What is a Company’s Constitution?
A company’s constitution describes a business’s activities relating to its members, directors and company secretary. This specifies the powers, roles, responsibilities, significant activities (if any), share allotment, dividend distribution and such other details including shares transfer protocols, director appointment/re-election/removal procedures, meetings conduct etc.
In Malaysia, having a constitution is not compulsory. The shareholder has the choice of adopting a constitution either at incorporation or post-incorporation. Yet, the companies with several members are advised to have a constitution for better provision of these issues.
Function of Company’s Constitution
A well regulated internal framework offers assurance and clarity to directors and shareholders concerning the operations of the company. The members’ terms, conditions or requirements may be shown in the Constitution.
This document gives the directors and board of directors more freedom and confidence to deal with various government agencies, financial institutions, and licensing authorities.
At what stage should one introduce a company constitution?
It is beneficial to implement a company constitution in the following five circumstances.
1. When the number of directors or shareholders is even
An even tie during board or shareholder meetings can be used to justify a ‘deadlock’ when an equal number of directors or shareholders support opposite outcomes. Therefore, creating voting regulations in a corporate constitution can avoid such predicaments.
- This provides a casting vote for the meeting chairperson in an event of a tie.
- No shareholder’s representatives will be allowed to act as the meeting chairman.
- Board meetings shall not begin if not all directors are present.
2. When aiming to extend beyond the protections provided by the Act for shareholders
According to section of Companies Act 2016 in part III division II sub-division I, the liability of shareholders to contribute paid-up capital and their right to hold management reviews at will are enabling them to make direct recommendations to the board. Further, other clauses can be formulated in the company’s constitution to strengthen the shareholder’s rights.
- Enables absent shareholders to nominate proxies for purposes of voting.
- That a written resolution that is not carried by the majority of votes in 14 days from distribution shall be deemed rejected.
- If fewer than 80% of voting shareholders are present at meetings, then no votes will be recorded.
3) When establishing a joint venture involving two or more companies
Additional provisions in the constitution can help shield corporate entities that act as shareholders in joint ventures.
- Each company owning part of the joint venture gets to choose a certain number of people to be in charge. This makes sure that everyone involved has a say in how things are run.
- Redeeming any of the joint venture’s corporate shareholders’ shares in case one of the participating companies faces striking off or winding up procedures.
- Restricting the joint venture’s operations in strict compliance with provisions stipulated in the constitution.
4) When seeking investment from investors
The Companies Act 2016, Part III, Division I, Subdivision I states that, by default, a company that lacks a constitution is only permitted to issue ordinary shares, which are entitled to the shares and voting rights of their respective owners. Nevertheless, if a company wants to issue preference shares which have no voting rights and are used for raising funds, a constitution is required.
- Further, the articles of association provided that 40% of the total shares will be preference shares.
- The discretion of a company to redeem or retain preference shares.
- Specifying how often and how much dividends will be paid to shareholders.
- Having the same voting rights for shareholders who are holders of preference shares as those who hold the ordinary shares.
5) When you wish to control how the Board operates
The Companies Act 2016, Third Schedule (Section 212), outlines the default procedures for the board, encompassing directors’ voting rights, methods of passing board resolutions, formation of committees, and appointment of managing directors. Given these basic outlines, a company can utilize its constitution to craft more specific and tailored regulations that align with its operational requirements.
- Mandating a majority vote among directors to pass a board resolution.
- Establishing a permanent chairperson for board meetings, unless removed from the board.
What is Memorandum and Articles of Association?
The SSM requires the submission of the Memorandum and Articles of association during company formation. The memorandum of association also known as the memorandum is a legal document for the external dealings of the company.
On the other hand, the company’s constitution is made up of the articles of association which are also referred to as the articles. In effect, these articles are virtually a collection business operation meant to regulate the corporate internal affairs.
The Memorandum of Association contains critical information, including:
- Company Name: A name for a private company must end with “Sendirian Berhad,” while the name of a public company should end with “Berhad.”
- Registered Office Location: The company’s official address of its registered office.
- Object Clauses: Nature of the company’s business.
- Limited Liability of Members: Introducing clear provision of limited liability for the company’s members.
- Authorized Share Capital: Nominal amount of Authorized Share Capital Registered with SSM.
According to Section 619(3) of the Companies Act 2016, existing companies already registered under previous laws can choose to continue the validity and enforceability of their Memorandum and Articles of Association (M&A).
In case of such changes, the company may decide to either entirely repeal the M&A or change certain articles. The company would have to pass a resolution abolishing the current M&A and opting for no particular constitution.
In such a case, the rights, powers, duties and obligations of the Board of Directors shall be governed by three related virtue companies (Section 31(3) Companies Act 2016).
