Before a company is incorporated, the Director(s) will need to decide on the rules for how the company’s is to be managed.
Most companies will adopt a document called a ‘Constitution’ upon registration. A Constitution is a contract between the company, its Directors and its shareholders that prescribes the governing rules and overall management of the company. This includes (but is not limited to) things like:
- How Directors and other office bearers are appointed or removed,
- The process for convening meetings of Directors and shareholders,
- The rights particular to the classes of shares available to the company’s shareholders,
- The specific records keeping and reporting obligations of the company, if any, and
- Indemnity and insurance.
If a company does not adopt a Constitution, then the company is automatically governed by default rules set out in the Corporations Act 2001 (Cth), called the ‘replaceable rules’. These rules offer a basic and simple guide to corporate governance, though are not as comprehensive as a Constitution.
The replaceable rules can be either displaced by the adoption of a Constitution or can be modified or supplemented by a Constitution so both operate in the management of the company.
Constitution vs Replaceable Rules
If you are a proprietary company, the replaceable rules can be a simple and cost-effective way to manage your company when starting out. However, the replaceable rules cannot be used to govern a company where the sole Director is also the sole shareholder, or a special purpose company.
A Constitution is tailored to the company’s individual requirements and operations and provides for more flexibility in its own governance. In particular, amendments to the Constitution can be controlled by the Directors and shareholders of the company, whereas the replaceable rules are incorporated into statute and therefore require legislative change by the government.
Whether a company adopts a Constitution, relies on the replaceable rules, or uses a combination of the two (2), it is important for all Directors and shareholders of a company to familiarise themselves with the rules that govern the company.
While a Company will ultimately be governed by a Constitution or the replaceable rules, we still recommend the use of a Shareholders Agreement as this is a more comprehensive contract between the Company and its shareholders dealing with such relevant issues as resolution of shareholder disputes, transfer of shares and the required percentage vote for certain decision making of the Directors and shareholders.