A company constitution is an important document which governs how a company is managed. There are many things to consider when setting up a new company. People often think about the company name and branding, company structure, and business plan. However, equally important is the content of the company’s constitution. This article explains some important things to consider when developing your company’s constitution.
What is a company constitution?
The way a company is to be managed is set out in its constitution. The constitution sets out the internal management structures and processes of the company, as well as the nature of the relationship between the company and its directors, officers and shareholders. Not all companies need to have a company constitution. Read our article ‘What Is a Company Constitution‘ for more information about what company constitutions are and whether your company needs one.
What to Include
The Corporations Act 2001 (Cth) (‘Corporations Act’) includes a set of ‘replaceable rules‘. These rules govern how a company is managed and run. However, you can amend or replace these rules by writing a custom constitution for your company. It’s important to note that the replaceable rules do not apply to companies with a sole member/director.
The first step in working out what to include in a constitution is to read the replaceable rules. You might find that these rules will adequately govern your company. In this case there is no need to write your own constitution. However, if you decide that some or all of the rules are not appropriate for your company, you can change them in your constitution.
1. Shares
The replaceable rules set out how shares can be issued and transferred. If your company will issue multiple types of shares with different conditions or voting rights you should include this in your constitution. You should also consider how you want shares to be issued and transferred and how and when dividends will be paid.
2. Directors’ Meetings
The replaceable rules also include a number of rules relating to Directors’ meetings. The rules govern calling and chairing of Directors’ meetings. They also set out the requirements for a quorum. The rules for circulating and passing resolutions are also set out in the replaceable rules. You should read these rules to work out whether they are appropriate for your company.
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3. Directors Powers and Duties
The replaceable rules dictate the powers and duties of the company directors. Under these rules, directors may exercise all the powers of the company unless restricted by other provisions of the Corporations Act, or by the constitution. This allows directors to take actions such as issuing shares and borrowing money on behalf of the company. The replaceable rules do not contain any specific information about the duties of directors. This means that directors are only subject to the standard duties under the Corporations Act. You should consider whether you want Directors to be subject to any additional duties or restrictions. If so, these duties and restrictions need to be included in the constitution.
4. Company Secretary
The replaceable rules only provide that a company secretary holds office according to the terms and conditions determined by the directors. If your company will appoint a secretary, you should consider whether you want them to be subject to specific duties or restrictions. If so your constitution needs to include these duties or restrictions.
5. Loans
The replaceable rules do not provide any restrictions or guidelines for the issuing of loans to third parties, including shareholders. If your company will issue loans to third parties, you should consider any conditions you want placed on this power. For example you might want to require that any loans to third parties must be repaid in a certain amount of time, or be subject to a minimum interest rate. If so, the constitution should include these restrictions.
Conclusion
A company’s constitution is an important document. It sets out many aspects managing and running the company. If your company doesn’t have a constitution the replaceable rules will apply. However, these rules may not meet the needs of your company. When reading the replaceable rules you should consider the 5 areas outlined in this article. Further, if you are unsure about what you should include in your constitution, you should seek advice from a company lawyer.
