Company Constitution Reviews: When Australian Companies Should Update Their Constitution

Many Australian companies set up their constitution once, file it away, and do not look at it again until a problem lands on the director’s desk. That is usually when the document is at its most expensive, such as during an investment round, a shareholder dispute, a leadership change, or a sale process. Common mistakes include relying on a very old template, assuming the replaceable rules are enough for the way the company actually operates, and forgetting that a constitution may clash with a shareholders agreement or current business plans.

A constitution review for companies helps you catch those issues before you sign a contract, issue new shares, bring in family members, or spend money on company setup for a restructure. The right review is not just about legal housekeeping. It is about making sure the company’s rules match how ownership, control and decision making work in real life. This guide explains what a company constitution does, when Australian companies should update it, what usually needs checking, and where founders and directors often get caught.

Overview

A company constitution is the internal rulebook for how an Australian company is governed. A review matters when the company has changed, the owners have changed, or the document no longer reflects the way decisions, share issues, director appointments and exits actually happen.

A practical constitution review for companies usually focuses on whether the document still works for the business now, not just whether it was legally acceptable at the time it was first adopted.

• share classes, share issue powers and pre-emptive rights
• director appointment and removal rules
• voting thresholds for ordinary and major decisions
• procedures for meetings, circular resolutions and signing documents
• transfer restrictions, drag along and tag along style exit mechanics if relevant
• dividend rules and founder protections
• consistency with the Corporations Act 2001 (Cth), ASIC records and any shareholders agreement
• whether the constitution still suits your current business structure, investors and growth plans

What Constitution Review for Companies Means For Australian Businesses

A constitution review for companies means checking whether your company’s internal rules still fit the business you are actually running. For Australian businesses, that usually involves looking at the constitution alongside the Corporations Act, the company’s current cap table, ASIC records, board practices and any deal documents already in place.

A proprietary company limited by shares does not have to adopt a constitution, because it can rely on replaceable rules under the Corporations Act. But many companies do adopt one, especially where there is more than one founder, different shareholdings, outside investment, family ownership, or a need for custom rules. Once you have a constitution, it matters. Directors and shareholders often assume it is background paperwork, but it can control major practical steps.

Your constitution may deal with:

• how directors are appointed, removed and replaced
• how many votes a shareholder has and when special resolutions are needed
• what happens if someone wants to transfer shares
• whether the company can issue new shares freely or only after certain approvals
• how meetings are called and held
• how documents can be executed
• what rights attach to different share classes

If these rules are outdated, the business can hit delays at exactly the wrong time. A founder may think they can issue shares to a new adviser, only to find the constitution requires a different process. A buyer may ask for due diligence documents and discover the company has not followed its own rules for years. An investor may refuse to proceed until the governance documents are cleaned up.

This is where founders often get caught. The constitution may have been suitable when the company had two founders and no staff. A few years later, the same company may have:

• multiple shareholders
• a family trust in the ownership structure
• employee equity or option arrangements
• external investors
• new directors
• online operations with material contracts, customer terms, and privacy obligations

The company has changed, but the rulebook has not.

Why the Constitution Matters Even If Day To Day Operations Seem Fine

A business can operate for years without noticing constitution problems because many decisions are made informally. That does not mean the document is working well. It may simply mean nobody has tested it yet.

Problems usually surface when there is pressure, such as:

• before you sign an investment term sheet
• before you issue shares to a new co-founder or adviser
• before you remove a director
• before you sell the business
• before a shareholder exits
• before you restructure the company group

At that point, everyone wants clarity on who can approve what, what consents are needed, and whether earlier actions were valid.

What A Review Is Not

A constitution review is not just a grammar check or a quick scan for old names. It should not be treated as a box ticking exercise before a transaction. The value comes from spotting where the document no longer matches the commercial deal between founders, the company’s current business structure, or legal requirements that affect company administration.

It is also not a substitute for other legal documents. A constitution can deal with governance, but it is not the same as a shareholders agreement, employment contracts, privacy policy, supply contract, commercial lease, or trade mark strategy. Many growing companies need those pieces to line up.

When This Issue Comes Up

Most companies should think about updating their constitution when there has been a real change in ownership, funding, control or strategy. The trigger is usually a business event, not a calendar date.

1. You Are Raising Capital

Investment rounds often expose old constitutions. Investors usually want clear rules around share classes, pre-emptive rights, founder protections, director appointments, reserved matters and exit mechanics.

