Everyone needs to play by the rules, including companies. But how do companies manage what kind of business they are in, the rights and duties of shareholders and directors, and how they should interact with each other?
This is where a company constitution becomes useful. A company constitution is a set of legal documents that define how a company can operate.
A constitution can be adopted when you register your company, after registration, or not at all. For constitutions adopted when you set up a new company, you’ll need each shareholder of the company to agree in writing to the constitution’s terms.
If you want to adopt a constitution after registering your company, you’ll need to do so by a process found in the Companies Act 2006 (CA 2006).
Do I Need A Company Constitution?
Having a company constitution is not strictly a legal requirement, but it’s a very good idea to have one. It primarily includes the ‘Memorandum of Association’, which is adopted when the company is incorporated with its initial shareholders, and the ‘Articles of Association’ which specify how a company must be run, governed and operated.
The administrative burden on private companies was lightened by the CA 2006 by the merging of these two constitutional documents – the memorandum and the articles of association. The memorandum of association used to contain the objects of the company, detailing the purposes for which the company would operate. These objects can now be outlined in the articles of association, the key public-facing governing document for a company.
It is a statutory requirement that all registered companies have Articles of Association, and in the absence of a company adopting bespoke Articles, a set of default Articles, known as the ‘Model Articles’ apply.
In addition, the Shareholders may enter into a Shareholders Agreement to supplement the Articles, which contains details about the running, governance and ownership of the company that they may want to keep out of the public domain. Unlike the Articles, the Shareholders Agreement is a private document, as there is no requirement to file it at Companies House.
You can gain more protection by having a well-developed company constitution. Often, disputes can arise over key company decisions or whether a person was able to make a decision at all.
From a practical perspective, both shareholders and directors must operate within the scope of the company’s constitution. With well-drafted constitutional documents your company will have the benefit of additional protection and clarity.
Can I Change A Company Constitution?
You can change your company’s constitution only with a shareholders resolution.
A regular review should be undertaken to ensure that the company’s constitution is still fit for purpose in the context of its current operations and structure.
When passing a resolution actioning said changes, you should be aware of any specific notice requirements set out in your existing company constitution, and ensure you comply with these so the resolution is valid. You will also have to notify Companies House that you have changed the constitution.
If you are operating a company, be sure to make sure that the right rules are put in place so that you can make key business decisions clearly and conveniently. If you would like help drafting a company constitution, or even just have a few questions, the friendly team at Sprintlaw are ready to help. Contact us by email at [email protected].
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