Company Constitutions and Shareholders’ Agreement
If you have an idea for a business, often you can find yourself so bogged down developing the product or refining the service that the company structures necessary to protect your interests are neglected.
A company constitution and shareholders’ agreement are two of a range of options available to you and your business partner(s).
Every Company has a constitution which governs how the company is to be run. If you have not formalised your own one you will be subject to Companies Act 1993. While the Act is better than nothing it does not cover a range of scenarios many take for granted and navigating your way around the act is not easy. For example, without a constitution the company is unable to:
- Repurchase its own shares;
- Issue redeemable shares;
- Refuse or delay the registration of a transfer of shares;
- Provide an indemnity to the directors; and
- Restrict the sale of shares.
Perhaps most importantly is the restriction of the sale of shares and pre-emptive rights. Where a party wishes to sell their shares in a small company, the other shareholders will generally want to reserve the right to have a first option to purchase those shares before they are offered to a third party. If this is what you and your business partner had envisaged then you should formalise this arrangement in a constitution. You may also wish to include a provision that on the death of a shareholder, his/her shares are to be offered to the existing shareholders and cannot first be distributed to a beneficiary of the deceased’s estate.
A shareholders agreement will often have a lot in common with a company’s constitution. However, as the shareholders’ agreement does not need to be registered with the companies office, it can deal with matters that you would rather keep confidential such as:
- What portion of net profit will be returned to the shareholders;
- A restraint of trade ;
- Business plans; and
- Dispute resolution processes.
On top of this, a shareholders’ agreements will often cover issues of control. You may, for instance, want to make sure 100% of the shareholders are required in order to approve spending over a particular amount of money.
There are no hard and fast rules about is required in a shareholders’ agreement and accordingly, they are easily tailored to your situation.