What Are Replaceable Rules? The Default Governance Model

The Corporations Act 2001 provides a set of default governance rules known as replaceable rules. These rules automatically apply to a company if it does not have its own constitution or has a constitution that doesn’t modify or replace them ($s135(1)$).

Think of them as a ‘starter pack’ for corporate governance, covering essential areas like:

• Powers of Directors: The replaceable rule in $s198A$ grants directors the power to manage the company’s business.

• Directors’ Meetings: Rules govern how to call meetings ($s248C$), use technology ($s248D$), and pass circulating resolutions without a formal meeting ($s248A$).

• Member Meetings: Standard procedures for general meetings, including notice periods ($s249H$) and quorum requirements ($s249T$), are set by these rules.

• Shares: The Act provides some default rules for shares, though these are often minimal.

While relying on the replaceable rules is possible, this approach is typically only suitable for the simplest structures, like a sole director/shareholder company. For most businesses, the generic nature of these rules is too restrictive and can create significant governance risks.

Why Adopt a Custom Company Constitution?

A bespoke company constitution is the architectural blueprint for your company. It allows you to tailor your governance framework to your specific business needs, ownership structure, and strategic goals. Adopting a constitution enables a company to override unsuitable replaceable rules and establish clear, unambiguous procedures.

For example, a 50/50 joint venture company would likely want to remove the replaceable rule giving a chairperson a casting vote ($s248G(2)$) to prevent deadlocks from being unfairly resolved.

Key advantages of a custom constitution include:

• Clarity and Certainty: It provides a single, clear source of rules for directors and shareholders.

• Risk Management: It can include specific authorisations that protect directors, such as the safe harbour provision in $s187$ of the Act. This section allows a director of a wholly-owned subsidiary to act in the best interests of the holding company, but only if the subsidiary’s constitution expressly authorises it.

• Investment Readiness: A well-drafted constitution demonstrates strong governance, making the company more attractive to investors and financiers.

• Customised Structures: It is essential for companies with different classes of shares (e.g., preference shares), as the specific rights attached to these shares must be detailed in the constitution.

Key Clauses Every Australian Company Constitution Should Address

A robust constitution should provide a detailed framework for the company’s internal management. Based on the Corporations Act 2001, here are the critical areas your constitution should cover.

Powers and Duties of Directors

While $s198A$ provides a broad mandate for directors to manage the company, a constitution can refine this. It can set specific limits on directors’ authority, such as requiring shareholder approval for major transactions. It should also clearly outline the process for appointing and removing directors.

Rules for Share Capital and Dividends

This is one of the most critical areas where the replaceable rules are insufficient. A constitution must detail:

• Different Classes of Shares: If the company plans to issue preference shares, redeemable shares, or shares with different voting entitlements, the constitution must define the specific rights for each class (as per Part 2H.1 of the Act).

• Dividend Payments: The constitution can set out specific rules for declaring and paying dividends, provided they comply with the legal requirements in $s254T$ of the Act, which includes a solvency test.

Procedures for Member and Board Meetings

Clear meeting rules prevent disputes and ensure decisions are made validly. A constitution can tailor procedures for:

• Quorum: Setting a different quorum for meetings than the default rule of two members ($s249T$).

• Technology: Establishing flexible rules for using technology at meetings to accommodate remote participants, building on the basic allowance in $s249S$.

• Voting and Proxies: Defining specific voting procedures and the rights of members to appoint a proxy to vote on their behalf ($s249X$).

How to Legally Amend Your Company Constitution

As a business grows, its governance needs change. A company can amend its constitution by passing a special resolution of its members.

A special resolution is a high-stakes vote that requires:

1. Proper Notice: The notice of the meeting must include the full text of the proposed amendment and state the intention to pass it as a special resolution ($s249L(1)(c)$). The notice must be clear and effective to ensure members understand the changes.

2. 75% Majority: The resolution must be passed by at least 75% of the votes cast by members who are present and entitled to vote.

This high threshold reflects the fundamental importance of the constitution as a contract between the company and its members.

External Influences: When the ASX or Financiers Shape Your Constitution

A company’s constitution is also shaped by its external relationships. Certain commercial and regulatory obligations can mandate specific constitutional content.

• ASX Listing Rules: A company seeking to list on the Australian Securities Exchange (ASX) must ensure its constitution complies with the ASX Listing Rules. These rules often require specific provisions relating to shareholder rights and company reporting.

• Financiers and Creditors: As a condition of funding, a bank or major creditor may require a company to embed certain clauses in its constitution. This could include a ‘negative pledge’ that restricts the company’s ability to pay dividends or take on further debt without the lender’s consent.

• Shareholders’ Agreements: Parties to a shareholders’ agreement may agree to entrench key terms from that agreement into the company’s constitution to make them more binding and durable.

Frequently Asked Questions (FAQ) about Company Constitutions

1. Do I need a constitution for my Pty Ltd company?

While not legally mandatory if you rely on the replaceable rules, it is highly recommended for almost every proprietary limited company. A constitution provides clarity, manages risk, and is essential if you have multiple shareholders or plan to seek investment.

2. What is the difference between a constitution and a shareholders’ agreement?

A constitution governs the company’s internal management and is binding on all members, directors, and the company itself. A shareholders’ agreement is a private contract only between the shareholders who sign it. While there is often overlap, they serve different purposes. Key terms from a shareholders’ agreement are often reflected in the constitution for broader enforceability.

3. What happens if a company breaches its constitution?

A breach of the constitution can have serious consequences. As the constitution operates as a contract, a member or the company may be able to take legal action to enforce its terms or seek remedies for a breach. Actions taken by directors in breach of the constitution may also be invalid.

4. How often should a company constitution be reviewed?

It is good governance practice to review your constitution every few years or whenever there is a significant change in the company’s business, ownership structure, or upon major changes to the Corporations Act 2001. An outdated constitution can create unforeseen risks.

Disclaimer: This article provides general information and does not constitute legal advice. The content is based on the Corporations Act 2001 and associated annotations current to mid-2025.

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