Constitutions - 3 tips

A company’s Constitution – it looks like fine print, but it’s an important document. Does your company have one? Are you a shareholder in a company, and if so, do you know if the company has a Constitution? If so what does it say? When did you last look? Does it matter if there isn’t one?

Here are three important things to consider:

If you are involved in a company, and it has a Constitution – read it.  

A Constitution is an important document. It sets out the rights, duties and obligations of a company, its directors and shareholders.   It deals with the rules surrounding share issues and share transfers (e.g. it could include pre-emptive rights processes,“drag-along” and “tag-along” rights), director appointment processes,shareholder voting, board and shareholder meeting processes). Don’t wait to read the Constitution until when you think you “need to”, by then it might be too late. 

If your company doesn’t have a Constitution – think about getting one.  

It is not legally necessary for a non-public company to have a standalone Constitution. The Companies Act 1993 includes a set of rules for the company, its directors and shareholders which together create a “default constitution”.  However, if you want to modify some of the Companies Act’s default provisions then those changes need to be in a separate Constitution (for example, giving different director appointment rights). Plus, there are a few things which a company cannot do unless these things are specifically provided for in a Constitution (for example,buy-back shares from existing shareholders and hold those shares in itself). And quite apart from anything else, the very act of preparing a Constitution (or at least checking it from time to time) means that directors and shareholders familiarise themselves with what it says and so how their company operates, changing things as necessary. There is value in this exercise alone.

If you have a Shareholders’ Agreement, but no Constitution – get one.  

If you have a Shareholders’ Agreement, then a Constitution that complements that document is generally essential. As mentioned above, there are certain rules in the Companies Act which will apply unless they are negated or changed in a company’s Constitution.  The Act is quite specific about what amounts to a Constitution – and in general a Shareholders’ Agreement is not a Constitution. So if you have a Shareholders’ Agreement but no Constitution, and there are things in your Shareholders’ Agreement which are intended to override something that the Act says then unfortunately those Shareholders’ Agreement provisions will not be apply (ouch!). Meaning that you will be left with whatever the default position is as set out in the Companies Act, which may suit no-one.  

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Author: Sarah-Jane Lawson

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