What is a Company Constitution?

Introduction

Most people are familiar with the term constitution. However, that's normally in the context of countries and governments. Far fewer people are familiar with the laws surrounding company constitutions. That's understandable, too; company constitutions are governed by the Corporations Act, which can be quite complex. For business owners, though, there are a few main points to consider in terms of company constitutions. Fortunately, those points are quite straightforward. But before addressing them, let's take a look at the definition of a company constitution. Essentially, a company constitution is a document that governs a company's internal management. Quite literally, a constitution 'constitutes' a company; it creates the company's entire structure.

Company Constitutions Are Not the Only Option

If you are not too familiar with company constitutions, you may be wondering: do all companies have them? The answer to that is no, not necessarily. Companies are classified in different ways under the law. Some of those classifications don't require a constitution. However, constitutions are always useful and important. As a result, most companies have them, even when they're not legally required. Nevertheless, there are a few alternative options, when it comes to company management. So let's take a look at what they include.

The Replaceable Rules: An Alternative to a Constitution

Even though constitutions are complex documents, their purpose is simple: effective company management. That purpose is something the Corporations Act understands. As a result, it offers an alternative to company constitutions. This alternative is known as the 'Replaceable Rules.' The Replaceable Rules are basically a set of rules designed to help companies manage their internal structures and operations. For example, the Replaceable Rules may cover the powers of company directors, or they may cover the payment of dividends on shares. For that reason, the effects of the Replaceable Rules are much the same as those of a company constitution. That is why the Corporations Act requires most companies to adopt one or the other.

Combining a Constitution with the Replaceable Rules

Establishing a company does not always have to involve a choice between a constitution or the Replaceable Rules. It may instead involve a combination of the two. The Corporations Act permits companies to apply both a constitution and the Replaceable Rules to their management. Generally, though, companies will choose in favour of a constitution. There is a good reason for that, too: constitutions can displace the Replaceable Rules. Company constitutions are therefore more adaptable; they give companies the opportunity to establish themselves in a unique and strategic manner. Rather than binding themselves to the broader terms of the Replaceable Rules, companies can address individual issues with a constitution.

What are the legal requirements of a company constitution?

The specific contents of company constitutions vary between companies. Large, publicly listed companies are likely to have extensive and quite complex constitutions. On the other hand, smaller companies are likely to have smaller constitutions. But in either case, the Corporations Act says relatively little about what must be contained within a constitution. However, that is not to say that the legislation is silent on how constitutions may be implemented. There are numerous requirements outlined by law, and some of those are listed below.

Company constitutions can be quite broad, but generally include these features

The appeal of company constitutions over the Replaceable Rules is the freedom they afford companies. With a constitution, a company has greater control over its structure; the law does not impose specific content requirements on constitutions. However, constitutions do remain bound to their practical purpose. And to achieve that purpose, there are a few provisions that will probably be required. Some examples of those provisions include:

• How directors will be remunerated;
• What powers are reserved for directors;
• How directors' meetings will take place;
• How shareholders will receive dividends;
• The rights conferred upon shareholders; and
• Shareholder conduct generally.

Although these are important considerations in most company constitutions, other issues are sure to arise. That's why professional advice is always an important step in drafting company constitutions.

By Finian McGrath