In Australia, a company’s internal affairs can be managed by:
- A Constitution;
- The replaceable rules; or
- A combination of the two.
What is a Constitution?
Traditionally known as the Memorandum & Articles of Association, a Constitution is a broad set of rules to govern and manage a company.
If adopted, public (limited) companies must lodge a copy of their initial Constitution (and any subsequent variation or replacement) with ASIC, the corporate regulator. No Liability public companies and Special Purpose companies must adopt a Constitution.
A Constitution can be adopted before or after registration. For both public and proprietary limited companies, changes to or replacing a Constitution require a special resolution and must have at least 75% of shareholders approving.
What are the Replaceable Rules?
Instead of a Constitution a company may adopt the default replaceable rules in the Corporations Act 2001, or a combination of the two. Section 141 of the Act provides a table of the replaceable rules, which cover areas including:
- Directors’ and members’ meetings;
- Director’s powers; and
- Inspection of company books.
The replaceable rules automatically apply to a company if it does not adopt a Constitution. Replaceable rules can be subsequently replaced with a Constitution.
It should be noted that the replaceable rules do not apply to a proprietary company if the same person is the sole director as well as the sole shareholder.
Effect of Constitution and Replaceable Rules
A company’s Constitution (if any) and any replaceable rules that apply to the company have effect as a contract:
- between the company and each member;
- between the company and each director and company secretary; and
- between a member and each other member;
under which each person agrees to observe and perform the Constitution and replaceable rules so far as they apply to that person.
Should Companies Adopt a Constitution or the Replaceable Rules?
The replaceable rules can be a quick, cheap, and easy way to manage a company’s governance. However, they cannot be amended and may not be appropriate to all companies.
A Constitution can be tailored and is more specific and flexible. It can be advantageous to have all the company’s rules in one central space rather than referring to a multitude of sections of the Corporations Act. However, a Constitution is not automatically updated with updates to the Corporations Act and thus can become outdated with modern practices.