Summary
- A company constitution governs the internal management of a company, setting out the rules that regulate relationships between directors and shareholders.
- Companies that do not adopt a constitution will be subject to the replaceable rules under the Corporations Act 2001 (Cth), which may be more onerous and less flexible.
- A constitution can be adopted at incorporation or later, but requires a special resolution passed by at least 75% of voting shareholders.
- This article is a plain-English guide to company constitutions for Australian business owners, covering when a constitution is required, how to adopt one, and how it differs from the replaceable rules.
- The content has been prepared by LegalVision, a commercial law firm that specialises in advising clients on corporate governance and company law.
Tips for Businesses
Review whether your company’s current governance – whether a constitution or the replaceable rules – reflects how decisions are actually made. If adopting a constitution, clearly state which replaceable rules it overrides. Ensure any amendments are passed by special resolution with proper notice given to all voting members.
On this page
- What is a Company?
- What is a Company Constitution?
- Differences Between a Company Constitution and Shareholders Agreement
- What are the Replaceable Rules?
- Do I Need a Company Constitution?
- What are the Benefits of a Company Constitution?
- How Do I Adopt a Constitution?
- Key Takeaways
- Frequently Asked Questions
A company constitution is a core corporate governance document that governs the management of your company. Most companies will adopt a constitution upon the registration of their business, to guide their processes right from the get-go. If your company does not have a constitution, then you will be governed by the default guidelines under the Corporations Act 2001 (Cth). These are known as the ‘replaceable rules’. This article explains:
- when you may need a constitution;
- how to adopt one; and
- how a constitution differs from the replaceable rules.
What is a Company?
Firstly, it is important to understand what a company is and how it is formed. In the UK, companies must be incorporated at Companies House, where they are given a unique company registration number.
When you are incorporating a new company with the Companies House, you must submit a number of documents. When incorporating online, through the government website, you will need to submit your company’s articles of association (and failing this, the ‘model articles’ will apply by default). Once incorporated online, you will receive a Memorandum of Association, a legal document that confirms the shareholders’ agreement to form a company. The memorandum and articles will form your company’s constitution.
A ‘company constitution’ is a shorthand term to describe the documents that govern the relationship between different stakeholders in your business. These stakeholders include directors, founders, and shareholders. Once it has been set up in this way, your business will then be regulated by your company’s articles of association in conjunction with English company law, which the Companies Act 2006 mostly sets out.
Companies Limited by Shares
The most common type of company is a private company limited by shares. A company limited by shares must be formed with a capital in the form of shares (known as ‘share capital’). A company’s share capital is the total amount contributed or promised to be contributed by its members. The company can use the share capital as the directors and shareholders see fit.
Managing a Company
A company’s internal management is governed by:
- the replaceable rules contained in the Corporations Act;
- a constitution (plus the mandatory replaceable rules); or
- a combination of both.
If your company does not have a constitution, it will be governed by the replaceable rules.
What is a Company Constitution?
A constitution governs the internal management of a company. Specifically, it is a document specifying the rules that govern the relationship between the company’s directors and its shareholders.
A constitution will typically include the:
- organisation of company meetings;
- execution of company documents;
- rights of shareholders and share classes;
- appointment, powers and removal of directors; and
- process of amending the constitution.
Your company constitution will be used in conjunction with a shareholders agreement (if you have one) to further clarify the rights of shareholders.
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Differences Between a Company Constitution and Shareholders Agreement
While a company constitution and a shareholders agreement are important governance documents, they serve distinct purposes and have several key differences.
A company constitution is a key document provided at incorporation. It sets the basic rules for running the company and governs the relationship between the company, directors, and shareholders. The constitution is binding on all shareholders, including those who join later. It typically covers appointing and removing directors, meeting procedures, share transfers, and share class rights. Unlike a shareholders agreement, it includes share class rights.
Although they overlap, a strong constitution and shareholders’ agreement form a complete framework for managing the company and shareholder relationships.
What are the Replaceable Rules?
Replaceable rules are provisions in the Corporations Act that apply to companies.
