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When setting up your company, there are several important details to consider. For example, what you should name your company, how will you manage outgoing expenses, and how to protect your assets. However, equally as necessary is deciding how you will manage your business through either a company constitution or the replaceable rules. This article explains what you should include in your company constitution and the importance of this document.
What Is a Company Constitution?
A company constitution is a document that prescribes a company’s internal management system. This document sets out the relationship between the company and each shareholder, director, and other company officers. Strictly speaking, there are no rules you need to follow when arranging your company’s internal management. However, the Corporations Act 2001 (Cth) (the Act) contains the replaceable rules. A company can rely on these rules, its constitution, or a combination of both to govern its internal management.
A company can adopt a company constitution before or after registration. If you adopt your constitution before registration, each member of the company will need to agree to the constitution’s terms in writing. If you adopt your constitution after registration, the company board must pass a special resolution. You can make changes to a company constitution by passing special resolutions. A special resolution requires 75% of votes cast.
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, suppose your constitution does not address a particular replaceable rule. In that case, the rule as defined in the Act will apply to your company, regardless of whether you intend this.
Some of the replaceable rules include:
- the conduct of board meetings, including the passing of resolutions;
- the powers, appointment and removal of company directors;
- rights of members;
- appointment of company secretary and officers; and
- the terms of company shares, the right to dividends, and the process to transfer shares.
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Why Is a Company Constitution Important?
If you are just starting your company, the replaceable rules can be a cost-effective way to manage internal governance. However, the rules may be confusing and hard to locate and apply when internal issues arise. A company constitution guarantees that all members and shareholders can access internal management rules in one place. It is best practice to have this in place when you register your company.
Having a company constitution in place allows you to modify or displace replaceable rules which limit your company’s internal governance or activities. You can also tailor your company constitution to its specific business affairs. This can allow you to modify the board, directors, and members’ amount of discretion and power. A company constitution can also outline a detailed set of internal management guidelines.
Having a company constitution in place is also essential if a company has plans to raise capital or take on additional shareholders in future. Likewise, you can draft provisions to allow greater control over company share capital. A constitution can:
- enable the power to issue different share classes;
- control voting and dividend rights attached to shares; and
- control future share sales to be first offered to existing shareholders.
Types of Clauses Found in a Company Constitution
Although your company will decide what matters to include in the constitution, it will typically address the following:
- Type of Company: What type of business structure is your company? Most commonly, Australian companies are Pty Ltd, with at least one shareholder with a limited number of shares.
- Meetings of the Board’s Directors: How will you call a meeting of directors? How many directors need to be present for a valid meeting and other matters (also known as a quorum)? How will you deal with proxy matters and cancelling meetings? 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 your company’s management 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 and resolutions?
- Conflicts of Interests: How will the company address situations where a dispute arises between a director’s personal interest and acting in the company’s best interests?
- 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?
Shares and Dividends
- 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 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?
- 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?
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 your company’s management rather than trying to deal with these administrative issues as and when they arise.
What to Include in Your Company Constitution?
There are a few key aspects of a company’s internal governance structure that a company constitution should cover.
Shares are dealt with under the replaceable rules. However, if your company plans on issuing different share classes with different voting rights and conditions, you should include the specifics of this in the constitution. A company constitution should also include provisions on how shares are to be transferred and issued, and how dividends will be paid to shareholders.
Directors Powers and Duties
The replaceable rules outline the powers of the company directors. These powers are broad and include issuing shares, borrowing of money, and issuing of debentures. Under the replaceable rules, it states that directors may exercise all company powers unless restrictions under the Act prohibit them. There is no mention of directors duties under the replaceable rules. Only the duties under the Act bind them. If there are any additional duties or restrictions you want to place on company directors, you can include them in your company constitution. Further, outlining directors’ powers and duties in one document create clarity.
Role of Company Secretary
The replaceable rules only outline that a company secretary holds office on the terms and conditions that the company directors establish. If your company chooses to appoint a secretary, its constitution can include specific powers, restrictions, and duties for the company secretary to follow.
Meetings and Resolutions
The replaceable rules include provisions regarding the running of meetings of the directors and members and the passing of directors’ resolutions. These rules outline the procedural aspects of the calling and conducting of meetings and the passing of resolutions. A company constitution can provide for any specific requirements your company may have to pass board resolutions, circular resolutions, or the conducting of directors and members meetings.
Circular resolutions are documented resolutions signed by your company’s directors to signify they favour the resolution. Circular resolutions are included in the replaceable rules. Suppose your company wishes to rely on circular resolutions as a function of your internal governance structure. In that case, a company constitution should include a provision enabling circular resolutions as a substitute for a convened director’s meeting.
The replaceable rule relating to circular resolutions can be restrictive as it requires the signing of the resolution by all directors, limiting its effectiveness. A company constitution can allow for more flexible circular resolution procedures by overriding this rule.
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.
Having a constitution tailored to suit your company’s operations and individual internal management structure gives more flexibility and control in your governance structure. A constitution also allows for much more control over your company as it grows and changes. 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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