As we’ve explained in our previous posts, the company incorporation process in Singapore, for the most part, is pretty straightforward. But then again, it also comes with its fair share of technical challenges, especially when you’re trying to register a limited company or partnership.
One of the main hurdles, according to both foreigners and local applicants, is the drafting of the company constitution. The Accounting and Corporate Regulatory Authority (ACRA), the body tasked with registering companies in Singapore, requires every single company applicant to prepare and submit a comprehensive company constitution, along with other incorporation documents.
So, to help you with that, this guide explains what a company constitution entails in Singapore, its accompanying binding effects, as well as the critical factors you should consider while drafting a company constitution.
What is a Company Constitution?
Unlike sole proprietorship businesses, companies in Singapore are basically distinct entities made up of one or several members. What’s more, they happen to exist and run separately from their members.
And that’s precisely where a company constitution comes in. Its principal purpose is to provide the legal guidelines for regulating and controlling all the company’s activities as an entity. So, in short, the company constitution is the primary document by which a company’s incorporation is based on.
And speaking of which, the Singapore Companies Act officially recognizes the company constitution as:
- “...the constitution that a company registers with the Registrar…”
It wasn’t always that simple, though. Before the Companies (Amendment) Act of 2014, the company constitution had a different legal framework. It essentially came in these two separate parts:
- Memorandum of Association: This document expressed the members’ intentions to form a company with their respective share capital contributions and liability limitations.
- Articles of Association: This, on the other hand, covered not only the scope, objectives, and activities of the company, but also the corresponding rules of administration.
But, this system changed with the 2014 amendment. Not entirely, though, as the Companies Act didn’t completely do away with the Memorandum and Articles of Association. Instead, they were merged into one centralized document called the Company Constitution.
Your Singaporean company constitution, therefore, should state your company’s operations and objectives, its overall structure, the administrative rules, as well as the powers and responsibilities of not only the directors, but also the members.
And if your registration application is successful, ACRA expects the company constitution to be applied in governing the day-to-day operations of the company, its administrative positions, plus the relationships between the members. Even activities like board elections, share acquisition, asset sales, and general meetings are largely regulated by the company constitution.
What are the Mandatory Sections of a Company Constitution in Singapore?
The good thing about Singaporean company constitutions is, ACRA gives you the freedom to dictate how you’d like to structure and run the company. It allows both foreigners and domestic business people to draft their preferred company regulations.
This freedom, however, comes with its restrictions. The Companies Act requires you to take into account the company’s obligations to the state and to its members, the members’ obligations to the company, as well as the members’ obligations to each other.
As such, your company constitution should include laws on company meetings, the powers of directors, the board of directors appointment procedures, the conduct of shareholders, shareholders’ rights, etc.
To keep all these elements organized, the Companies Act goes ahead and provides a systematic clause framework that you should follow. These mandatory sections include:
- Name Clause: This section states the specific business name of the company, as approved by the registrar of companies. This is what ACRA will adopt as the company’s legal identity, and you’re expected to maintain it not only for your company’s operations, but also for the corresponding official documents.
- Registered Office Clause: This part provides the details of the local premises you’ve registered as the company’s official business address. The location serves as the company’s primary office, from where you get to conduct the core administrative duties, as well as store records like meeting minutes, financial statements, statutory files, etc.
- Liability Clause: This is the section that deals with the obligations of the members in case the company is dissolved. The general rule is to state the limits of the members’ liabilities, especially as they pertain to the company’s assets.
- Capital Clause: This is where you state the company’s overall share capital amount and the corresponding division formula. That means you should include even details like the number of company shares, as well as the subsequent value of each share.
- Subscriber Clause: The Subscriber Clause reveals the company’s members through a subscription roll that states not only the full name, but also the residential address, and occupation of each individual who commits to the company constitution. What’s more, you should include the members’ respective share numbers based on their contributions to the company’s overall share capital.
