A Malaysian Company’s Constitution – why is it important?
One of the most commonly heard terms when it comes to company related matters is the “company’s Constitution” or what was previously known as the “Articles and Memorandum of Association”. But what exactly is a Constitution and is it mandatory to have it in a company?
In this article, we explore what a Constitution is and the purpose of it in a company.
What is a company Constitution?
The company’s Constitution (previously known as the Articles and Memorandum of Association) is a legal document which sets out the objects and powers of a company and also governs the internal affairs and management of the company.
Further, the company Constitution also acts as a contract which binds the company, its shareholders and also the directors, and may contain covenants and procedures which they would have to comply with. In that sense, the Constitution has a wider and more binding legal effect than a Shareholders’ Agreement (which may not bind the directors who are not parties to the agreement).
In the case of Beh Chun Chuan v Paloh Medical Centre Sdn Bhd & Ors [1999] 3 MLJ 262, the petitioner alleged that the company had been conducted in a manner that was oppressive to the petitioner based on the alleged breach of the terms of shareholders’ agreement which had not been incorporated into the articles of association of the company. The court explained that a shareholders’ agreement is essentially a contract between the members of the company to regulate their conduct and define their duties and obligations inter se in the running of the company. However, in order to ensure that the terms of the shareholders’ agreement shall bind the shareholders under the Companies Act, it would be necessary to incorporate them into the articles of association (currently known as the ‘Constitution’) of the company. As such, the court dismissed the claim and held that the petitioner’s claim that the shareholders’ agreement prevailed over the articles of association was untenable.
Based on the above, we can clearly understand the wider binding legal effect of the Constitution compared to a Shareholders’ Agreement in governing the relationship between members of a company.
Is a company Constitution mandatory?
Previously under the Companies Act 1965, any companies limited by shares were statutorily required to have an Articles and Memorandum of Association. However, under the current Companies Act 2016 (“CA 2016”), it is no longer mandatory for a company to have a Constitution.
So what happens if a company does not have a Constitution? The entire provisions of the CA 2016 would then apply to the company and would act as a default Constitution. That would mean that the rights, powers, duties and obligations of the directors and shareholders would be governed by the CA 2016. The question then leads to “Do you know exactly what the default provisions of the CA 2016 are in respect of the Company?” For some context, the CA 2016 has 577 pages and 620 sections. An average Constitution contains about 40 pages. Which document do you think will be easier to read?
Can a Constitution be altered?
The CA 2016 sets out certain procedures which allows for the alteration of a Constitution by the company. Section 36(1) of the CA 2016 stipulates that alteration of a Constitution is done by way of a passing of a special resolution which requires a majority vote of 75% by the shareholders who are entitled to vote.
However, alteration to the Constitution may also be subjected to certain restrictions (e.g. if a provision under the Constitution expressly prohibits it to be altered) and should only be done if it is “bona fide for the benefit of the company as a whole” as laid down in the case of Allen v Gold Reefs of West Africa.
What should your Constitution be tailored to address?
In practical terms, certain specific provisions should be tailored into the Constitution depending on your own specific situation. The following are examples of provisions that will be relevant if you find yourself in any of the following situations:
- If you are a business owner – the ownership, control and exit provisions;
- If you are a joint business owner together with other ‘shareholders/partners’ – the voting rights, roles & responsibilities, a dividend policy, reserved matters, exit provisions;
- If you are part of a ‘family business’ – the separation between ownership vs control are important, dividend policy, ability of spouses or children to participate in the business etc;
- If you are a director – voting on board matters, access to full information, director’s fee or remuneration;
- If you are an investor (by way of equity/shares) in the company – your preference rights (ranking ahead of others), ability to nominate a director, reserved matters, access to information, exit provisions; or
- If you are an employee who has received employee share options – voting rights, tag along rights, ability to obtain information.
Conclusion
Though no longer mandatory, a company is still encouraged to adopt a constitution as part of good governance. The exercise of revising the constitution is important to tailor to your specific needs at that current time, to anticipate any future changes or challenges, to regularize any inconsistencies and to incorporate any shareholders’ agreement that may have been entered into. Directors and shareholders will have one less problem to worry about when matters relating to the company and its regulations are set out clearly in a consolidated document which may be altered according to the best interests of the company.
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This article was written by Shawn Ho with assistance from Natalie Ng (Legal Manager) . Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020. We are also ranked as a Recommended Firm by IFLR1000 for 2020.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
