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Constitution or Replaceable Rules?

by | Jun 28, 2018 | Business Law | 0 comments

Since 1998 companies have been able to either adopt a constitution, the Replaceable Rules or a combination of the two.

Replaceable Rules are “default rules” found in section 141 of the Corporations Act 2001 (Cth) (‘the Act’). They govern the powers of directors, appointment of directors, transfers of shares and rules relating to meetings. Small businesses with a sole director and sole shareholder company structure are not allowed to use Replaceable Rules.

A company may adopt a constitution instead. This is a more detailed document, which overrides the Replaceable Rules and operates as a contract between the company and each member, director and company secretary. A constitution is preferable where not all members or directors are related as it then becomes more important to be able to deal with issues that the Replaceable Rules do not traverse.

Companies with more complex affairs (eg unrelated members or members with different voting rights) may also consider a Shareholders’ Agreement which operates hand in hand with a constitution by further prescribing the conduct of members.

Replaceable Rules

Constitution
Pros

  • Readily available without cost
  • Updated with updates to the Act without more
 Pros

  • Allows for a succession plan eg how members exit eg first right of refusal
  • Can contain particular rules for different classes of members thus more specific
  • Can be changed by members thus flexible
Cons

  • Cannot be changed by members
  • Are found in various sections throughout the Act lending to difficulty in interpretation.
  • May not suit all members needs being “default rules”
 Cons

  • Cost to have lawyers prepare and update
  • Need 75% majority to change it
  • Not automatically updated with updates to the Act

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