a basic framework for the running of your company, covering areas such as:
- appointment and removal of directors;
- remuneration of directors;
- calling of director and shareholder meetings;
- conducting director and shareholder meetings;
- pre-emptive rights for existing shareholders;
- transfer of shares; and
- voting entitlements for shareholders.
How Can I Displace the Replaceable Rules?
To displace the replaceable rules, you must:
- put in place a constitution; and
- expressly displace the replaceable in your company’s constitution by ensuring it contains an express provision doing so.
To adopt a constitution, you must pass a special resolution of all your existing shareholders. The threshold for a special resolution is 75% of shareholders eligible to vote. Additionally, you must usually give the shareholders at least 21 days’ notice. Your notice should also set out an intention to propose the special resolution and state the resolution i.e. to adopt a company constitution.
Continue reading this article below the formWhat Are Company Resolutions?
When making certain decisions that will substantially affect your company or your shareholders’ rights, you should consolidate your company constitution, the Corporations Act and shareholders agreement (if you have one). These documents will dictate the:
- process for obtaining director or shareholder approval; and
- threshold vote required to pass any given resolution.
There are generally two ways you can pass a resolution:
1. Meetings
The traditional way of passing a resolution is to call an in-person or video conference meeting. At such a meeting, those entitled to vote will vote by a show of hands. The replaceable rule concerning counting votes is based on a show of hands or a poll. Notably, a shareholder generally gets a number of votes equal to the number of shares.
It is common for constitutions to set their own voting mechanism. Company constitutions generally allow a show of hands where a clear consensus is reached. Alternatively, companies may use a poll where a show of hands is disputed.
2. Circulating Resolutions
Circulating resolutions allow your company to pass a shareholder or director resolution without the need to:
- call a formal meeting; and
- hold an official vote.
If you issue a circular shareholders resolution, it must be in writing, and all the shareholders entitled to vote must sign it. However, a circulating shareholders’ resolution must be unanimous to pass.
When it comes to circulating director resolutions, you need to:
- circulate a written resolution to all directors entitled to vote; and
- have them sign that they are in favour of the resolution for the resolution to pass.
However, unlike with circulating shareholder resolutions, you have a level of flexibility as this is a replaceable rule.
What Replaceable Rules Can I Not Displace?
It is important to note that the Corporations Act does not allow you to displace the rules relating to compulsory shareholder resolutions. Some of the more common instances of compulsory resolutions include:
- share buy-backs;
- reduction in the company’s share capital;
- changes to the company constitution;
- changing the company’s name; and
- changing company type.
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Key Takeaways
To ensure you comply with the law, it is essential to understand how the replaceable rules affect your company. The replaceable rules are a set of default provisions that apply to your proprietary company unless you:
- put in place a constitution; and
- expressly displace the replaceable in your company’s constitution by ensuring it contains an express provision doing so.
If you need assistance with putting a constitution or shareholders agreement in place, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A special resolution requires at least 75% of shareholders entitled to vote to pass the resolution.
The best way to maintain an acceptable level of control is to place a shareholders agreement in addition to your company constitution. In your shareholders’ agreement, you can ensure greater board control by entrenching a right to appoint a director to the board.
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