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Every company needs a corporate governance structure that can help control risk and formalise decision-making. The replaceable rules in the Corporations Act (the Act) provide a useful and basic framework, which can be fully adopted or modified to suit business needs. This article will explain how replaceable rules work and when they may be appropriate for your company.

What Do the Replaceable Rules Cover?

The Act lists 39 replaceable rules that companies can adopt as part of their internal governance structure.

Some of the rules cover:

  • the appointment, powers, removal and remuneration of directors of the company;
  • the conduct of board meetings (including calling, conducting and passing resolutions);
  • the conduct of members’ meetings and the rights of members;
  • the right of members to inspect the company’s books;
  • appointment of the company secretary;
  • terms of shares and the right to dividends; and
  • the process of transferring shares and the right of pre-emption.

When Do the Replaceable Rules Apply?

The default position is that the replaceable rules apply unless otherwise provided for by the company’s constitution. A company’s initial governance framework can be structured by: 

  • relying on replaceable rules only;
  • adopting a constitution that excludes all replaceable rules in favour of the constitution’s rules; or
  • adopting a constitution which excludes some replaceable rules and includes other replaceable rules.

You can also use a shareholders agreement to clarify the rights of shareholders alongside your constitution.

A company can pass resolutions that that excludes the use of replaceable rules. Sometimes, the company’s constitution would exclude replaceable rules but not contain any provisions to cover the matters raised by the excluded rules. In that case, common law (or decisions made by judges) would apply.

Who is Covered By Replaceable Rules?

The rules can apply to public companies, private companies or both.

A public company is one that offers its shares to the public, such as listing it on the stock exchange. A private company is one that does not offer its shares to the public.

They do not apply to one-person companies where the sole director is also the sole shareholder. Some replaceable rules are also specific to a public or private company. For example, a public company cannot remove the right of a member to appoint a proxy for a meeting.

Replaceable rules may not apply to companies registered before 1 July 1998. However, if the company:

  • had a constitution and repealed the constitution after 1 July 1998, the replaceable rules will apply;
  • had a constitution and had not repealed that constitution, the rules of the company’s constitution will apply. The old Corporations Law (which preceded the Corporations Act) may apply alongside the constitution unless the constitution has excluded or modified those rules; or
  • was registered before 1 July 1998 and never had a constitution, the Corporations Law will apply.

How Do the Replaceable Rules Work?

Replaceable rules, the constitution of a company and/or the shareholders agreement of a company operate as a contract between:

  •    the company and each member;
  •    the company and each director and company secretary; and
  •    a member and another member.

That means anyone in the above list who breaches any of the replaceable rules will be in breach of contract. Members can seek a court order requiring compliance with the replaceable rules or for compensation. As the obligations are contractual, those who breach replaceable rules are not prosecuted under the Act.

Why You Might Rely on Replaceable Rules

You may wish to rely on replaceable rules during the early stages of your business, especially if you do not have the funds or time to draft a company constitution. The replaceable rules provide a basic framework for corporate governance. However, most companies usually adopt a basic constitution. 

A company can adopt a constitution or amend it at a later time by passing a special resolution. This process requires the company to give 28 days of notice for public companies, or 21 days for private companies. The proposed change to the constitution should be done in good faith and in the best interests of all members of the company.

Why You Might Exclude Replaceable Rules

Relying on replaceable rules can be initially cost-effective, but the rules may be confusing and hard to find for members and shareholders. Many companies adopt a constitution to ensure everyone can access corporate governance rules in one document. 

A constitution also:  

  • allows the company to modify the discretion and power of the board to control the company’s affairs based on specific business needs;
  • provides more comprehensive guidelines for management which can be useful for large public companies;
  • minimises any inconsistency between replaceable rules and any relevant provisions in the constitution;
  • allows adequate coverage for certain special purpose companies (such as a superannuation trustee); and
  • provides the company with increased control over its share capital, including:
    • the power to issue shares in different classes with different voting and dividend rights;
    • the power to issue partly paid shares and regulate calls on those shares; and
    • the ability to control the sale of shares so that they must first be offered to existing shareholders.

Therefore, a company constitution provides a tailored solution that reflects the business needs of the company as well as greater transparency for members and shareholders. 

Key Takeaways

You can rely on replaceable rules for your internal governance, especially if you have just started your company. However, many companies will have constitutions that will exclude all replaceable rules or include some alongside their own rules. If you have any questions, get in touch with LegalVision’s business lawyers today on 1300 544 755 or fill out the form on this page.

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