A Company Constitution is a legal document that governs the internal management of a company. It acts as a contract between the company and each member, director, the company secretary as well as a contract between the members themselves. A Company Constitution can be enacted before or after company registration. If enacted before registration, each member must agree to the terms of the constitution in writing and if enacted after, the company must use a special resolution with a result of 75% of the vote being in favour of the Constitution.
For most companies, using a Company Constitution is optional but the following company types must have one in place: ‘no liability’ public companies and ‘special purpose’ companies.
If a Company Constitution is chosen to not be used by a company that is not required to have one, the Corporations Act has a set of replaceable rules that will then take the place of a Company Constitution and automatically govern internal management. The rules relate to matters such as the appointment of directors as well as their powers, regulation of the meetings of both directors and members, shares, shareholder rights and the inspection of books. Keep in mind that your company must have been registered after July 1 1998 for the rules to be applicable; if registration occurred prior, the rules are still applicable if there was a Company Constitution that was eventually repealed after July 1 1998 or if there has never been a Constitution. Further, the rules do not apply to a proprietary company that has one person as both the sole director and sole shareholder.
It is important to note that not only can the replaceable rules be used in place of a Company Constitution, the two can actually be used in combination with each other. For example, your Company constitution can add specifics to areas and responsibilities that are broadly described by the replaceable rules. Further, a formally adopted Company Constitution can actually override specific replaceable rules and must explicitly state this override in the wording of the Constitution.
In addition to this, any areas not addressed by a Company Constitution but contained within a replaceable rule provision will be overseen by this replaceable rule.
Why Should You Use a Company Constitution?
Although using the replaceable rules in place of a Company Constitution may be cost-effective, the rules themselves can be difficult to locate, understand and apply when internal issues actually arise. The key benefit of having a Company Constitution is that all the relevant provisions are located in one place with an agreed upon wording and can thus be easily applied to any internal issues that arise.
Further, your Company Constitution can be tailored to your company’s operations. As mentioned in the above section, a Company Constitution can override replaceable rules if stipulated and this means that, for example, the power of the directors can be modified to suit the needs of your company’s operations.
What to Include in a Company Constitution
Company Constitutions generally contain clauses pertaining to standard background and logistics of the company such as the company type (for example a Proprietary company/Pty Ltd), how directors are appointed, how directors are remunerated as well as how certain company documents are constructed such as the minutes of meetings.
However, there are also other areas related to internal governance that should also be addressed.
Powers and Duties of Directors
The replaceable rules are quite broad in outlining the powers held by company directors; the relevant rule essentially states that directors can exercise all powers of the company as long as they are not prohibited by the Corporations Act and provides examples such as the issuing of shares and debentures as well as the borrowing of money.
The term ‘duties’ is not mentioned in the relevant rule.
In light of this, if you wish to further specify the powers of directors and identify certain duties, you can stipulate these in the Company Constitution.
Role of the Company Secretary
Again, the replaceable rule here is broad in stating that the company secretary holds office as per terms and conditions outlined by the directors and as such, your Company Constitution can outline the company secretary’s specific powers and duties.
Shares and Shareholder Rights
Whilst shares are also addressed in the replaceable rules, if you wish for the shares of your company to be subject to certain rules regarding their issue and transfer, how dividends will be paid or different shareholder rights, these should be laid out in your Company Constitution.
Meetings and Circulating Resolutions
The replaceable rules regarding meetings are not only broad but tend to provide considerable scope to company directors as reflected in the fact that they ‘may elect a director to chair their meetings’, ‘can determine the period for which the director is to be chair’ and quorum involves two directors ‘unless the directors determine otherwise.’ Here, in light of this wide scope, the Company Constitution can set out its own processes, requirements and restrictions with respect to how meetings are conducted.
On the other hand, the provisions set forth by the replaceable rules regarding circulating resolutions are relatively more specific. A circulating resolution is what allows directors to pass a resolution without holding a meeting and the replaceable rule requires that a document or multiple identical documents stating favourability towards the resolution be signed by all directors. Therefore, if you wish for your company to pass resolutions mostly via circulating resolutions, not only can you affirm this in your Company Constitution but further, you can override the rule and substitute it with more flexible provisions if you find the replaceable rule restrictive as per the needs of your company’s operations.
If you wish to change what is included in your Company Constitution, this involves a special resolution also requiring 75% of votes being in favour of the changes.
A Company Constitution is a legal document governing the internal management of a company. Whilst the replaceable rules of the Corporations Act can substitute a Company Constitution, the two can also be used in conjunction with each other. Comparatively, a Company Constitution promotes clarity especially with regards to responses to internal issues. Further, it can also be tailored to your company’s operations and needs. In your Company Constitution, you should include provisions addressing areas such as the powers and duties of company directors, the role of the company secretary, shares and shareholder rights, meetings and circulating resolutions.