Company Constitution or Replaceable Rules: Which Is Better? (2020 Update)
A company's internal affairs can be managed under both a company constitution and replaceable rules in the Corporations Act. Learn which is better here.
The internal management of your company is an important matter. Under Australian law, there are two ways you can organise this. Firstly, you can manage your company under an internal company constitution. Alternatively, you can manage it under national rules outlined in the Corporations Act 2001 (Cth). In this article, we’ll discuss what Company Constitutions and Replaceable Rules involve, so you can decide which framework is best for your company. If you require legal guidance regarding the management of your company, you should contact a business lawyer.
First of all, company constitutions are not mandatory for every proprietary company. However, company constitutions are extremely useful and indeed recommended for companies. This is especially true for those 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. If you are a current or future shareholder, you will be bound by the constitution.
A company constitution does not affect the personal capacity of a shareholder. This is because the rights stemming from a company constitution will only be enforceable against shareholders in their capacity as a shareholder. Further, company shareholders and directors have no enforceable rights. 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
To modify a company constitution, a special resolution must be passed. A special resolution requires 21 days notice (28 days for publicly listed companies). 75% of the votes need to be in favour to pass the resolution. Check out our guide to learn more about modifying a company constitution.
Replaceable Rules in the Corporations Act
Replaceable rules, like a company constitution govern the activities and operation of companies. These rules are in the Corporations Act 2001 (Cth). These rules apply unless they are ‘displaced’ or modified by the company. The replaceable rules are set out in section 141 of the 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 was registered after 1 July 1998, 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.
Which is better?
A company constitution is broader and will cover a wider range of circumstances due to it’s individualised nature. Due to this, it is arguably the safer way to manage your company’s internal affairs.
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.