Company Constitutions

Mar 30

What is a Company Constitution?

A legally binding agreement between your company and its internal members that defines rules related to internal governance, business activities and rights and obligations of its internal members.

It is submitted as part of a company’s incorporation process.

A company constitution has the following components:

Name and type of company
Decision-making and board member selection structure
Nature and extent of liabilities of company members
Details of company shareholders
Business objectives and activities of the company
Rules and regulations pertaining to share issuance, board resolutions and director duties

Moreover, having a defined constitution in your company documentation may empower your company to perform certain actions that are not defined with the relevant company legislation in your jurisdiction.

For instance, it enables your company to acquire shares from existing shareholders and restrict transfer of shares.

Why is Company Constitution Important for Business Today?

A company constitution enables your company to:

Pre-define rights and obligations of stakeholders, along with company’s policies and processes
Ensure a balance of power between shareholders and directors, especially in cases of evident gaps in control
Retain control over your company as it grows and provide flexibility and certainty in governance

Why is it Important for an Event Tomorrow?

A company constitution is important for an event tomorrow, as it helps:

Benchmark the existing processes and regulations of your company against your competitors
Evaluate details on share capital, policy on share transfer and issuance and stake owned by your shareholders
Resolve any potential disputes related to ownership of shares, internal processes, management or compliance
Assess the relationship between your company and shareholders
Understand what rules exist that may impact on the ability to achieve or process to implement a proposed transaction

Pros of Addressing Company Constitutions

Improvement in decision-making ability of your company by defining roles and powers
Reduction in internal disputes as process of appointment and removal of directors is pre- defined
Flexibility to modify or replace rules and regulations that are provided for as standard under the relevant company legislation in your jurisdiction

Cons of Not Addressing Company Constitutions

Lack of clarity in how to deal with particular situations
Board of directors may lack the required powers to address certain matters that are not common but important to your company
Increased difficulty in protecting the rights of minority shareholders

The Law

Section 134 of the Corporations Act 2001 (Cth) (Corporations Act) provides that a company's internal management may be governed by a constitution, the replaceable rules as set out in that Act, or a combination of both.

The term "constitution" is defined in s 9 to mean:

a company’s constitution, which (where relevant) includes rules and consequential amendments that are part of the company’s constitution because of the Life Insurance Act 1995; or
a managed investment scheme’s constitution; or
in relation to any other kind of body:
- the body’s charter or memorandum; or
- any instrument or law (other than the Corporations Act) constituting, or defining the constitution of, the body or governing the activities of the body or its members.

The rules that a company adopts to govern the internal management of the company may be referred to as corporate governance rules. These rules may be in the form of the company's constitution or the "replaceable rules" as set out in the Corporations Act.

Under s 136, a company adopts a constitution:

on registration (each initial shareholder agrees in writing to the terms of a constitution before the application is lodged); or
after registration (if the company passes a special resolution adopting a constitution or a court order is made that requires that the constitution be adopted).

A company may modify or repeal its constitution or a provision of its constitution, by special resolution (refer to s 136(2)).

Replaceable rules

The general principle is that for an agreement to be binding there must be consideration. Nominal consideration is sufficient to make a simple contract binding. Under s 140 the constitution of a company and the replaceable rules are a statutory contract. Unlike a public company (s 117), a proprietary limited company does not need to register its constitution.

Section 140 of the Corporations Act provides that the constitution and the replaceable rules are contracts between the company and each member, each director, each company secretary. Non-compliance with a company’s constitution or any applicable replaceable rules is not, in itself, a contravention of the Corporations Act. However, if a company is in default of its obligations to a member under its constitution, the member would ordinarily have a personal contractual right to remedy the breach. This may include declaratory and injunctive relief to enforce company compliance or damages against the company for non-compliance. Replaceable rules are applicable to a company unless the company adopts a constitution that expressly excludes or overrides the operation of the replaceable rules.

As a general rule, replaceable rules can apply to any company, including a proprietary company that is or was registered after 1 July 1998. However, a proprietary company cannot use the replaceable rules if the same person is both its sole director and its sole shareholder. A company, including a proprietary company, may also include in its constitution, a reference to replaceable rules that does not otherwise apply (see s 135).

The sections of the Corporations Act that may apply as replaceable rules are set out in a table form in s 141.

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For more information, please contact Gavin McInnes on 07 3367 8681 or gmcinnes@grmlaw.com.au.

The information contained in this article is general in nature and cannot be regarded as anything more than general comment. Readers of this article should not act on the basis of this comment without consulting one of GRM LAW 's legal practitioners who will consider their particular circumstances.

Expertise

GRM LAW has a wide range of experience assisting companies in all aspects of business, corporate, managed funds and IT law.

Not only will you find that GRM LAW is likely to have assisted someone in your exact situation, but you’ll find that a GRM LAW lawyer can distill a complex legal issue into a set of actionable options for you to consider.

Gavin McInnes