Emil Ford Lawyers’ Joseph O’Mara, Associate, revisits the key points from his September presentation at Legalwise’s annual Charities and Not-For-Profits Symposium, where he encouraged charities to strive for a “beautiful” constitution.
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A charity’s constitution is its fundamental document. It shapes and defines the interactions between members and the board, and the objects contained within it determine the nature and scope of the charity’s activities. If you’ve been involved with charities and not-for-profits at some level, you will understand that there are constitutions and then there are constitutions. A well-functioning and harmonious charity can mask a flawed constitution, which may get the job done despite having ambiguous or inconsistent provisions, onerous obligations or even just be hard to navigate.
On the other hand, a beautiful constitution is a joy to navigate, is free from inconsistencies, strikes the right balance between providing safeguards and freedom to operate and is a helpful reference point that educates board members on their role and functions.
When to look at your Constitution?
Although there is no time like the present, there are several contexts where a charity is required to consider its constitution:
1. forming a new charity: this is the obvious context and the perfect opportunity for a charity to start its life with a beautiful constitution;
2. change of entity: many charities have changed from an incorporated association under state law to a company limited by guarantee, or from an unincorporated association to an incorporated association or company limited by guarantee and require a new constitution to implement this change;
3. merger of two or more charities: more and more charities are merging in order to create efficiencies, avoid double up and increase the likelihood that they will be granted government funding, and constitutions are often amended as part of this process; and
4. change of scope: as charities evolve they may wish to branch into new activities and fields of charitable services, which may require a change to the objects/purposes of the charity as set out in its constitution.[1]
In any of these contexts, or even when making a simple amendment such as increasing the maximum number of directors on the board, the charity has an opportunity to consider its entire constitution and look for ways to address flaws and make improvements.
Practical Tips
The constitutions of charitable companies are often long documents covering many different aspects of a charity, from its objects to its membership, its governance structure and its financial reporting obligations. Here are a few practical tips to making the most of a charity’s constitution:
1. A charity’s constitution is its fundamental document, but not a sacred text: there can be an aura of mystery and reverence that surrounds a charity’s constitution but this need not be the case. A constitution should be a working document and should reflect the current needs and structure of a charity. Charities should not be afraid to improve their constitution.
2. Be wary of letting tax wag the dog: the availability of tax concessions is an important consideration for a charity, but charities should be wary of tax being the primary consideration. Many charity founders are driven by a perceived need to obtain DGR status because this is seen as a mark of legitimacy or necessary to secure funding. In our experience, donors will give to a charity because they support its purpose, not because they receive a tax deduction for doing so. Founders should therefore start with their objects and determine what they hope to achieve through their charity before considering the available tax concessions.
3. Make the most of legal advice: it is possible to draft or amend a charity’s constitution without obtaining legal advice and the ACNC template constitution for a company limited by guarantee is an excellent resource in this respect. However, one does not simply use a template. Like all templates, a template constitution should be adapted to meet a charity’s unique circumstances and requirements. If a charity thinks it would benefit from legal advice, it should obtain legal advice at an early stage as a charity lawyer will consider the practical implications of a proposed membership or governance structure. Undertaking a “DIY” first and then approaching a lawyer for final sign off can increase the length of the process of adopting a constitution, lead to wasted board discussion over provisions that a lawyer might later advise are unlawful or impractical and even increase the fees paid to the lawyer if the lawyer is required to correct mistakes.
4. Retain flexibility: a charity’s constitution should balance the important safeguards provided by its constitution with the need for it to be a working document that does not unnecessarily constrain the ability of the charity’s board to operate. Areas where this balance needs to be considered include requiring member approval of certain board decisions such as the sale of property and imposing maximum term limits on the length of time that board members can stay in office.
5. Include a dispute resolution clause: disputes within charities are not well suited to resolution by litigation[2] and it is now common to include a clause in a charity’s constitution that sets out a dispute resolution process to address disputes between members, between directors, or between the board and the members. A dispute resolution clause can prevent the monetary expense and time cost of litigation and require a process that is better suited to addressing the relational aspects of a dispute such as assisted mediation.
6. Ensure the members adopt or amend the constitution: the Corporations Act requires the members by special resolution to approve the adoption or amendment of a charity’s constitution,[3] but some charities make changes to their constitution at the board level without reference to the members. What should happen is that the board should pass a resolution to recommend a constitution for adoption or amendment by the members and call a meeting of the members to consider a resolution to adopt or amend the constitution. The distinction between the members and the directors should be maintained even in closely held companies where the same people constitute both the members and directors of a company.
Beautiful Constitutions
Charities and advisers to charities should seek to make the most of their constitutions and strive for a document that is easy to understand, appropriate and adapted to the charity’s circumstances and free from inconsistencies and ambiguities.
Joseph O’Mara is an associate at Emil Ford Lawyers, which has for most of its 100 year history served charity and not-for-profit clients in Australia. Joseph practises mainly in commercial and not-for-profit law with an interest in employment and intellectual property law.
In the not-for-profit area, Joseph assists charities through the establishment phase (from advising on the initial concept and drafting an appropriate constitution to reflect this, to establishing a structure and registering with the ACNC) and advises established charities on various issues including constitutional reviews, governance, intellectual property licensing, charitable investment fundraising and employment law issues.
Joseph is a contributing author to Emil Ford’s Not-for-Profit Law notes, which keep Australian not-for-profit organisations up-to-date with legal developments in the sector.
Contact Joseph at Joseph.Omara@emilford.com.au or via LinkedIn. Visit Emil Ford Lawyers on Facebook or LinkedIn.
[1] A charity’s activities must be consistent with its charitable objects. See Commissioner of Taxation of the Commonwealth v Word Investments Ltd [2008] HCA 55 at [70] per Gummow, Hayne, Heydon and Crennan JJ.
[2] The same principle applies to disputes between charities. See the scathing closing remarks of Judge Hacon at [73] in the English case of NOCN (Formerly National Open College Network) v Open College Network Credit4Learning [2015] EWHC 2667, which involved a trade mark dispute between two charities.
[3] See s136 Corporations Act 2001 (Cth).