M&A vs. Constitution
Memorandum and Articles of Association
According to the Companies Act of 1965, each company had to have a Memorandum and Articles of Association (M&A), which now form the Constitution under the new Companies Act of 2016.
But a company can decide not to have a Constitution according to the company’s particular business requirements. In that event, the company, its directors and every member thereof shall have rights, powers, duties and obligations as prescribed by the Act.
Where a company does have a Constitution, the Act specifies that save where otherwise provided in the Constitution, for all purposes (and without limiting or derogating from any provision of this Act) the rights, powers, duties and obligations of the company and its directors and members may be exercised or performed if in accord with this Act as applicable to a company limited by shares (sec.111(2)). The Act deems any provision within the Constitution conflicting with it unconstitutional. So what is the function of Memorandum and Articles of Association?
Until the company takes action on the following options, the existing Memorandum and Articles of Association (M&A) automatically serve as the company’s Constitution:
- Removal of existing Memorandum and Articles of Association (M&A): If a company opts to remove its existing Memorandum and Articles of Association (M&A), it will operate without a Constitution and will be governed solely by the restrictions outlined in the Act.
- Amendment of existing Memorandum and Articles of Association (M&A) or establishment of a new Constitution in compliance with the Act. The process for amending Memorandum and Articles of Association M&A usually involves obtaining approval from the shareholders through a special resolution. This might require a certain majority vote, such as a two-thirds majority.
Given that the Constitution is a document setting out the legal policies of a company, and not having any clause could lead to confusion in extreme cases.
An appropriate Constitution in line with the Act and the firm’s primary goals enthuses the right persons to take an educated decision on various matters such as succession, signing rules, and use of technology.
Your Company’s meticulous drafting of the Constitution that serves as the basis of its growth and progress.
Building a Solid Foundation: Key Considerations for Creating a Comprehensive Company Constitution
The company constitution of a company is its central document that details the major tenets for how the firm shall be structured, governed and operated. This document is the foundation of any successful or legal complaint organization. Crafting a robust constitution requires careful consideration of several crucial aspects:
1. Structuring Decision-Making: Clarity and Accountability
- Defining Roles and Responsibilities: Distinguish the roles of the persons or group involved in decision making like a board of directors, management team and shareholders.
- Establishing Voting Procedures: Specify reasonable voting protocols such as quorum levels, proxy voting arrangement, and majority/supermajority votes.
- Defining Decision-Making Processes: Create a clear process to raise concerns, have discussions and make conclusions.
2. Balancing Interests: Employee Rights and Responsibilities
- Protecting Employee Rights: Establishing and honoring employees’ rights, such as the right to safety and wholesome environment, freedom from discrimination, privacy protections and equitable compensation.
- Specifying Employee Duties: The code should outline performance expectations, adherence to company’s policies, confidentiality obligations, and ethical standards for all employees.
- Establishing Fair Disciplinary Procedures: Develop transparent and equitable mechanisms of handling employees’ misconduct to enhance accountability and a good working environment.
3. Fostering Order and Ethics: Implementing Company Rules and Regulations
- Code of Conduct: Define a code of conduct for all employees related to their overall behavior, professionalism, and ethical expectations.
- Workplace Policies: Formulate robust policies which touch on safety, harassment, discrimination, equal opportunity, as well as use of social media.
- Data Privacy: Develop transparent data collection, storage, usage and disclosure policies that meet legal requirements and safeguard employee and customer data.
4. Navigating the Legal Landscape: Adhering to the 2016 Companies Act
- Corporate Governance: Align the constitution with the Act’s requirements for board composition, shareholder meetings, and financial reporting.
- Shareholder Rights: Clearly outline shareholder rights, including the right to information, voting, and dividends.
- Legal Compliance: Address legal obligations related to taxation, employment law, environmental regulations, and other relevant legislation.
Regular Review and Updates: Ensuring Ongoing Relevance and Compliance
The constitution of the company breathes, and this means that it requires occasional alterations to cope with legislative changes, practices of the company or needs of all stakeholders. As such, it ensures the entity remains relevant, effective and compliant with the law.
How FastLane Group Can Help in Laying the Right Foundation for Success
Taking all these factors into account in a detailed manner, it becomes possible for companies to develop an all-encompassing constitution that acts as a sound basis for long-term prosperity which encompasses conduct of ethical business, effective decision-making and growth that considers the wellbeing of the society.
Leverage FastLane Group’s expertise in company incorporation and company secretary services to ensure your constitution lays the foundation of Memorandum and Articles of Association. Contact us today to unlock your company’s potential and Memorandum and Articles of Association.