Constitutions vs replaceable rules: which does your company need?

When you register a company in Australia, you have two options for governing its internal management: adopt a constitution, or rely on the replaceable rules set out in the Corporations Act 2001. You can also use a combination of both, though this can create complexity and is generally not recommended.

The replaceable rules are default provisions that apply automatically unless displaced by a constitution. They cover basic matters such as the powers of directors, the right to call meetings, and the process for appointing and removing directors. However, they are generic and were not designed for the specific circumstances of any particular company. Beyond a pro-rata offer of new shares to existing holders (s254D), a director discretion to refuse transfers (s1072G) and a chair’s casting vote, they do not address pre-emption on transfers, structured deadlock resolution, drag-along or tag-along rights, or many other governance matters that become important when disputes arise.

A tailored constitution allows you to define exactly how the company operates. Common provisions include pre-emption rights on share transfers, specific classes of shares with different rights (voting, dividend, winding up), casting vote provisions for directors, processes for resolving deadlock, restrictions on the types of business the company can conduct, and indemnification of directors and officers. For companies with multiple shareholders, a constitution is effectively essential.

Single-director, single-shareholder companies can technically rely on replaceable rules alone, but even in this case, a constitution provides clearer documentation of governance arrangements and is recommended if the company will ever have a second shareholder, enter into a shareholders’ agreement, or apply for finance.

At CoSec Partners, our standard constitution is included with every Pty Ltd registration. It is drafted and regularly reviewed by an independent external law firm and covers director powers, share transfers, meetings, and dispute resolution. It also provides for multiple share classes at no extra cost: ordinary shares, A class shares, B to H class shares, and I and J class redeemable preference shares. Firms that prefer their own constitution can use it instead.