Author: Lawyer Zhang Jingxinyue, PRC-qualified Lawyer | Singapore Registered Foreign Lawyer
Note: In Singapore, the company's constitution (Constitution) sets out the basic framework for organising the company. It outlines the company's purposes and stipulates the rights and obligations of the company, the board of directors and shareholders.
Before 3 January 2016, a company's constitutional documents usually comprised two documents, namely the Memorandum of Association and the Articles of Association (collectively, the M&AA). The former defined the company's basic functions, while the latter regulated the relationship between the company and its members and among members.
With the enactment of the Companies (Amendment) Act 2014, the requirement for an M&AA has been abolished, and the Act now requires all companies incorporated after 3 January 2016 to adopt a single-document constitution.
For company promoters investing in Singapore from overseas, selecting a suitable company constitution is a good start. The good news is that company promoters do not have to draft the company constitution from scratch. The Companies (Model Constitutions) Regulations 2015 provide model constitutions for company promoters' reference. The First Schedule sets out the model constitution for private companies limited by shares, and the Second Schedule sets out the model constitution for companies limited by guarantee.
For ease of illustration, this article only addresses the model constitution for private companies limited by shares. (Readers may click “Read Original” at the bottom left of this article to obtain the model constitution.)
01 Essential Contents of a Singapore Company Constitution
1. Mandatory Contents
Under the relevant provisions of the Singapore Companies Act, the company constitution must contain the following:
(1) Name Clause
This clause provides the name of the company approved by the Registrar of Companies. The company will use this name at all times in operating its business and signing formal documents.
(2) Registered Office Clause
This clause provides the location of the company's registered office. The company keeps records such as statutory registers and minutes of meetings at its registered office.
(3) Liability Clause
The company must state in its constitution the scope of its members' liability. This part will explain the members' liability in the event of the company's dissolution.
(4) Share Capital Clause
This clause provides the amount of the company's share capital and the fixed value corresponding to each share.
(5) Subscriber Clause
Subscribers are the shareholders of the company. This clause provides the declaration of the subscribers who wish to incorporate the company in accordance with the constitution, the full name, address and occupation of each subscriber, and the number of shares in the company subscribed by each subscriber.
2. Optional Provisions
In addition to the mandatory contents of the company constitution mentioned above, other provisions may also be included in the company constitution, for example:
(1) issuance, allotment and transfer of shares;
(2) organisation and operation of the board of directors and general meetings;
(3) appointment and removal of directors;
(4) directors' duties and powers;
(5) profit distribution and capitalisation;
and distribution of surplus assets upon winding up.
02 Key Considerations When Drafting a Singapore Company Constitution
As the company constitution will become the legal document governing the company's internal affairs, the relationships among members, and the relationship between members and directors, the following matters should be kept in mind when drafting and adopting it:
1. Business Objectives
Consider the company's objectives and what the company intends to achieve, and align the company constitution with those objectives.
2. Decision-Making Structure
Company promoters need to implement in the company constitution a complete set of ideal decision-making structures for operating the company. All of these can be included in the “Rules” section of the constitution, which may help avoid potential future conflicts among members over decision-making.
3. Specific Rules and Regulations
Where the model constitution does not provide for specific rules and regulations that the company promoters intend to implement in the new company, those should be considered for addition outside the framework of the model constitution. For example, regarding future share issues, if the company promoters wish to issue new shares to existing shareholders first before offering them to the public and the private market, this should be incorporated into the company constitution.
03 Should the Model Constitution Be Adopted?
First, for the vast majority of newly incorporated companies, adopting the model constitution is an approach that can meet requirements and save costs. However, it should be noted that the adoption of the model constitution must suit the company promoters' own needs; otherwise, it may create certain inconveniences. We provide the following two examples by way of illustration.
Regulation 67(1) of the model constitution provides: “at the first annual general meeting of the company, all the directors must retire from office”, meaning all directors must retire at the company's first annual general meeting. Regulation 67(2) provides: “At every annual general meeting subsequent to the first annual general meeting of the company, one-third of the directors for the time being, or, if their number is not 3 or a multiple of 3, then the number nearest one-third, must retire from office”, meaning at every annual general meeting after the first, one-third of the directors must retire. At the same time, Regulation 68 further provides that directors who have retired may be re-elected by shareholders at a general meeting. This is intended to safeguard shareholders' control over the company's management.
