When you start a company, there are different ways you can manage it. One of the ways is to use the replaceable rules in the Corporations Act. Alternatively, you can have a Company’s Constitution. that adopts, modifies or removes the replaceable rules in full or part. Both of these options have their advantages and disadvantages and you can read more about it here. Alternatively, you can also choose to have a combination of the two based on what is appropriate for your company.

You can find the replaceable rules in s 141 of the Corporations Act and they cover 6 broad areas of internal governance.

Officers and Employees

Under this category, you can replace rules on

1. How directors of proprietary companies vote and complete transactions
2. The director’s powers
3. Negotiation instruments conditions. For example, you can change the number of directors who can accept, refuse or sign etc. a negotiation instrument.
4. How to appoint a Managing Director, what powers they have and their term.
5. How you appoint a director. Does appointment have to be passed at the general meeting?
6. If directors may appoint other directors for a quorum at AGMs.
7. How to appoint an alternate director who can exercise certain rights as decided by the directors.
8. When and how remuneration is awarded to directors.
9. How directors can resign.
10. How shareholders can remove a director for proprietary companies.
11. Who can revoke the appointment of Managing Directors and how the process is started.
12. The terms and conditions of secretaries. Are directors the only ones who can set them?

Inspection of Books

Under this category, you can replace rules on

1. How members access to the company’s books.

Director’s Meetings

Under this category, you can replace rules

1. On how to pass regulations in companies with more than one director.
2. On how to call director’s meetings.
3. Regarding how to elect a chair for the director’s meetings.
4. What the quorum is at the director’s meetings? Are two directors enough?
5. What the majority percentage is for passing a resolution?

Member’s Meetings

Under this category, you can replace rules on

1. Who can call member’s meetings?
2. How to give notice to joint members. Is it alright to give notice just to the first member in a jointly owned share?
3. The delivery of notice by fax or post. When is notice a assumed to have been delivered?
4. When to give notice of resuming an adjourned meeting. Is notice only to be given when the meeting is adjourned for more than a month?
5. What the quorum is at member’s meetings. Are two people enough?
6. Who elects the chair for member’s meetings. Are directors the only one who can do it? Does it need to be more than one director who decides?
7. What may be discussed when adjourned meetings are resumed. Are members able to raise issues that have already been discussed?
8. Who can appoint a proxy
9. Under what situations a proxy’s vote is valid. Are proxy votes valid if the member dies or if the shares have been transferred?
10. How many votes a member has.  
11. Who’s vote count in a jointly held shares. Who’s vote gets counted?
12. When a member can challenge a right to vote. Is it at meetings only?
13. How voting is carried out, including specifying how proxy votes are to be cast.
14. When and how polls must be taken. If it’s immediate or at the discretion of the chair?

Shares

Under this category, you can replace rules

1. On whether directors have to offer shares of a particular class to existing members in that class first. This also includes the process to do so and if this rule can be by-passed by a resolution at the general meeting.
2. Regarding the amount, time and payment of dividends
3. Related to dividends for shares in a proprietary company.  

Transfer of Shares

Under this category, you can replace rules on

1. Who gets shares upon the death of a member?
2. Who gets shares if the member goes bankrupt and how to intitate the process.
3. How shares may be transferred if a shareholder is mentally incapacitated
4. When the transfer of shares comes into effect.
5. Whether directors of proprietary companies can refuse to reject transfers.

Although there are many rules a company can choose to replace, these rules are largely procedural. They relate to how certain things are done and by who. However, they give the basic structure on which your company can run, especially in the early days.

Why do companies replace them?

In general, you replace the replaceable rules to be better and more appropriate for your company. Importantly, your constitution gives you better control of your company and is easier to modify.

A constitution also acts as a contract between

1. The company and the members
2. The company and the directors and secretary
3. Between members

So it is easier to manage the relationships within the company and offer remedies in case of a breach of rights.

For more comprehensive advice on what type of internal governance is best for your company, get in touch with a business lawyer today.

Unsure where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.