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About the organisation

An organisation structured as a proprietary company limited by shares (Pty Ltd) applied to the ACNC for registration as a charity.

The organisation’s governing document stated that its purpose was to enhance the Australian natural environment.

To achieve its purpose, the organisation stated it would provide information and education, and conduct research.

About the application and registration process

The ACNC assessed the organisation as having charitable purposes for the public benefit.

However the organisation’s structure as a proprietary company limited by shares and governing document demonstrated that it was not required to operate as a not-for-profit.

They also raised concerns about whether the organisation complied with Governance Standard 5.

A proprietary company limited by shares can be registered as a charity as long as its governing document makes clear that it must operate on a not-for-profit basis, and that it does not allow shareholders to receive private benefits.

However, any governing document generally appropriate for a proprietary company limited by shares will need significant amendments for it to also be appropriate for use if that organisation seeks registration as a charity with the ACNC.

Because of this, the ACNC encourages people thinking about setting up a charity to consider whether the proprietary company limited by shares is the best legal structure for their charity. A different legal structure may better suit their charity.

The ACNC needed to work with the organisation to ensure its governing document was suitable and provided sufficient controls to ensure it operated as a not-for-profit – thus making it eligible for charity registration.

This work focused on a couple of areas.

To be registered with the ACNC, an organisation must meet the requirement of being a not-for-profit. This means the organisation cannot, and must not be able to, operate for the profit, personal gain or other benefit of particular people.

An organisation can achieve this by including particular statements – or clauses – in its governing document, and then following them.

Upon examining the organisation’s governing document, the ACNC identified some potential issues.

Sale of shares

The organisation’s governing document included a clause that did not restrict the price of any sale of shares. It also contained no restrictions on the issuing of new shares, or the price any of those shares might be issued for.

Allowing an organisation to sell or transfer shares for value other than the issue price, or distribute profits from dividends to members, shows its capacity to profit.

To be eligible for charity registration, a proprietary limited company must not be able to operate for private profit or benefit.

Payments of brokerage or commission

The organisation’s governing document also included a clause allowing for payment of brokerage or commission.

While this type of clause would not necessarily mean that an organisation can’t be registered as a charity, its Responsible People must ensure they comply with obligations to act in the best interests of the organisation when deciding to pay brokerage or commissions.

It is unlikely to be in a registered charity’s best interest to pay brokerage or commissions in relation to the sale of shares. This is because these would lead to private benefit.

Clauses not overriding other governing document provisions

Lastly, while the organisation’s governing document contained appropriate not-for-profit and winding-up clauses, there was no clause to state that these clauses overrode any other inconsistent clauses contained in the governing document.

Due to the other clauses that allowed the organisation to operate for private benefit, this lack of explicit overriding clauses meant its governing document did not, in fact, require the organisation to operate on a not-for-profit basis.

Response

After discussions with the ACNC, the organisation moved to address these issues, and to demonstrate that it was required to operate as a not-for-profit.

It did so by amending its governing document to include clauses stating that:

  • any transfer of shares could not be for any more than the issue price;
  • the replaceable rules contained in the Corporations Act 2001(Cth) did not apply to the organisation, and were overridden by the clauses appearing in its governing document; and
  • while the company remained registered as a charity, the ACNC Act and ACNC Regulations would apply.

The organisation also removed from its governing document the clause allowing for payment of brokerage or commission.

Governance Standard 5 requires charities to take reasonable steps to ensure Responsible People act in the best interest of the charity, and that they don’t misuse their position.

A review of the governing document prompted concerns about whether the organisation had measures in place to ensure its Responsible People properly managed any conflicts of interest.

And although the governing document contained clauses requiring the organisation’s Responsible People to disclose conflicts of interest, it did not restrict them from being involved in decisions to:

  • execute a contract or agreement, or
  • vote on matters involving a contract

in which they had an interest.

Response

In response, the organisation made amendments to clauses in its governing document. These amended clauses stated that:

  • Responsible People who did not have a conflict of interest could decide whether someone could participate in discussion on matters for which they had a conflict of interest,
  • a person should not be allowed to vote on matters or execute contracts where they have a conflict of interest, and
  • a Responsible Person with a conflict of interest would not be allowed to participate in the execution of a contract, arrangement or understanding.

Outcome

After the organisation formally made the changes to its governing document, the ACNC registered it as a charity.