From a legal perspective, this a welcome development.
On 25 February 2022, the Companies Act [Cap 42:01], was amended to make it a requirement for all businesses to have a constitution. Previously, when it wasn’t mandatory, in the the case of a dispute for example, Cap 42:01 is what would be regarded as the default constitution of a registered business.
I know what many of you are probably thinking. “Not another unexpected and unnecessary hurdle I have to jump over just to run my business!” Through my experience dealing with the legal pitfalls companies unwittingly find themselves in, this is a welcome development.
A company constitution is the foundation of good governance in any company, no matter how big or small they may be.
Benefits of a constitution
A constitution is tailored to suit your company’s individual operations. This means it gives you much greater flexibility and certainty in your governance, and allows you to have more control as your company grows or changes over time.
A constitution may also work well to amend the balance of power between shareholders and directors versus management in the event there is a gap in control. The constitution clearly outlines the division of roles and powers, such that the company becomes a well-oiled machine and thereby creating a perfect ecosystem between the shareholders, directors, as well as management of the company.
For example, shareholders can be empowered to give directions to, or overturn decisions of, the company’s directors.
It is not prudent to simply copy the constitution that is in the Companies Act as some of the provisions could be limiting and not beneficial to your business needs and interests. It is more prudent to get legal assistance to ensure that your constitution is in compliance with the provisions of the Companies Act and is in the best interests of your business in line with the Companies Act.
Some key things to consider when developing a constitution include the following:
- Objectives of the business – what is the purpose of your business and what does it want to achieve.
- Decision-making structures – how will decisions be made? Will anyone other than the directors have power to make decisions? What powers should shareholders have over decisions made by the directors and to what extent do these powers go?
- Rules and Regulations – what specific rules and regulations will be applicable to the company.
It is worth noting that in light of the new amendments, all companies that do not have a constitution by 25 February 2023 shall be de-registered from the Companies and Intellectual Property Authority (CIPA). It is therefore imperative that each and every company have a constitution before the set deadline of 25 February 2025.
Do you need help drafting your constitution? Whatsapp us on 75364779