Day 95 Internal governance complies with Replaceable Rules and Constitution

Internal governance complies with Replaceable Rules and Constitution

The internal governance is the instrument that defines the structure and management procedure of a company. It relates to the appoint, removal and distributing powers of officers, as well as disclosure of share classification plus rules regarding dividend payment. The Corporations Act(2001) S.134 states that the internal governance rule in a company consists of the replacement rule set by the C.A., the company’s own constitution or the combination use of both.

The replaceable rules are the model regulations spread out in the Corporations Act, and the section 141 provides a table to list all the terms. It is rare to see company that adopts these rules since they are rather rigid and unsuitable for diversify situations.

On the other hand, the constitution is the company own set of regulations, which is the collation of all internal governance principles. Under S.135(2), the replaceable rules can be replaced or modified by company constitution. More importantly, applying the constitution grants the company much flexibility to satisfy other requirements such as ASX listing rules. In addition, it also helps the company to avoid the unfavorable legislative adjustment towards the replacement rules. Section 136(1)(2) proclaims the requirements to adopt an constitution, where obtaining the written consent of all proposed members on registration, or generated by the special resolution process. Such process involves the pass of the resolution by at least 75% of entitled members’ votes. The special resolution is also the necessary proceeding to alter the constitution, justified by S.136(2). However, there are several limitations over the alteration to the company constitution for the purpose to protect the right of shareholders.

To illustrate, under the Corporations Act(2001) S.136(3), the constitution cannot be modified unless it passes the special resolutions and the entrenching provisions. Moreover, the alternation on constitution will lead to the compulsion on shareholders to buy more shares(S.140(2)) or the variation of class right on shares(S.246B) is not valid. At last, the section 232 espoused that the change must be fair and without oppression to a specific group of members, otherwise it will not be a legitimate alternation. Furthermore, the common law also provides restrictions on the variations of constitution, but only in the scenario involves expropriation of shares. The high court advocates that the adjustment made to constitution is valid if the expropriation is for proper purpose and fair(procedural and substantive).

Although the replaceable rules are part of the Corporations Act, the non-compliance of it will not breach the Act. The relevant party may refer to the contravention of statutory contract if necessary.