Starting a Company in Australia
There are a few issues that repetitively occurs when we are providing corporate legal services to our clients. Many of these issues are common misconceptions of the usual corporate operation in Australia. Even though the basic legal concepts and structure of the limited company is similar to those in China, there are differences in company operation and usual commercial practices. In this article, we wish to guide you through the common issues when you’re setting up your company.
1. Common legal documents
Before a company is incorporated, it is advisable to have a couple of legal documents done.
The document of paramount importance is the Shareholders Agreement of a company. A shareholder’s agreement regulates the relationship between the shareholders and the relationship between the shareholders and the company. Therefore, the parties for the agreement will usually be the shareholders and the company.
A constitution of the company is not compulsory to ordinary private companies. If the company does not adopt its own constitution, the replaceable rules in the Corporations Act 2001 (Cth) will apply.
It is also important to settle the employment terms and conditions for the employment of the key staffers, especially the directors.
2. Directors’ and Shareholders’ Meeting
In Australia, the Board of Directors usually undertakes the day to day management and decision making of the company. The conduct of director, insofar as he or she is acting in the best interests of the company, represents the company and its legal personality.
As a general proposition, the shareholders have no part to play in the actual exercise of powers of the management of the company. The usual functions that are expected to be performed by the Shareholders’ meeting being:
· Contributing financial investments to the company;
· Receiving dividends;
· Appointment and removal of directors; and
· Decisions concerning the critical issues of the company such as whether to wind up the company voluntarily.
Although it is not uncommon for companies to vest more power to the Shareholders’ Meeting by way of adopting a company’s constitution, there could be impracticality if you choose to do so.
3. Contribution
The same as the usual practice in China, investors have many different ways of injecting funding or providing a contribution to the Company. In terms of monetary contribution, a general distinction will be drawn on whether the investment is Debt Investment or an Equity Investment.
a. Debt Investment
Debt Investment is when a contributor makes contributions to the company by way of a loan. Debt investment is broadly accepted and considered safer for investors. Debt investment will not appear as the issued capital on ASIC registers. Therefore, it is not uncommon for business persons to conduct financial due diligence before entering into transactions.
Precaution and arrangements include:
· a loan arrangement between the company and the contributor;
· when the loan is payable;
· the interest rate of the loan; and
· the time and/or conditions when the principal and interests are payable to the contributor.
Since it is a loan arrangement, it could be a secured loan or an unsecured loan. Usual security arrangements could be a general security agreement against all the current and after-acquired assets of the company or over a specific asset.
The major reason why debt investment is considered safer is that, in the event of liquidation, the investors will be considered as a secured creditor or unsecured creditor depending on the type of loan arrangement while the shareholders invested by way of equity will be ranked after the creditors of the company.
A drawback of debt investment could be the loss of opportunity to acquire greater financial benefit should the company operate successfully and delivered a high return.
b. Equity Investment
Equity investment is the usual way of investing in a company where the investor purchases the shares in the company at a certain price. If the company’s share value grows, the investors could receive a return when they sell their shares.
The shareholders could decide their company’s classes of shares in its shareholders agreement and constitution. Ordinary Shares usually provide a voting right to the shareholders at the shareholder meeting and a right to dividends when the company resolve to pay the dividend. It is not uncommon for a company to have other classes of shares alongside the ordinary shares with different conditions attached to those shares. Various conditions could be attached to the shares, from the right to vote to the entitlement to the dividend.
Preference shares are another common setting for share classes. In essence, preference shareholders have preferred rights to ordinary shareholders. Most commonly, in the event of liquidation, preference shareholders will be paid out prior to the ordinary shareholders.
As discussed above, the disadvantage of equity investment being, in the event of liquidation, all shareholders who contributed by way of equity rank after the creditors. We will further elaborate on corporate liquidation in later series.
4. Foreign Investment Review Board
If you are considered as a Foreign Government Investor under Foreign Acquisitions and Takeovers Act 1975 (Cth), you may be required to make applications to the Foreign Investment Review Board and seek its approval before you incorporate a company and operate your business in Australia. We will discuss the procedure and criteria for assessment in later series.
Disclaimer
This article is prepared by Guantao & CS Lawyers to provide general information on legal topics. The contents contained in this article do not constitute legal advice and should not be relied upon as legal advice. Guantao & CS Lawyers is not responsible to you or anyone else for any loss suffered in connection with the use of the content of this article. Should you require any legal services, please contact us to consult with you about the specific legal matters.
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If you have any questions, please feel free to contact:
Shun Cheng
Managing Partner, Guantao & CS Lawyers (Sydney)
T: +61 2 9002 0999
E: Shun.cheng@cslawyers.com.au; chengshun@guantao.com
Calvin Mai
Solicitor, Guantao & CS Lawyers (Sydney)
T: +61 2 9002 0999
E: Calvin.mai@cslawyers.com.au; Calvin.mai@guantao.com