A company can displace or modify the replaceable rules with the company’s constitution. However, some of the replaceable rules are mandatory for all companies. A company’s constitution cannot displace these mandatory rules.
The replaceable rules do not apply to a single shareholder or single director company. There are a separate rules for these types of companies in the Corporations Act.
Do I Need a Company Constitution?
You must have a constitution if you are a:
If your company is registered through the Australian Securities & Investments Commission, you have the choice to either:
- use the replaceable rules contained in the Corporations Act;
- draft your own constitution; or
- use a combination of the two.
What are the Benefits of a Company Constitution?
Unlike the replaceable rules, a company constitution will not automatically apply to your business. Although it is best practice to have a constitution in place, relying on the replaceable rules can be a cost-effective solution when starting out your business.
There are a number of reasons why you may choose to adopt a company constitution instead of relying on the replaceable rules. Most importantly, a constitution is a bespoke agreement that you can tailor to the needs of your individual company.
A constitution also allows you more flexibility in managing your company. The replaceable rules generally contain more onerous obligations, which will apply unless a constitution overrides them. Although, there are some replaceable rules which will always apply, even if the company has a constitution.
In contrast, the replaceable rules are basic rules that apply to all companies. This means that they do not necessarily cover everything your company may need.
A constitution also allows your company broader coverage and flexibility than the replaceable rules. This is because you can amend your constitution if your company’s processes change, whereas only the government can change the replaceable rules through legislative reform.
How Do I Adopt a Constitution?
You can adopt a constitution on or after the registration of your company. If you would like to adopt or amend a company constitution, you will need to pass a special resolution at a meeting.
If you would like to adopt a constitution, you will likely need to have a lawyer draft one for you. When assembling a constitution, you can choose to:
- draft your own entirely from scratch; or
- use a combination of the replaceable rules and a constitution.
If you intend to replace any of the replaceable rules with your constitution, you must explicitly state in the constitution that it will override the replaceable rules. If you only want to replace a few of the replaceable rules, you must specify which rules you intend to override.
Process to Adopt the Constitution
If your company wants to adopt a constitution on incorporation, all the initial members must agree in writing. Your company can also adopt a constitution after incorporation. The company must:
- Issue a notice. A company has to give notice of a special resolution and general meeting. A publicly listed company must give at least 28 days notice of the meeting. All other companies must give at least 21 days notice. The notice should include the time, date and place of the meeting, the general business that you will discuss and the intention to pass the resolution;
- Hold a general meeting. To adopt a new constitution, the company must pass a special resolution at a general meeting. At least 75% of the voting members of the company must vote in favour of the resolution for it to pass. However, you will also need to follow any other requirements for passing resolutions that are set out in the original constitution.
Altering the Constitution
If your company has adopted a constitution, it can later modify or repeal it, in whole or part, by passing a special resolution at a general meeting of the company’s members.
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Key Takeaways
A company constitution is a core legal document that governs the internal management of your business. Only some companies are legally required to have a constitution. Regardless, most companies will choose to adopt their own constitution so that they can tailor it to the individual needs of their business. If you would like to adopt a constitution, you will need to have one drafted and pass a special resolution.
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Frequently Asked Questions
The primary reason people set up companies is to protect themselves personally from incurring liabilities. A company has a separate legal existence, distinct from its owners (its shareholders), directors and employees. Only in limited circumstances can the directors of a company be held liable for any debts it incurs.
You are required to have a constitution if you are a ‘no liability’ public company or a ‘special purpose’ company. For other companies registered through ASIC, you have the choice to either use the replaceable rules contained in the Corporations Act or draft your own constitution.
We usually recommend that you put one in place. If your company does not have a constitution, it will be governed by the replaceable rules from the Corporations Act. These rules can be very onerous to comply with. Putting in place a simple constitution can make life much easier and give you a lot more flexibility when it comes to making decisions on behalf of the company.
It is important to review your constitution and understand the processes for making decisions and dealing with shareholders. If you do not comply with your constitution, those decisions will not have been validly made. If your constitution appears overly complicated, you should consider putting a new constitution in place that reflects how you are actually making decisions.
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