UKML 2013

COMPANY LAW

Is IT
advantageous to
have a
constitution for
a company ?
What is constitution ?
- Constitution is an effective legal contract which sets out the objects and the power of a company.
Constitution govern the internal affairs and management between the company and each of its members
and directors and shareholders.
- Constitution covers the duties governing a company including power, responsibilities, roles allotment
of shares, dividend payment, transfer of shares, appointment/re-election/removal of directors, and
conduct of meetings, amongst others.
- Constitution specifies the governing rules of a company. Constitution could be customized and agreed
upon by the shareholders of your company with guidance from lawyers or compliance experts. Your
constitution then works in conjunction with your company’s shareholder agreement
- Under CA206 Section33(1), once the constitution is adopted, it would bind with the company and
members to the same extent as if the constitution had been signed and sealed by each member and
contained covenants on the part of each member to observe all the provisions of the constitution.
CA 2016 Section 31(1): A company, other than company limited by guarantee, may or may not have a
constitution.
CA2016 Section 38(1): A company limited by guarantee shall have a constitution.
Every company was required to have a memorandum and articles of association which is known as the
constitution :
Therefore, under s31 and 38 CA 2016 , limited company was required to have a memorandum and articles of
association which is known as the constitution; other types of company may or may not have a constitution. It is
optional for them.

What IF company doesn’t have a constitution ?

According to CA2016 Section 31(3), if a company does not have constitution, each of the
directors and members of the company will have the rights, powers, duties and obligations as
set out in the Act. In the absence of constitution, the Act sets out the rights, duties and
obligations of shareholders, amongst other matters.
According to CA2016 Section31(2), if the company has a constitution, then every directors and
members of the company will also have the rights, powers, duties and obligations as set out in
the Act, except to the extent that such rights, powers, duties and obligations are permitted to
be modified in accordance with this Act and are so modified by the constitution of the
company.
Can a person be sued because of a company constitution?
● Since the company is governed by its internal rules in the constitution and by outside laws
such as the Corporations Act (2001) , the constitution can obviously be the subject of legal
challenge. Section 140 of the CA states that a constitution takes legal effect as a contract
between the company and shareholders, the company and each director and secretary, and
a shareholder and each other shareholder, where each person agrees to observe the rules.
Accordingly, the constitution binds shareholders and regulates what officers can do and
advisers that simply go for a cheap or easy supplier without having regard to quality may be
at risk if the constitution is unsuitable.

● To determine whether a constitution is suitable, some of the key issues that need to be
considered include:
- Whether the constitution aligns with relevant succession planning strategies.
- Whether the constitution enables the right people to make decisions.
- Whether the constitution complies with current laws.
Beh Chun Chuan v Paloh Medica Centre Sdn Bhd & Ors [1999]
• In the case of Beh Chun Chuan v Paloh Medical Centre Sdn Bhd & Ors [1999], 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 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
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.
 Why do company need
constitution?
• Provide directors and shareholders with peace of mind
as it sets out a calibrated set of internal regulations to
govern the management of the company
• Amended in accordance with the wishes of the
members.
• Provides flexibility and greater certainty to the directors
and shareholders to deal with the relevant authorities,
facilitate dealings with banks and handle licensing
matters with relevant parties.
 Advantages of having
constitution
1. To specify how directors are appointed and removed.
Directors can be appointed by certain shareholders while non-executive directors can be appointed by the
board, replacement and notice options can be covered and so on. The constitution also provided for the
appointment of alternate directors, which could be vital if a director was overseas or unavailable. The
constitution enable the company or a shareholder to entrench a director. This simply means that a particular
shareholder can appoint a director and only that shareholder can remove that director or directors can be
appointed or removed by the majority of 75% or more of the shareholders.

2. To empower the company to do certain actions which are not available under the Companies Act.
Constitution enable the company to acquire shares from shareholders and to indemnify and obtain insurance
against directors and employee's actions.

3. Rights and obligations attaching to
shares can be specified.
The company could forfeit shares for non-
payment of calls, voting rights can be
attached to certain classes of shares to
ensure control, rights to equal shares in
dividends and rights to equal shares in
distribution of surplus assets can be varied,
preferential rights to distributions of capital or
income can be conferred, rights to appoint or
remove directors or auditors, adopt
constitutions, alter constitutions, approve
major transactions, approve amalgamations
of the company, put the company into
liquidation can all be limited so you retain
control of your company.
4. The process of decision making can be
specified.
Strategic planning and smooth governance are
vital to ensure the company progresses.
Procedures of all meetings, including voting and
decision-making processes, obligations of
shareholders and directors can all be specified
in the constitution to help this. The constitution
can also determine how the board is constituted
 
5. To restrain shareholders and directors.
A restraint of trade agreement in the
constitution would bind incoming shareholders
without their having to sign a separate deed.
 Advantages of having constitution (CONT…)
6. The procedure of share transfers can be restricted.
Under the Companies Act, any share can be transferred to anyone. The constitution can restrict
this in several ways which is often very important in a closely-held company. Any shareholder
who wishes to sell their shares must first offer them to the other shareholders at a set price which
the other shareholders can then decide to purchase. The constitution can also determine the
manner of valuing the shares if there is any disagreement in this respect. Company could also
insert preliminary procedural steps such as approval by a special resolution of the shareholders
before a share transfer can be registered. These procedures ensure that the remaining shareholders
support the entry of a new shareholder and was able control the company by retaining the shares
amongst themselves.
 Conclusion
● Constitution enables company to have several classes of shares with different voting rights, dividend
rights and rights to capital upon winding up which can be useful in achieving objectives like income
splitting, dividend streaming and selective control.
● Constitution creates enforceable rights and obligations in relation to shareholders regarding to their
role as shareholders of the company.
● The Constitution normally contains comprehensive rules regarding the calling and holding of meetings,
passing of resolutions, whereas these provisions are not contained in the Replaceable Rules.
● Shareholders are allowed to ask questions and pass resolutions which are related to the management
of the company and create guidelines on the day-to-day management.
● The Constitution provides a comprehensive published document which is easily assessable by its
members and available to the company’s bankers and other parties.
● Company constitutions do not affect the personal status of a company’s shareholders.

Therefore, in my opinion, it is advantageous to have constitution in a company. Constitution is

important to tailor the specific needs of company 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 the company.