In an earlier article I spoke about the rules that govern a corporation. These can be either a specifically designed set of rules called a “Constitution” or a set of standard rules call “Replaceable Rules” set out in the Corporations Act 2001.
The question arises which is better?
In my view using a specially designed Constitution has many advantages over being governed by the Replaceable Rules set out in the Act including:
A Constitution enables you to have several classes of shares with different voting rights, dividend rights and rights to capital upon winding up which can be useful in achieving objectives like income splitting, dividend streaming and selective control. This is not available under the Replaceable Rules.
The Constitution normally contains comprehensive rules regarding the calling and holding of meetings, passing of resolutions, whereas these provisions are not contained in the Replaceable Rules.
A Constitution can contain comprehensively drafted guidelines on the day to day management of the company as compared to the brief provisions in the Replaceable Rules.
The Replaceable Rules are not applicable to proprietary companies with the same person as the sole director and shareholder.
The Replaceable Rule provisions regarding the appointment of directors can allow one group of shareholders to take control of a directors meeting in the absence of the usual directors which can be undesirable.
The Constitution provides a comprehensive published document which is easily assessable by its members and available to the company’s bankers and other parties.
The Replaceable Rules cannot be used for special purpose companies such as superannuation trustee companies.
A company’s Constitution can be modified and amended in accordance with the wishes of its members by the calling and passing of a special resolution.
Simply put, a Constitution give it’s shareholders flexibility and greater certainty.
If you have questions regarding the operation of a corporation please contact our business law team at Everingham Solomons where Helping You is Our Business.
Companies formed after 1 July 1998 can have a simple set of rules known as “a Constitution” in place of what was previously called “Memorandum and Articles of Association”.
If a proprietary company does not adopt a Constitution, they will be automatically governed by the Replaceable Rules as outlined in the Corporations Act 2001.
Most companies have a Constitution which is drawn up prior to the registration of the company. The Constitution has the effect of a contract between:
the company and each shareholder;
the company and each director;
the company and the company’s secretary;
a shareholder and each other shareholder.
A company adopts a Constitution on registration of the company provided each person who agrees to become a shareholder agrees in writing to the terms of the Constitution.
A company may modify or repeal its Constitution, or a provision of its Constitution by passing a special resolution. A special resolution requires at least 21 days notice and the agreement of a 75% majority of votes cast.
Special purpose companies such as a superannuation trustee are required to have a Constitution designed for that company.
A corporation can however take advantage of the Replaceable Rules set out in the Corporations Act to govern its internal management, however in our view a company should have a modern constitution that takes account of changes in the law and our changing world. It is not difficult to update a company’s constitution.
It is important to note however that the Replaceable Rules do not apply where the same person is the sole director and shareholder. These companies must use a Constitution.
If you have any enquiries regarding the operation of corporations, then please contact our business law team at Everingham Solomons where Helping You is Our Business.
In an earlier article I spoke about the rules that govern a corporation. These can be either a specifically designed set of rules called a “Constitution” or a set of standard rules call “Replaceable Rules” set out in the Corporations Act 2001.
