Small Business

Constitution v Shareholders Agreement

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What’s the difference between a company constitution and a shareholders agreement?

Both are important documents which deal with the internal management of the company and the rights and obligations of shareholders, but they are two very different things. Usually, when you set up a company, you will receive an ‘off the shelf’ constitution which is not tailored to your company in any way – so it’s a good idea to get a shareholders agreement drawn up by a lawyer to make sure any gaps not addressed by the constitution are covered off.

Constitution

Put simply, the company constitution is a document which outlines the internal management procedures of a company and the relationship between its directors and shareholders.

Whilst it has no prescribed form, typical clauses within a company constitution might include those relating to:

  • appointment, removal and powers of the company’s directors
  • the organisational procedure for director’s meetings
  • resolution of conflict of interest scenarios between a director and the company’s interests
  • the rights of shareholders and the power to issue shares

If your company does not have a constitution, the Act sets out 39 rules which will be taken to apply to a company, called “replaceable rules”.

Shareholders Agreement

The shareholders agreement is, as the name suggests, an agreement between the shareholders of the company.

As opposed to the constitution, which outlines more “day to day” management matters, a shareholder agreement tends to supplement the company constitution. A shareholders agreement will need to be tailored to your company and circumstances, so it’s important to have this prepared by a lawyer. Typically, a shareholders agreement will deal with the following:

  • the relationship between the shareholders and the directors
  • the power of shareholders to appoint and remove directors
  • issuing new shares and the calculation of dividends
  • selling shares to third parties
  • resolution of deadlocks and disputes between shareholders
  • obligations and restrictions on shareholders, including restraint of trade and confidentiality

Whilst you are not required by law to have a shareholders agreement, it is strongly advisable to have one in place where there is more than one shareholder, even where others shareholders are your friends or family. A constitution alone would be unlikely to provide a clear mechanism for dealing with certain scenarios, such as resolving disputes.

If you would like help with drafting a shareholders agreement, contact us now for a fixed fee quote.

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