Company Constitution

What is a Company Constitution?

A company constitution is a legally binding agreement between your company and its internal members that defines rules related to corporate governance, business activities, and rights and obligations of its internal members.

It is submitted as part of a company’s incorporation process and is a valuable piece of the broader GRC puzzle.
 

Company constitution documents
 

A company constitution has the following components:

• Name and type of company
• Decision-making and board member selection structure
• Nature and extent of liabilities of company members
• Details of company shareholders
• Business objectives and activities of the company
• Rules and regulations pertaining to share issuance, board resolutions and director duties

Moreover, having a defined constitution in your company documentation may empower your company to perform certain actions that are not defined with the relevant company legislation in your jurisdiction.

For instance, it enables your company to acquire shares from existing shareholders and restrict transfer of shares.

Is a company constitution the same as articles of association?

Prior to 1988, companies required an article of association as well as a memorandum of association. Now, a single document – the company constitution – replaces these two separate articles.  

Company constitution vs shareholders agreement

A company shareholders agreement is different to a constitution. While the former regulates the rights, powers, and responsibilities specifically of shareholders, a company constitution contains general rules for the governance of the overall company.
 

Why is a Company Constitution Important for Business Today?

A company constitution enables your company to:

• Pre-define rights and obligations of stakeholders, along with company’s policies and processes

• Ensure a balance of power between shareholders and directors, especially in cases of evident gaps in control
• Retain control over your company as it grows and provide flexibility and certainty in governance

Why is it Important for an Event Tomorrow?

A company constitution is important for an event tomorrow, as it helps:

• Benchmark the existing processes and regulations of your company against your competitors

• Evaluate details on share capital, policy on share transfer and issuance and stake owned by your shareholders
• Resolve any potential disputes related to ownership of shares, internal processes, management or compliance
• Assess the relationship between your company and shareholders
• Understand what rules exist that may impact on the ability to achieve or process to implement a proposed transaction like a merger or acquisition

Pros of Addressing Company Constitutions

• Improvement in decision-making ability of your company by defining roles and powers
• Reduction in internal disputes as process of appointment and removal of directors is pre- defined
• Flexibility to modify or replace rules and regulations that are provided for as standard under the relevant company legislation in your jurisdiction

Cons of Not Addressing Company Constitutions

• Lack of clarity in how to deal with particular situations
• Board of directors may lack the required powers to address certain matters that are not common but important to your company
• Increased difficulty in protecting the rights of minority shareholders