GUIDANCE
ABOUT REPLACEABLE RULES AND WRITTEN CONSTITUTIONS - PROPRIETARY COMPANIES
Freedom of Choice
What are the replaceable rules?
Replaceable Rules Outlined
What are constitutions?
Are constitutions mandatory for any type of proprietary company?
What sorts of things are governed by constitutions/replaceable
rules?
What effect do constitutions and replaceable rules have?
One person companies and replaceable rules
How is a constitution adopted from the outset?
How is a constitution subsequently adopted or modified?
If a proprietary company specifically adopts a written constitution
or modifies it, is the company required to lodge a copy of the constitution,
or the modifications to it with ASIC?
If a company specifically adopts a written constitution,
where must copies of it be kept?
Background
to the changes in the law relating to memorandums and articles of association,
constitutions and replaceable rules
Why won't Incorporator produce memorandums and articles
of association or constitutions?
A company's
internal management may be governed by the replaceable rules, by a specifically
adopted written constitution or by a combination of both - section 134
of the Corporations Act 2001.
What
are the replaceable rules?
The replaceable
rules are certain sections of the Corporations Act 2001 which automatically
apply to govern a company's internal management, unless they have been
wholly or partly replaced or modified by a specifically adopted written
constitution - sections 135(1)
and 135(2)
of the Corporations Act 2001. The replaceable rules govern matters such as:
1. the appointment and powers of directors;
2. the regulation of directors' meetings;
3. the regulation of members' meetings;
4. any special rights attaching to special classes of shares; and
5. the transfer of shares.
(You can
see the full content of the replaceable rules by clicking here. You can also see a mostly hyperlinked version of the Replaceable Rules by clicking here.)
Replaceable
Rules Outlined
(This is a direct link to ASIC's very informative summary guide as to
the content of the replaceable rules. This link is not to suggest that
Incorporator has any association or affiliation with ASIC or any sponsorship
from, or endorsement by, ASIC.)
What
are constitutions?
A constitution
is a written document which a company may (but need not) choose to adopt
governing (or partly governing - in conjunction with the replaceable rules)
a company's internal management. More specifically, it may govern matters
such as:
1. the appointment and powers of directors;
2. the regulation of directors' meetings;
3. the regulation of members' meetings;
4. any special rights attaching to special classes of shares; and
5. the transfer of shares.
Are
constitutions mandatory for any type of proprietary company?
No.
Constitutions are not mandatory under the Corporations Act 2001 for any type of proprietary company- section 134 of the Corporations Act 2001 - the company may rely entirely on the replaceable rules.
However, if the company is to have any class of shares, other than ordinary shares, Incorporator recommends that the company adopt a written constitution setting out any special rights attaching to those shares.
(Ordinary shares are by far the most common type of share. They have no unusual rights attached to them. Shareholders of ordinary shares have the normal or ordinary rights as set out in various sections of the Corporations Act 2001 and various rights as developed by the courts over the last few hundred years.)
In the case
of an issue of preference shares, section 254A(2)
of the Corporations Act 2001 requires that the rights with respect to the following
matters must either be set out in a constitution or be approved by a special
resolution:
a) repayment of capital;
b) participation in surplus assets and profits;
c) cumulative and non-cumulative dividends;
d) voting; and
e) priority of payment of capital and dividends in relation to other shares
or other classes of shares.
What
sorts of things are governed by constitutions/replaceable rules?
Constitutions/replaceable
rules govern matters such as:
1. the appointment and powers of directors;
2. the regulation of directors' meetings;
3. the regulation of members' meetings;
4. any special rights attaching to special classes of shares; and
5. the transfer of shares.
What
effect do constitutions and replaceable rules have?
A company's
constitution, if any, and any replaceable rules that apply to the company,
have the effect of a contract between:
1. the company and each of its members;
2. the company and each of its directors/secretaries; and
3. each of the company's members.
