News & Insights

Ensuring your company has the knowledge, procedures and tools to manage internal affairs and make effective corporate decisions can be tricky in today’s fast paced environment. This often requires a thorough consideration of your company’s internal decision-making processes.

If you need to manage multiple shareholders in your company and maintain an effective control structure as to how the company and its operations are run, it is essential to have a properly tailored company constitution which supports flexible decision making and corporate governance.

We are regularly approached by clients to assist in resolving corporate issues after members or shareholders in the company run into problems by not having regard to their often standardised or poorly drafted company constitution.

Resolving disputes or rectifying problems stemming from a poorly drafted company constitution is likely to be far more costly than ensuring your constitution is both correctly configured from the outset and properly consulted when making decisions.

What is a company constitution?

The internal management of a company can be governed by a company constitution, the replaceable rules from the Corporations Act 2001 or a combination of both.

A company constitution is a unique contract between the company and its directors, secretary and shareholders. It sets out a company’s specific governing rules relating to the internal management and operation of the company. These rules typically regulate the company’s structure, appointment and removal of directors, powers and remuneration for directors, voting procedures, director and shareholder meeting rules, share transactions and dividends, and any other matters customised and agreed on by the shareholders.

It is typically adopted at the commencement of the company but can be adopted later by special resolution.

When do you need a company constitution?

A company constitution is required for ‘no liability’ public companies and ‘special purpose’ companies but is otherwise not a mandatory requirement for a company when incorporating.

If a constitution is not adopted, the company will instead be governed by a uniform set of default replaceable rules under the Corporations Act 2001. These rules are generalised and cover a narrower, limited range of circumstances relating to the company’s internal management and operation. As a result, the replaceable rules may not be flexible enough to cover various needs of the company.

What are the benefits of a company constitution?

Adopting a company constitution is best practice if a company wishes to adopt its own set of tailored governance rules which regulate the entire affairs of the company and completely address the company’s operations.

A well-drafted constitution provides clarity and flexibility in corporate governance and decision-making, as opposed to the inflexible, unclear and sometimes onerous obligations in the replaceable rules.

Company constitutions also offer greater certainty by ensuring members and shareholders can access internal management rules in a simple, centralised location and understand what decisions can be made and how to make them.

The pitfalls with company constitutions

We are increasingly seeing trends of companies adopting standardised Constitutions from incorporation agents which do not adequately meet the needs of the company. This circumvents the main objective of adopting the company constitution in the first place, and frequently leads to companies creating significant problems for shareholders and directors down the track when they do not actually read or refer to the constitution when taking corporate action.

Where a company constitution has been adopted, it is essential that the company’s members review the constitutional documents to ensure they understand and act in accordance with the rules.

Some examples of recent issues we have encountered and have worked on resolving with clients include:

• Shares issued to shareholders of a particular class, and that class is not actually provided for by the Constitution and not otherwise defined by the documentation issuing the shares.
• Constitutions providing for quorums for General Meetings that become unachievable as the number of members grow. This can be a particular issue for not-for-profit companies with a high likelihood of attracting a high percentage of ‘passive’ membership.
• Director appointments that are made by the Board, but then not subsequently ratified at a General Meeting of Shareholders within the timeframes required by the Constitution and having the effect of automatic cessation of that director acting in that role.
• Pre-emptive rights provided by Constitutions which are then not followed in the issue or transfer of shares.
• Chairman ‘casting’ vote provisions that may not be intended or followed.

What is the solution?

The above illustrates the importance of having a properly drafted company constitution and having regard to the constitution when undertaking corporate actions.

Macpherson Kelley recognises good internal governance starts with a constitution that is well drafted to fit the company’s needs and is thoroughly reviewed and understood by the company’s members and shareholders, so that all corporate actions are properly undertaken.

We frequently assist companies to draft, review and interpret constitutions to strategically meet company needs and resolve corporate issues before and when they arise. Please get in touch with us if you have any questions surrounding your company’s constitution or if you are considering whether adopting a company constitution is suitable for you.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.