The Importance of a Company Constitution in Malaysia

ARTICLE SUMMARY

Title: The Importance of a Company Constitution in Malaysia

Published: 19 May 2020

Prepared by: Nurazira Natasha binti Hamdan

Source: https://dnh.com.my/the-importance-of-a-company-constitution-in-malaysia/

This article concerns about the company’s Constitution in Malaysia, whether it is mandatory or not to have it applicable in a company. Previously, the company’s Constitution was known as the Articles and Memorandum of Association. Based on this article, I had learned that the company’s Constitution is quite important nowadays regarding its purposes and benefits. Basically, the company’s Constitution is a legal document which sets out the objects and powers of a company, governs the internal affairs and management of the company.

Besides, the constitution of the company also serves as a contract which binds the company, the shareholders, managers or directors and may include a particular agreement and procedure they should 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 the parties to the agreement.

In the case of Beh Chun Chuan v Paloh Medical Centre Sdn Bhd & Ors [1999] 3 MLJ 262, the petitioner argued that the company was carrying out in a manner that oppressed the petitioner based on the alleged breach on the terms of the shareholders' agreement. The agreement had not been incorporated into the articles of the company’s association. As a result, the court rejected the claim and held that the plaintiff’s claim which stated the agreement of the shareholders prevailed over the articles of association, was unsustainable as the shareholders’ agreement does not bind the shareholders under the Companies Act. By virtue of this case, the wider and binding legal effect of the Constitution can be clearly understood and comprehended in governing the relationship between the members of a corporation compared to a Shareholders' Agreement.

Previously, under the Companies Act 1965, any company which limited by shares was required by law to have an Association Articles and Memorandum. However, it is no longer mandatory for an organization to have a Constitution under the current Companies Act 2016 ('CA 2016'). In consequence, any company which does not have their own Constitution will face a huge problem because if there are any mistakes or anything that needed to be referred to the provision, they will have to explore the whole Company Act 2016 which is a way longer than the Constitution. Based on CA2016, the Constitution can be altered using certain procedures as stated in Section 36 (1) of CA2016 where the alteration requires a majority vote of 75% by the shareholders who are entitled to give their vote. However, the alteration also has a certain restriction which made the company has to make sure that the alteration 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.

Next, the article also mentioned that the Constitution should be tailored depending on our own specific situation. For instance, if you are a business owner, your Constitution should cover the ownership, control and exit provisions. Meanwhile, if you are a part of family business, it is important to separate the ownership from control, dividend policy and spouses or children's ability to participate in the business.

In my opinion, I strongly agreed that all companies should have their own Constitution to assist them in conducting their jobs. We do not know what will happen in the future. Apart from that, the Constitution will definitely become a great help in time management as the companies only need to go through a few pages regarding their situation rather than reading and referring to the Companies Act 1965.

In conclusion, although the Association Articles and Memorandum is no longer mandatory, as a part of good governance, it is still recommended for a company to implement a constitution. In order to adapt to the specific needs in a particular moment, to anticipate any future changes or challenges, to regularize any inconsistencies and to incorporate any shareholder agreement that may have been entered into, it is crystal clear that the exercise of revising the constitution is vital. When there are matters happened and it is related to the company, where the legislation have been clearly laid out in a consolidated paper that can be amended according to the company's best interests, the directors and shareholders will have a less concern to think about.