Why You Should Update Your Company’s Constitution

Why You Should Update Your Company’s Constitution

By |2019-07-17T10:22:16+00:00July 17th, 2019|Blog, Latest News|

Every company formed in Ireland must have a Constitution (formerly known as a Memorandum & Articles of Association).

The company’s Constitution should be a well-written document; it sets out the rules and regulations of how a company is to be internally governed, and how it will conduct its business activities.

The Constitution also sets out the rights of various stakeholders of the company, including its directors and shareholders.

A Private Limited Company may have a standard one-page Constitution that takes in the Companies Act 2014 (the “Act”) in its entirety, without amendment.

Alternatively, it may adopt a tailor-made Constitution that is reflective of the business of the company and makes modifications to the optional provisions in the Act.

It is important to ensure that no provisions of the Act are contravened when adopting your own Constitution. It is always advisable to seek professional advice when drafting your Constitution.

Companies Act 2014

Before the introduction of the Act, Private Limited Companies had a Memorandum & Articles of Association. The Act replaced the Memorandum & Articles of Association with a Constitution for Private Limited companies. Both terms are typically used for other company types, such as Companies Limited by Guarantee (CLGs) as the Constitution for a CLG contains a Memorandum & Articles of Association.

Why Update?

Any company set up before the Act commenced on 1st June 2015 should update its Constitution so that it references the new legislation.

Where a Constitution has not been updated in line with the Companies Act 2014, the company secretary may find it difficult to provide advice on the interpretation of the clauses in the Constitution, especially if it contains references to previous Companies Acts that may no longer apply (retirement by rotation, AGMs must be held in Ireland and for Private Limited Companies there must be a minimum of 2 Directors).

It is important to bear in mind that both internal (directors, shareholders) and external stakeholders (Investors, Banks, Creditors etc.,) will look to the Constitution for guidance and that the Constitution is a publicly filed document in the CRO.

From an optics and reputational point of view, it is important for the directors to ensure that what is available publicly is reflective of the current position of the company.

We have outlined the types of clauses that may be inserted or altered to make your Constitution more functional for your specific company.

Regarding Directors:

  • The powers and duties of directors
  • The number of directors admitted on the board at any given time
  • The number of meetings to be held within each calendar year
  • The process for resigning or appointing directors
  • The amount of time each director may serve on the board
  • The role of alternate directors
  • The quorum of directors 

Regarding Shares:

  • Outlining the authorised share capital
  • Whether the share capital can be increased or decreased
  • The division of the share capital into shares
  • The classes of shares that the company possesses
  • The number of shares appointed to each investor
  • The length of time it will take to register a new share holder
  • How the company might issue share certificates
  • Share rights in respect of dividends
  • Pre-emptive rights, if any
  • Share voting rights

Regarding Company Finances:

  • Shareholder Loans – how the company might issue loans to third parties
  • Repayment of investment – the terms of repayment of shareholder investments
  • Dividends – how dividends are paid out to shareholders
  • Conflicts of interest and how to respond accordingly

The Constitution of a company is there to provide security and clarity when common issues arise. The more detail and thought that is placed into the document, the more structure it provides in times of change.

We have described only a few examples of clauses that can make a difference within your Constitution. As every company is different, a company’s particular needs should be assessed when determining what clauses within a Constitution could better assist the future needs of the company.

How to Update

Any change to the Constitution of a company requires a special resolution of the members; the change must be approved by 75% of the members entitled to vote at an EGM.
If the members elect to modify or alter the Constitution, the company secretary must then notify the Registrar of Companies and complete the necessary filings with the Companies Registration Office.

Also Read: 11 Things To Know About Ireland’s New Central Register Of Beneficial Ownership

About the Author:

Gráinne Howard