The main difference, therefore, lies in the basic basis on which the two documents are drawn up and amended. Both documents cannot be contradicted by any of the provisions of the law. In general, a Constitution will define the general provisions relating to the management of the company, while the shareholders` pact is a more specialized document, adapted to the specific objectives of the company, the nature of its activities and the wishes of its shareholders. Shareholder agreements generally contain stricter requirements for the operation of the company and control what all shareholders want with respect to the operation and management of the company. This article deals with constitutions and shareholder agreements – their purpose, their differences, and whether you need one or both for your business. It is customary for shareholders to believe that where a shareholders` pact and a partnership act on the same subject, an inconsistency clause in the shareholder contract would mean that the provisions of the shareholder contract prevail over those of the Constitution. The decision in Cody/Live Board Holdings Limited  NSWSC 78 highlights the shortcomings of this approach. Shareholder agreements are also useful when considering unexpected events. When a shareholder dies or is no longer able to participate in the activity, a shareholders` pact can determine the rights and obligations of the parties involved.
What you should do ultimately depends on the size, structure and specific needs of your business, and a lawyer can help you find the way forward. In general, the answer is when stakeholders want to establish specific rules about why the company exists, how it is managed, who can be involved and how it will be owned in the future. We summarized some of the most common reasons under the following headings. A company constitution is usually part of the documents that are produced when starting a new business, but can also be adopted at a later date. The company`s rules are partly governed by law. The act contains a number of provisions called “replaceable rules.” Corporate laws may incorporate these rules into their own constitutions or enforce provisions other than those provided for by law. Companies generally deal with issues such as: a shareholder pact defines how control of the company is shared between shareholders and directors. A shareholders` pact can provide clear guidance against a shareholder who wishes to sell his shares and withdraw from the company, unlike the default provisions of the Companies Act 1993.
In the absence of clear guidelines set out in a shareholders` pact, questions may arise between outgoing and remaining shareholders. Even if a bespoke constitution contains provisions on outgoing shareholders, it is unlikely that these provisions are more than general. A shareholder pact can be much more detailed and clarified. A constitution or certain provisions of a constitution may be amended by a less than unanimous agreement between members (usually 75% by a special resolution). On the other hand, an amendment to a shareholder contract must generally be approved unanimously, even in the event of a very small change. Shareholders who hold less than 50% of a company`s shares may be in a minority in different circumstances. For example, even if the Corporations Act contains certain rules of corporate governance, it is important to have a constitution that responds to more specific scenarios.