Tailored Constitutions vs Shareholders’ Agreements

At first glance, it would seem that a Constitution and a Shareholders’ Agreement are similar in that they both regulate the rights and obligations of a Company’s Shareholders.  A further look at two typical documents of this type reveal that they contain different rights and obligations and can be used in different ways depending on the circumstances of the Company.

The structural differences

Before looking at some of the differences, it is important to understand that a Constitution is generally controlled, in part, by the provisions of the Corporations Act 2001 (Cth) (Act) and amending it requires 75% of Members that are entitled to vote in the general meeting to vote in favour of amending it (Special Resolution).  Conversely, a Shareholders’ Agreement is essentially an agreement between the signatories and can usually only be amended by each of the shareholders agreeing to any proposed amendment.

Therefore the key difference lies in the fundamental basis on which the two documents are created and amended.  Both documents must not conflict with any of the provisions of the Act.
Generally speaking, a Constitution will set out the broad provisions relating to the governance of the Company, whilst the Shareholders’ Agreement is a more specialised document tailored to the particular purposes of the Company, the nature of its business and the wishes of its shareholders.  Shareholders’ Agreements will usually include more prescriptive requirements relating to the operation of the Company and controls what all Shareholders would like to see in regard to the operation and management of the Company.

Why isn’t a standard Constitution sufficent?

Both majority and minority Shareholders need protection from each others’ actions or inactions (as the case may be).  For example, without a Shareholders’ Agreement, minority Shareholders may be exposed to the actions of the majority who are able to amend the Company’s Constitution provided that they hold the requisite voting power of 75%.
Similarly, majority Shareholders may wish to ensure that the entire share capital of the Company can be sold if a bonafide purchaser for value makes an offer for all the shares.  Both a tailored Constitution and a Shareholders Agreement can include clauses to this effect (Drag Along Rights).  A standard Constitution does not include such a provision.
This is but one example of why a standard Constitution is not sufficient.

Inconsistency and prevalence

To the extent the Shareholders’ Agreement and Constitution deal with similar issues and there are any inconsistencies, it is common to provide that the Shareholders’ Agreement prevails to the extent of the inconsistency.

Can a Constitution include provisions that are usually included in a Shareholders’ Agreement?

A tailored Constitution can generally include provisions that are included in a Shareholders’ Agreement.  Provided that there is no attempt to contract out of any of the provisions of the Act and that the inclusion of any such provisions are not deemed to be oppressive to minority Shareholders.

The advantages of using a tailored Constitution

If the decision is made to incorporate the provisions usually associated with a Shareholders’ Agreement in a Constitution, it is usually because a Company is raising capital and acquiring more and more Shareholders.  New Shareholders will not be required to agree to the Shareholders Agreement, but simply consent to being a Members and to be bound by the Constitution.

Further information

Related articles

What do Shareholders’ Agreements protect against?

What is a Shareholders Agreement?

Further information

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Link: dundaslawyers.com.au
Telephone: (07) 3221 0013
Facsimile: (07) 3221 0031
Mobile 0419 726 535

Disclaimer

This article is general in nature and cannot be regarded as legal advice.  It is general commentary only. You should not rely on the contents of this article without consulting one of our lawyers. If you would like advice regarding how the law applies to your individual circumstances, then please contact one of our legal practitioners.

 

Dundas Lawyers
Street Address Suite 12, Level 9, 320 Adelaide Street Brisbane QLD 4001

Tel: 07 3221 0013

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