(section
140(1)
of the Corporations Act 2001)
One
person companies and replaceable rules
Replaceable rules do not apply to a proprietary company with the same person as its sole director and shareholder*** - section 135(1) of the Corporations Act 2001. But this does not mean that a one person company needs to specifically adopt a written constitution. Instead, section 201F and 198E of the Corporations Act 2001 automatically apply to a one person company and directly regulate important matters such as the appointment of additional directors, and their powers and duties.
***This makes
sense when you consider that the replaceable rules are designed largely
to regulate relations and disputes between, and divide powers between,
directors and shareholders. That purpose falls away when the same person
is the company's sole director and shareholder.
How
is a constitution adopted from the outset?
If a constitution
is required from inception of the company it can and will be adopted immediately
upon the formation of the company, so long as each proposed member of
the company has previously agreed in writing to its terms - section 136(1)(a)
of the Corporations Act 2001.
How
is a constitution subsequently adopted or modified?
A constitution may be adopted, or modified, subsequent to a company's formation if the company passes a special resolution to do so - sections 136(1)(b) and 136(2) of the Corporations Act 2001. (A 'special resolution' is a resolution made on at least 21 days notice to members and passed by at least 75% of eligible voters - sections 9 , 249H and 249L of the Corporations Act 2001.)
If it is
desirable that a specific constitution be adopted then Incorporator recommends
and prefers that a solicitor be consulted to tailor the constitution to
the user's specific requirements, rather than Incorporator offering a
range of generic constitutions for adoption. However you can still use
Incorporator, in conjunction, to assist you with all other aspects of
the incorporation.
If
a proprietary company specifically adopts a written constitution or modifies
it, is the company required to lodge a copy of the constitution, or the
modifications to it with ASIC?
No.
A proprietary
company, such as the company you propose forming, is not required to lodge
a copy of its proposed constitution with ASIC or any subsequent modifications
to it.
If
a company specifically adopts a written constitution, where must copies
of it be kept?
A constitution,
if adopted, must be kept with the company's records so that copies can
be given to members on request - section 139
of the Corporations Act 2001.
Background
to the changes in the law relating to memorandums and articles of association,
constitutions and replaceable rules
Prior to major amendments to Australian company law (effective 1 July 1998), companies had to have a document detailing certain of the company's key characteristics, called a memorandum of association. Companies also had to have a document governing the company's internal management called articles of association. Also, all companies were previously obliged to ensure that the companies' office (then called 'the ASC' but now called 'ASIC') had records indicating the content of companies' memorandums and articles.
Since changes
to Australian company law effective 1 July 1998, newly formed companies
no longer have to have memorandums and articles of association. Instead,
as previously mentioned, a company's internal management may be governed
by the replaceable rules, by a constitution or by a combination of both
- section 134
of the Corporations Act 2001.
Why
won't Incorporator produce memorandums and articles of association or
constitutions?
Incorporator will not produce memorandums and articles of association because these documents have effectively been abolished for newly formed companies - Part 2B.4 of the Corporations Act 2001.
Incorporator will not produce constitutions for a number of reasons:
- First,
because they are not mandatory for proprietary companies (nor most types
of public companies) - section 134
of the Corporations Act 2001. They are therefore not essential to Incorporator's
core function of forming companies.
- Secondly,
because the Corporations Act 2001 includes modern replaceable rules
which automatically operate to govern the internal management of companies
which have not specifically adopted constitutions - sections 135(1)
and 135(2)
of the Corporations Act 2001.
- Thirdly,
because a (now) common type of company - a proprietary company with
the same person as its only director and shareholder - essentially has
no issues of internal management to be governed. This is reflected in
section 135(1)
of the Corporations Act 2001 which makes the replaceable rules inapplicable
to such companies.
- Fourthly,
because if it is desirable that a specific constitution be adopted then
Incorporator recommends and prefers that a solicitor be consulted to
tailor the constitution to the user's specific requirements, rather
than Incorporator offering a range of generic constitutions for adoption.