memorandum and articles of association_1

8/4/2019 Memorandum and Articles of Association_1

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MEMORANDUM AND ARTICLES OF ASSOCIATION

Each company is required, on formation, to adopt and lodge with the ROC amemorandum of association (MOA).

The MOA is the document by which the original incorporators signal theirintention to form a company. Section 18 provides for the requirements ofthe contents of MOA.

The Articles of Association (AOA) is basically a set of regulations formanagement of the company. It contains rules governing matters such asappointment, removal and powers of officers, meeting procedures and so on.

It is open to the members of a company to decide the precise form of therules to be adopted by the company so as to meet the companys particularrequirements. The CA, 1965 provides a set of model rules, in the form of

Table A in the Fourth Schedule, which a company may adopt as its AOA, but itis not obliged to do so. Some companies may use a combination of Table Aarticles and specific articles designed to meet the particular requirements ofthe company.

Section 30(2) : If a company does not register its AOA upon incorporation,the provisions of Table A applies to that company as if the company hadregistered Table A as the companys AOA.

Amendment or Alteration of MOA/AOA

The MOA may only be altered to the extent and in the manner as provided bythe CA, 1965. Section 21 (1A) provides that subject to Section 33 andSection 181, if a provision of the memorandum of a company could lawfullyhave been contained in the Articles of the company, the company may, byspecial resolution, alter the Memorandum

(a) by altering; or(b) by deleting

the provision, unless the Memorandum prohibits the alteration or deletion ofthat provision.

The AOA may be amended (by deleting/altering) by a special resolutionpassed by the company subject to the CA, 1965 and to any conditions in itsMemorandum.

Once registered, the MOA and the AOA bind the company and the membersto the same extent as if they respectively had been signed and sealed byeach member and contained covenants on the part of the member to observeall the provisions of the MOA and the AOA.

Lim Beng Hui & Ors. v. Ling Beng Sung (1990)The MOA and the AOA constitute a contract between the members inter se.The contract is deemed to contain covenants that each member will observeall the provisions of the MOA and AOA.


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The MOA and AOA however, do not operate as a contract between a memberand outsiders.

Eley v. Positive Government Security Life Assurance Co Ltd (1875)The companys AOA stated that Mr. Eley should be the companys solicitor.When the company ceased to employ him as its solicitors, Mr. Eley sued thecompany. The court held that this was not a right given to him as a memberand he could not rely on the Articles as a contract for professional services.

The Ultra Vires Doctrine

The MOA must state the objects of the company. The purpose of the objectsclause is to define and limit the activities which the company is permitted toundertake. Anything exceeding these limits is ultra vires the company andmay be void.

In order to authorize acts which otherwise would be ultra vires, a companymay by a special resolutions alter the provisions of its memorandum withrespect to the objects of the company : Section 28(1).


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SHARES AND SHAREHOLDING

Sources of Company Finance

The principal sources of finance for companies limited by shares include :

Share capitalA companys share capital is made up of the money or assetscontributed to the company by people proposing to become membersof the company. The amount contributed becomes the property of thecompany and the contributor is issued with shares in the company.

Debt financeDebt finance is money lent to the company, in the expectation that thecompany will pay interest throughout the term of the loan and repaythe principal (the original amount loaned) by the end of the term. Thelender may be an outsider, such as a bank. Examples of debt financeare term loans and overdraft facilities.

Trade financeTrade credit is a term used to describe the situation where a companyhas received goods or services in advance of paying for them, or hasreceived payment in advance of delivering goods or services.

Retained earningsEarnings from previous periods that have not been distributed to thecompanys members and is an important source of working capital for

many companies.

The nature of Share Capital

The companys share capital is the amount of money or assets contributed tothe company by its members when they subscribe for shares in the company.A companys power to issue shares is contained in Section 18. Section 18(1)makes it compulsory for companies to have a capital clause in thememorandum stating the amount of capital the company proposes to registerand its division into fixed amounts. This is called the companys authorizedcapital.

A share in a limited company is a claim against the company to which therights set out in the Companies Act 1965 and the companys MOA and AOAattach. Generally, those rights will be :

Distribution rights : rights to receive dividends during the companyslife and, depending on the terms of issue of the particular share, rightsto repayment of the principal and to share in any surplus assets of thecompany on a winding up; and


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Control rights : rights to exercise some control over the managementof the companys affairs, generally taking the form of a right to vote onparticular decisions affecting the company.

The legal nature of a share is set out in Section 98 which provides that ashare is a movable property transferable in accordance with the terms of the

articles of the company.

Borlands Trustee v. Steel Bros & Co Ltd (1901)A share was described as the interest of a shareholder in the companymeasured by a sum of money, for the purpose of liability in the first place andof interest in the second. A share also consists of mutual covenants enteredinto by all the shareholders inter se in accordance with the contractcontained in the AOA.

Shareholders rights

Typically, the rights that attach to shares may include :

Voting rightsShareholders are members of the company and will generally have theright to vote at general meetings of the company. The shares of apublic company carry one vote per share.

Distribution rightsThis is a shareholders entitlement to receive money or other assetsfrom the company. Distributions by companies to their shareholderscan be in the form of :

- Dividends, which are payments out of the companys profits;- A return of capital, which is the return to the shareholder of theamount originally subscribed for the share.

Rights to receive informationThe Companies Act gives members some rights to receive to obtaininformation about the company. This promotes transparency in thecompanys affairs which helps to prevent the companys managersfrom acting to the detriment of the shareholders.

Class rights

Classes of shares

Companies can issue shares of different types, with different rights attachingto each type of the shares. Companies issue shares of different classes toaccommodate the different needs and preferences of different types ofinvestors.

Many companies elect to issue shares of 2 classes ordinary shares andpreference shares. Typically, where this distinction exists, the ordinaryshares will have these rights :


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The right to share equally in any dividends (if they are declared) withall the ordinary shareholders, after all other claimants have been paid;

The right to vote at a general meeting of the company;

The right to be repaid their capital on a winding up after all otherclaimants have been repaid; and

The right to share pro rata in any surplus assets on a winding up.

Preference share is defined in Section 4 as a share by whatever name calledwhich does not entitle the holder thereof to the right to vote at a generalmeeting or to any right to participate beyond a specified amount in anydistribution whether by way of dividend or on redemption in a winding up orotherwise.

Preference shares typically have these rights :

The right to receive a fixed dividend, provided there are profits

available for distribution and a dividend is declared by the company; The right to be repaid the principal on a winding up in priority to

ordinary shareholders;

No voting rights unless dividend are in arrears, except on resolutionsto reduce the companys capital or to wind up the company, or at classmeetings on matters affecting their class rights; and

No right to share in surplus assets on a winding up.

The rights given to preference shareholders are exhaustive. This means that,other rights must be expressly stated before the law recognizes them.

Cumulative preference shares preference shares may be cumulative or non-

cumulative. The holder of a cumulative preference share carries forwardtheir entitlement to a distribution from one year to the next if no dividend isdeclared in a particular year. The holder of non-cumulative preference shareloses their entitlement to any dividend that is not declared or paid in therelevant year.

Redeemable preference shares the CA also allows companies to issueredeemable preference shares if authorized by the articles. Redeemablepreference shares allow for repayment of the principal at a particular time oron the occurrence of a particular event prior to winding up of the company.As such, redeemable preference shares represent an exception to thegeneral principle that companies cannot repay share capital prior to a

winding up.


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memorandum and articles of association_1

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