When setting up or running a private company in Australia, you’ll encounter three key governance frameworks the company constitution, the shareholders’ agreement, and the replaceable rules under the Corporations Act 2001 (Cth).
Each serves a different function, applies in different ways, and can have very different legal consequences. Understanding how they interact is essential to avoid shareholder disputes and maintain a compliant governance structure.
The Company Constitution – The Internal Rulebook
A company constitution is a legally binding document that defines how the company is internally managed. It has the effect as a contract between the company, its directors and shareholders under section 140 of the Corporations Act.
A constitution usually covers:
- appointment and removal of directors;
- voting and powers of directors;
- procedures for board and shareholder meetings;
- share classes, transfers and rights; and
- dividend and winding-up provisions.
Under section 134 of the Corporations Act, a company may:
- rely solely on the replaceable rules in the Corporations Act;
- adopt its own constitution; or
- use a combination of both.
Most private companies adopt a tailored constitution for flexibility, for example to create multiple share classes or controlling share transfers. Once adopted, under section 136(1)(b) of the Corporations Act it binds all current and future shareholders and remains in force until amended by a special resolution (typically 75% shareholder approval).
The Shareholders’ Agreement – The Private Contract Between Owners
A shareholders’ agreement (sometimes called a shareholders’ deed) is a private contract between shareholders (and sometimes the company). It’s not required by law or registered with ASIC, allowing the parties to include confidential or commercial terms.
While the constitution governs how the company operates, the shareholders’ agreement focuses on how the owners interact.
A shareholders’ agreement typically covers:
- share transfers, pre-emptive rights and valuation methods;
- dividend and funding policies;
- drag-along and tag-along rights;
- dispute resolution and deadlock procedures; and
- decision-making thresholds and veto rights
Because it is contractual, a shareholders’ agreement is enforceable through common law remedies like damages or injunctions.
The Replaceable Rules – The Default Framework
The replaceable rules under the Corporations Act provide a set of default governance provisions. They automatically apply to companies that don’t adopt a constitution (except for sole-director/shareholder companies).
Section 141 of the Corporations Act sets out the provisions of the act that apply as the replaceable rules. The replaceable rules cover such things as:
- appointment and powers of directors;
- directors’ and members’ meetings;
- share transfers and dividends; and
- access to company records.
Replaceable rules are convenient for simple ownership structures but are generic and inflexible. They cannot be altered except through legislative amendment, and they don’t apply to certain entities (e.g. no-liability or special-purpose companies). This is one of the reasons why many companies choose to adopt a constitution.
How They Work Together
- Replaceable rules are the default.
- A constitution can modify or replace the replaceable rules (but cannot override the Corporations Act).
- A shareholders’ agreement can supplement either.
In practice, a company with a single shareholder will commonly rely on the replaceable rules or its constitution alone. Where there are two or more shareholders, especially where the owners are unrelated or have unequal roles or investments, it’s common to have both a constitution and a shareholders’ agreement.
Key Takeaway
For many private companies with more than one shareholder, having both documents ensures clarity, flexibility and compliance with the Corporations Act 2001. They also help prevent disputes, protect minority shareholders and support future investment.
Our corporate lawyers can help you draft, review and align these documents to protect shareholder interests and prevent future disputes. Get in touch with us to discuss your company’s governance needs.
Frequently Asked Questions
- Do I need both a company constitution and a shareholders’ agreement?
It depends on your ownership structure. A single-shareholder company can usually rely on its constitution alone. But once there’s more than one shareholder especially where the owners are unrelated, contributing differently, or planning for growth – a shareholders’ agreement adds real value.
- How does a shareholders’ agreement work with only two shareholders?
In a two-shareholder company, each person often holds 50% and has equal voting power which can easily lead to deadlock. A shareholders’ agreement can manage this risk through dispute-resolution, deadlock or “shotgun” clauses, allowing one shareholder to offer to buy or sell shares at a set price, forcing the other to choose. Together, these provisions properly drafted can provide a practical way to resolve disagreements without litigation or disruption to the business.
Our corporate lawyers can provide expert advice on drafting, structuring and planning shareholders’ agreements suited to two-person companies to protect both the company and its shareholders.
- What happens if there is a conflict between the constitution and the shareholders’ agreement?
Conflicts between the two documents can create real problems. If they say different things, it can be unclear which rule applies, delaying decisions or even rendering certain clauses unenforceable.
The best solution is to plan for consistency upfront. When both documents are drafted together, they can clearly allocate decision-making powers, reflect the same definitions, and include a precedence clause confirming which document prevails if a conflict ever arises.
Most shareholders’ agreements provide that they prevail over the constitution between the parties. Getting these documents aligned from the outset avoids confusion, protects shareholder rights and keeps the business running smoothly.
- How are a companies governance documents changed?
When it comes to making changes, each governance document sets out its own process:
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- Company constitution: Under the Corporations Act, a constitution can only be changed by a special resolution of members, which means at least 75% of shareholders must vote in favour. This high threshold helps protect shareholders from unexpected rule changes.
- Shareholders’ agreement: Because it’s a private contract, the process depends on what the agreement says. Many require a special resolution of shareholders, while others may specify that certain key investors or classes of shareholders must approve the change. The mechanism can be tailored to the company’s structure and ownership dynamics.
- How often should a company review these documents?
These documents shouldn’t sit on a shelf. They need to evolve as your business does. A review is essential whenever there’s a new investor, a change in shareholder structure, or an ownership or control shift, for example, when bringing in staff shareholders, family members, or external capital.
They should also be revisited after any major legislative changes or as part of regular corporate housekeeping every few years. Out-of-date governance documents can cause disputes, misaligned decision-making, or even invalidate key provisions.
- Can replaceable rules cause problems for growing companies?
Yes! The replaceable rules are designed as a one-size-fits-all framework, which works fine for small, simple companies but quickly becomes a limitation as ownership structures evolve.
The replaceable rules don’t cater for different share classes, investor rights, or custom decision-making powers, and they offer little flexibility for managing disputes or protecting minority shareholders.
A tailored company constitution gives growing businesses the freedom to design their own rules – from how directors are appointed to how capital is raised or profits are distributed. It’s a key step in future-proofing your governance before external investors or new shareholders come on board.
Expert Corporate Lawyers for Your Governance Needs
Getting your company’s governance right isn’t just about compliance. It’s about creating clarity, control and confidence in how your business operates.
Our corporate lawyers at Adventum Legal specialise in preparing and aligning company constitutions, shareholders’ agreements and governance frameworks for private companies. We also prepare all necessary supporting documents, including resolutions, notices of meeting and adoption instruments, ensuring a seamless and compliant implementation process.
Contact us today to discuss how we can help you strengthen your company’s governance and safeguard shareholder interests.
