Which is better for a Company, a Constitution or Replaceable Rules?

TRIn 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:

  1. 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.
  2. 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.
  3. 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.
  4. The Replaceable Rules are not applicable to proprietary companies with the same person as the sole director and shareholder.
  5. 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.
  6. The Constitution provides a comprehensive published document which is easily assessable by its members and available to the company’s bankers and other parties.
  7. The Replaceable Rules cannot be used for special purpose companies such as superannuation trustee companies.
  8. 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.

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