What is a Company Constitution?
Company Constitution is the term used for the legal documentation in Singapore that specifies rules and regulations on how a company will carry out its business activities and be governed. It is prepared as part of the incorporation company in Singapore process and new companies are expected to submit an official Company Constitution. The term can vary in different law jurisdictions and may also be referred to as the Articles of Association in places like the UK, Hong Kong and Australia, we’ll tell you why in the next section.
Aside from the legal obligations, the Company Constitution (or Articles of Association) brings about many benefits to a newly-incorporated company. It encompasses all the important information regarding the very process of incorporation, including the company members’ rights and the relationships between them. It defines the company’s relationship with each individual member and the relationships between the members of the company, all which agree to respect the provisions set out in the company constitution. As such, it is the first line of prevention for potential conflicts and unwanted litigation.
Because the company constitution is a legally binding contract between the company and its members, the members can bring an action to enforce its provisions . Similarly, the company itself can also enforce the provisions of the company constitution to compel its members to comply with it.
Historical Context
Historically, common law jurisdiction used to have two documents to constitute a company – the Memorandum of Association and the Articles of Association.
The first document, the Memorandum of Associations, defines the company structure, company objectives, and the company members’ liability (basically the rules applicable towards third parties outside the company). When it comes to the Articles of Association, they described the company regulations, internal government, and company members’ rights (the rules applicable within the company).
However, a trend has occurred towards merging those two documents into one. Today, this unique document contains the same information as the Memorandum & Articles of Association and serves the same purpose. It is considered an official Company Guidebook which acts as a rulebook for all company members.
In the UK, HK and Australia the Memorandum was simply retired from the constitutional documents, leaving the Articles of Association being the unique constitutional document comprising all the rules and regulations that govern the company (internally as well as towards third parties). However, in Singapore, the Company Constitution remains as the specific name of the legal documentation required for incorporation.
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Drafting the Company Constitution
There are several mandatory segments that need to be included in the company constitution:
- Name clause which states the name of the company.
- Liability clause which defines the extent of the company members’ liabilities limitations
- Subscriber clause which outlines original company shareholding.
- Objects clause which lists the activities and objectives of the company.
- Rules and regulations regarding both internal and external compliance with regulatory authorities.
Ultimately, it depends on the company which further information will be included in the final version of the document, but most commonly it boils down to:
- Company type and the company’s business structure.
- Shares issued by the company, matters regarding their transfer, and ways in which share certificates will be dealt with.
- Dividends and the plan of their payment to shareholders.
- Directors, their powers and duties, the number of directors, the frequency of their meetings, weight of voting, etc.
- Company documents and records from the meetings.
- Conflict of interest and methods of their resolution.
- Loans and their issuing to third parties.
- Indemnities that are given to directors and employees.
The above is not a complete list and can be expanded almost indefinitely due to the diversity of industries, variety of company types, and a businesses’ individual requirements. Although it can be challenging to predict all the situations in which the company constitution can come in handy, it is imperative to establish an extensive one as a point of reference for the most commonly cited issues and then if need be, alter it in the future.
Important Considerations
In order to to at least comply with mandatory clauses that need to be included in the company constitution, some of the most important considerations include:
Business goals
How do you see yourself and your company in 5 years? While it may seem like a cliche or even redundant to ask, the answer will greatly affect the specifics of the company constitution. All provisions and definitions listed within the document need to be in line with your business objectives and should clearly state the activities that will be taken, as well as the situations that the company will not engage in.
Company structure
The company constitution document can help prevent potential conflicts among company members. Taking this into account, it is imperative to clearly define each member’s role and authorisations, thus further facilitating any decision-making processes, like electoral procedures and voting on certain subjects.
Rules and regulations
To ensure all company members’ actions are aligned with the company’s mission and vision, list a set of rules and regulations for everyone to follow. The rules and regulations most commonly refer to the director’s duties, relations among shareholders, the issuing of shares, conduction of AGMs etc.
Important: While the company constitution has a minimum requirement regarding the information that needs to be included in the document, you are not limited by the number of items that can be listed in the documentation. This means that the person drafting the documents is allowed to include as many specific rules and regulations they feel are necessary to ensure the most optimal company management and governance.
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Amending the Company Constitution
The company constitution is a statutory requirement for company incorporation and is drafted early on. Considering this, it is not uncommon for businesses to notice over time that certain provisions should be amended to improve company governance and business management. Typically, to make amends, the company first needs to give 21 days notice and prove the changes were approved by the majority of votes (75% or more).
Bottom Line
All company members are required to act in accordance with the company constitution. It is an official guidebook which affects all activities performed internally and externally, that way ensuring all business operations are performed in line with company objectives, values, and culture. The company constitution establishes a cohesive structure of the company members, relationships between them, and work they perform as a part of their business responsibilities.
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READ: Guide to Incorporating Your Company in Singapore
READ MORE: Shareholders Resolution to Alter Articles of Association
