What is a Company Constitution?
A Company Constitution documents a company’s management rules. It creates a contract between the company, its members, its directors, and the company secretary. A Company Constitution is a convenient resource for members or shareholders looking to review and set all internal management rules.
When starting a business in Australia, effectively setting up a Company Constitution is an important first step.
Who can use LawDepot's Company Constitution template?
LawDepot’s Company Constitution template can be used by for-profit corporations operating in Australian Capital Territory, New South Wales, Northern Territory, Queensland, South Australia, Tasmania, Victoria, and Western Australia.
Simply select your region when filling out our questionnaire, and your Company Constitution will be customised to meet the laws and regulations of your jurisdiction.
Why is a Company Constitution important?
Although your corporation isn’t legally required to have a Company Constitution, it’s a good idea to create one, so that your company’s rules and regulations are tailored to suit your specific needs.
Without a Company Constitution, your company’s rules and regulations are set by the provisions of the Corporations Act 2001. This act outlines various rules that apply to Australian corporations. This includes 'replaceable rules,' which deal with meetings of members and directors of the company. The Australian Securities and Investment Commission (ASIC) requires a company to create its own Company Constitution, follow the replaceable rules, or a combination of the two.
By using LawDepot’s Company Constitution document, you are customising important rules about member and director meetings, director conduct, and officer roles. If the replaceable rules overlap with your customised constitution, your Company Constitution will apply. If your constitution does not cover a particular matter, the replaceable rules will apply to fill the gap.
What rules and terms should a Company Constitution include?
In Australia, a Company Constitution includes crucial information about how your business operates. When drafting it, here are the key rules you must outline.
1. Sole member/sole director
If your company is a sole member/sole director proprietary company, then you won’t need to hold meetings. Instead, resolutions are passed when the sole member signs a record in the company’s minute book. In that case, the replaceable rules in the Corporations Act do not apply and you don’t need to outline any of the rules listed below.
2. Quorum
A quorum is the minimum number of shareholders present or the percentage of voting shares required to be represented at a meeting before that meeting can proceed.
Generally, when setting a quorum, it’s smart to select a percentage that effectively represents the desired cross-section of shareholders. For example, if one shareholder owns 66 percent of the corporation, setting the quorum percentage below 66 ensures that one shareholding is a quorum. Alternatively, setting it at 67 percent or more ensures at least another shareholder needs to be present.
If your bylaws don't address what forms a quorum, then a majority of the shareholders present at the meeting is a quorum.
3. Remote communication
There may be instances where it’s more practical for shareholders to attend a meeting remotely. If your Company Constitution allows remote communication, a shareholder can attend a meeting by phone or video conference.
4. Voting trusts
A voting trust occurs when a shareholder temporarily gives their voting shares to a third party known as a trustee or proxy. This third party is usually obligated to vote in accordance with the shareholder’s instructions, which are outlined in a proxy form or voting trust agreement.
Voting trusts are useful when a company has minority shareholders with limited interest or voting strength. They can also help resolve conflicts of interest, retain majority control, and prevent hostile takeovers.
5. Cumulative voting
When electing directors, cumulative voting allows minority shareholders to concentrate all their votes on a single director candidate.
For example, suppose a corporation holds five elections for five potential directors, and a minority shareholder has two votes in each election (ten total votes). In that case, cumulative voting allows the shareholder to apply their combined ten votes to a single director's election.
Cumulative voting can help prevent a majority shareholder from choosing all the directors of a company.
6. Meeting notice periods
When a special meeting is called, the Company Constitution should state how much notice is required. LawDepot’s template provides three options: reasonable notice, a number of hours, or a number of days.
What qualifies as reasonable notice is up for interpretation and depends on the established business practices within the company. Select a different option if you prefer more definitive notice for directors’ meetings.
7. Conflict of interest
Your company may find it appropriate to stop a director from voting on issues where there is a potential conflict of interest.
A conflict of interest occurs when a director’s personal interests clash with the company’s interests. This is a problem because a director must act in the company’s best interest.
8. Officer structure
When drafting your Company Constitution, you will be asked to choose between a simple or complex officer structure.
A simple officer structure consists of a president, a treasurer, and a secretary. A complex officer structure can consist of a CEO, COO, CFO, president, and a number of vice presidents.
How to write a Company Constitution
To create this essential document for your Australian business, complete our questionnaire and follow these five simple steps:
- Step 1: State your location
- Step 2: Provide company details, including registered name and Australian Company Number
- Step 3: Outline the rules for shareholder meetings
- Step 4: Create rules for director meetings
- Step 5: Finalise director and officer details
Can a Company Constitution be changed?
As your business grows and corporate regulations change, it is important to update your Company Constitution to reflect any changes in your corporation.
A Company Constitution can be amended using a special resolution. In order for the proposed changes to be approved, at least 75% of the votes cast must be in favour.
Once the change has been approved, it can be adopted and integrated into the Company Constitution.