C6 - Company Constitutions

The constitution of a company sets out certain rights, roles and responsibilities of members or shareholders and directors and rules which govern various internal management activities such as meetings of members and directors.

The constitution is a fundamental component of the governance framework. The constitution has the effect of a contract between:

• the company and each member;
• the company and each director;
• the company and the company secretary;
• a member and each other member.

Constitutions cover a range of rules including:

• the appointment, removal and power of
  the directors;
• procedures for conducting director meetings;
• rules regarding transferring shares and
  paying dividends.

The Corporations Act 2001 (Cth) does not specify the contents of a company’s constitution. However, some not-for-profit companies must have specific clauses in their constitutions for tax concessions in accordance with the Income Tax Assessment Act 1997 (Cth). All new directors need to be aware of their duties in relation to the organisation’s constitution.

Constitutions should be reviewed regularly to stay up to date with changes to the Corporations Act 2001 (Cth) and other legislation, modern company practices and technologies. Signs to look for that the constitution may need updating include:

• the use of terms such as the ‘Corporations Law’;
• referring to the constitution as a ‘memorandum and articles of association’;
• requiring unnecessary formalities to be complied with to perform simple functions;
• not allowing for the use of circular or written resolutions by the board;
• not allowing for the organisation to use technology for meetings or to communicate with members.

Corporations Act 2001 (Cth)

Companies may decide to operate either under the replaceable rules or under their own constitution.

The replaceable rules are contained in Part 2B.4 of the Corporations Act 2001 (Cth). These rules list the terms and conditions of the company’s internal management, its governance system, and, as noted above, deal with such issues as the appointment, powers and remuneration of directors, frequency of directors’ meetings and members’ meetings, rules for share transfers, and rights of members to inspect the company’s books.

The replaceable rules will usually apply automatically unless a company displaces or modifies them in its own constitution. The exception is the proprietary company where the same person is both its sole director and sole shareholder. In this case, the replaceable rules do not apply because there are no other shareholders to consider. However, a constitution may be adopted, if the director/shareholder wishes.

Companies can choose to adopt the provisions of the replaceable rules or to draft their own constitution to establish their own internal rules.

For example, a company can include object clauses within its constitution which outline and restrict the activities in which the company may engage in (s 125(2)). Under section 135 of the Corporations Act 2001 (Cth), a company can choose:

• to establish a constitution that will specify all the rules (the equivalent of the old articles and memorandum (see s 141);
• not to adopt a constitution, and thereby be governed by the replaceable rules; or
• adopt a combination of the two (ss 135 and 136).

Under s 233 of the Corporations Act 2001 (Cth), the court can also make an order requiring a company to adopt a constitution (called the ‘oppression remedy’). The intent of this section is to strengthen the minority shareholders of a company in resisting oppression by the majority. This remedy been used most often in relation to small or closely held companies.

There are certain types of companies that are required by law to be governed by a constitution. These are:

• public companies limited by guarantee that are applying to omit the word ‘Limited’ from their name (s 150);
• no-liability public companies (s 112);
• public companies listed on the stock exchange, which are required by the Listing Rules of the ASX to have their own constitution.

A company can adopt a constitution either at the time of registration or at any stage afterwards. For a constitution to be formally binding at the time of the company’s registration, it is necessary for each person specified in the application form (who consents to become a shareholder) to agree in writing to the terms of the constitution before the application is lodged. Alternatively,
a company can adopt, modify or repeal its constitution, or a provision of its constitution, by passing a ‘special resolution’. A special resolution is a resolution passed at a meeting of the company’s shareholders (the meeting requires at least 21 days’ notice to be given to shareholders, or 28 days in the case of publicly listed companies), which requires the agreement of a 75 per cent majority of
eligible voters.

If the company is a public company, its constitution must be lodged with the Australian Securities and Investments Commission (ASIC) along with its application for registration. Alternatively, if a public company adopts a constitution by special resolution after registration, a copy of the constitution and the special resolution must be lodged with ASIC within 14 days after it is passed. A public company can also modify or repeal its constitution by a special resolution of its members but, again, ASIC should be advised (s 136).

A proprietary company is not required to lodge its constitution on application for registration, but a copy must be kept with the company’s records and made available to authorities if required. However, proprietary companies do need to lodge a copy of the document if amendments to the constitution affect its name, share capital or type. All companies must provide an up-to-date copy of the constitution to any member who requests it within seven days (s 139).

Benefits of a Constitution

Unlike the replaceable rules in the Corporations Act 2001 (Cth) or model rules under one of the state or territory association incorporation acts, for example, a constitution can be tailored to suit the company’s individual circumstances and gives greater flexibility than the replaceable rules. For example, a company’s constitution can be modified and amended in accordance with the wishes of its shareholders by the calling and passing of a special resolution when circumstances require such changes.

Other benefits include:

• the company can have several classes of shares with different voting rights, dividend rights and rights to capital upon winding up;

The constitution can:

• specify how directors are appointed and removed;
• set out the rules regarding the calling and holding of meetings, passing of resolutions;
• provide guidelines on the day-to-day management of the company;
• using the constitution to communicate to key stakeholders how the company is governed and managed.

Contents

Constitutions are specific to the organisation and the clauses to be included will vary depending on the structure of the company. The list below shows the typical clauses that may be included in a constitution:

• definitions and interpretations
• objects
• powers
• income and property of the company
• membership
• fees and subscription
• cessation of membership
• general meetings
• calling a general meeting
• proceedings at general meetings
• proxies
• directors
• powers and duties of directors
• proceedings of directors
• inspection of records
• accounts
• audit
• notices
• indemnity
• mediation
• chief executive officer
• company secretary
• by-laws and regulations
• dissolution and winding up
• adoption and amendments of Constitution