Company Constitution: What It Is and How to Amend It
When buying or setting up a new company, you may wish to change the way the company is being regulated and managed. The most crucial document to be amended in this case would be the company constitution. The company constitution (“the Constitution”) outlines the objects of the company and governs the rights, powers, duties and obligations conferred on the company, its board of directors and its shareholders.
As of 3 January 2016, the Constitution consists of both the Memorandum of Association and Articles of Association. No action is required if the company you purchase or merge with has their own existing Memorandum and Articles of Association. The company may choose to adopt a new Constitution with content merged from the Memorandum and Articles of Association as well. If you are setting up a new company, then you have to submit the Constitution in its new format.
A model Constitution has been provided in the First Schedule of the Companies Act for business owners to refer to. For the benefit of the majority of companies that still rely on the old Memorandum of Association and Articles of Association, this article will explain the functions and content of both documents respectively.
Memorandum of Association
The Memorandum of Association is a corporate document that set outs the basic characteristics of the company and is mainly relevant for explaining what the company does to an external audience. As a matter of law, it should be dated and must include the company name, liability of members, a statement indicating the subscribers’ desire to form the company and their agreement to take up shares in it, and the details of the company’s shareholders. These details consist of their full names, addresses and their occupations.
The Memorandum can also set out the company’s objects, any restrictions on the company’s capacity and powers and an entrenchment clause if the new company owners wish to make the amendment of certain clauses difficult.
Having an entrenchment clause allows you to make another specified provision alterable only if certain conditions are met or if you have more than 75% support from shareholders. The entrenchment clause itself can only be amended if unanimity among shareholders to change it is achieved. Any other terms relevant to the company in general may also be included in the Memorandum.
Effects of the Memorandum of Association
It is important to consider the effect of the Memorandum of Association on transactions that the company may enter into. With sections 23(1) and 25(1) of the Companies Act now in force, the legal problem of ultra vires, where any acts beyond the powers or capacity dictated to the company by the Memorandum of Association would be invalid, will now be avoided. These acts will still be considered valid and legally enforceable.
However, the limits imposed by the Memorandum of Association can still function as a form of internal policy on a company’s capacity and external powers, and breaches of the Memorandum can be penalised accordingly from an internal perspective.
Articles of Association
As for the Articles of Association, they are the primary provisions that regulate the internal management and affairs of the company. The Articles bind even those who do not agree to them. With regard to the content of the Articles, there are no mandatory requirements that apply.
Table A in the 4th Schedule of the Companies Act provides an idea of what can be included. Articles normally deal with matters that relate to the issue of share capital and the variation of rights attached to shares, liens and calls on shares, transmission and forfeiture of shares and procedures for general meetings of the company and notices relating to these meetings. The Articles are interpreted as business documents and validation of actions within the company will be favoured if commercially justified.
Making Amendments to the Constitution
Amending any provision of the Memorandum or the Articles requires a special resolution to be passed. This special resolution requires more than 75% support from shareholders, with the requisite notice period served. The notice period is 14 days for private companies and 21 days for public companies.
Ensuring the Constitution is Enforced
As the Constitution amounts to a statutory contract between the company and its members and between members themselves, the members, otherwise known as shareholders, can bring an action to enforce the provisions of the Constitution. Likewise, the company can also bring an action to compel its members to comply with the Constitution’s provisions. Non-members or third parties do not have such rights.
So in crafting or amending the constitution of a company, it is crucial to consider the consequences it may have in limiting your actions as a business owner or shareholder, and those of your other shareholders and the company in general.
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