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Constitution of the Company: What is it and why is it important?

In: Corporate Functions

A company is a separate legal entity. Being a separate legal entity provides a company with several rights. However, it also makes it subject to various laws. For example, companies can sue or be sued, acquire, hold or sell property, and enter into contracts. Companies also have perpetual succession, making them exist beyond shareholders or directors. Companies also have a board of directors that manage their operations.

The internal structure of a company may differ from one company to another. Usually, it depends on how the company operates. However, when companies get incorporated, there is an internal document that defines their structure. It comes in the form of a company constitution. A company constitution is a critical document for companies.

Before understanding the importance of a company constitution, it is crucial what a company constitution is.

What is the Constitution of the Company?

A company constitution is an internal document that defines a company’s governance. It contains a set of rules on how a company is directed and governed. In Singapore, the constitution of a company sets out the basic framework its organization and governance. It helps define a company’s objectives and directs the rights, duties, obligations and power conferred by the company, its shareholders and its board of directors.

The constitution of the company may include varying documents based on a company’s jurisdiction. In Singapore, it consists of the Memorandum of Association and the Articles of Association for old companies. For new companies, however, the same does not apply. Companies incorporated after 3 January 2016 must adopt a single document for the constitution of the company.

Having a constitution of the company may not be mandatory for every company. In some jurisdictions, for example, private companies do not need one. However, in other countries, the rules may differ. In Singapore, it is mandatory for companies to adopt a constitution at the time of its incorporation. Similarly, the content in the document may also differ from one jurisdiction to another.

There are several areas that a constitution must define. These include the company name, the type of the business, the capital amount, the liability of the company’s members, etc. Through the constitution, companies can define their purpose or objective. Furthermore, it also helps describe the responsibilities and rights of the directors, how the company must operate, etc.

What are the contents of the Constitution of the Company?

The constitution of the company must define several areas. The requirements for its content usually come from the companies act of the jurisdiction in which a company operates. Based on those requirements, companies must draft a constitution. In addition to the mandatory sections, companies can also include other content that fits the context.

In Singapore, the Companies Act does not define the contents of the constitution of the company. However, there are several rules that companies must follow when drafting a constitution. The Companies act makes the following sections mandatory for a company’s constitution.

1.      Company Name

The constitution of the company must define a company’s name. This name usually comes from the registrar, who must approve it first. There are several rules related to which names companies can choose. The company name is a crucial part of the constitution as it will be a part of other official documents as well.

2.      Registered office

The constitution of the company must define a company’s registered office address. Like company name, the registered office location is also a crucial part of the constitution. Under the Singapore Companies Act, the registered office is where companies must keep their statutory registers.

3.      Members’ liabilities

The company constitution must also contain a clause to define the extent of the liability of its members. This clause is crucial in establishing rights and liabilities. If a company dissolves, this clause can also help avoid confusion.

4.      Capital

As mentioned, the constitution of the company also defines the capital for a company. It must include the share capital amount and how it translates into shares of a fixed value. Through this clause, companies also define the par value of their shares.

5.      Subscribers

The constitution of the company must also define the subscribers to the constitution. Usually, it must include the full name, occupation and address of those subscribers with the number of their shares.

6.      Objectives

Although not a requirement, the constitution of the company also includes its objectives. Companies must define both their primary and secondary objectives in the constitution. Using this clause, companies can also introduce restrictions on how they operate.

7.      Rules

One of the primary parts of any constitution of the company is its rules. Usually, a constitution will define the various rules that will apply to the company. These rules dictate how the company runs on a daily basis. On top of that, they will also cover various other areas. These may include the company’s shares, directors, secretary, meetings, financials, dividends and reserves, notices, liquidation, etc.

What is the importance of the Constitution of the Company?

In some cases, it is not mandatory for companies to have a constitution. Despite that, it can be beneficial to draft a constitution. One of the most prominent advantages of a constitution is defining fundamental aspects of a company’s operations. As mentioned, the constitution of the company describes various critical content that can be significantly crucial in running a company.

On top of that, the rules stated in the company constitution dictate how a company is run and governed. Having these rules in a written statement can also help provide a reference point for future use. Furthermore, it can help avoid conflicts as well. Without well-defined rules, companies cannot run in an effective and efficient manner.

Lastly, the constitution of the company can help define further rules or procedures that companies must follow. These rules are outside those that apply to a company from mandatory sources. Each company constitution only applies to a specific company. Therefore, it gives companies greater flexibility and certainty in their governance and control.

Conclusion

The constitution of the company is a document that defines several aspects of a company’s operations and governance. Depending on the jurisdiction, it may only be a single document or include the memorandum of association and articles of association. There are several areas that the company constitution can define. The requirements may differ from one jurisdiction to another. Overall, the constitution is a document of high importance.

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