What’s the difference between a company constitution and a shareholders’ agreement?
Corporate Law - 18 Jan 2022
So, you’ve read about why a shareholders’ agreement is an important aspect of your company, but what’s the difference between a shareholders’ agreement and a constitution?
In a nutshell, a company constitution includes general rules for the governance of a company as a whole. In contrast, a shareholders’ agreement regulates the rights, powers, and responsibilities of the shareholders themselves. It may be necessary to have a shareholders’ agreement in addition to a constitution to ensure that all rights and responsibilities, as well as rules regarding company management and disputes, are comprehensively addressed.
Whether or not your company will benefit from implementing a shareholders’ agreement will depend on the number of shareholders involved and the stage of the corporate lifecycle that your company sits.
What is a constitution?
A constitution governs the management of the company, including the mechanisms for day-to-day management. Among others matters, constitution provisions often cover the duties and powers of company directors, how shares are issued, and the processes regarding holding meetings and passing resolutions.
A constitution can:
- be drafted specifically for a particular company; or
- use the ‘replaceable rules’ as set out in the Corporations Act 2001; or
- be a mixture of both.
What is a shareholders’ agreement?
A shareholders’ agreement governs the relationship between shareholders (members) and the company. It can also include provisions regarding relationships between shareholders, for example, protection for minority shareholders or rules for shareholders of a specific share class. It often works as a mitigation strategy for potential issues between shareholders, for example:
- when appointing or replacing directors;
- bringing on new investors;
- dealing with deadlocks and disputes; and
- valuing and transferring shares.
What are the major differences?
The confusion about these two legal documents is absolutely justified; there can be some common crossover between the two.
However, the crux of the differences comes down to shareholders’ agreements being optional, confidential, and more particular to the company’s circumstances. A shareholders agreement acts as a way to ensure that existing and new shareholders have consistent expectations of their role while allowing them to best work together to achieve company growth.
On the other hand, constitutions are mandatory (unless the company simply chooses to use the replaceable rules in the Corporations Act) and involve broad, high-level governance of the internal management of the company. They aren’t limited to shareholder powers and also include more provisions relating to directors.
The requirements for a constitution and a shareholders’ agreement will vary depending on the structure and demands of your company. If you are interested in setting up either of these legal documents, get in touch with our friendly and experienced team at ABA Legal Group. Our trusted advisors can assist with determining whether you are going to benefit from implementing a shareholders’ agreement in the first place, and if so, ensure that the shareholders’ agreement is appropriately adapted to your unique circumstances and requirements while maintaining consistency between the shareholders’ agreement and constitution.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.