CS Law column: Should we have a company constitution? - Ashley Chrystall

Ashley Chrystall - CS Law.

Ashley Chrystall is a solicitor for CS Law.

OPINION

There are many things to consider when incorporating a company, including whether your company would benefit from having a constitution.

A company is not required to have a constitution as the Companies Act 1993 (“Act”) provides default rules relating to the rights and obligations of companies, directors and shareholders. However, a constitution allows you to alter the rules set out in the Act to suit your company.

It is important to be aware that your company’s constitution will have no effect where it contravenes, or is inconsistent with, the Act.

The Act contains three types of provisions:

1. Default provisions, which can be negated or modified in any way by a company’s constitution.

2. Optional provisions, which only apply if a company’s constitution expressly permits the company to use those rules.

3. Mandatory provisions, which cannot be modified by your company’s constitution.

A company’s constitution can include optional provisions, which expressly permit a company to take certain actions, such as:

· Restrict the transfer of shares (section 39). Without this, any shareholder can transfer their shares to any other party without the consent of other shareholders.

· Acquire its own shares (section 59).

· Issue redeemable shares (section 68).

· Indemnify or insure directors or employees, either current or former (section 162). It is extremely important to adopt a constitution in order to protect directors from liability as directors cannot insure against normal insurable director risks without the indemnity.

· Appoint an alternate director.

If you decide not to have a constitution, the default rules will apply, such as:

· The majority required for passing a special resolution being 75% (section 2(1)).

· All shares having equal footing, having one vote, and sharing equally in all distributions (section 36).

· Pre-emptive rights existing when issuing new shares, but not transferring existing shares (section 45).

· The board having unrestricted rights to manage, direct and supervise the company’s business (section 128).

· Interested directors being able to attend directors’ meetings and vote on the matter (section 144).

There can be significant risks in not adopting a constitution on incorporation. We recommend adopting a constitution to tailor the rules to fit your company’s specific requirements and do so on incorporation.

You can adopt a constitution after incorporation with approval from 75% of shareholders. If your company has a range of shareholders or there are shareholder disputes, it may be very difficult to adopt a constitution if one was not registered on incorporation.

It is unlikely that the default provisions will be sufficient, and we have highlighted some pitfalls in relying on the basic Companies Act provisions without a constitution.

If you would like assistance with creating, reviewing or updating your company’s constitution, we welcome your inquiry.