COMPANY LAW

MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

TOPICS

• The Memorandum of Association

• The Articles of Association

MEMORANDUM OF ASSOCIATION

Bowen LJ in Guinness v Land Corporation of

Ireland (1882)

• The memorandum contains the fundamental conditions

upon which alone the company is allowed to be

incorporated. They are conditions introduced for the

benefit of the creditors, and the outside public, as well

as of the shareholders. (The articles of association are

the internal regulations of the company).

MEMORANDUM OF ASSOCIATION

• Therefore it defines the essential components of the company’s structure

• Statutory requirements s 18(1):• The name of the company • The objects of the company• A share capital clause• A liability clause• An association clause• A subscriber clause

MEMORANDUM OF ASSOCIATION

• A third party who deals with the company may refer to the

company’s Memorandum which is deposited with SSM. (refer to

the preceding lectures)

• Thus the Memorandum is a public document and today can be

viewed electronically via the e-info portal of the SSM website.

• HTTP://WWW.SSM.COM.MY/EN/SSM-SERVICES

AMENDING THE MEMORANDUM OF ASSOCIATION

• It is often the case that a company may wish to alter its

Memorandum of Association.

• This is natural as the company evolves and needs to adapt to

change.

• Amending the Memorandum is subject to specific statutory

provisions.

AMENDING THE MEMORANDUM OF ASSOCIATION

• S 23- the company’s name

• S 25- unlimited to limited

• S 26- public to private

• S 28- object clauses

• S 62- share capital

• S 64- reduce the share capital

AMENDING THE MEMORANDUM OF ASSOCIATION

• Generally amendments can be made by way of a special

resolution except those that deal with matters involving shares.

• Changes to the provisions of the Memorandum of Association

must also be notified to the Companies Registry.

AMENDING THE MEMORANDUM OF ASSOCIATION

• The changes to the Memorandum of Association

cannot be made in breach of other company law rules

and there are protections against such changes

where they increase the liability of individual

shareholders, vary the rights of any class of

shareholders or otherwise prejudice minority

shareholders.

AMENDING THE MEMORANDUM OF ASSOCIATION

Special Resolutions require the votes of 75% of members present in person or by proxy, who are entitled to vote and do vote.

The meeting at which the resolution is proposed must have had at least 21 days notice, unless a shorter period was agreed by majority in number of members holding at least 95% of the shares.

Certain matters can only be decided by special resolution and the articles cannot provide to the contrary.

THE OBJECTS CLAUSE

• The object clause of the Memorandum of the company

contains the object for which the company is formed. An act

of the company must not be beyond the objects clause,

otherwise it will be ultra vires and, therefore, void and cannot

be ratified even if all the members wish to ratify it.

THE OBJECTS CLAUSE

• ultra vires (uhl-trah veye-rehz) adj. Latin for "beyond powers," in the

law of corporations, referring to acts of a corporation and/or its

officers outside the powers and/or authority allowed a corporation by

law.

THE OBJECTS CLAUSE

• The doctrine of ultra vires has been developed to protect the investors and creditors of the company. This doctrine prevents a company to employ the money of the investors for a purpose other than those stated in the objects clause of its memorandum. Thus, the investors and the company may be assured by this rule that their investment will not be employed for the objects or activities which they did not have in contemplation at the time of investing their money in the company.

THE OBJECTS CLAUSE - UK• Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875)

The objects of the company as stated in the objects clause of its memorandum, were ‘to make and sell, or lend on hire railway carriages and wagons, and all kinds of railway plaint, fittings, machinery and rolling stock to carry on the business of mechanical engineers and general contractors to purchase and sell as merchants timber, coal, metal or other materials; and to buy and sell any materials on commissions or as agents.’ The directors of the company entered into a contract with Riche for financing a construction of a railway line in Belgium. The contract was ratified by all the members of the company, but later on it was repudiated by the company. Riche sued the company for breach of contract.

Issue: whether the contract was valid and if not, whether it could be ratified by the members of the company?

THE OBJECTS CLAUSE - UK

• The House of Lords held unanimously that:

(a) The contract was beyond the objects as defined in the objects

clause of its memorandum and, therefore it was void, and

(b) The company had no capacity to ratify the contract.

THE OBJECTS CLAUSE - UK• Following the Ashbury’s case, the shortcomings or

disadvantages of this rule became apparent. The doctrine creates hardships both for the management and outsiders dealing with the company.

• An outsider dealing with the company is, in law, presumed to have knowledge of the provisions of the memorandum and articles of the company. A contract made by an outsider with the company in respect of anything which is not covered under the objects clause in its memorandum is ultra vires and therefore void.

AVOIDING ULTRA VIRES - UK

• Owing to the difficulties of the ultra vires rule, businesses

attempted to evade the ultra vires rule. One approach was to

make the objects clause wide enough to cover various

situations. All sorts of objects, which a company may wish to

adopt, are stated in the objects clause.

