NZ Company Constitution

A company constitution is a “rule book” for how the company will be run. It deals with important matters such as:

• the process for transferring company shares, including ensuring that existing shareholders get a first opportunity to purchase shares from outgoing shareholders in certain circumstances;

• how director and shareholder meetings will be conducted;

• how directors and shareholders can make decisions;

• how many directors the company will have and how those directors can be paid; and

• the ability of the company to indemnify directors and employees against loss and buy insurance to cover directors’ and employees’ liability.

In New Zealand a company doesn’t have to have a constitution (unless it is listed on the stock exchange, then it needs one). If a company doesn’t have its own constitution, the default rules set out in the Companies Act 1993 apply.

We recommend that a company has a constitution for two main reasons:

• A constitution draws together all of the rules of the company in one place, rather than relying on a default regime set out in different areas of the Companies Act 1993. Putting in place a company constitution upfront can help to avoid confusion and costly disputes later on.

• There are some important provisions in the Companies Act 1993 that don’t apply unless the company has a constitution that includes the provisions. In particular, a company can’t indemnify a director or employee or take out insurance for a director or employee unless the company’s constitution says it can.

Checklist is not available for this document.

Sample is not available for this document.

Number of Directors
• How many directors is a good minimum number?
Quorum for Directors' Meetings
• What is a quorum?
• Why would I opt for quorum that is different to the standard in the Companies Act ie a majority?
Appointment and Removal of Directors
• Should I put a time limit on directors?
Quorum for Shareholders' Meetings
• Why would I opt for quorum that is different to the standard in the Companies Act ie a majority?
Special Resolution Percentage
• Why would I opt for a different percentage to the Companies Act for a special resolution ie 75%?
• What are special resolutions?

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Number of Directors

• How many directors is a good minimum number?

  The Companies Act 1993 says that a company has to have at least one director.
  
  When deciding on the minimum number of directors, you may want to consider:
  
  - The size and turnover of the company. One or two directors may be ideal for a small company, whereas a larger company that is dealing with a wider range of issues and a higher turnover may wish to have more directors to spread the workload.
  
  - What type of issues the directors will be making decisions on. If the company faces a wide range of issues, then it may be helpful to have several directors that have different skills.
  
  - How quickly decisions need to be made. A small number of Directors is likely to be able to make decisions more quickly than a larger number of Directors. A small start-up company may wish to have a low minimum number of directors (one or two). The company can always appoint more directors as it grows.
  

  This hint is provided by Cavell Leitch.

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Quorum for Directors' Meetings

• What is a quorum?

  A quorum is a minimum number of people that must be present at a meeting to make the meeting valid. For example, if a company has three directors and a quorum for a directors’ meeting is a majority of directors, then two out of three of the directors need to be at the meeting to make it a valid meeting.

  This hint is provided by Cavell Leitch.

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• Why would I opt for quorum that is different to the standard in the Companies Act ie a majority?

  Setting a higher quorum can provide a protection against decisions being made by just a majority of directors in the absence of input from other directors.

  This hint is provided by Cavell Leitch.

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Appointment and Removal of Directors

• Should I put a time limit on directors?

  Many companies, particularly medium to large companies, restrict the amount of time that a director can hold office to a term anywhere between four to eight years generally. The reason for this is to ensure that new ideas and perspectives can be brought to the directors’ table. It is important not to make a director’s term too short as a director may take up to one year to become fully familiar with the workings of the company and then may provide valuable input into the company’s decision making for a number of years.

  This hint is provided by Cavell Leitch.

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Quorum for Shareholders' Meetings

• Why would I opt for quorum that is different to the standard in the Companies Act ie a majority?

  Setting a higher quorum can provide a protection against decisions being made by in the absence of input from other shareholders.

  This hint is provided by Cavell Leitch.

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Special Resolution Percentage

• Why would I opt for a different percentage to the Companies Act for a special resolution ie 75%?

  Setting a higher percentage can protect minority shareholders, for example, if a minority shareholder holds 20% of the voting rights, they will not be able to stop a special resolution by voting against it. If the special resolution percentage is set at 85%, then they would be able to.

  This hint is provided by Cavell Leitch.

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• What are special resolutions?

  The big decisions that companies face are dealt with by special resolutions. These big decisions include:
  - adopting, amending or revoking the company’s constitution;
  - approving a major transaction;
  - amalgamating the company;
  - appointing a liquidator of the company.
  

  This hint is provided by Cavell Leitch.

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This document has been prepared by Cavell Leitch