Company Constitutions

9 September, 2014 | Peter Smith

What is a constitution?

A constitution is a public document (i.e. it must be filed, uploaded and displayed on the Companies Office website) containing specific rules about how your company is to be run. A constitution can be registered at any time after incorporation but we recommend that you have a constitution drafted and filed when you are first incorporating any new company. A constitution sets out specific rules which govern the company itself, the board and each director and shareholder of your company.

Examples of what a constitution can include are:

• requirements for the appointment and removal of directors;
• recording the number of directors that need to sign any documents which bind the company; and
• details of any rights that must be observed by the shareholders before selling or transferring their shares. These rights are called pre-emptive rights.

Why do you need a constitution?

A constitution is not a compulsory document. If you do not have one, the provisions of the Companies Act 1993 (“the Act”) apply to and govern your company. However, you may not want these clauses to apply. It is not one size fits all legislation.

The most important function of a constitution is that it amends the standard provisions that are implied by virtue of the Companies Act. For example, a public company listed on the stock exchange will need a different constitution to that of a small private company with only two or three shareholders.

How does a constitution fit with a shareholders agreement?

The reason why you need a shareholders agreement as well as a constitution is because a shareholders agreement is a private document containing the specific and detailed agreement between the shareholders of a company, as opposed to the generic details contained in a constitution.

A shareholders agreement, for example, sets out the financial structure of a company, the responsibilities of working directors and how shareholders can exit the company. These matters are not covered in a constitution. Shareholders agreements can have more specific details of the shares and the shareholders of the company, particularly in regards to the finances and funding of the company. For example, it can record exactly how much start-up capital was put into the company by the shareholders.

Even if your company has a shareholders agreement, it may still need a constitution as well.

To discuss your company’s situation with a skilled commercial lawyer and whether or not a constitution is required for you, please contact skilled commercial lawyer, Peter Smith by phone on 09 837 6882 or email peter.smith@smithpartners.co.nz