What is the constitution of a company?

            The Constitution of a company is a legal document that maintains how the company and the company’s activities are being regulated and managed. Specifically, the Constitution outlines the company’s governing rules and procedures, purpose of the company, as well as its board of directors and shareholders, and their rights and responsibilities. All companies have to ensure that the execution of their business is in accordance with what is stated in the Constitution. Thus, this means that when setting up a new company or when buying over a company, individuals may amend the Constitution according to how they want the company to be regulated and managed. The Constitution of a company is also required during the incorporation.

 

            The company Constitution was previously made up of two documents, the Memorandum of Association and the Articles of Association. Following the Amendment 2014, these two documents have merged into one and are hereafter referred to as the Constitution of a company. 

According to the Companies Act, the following sections are mandatory in a company’s Constitution:

 

  1. Name Clause

The name approved by the company registrar has to be specified. This will be the name used at all times in business dealings and documentation.

  1. Registered Office Clause

This clause specifies the address of the company’s registered office. All records of company documents, such as statutory registers, have to be kept at the registered office address.

  1. Liability Clause

This clause specifies the extent of liability of the members of the company. This provides clarification to members and their liability in the case of the dissolution of the company.

  1. Capital Clause

The share capital amount of the company has to be stated under this clause, along with the division of the share capital.

  1. Subscriber Clause

The names, addresses and occupations of subscribers to the company are stated here.

  1. Objects Clause

This clause specifies the business activities of the company and the manner of operation. It also specifies the business activities that the company cannot take part in.

  1. Rules and Regulations

The following rules and regulations mandate how business decisions are made and how the company’s activities are regulated. This can also help companies to be compliant and to adhere to regulatory authority guidelines. The rules can be decided based on the company’s discretion, and will usually relate to the following areas:

    • Shares – issue of shares, transfer of shares, alteration of share capital, etc.
    • Meetings – general meetings and the notice and proceedings of such meetings, etc.
    • Directors – appointment of directors, duties and power, and managing/substitute directors, etc.
    • Secretary – appointment and removal of a company secretary, etc.
    • Common Seal – ensuring the safe custody of the seal, persons authorised to use the seal, etc.
    • Financial Statements – accounting records to compile company’s transactions and the maintenance of such records, etc.
    • Dividends and Reserves – declaration of dividends, purpose of reserves, etc.
    • Capitalisation of Profits and Reserves – approval of capitalisation, director’s powers in giving effect to capitalisation, etc.
    • Sending of Notices – sending of notices to members and subscribers and the methods of doing so, etc.
    • Winding Up – method of winding up, role and power of director in the winding up of the company, appointment of liquidator, etc.
    • Indemnity – indemnity for the company’s director, secretary, auditor and officer against any liabilities during the course of business operations

In order to draft out the Constitution in the mandatory framework described above, there are several factors that individuals would have to consider first. Giving ample thought and consideration to the following factors will help ensure a clear and formalized Constitution which would be useful during the course of the business, especially when circumstances involving crucial decisions arise.

 

  1. Business Objectives
  • There should be clear goals for the company, and the Constitution will be tailored in accordance with those goals
  • This is also reflected in the Objects Clause, under which the company states their main business activities and the activities that they will not partake in

 
 

  1. Decision-Making Structure
  • Decision-making structures should be envisioned and stated specifically in the Constitution in order to prevent conflict over decisions about the company
  • The structure also has to comply with legal and compliance regulations
  • This should be reflected in the Objects Clause or the Rules and Regulations section

 
 

  1. Specific Rules & Regulations
  • This pertains to rules and regulations unique to one’s company, depending on its mission and values profile
  • For instance, if a business owner wishes to offer future shares to existing shareholders first before availing them to the market, then this should be included in the Constitution of the company

 
 

  1. Mandatory Sections
  • Mandatory sections refer to the remaining sections that have to be included in the Constitution in accordance with Section 22 of the Companies Act, such as the Name Clause and the Liability Clause

 
 

Finally, when drafting the Constitution, individuals may wish to refer to a model Constitution provided by the Companies Act. Alternatively, many individuals acquire help from external sources, such as lawyers or qualified corporate secretaries, to assist them in forming the Constitution, given the importance of this document. In all, the Constitution is one of the most important documents when setting up the company, so great care and attention must be directed to the process of drafting it. 

 

 

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