Why should a company adopt a constitution?
In the context of an M&A transaction, why can’t shareholders solely rely on a shareholders’ agreement after completion of the transaction?
Where there is more than one shareholder after completion, the next step after execution of a shareholders’ agreement is to either amend or adopt a constitution that 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 set out in one document i.e. the constitution, as opposed to being governed by various default provisions under the Companies Act 2016.
A constitution has wider legal implications than a shareholders’ agreement.
A constitution binds the company, shareholders, as well as directors. A constitution serves as regulations of a company and automatically binds any new shareholders.
On the other hand, a shareholders’ agreement binds the shareholders and the company (only if the company is a party to the agreement). For a new shareholder to be bound by an existing shareholders’ agreement, the new shareholder must agree to the terms of the shareholders’ agreement. Some shareholders’ agreements may specify that any share transfer to a new shareholder is contingent upon the new shareholder’s acceptance of the existing agreement.
To give full effect to a shareholders’ agreement, the relevant provisions should be incorporated into the constitution of the company.
This post was posted on LinkedIn on 25 January 2024.
