Companies are the most common form of business entity. They offer many advantages over sole trading and partnerships, in particular, limited liability for the business owners or shareholders.
When it comes to commercial governance, there are two main documents that companies need so that proper governance can be secured and possible future circumstances can be dealt with appropriately: (1) a company constitution and (2) shareholders’ agreements.
It is possible to simply incorporate a company and operate under the default provisions of the Companies Act. However, many businesses, particularly those with more than one principal, desire a greater level of governance control that sets out the corporate ground rules of the company and the rights and entitlements of its shareholders. This is customarily achieved through using at least a company constitution, and (more often) a constitution combined with a shareholders’ agreement.
As the trusted experts in commercial law, here at Gillespie Young Watson we break down these two essential documents in commercial governance and discuss the importance of a combination of the two in more depth below.
What’s a Company Constitution?
Constitutions typically modify and adapt the default provisions of the Companies Act simply by replacing or amending them with a more detailed and business-specific governance document. Matters in the Companies Act that are often modified include the manner of appointment of directors, and control on the sale of shares or known pre-emption rights. A common example of a pre-emption right is the right of existing shareholders to acquire new shares issued by a company before they are offered to a third party.
Constitutions are public documents and they can be viewed on the Companies Office register. Often there are matters shareholders wish to agree on which they do not wish to be public. Shareholder agreements meet that need.
What’s a Shareholders’ Agreement?
A shareholders’ agreement is basically an agreement between the shareholders or “owners” of the company. It exists to protect the shareholders’ investments and stock ownership, and ideally establishes a fair relationship between all shareholders and the company’s governance.
Shareholders’ agreements typically deal with matters like distribution policies, role expectations of the principals, death or disability contingencies, exit regimes and other essentials and private matters.
Commercial Governance Solutions
The combination of a constitution and shareholders’ agreement can provide a level of certainty and confidence that if unexpected changes in circumstance arise, the outcomes to be achieved have been identified, agreed upon and recorded. This can avoid expensive litigation and the breakdown of what start out as amicable relationships.
At Gillespie Young Watson we specialise in preparing company constitutions and shareholders’ agreements. This can be for new businesses or existing ones. We begin by taking the business principals through a range of possible circumstances, many of which often will not have occurred to them. Having settled on a consensus, we then prepare documents that meet the specific requirements of the business and its principals.
If you would like to discuss your business with one of the best commercial lawyers Wellington wide, contact David Butler. For more information on commercial law, don’t hesitate to Contact Us today to find out how we can help you.