What is a Company Constitution and What Does it Mean to Adopt One?

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?

A company is a legal entity. A company can:

• sue and be sued;
• enter into contracts; and
• acquire, hold and sell property.

Companies have perpetual succession, meaning that they continue to exist even if their shareholders or directors leave or die. Companies are managed centrally under a board of directors. Generally, companies have shared ownership by contributions of capital (i.e. shares). It is possible to have a one person company. However, a private company cannot have more than 50 members under the law. If a company has more than 50 members, it must convert to a public company. 

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. 

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:

• ‘no liability’ public companies; or
• ‘special purpose’ company. 

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:

1. 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;
2. 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.

If you would like assistance drafting or reviewing your company constitution, our experienced business 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.

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