Shareholders' Agreement vs Constitution

The differences between are as follow:

Constitution – binds the company, shareholders and directors who initially agreed to adopt a constitution and any future shareholders

Shareholders' agreement – binds those who are parties to it.

Constitution in the Company Act 2016

With the enforcement of the Companies Act (CA) 2016, a private company may now option to adopt a constitution on or after incorporation. Unlike the old regime under CA1965, the company’s Memorandum and Articles of Association (MAA) were mandatory and shall lodge to SSM during registration of the company.

What is a constitution?

The new CA 2016 did not specifically define Constitution and stated it as a legal document recognised by the Companies Act 2016 under Section 34. In short, this legal document specifies the rules and policy in governing the relationship and activities of the corporate, its shareholders and directors.  

It is best to adopt a constitution if:

1) the company has more than one (1) shareholder to avoid any dispute among the directors and shareholders of the company. 

2) the Companies Act 2016 is silent on the policy, the company constitution can be used to fill in the gap.

For example, the Companies Act 2016 states that issuance of new shares requires ordinary resolution, which can be passed through a majority vote. However, members may adopt Company Constitution to specify that the issuance of a new share must be decided with a unanimous vote.

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