Everyone needs to play by the rules, including companies. But how do companies manage what kind of business they are in, the rights and duties of members and directors, and how they should interact with each other?

This is where a company constitution becomes useful. A company constitution is a legal document that defines how a company can operate. It also sets out the rights and duties of people in the company, such as members, directors and the company secretary.

A constitution can be adopted when you register your company, after registration, or not at all.

For constitutions adopted when you set up a new company, you’ll need each member of the company to agree in writing to the constitution’s terms.

If you do not adopt a company constitution, your company will instead be governed by the “replaceable rules” set out in the Corporations Act. The replaceable rules are a set of general, broad rules that act in place of a constitution if your company doesn’t have one.

If you want to adopt a constitution after registering your company, you’ll need to do so by a process called a special resolution. This is an official process where the company as a whole decides to take on a new constitution, and you’ll need at least 75% of members to vote in favour of this.

Where Did Company Constitutions Come From?

In the past, there were two key legal documents that filled the role of the modern constitution.

Firstly, there was the Memorandum of Association, which defined rules about how a company could act when dealing with issues and people outside of the company. There was also the Articles of Association, which defined rules about how the company was to operate internally, and regulated relations between people inside the company.

These terms have been retired and are now replaced by the modern constitution.

Do I Need A Company Constitution?

Having a company constitution is not strictly a legal requirement, but it’s a very good idea to have one.

When you register a company, ASIC requires you to choose between having your own constitution, using the replaceable rules provided by the Corporations Act, or using a combination of both.

While the replaceable rules are free, you can gain more protection by having a well-developed company constitution. Often, disputes can arise over the issuing of new shares, key company decisions or whether a person was able to make a decision at all — and these disputes may encompass many different circumstances that were not included in the replaceable rules.

With a well-drafted constitution, however, your company will have the benefit of additional protections that have been developed by lawyers over the many years since the replaceable rules were last updated.

How Do I Get A Constitution?

You can engage a lawyer to help you draft a constitution for your company. Alternatively, many incorporation platforms such as EasyCompanies provide a constitution for your company as part of the incorporation process.

Can I Change A Company Constitution?

You can change your company’s constitution (or even get rid of it) by passing a special resolution. Special resolutions need to be held in accordance with the rules laid out in your company’s existing constitution or in the replaceable rules (whichever applies) and must be passed by at least 75% of people who vote.

When passing a special resolution, you should be aware of any specific notice requirements set out in your existing company constitution, and ensure you comply with these so the resolution is valid. If you are a public company, you will also have to notify ASIC that you have changed the constitution.

Conclusion

If you are operating a company, be sure to make sure that the right rules are put in place so that you can make key business decisions clearly and conveniently. If you would like help drafting a company constitution, or even just have a few questions, the friendly team at Sprintlaw are ready to help. Contact us at 1800 730 617 or email team@sprintlaw.com.au.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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