Are you in business? Do you have a company? Do you have shareholders other than yourself in that company? Do you want to retain control of your company? Are you a shareholder or investor in a private company? Do you want to ensure you have a say in how the business is run? If you answered yes to any or all of these questions, then you need a constitution for that company.

We are often approached by clients either operating a business or invested in a business, who have had a falling out with their fellow directors or shareholders and want us to “fix” the problem. Unfortunately, while we can almost always do so, resolving conflicts amongst shareholders and directors is costly, time consuming and often detrimental to the business it should be running. To avoid much of the stress and cost involved, we always recommend that clients have a constitution for their company, regardless of whether they are in a stable relationship, and no matter how well they know their business partner(s).

Still not convinced? Then consider the following reasons why we think having a constitution is important for you and your company:

1. To specify how directors are appointed and removed.
   
Directors can be appointed by certain shareholders, non executive directors can be appointed by the board, replacement and notice options can be covered and so on. The constitution can also provide for the appointment of alternate directors, which could be vital if a director was overseas or otherwise unavailable. The constitution can enable the company or a shareholder to entrench a director. This simply means that a particular shareholder can appoint a director and only that shareholder can remove that director or directors can be appointed or removed by the majority of 75% or more of the shareholders.
2. Rights and obligations attaching to shares can be specified.
   
For example, the company could forfeit shares for non payment of calls, voting rights can be attached to certain classes of shares to ensure control, rights to equal shares in dividends and rights to equal shares in distribution of surplus assets can be varied, preferential rights to distributions of capital or income can be conferred, rights to appoint or remove directors or auditors, adopt constitutions, alter constitutions, approve major transactions, approve amalgamations of the company, put the company into liquidation can all be limited so you retain control of your company.
3. The procedure of share transfers can be restricted.
   
Under the Companies Act, any share can be transferred to anyone. The constitution can restrict this in a number of ways which is often very important in a closely held company. Usually we would provide for pre emptive rights to attach to the shares. That means any shareholder who wishes to sell their shares must first offer them to the other shareholder or shareholders at a set price which the other shareholder or shareholders can then decide to purchase. The constitution can also determine the manner of valuing the shares if there is any disagreement in this respect. We can also insert preliminary procedural steps such as approval by a special resolution of the shareholders before a share transfer can be registered. These procedures ensure that the remaining shareholders support the entry of a new shareholder or are able to control the company by retaining the shares amongst themselves.
4. The process of decision making can be specified.
   
Strategic planning and smooth governance are vital to ensure the company progresses. Procedures of all meetings, including voting and decision making processes, obligations of shareholders and directors can all be specified in the constitution to help this. The constitution can also determine how the board is constituted.
5. To empower the company to do certain actions which are not available under the Companies Act.
   
For example, the company can be enabled to acquire shares from shareholders and to indemnify and obtain insurance against directors and employees actions.
6. To restrain shareholders and directors.
   
A restraint of trade agreement in the constitution would bind incoming shareholders without their having to sign a separate deed.

Conclusion

A company constitution is a manner of controlling the operation of the company; it protects the rights of minor shareholders and ensures the company is controlled by those people that you wish it to be controlled by. This can of course lead to situations where disagreements amongst directors result in an impasse at which point you could either provide dispute resolution provisions or forced sale provisions (sometimes called a “shotgun clause”) although these are usually more appropriate to include in a shareholders agreement.

You should carefully consider the structure of your particular company. If your company has a majority shareholder and one or more minority shareholders, you need to turn your mind toward the decision making process and protecting your interest. Shareholder democracy may be the last thing on your mind while business is good and your relationship with your partner (or spouse) is going well. Nevertheless, the constitution should reflect the fact that despite the difference in shareholding, control of the company is to be equally shared. Of course if that is not your intention that should also be specified. Issues relating to share transfers, calls on shares, appointment and removal of directors, authorisation, remuneration and other benefits all need to be addressed well before the business starts to struggle or your relationship with other shareholders sours.

The process of adopting a constitution is fairly straightforward. We can prepare a draft for your perusal and then as shareholders you can pass a resolution adopting the constitution. The resolution, a notice, and the constitution are then filed electronically with the Companies Office.

If you wish to discuss the terms of a constitution, or prepare a draft constitution for you to look over, please contact either Andrew Simpson or Les Allen in our city office or Harshad Shiba in our Albany office.