Chapter 8 Company Constitution and Replaceable Rules www.learnnowbiz.com Corporate Governance

Internal Governance Rules Many of a company’s rules for its internal functioning are set out in its internal governance rules. A company’s internal governance rules will consist of either: The replaceable rules set out in S141. A constitution. A combination of the replaceable rules and a constitution.

Replaceable Rules The replaceable rules are a set of model rules in The Corporations Act which a company may, but is not obliged to, adopt its internal governance rules. Their contents are grouped into the following categories: Officers and employees. Inspection of books. Directors’ meetings. Meetings of members Shares. Transfer of shares. Under S134 it is open to company members to choose to adopt their own rules or adopt the replaceable rules.

Constitution Prior to 1 July 1998 every company was required to have a corporate constitution, consisting of a memorandum and articles of association. Since July 1 1998, if a company does not have a corporate constitution, the Replaceable Rules will act as its corporate governance rules. A company’s constitution and any applicable replaceable rules have effect as a contract between: The company and each member. The company and each director and company secretary. A member and each other member.

Adoption and Modification of a Company Constitution A constitution can be adopted on registration by each member agreeing in writing. After registration, a company can adopt a constitution by a special resolution of its members. A company may repeal or modify its constitution by special resolution of members S136 (2) which requires 75% member approval. A company can also limit modification of its constitution by including additional requirements. S232 provides for members to seek relief against changes to the constitution on grounds of oppression.

Constitution There are also common law limitations on the power of companies to amend their constitutions to prevent the abuse of voting power by the majority. The courts will examine the purpose and effect of an alteration in the articles to determine whether the change is for proper purpose and is fair. Two main questions are considered: Have the majority enriched themselves at the expense of the minority? Is the expropriating provision in the overriding interests of the company?

Choice of Replaceable Rules or Constitution Examples of why a constitution may be adopted: The Replaceable Rules may need to be supplemented or modified. Some companies cannot use the replaceable rules without modification due to regulation. To incorporate restrictions on the company’s objects e.g. Charities.

Consequences of the Internal Governance Rules not Being Observed A member, director or secretary may be able to obtain an injunction requiring a company to comply. Another member may be able to obtain declaratory or injunctive relief or damages. The company may be able to obtain declaratory or injunctive relief or damages against a director or secretary.