A company’s operation can be governed by either a specifically designed constitution or the standard rules included in the Corporations Act called ‘replaceable rules’. If the replaceable rules are ready to use, why bother creating a bespoke constitution?
Some companies aren't allowed to use the replaceable rules: public companies, some special purpose companies (such as certain not-for-profits) and proprietary companies with the same sole director and shareholder.
For companies that have the choice, advantages of a tailor-made constitution include:
- Accessibility – The replaceable rules are littered all over the Corporations Act. It's much easier to work with a constitution, trust us.
- Modification - A constitution can be amended by the shareholders. The replaceable rules are stuck in time.
- Pre-emptive rights - A constitution can provide pre-emptive rights for share issues and transfers. Under the replaceable rules, pre-emptive rights apply only to the issue of shares.
- Appointment of directors - A constitution can set a maximum or minimum number of directors, and give a holding company or the directors themselves power of appointment – much more flexible than the replaceable rules.
- Removal of directors – The Corporations Act removes directors if disqualified (eg. for criminal conviction, bankruptcy, disqualification in a foreign jurisdiction, causing the failure of multiple companies, or repeated contravention of the Corporations Act). A constitution can provide for directors to be automatically removed in other circumstances, such as if they are of unsound mind or convicted of an offence. The replaceable rules only provide that the shareholders can remove directors.
- Meetings – A constitution can give you much greater procedural flexibility for directors' and shareholders' meetings – for example in relation to quorums, casting votes and allowing directors to pass a circular resolution by majority rather than having to get all directors to sign the document as the replaceable rules require.
- Subsidiaries – A constitution can authorise directors of wholly-owned subsidiaries to act in the best interests of their holding company. This isn't possible under the replaceable rules.
The replaceable rules aren't bad, but they are limited in many ways and it isn’t hard to design a constitution that exactly fits your company's bill. Ever bought a suit off the rack with no alterations required? Us neither.