Constitution or Shareholders’ Agreement – which one prevails?
In the daily practice of a corporate lawyer in Mauritius, a common item which crops up when seeking to ascertain the management rights and duties and obligations of the various stakeholders of a company is whether one should give prevalence to the company’s constitution or to its shareholders’ agreement.
A quick analysis of the law shows that a company may but does not need to have a constitution. Where it does not, it will be the provisions of the Companies Act (the Act) which will govern the rights and powers of its Board and shareholders. Where it does, the provisions of such constitution will govern such rights and powers provided there are no inconsistencies with the mandatory provisions of the Act. The constitution has the effect of a contract between the company and each shareholder, and between the shareholders themselves.
A shareholders’ agreement on the other hand is essentially a private contract between the shareholders of the company setting out their agreement regarding their rights within the company such as rights attached to different classes of shares, investment decisions and visions of the shareholders, management rights and exit strategies. However, a shareholders’ agreement must always comply with the mandatory provisions of the Act.
Amending the constitution of a company requires a special resolution of 75% whereas a shareholders’ agreement would generally only be amended by all the shareholders agreeing to any proposed amendment.
One needs to note that Section 272(1)(a) of the Act provides that where all shareholders of a private company agree to or concur in any action which has been taken or is to be taken by the company, the taking of that action is deemed to be validly authorised by the company, notwithstanding any provision in the constitution of the company.
Section 272(7) of the Act further provides that all the shareholders of a private company may, by agreement in writing, restrict in whole or in part the discretion and powers of the directors of the company to manage the business and affairs of the company. This shareholders’ agreement may confer on any person who is a party to it, whether or not a shareholder, a member or director of the company, such powers and discretions as they think fit.
However, Section 272(10) of the Act provides a safeguard such that a unanimous shareholders’ agreement under subsection (7) shall not have effect until all the directors of the company, its management company or its registered agent have been notified of its contents, and notice of the entry into of the agreement and its effect has been given to the Registrar of Companies.
It is common to provide in a shareholders’ agreement that to the extent there are inconsistencies between the shareholders’ agreement and the constitution, the shareholders’ agreement will prevail.
However, it is trite law that the parties to an agreement are bound by the terms of the agreement unless the clauses are in breach of the provisions of the constitution of the company or under the Act and can be considered to be null and void. Therefore, in our view, the constitution will prevail where there are inconsistencies between the shareholders’ agreement and the latter.
A question which arises is how valid would this clause be in the event of a dispute and would the courts enforce the provisions of the shareholders’ agreement or of the constitution? A quick resolution to this issue would simply be to always incorporate the provisions of the shareholders’ agreement in the company’s constitution by amending the latter.
