Malcolm Rivera
A company constitution is a core corporate governance document that governs the management of a company. It is a legally binding document that sets out how a company operates and establishes the rights and obligations of its members, directors, and company secretary. While adopting a company constitution is not a strict legal requirement, it is highly recommended. If a company does not have a constitution, it will be governed by the default replaceable rules outlined in the Corporations Act. A company constitution can be adopted before or after registration, and if adopted before registration, each member must agree in writing to the terms of the constitution.
| Characteristics | Values |
|---|---|
| Mandatory for specific company types | 'Special purpose' companies and 'no liability' public companies must have a constitution. |
| Mandatory for specific scenarios | If a company wants to change or remove a replaceable rule, they will need a constitution that outlines the changes. |
| Legal requirements | A company constitution is a legally binding document that sets out how a company operates. |
| Customisation | A company constitution can be tailored to a company's operations and needs. |
| Flexibility | A company constitution allows a company broader coverage and flexibility than the replaceable rules. |
| Amendment | A company can change or repeal its constitution by passing a special resolution. |
| Consensus | A special resolution requires at least 75% of the votes cast to be in favour. |
| Notice period | A special resolution needs at least 28 days' notice for publicly listed companies and 21 days' notice for other company types. |
| Storage | A copy of the constitution must be kept with the company's records. |
| Access | A company must provide a current copy of the constitution to any member who requests it within seven days. |
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What You'll Learn
Company constitution vs replaceable rules
A company constitution is a core corporate governance document that governs the management of a company. It is a contract between the company, its directors, and its members. A company can adopt a constitution before or after registration. If it is adopted before registration, each member must agree in writing to the terms of the constitution. If it is adopted after registration, the company must pass a special resolution to adopt the constitution. A company can change or repeal its constitution by passing a special resolution. A company must provide a current copy of the constitution to any member who requests it within seven days.
Replaceable rules, on the other hand, are a set of basic rules contained in the Corporations Act 2001(Cth) that can be used to govern a company's operations and activities. They are cost-effective and effort-free, as they are ready to use and do not require any time, money, or resources to prepare. If a company doesn't want to have a constitution, they can use the replaceable rules instead. However, replaceable rules can only be changed through legislative reform, whereas a company constitution can be modified frequently. A company constitution can be advantageous because it is a bespoke agreement that can be tailored to the specific needs of the company. It also allows for broader coverage and greater flexibility in managing the company.
The internal management of a company is an important matter, and under Australian law, there are two ways to organise this: through an internal company constitution or using replaceable rules outlined in the Corporations Act 2001(Cth). A company constitution will be easier to refer to than the replaceable rules, especially for larger companies, as they can include more detailed rules. However, replaceable rules might be more suitable for smaller companies as they are cost-effective and do not require additional resources to prepare.
It is important to note that a company constitution is not mandatory for every proprietary company. However, it is highly recommended as it is very useful, especially for companies that don't have ordinary share arrangements. On the other hand, replaceable rules will automatically apply if a company does not have a constitution, except in the case of a single shareholder who is also the sole director.
When to adopt a company constitution
A company constitution is a core corporate governance document that governs the management of a company. It is a bespoke agreement that can be tailored to the needs of the company. It allows the company broader coverage and flexibility than the replaceable rules.
Most companies adopt a constitution upon the registration of their business to guide their processes from the beginning. However, a company can adopt a constitution before or after registration. If it is adopted before registration, each member must agree in writing to the terms of the constitution. If a constitution is adopted after registration, the company must pass a special resolution to adopt the constitution. A special resolution requires that the company gain approval from at least 75% of shareholders with voting rights.
If a company wants to change or remove a replaceable rule, they will need to have a constitution that outlines the changes. A company constitution can be amended if the company's processes change, whereas only the government can change the replaceable rules through legislative reform.
It is best practice to have a constitution in place, but relying on the replaceable rules can be a cost-effective solution when starting a business. The replaceable rules are a basic set of rules for managing a company that apply to all companies. They are outlined in the Corporations Act 2001 and will apply unless a constitution overrides them. However, there are some replaceable rules that will always apply, even if the company has a constitution.
How to adopt a company constitution
A company constitution is a core corporate governance document that governs the management of your company. It is a contract between the company, its directors, and its shareholders that set the company in the right direction for operation and growth. It lays out the company's main business objectives, responsibilities of the directors and shareholders, and how the company is governed in terms of shares allotment, dividend payments, the appointment of directors, etc.
