When setting up your company, you are likely thinking of what you should name your company, outgoing expenses, growth and protecting your assets. Equally as important, however, is deciding how you will manage your business through either a company constitution or the replaceable rules. We set out below this aspect of starting up your business.

What is a Company Constitution?

A company constitution is a document that prescribes a company’s internal management system and sets out the relationship between the company and each shareholder, director and other officers of the company. Strictly speaking, there are no rules you need to follow when arranging the internal management of your company. The Corporations Act 2001 (Cth) (the Act), however, contains the replaceable rules, and a company can rely on these or their constitution to govern internal management.

Types of Clauses Found in a Company Constitution

Although a company decides what matters to include in their constitution, it will typically address the following:

  • Type of Company: What type of business structure is your company? Most commonly, Australian companies are a Pty Ltd with at least one shareholder with a limited number of shares.
  • Shares: Has your company issued different types of shares that attract specific conditions? For example, the company may have issued Ordinary Shares, A Preference Shares and B Preference Shares which all hold different voting rights at meetings, rights to dividends and also to the repayment of the shareholder’s investment on the winding up of a company.
  • Share Certificates: How will your company issue share certificates and other matters dealing with the share certificates?
  • Transfers of Shares: How will your company transfer shares?
  • Dividends: How and when will the company pay dividends to shareholders?
  • Meetings of the Directors of the Board: How will you call a meeting of directors? How many directors do you need present for a valid meeting and other matters (also known as a quorum)? How will you deal with proxy matters, cancelling meetings and what is the chairperson’s role?
  • Weight of Votes at Meetings: What are the terms of the issued shares?
  • Directors: How are directors appointed and removed? What is the maximum number of directors in the company? How are alternate directors appointed and what is their role?
  • Remuneration of Directors: This includes their salary, expenses and benefits;
  • Company Documents: What is the process and requirements for documenting the minutes of meetings as well as resolutions?
  • Conflicts of Interests: How will the company address situations where a conflict arises between a director’s personal interest and acting in the best interests of the company?
  • The Powers and Duties of Directors: This includes their ability to bind the company and execute documents.
  • Company Secretary: If the company chooses to appoint a company secretary, what is their role and duties?
  • Indemnities: What indemnities will the company give to directors and other officers, including employees?
  • Shareholders Loans: How will the company issue loans to third parties?

Evident from the above list, there are many areas to consider when setting up the rules to govern your business. It is always best practice to have a reference already in place for the management of your company rather than trying deal with these administrative issues as and when they arise. It provides clarity and certainty to the company, the shareholders, the directors and officers.

Your company can only decide to adopt its constitution by way of a special resolution requiring the agreement of a 75% majority of the votes cast. As the manner in which a business is run is an important consideration, a special resolution is necessary to change or adopt a constitution.

The Replaceable Rules

You should also consider the replaceable rules, set out in section 141 of the Act. Your company will be deemed to have adopted these rules if not explicitly excluded by the company constitution. There are 39 provisions in the Act setting out the replaceable rules. Importantly, if your constitution does not address a particular replaceable rule, the rule as defined in the Act will apply to your company, irrespective of whether you intended this or not.

Key Takeaways

When starting a company, you should give appropriate attention to your business’ internal management. This is especially true when considering how the replaceable rules can impact your business – whether or not you knew they existed. If you have any questions about corporate governance or adopting a constitution, get in touch with our commercial lawyers on 1300 544 755.

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