- Objects Clause: This is more of an optional section that outlines the company’s activities and business objectives. Hence, you can go ahead and specify what you intend to venture into, how you plan to conduct the business, as well as the accompanying privileges, powers, capacity, and limitations of the company. This applies to both the primary and secondary objects.
- Rules: This is another optional section. And, as the name suggests, it acts as the company’s rulebook, providing the same range of regulations that previously came with the articles of association. You’re free to draft the specific policies that’ll govern the day-to-day running of the company. And when it comes to that, the rulebook should address issues such as:
- The Company’s Common Seal: How and where to keep the company seal in safe custody; plus the parties authorized to use the company seal.
- Company Secretary: The procedure of appointing the company secretary; the process of removing the company secretary; and the duties of the company secretary.
- Board of Directors: How to conduct board elections; how and when to hold board meetings; the process of appointing board members; the privileges, powers, and duties of each board position; the administrative framework of the board (substitute directors, alternate directors, managing directors, etc.); plus the procedure of resigning from the board.
- Company Meetings: When and how to hold company meetings; the Annual General Meeting (AGM) schedule; how to issue meeting notices; meeting quorum numbers; minutes filing, etc.
- Company Shares: Issuance of share certificates; the procedure for adjusting the share capital; share forfeiture and lien; the share trading process; share transfer and acquisition framework (transferrable volume, fees payable, notice of transfer, transfer paperwork, etc.); plus the rights and privileges of each category of shares.
- Correspondence Notices: Types of company notices; the contact address and details of each member; the correspondence channels; notice periods; plus the recording and filing of each correspondence document.
- Financial Statements: How to record, file, and store financial details; the transactions captured in the financial statements; statement approval procedure; the overall bookkeeping framework, etc.
- Company Dividends: How to declare and distribute company dividends; the corresponding reserve volume; dividend payout channels; etc.
- Profit and Reserves Capitalization: The capitalization approval process; the privileges and powers of the board of directors in capitalization.
- Member Indemnity: Indemnity protection policies for each officer, auditor, secretary, director, or board member against any form of liabilities that may arise as they perform their official duties.
- Company Dissolution: The process of winding up the company; liquidator appointment procedure; the duties of the liquidator; as well as how to manage the assets and liabilities when the time comes to wind up.
While we’ve comprehensively outlined the mandatory company constitution sections in Singapore, we’ve barely scratched the surface in the custom-rules part. The truth is, there are many other types of regulations you can include in this section alone. What you end up with, in the end, depends on your company’s needs, composition, activities, and overall setup.
The Model Company Constitution In Singapore
If you can’t find the time to draft all those intricate legal details, here’s a pleasant surprise for you. Turns out Singapore is considerate enough to offer you a model company constitution.
This provision was introduced in 2015 through the Singapore Companies (Model Constitutions) Regulations of 2015. It provides a basic compilation of legal clauses that can be adopted by pretty much any standard company in Singapore. So, in other words, you can think of it as the one-fits-all version of the company constitution.
If you choose to give it a try, you can go ahead and acquire the document directly from ACRA’s website. You’ll find two types of downloadable constitutions in PDF form. The model constitution’s First Schedule is prepared specifically for primate limited companies in Singapore. Then the Second Schedule, on the other hand, offers regulations for companies limited by guarantee.
Whichever you pick, the model constitution is bound to save you quite a lot of time and effort. You get to proceed with the company incorporation procedure without drafting any company laws. So, it’s no surprise that quite a number of applicants have used this approach to beat ACRA’s company registration system.
Make no mistake about it, though. While the model company constitution is admittedly convenient for beginners, it’s not exactly the best option. And the reason is, the document doesn’t go into the finer unique details that set your company apart. You can only get such exclusive privileges from a custom draft.
Key Points to Consider When Drafting a Company Constitution In Singapore
Going by the points we’ve discussed so far, it’s pretty evident that a company constitution is not only relevant to company incorporation. Once the registration process is done, you’ll be counting on it to coordinate all the gears within your company.
And that, in a nutshell, means that the rules and systems in your company constitution are bound to impact your business activities, company shares, as well as the directors and shareholders.
