Difference between Company Constitution and Shareholders Agreement
When it comes to starting a company, one of the first steps is to define its governing rules and regulations. And there are two essential documents that help in setting this up – the company constitution and the shareholders agreement. These two documents may sound similar, but they are quite distinct.
In this article, we’ll be discussing the major differences between a company constitution and a shareholders agreement.
What is a Company Constitution?
A company constitution is a legal document that outlines the basic structure of a company. It contains the rules and regulations that govern the internal operations of a company. A constitution is generally prepared when a company is first formed and is required by law in some jurisdictions.
A company constitution typically covers the rights and obligations of the directors, the shareholders, and the company itself. It also outlines the procedures for convening and conducting meetings, the appointment and removal of directors, and the issuance and transfer of shares. In addition, it may also contain provisions on the distribution of profits, borrowing powers, and other matters that affect the company’s governance.
What is a Shareholders Agreement?
A shareholders agreement, on the other hand, is a private contract between the shareholders of a company. It is not required by law, but it is highly recommended, especially for companies with several shareholders. A shareholders agreement sets out the rights and obligations of the shareholders in relation to each other and the company.
A shareholders agreement typically covers matters such as the transfer of shares, the payment of dividends, the appointment of directors, and the resolution of disputes between shareholders. It may also contain provisions on the management of the company, the use of company assets, and the rights of minority shareholders.
Key Differences
While a company constitution and a shareholders agreement may share some similarities, there are several key differences between them:
1. Legal Basis
A company constitution is a legal document that is required by law in some jurisdictions. It is filed with the relevant government agency and is binding on the company, its directors, and its shareholders. A shareholders agreement, on the other hand, is a private contract between the shareholders of a company. It is not filed with any government agency and is binding only on the parties who have signed it.
2. Scope
A company constitution covers the internal operations of a company and sets out the basic structure of the company. A shareholders agreement, on the other hand, focuses on the relationship between the shareholders and the company. It sets out the rights and obligations of the shareholders in relation to each other and the company.
3. Flexibility
A company constitution is relatively inflexible and can only be amended by a special resolution of the shareholders. This means that any changes to the constitution require the agreement of a significant majority of the shareholders. A shareholders agreement, on the other hand, can be amended more easily, as long as all the parties to the agreement agree to the changes.
Conclusion
In summary, a company constitution and a shareholders agreement are both important documents for any company. While they may share some similarities, they are distinct documents that serve different purposes. A company constitution sets out the basic structure of a company and its internal operations, while a shareholders agreement focuses on the relationship between the shareholders and the company. It is recommended that both documents are prepared when starting a company to ensure that all parties are clear on their rights and obligations.
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