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Not all companies are created equal

Daniel Butler, Director, DBA Lawyers

Small private companies frequently act as trustees for SMSFs or trusts, and sometimes in their own right. These companies are governed by their constitution (a set of internal rules). Standard constitutions for a private company are often outdated and contain many pitfalls for the unwary. On the other hand, the DBA Lawyers company is carefully drafted for the pace of the present day and to cater for small private companies that are typically controlled by a family.

Numerous advantages of using a DBA Lawyers company are not found anywhere else. These advantages are present for all new companies incorporated through DBA Lawyers, even if the company is not an SMSF trustee. Existing companies without our constitution can also use our constitution upgrade service to obtain an up to date and strategic constitution. This is important for companies that have an old constitution (often called a memorandum and articles of association) or a poorly drafted one.

Advantages of the DBA Lawyers company

  • Successor directors and value-added template — A director can appoint one or more successor directors to step in as directors on the incapacity or death of the director. A template successor director form is provided with every company. Few to no other companies allow for successor directors or provide template documents to implement them.
  • Executor or attorney under enduring power of attorney stands in a shareholder’s shoes — A shareholder’s legal personal representative (‘LPR’) is fully empowered to exercise shareholder rights (such as voting on the appointment of a director). The general law requires LPRs to be empowered in this way, but many other constitutions do not fully empower an attorney to act on a shareholder’s behalf.
  • Modern expansive provisions — The constitution does not suffer from outdated provisions such as requiring at least two directors at all times. Further, almost all constitutions require every director to sign a resolution. However, under the DBA Lawyers constitution, a simple majority of directors can pass a resolution without a formal meeting.
  • Expansive powers to execute documents — The constitution allows a sole director to execute documents, even when they are not also a secretary. Many other constitutions follow the stricter provisions in the corporations law where a sole director can only execute documents where that person is also the company secretary.
  • Fair voting for majority directors and shareholders — Almost every constitution will allow a small number of persons (often two) to form a quorum for a meeting of shareholders or directors. If one or more persons are unable to attend (even due to innocent things such as being caught in traffic), the small number of persons forming a quorum can pass shareholder or director decisions without the consent of the overall majority who may not be present. This is because decision making is typically structured to allow a majority of those present at the meeting to make decisions, instead of having regard to the overall directors or shareholders. The DBA Lawyers constitution addresses this uniquely by requiring an overall majority of all existing director/shareholder votes, ignoring the number present at a given meeting.
  • Fair voting for directors acting for someone else — When more than one director acts in place of somebody who would have been a director, the directors in office only have the voting power of the one person who would have been a director. This is useful for succession planning (not just in the SMSF context) to ensure fairness. It can apply, for example, when say two attorneys (under an enduring power of attorney) are acting as directors for an SMSF member who has lost capacity. Many other constitutions do not deal with this fairness issue, resulting in the other directors being out voted or their votes being diluted.
  • Division 7A loan agreement — A Division 7A loan agreement template is included in case a debit loan arises and to ensure a written loan agreement can be documented. The template covers both shareholders and shareholders’ associates. Many other companies with associated templates do not cover div 7A of the Income Tax Assessment Act 1936 (Cth) and those that do will not generally cover loans to associates.
  • Flexible special purpose company provision — DBA Lawyers is recognised as Australia’s leading SMSF law firm. If a company wants to act as a special purpose SMSF trustee (or cease to act as a special purpose SMSF trustee), there is no need to incur costs to change the constitution. The DBA Lawyers constitution has a switching provision that applies when needed. When acting as a special purpose company, a reduced ASIC annual fee (approximately an 80% discount) applies.
  • Suitable for SMSF investment in 50/50 unit trust or company — If the company structure is set up exactly as 50–50 controlled by two unrelated family groups, the constitution does not contain any of the dangerous casting votes or other provisions that can lead to an in-house asset for the SMSF(s) investing.
  • Compliant and backed by lawyers — The constitution complies with the latest laws and is supported by a dedicated team of lawyers.
  • Detailed memo — A detailed memo on the operation of a company and directors’ duties and shareholders’ rights is included. This document can assist parties to understand what they need to know when they have a company.
  • Flexibility in share classes — The constitution has the flexibility to issue various share classes. This can allow planning for differentiated voting, dividend and capital rights. Also, ‘Guardian’ shares, for example, allow a guardian to exercise control in the event of a dispute. The different shares are summarised below.
 Right to voteRight to dividendsRight to repayment of share price on winding-upRight to distribution of surplus assets on winding-up
SMSF 1
Ordinary
Limited
Guardian 2
Capital Share
AA shares – TT shares 3
  1. Issuing SMSF shares reinforces the special requirements for qualifying as a special purpose SMSF company and assists in ensuring these are not inadvertently breached. However, SMSF shares are not strictly required for the company to qualify as a ‘special purpose company’ (the constitution itself contains appropriate provisions to ensure the company qualifies).
  2. Broadly, Guardian Shareholders must be present at meetings and must consent to any decision before it can be passed.
  3. AA to TT class shares each have the same rights as ordinary shares, but issuing separate classes can offer greater flexibility with different shareholders.

Conclusion

While a new company is sometimes viewed as a commodity, those who are switched on will seek out the above strategic features that give a company or constitution update a strong footing.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

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