A constitution is a legal document that governs the internal management of a company. Having a constitution is generally considered to be good business management practice.
A constitution is important, as it oversees the activities of a company, and sets out the rights and duties of people, such as:
- directors, and
- the Company Secretary
A company constitution also dictates the relationship between the company’s directors and its shareholders.
A company that is registered with Australian Securities & Investments Commission (‘ASIC’) is required to choose to either have a constitution that is drafted from scratch, or adopt the replaceable rules contained in the Corporations Act 2001 (Cth), or the company may elect to use a combination of both. In the event that replaceable rules are used, a company can, at any time, modify or displace the replaceable rules by way of a constitution in its place. It is important to specifically state in the constitution that it will override the replaceable rules. An exception to replaceable rules not applying is in circumstances where a company has a sole member/director, or where the member/director is one and the same person.
What does a Constitution include?
A company constitution will generally include provisions in relation to:
- the structure of a company;
- governance of company meetings;
- issue and transfer of shares;
- voting procedures;
- execution of company documents;
- rights of shareholders and share classes;
- apppointment, power and removal of directors; and
- process of amending the constitution.
What are the Replaceable Rules?
Inthe absence of a constitution, a company will be governed by the default guidelines under the Corporations Act 2001(Cth), which contains a set of replaceable rules that governs a company’s internal management. The replaceable rules are a set of basic company management rules which can be a cost-effective mechanism when starting a new business. Replaceable rules apply to companies registered after 1 July 1998.
Some examples of the provisions which thereplaceable rules cover are as follows:
- Offices and employees (i.e. powers of directors);
- Inspection of books (i.e. allowing members to inspect the books);
- Directors' meetings (i.e. how voting should be carried out); and
- Shares and transfer of shares (i.e. provisions about paying dividends).
Why choose a Constitution instead of replacement Rules?
There are may be reasons why you might adopt a company constitution instead of relying on replaceable rules. Importantly, a constitution is a bespoke legal agreement that can be tailored to the specific needs of the company. In comparison, the replaceable rules are basic rules that apply to all companies. This means that they do not necessarily cover everything a company may need or require.
A constitution also allows a company broader scope and flexibility than the replaceable rules. This is because the constitution can be amended, as required, if a company’s processesor structure change, whereas the replaceable rules can only be amended through legislative reform.
How Sharrock Pitman Legal can assist?
Having an effective constitution is an essential and crucial means of governing a company’s internal affairs and management. If you are starting our own business or considering adopting a constitution for your company, it is important to obtain legal advice and arrange a lawyer to assist in drafting a constitution that meets the needs and requirements of the company. If you require assistance, please do not hesitate to get in contact with us on 1300 205 506. As Accredited Specialists in Commercial Law and Commercial Litigation, we are well equipped to provide expert legal advice regarding your unique circumstances.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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For further information contact
Lynda is a Senior Associate of Sharrock Pitman Legal. She is part of our Litgation team. For further information, contact Lynda Lim on her direct line (03) 8561 3330.