Eleanor Finch
A company constitution is a crucial document that establishes a company's internal management and governance. It specifies the rules that govern the relationship between the company's directors and shareholders, defining their roles and powers. Constitutions can be adopted before or after company registration, and they can be modified or repealed through special resolutions. They provide flexibility and control over the company's operations, allowing customization to suit the company's specific needs. The constitution is an essential source of information for running a business and making decisions, ensuring clarity and reducing internal disputes.
| Characteristics | Values |
|---|---|
| Purpose | To establish the company's business purpose, define the relationship between internal stakeholders, and set out basic rules of conduct |
| Documents | It can be made up of more than one document, including articles of association and memoranda of association |
| Rules | It is a collection of rules that govern the internal management of the company |
| Registration | It can be adopted before or after company registration |
| Modification | It can be modified or repealed by passing a special resolution |
| Voting | The special resolution must be passed by at least 75% of voting members |
| Legal requirement | It is not a strict legal requirement but is highly recommended |
| Default rules | If a company does not have a constitution, it will be governed by the default "replaceable rules" under the Corporations Act |
| Mandatory rules | Some of the replaceable rules are mandatory for all companies and cannot be displaced by a company's constitution |
| Proprietary company | A proprietary company must have a constitution, but it does not need to be lodged with the Australian Taxation Office (ATO) |
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What You'll Learn
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 collection of rules that establish a company's purpose, define the relationship between internal stakeholders, and set out basic rules of conduct. It is the most important source of information about running a business.
A company constitution can be adopted before or after a company's 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. This requires approval from at least 75% of shareholders with voting rights.
Some companies are legally required to have a constitution. For example, a proprietary company (a special purpose company) must have a constitution, although it does not need to be lodged with the Australian Securities & Investments Commission. However, a copy must be kept with the company's records, and a current copy must be provided to any member who requests it within seven days.
Even if a company is not legally required to have a constitution, it may still be beneficial to adopt one. A company constitution allows for more flexibility in managing the company and can be tailored to the individual needs of the business. It can also provide a more bespoke agreement that establishes the company's purpose and sets out the rules of conduct.
If a company does not have a constitution, it will be governed by the default guidelines under the Corporations Act 2001, known as the "replaceable rules". These are a basic set of rules for managing a company and apply to all companies registered after 1 July 1998. However, some companies may find that the replaceable rules contain more onerous obligations than they would prefer. In this case, a company can displace or modify the replaceable rules with its constitution, although some of the replaceable rules are mandatory for all companies.
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How to adopt a company constitution
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 shareholders that sets 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.
Not all companies are legally required to have a constitution. If a company does not have a constitution, it will be governed by the default guidelines under the Corporations Act 2001 (Cth), also known as the 'replaceable rules'. However, most companies will adopt a constitution upon the registration of their business, to guide their processes right from the start.
- Timing: You can adopt a constitution on, or after, the registration of your company.
- Drafting: It is recommended to have a lawyer draft the constitution for you. The constitution can be made up of more than one document. The articles of association and the memorandum of association are two documents that can make up a constitution. The articles of association define a company's internal structure, lay out requirements for the board and management, and explain the rules for how shareholders interact with them. The memorandum of association, where it exists, is more about the business's external side. It explains what the business can do and what falls outside its remit.
- Agreement: If you are adopting a constitution before company registration, all initial members must agree in writing to the terms of the constitution.
- Special Resolution: If you are adopting a constitution after company registration, you will need to pass a special resolution at a general meeting. A special resolution requires that you gain approval from at least 75% of shareholders with voting rights. A publicly listed company must give at least 28 days' notice of the meeting, while 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 will be discussed, and the intention to pass the resolution.
- Replacing Replaceable Rules: 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.
By adopting a company constitution, businesses can tailor their governance structure to their specific needs and gain greater flexibility in their operations.
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What a company constitution includes
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 business purpose, define the relationship between internal stakeholders, and set out basic rules of conduct. The constitution is the most important source of information for running a business.
The constitution can be made up of more than one document, and it is not mandatory for all companies to have one. If a company does not have a constitution, they will be governed by the default guidelines under the Corporations Act 2001 (referred to as the 'replaceable rules'). These rules govern how a company is managed and run, but they may not meet the needs of a specific company.