If your constitution only contemplates ordinary shares and basic voting, it may not support the deal you are trying to do. Leaving this too late can slow the raise and increase legal costs.

2. You Have Added Or Want To Add New Shareholders

Bringing in a co-founder, family member, key employee, adviser or strategic partner is a common trigger for a constitution review for companies. New owners change the practical risk profile of the business.

You may need to check:

• whether existing shareholders get first rights before new shares are issued
• whether different share classes are needed
• how voting rights will work
• what restrictions apply if someone wants to leave

This matters before you promise equity in a conversation and before you print documents or update ASIC records.

3. There Is A Shareholder Dispute Or Breakdown Between Founders

A disagreement often sends everyone back to the constitution to work out what rights each person actually has. If the document is vague, outdated or inconsistent with later conduct, the dispute becomes harder and more expensive to resolve.

Even if there is no active dispute, warning signs should prompt a review. For example:

• founders are no longer contributing equally
• one director has become inactive
• there is confusion about who can sign contracts
• share transfers were discussed informally but never documented properly

Getting ahead of those issues is usually much easier than fixing them after relationships have soured.

4. The Company Has Grown Beyond Its Original Setup

A small startup constitution often does not suit an established SME. Once the business hires staff, enters major supply contracts, leases premises, sells online at scale, or expands into new markets, governance mechanics matter more.

The constitution should fit the company’s current size and decision making processes. A document drafted for a simple founder-run company may be too loose, or too restrictive, for a business with several directors and shareholders.

5. You Are Restructuring The Business

A restructure can involve a new holding company, changes in share ownership, trust involvement, asset separation or planning for succession. When the ownership map changes, the constitution often needs attention as well.

This is especially relevant for family businesses and founder-led companies planning long term succession. Before you spend money on company setup for a restructure, check that the internal company rules can support what you are trying to achieve. You should also speak with an accountant or tax adviser on any tax consequences.

6. You Are Preparing For A Sale Or Due Diligence

Buyers and investors usually want to see clean governance records. An outdated constitution can become a due diligence issue if share issues, director appointments or shareholder approvals were not handled in line with the company’s own rules.

Fixing this early gives the business more control over timing and messaging. Fixing it mid-deal is often more stressful.

7. The Document Is Simply Old

If the constitution was adopted many years ago and has not been reviewed since, that alone is a good reason to revisit it. Law reform is not always the main issue. More often, the problem is that the document reflects a business that no longer exists in that form.

Practical Steps And Common Mistakes

The best way to update a company constitution is to compare the document against how the business actually operates now, then fix gaps before a transaction or dispute forces the issue. A good review is part legal check, part commercial reality check.

Step 1: Pull Together The Current Governance Documents

Start with the documents you already have, not just the constitution itself. You will usually want to compare:

• the current constitution and any amended versions
• shareholders agreements, founder agreements or investment documents
• ASIC records and current officeholder details
• share certificates, cap table records and share issue documents
• board and shareholder resolutions

The main risk is inconsistency. A company may have promised one thing in a shareholders agreement and left a different rule in the constitution.

Step 2: Match The Constitution To The Current Ownership Structure

Check whether the document reflects the people and entities who now own the company. If shares are held by individuals, trusts or related entities, the constitution should work with that reality.

Questions to ask include:

• are the share classes described accurately
• do the voting and dividend rights make sense
• does the document deal properly with future transfers or exits
• are there any founder protections that no longer fit

This step matters before you issue more equity or negotiate with investors.

Step 3: Review Director Powers And Decision Making Rules

Many problems come from uncertainty about who has authority to act. Directors may be signing contracts, approving expenses or making strategic decisions without checking what the constitution says.

Look at:

• how directors are appointed and removed
• whether there is a minimum or maximum number of directors
• what counts as a quorum
• when shareholder approval is required
• whether written resolutions and online meetings are properly covered

These points become very real before you sign a contract, refinance, raise money, or change leadership.

Step 4: Check Share Transfer And Exit Rules Carefully

Exit mechanics are one of the most commercially sensitive parts of a constitution. If a shareholder wants to leave, becomes inactive, dies, becomes insolvent, or receives an offer from a third party, the constitution may control what happens next.

