Replaceable rules – how to use them at your startup company

By Vivian Michael | Company

Replaceable rules - how to use them at your startup company

Replaceable rules are rules for the internal management of your company. These rules are found in the Corporations Act 2001 (Cth).

Also, the rules will apply to a company that’s registered after 1 July 1998 and any company registered before 1 July 1998 that has since repealed its constitution.

Which rules?

Now, a company can be internally managed by replaceable rules; or constitution; or a combination of both.

Sole director and sole shareholder 

Importantly, replaceable rules are not mandatory for a company with a sole director and shareholder.

Flexibility to add rules tailored to your company

You can add extra rules in the constitution that are either in addition to or override the replaceable rules.

Breach of the rules 

Now, a breach of the replaceable rules is not a breach of the Corporations Act. Rather, the rules have the same effect as a contract and avenues for redress are the same as those for a breach of contract.

So what exactly does this mean?

Contract effect

Both the replaceable rules (and constitution - if there is one), have the same effect as a contract between:

  • the company and each shareholder; and
  • the company and each director and company secretary; and
  • between a shareholder and each other shareholder.

Now, what this means is that each person agrees to observe and perform the replaceable rules/constitution.

Next, let's look at when the rules won't apply.

When the rules won't apply

Unless they agree in writing, a shareholder won’t be bound by a change that:

  • requires the shareholder to take up more shares; or
  • increases the shareholder’s liability to contribute to share capital; or
  • adds restrictions the right to transfer shares already held unless the change is made because of a change from public to a private company; or to add a proportional takeover clause to the company’s constitution.

Which should you use?- replaceable rules or a constitution?

So which should you choose - replaceable rules or a constitution?

Now, while you have the choice of replaceable rules, a constitution or a combination of these, keeping things simple as a startup can be helpful to reduce costs.

This means replaceable rules can suit you just fine in the early stages.

And you can pay for a bespoke constitution when you have more resources.

What do the replaceable rules cover?

Below is an example of what the replaceable rules cover. 

As at the time of writing, the list includes all replaceable rules in the Corporations Act 2001 (Cth).

  • voting - who can vote and how many votes each person gets; and
  • director powers - what sort of decisions directors can make; and
  • share transfers - how and when shares can be transferred; and
  • directors pay - how much or if any directors fee will be paid; and
  • chairing meetings.

Summary

Replaceable rules are rules for how your startup is managed internally. You can use replaceable rules, a constitution or a combination of these for your startup. If you are a sole director and shareholder, the replaceable rules and a constitution are not mandatory. The replaceable rules can be overridden by a constitution. You can use replaceable rules early on to bootstrap your startup and when you have resources, pay for a customised constitution. 

Finally, the rules generally cover voting, director decisions, share transfers, directors pay and meetings. 

Do you have questions about using replaceable rules at your startup?





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About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to entrepreneurs launching in Australia that would otherwise DIY, rely on legacy contracts or go without.

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