A company’s shareholders (investors) and directors can look to both a company’s constitution and its shareholder agreement to figure out what rights and responsibilities they have, but at times there may be some overlap (hence the ‘bitta both’)!

A company might ordinarily start out with a company constitution, and later adopt a shareholder agreement if the company’s shareholders decide it’s time to put one in place. So what is the difference between a constitution and a shareholder agreement?

Company Constitution

A company constitution governs the relationships between the company and its directors, secretary and shareholders, and addresses key protocols that relate to a company’s day to day or management issues.

The constitution that will apply to a company will either be:

  1. A constitution that has been drafted by the company’s lawyers;
  2. If a company hasn’t adopted a specific constitution, the basic replaceable rules as set out in the Corporations Act 2001 (Cth) apply (as the name suggests, these rules are replaceable, so a company can replace these rules with a constitution of their own); or
  3. They can be a mixture of both of the above.

Often, when you incorporate a company online using services such as ECompanies or ClearDocs, these services have standard constitutions that they will use for the companies they incorporate.

Some of the matters covered by a company constitution include:

  • The appointment, powers and removal of directors;
  • Meetings of directors and how they are called and organised;
  • Issuing shares and the rights of shareholders depending on their class of shares, including their rights to payment of dividends; and
  • Matters dealing with the conflict of issues between directors personal interests and the interests of the company.

Importantly, a company constitution must be observed by all company shareholders and requires at least 75% of the company’s shareholders to vote in favour of any amendment to the constitution (called a Special Resolution).

Shareholders Agreement

Not every company will have a shareholder agreement, but we think it can be a good idea to consider putting one in place when there is more than one shareholder. A shareholders agreement aims to protect the shareholders’ investments by governing the shareholders’ conduct and investment framework. Some common issues addressed may include:

  • Methods of payment and calculation of dividends;
  • Transfer and issue of shares either to other shareholders or third parties;
  • Meetings of shareholders and how they are to be organised and who must attend;
  • Shareholders’ voting rights and whether they are equal or not; and
  • How the company can raise capital.

A shareholder agreement is binding between the signing parties and can usually only be modified by each of the parties agreeing to the proposed change.

The reality is that there may be some areas of overlap between the company’s constitution and a shareholder agreement. Often, the two documents need to work in sync. If there is an inconsistency between the constitution and the shareholder agreement, the shareholder agreement will normally take precedence over the constitution (the shareholder agreement will normally include a clause to this effect). It is best practice to amend the constitution if there ends up being an inconsistency with the shareholder agreement.

Does your company have both a constitution and a shareholder agreement? Have you had any issues in relation to the interaction between the two documents?

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