If you run a company, or are intending to start one, you’ve probably heard of a company constitution and a shareholders agreement. However, these are different documents that serve different purposes. In this article, we’ll outline what the differences are, so you know when and how to use them for your business.
What is a company constitution?
All businesses need to have a constitution. This document can be custom-created by your company or through implementing the replaceable rules found in the Corporations Act 2001 (Cth). You can also combine these, and have your constitution based on your own rules and those found in the Act.
The replaceable rules cover:
- Officers and employees
- Inspection of books
- Directors’ meetings
- Meeting of members
- Shares and the transfer of shares
A company will more often than not, need a company constitution. Further, these companies are usually:
- No liability public companies
- Special purpose companies that want a reduced annual review fee
- Proprietary companies
However, a special purpose company will not require this document if the same person is both a sole trader and the sole shareholder.
This document will structure the activities of the company and the activities of the directors and shareholders. A business lawyer can also assist you in drafting a company constitution that best meets the needs of your business.
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Special resolutions
A special resolution will help you make certain changes to your constitution and is passed by a vote amongst the shareholders. To do this, you must hold a meeting and give your shareholders 21 days’ notice. In order for the resolution to pass, 75% of the votes must be in favour.
If a member requests a copy of the constitution, you must also provide it within 7 days.
What is a Shareholders Agreement?
This agreement sets out the relationship between shareholders in your company. This agreement may regulate some matters that a company constitution doesn’t cover.
A shareholders agreement will set out:
- Who can be a shareholder
- Who can serve on the board
- What is to happen when different circumstances arise (e.g. death, bankruptcy or resignation)
Company constitution v shareholders agreement
A company constitution relates to the company, and all relevant parties. This includes the directors, founders and also the shareholders. By contrast, a shareholders agreement specifically pertains to the shareholders, and the shareholders exclusively. Although there may be some overlap in what they cover, they serve different functions and are equally important in running your company effectively.
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