Do companies need constitution?

Company Law

Following yesterday’s post, the next step after execution of a shareholders’ agreement is to amend the constitution of the company (if there is one) to be consistent with the shareholders’ agreement.

A company without a constitution should consider adopting one which is consistent with the shareholders’ agreement.

Save for a company limited by guarantee, it is not mandatory for a company to have a constitution under the Companies Act 2016. However, it would be easier for the company, directors and shareholders to have their rights, duties and powers to be set out in one document i.e. the constitution, compared to being governed by various default provisions under the Companies Act 2016.

Whilst most shareholders’ agreements provide that the terms in the agreements prevail over constitutions in the event of inconsistencies, caselaw has shown that constitution has wider legal effect than a shareholders’ agreement.

A shareholders’ agreement binds the shareholders and the company (if it is a party to the agreement). A constitution binds the company, shareholders as well as directors.

To give full effect to a shareholders’ agreement, the relevant provisions should be incorporated into the constitution of the company.

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This post was first posted on Linkedin on 9 February 2021.

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