Common issues include:

• no clear pre-emptive process for offering shares to existing holders
• unclear valuation mechanics
• no treatment of bad leaver style scenarios where relevant
• outdated or missing drag along and tag along style clauses for companies expecting an eventual sale

A review helps the owners agree on the rules while relationships are still workable.

Step 5: Check For Alignment With Actual Business Plans

The constitution should support the company’s likely next steps. A business planning to scale, bring in investors, issue options, expand online, or create a group structure may need more tailored rules than a very small owner-managed company.

That does not mean every startup needs a complex constitution on day one. It does mean the document should be reviewed when the business model changes in a meaningful way.

Common Mistake: Assuming Replaceable Rules Or A Template Will Cover Everything

Template documents can be fine at formation, but they often miss practical founder issues. They may not deal well with unequal contributions, staged equity, deadlock, transfer restrictions or investor rights.

Replaceable rules also may not match how the company wants to operate. If the founders have made side arrangements that differ from the default position, those should be checked properly.

Common Mistake: Forgetting The Approval Process For Amendments

A company cannot usually change its constitution casually. Under the Corporations Act, modifying or repealing a constitution generally requires a special resolution of shareholders. The exact process matters, including notices and record keeping.

If the amendment process is mishandled, the update itself may be challenged. This is why companies should treat constitution changes as formal governance steps, not informal founder admin.

Common Mistake: Ignoring The Flow On Effects

Changing the constitution may require related updates elsewhere. Depending on the situation, that could include:

• new shareholder approvals
• updated cap table records
• revised shareholders agreements
• director consents or resignations
• new employee equity documents
• ASIC notifications where relevant

A constitution should not be reviewed in isolation if the company’s commercial arrangements are changing at the same time.

Common Mistake: Waiting Until Due Diligence Starts

Founders often leave governance cleanup until an investor or buyer asks for documents. That usually reduces flexibility and increases cost. It can also weaken trust if the business appears disorganised.

A planned constitution review for companies is usually cheaper and calmer than an urgent fix during a transaction.

How Often Should You Review It?

There is no single legal rule that says every company must review its constitution annually. A practical approach is to revisit it when there is a trigger event and also as part of periodic governance housekeeping.

For many SMEs, a review makes sense:

• after a funding round
• when adding or removing shareholders
• when directors change
• before a restructure or business sale
• if the document is several years old and the business has materially changed

FAQs

Does every Australian company need a constitution?

No. Some companies rely on the replaceable rules under the Corporations Act instead. But if your company has a constitution, or your ownership structure is more than very simple, it is worth checking that the document suits your current needs.

Can a company constitution be changed after registration?

Yes. A company can usually modify or repeal its constitution by special resolution of shareholders, subject to the Corporations Act and the company’s existing rules. The process should be handled carefully and documented properly.

What is the difference between a constitution and a shareholders agreement?

A constitution is the company’s internal governance document and can bind the company, its directors and its members in that capacity. A shareholders agreement is a contract between the shareholders, and often the company, covering commercial arrangements in more detail. Many companies need both documents to work together.

When should founders review the constitution?

Founders should review it when ownership changes, investment is planned, directors change, a dispute is brewing, or the business has outgrown its original setup. It is best done before you sign, issue equity or begin due diligence.

What happens if the company has not followed its own constitution?

The consequences depend on the issue, but it can create uncertainty around approvals, share issues, director appointments and transaction documents. That may need corrective steps, updated resolutions and wider governance cleanup.

Key Takeaways

• A constitution review for companies checks whether the company’s internal rules still match its ownership, governance and growth plans.
• Australian companies should usually revisit the constitution when raising capital, changing shareholders, appointing or removing directors, restructuring, planning succession, or preparing for a sale.
• The most common problem is not having a constitution, it is having one that no longer reflects how the business actually operates.
• Key areas to review include share classes, voting rights, transfer restrictions, director powers, meeting procedures, exit mechanics and consistency with any shareholders agreement and ASIC records.
• Changes to a constitution generally require a formal shareholder process, so updates should be planned before a transaction or dispute creates urgency.
• If your business is dealing with constitution review for companies and wants help with amending a company constitution, shareholder approvals, governance documents, and share issue arrangements, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Official Sources to Check

Rules and regulator guidance can change. Check the current official material most relevant to this issue before relying on the article:

• ASIC: Company directors and responsibilities
• Federal Register of Legislation: Corporations Act 2001