A Corporate Charter also referred to as an article of incorporation is the highest governing document of a corporation which is filed by the founders of a company to the secretary of state to make their company a legal corporation if approved by the state. It contains details such as the corporation’s name and address, the objective of the corporation, number of authorized shares, profit or non-profit share status, etc.
The creation of a corporate charter is important for building a new corporation, if not created before the inception of the business they risk themselves being liable for all the possible debts and damages created by the business during the period when they transacted without the legal tag of being a corporation, i.e. creating corporate charter helps in prevention of personal liability of the owner. In case a corporation wants to sell its share it’s important that they register the charter with the state so that it can access the legal authority to sell shares.
There’s a significant difference between shareholder’s agreement and corporate charter which is mostly concerned with the procedural aspects of the company, like when, how, and who can amend them. The amendments in the charter can only be brought if the majority shareholders and the board of directors agree to do so. On the other hand, a shareholder’s agreement is a contract, so it is governed by the contract law rules.
Thus, any amendments can be brought to the contract if and only if all the parties to the contract agree to it. Most of the important functions of a corporation can be done by a charter instead of a shareholder agreement some of the provisions such as waiver of the doctrine of corporate opportunity are mostly done by charter instead of shareholder’s agreement.
Other than that, courts treat charters as a more important document as compared to other instruments of corporate governance. So, why do shareholder’s agreements exist and what part of corporate governance can they distinctly promote?
The reasons can be put as both procedural and substantive. By procedural, it can be said that both the charter and shareholder agreement are used to make organizational decisions.