Do I need a Company Constitution?

When establishing a business, it is important to consider how you would like your business’s external and internal affairs to be managed. The Australian Securities and Investment Commission (ASIC) requires a company’s internal management to be governed by either a company constitution or by the replaceable rules under section 141 of the Corporations Act 2001 (Cth).

We have previously discussed why a shareholder’s agreement is important in protecting shareholder’s rights, but what about the internal governance of a company as a whole?

What is a company constitution?

A company constitution is a formal contractual agreement that governs the internal control and management of the business. Constitutions provide a broad framework and detailed mechanisms for the day-to-day running of a business. The contents of a company constitution can be distinctive to your company, but often include:

  • Powers and duties of a director
  • Directors and members meetings
  • Shareholder rights and obligations
  • Voting procedures

Company constitutions provide flexibility for businesses to adapt their internal management based on the structure and needs of the business. A company may also adopt a constitution prior to or post registration. When adopting a company constitution before registration of the company, company members must sign their agreement to the terms of the constitution. If a company choses to adopt a constitution post registration, they must pass a special resolution with either 28 days of notice prior for publicly listed companies, or 21 days of notice prior for all other types of companies.

What are the replaceable rules?

Replaceable rules automatically apply to any company registered after 1 July 1998 that does not adopt a company constitution. The replaceable rules are a basic default set of 39 prescribed rules and provide a general guide for managing a company. The rules are often difficult for company members and directors to navigate and comprehend as they are contained in various provisions within the Corporations Act.

The replaceable rules also do not apply to a proprietary company where the same person is both the sole director and sole shareholder of the company.

How we can assist

Ultimately, the decision to introduce a company constitution is up to you. However, we still recommend the use of a company constitution and shareholders agreement to assist you with internal governance and management.

Our team at Southern Waters Legal can assist with the drafting of all necessary documents for your company’s internal governance framework, including company constitutions and shareholders agreements.

If you would like further information or specific advice in relation your company’s internal governance, please do not hesitate to contact us on 9523 5535.

Disclaimer: The information contained in this article is provided as general information only. It is not intended to be legal advice and it should not be used or relied on as legal or professional advice.