In smaller companies, the business activity itself takes the spotlight and, at the early stages of the entrepreneurship journey, partnerships more often than not are optimistic and have little regard to the constitutive documents of the company. However, the downside of not formalising the arrangement between the business partners may lead to future disputes. In turn, this may affect the continuous operation of the company if a breakdown in the relationship among the partners occurs.
In most cases, business partners hold the company’s shares in equal proportions based on the history of their past relationship, trust and confidence. They also appoint themselves as directors of the board. Occasionally, in-kind contributions such as assets and expertise are made instead of injections of capital.
In the absence of any constitutive documents, the Companies Act 2001 (the ‘Act’) and in particular its Second Schedule will govern the company.
Having appropriate constitutive documents at inception allows business partners to customise the standard provisions of the Act (to the extent permissible[1]) to meet their objectives and needs, taking into account any specificities of the company’s activities.
If the appropriate constitutive documents are not implemented, business partners may find themselves unable to reach a consensus either in their capacity as shareholders and/or as directors. They may even resign from their position as directors due to frustrations, and will hence be excluded from the decision-making process. In the absence of such management powers, the operations and the profits of the company, and in turn the dividends payable to the shareholders, may be adversely impacted.
Among the advantages conferred by the Act on shareholders is the power to exercise a management review, where recommendations made by shareholders are binding (a) upon the passing of a special resolution of shareholders or (b) if the constitution expressly provides that the shareholders’ recommendations are binding on the board. Adopting a constitution at the outset may therefore offer an interesting solution to take directors to task.
In larger companies, adopting both a constitution and a shareholders’ agreement may be warranted as the constitution of a domestic company is a publicly available document filed with the Registrar of Companies (the ‘ROC’). Shareholders may be wary of having sensitive commercial matters made public. A shareholders’ agreement would be appropriate in the circumstances as it remains a private document among the signatories involved. In those cases, the constitution would in principle prevail over the shareholders’ agreement, unless the shareholders unanimously agree that the latter overrides the constitution in accordance with section 272 of the Act. It is important that the constitution and the shareholders’ agreement be consistent with one another either by (a) entrenching key clauses in the constitution or (b) making the appropriate cross-references.
In contrast to domestic companies, the constitution of global business companies and authorised companies (which are Mauritian structures commonly used by foreign investors) can be inspected by limited categories of persons. Nevertheless, investors may choose to adopt a shareholders’ agreement over and above the constitution due to the slightly different remedies afforded by each type of constitutive document. In certain cases, a shareholders’ agreement may also be governed by foreign law, compared to the constitution (which is necessarily governed by Mauritian law).
Common practicalities which business partners may consider when deciding whether to adopt a constitution and/or a shareholders’ agreement include:
- having an effective dispute resolution mechanism. In the worst-case scenarios, deadlock among shareholders and/or board members may arise due to differing management styles, direction and vision for expansion, conflicts of interest, lack of time and attention to day-to-day activities, different personalities, and so on;
- catering for reserved matters, which are key decisions affecting the operations and management of the company;
- catering for the threshold for approving those reserved matters;
- if in-kind contributions are made, agreeing on the valuation method to confer a monetary value to such contributions;
- providing for the timing and manner in which profits are distributed;
- providing for any particular considerations when transferring shares among the current shareholders or to a third party;
- adopting anti-dilution mechanisms and/or any transfer restrictions such as drag-along rights, tag-along rights, and so on;
- agreeing on the financing of the company and its activities, either by way of additional capital injections or by raising finance with financial institutions;
- if capital injections are required, providing for the consequences of a shareholder failing to contribute the requested amount; and
- planning for the consequences arising upon the retirement or death of a shareholder, or other exit strategies.
The business partners involved must ensure that the documents are reviewed by a lawyer to ensure that the constitution and the shareholders’ agreement do not conflict with one another and are aligned to allow for a harmonious interpretation and application of the powers, rights and discretions.
[1] Certain provisions of the Act cannot be tailored in a constitution and are of public order.
