There is a recognition within the Companies Act 1993 (“the Act”) that the rules it creates may not be wholly suitable for every company which conducts its business in New Zealand. The relative inflexibility of statute may occasionally result in a compliance regime which lacks nuance and so proves undesirable.
The solution found in the Act to this relative inflexibility is to allow a company the freedom to establish its own regulations and structure. However, there is also the recognition that too great a departure from the Act has the potential to run counter to public policy interests. The balancing act which ensues is embodied in the creation of company constitutions.
Broadly speaking, a constitution permits the modification or negation of the rights, powers, duties, and obligations otherwise provided to a company, its board of directors, its directors, and shareholders under the Act. That is not to say that every right, power, duty, and obligation may be varied or negated. The Act states the instances where this may occur, usually permitting negation or variation to recognized that a particular company itself is best suited to making a decision as to the rules and structures which govern it. It is freedom, but freedom of a limited form.
Should My Company Adopt a Constitution
There is no requirement under the Act to adopt a constitution. It is completely up to the shareholders to make this decision. No penalties will be levied on a company which chooses not to, or fails to, adopt a constitution. The practical result of not having a constitution is that the Act becomes the primary source of the rules and structures which govern the company.
Whether this is a desirable position will depend principally on the type of company in question. For many SMEs, especially those companies whose directors are also the majority shareholders, the lack of a constitution is unlikely to prove overly determinantal to the good governance of the company.
Where the question becomes more pressing, is where there is the potential for divergent interests between directors and shareholders, or where there is simply a large number of shareholders. A classic example of this is publicly listed companies who are actually required to adopt a constitution by operation of the NZX Listing Rules in any case. Where these factors are present, the default of rules of the Act are no longer suitable.
For instance, pre-emptive rights which attach to all shares unless a constitution varies the position seriously limits the manner by which new shares may be issued in a company. A company who is considering issuing shares to raise capital, would find the default rules under the Act wholly unsuitable.
Ultimately it depends on the company as to whether a constitution should be adopted. Where it is concluded that a constitution should be adopted, it then becomes a question as what that constitution should look like bearing in mind the needs of the shareholders and the company.
Please contact the writer to discuss whether your company ought to adopt a constitution or to hold a review of one already in place.
Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important you seek legal advice particular to your circumstances.