In practice, it is not uncommon for questions to arise as to whether a shareholders’ agreement still needs to be complied with if its terms are not incorporated into the company’s constitution.
This issue often becomes relevant where the shareholders’ agreement contains important provisions relating to reserved matters, share transfer restrictions, director appointment rights, consent thresholds, or other governance arrangements, but those same provisions are not expressly reflected in the constitution.
In my view, this question should not be approached too simplistically.
The fact that a shareholders’ agreement is not incorporated into the constitution does not necessarily mean that it can be disregarded. At the same time, it should not automatically be assumed that the shareholders’ agreement will operate in the same way as the constitution or bind the company in the same manner.
The more accurate position is that a shareholders’ agreement and a constitution are different instruments, with different functions and different legal effects. That distinction matters.
A shareholders’ agreement and a constitution are not the same
A company’s constitution forms part of the company’s constitutional framework. It governs the internal rules by which the company operates and is part of the legal structure through which the company is managed and controlled.
A shareholders’ agreement, on the other hand, is generally a contractual arrangement between its parties. It records rights, obligations, restrictions, and understandings agreed between them.
For this reason, the question is not simply whether the shareholders’ agreement has been incorporated into the constitution. The more relevant questions are:
- who are the parties to the shareholders’ agreement;
- what obligation is said to apply;
- whether the company itself is bound by the agreement; and
- whether the relevant provision is consistent with the constitution and the applicable law.
Without considering these questions, the issue cannot be analysed properly.
Non-incorporation does not necessarily make the shareholders’ agreement irrelevant
A shareholders’ agreement does not cease to matter merely because it is not reflected in the constitution.
If it has been validly entered into, it may still remain binding as a matter of contract between the parties to it. In that sense, non-incorporation into the constitution does not automatically deprive it of effect.
However, it is important to distinguish between contractual effect and constitutional effect.
A provision may still bind the contracting parties, but that does not necessarily mean that it will regulate the company’s internal machinery in the same way as if it had been incorporated into the constitution. This is where practical difficulty may arise.
Whether the company is itself bound is an important consideration
A further point that should not be overlooked is whether the company is itself a party to the shareholders’ agreement.
If the company is not a party, then the analysis becomes more complicated, particularly where the provision is intended to affect how the company acts in practice.
This may be especially relevant where the shareholders’ agreement seeks to regulate matters such as:
- board approval mechanics;
- director appointment or nomination rights;
- share transfer restrictions;
- reserved matters; or
- shareholder consent requirements.
If such matters are set out only in the shareholders’ agreement, but not reflected in the constitution, practical issues may later arise as to how those rights are to be implemented through the company’s own internal processes.
Inconsistency between the shareholders’ agreement and the constitution should not be underestimated
Where the shareholders’ agreement provides one thing and the constitution provides another, the difficulty is not merely theoretical.
In practice, inconsistency between the two documents may create uncertainty as to which position should be followed for a particular corporate action or governance process. It may also create difficulty where one party seeks to rely on a contractual right that is not supported by the company’s constitutional framework.
This is why the relationship between the shareholders’ agreement and the constitution should always be considered carefully. Where important governance rights are intended to have practical operation, inconsistency between the two documents can become a real source of dispute or confusion.
How SHA provisions may still be followed in practice
Where certain provisions in a shareholders’ agreement are not reflected in the constitution, that does not mean they should simply be ignored. However, if such provisions are intended to be effective in practice, they should not be left as contractual wording on paper alone.
The first step is to identify which provisions are purely contractual in nature, and which are intended to affect the company’s internal governance or decision-making process.
That distinction is important.
Some provisions may remain matters strictly between the contracting parties. However, where the provision is intended to affect matters such as approvals, reserved matters, transfer restrictions, nomination rights, or consent mechanics, practical issues may arise if the company’s governance framework does not reflect them.
It is also important to consider whether the company itself is a party to the shareholders’ agreement. If it is not, and the provision is intended to operate through the company’s internal processes, the ability to implement the agreed position may be less straightforward in practice.
As a matter of governance, a more reliable approach is to translate the relevant shareholders’ agreement provisions into the company’s internal approval and compliance process. In other words, the shareholders’ agreement should be treated as a live governance document, not merely a document to be referred to only when a dispute arises.
Where a proposed corporate action is being considered, the review should therefore not be limited to the Companies Act and the constitution alone. It should also include consideration of whether the shareholders’ agreement imposes any additional restriction, approval requirement, consent threshold, or procedural step.
In practice, it may also be useful to maintain an internal checklist or summary of the key shareholders’ agreement provisions that require monitoring. The purpose is not to restate the agreement in full, but to ensure that the relevant stakeholders know what should be checked before action is taken.
Ultimately, if a provision is intended to have continuing and effective operation through the company’s governance framework, it is often preferable to consider whether it should also be appropriately reflected in the constitution rather than relying on the shareholders’ agreement alone.
Why this matters in practice
This issue matters because important shareholder rights are often documented in the shareholders’ agreement, but not always fully carried through into the constitution.
This may include provisions relating to:
- share transfer restrictions;
- pre-emption rights;
- director nomination rights;
- reserved matters;
- approval thresholds; and
- other governance protections negotiated between the parties.
These rights may be commercially important. However, if they are left only in the shareholders’ agreement, without being considered from a constitutional and implementation perspective, problems may later arise as to how they are to be enforced or followed in practice.
This is particularly so where the relevant right is expected to operate through the company itself, rather than merely as a matter of contract between the shareholders.
Good governance requires more than relying on one document alone
For this reason, the issue should not be approached on the basis of a simple yes or no.
It would be too broad to say that a shareholders’ agreement no longer needs to be complied with merely because it is not incorporated into the constitution.
Equally, it would also be too broad to assume that the shareholders’ agreement will always operate as though it were part of the constitution.
A more balanced and practical view is that a shareholders’ agreement may still remain binding as a matter of contract, but where important rights are intended to operate through the company’s internal governance structure, non-incorporation into the constitution may create limitations, uncertainty, or practical difficulty.
In that sense, the issue is not only whether the shareholders’ agreement remains relevant, but whether the agreed rights have been properly structured to operate effectively in practice.
Final thoughts
A shareholders’ agreement does not necessarily lose its effect simply because it is not incorporated into the company’s constitution.
However, the agreement and the constitution do not serve the same function, and they do not operate in the same way. That distinction should always be kept in mind.
Where important shareholder rights or restrictions are intended to have practical operation, they should not be left to assumption. It should be considered carefully whether the relevant provision is intended to remain purely contractual, or whether it should also be reflected in the constitution and the company’s governance process.
In practice, good governance is not only about what has been agreed in principle. It is also about whether the arrangement has been structured in a way that allows it to operate properly, clearly, and effectively.
Civernyx 
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