When you start a company, you must decide what management rules it will follow. A company constitution is used to govern the internal management of a company. A constitution is an essential legal document that you can use to oversee your company’s activities and the relationship between your company’s directors and shareholders.
In this article, we’ll explain what a company constitution is, why you need a company constitution, what to include in your constitution, how to create a company constitution, the benefits of a company constitution and answers to other frequently asked questions.
Read along!
Table of Contents
What is a Company Constitution?
A Company Constitution is a set of rules which govern the relationship between a company’s directors and shareholders and the operation of the company. Therefore, they provide a broad framework to outline basic expectations and how to resolve disputes.
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Why do you need a Constitution?
The Australian Securities and Investment Commission (ASIC) requires that each company must choose to use their own Constitution or adopt replaceable rules from the Corporations Act 2001(Cth) or use a combination of both. Therefore, before you register your company, you must either draft a Constitution or seek to adopt the replaceable rules.
However, ASIC states that company constitutions are mandatory for ‘special purpose companies’ and ‘no liability’ public companies.
What should be included in a Company Constitution?
Company constitutions should include rules and cover information about the following:
- Your company’s structure
- The issue of shares
- The transfer of shares
- Share certificates
- Governance of meetings
- Voting procedures
- Directors
- Company Secretary
- Dividends
- How company documents will be executed
- How company meetings will be organised
- The class of shares shareholders will have
- Shareholder rights
- How company directors are removed
- How company directors are appointed
- The powers provided to company directors
- Share certificates
- The process that must be used to amend the constitution
How do I create a Company Constitution?
There are multiple ways you can create a company constitution, including the following:
- You can create your company’s constitution yourself
- You can hire a lawyer to assist you in creating a company constitution
- You can use ASIC’s Replaceable Rules
- If you register your company through Lawpath, you will be provided with a company constitution template you can modify for your company’s needs
How to amend your constitution?
You can amend or remove provisions within your constitution by passing a special resolution. There are a few requirements that must be met and steps that must be followed to amend your constitution. These include the following:
- You need to review your constitution to see the rules that must be followed to amend your constitution, or whether there are rules that can’t be removed that must remain as part of the new constitution
- You must provide notice of the special resolution. You must provide a minimum of 21 days notice, however, if you have a public company, you’re required to issue notice 28 days prior to the meeting
- The notice you provide must include the following information:
- Where the meeting will be located
- The date the meeting will be held
- The time the meeting will take place
- Information regarding proposed special resolutions
- An electronic address for voting, for example, an email address
- A meeting agenda
- Proxy voting information
- For the special resolution to pass, 75% of the votes cast must be in favour of the resolution
- After the special resolution has been passed by the company, a private company is required to provide an updated version of the constitution to any member who requests a copy within seven days. It is required for public companies to submit their new company constitutions and the special resolution that led to their new constitution to ASIC within 14 days of passing the special resolution
What are the Replaceable Rules?
Replaceable rules are a basic set of rules contained within the Corporations Act that your company can use to govern its internal management where you have chosen not to adopt a company constitution.
Replaceable rules in the Corporations Act cover the following:
- Powers of directors
- How the company appoints directors
- How directors will be able to appoint other directors
- How directors will be remunerated
- How members can be removed from the company
- How the company or its directors will allow the members to inspect books
- How voting will be carried out during member meeting
- How directors’ meetings must be called and how they must run
- Shares and transfer of shares (i.e. provisions about paying dividends)
You can choose at any time to modify or replace the Replaceable Rules with your own constitution. You should also be aware that Replaceable Rules don’t apply to proprietary companies, whether the sole director of the company is also the sole shareholder.
What are the benefits of a company constitution?
The benefits of using a company constitution include the following:
- There are broader provisions that can be included in a constitution compared to replaceable rules
- A constitution can be customised to suit the specific situation your business is in and to suit the specific needs of your business
- You can manage your business with greater flexibility using a constitution
- Replaceable rules have stricter rules that’ll apply until a constitution displaces them
- Replaceable rules are basic. Therefore they may not be able to address all the specific needs of your company
- You can amend your constitution, but you can’t amend replaceable rules, as replaceable rules can only be amended by reforming the law
Is a company constitution a contract?
Company constitutions are contracts between the following:
- Each member and the company
- Each director and the company
- The secretary of the company and the company
- Each member of the company
Conclusion
Company constitutions are crucial for the corporate governance of your company. Therefore, it’s crucial that you get your company constitution right!
If you’re feeling unsure about how to create a constitution for your company, you can use our company constitution template. Alternatively, you can hire a lawyer for legal advice to create a company constitution suitable for your business or to see whether your company can use replaceable rules instead.
