With the Annual General Meeting (AGM) season on the horizon, now is the perfect time to review your company's constitution to consider whether it requires updating. Amendments to a constitution require shareholder approval by way of a special resolution - that is, 75% of shareholders present and voting at the meeting. So, the AGM is an ideal time to propose an amendment to your company's constitution to ensure it is both up to date and relevant for your company's structure and objects. After all, there's nothing like a spring clean!
Some issues to keep in mind when reviewing your constitution are as follows.
Total overhaul
You may want to consider adopting a totally new constitution if your current constitution is older than say 10 to 15 years. A constitution this old will likely be out of date and is unlikely to incorporate the more recent amendments to the Corporations Act. Any reference to the old Corporations Law is a good indication that your constitution may be in need of a total overhaul.
Dividends
The old test that dividends could only be paid out of a company's profits was replaced in 2010 by an amendment to the Corporations Act. The relevant test now requires that:
- a company not pay a dividend unless its assets exceed its liabilities
- the payment of the dividend is fair and reasonable to the company's shareholders as a whole
- the payment of the dividend does not materially prejudice the company's ability to pay its creditors.
A constitution which still refers to the "profits test" will require the company to satisfy the new assets test as well as the old "profits test" before it can declare a dividend. It would be useful, in these circumstances, for the dividend provision in the constitution to be replaced by reference to the new test.
Refreshing proportional takeover protections
A company can protect itself from a potential proportional takeover (a takeover for only part of the shares of the company) by including a provision in the constitution which makes proportional takeover bids subject to shareholder approval. This protection, however, ceases to apply after three years. So, you may want to refresh your company's proportional takeover provisions if it is due to expire within the next 12 months.
Direct voting
Direct voting allows shareholders to cast votes towards resolutions without attending meetings or appointing proxies to vote on their behalf. More and more companies are now using direct voting as a more efficient method of running shareholder meetings. However, in order to implement direct voting you would need the appropriate provisions in your company's constitution. So, an amendment to your constitution to permit direct voting is worth considering.
Unmarketable parcel facility
An unmarketable parcel facility allows a company to sell small, unmarketable parcels of shares on behalf of their holder. This ability is beneficial to the company since it reduces the high administrative costs in maintaining a large number of small shareholdings. The company's power to deal with unmarketable parcels should be set out in its constitution and, if it's not there, would be worthwhile including to provide the maximum flexibility going forward.
Preference shares
Although under the Corporations Act a company has the power to issue preference shares, the rights attaching to the preference shares must be set out in the constitution or must be otherwise approved by a special resolution of shareholders. It is worthwhile reviewing your constitution to ensure that it includes appropriate terms for preference shares.
Technology
Does your constitution allow for use of technology in holding shareholder and director meetings? Also, can documents be given to your shareholders by email? If not, then these are useful provisions to include in your constitution.
Here to help
Please contact Middletons' Corporate & Commercial Group if you would like assistance with reviewing or proposing amendments to your company's constitution in time for your company's AGM.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
