This is a guide about the company constitution and replaceable rules in Australia.
The company constitution and replaceable rules govern the control and management of a business. While the constitution is a contract between members parties within the company, the replaceable rules are rules set out in the Corporations Act.
Let’s find out more.
What is a company constitution?
According to ASIC, a constitution is a contract between:
- The company and each member
- The company and each director
- The company and the company secretary
- A member and each other member
This document generally guides how meetings are run (both board meetings and members meetings), as well as a host of other procedural governance items.
What should the constitution cover?
The constitution should cover the following clauses:
- The company’s structure
- The issuance and transfer of shares
- Share certificates
- Procedures for conducting meetings
- Voting procedures
- The appointment, removal and power of directors
- Rules regarding paying dividends
- Income and property of the company
- Inspections of records
- Company secretary
- Dissolution and winding up
- Adoption and amendment of the constitution
When to adopt a constitution?
A company may adopt a constitution either before or after registration.
If the company adopts a constitution before the company registration, each member must agree in writing to the terms of the constitution.
To adopt a constitution after the registration, the company must pass a special resolution (approval from at least 75% of shareholders with voting rights).
What companies require a constitution?
The following companies must have a constitution:
- No liability public companies
- Special purpose company
If your company is registered with the Australian Securities and Investment Commission (ASIC), you can choose one of the following:
- Establish a constitution specifying all the rules
- Be governed by replaceable rules
- Adopt a combination of the constitution and replaceable rules
Changing the constitution
A company’s constitution can be changed or repealed by passing a special resolution.
A publicly listed company must give at least 28 days’ notice of the meeting, and other companies must give at least 21 days’ notice. The notice must include the time, date and place of the meeting, topics to be discussed and the intention to pass the resolution.
For the resolution to be passed, at least 75% of the voting rights must be in favour of the change.
A proxy can be appointed to vote for members who cannot attend the meeting on their behalf.
Once the special resolution to change the constitution has passed, a private company must keep a copy of the constitution with the company’s records and provide a copy to any member who requests it within seven days.
What are the replaceable rules?
If a company does not adopt a constitution, it can use the replaceable rules instead.
Replaceable rules appear in the Corporations Act and provide basic rules for governing a company.
What companies can have replaceable rules?
Both private and public companies in Australia can have replaceable rules. However, replaceable rules do not apply where a company’s sole director and sole shareholder is the same person.
Which matters do the replaceable rules cover?
Section 141 of the Corporations Act sets out 39 provisions that apply to the replaceable rules:
|1||Officers and employees||Voting and completion of transactions – directors or proprietary companies|
|2||Power of directors|
|5||Company may appoint a director|
|6||Directors may appoint ither directors|
|7||Appointment of managing directors|
|9||Remuneration of directors|
|10||Director may resign by giving written notice to company|
|11||Removal by members – proprietary company|
|12||Termination of appointment of managing director|
|13||Terms and conditions of office for secretaries|
|14||Inspection of books||Company or directors may allow member to inspect books|
|15||Director’s meeting||Circulating resolutions of companies with more than one director|
|16||Calling directors’ meetings|
|17||Chairing directors’ meetings|
|18||Quorum at directors’ meetings|
|19||Passing of directors’ resolutions|
|20||Meeting of member||Calling of meetings of members by a director|
|21||Notice to joint members|
|22||When notice by post or fax is given|
|23||Notice of adjourned meetings|
|25||Charing meetings of members|
|26||Business at adjourned meetings|
|27||Who can appoint a proxy (only for proprietary companies)|
|28||Proxy vote valid even if member dies, revokes appointment etc.|
|29||How many votes a member has|
|30||Jointly held shares|
|31||Objections to right to vote|
|32||How voting is carried out|
|33||When and how polls must be taken|
|34||Shares||(a) Pre-emption for existing shareholders on issue of shares in proprietary company|
|35||(b) other provisions about paying dividends|
|36||Dividend rights for shares in proprietary companies|
|37||Transfer of shares||Transmission of shares on death|
|38||Transmission of shares on bankruptcy|
|39||Transmission of shares on mental incapacity|
|40||Registration of transfers|
|41||Additional general discretion for directors of proprietary companies to refuse to register transfers|
Changing the replaceable rules to a constitution
Replaceable rules may be applied at the initial stages of your company or if you do not have time or resources to draft a constitution.
Your company can change the replaceable rules to a constitution in the future by passing a special resolution.
Notice must be given at least 21 days for private companies or 28 days for public companies.
The change must be approved by all members of the company and in good faith.
Constitution vs replaceable rules
Replaceable rules are simple and cost-effective and can be used when the business has just been incorporated. However, not all businesses are eligible to adopt the replaceable rules.
A constitution is more flexible and can be tailored to meet the needs of your company. It also combines the rules in one place, rather than referring to the different sections in the Corporations Act.
Companies in Australia must adopt either a company constitution or replaceable rules. Each set of rules have its advantages and disadvantages; therefore, you should verify which set your entity can apply. For more information, feel free to schedule a consultation with Acclime.