How to Draft a Company Constitution
A Company Constitution, previously known as 2 separate documents, the Memorandum of Association and the Articles of Association (M&AA) is a formal document that sets out the basic framework on which your company is organized.
The Company Constitution defines the rules by which you company operates, and outlines your business activities, legal entity name, the procedures by which the company’s owners, shareholders and directors will conduct your business, and the rights and privileges of the company and those of its principal officers and members.
That said, the Constitution is an important piece of legal document that has to be considered seriously when forming and incorporating a new company. You are required to file the constitution with the Accounting and Corporate Regulatory Authority (ACRA), and if you do not wish to create your own constitution, you may choose to adopt the Model Constitution provided by ACRA at the time of your company’s incorporation. Once filed, should you need to change or adopt a new Constitution, a resolution of shareholders must be passed and a copy filed with ACRA for it to take effect.
The Company Constitution is Mandatory
All company members are expected to abide by, and act in accordance with, the Company Constitution.
Under the Companies Act (Cap. 50), you are required to file a Constitution when forming a new company, i.e. it is a requirement prior to a company’s registration. As long as the Constitution is in line with the general provisions of the Companies Act, it will be considered a binding agreement that exists between the company and its shareholders. In addition to meeting legal requirements, we advise business owners, shareholders and principal officers to refer to the Company Constitution before any important decisions within a company is made, such as the appointment or removal of shareholders and company directors.
What must I include in my Company Constitution?
It is up to the members of a company to decide on what items are to be included in the Constitution, but we recommend that you use a licensed and experienced Filing Agent or corporate secretarial service provider to help ensure you cover the mandatory clauses that are aligned with the Companies Act.
The clauses to be included in the Constitution will vary depending on the structure of your company and the nature of your business activities. However, the following information MUST be included:
Name Clause: specifies the legal name of the company (as approved by the Registrar) that will be used in all the business dealings and documentation.
Registered Office Clause: specifies the registered office address where the company will keep its records such as statutory registers, resolutions, minutes etc.
Objects Clause: states the business objectives and activities of the Company – mandatory for a Company Limited by Guarantee (CLG)
Liability Clause: specifies whether the liabilities of its members are limited or unlimited, as well as providing clarifications over the position of the company’s members and their respective liabilities in the event of a dissolution of the company.
Capital Clause: states the share capital amount, division of share capital of shares of fixed value, and assignment of shares amount for each shareholder.
Subscriber Clause: specifies the full names, address and occupations of subscribers to the Company.
What Do I need to Consider When Drafting my Company Constitution?
Most companies can adopt the Model Constitution provided by ACRA at the point of their incorporation, you may want to consider drafting your own Constitution to suit the unique needs of your business. Remember that the Constitution is a legal document that defines the rules by which you operate your business – as such, a Constitution that is specifically written for your company will ensure that the interests of all stakeholders are adequately protected, especially when you may have members who may be trustees or overseas holding companies.
Drafting your own Constitution need not be an overly-complex task, and we recommend the following guidelines to help you:
1. Business Activities and Goals: An effective Constitution is one that considers the primary and secondary business activities of the company, and the goals that the company wants to achieve as the starting point when drafting the Constitution. This will allow you to have a clear understanding of the types of situations and activities your company will engage in, as well as the provisions and directions that govern how business will be conducted to achieve your objectives.
2. Company Organization: A Constitution that has clearly defined roles, authorizations and responsibilities of its owners, shareholders and directors can help prevent potential conflicts among its members. This will also define the decision-making processes and voting rights of members.
3. Mandatory Clauses: These are the minimum requirements for information that is required by ACRA in your Constitution, and it goes without saying that they must be included in order for the Constitution to be in effect in accordance with statutory requirements and provisions in the Companies Act.
4. Other Rules & Regulations: You can include additional rules and regulations for company members to follow, including directors’ duties, shareholder relationships, issuance of shares, conducting of Annual General Meetings (AGMs) and Extra Ordinary General Meetings (EOGMs) etc.
An important point to note that while the Companies Act has laid down the minimum requirements regarding the type of information that must be included in the Constitution, you are not limited by the number of items that can be listed. This means you are free to include as many specific rules and by-laws you feel are necessary to ensure optimum management and sound governance to protect the interests of all stakeholders of your company.
FidCorp Services is a provider of professional corporate secretarial, accounting and business advisory solutions. Find out more about what we can do for you: www.fidcorp.com.