A company can adopt a constitution before or after registration. If it is adopted before registration, each member must agree (in writing) to the terms of the constitution. If a constitution is adopted after registration, the company must pass a special resolution to adopt the constitution. A company can change or repeal its constitution by passing a special resolution. A special resolution needs at least 28 days' notice for publicly listed companies and 21 days' notice for other company types. For the resolution to pass, at least 75% of the votes cast or 75% of the voting members of the company must vote in favour of the resolution.
If a company wants to change or remove a replaceable rule, they will need to have a constitution that outlines the changes. A company constitution will not automatically apply to your business. Although it is best to have a constitution in place, relying on the replaceable rules can be a cost-effective solution when starting a business. Replaceable rules are basic rules that apply to all companies and are outlined in the Corporations Act.
If you would like to adopt a constitution, you will need to have one drafted and pass a special resolution. You will likely need to have a lawyer draft one for you. When assembling a constitution, you can choose to replace any of the replaceable rules with your constitution or only a few of them. You should regularly review your company constitution and, if necessary, update it to ensure that it complies with legal requirements and best standards from a government perspective.
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What to include in a company constitution
A company constitution is a core corporate governance document that governs the management of a company. It is a collection of rules that establish a company's purpose, structure, and basic rules of conduct. It also defines the relationship between internal stakeholders, such as the company's directors, officers, and shareholders.
- Management structures and processes: The constitution should outline the internal management structures and processes of the company, including any specific rules or procedures that govern the relationship between the company and its directors, officers, and shareholders.
- Shareholder rights and responsibilities: The constitution should clarify the rights and responsibilities of shareholders, including any conditions or restrictions on share ownership, transfer, and issuance. It should also address how and when dividends will be paid.
- Director powers and duties: While the replaceable rules under the Corporations Act 2001 outline the powers and duties of directors, a company constitution can impose additional duties or restrictions. For example, the constitution can specify the actions directors are authorised to take on behalf of the company, such as issuing shares or borrowing money.
- Company secretary: The replaceable rules state that a company secretary holds office according to the terms and conditions determined by the directors. If your company will appoint a secretary, consider including any specific duties or restrictions in the constitution.
- Loans to third parties: The replaceable rules do not provide guidelines for issuing loans to third parties, including shareholders. If your company plans to issue such loans, the constitution should outline any conditions, such as repayment timelines or minimum interest rates.
- Amendments and updates: It is important to regularly review and update your company constitution to ensure it remains compliant with legal requirements and best practices.
Changing or repealing a company constitution
A company constitution is a core corporate governance document that governs the management of a company. It is a bespoke agreement that can be tailored to the needs of the company. A company constitution can be adopted before or after registration. If it is adopted before registration, each member must agree in writing to the terms of the constitution. If it is adopted after registration, the company must pass a special resolution to adopt the constitution.
A company constitution can be changed or repealed by passing a special resolution. This requires at least 28 days' notice for publicly listed companies and 21 days' notice for other company types. For the resolution to pass, at least 75% of the votes cast must be in favour. Public companies that have changed or repealed their constitution are required to lodge a Form 205 Notification of Resolution.
There are several reasons why a company may choose to change or repeal its constitution. Firstly, a company's processes may change, and the constitution needs to be updated to reflect these changes. Secondly, a company may need to change its constitution to comply with current laws and legal requirements. Thirdly, a company may want to change its constitution to take advantage of tax concessions. Additionally, a company may want to change its constitution to limit the company's operations or to update the company's address, number of directors, or number of members.
It is important to note that changing or repealing a company constitution can have legal implications, and it is recommended to seek legal advice before making any changes.
Frequently asked questions
No, it is not a strict legal requirement. However, it is highly recommended and is a valuable asset, especially for companies with complex operations. A company constitution is a core legal document that governs the internal management of a company.
A company constitution is a bespoke agreement tailored to the individual needs of the company. It provides greater protection and clarity and helps prevent disputes over matters such as the issuance of new shares, key company decisions, etc. It also allows for broader coverage and flexibility as it can be amended if company processes change.
If a company does not have a constitution, it will be governed by the default 'replaceable rules' outlined in the Corporations Act 2001. These are a basic set of rules for managing a company and apply to all companies. However, they do not necessarily cover everything a company may need.