Now, with stakes that high, you might want to take extra caution when drafting your company constitution. The most critical factors you should keep in mind include:
- Business Objectives: Consider what you intend to achieve with your company over the long haul. Every single regulation you choose to include in the company constitution should be perfectly aligned with your business plan, as well as the company’s overall purpose and targets. A strategic business always rides on a rulebook that seamlessly supports its goals.
- Administrative Framework: Uniting multiple members with common goals under one shared company isn’t enough. Although each individual may mean well, failing to provide a well-defined administrative framework could lead to all sorts of disputes.
To avoid such complications, your constitution should be accompanied by a clear decision-making structure, detailing all the administrative levels across the company. You should also stipulate the roles and privileges of each position without tilting the balance of power. And while you’re at it, remember to promote democracy by limiting the terms of the board members.
- Mandatory Sections: You cannot afford to exclude any of the mandatory clauses from your company constitution. According to Section 22 of the Companies Act, each company constitution in Singapore should come with a dully-filled Subscriber Clause, Capital Clause, Liability Clause, Registered Office Clause, and Name Clause.
- Corporate Compliance Requirements: While ACRA is open to custom company rules and regulations, there’s this one condition you should always keep in mind. Your company’s rulebook is only applicable if it respects the rule of law in Singapore, and the corporate compliance requirements that come with it. It shouldn’t clash with the statutory regulations.
- Corporate Entity: “Company constitution” happens to be a general term that describes rulebooks from all company types. When you go beyond that and compare the individual subcategories, it turns out their constitution documents are not entirely similar. The constitution you draft for your company should be in line with its selected corporate entity features.
If you’re tying the business to a foreign parent company, for instance, the constitution should follow subsidiary company rules.
The Importance of a Company Constitution in Singapore
It goes without saying that a Singaporean company constitution offers both foreigners and domestic residents a wide range of benefits, regardless of their company sizes. Small to medium-sized businesses, as well as large enterprises, are bound to appreciate the relevance of these corporate rulebooks.
Now, when you consider all the attributes collectively, the overall importance of a company constitution in Singapore can be summarized by simply describing the binding effect it makes on corporations. The Companies Act, for instance, states that (in its simplest form);
“...Subject to this Act, the company constitution will, when incorporated, proceed to bind the company and the members in the same way as if it had signed and sealed by each individual member.”
As such, a company constitution in Singapore is expected to
- Bind The Company To Its Members: By governing the business activities and operations of the company, the company constitution helps the company fulfill its obligations towards its members. In case it fails to abide by the rules and ends up violating such terms, the members are free to take legal action against the company.
If, for instance, its directors fail to issue dividends as stipulated in the company constitution, the shareholders can go ahead and seek injunctions against the company. Singapore’s legal system will treat the issue as a contract breach.
- Bind The Members To The Company: While on one hand the company is required to meet its obligations towards its members, it turns out that on the other, the members themselves have their fair share of obligations to the company. The company constitution ensures they fulfill their company responsibilities and safeguard its interests.
A shareholder can’t, for example, liquidate their shares randomly if the constitution stipulates otherwise. Such an action could compromise the company’s activities and profits.
- Bind The Members Between Themselves: A company constitution in Singapore is also some form of inter se covenant for shareholders and directors. That means the individual members commit to each other for as long as they hold shares in the company.
When it comes to the division of shares, for instance, each member should get their rightful equity based on the respective capital contributions. The company constitution also governs the subsequent share transfer procedures to safeguard not only the share values, but also the company ownership rights.
The Bottom Line
At this point, you now have a better idea of what a company constitution is, as well as its essential attributes and sections.
Here’s a word of caution, though. Although this guide provides helpful insights, it doesn’t completely prepare you for company constitution drafting. You still need to learn all the corporate compliance processes and legal policies that might influence your company and its operations
Therefore, the bottom line is, now may not be a good time to embark on the project alone. You should, instead, engage a professional corporate services provider like WealthBridge for your company in Singapore. Our experts can help you come up with an in-depth legal company constitution for governing your business.