Company Constitutions and Shareholders’ Agreements: Understanding the Difference
Company constitutions and shareholders’ agreements may appear to serve similar purposes at first glance, leading some business owners to question whether both are necessary. However, these documents serve distinct yet complementary roles that together provide a comprehensive governance framework for your company. While not all companies are required to have a constitution (as they can rely on the replaceable rules in the Corporations Act 2001 (Cth)), having both a tailored constitution and a shareholders’ agreement offers the most robust protection and clarity for all stakeholders.
What is a Company Constitution?
A company constitution is a document that sets out the rules governing the internal management of a company. Under the Corporations Act 2001 (Cth), it operates as a contract between the company and its members, and between the members themselves. It is relevant to all company members including directors, shareholders, and company secretaries.
A company constitution typically covers topics such as:
- Company name, type (legal structure) and objectives
- The rights, powers and obligations of directors, shareholders and company secretaries
- Decision-making processes, including voting requirements, meeting procedures (such as notice periods and quorum requirements), and the powers of different positions
- Procedures for the appointment, removal and replacement of directors
- The classes of shares and the rights attached to each class
- The procedure to alter the constitution, which usually requires a special resolution (75% of votes cast by members entitled to vote) and lodgement of the amended constitution with ASIC
What is a Shareholders’ Agreement?
A shareholders’ agreement is a private contract between some or all shareholders that sets out their specific rights, obligations and restrictions in relation to the company and their shares.
A shareholders’ agreement typically covers topics such as:
- Rules for the admission of new shareholders and restrictions on who can become a shareholder
- Financial management including dividend policies, capital raising requirements, and restrictions on distributions
- Restrictions and requirements on the transfer of shares, including pre-emptive rights (also known as rights of first refusal, which give existing shareholders the right to purchase shares before they are offered to external parties), drag-along and tag-along rights, and restrictions on permitted transferees
- Communication and decision-making: specific requirements for shareholder communication, decision-making processes, and dispute resolution procedures
- Buy-out provisions triggered by events such as default, retirement, incapacity, death, or voluntary exit
- Confidentiality and non-disclosure obligations
What Are the Differences Between the Two?
These documents differ in the following four key areas:
- Purpose: the constitution provides the foundational governance framework and ensures compliance with the Corporations Act 2001 (Cth), while shareholders‘ agreements address the specific commercial arrangements and relationships between shareholders
- Privacy: a constitution, if adopted, is a public document that must be lodged with ASIC and can be accessed by anyone. In contrast, a shareholders’ agreement is a private contract between the parties who sign it and is not publicly accessible.
- Scope: under section 140 of the Corporations Act 2001 (Cth), a constitution automatically binds the company and all its members (including future members) as if each had signed it. In contrast, shareholders’ agreements only bind the parties who sign them and do not automatically bind new shareholders unless they agree to be bound.
- Amendment Process: constitutions can be amended by a special resolution (at least 75% of votes cast by members entitled to vote on the resolution), while shareholders’ agreements typically require unanimous consent unless the agreement itself specifies otherwise.
How Do They Work Together?
As you can now see, both documents are necessary because they both serve distinct purposes. They complement each other because their roles work together to ensure effective governance and a well-structured environment. Such clear governance structures can help attract investors, minimize disputes through well-defined processes, and create a solid foundation for long-term business success.
Together, these documents clarify the company’s overall governance rules while also protecting minority shareholder rights through specific provisions that may not be available under the replaceable rules or a standard constitution alone. Together, they address both day-to-day governance requirements and provide clear protocols for handling specific scenarios such as shareholder exits, disputes, or changes in ownership.
If you have any questions about company constitutions and shareholders’ agreements for your business, or need assistance drafting or reviewing these documents, please do not hesitate to contact us.
DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.