Most of us know that constitutions are the leading set of rules and the groundwork of how an entity operates. We have seen how nations around the world work within the frames of a constitution. Now, even Australian companies have been doing the same since the legislation mandated that companies need both, the articles of association and a memorandum of association in 1998.
What is a Corporate Constitution?
A corporate constitution is a document that specifies the rules governing the activities of, and the relationship between, the company and its shareholders.
This means that this constitution sets out certain responsibilities, roles and rights of directors and shareholders and governs several internal management activities such the meetings of directors and shareholders.
The corporate constitution is the fundamental component of the governance framework.
Why do you need a Corporate Constitution?
We often treat a corporate constitution as a commodity, even though it is one of the most important documents over the total effectiveness of the company. Since this document governs the company’s decision powers like the removal or appointment of shareholders or officers, we recommend that the company gets it as soon as possible.
A poorly drafted constitution exposes the company, including the shareholders and officeholders to legal risks. Greater administrative complexity and useless costs may surface while the company loses out of many strategic opportunities.
What are the requirements for a Corporate Constitution?
According to the Corporations Act 2001 (the Act), a company can implement its own constitution, use the replaceable rules drafted in the Act, or have a combination of both regarding the rules that will eventually guide the internal management of the company.
Under Section 136(1) of the Act, the company can adopt a constitution in the following ways:
- Adopt a constitution on registration by a company if each specified person in the application, who consents to be a member, agrees in writing to the terms of the constitution before you lodge the application.
- Alternatively, the court can also make an order that would require the company to adopt a constitution under Sector 233 of the Act (oppression remedy). It requires public companies that already have a constitution to lodge a copy and other relevant resolutions and documents with ASIC (Australian Securities and Investments Commission) within 14 days.
What are content requirements for a Corporate Constitution?
Apart from the specific companies, the Act does not specifically direct what should contain in the constitution of a company. But mostly, some matters that will be referred include directors’ meetings, directors’ powers, how the directors are remunerated and appointed, the conduct of the shareholders, and shareholders’ rights, etc.
Companies that do not have the term ‘limited’ in their name provide the constitution of such companies under Section 150 (1) like:
- The company should only pursue purposes that are charitable and they should apply their income of revenue to promoting these purposes.
- The company cannot pay fees to the directors and/or making any form of distribution to the members.
- The directors must approve any other payments that the company wishes to make.
Under Section 112 of the Act, which does not deal with no-liability companies, requires that such companies must state that mining is its sole purpose. As a result, the firm will have no legitimate right to retrieve calls made on its shares from any shareholder who has not paid.
Replaceable rules are the provisions in the Act that apply to companies that are formed after July 1998 or companies that were formed before that date and have repealed their constitutions. But, a company can change or displace the replaceable rules with the company’s constitution. A company can change or displace any single or multiple replaceable rules by adopting a constitution.
Can a Corporate Constitution restrict the activities of a company?
A corporation constitution can include object clauses which restrict and outlines the activities that the firm might undertake under Section 125 (2) of the Act. While object clauses are not mandatory, it might provide a sign regarding the business. Also, failure to comply with these rules, if they apply to the company, is not a contravention of the Corporations Act.
A corporate constitution is a very important document that every company must have. Your company’s constitution will work alongside the agreement of your company’s shareholders; hence you need to make sure both are drafted well.
If you are looking for help with drafting your company’s constitution, get in touch with us via a phone call or an email.