When considering whether the internal management of your company should be governed wholly by a company constitution, by the Corporations Act replaceable rules or by a combination of both, it is important to determine what a company constitution is and what the Corporations Act replaceable rules entail.
If you require legal guidance regarding the management of your company, you should contact a business lawyer.
First things first, company constitutions are not mandatory for each and every proprietary company. However, company constitutions are extremely useful and indeed recommended for companies that do not have ordinary share arrangements. Company constitutions specify the rules governing a company’s directors and shareholders in relation to the operation of a company. Both current and future company shareholders are bound to the constitution, provided that they are parties to the contract.
Importantly, a company constitution does not affect the personal capacity of shareholder. This is because the rights stemming from a company constitution will only be enforceable against shareholders in their capacity as a shareholder. Additionally, no enforceable rights are created between company shareholders and company directors. Therefore, the provisions of a company constitution which serve to protect the interests of minority shareholders, cannot be enforced by majority shareholders.
Modification of Company Constitutions
In order to modify a company constitution a special resolution must be passed. A special resolution requires 21 days notice (28 days for publicly listed companies). For a special resolution to pass there needs to be a 75% majority of votes cast. Check out our guide to learn more about modifying a company constitution.
Replaceable Rules: What are they and where to find them?
Replaceable rules, like a company constitution govern the activities and operation of companies. However, unlike company constitutions, replaceable rules are found in the Corporations Act and will apply unless they are displaced or modified by a company’s constitution. The replaceable rules that govern the internal management of a company are set out in section 141 of the Corporations Act. These rules govern matters relating to;
- the appointment of directors;
- the powers of directors;
- the regulation of both directors’ and members’ meetings;
- inspection of the books;
- unusual rights which may attach to special classes of shares; and
- the transfer of shares.
Where each person under a company agrees to follow the replaceable rules they operate contractually between the company and members, the company and directors, including the company secretary, and members and other members. Importantly, a breach of the replaceable rules does not result in a breach of the Corporations Act. However, there is a right between a shareholder of a company and the other shareholders to require the compliance with any replaceable rules that govern a company’s internal activities.
What companies do replaceable rules apply to?
If your company is registered after 1 July 1998, that is after the commencement of the Company Law Review Act the replaceable rules will apply. Additionally, if your company was registered prior to 1 July 1998 and has repealed its constitution after that date the replaceable rules will apply.
Differences between the replaceable rules and a company constitution
An important difference between company constitutions is that replaceable rules enable minority shareholders to protect their interests against decisions which may have an adverse impact on them in terms of financial consequences as it allows minority shareholders to negotiate terms of their relationship with other shareholders. Notably, a constitution is more specific and more comprehensive than simply relying on the brief provision of replaceable rules of the Corporations Act.
A further critical difference between a company constitution and replaceable rules is that a company constitution is a published document that is accessible not only to company members but also to other parties and is arguably clearer than the replaceable rules as legislation often lacks comprehensive clarity. Finally, a company constitution can protect a broader range of companies. For example, the replaceable rules cannot govern proprietary companies where a person is the sole director and shareholder, and the replaceable rules are not applicable to special purpose companies.
The verdict: What is more beneficial for your company?
Through covering a wider range of circumstances a company constitution is broader, arguably the safer and a more specific way to manage your company’s internal affairs.
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