Companies are a huge part of Australian commercial life.
At the beginning of 2019 there were over 2.6 million companies on ASIC’s register! The vast majority (over 2.5m) were proprietary companies – being private companies used by small to medium businesses or as trustees for family trusts.
Creating a company is something that can be done with ASIC for a standard fee (in July 2023 between $474 – $576). But your company also needs a set of rules about how it will run, and how its directors and shareholders will get things done.
So, where do you get these rules?
Well, since 1998, the Government has given companies an automatic set called the ‘Replaceable Rules’. These rules apply for all companies by default unless the shareholders choose to adopt their own Constitution.
So why would you pay money for a Constitution, when the Government has given you the ‘Replaceable Rules’ for free? This is a fair question – but in our experience, you should, and here are some reasons why:
- The Replaceable Rules deal with some things, but not necessarily everything you may need. If you have your own Constitution you can customise it to cover your own particular circumstances – how you want to run your company.
- You can clearly set out how your meetings will run, how directors and members can vote, and what level of agreement you need to make certain decisions (e.g. ordinary resolutions (50%+), special resolutions (75%+), or unanimous resolution (100% only)).
- You can make specific rules about who does what, and how much they get paid or reimbursed.
- You can make clear rules for when shareholders do the wrong thing, and you want the company to be able to impose sanctions or ultimately get rid of the shareholder (i.e. trigger a suspension, cancellation or buyout of their shares).
- You can have specific ‘pre-emption’, ‘come along/drag along’ and ‘tag along’ rights for when shareholders are looking to sell their shares in the company. You can find more information about these rights here.
- You can make rules to set the terms of any loans between the company and shareholders. This can avoid potential insolvency scenarios, as well as automatically manage compliance with Division 7A. See more about Division 7A here.
- The Replaceable Rules are spread out across the Corporations Act 2001 (Cth) from section 194 to section 1072G. This means you need to scan through thousands of pages of legislation to find them. In contrast, your Constitution can be a ‘one stop shop’ for all the rules for your company which everyone can easily access.
- Because the Replaceable Rules are set out in the legislation, they can be changed in the future by the Parliament. A Constitution allows you to ‘lock in’ the rules for your company so they are only changed when you take action.
- The fact the Replaceable Rules emerge from the Corporations Act 2001 (Cth) could allow people to say the company’s decisions can be challenged in Court through the Administration Decisions (Judicial Review) Act 1977 (Cth). This is on the basis that the Replaceable Rules are ‘made under an enactment’ (i.e. by the legislation, rather than only contract law), which remains uncertain in the law.
- It is unusual to actually have the choice to make your own rules, and not be forced to accept what the Government or big business forces on you. The Government has given you the power to make your own rules in your Constitution, so you may as well exercise those rights!
A Constitution ultimately lets you decide for yourself how your company is run.
If you already have a Constitution but it does not deal with some of the above things, you may think about updating it. You can update your Constitution at any time, as long as at least 75% of the votes are cast in favour of the update.
The information contained in this post is current at the date of editing – 4 December 2023.