For some start-ups, a stable management team is crucial to surviving the initial stage. Even if a re-election mechanism is designed, this process creates additional inconvenience. For some shareholders who also serve as directors, resignation and re-election are also unnecessary procedures. Therefore, company promoters may choose to delete Regulation 67(1) and retain only paragraph (2), i.e. one-third of the directors must retire at each annual general meeting.
Regulation 93(1) of the model constitution provides: “A resolution in writing, signed by all the directors for the time being entitled to receive notice of a meeting of the directors, is as valid and effectual as if it had been passed at a meeting of the directors duly convened and held”, meaning that company resolutions must be signed and passed by all directors. In practice, some directors may be unable to sign for various reasons, or it may be inconvenient for directors to sign because they are overseas, ultimately causing resolutions to fail or be delayed. Therefore, the model constitution should not be mechanically followed. Company promoters may adjust the mode of passing resolutions according to the actual circumstances of the company's management. For example, a model under which a resolution is signed and passed by a majority of the directors may be adopted.
In the process of incorporating a new company, company promoters should fully understand the contents and relevant details set out in the model constitution. If it basically meets the company's needs, the model constitution may be adopted. If it is found that the model constitution cannot be used, the company promoters should have thorough communication with their lawyer on the organisation and operation methods to be adopted after incorporation, so that the lawyer can make targeted amendments to the company constitution.
04 Comparison of Legal Provisions on Company Constitutions in Singapore and China
1. Composition of the Company Constitution
As mentioned above, a Singapore company constitution is governed by the Companies Act (Chapter 50), which abandons the two-document model comprising the memorandum of association and articles of association and adopts the form of a single legal document.
Under China's legal system, the company's articles of association are likewise a single legal document, regulating both the company's external affairs and its internal affairs. In addition to the Company Law and its relevant judicial interpretations, in some special circumstances, various other legal documents also regulate the company's articles of association, such as the Mandatory Provisions for the Articles of Association of Companies Listed Overseas and the Guidelines for the Articles of Association of Listed Companies formulated by the China Securities Regulatory Commission.
2. Legal Effect of the Company Constitution
Under Singapore law, the company constitution is in substance a contract created between the company and all its members, and among those members. Section 39(1) of the Companies Act provides that “the constitution shall be binding on the company and its members at the time of registration”. This provision gives each member of the company a personal right to bring an action to require enforcement of the constitution or to restrain breaches of it. If the court considers that the constitution has been breached, it may issue a court order requiring compliance with the constitution or require compensation for the loss suffered by the innocent party. However, section 39(1) only concerns matters affecting members' rights. For example, if a member is prevented from exercising his or her voting rights at an annual general meeting, that member may seek a court confirmation to exercise his or her voting rights. This is because the voting right is conferred on him or her in the capacity of a member of the company.
On the other hand, directors, company employees and third parties cannot require enforcement of any provision under the constitution. For example, even if the constitution provides that a director has a veto right, namely the right to reject a particular decision or proposal, he may not be able to successfully obtain a court order requiring compliance with that particular provision. This is because the director's veto right is a right held in his capacity as a director of the company, not a right held in his capacity as a shareholder of the company that allows him to directly enforce the constitution.
Under China's legal system, the articles of association are the company's charter and the most fundamental operational and management rules of the company. Therefore, the company and its internal shareholders, directors, supervisors and senior management personnel must all be bound by the articles of association. Article 11 of the Company Law provides: “A company shall formulate its articles of association in accordance with the law when it is established. The articles of association are binding on the company, its shareholders, directors, supervisors and senior management personnel.”
3. Contents of the Company Constitution
Articles 25 and 81 of the Chinese Company Law set out in detail the matters to be included in the articles of association of limited liability companies and companies limited by shares, similar to the requirements under Singapore law.