The articles of association and the memorandum of association are two documents that can make up a constitution. The articles of association define a company's internal structure, laying out the requirements for the board and management and explaining the rules for how shareholders interact with them. Memoranda, where they exist, are more about the business's external side. They explain what the business can do and what falls outside its remit, providing clarity to shareholders about the activities they invest in.
When creating a constitution, companies will need to consider the replaceable rules and whether they want to amend or replace them. The replaceable rules dictate the powers and duties of company directors, allowing them to take actions such as issuing shares and borrowing money on behalf of the company. If a company wants to change or remove a replaceable rule, they will need to outline the changes in their constitution.
To adopt a constitution, a company must pass a special resolution at a general meeting, with at least 75% of voting members in favour of the resolution. A company can adopt a constitution before or after registration, but all initial members must agree to the terms of the constitution in writing.
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Why a company constitution is important
A company constitution is a collection of rules that establish a company's purpose, define the relationship between internal stakeholders, and set out basic rules of conduct. It is a core legal document that governs the internal management of a business. It is important because it helps to:
- Establish a company's purpose and set out rules of conduct: A company constitution defines the company's purpose and sets out the basic rules that govern how the company should be run. This includes the rights and responsibilities of directors, shareholders, and the company secretary. It also covers the process for appointing and removing directors, which can help reduce internal disputes.
- Tailor rules to the individual needs of the business: A company constitution allows businesses to tailor their rules to their specific needs. This is especially important for companies with complex operations, as it provides flexibility and ensures that the company's rules are aligned with its unique requirements.
- Provide clarity and protection: A well-crafted company constitution provides greater protection and clarity for the business. It can help prevent disputes over matters such as the issuance of new shares, key company decisions, and the authority of individuals within the company. It also ensures that the company complies with regulatory standards and evolving business practices.
- Benchmark against competitors: A company constitution allows businesses to compare their processes and regulations with those of their competitors. This helps businesses identify areas where they may need to make changes or improvements to remain competitive.
- Evaluate share-related details: A company constitution provides details on share capital, policies on share transfer and issuance, and the stake owned by shareholders. This helps resolve potential disputes related to share ownership and provides flexibility and certainty in governance.
- Assess the relationship between the company and shareholders: By defining the rights and responsibilities of shareholders, a company constitution helps to assess and maintain a balanced relationship between the company and its shareholders.
While adopting a company constitution is not a strict legal requirement, it is highly recommended as it provides greater protection, clarity, and flexibility for the business. It is a valuable tool for effective decision-making and conflict resolution within an organisation.
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How to change a company constitution
A company constitution is a core legal document that governs the internal management of a business. It is a collection of rules that establish a business's purpose, define the relationship between internal stakeholders, and set out basic rules of conduct. It can be made up of more than one document.
The articles of association and the memorandum of association are two documents that can make up a constitution. Articles of association define a company's internal structure, lay out requirements for the board and management, and explain the rules for how shareholders interact with them. Memoranda, on the other hand, are more about the business's external side, explaining what the business can and cannot do.
If a company does not have a constitution, it will be governed by the default guidelines under the Corporations Act, known as the "replaceable rules". These are a basic set of company management rules that automatically apply to all companies registered after 1 July 1998.
Now, to change a company constitution, company members must pass a special resolution at a general meeting to approve the changes. At least 75% of the voting members of the company must vote in favour of the resolution for it to pass. A publicly listed company must give at least 28 days' notice of the meeting, while all other companies must give at least 21 days' notice.
If you are updating a Pty Ltd company's constitution (without changing what the company does), you don't need to lodge anything with ASIC. However, if the amendment is to change the company from a private company to a public company, the company must lodge copies of the new constitution with ASIC and the special resolution within 14 days of the resolution being passed.
Some other reasons to amend a company constitution include:
- To reflect current law and changes to company details, such as address, number of directors and members, etc.
- To comply with a court order that asks for specific changes.
- To update the constitution to reflect whether the company is now a special purpose company.
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Frequently asked questions
A company constitution is a document that specifies the rules that govern the relationship between the company's directors and shareholders. It also establishes the company's purpose and sets out basic rules of conduct.
A company constitution is important as it provides a flexible framework for the company's governance and internal management. It allows the company to adapt its constitution to its specific needs and situation, and amend it as processes change. It also helps to reduce internal disputes, retain control as the company grows, and improve decision-making by defining roles and powers.
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. If adopted after registration, a special resolution must be passed with at least 75% of votes in favour. A lawyer should be consulted to draft the constitution.
