The Foundations of Company Management: What is a company constitution and do you need one?

Categories:Corporate Law & Governance

By Narin Xavier de Saini

business-pillars

 

Even though artificial, a company has the powers of a real person. But the company acts through people – its directors, company secretaries and members. These people have differing views, needs and goals.

So, how do we unite these people in the common enterprise? How do we divide power? What is the relationship and rules of conduct between corporate officers and members?

These questions of internal management are answered by the company constitution – the foundational document for the operations of a company.

 

What is internal management?

The internal management of a company includes core matters relating to:

  • the power of directors;
  • the appointment of directors, including managing directors and alternate directors;
  • the remuneration of directors;
  • directors’ meetings;
  • the resignation, retirement or removal of directors;
  • disclosure of of, and voting on matters involving, directors’ material personal interests in the affairs of the company;
  • calling members’ meetings;
  • the holding of members’ meetings;
  • proxies at members’ meetings;
  • voting at at members’ meetings;
  • inspection of the company’s books by members;
  • pre-emption rights on issuing shares;
  • the payment of dividends;
  • the transfer of shares.

 

What is the constitution?

a contract between the company, members and officers

The constitution (or the default replaceable rules under the Corporations Act 2001 (Act)) is effectively a contract about the internal management of a company between:

  1. the company and each member;
  2. the company and each director and company secretary;
  3. each member and every other member.

Under the Act, each party agrees to observe and perform the constitution and rules so far as they apply to that party.

And being a contract – it can be enforced.

outsiders cannot enforce this contract

Example: We have a shareholder or some third party. The constitution says that the shareholder or third party is to be the sole IT provider for the company. That cannot be enforced.

An outsider, or even a director or a member acting in another capacity (e.g. as a service provider to the company), cannot treat terms in the constitution that gives that person rights as a contract. They can’t enforce the constitution while wearing another hat. You need a special contract for that.

 

Every company has a constitution

Except for a single shareholder/director company, a company’s constitution will be one of the following:

  1. only the default replaceable rules under the Act (if the company has not adopted a constitution);
  2. a specific constitution drawn up for that particular company;
  3. a specific combination that partially adopts and partially modifies the replaceable rules;
  4. the memorandum and articles of association (for companies registered before 1 July 1998 that have not repealed the memorandum and articles after that date).

 

Does your company need a constitution?

Under the Act, most companies are not required to adopt a constitution. The question then becomes: Does your company need a constitution? Do you run with the default rules or do you customise?

That depends on whether the default replaceable rules are aligned with your company’s management and operations requirements, both presently and in the future.

If you take a company as being a union of the principles and visions of individuals, and you take internal management as a way of focusing and disciplining corporate governance ideas and corporate and personal goals, then thinking about a constitution is an important first step.

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