Why You Should Update Your Old Company Constitution
With changing law and changing technology, it is important that a company’s founding document – its Constitution – continues to be compliant, meets the requirements of its daily activities and is written in plain language.
We have recently undertaken a review of our clients existing Company Constitutions and found many to be out of date with current law & technology. With that in mind, we have compiled a list of the benefits of updating your Company Constitution.
The Benefits of Updating your Company Constitution
1. No Technology in old Company Constitutions
Technology changes how boards communicate with employees and shareholders. Therefore, it is important the constitution reflects technology changes so the new constitution outlines how technology is used in meetings. Members do not need to attend meetings and can appoint a proxy.
2. Clarity around Dividend Payments
In 2010, the Australian government amended section 254 of the Corporations Act, which governs how dividends are paid.
Before 2010 dividends were only payable from company profits. Now a company can declare dividends if:
• its assets exceed liabilities; and
• the payment is fair and reasonable; and
• the payment does not materially prejudice the company’s ability to pay its creditors.
Under some old constitutions, you are not able to pay dividends.
3. Share buy-backs now allowed
Share buy-backs allow companies to buy back its shares from shareholders. In Australia, there are five types: equal access, on-market, employee share scheme, selective buy-back and minimum holding. Replacing your company constitution will ensure the legality of the buy-back.
4. Preference shares allowed
The new constitution allows the company to issue preference shares under Australian law.
5. Single Director Companies now allowed
The minimum number of directors for a company reduced from two to one, allowing for single director companies. This protects your assets, as only one person (the ‘risk person’) goes down if the company becomes insolvent. Moreover, it also allows for directors to resign and leave a single director.
Upgrading your constitution will allow you to have a single director, as many Memorandum & Articles and Constitutions still require two directors and a company with insufficient officers breaches the Corporations Act 2001.
However, single director companies can come with other problems, like what would happen if the single director dies or is incapacitated. The solution to this is to prepare minutes to appoint a Successor Director, who will automatically be instated if something happens to the original company director. We will have more information on the Successor Director System next month.
6. No mandatory Annual General Meetings
Because many constitutions require an AGM, and if you fail to hold the AGM, your company is in breach. The law no longer mandates an AGM, so our new update gets rid of this requirement.
7. Escape the company seal
A company seal is a stamp. Many Constitutions require all documents signed by the company have a ‘seal’. But now, companies no longer need a seal under the Company Law Review Act 1988 (Cth). Your new Company Constitution will reflect that, since if your rules require a seal then a deed signed without a seal is invalid.
8. Old Memorandum & Articles limit your powers
Some old Memorandum & Articles and Constitutions contain a ‘purpose of the company’. But your company may have changed activities since your Constitution was written, and therefore is acting outside its powers and non-compliant. An updated Constitution will remedy this issue.
Please contact us if you want to upgrade your old Company Constitution! And feel free to phone or email us if you have any further questions about this.
Download our flyer on the 8 Benefits of Updating Your Company Constitution here
Part 1 of the Successor Director System blog series. Read Part 2 – Protect the Control of Your Companies with a Successor Director here.