We strongly recommend that every company adopts a constitution for the reasons outlined in this article.

 A company constitution is a set of rules to govern the management, administration and operation of a company.

Company constitutions can address a broad range of matters including decision-making, distribution of dividends, rights attaching to shares, transferability of shares, and the duties of the company’s directors.

It is not mandatory for New Zealand companies to have their own constitutions. If a company does not have its own constitution, the default rules set out in the Companies Act 1993 apply.

Companies that have their own bespoke constitutions are still required to comply with the Companies Act. This is because the Companies Act contains “modifiable” and “non-modifiable” rules.

Modifiable rules are default rules that apply if a company does not have its own constitution, or if the company has a constitution that is silent on the matter in question.

Non-modifiable rules are rules that cannot be modified in a company’s constitution. Clauses in constitutions that attempt to alter or depart from non-modifiable rules are void and have no legal effect.

The Companies Act also states that some actions can only be undertaken by a company if they are specifically permitted in the company’s constitution.

Companies that wish to depart from the modifiable rules of the Act, or take any actions that the Act requires to be authorised by the constitution, need to adopt their own bespoke constitutions.

This article discusses the reasons a company may decide to adopt a constitution, the rules that apply when a company does not have a constitution, and the key provisions that are typically included in bespoke company constitutions.

Indemnity and Insurance

Many companies look to provide indemnities to directors in respect of costs incurred or liabilities arising in the course of their directorship. Companies may also look to arrange Directors and Officers Insurance in respect of the same costs and liabilities.

Section 162 of the Companies Act states that a company must not indemnify or effect insurance for a director or employee of the company unless the indemnification and/or insurance is expressly authorised by its constitution.

Indemnities given by companies in breach of section 162 of the Act are void and of no legal effect.

If your company is looking to effect insurance or provide indemnities to directors or employees, you must ensure your company’s constitution explicitly authorises this.

Issues of Shares

Section 45 of the Companies Act contains a modifiable rule that, if a company issues new shares that rank equally or ahead of the existing shares, the “new” shares must be offered to the holders of existing shares on terms that would, if accepted, maintain the existing voting and/or distribution rights of those holders.

For example: if your company has 3 existing shareholders who each hold 40 ordinary shares, and your company intends to issue an additional 120 shares, section 45 of the Act would require your company to offer the new shares to the existing shareholders, so they can each purchase an additional 40 shares and maintain their 33.3% shareholding percentage.

However, the rule provided at section 45 of the Act can be negated or modified by a company’s constitution.

If your company intends to issue shares to new shareholders in the future (for example, to investors as part of capital raising), you need to ensure your company has a bespoke constitution that negates or modifies section 45 of the Act.

Transferability of Shares

Section 39 of the Companies Act states: “subject to any limitation or restriction on the transfer of shares in the constitution, a share in a company is transferable.”

This means the default position in New Zealand is that shareholders are free to transfer their shares to third parties as they see fit.

Some closely-held companies have constitutions that require existing shareholders who intend to dispose of their shares to offer those shares to the existing shareholders in the first instance.

This allows the existing shareholders to increase their percentage shareholding in the company over time, and helps to prevent the introduction of third party shareholders into the folds of closely-held companies.

If your company wishes to include a ‘right of first refusal’ to existing shareholders in circumstances where another shareholder is looking to sell, your company will need to adopt a constitution setting out clear procedures that will apply in the case of share transfer. These provisions should address:

• whether the existing shareholders can require the price for the “sale shares” to be set by reference to “fair value”;
• the agreed procedure for determining “fair value” (for example: agreed formula or independent valuation); and
• whether the selling shareholder can sell their shares to a third party, or withdraw their sale notice, if not all the sale shares are accepted by the existing shareholders.

Method of Contracting

Section 180 of the Companies Act contains modifiable and non-modifiable rules as to how a company may contract with a third party.

The section states that deeds may be entered into on behalf of a company by:

• 2 or more directors;
• If there is only 1 director, that director whose signature must be witnessed;
• 1 or more attorneys appointed in accordance with the Act; or
• If the constitution of the company provides, a director or other person (or class of persons) whose signature(s) must be witness.

The “modifiable rule” included under section 180 allows flexibility for companies who wish to authorise specific employees (or classes of employees) to enter into binding legal agreements on behalf of the company.

Companies whose day to day affairs are managed by personnel other than directors may wish to include a provision in their constitution to specifically permit those persons to sign contracts on behalf of the company.

Holding Company / Directors’ Duties

Section 131 of the Companies Act imposes an obligation on directors, when exercising powers or performing duties, to act in good faith and in what the director believes to be the best interests of the company. This is the cornerstone duty of company directors in New Zealand.

The Companies Act contains a range of modifiable provisions that shed light on what can be considered the “best interests of the company.”

Subsections (2) – (4) of section 131of the Act include circumstances where, if it is specifically permitted in the company’s constitution, directors are entitled to act in the best interests of another legal person (for example, the company’s holding company or a specific shareholder), even though the actions taken may not be in the best interests of the company itself.

Companies that are wholly owned-subsidiaries, subsidiaries or joint venture vehicles should consider adopting a bespoke constitution to authorise directors to act in the best interests of the company’s holding company(s) and/or shareholders. This provides protection to directors who may be concerned about balancing their duties in respect of multiple related entities.

Repurchase of Shares

Under the Companies Act, a company may repurchase its own shares, but only if this is specifically permitted under the company’s constitution.

The repurchase of shares is not uncommon and is used for a variety of reasons, such as returning surplus cash to shareholders, increasing the value of the remaining shares, or preventing hostile takeovers.

Holding the Company's Own Shares

Finally, under the Companies Act, a company is not entitled to hold its own shares unless this is specifically permitted under the company’s constitution. 

Companies that may look to acquire and/or hold their own shares in the future should ensure they adopt a bespoke constitution which authorises the company’s acquisition and holding of its own shares.

Adopting a constitution for your company

Many New Zealand companies choose to adopt bespoke constitutions so that they can structure and manage their affairs in their own way.

Bespoke constitutions can promote flexibility and provide comfort to directors and employees by clarifying their duties and responsibilities, and permitting indemnification and insurance.

The team at MoranLaw has specialist expertise in company structuring, management and administration, including assisting with preparing bespoke constitutions for New Zealand’s leading companies.

If you are looking to adopt a bespoke constitution for your company, or amend your existing constitution, feel free to reach out to our team.