Under the Chinese Company Law, the articles of association of a limited liability company shall specify the following matters:
(1)company name and domicile;
(2)business scope of the company;
(3)registered capital of the company;
(4)names or titles of the shareholders;
(5)method, amount and timing of capital contribution by shareholders;
(6)company organs, their method of formation, powers and rules of procedure;
(7)legal representative of the company;
(8)other matters that the shareholders' meeting considers necessary to specify.
Under the Chinese Company Law, the articles of association of a company limited by shares shall specify the following matters:
(1)company name and domicile;
(2)business scope of the company;
(3)method of establishment of the company;
(4)total number of shares, value per share and registered capital of the company;
(5)names or titles of the promoters, number of shares subscribed by them, capital contribution method and time;
(6)composition, powers and rules of procedure of the board of directors;
(7)legal representative of the company;
(8)composition, powers and rules of procedure of the supervisory board;
(9)profit distribution method of the company;
(10)grounds for dissolution and method of liquidation of the company;
(11) method of notices and announcements of the company;
(12) other matters that the shareholders' general meeting considers necessary to specify.
4. Adoption of the Company Constitution
Under section 19 of the Singapore Companies Act, any promoter of a company must submit the company constitution to the Accounting and Corporate Regulatory Authority (ACRA) of Singapore. The company constitution takes effect from the time of submission. If the company promoters choose to adopt the Model Constitution without any amendment, they only need to indicate the type of model constitution selected at the time of incorporation, namely the First Schedule constitution for private companies limited by shares or the Second Schedule constitution for companies limited by guarantee.
Under the Chinese Company Law, the articles of association of a limited liability company are formulated by all shareholders, while the articles of association of a company limited by shares are formulated by the company promoters. Where the company is established by share offer, the articles of association must also be adopted by the inaugural meeting. The articles of association must be filed for registration with the State Administration for Industry and Commerce or its local branches.
5. Amendment of the Company Constitution
An amendment to a Singapore company constitution must be effected by a special resolution passed at an extraordinary general meeting. If the constitution imposes more stringent restrictions on the amendment of a particular provision, the amendment or deletion of that provision must satisfy the conditions and procedures in the restrictive provision. Amendments to a Singapore company constitution are divided into two categories: amendments that do not change the company's objects, and amendments that change the company's objects.
- For an amendment that does not change the company's objects, the company must give shareholders at least 14 days' notice for a private company or 21 days' notice for a public company of the extraordinary general meeting, and the amendment must be passed by shareholders holding at least 75% of the voting rights before it takes effect.
- For an amendment that changes the company's objects, the company must give shareholders at least 21 days' notice of the extraordinary general meeting, and the amendment must be passed by shareholders holding at least 75% of the voting rights before it takes effect.
Under Articles 43 and 103 of the Chinese Company Law, for amendments to the articles of association of a limited liability company, a resolution of the shareholders' meeting to amend the articles of association must be passed by shareholders representing at least two-thirds of the voting rights before it takes effect. For amendments to the articles of association of a company limited by shares, the amendment must be passed by at least two-thirds of the voting rights held by shareholders attending the meeting before it takes effect. Under China's legal system, there is no provision or relevant judicial interpretation that expressly approves or prohibits a company from moderately increasing this percentage threshold in its articles of association based on its own actual circumstances.
Conclusion
A Singapore company constitution is a contractual document between the company and shareholders, and among shareholders, and is crucial to the company's future operations. The model constitution provides convenience for company promoters to incorporate a company quickly and effectively, but company promoters should also understand whether there are special practices in the enterprise's operating structure so as to avoid inconvenience caused by adopting the model constitution.
In addition, China and Singapore belong to two different legal systems, namely the civil law system and the common law system. Although the laws and regulations of the two countries do not differ significantly in their provisions on the contents of the constitution, company promoters should avoid mechanically applying the provisions of their home country's legal system and falling into preconceived thinking.
If you would like to further understand matters relating to expanding into Singapore, business establishment and other relevant issues, please contact the professional consultants of the China-Singapore Legal News team.
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This article is for informational reference only and does not constitute formal legal advice.
This article is general information and not legal advice. Specific matters require assessment by appropriately qualified professionals.