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 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. 

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. 

The replaceable rules are a basic set of company management rules that automatically apply to all companies registered after 1 July 1998. Only companies with a sole shareholder who is also the sole director are exempt from the replaceable rules.

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. 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.

A special resolution requires that you gain approval from at least 75% of shareholders with voting rights.

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.

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. If you would like assistance drafting or reviewing your company constitution, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a Company Constitution?

A company constitution is a document outlining the internal management of your company. Specifically, it governs the rules of the relationship between company directors and the company shareholders.

Do I Need a Company Constitution?

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.

How Do I Adopt a Constitution?

You can adopt a constitution if your company is registered and you pass a special resolution at a meeting. If you wish to override any of the replaceable rules contained in the Corporations Act, you must explicitly state which rules you intend to displace.

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