AVOIDING ULTRA VIRES -UK

• Bell Houses Ltd., v. City Wall Properties Ltd. (1966)

• A company was authorized by the objects clause of its

memorandum to carry on any other trade or business,

which could, in the opinion of the directors be

advantageously carried on by the company in

connection with its general business. This clause was

held valid.

ULTRA VIRES – POSITION IN THE UK TODAY

• Its importance has been diminished as a result of

the Companies Act 2006 s 31, which allows for

unlimited objects for which a company may be run.

Furthermore, any limits a company does have in its

objects clause has no effect whatsoever for people

outside a company (s 39 CA 2006), except as a

general issue of authority of the company's agents.

ULTRA VIRES – MALAYSIA

• Section 20 Companies Act 1965: the doctrine has been

modified and thus it states that the fact that the company did

not have the capacity to enter into a particular transaction is

irrelevant as against third parties. Hence an ultra vires

transaction may be valid.

ULTRA VIRES – MALAYSIA• However, by section 20(2), the company’s lack of

capacity or power may be asserted or relied upon: • in proceedings against the company by any member,

or debenture holder who is secured by a floating charge over the company’s property, to restrain the company from doing an ultra vires act or transaction;

• in proceedings by the company or by any member of the company against the present or former officers of the company;

• in any petition by the Minister to wind up the company.

ULTRA VIRES – MALAYSIA• In Malaysia, although ultra vires transactions which have

been completed cannot be invalidated, the officers are not free to ignore the objects clause of the company.

• Thus, an injunction can be brought to prevent an uncompleted ultra vires transaction. Further, the officers who were responsible for the ultra vires transaction may be made liable to the company. This could involve issues of breaches of director’s duties. This may be relevant if the borrowing transaction materially affects the company’s ability to pay creditors. Finally, it is even possible to have the company wound up on grounds of serious ultra vires transaction.

THE ARTICLES OF ASSOCIATION

• An official document giving details of the structure and running of

a company, for example the powers of directors, the rights of

shareholders, the way in which the accounts will be approved,

etc or

• A set of regulations for the internal management of a company.

THE ARTICLES OF ASSOCIATION

• If we recall, the incorporation of a company requires the submission of:

• An original copy of the Memorandum and Articles of Association stamped at

RM100.00.

• The first directors and secretaries shall be named in the Memorandum and

Articles of Association.

• The subscribers to the company’s shares shall sign the Memorandum and

Articles of Association in front of a witness.

THE ARTICLES OF ASSOCIATION

• So a company must have an AA. A company has the

following options:- adopt Table A, Fourth Schedule of the CA 1965;

- do not create an AA. Then the Table A, Fourth Schedule of the CA 1965 becomes

the default AA;

- creates its own AA, yet does not exclude the application of Table A, Fourth

Schedule of the CA 1965, thus Table A will be applicable in the event of any

lacuna.

- See Section 30 of CA 1965

THE ARTICLES OF ASSOCIATION

For incorporation of a private company, the Articles of

Association shall contain the following stipulations:

a. Restriction on the right to transfer the company’s shares;

b. Limitation on the number of members to not exceed fifty;

c. Prohibition on any invitation to the public to subscribe the shares/debentures of the company; and

d. Prohibition on public invitation to the public to deposit money with the company.

THE ARTICLES OF ASSOCIATION

• For listing, companies are required with Chapter 7 of the Bursa

Malaysia’s Listing Requirements. Understandably, as a listed

company, there are greater controls on the structure of the AA

particularly those that relate to capital, borrowing and lending,

voting etc.

THE ARTICLES OF ASSOCIATION

• If there is a conflict between the MA and MA, then the provisions of the

MA shall prevail.

• If there is a conflict between the AA and any statutory provision, then the

question of which one prevails will depend on the words used in the

context of the issue.

Amending The Articles of Association

• S 31(1) the company is free to alter its articles by special resolution.

• Lindley MR in Allen v Gold Reefs of West Africa Ltd [1900]: a member must vote ‘bona fide for the benefit of the company as a whole’

• Latham CJ in Peter’s American Delicacy Co Ltd v Heath (1939) : The Court will not interfere unless the decision is one that no reasonable person could make.

AMENDING THE ARTICLES OF ASSOCIATION

• Evershed MR in Greenhalgh v Ardene Cinemas Ltd [1951] Ch 286:

the majority may not oppress or treat the minority unfairly.

• Sometimes a company may impose other requirements in its MA that

also must be complied with before the AA can be altered. (see s 31(1)

CA 1965)

Legal effects of the MA and the AA

• It is a binding contract between the company and its members;

• Hickman v Kent Sheep Breeders Association (1876)• Eley v Positive Government Security Life Assurance Co

(1875)

• It is also a contract between individual members in their capacity as members.

• Wong Kim Fatt v Leong & Co Sdn Bhd (1976) • Rayfield v Hands (1958)