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COMPANYS CONSTITUTION

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The Memorandum, Articles & ShareholdersAgreement

What is Memorandum of Association (MA)?What are Articles of Association (AA)?Can MA and AA be altered?

What are the conditions that need to be fulfilled before an article may be altered?What is the effect of an alteration of the AA?

What is the object clause?What effect does the terms of a shareholdersagreement have on the co.?

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MEMORANDUM OF ASSOCIATION

Each company must have Memorandum of Association(MA) before it can be registered S. 16(1)

It is the main constitutional document of the co. S. 18 provides the contents of MA

Name of the co.Objects of the co.The share capital clause

The limited liability clauseAn association clause where subscribers agree totake up the numbers of shares statedThe names, addresses & occupations of thesubscribers to the MA

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OBJECTS OF MA

The companys powers must be defined. The objects set out the purpose for which the co.

exists.It details all that the co. is permitted to do.The co. must act within its stated objects.

What happens if a co. does an act which is notspecified in its object? i.e. if the act is outside thescope of its objects.

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Ashbur y Railway Carr iage & I ron Co v. Riche (1875) LR 7 (House of Lords)

The objects clause in the cos MA stated as follows to make, and sell, and lend or hire, railway carriages and wagons . . ., tocarry on the business of mechanical engineers and generalcontractors. The directors of the co. entered into contract to build railway. The co. then refused to proceed with the contract. Thevendors sued the co. for breach of contract.Held: the construction of railway was not within the objects clauseas stated in the cos MA. The act was ultra vires and the contractwas therefore void and the vendors failed in their action againstthe co.Ul tra vires in excess or outside/beyond the powers conferred bythe MA i.e. the co. does not have the power or capacity to enterinto such contracts.

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ATTEMPTS TO DIMINISH THE OPERATIONOF UL TRA VI RES

To put a wide object clause. S. 20 CA 1965 strikes out the absolute effect of

ultra vires.

Alteration of objects in memorandum s. 28(1) . By special resolution ( s. 152 ) the co. may alter the

objects clause. The procedure for alteration laid down in s. 28

must be complied with.

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S. 20 Co. Act 1965

S. 20(1) states that the validity of an act /contract/transferof property by a co. cannot be challenged on the groundthat it is ultra vires i.e. that the act was done in in excessof the companys capacity or power.

Effect an ultra vires act is valid pursuant to s. 20(1) .However, the director or officer who had entered into anultra vires transaction can be sued by the company

- s. 20(2)(b) .If the unauthorised act or transfer is yet to be performed,then the courts have the power to restrain the

performance of the act and to order compensation for lossor damage sustained by either party - s. 20(3) .

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ALTERATION OF MA

The MA may be altered only to the extend and in themanner provided by the Act s. 21(1)

If there are no specific provisions to alter then the MAcannot be altered.

The following are alterable:Change of company name s. 23Conversion of unlimited to limited co. or vice versa

s. 25Conversion of private co. to public co. s. 26Alteration of the objects of the co. s. 28(1)

To alter or reduce the share capital s. 64

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ARTICLES OF ASSOCIATION

They are provisions that regulate the internal managementand operation of the company.Matters set out in AA include:

Division of power & relationship between general

meeting of shareholders and BOD Method of appointment of directorsDuties of directors

Procedure of meetingsProcedure for allotment and transfer of sharesManner dividends are declared

Right and obligations of members etc.

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How to lodge an article?

All companies shall lodge with the Registrar thememorandum and articles s. 16(1) .A co. limited by shares need not lodge their own

AA s. 30(1)If they elect not to lodge their own AA, they canadopt Table A Articles of the Fourth Schedule astheir AA.A co. limited by guarantee must lodge own AA.

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What is Table A of Fourth Schedule?

Sometimes referred to as model AA.It constitutes clear and comprehensive set ofregulations for the management of a co. limited byshares.A co. may adopt all or any of the regulationscontained in Table A s. 30(1)

If company lodges AA, what happens to Table A?Contents in Table A apply to the extent that they arenot excluded or modified by the lodged articles

s. 30(2)

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The articles bind the co. and the members as if they had been sealed by the co. on which the members can sue and be sued by the co. and where the rights of an individualmember have been infringed, he may sue in his own

name.Wood v. Odessa Waterworks Co . (1889) 42 Ch 636Here, it was provided by the articles that a dividend was to be

paid on the shares to the shareholders. The general meeting by amajority passed an ordinary resolution proposing not to pay adividend in cash but instead to grant debenture - bonds to theshareholders. These were to be redeemable over 30 years. The co.made profits and the dividends to be paid were loaned by theshareholders to the co. in return for the debentures. The plaintiff,Wood, a shareholder sought an injunction to restrain the co. from

acting on the resolution. He alleged that this proposal wasinconsistent with the articles. The question for the judge, JusticeStirling, was whether it was within the power of the majorityshareholders that voted in the general meeting to bind the minorityshareholders who dissented. Wood was one of those whodissented. And in answer to that question, he said the following:-

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The articles of association constitute a contract notmerely between the shareholders and the co., but betweeneach individual shareholder and every other; and the

question which I have just stated must in my opinion beanswered in the negative if there be in the articles acontract between the shareholders as to a division of

profits, and the provisions of that contract have not been followed Those articles provide that the directorsmay, with the sanction of the general meeting, declare adividend to be paid to the shareholders. Prima facie thatmeans to be paid in cash. The debenture-bonds proposedto be issued are not payments in cash; they are merelyagreements or promises to pay: and if the contention ofthe co. prevails a shareholder will be compelled to acceptin lieu of cash a debt of the co. payable at some uncertain

future period. In my opinion that contention ought not to prevail

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The fairness or unfairness of an article is not relevant indeciding whether it can be enforced. A members rightsand liabilities under the articles are purely a matter ofcontractual obligation.

In Wong Kim F att v. Leong & Co. Sdn. Bhd. [1976] 1MLJ 140 the companys articles contained an article that

provided that, The holders of seven -tenths of the issuedcapital of the co. may at any time serve the co. with arequisition to enforce the transfer of any particular

shares not held by the requisitionists . The seconddefendant held 250,000 shares out of 300,000 issuedshares. He served a requisition to buy out Wongs shares.Wong objected to this. He obtained an interim injunctionto prevent the enforcement of the article. However, at thehearing of the action the learned judge, Chang Min TattJ, held that the article was enforceable. He said:-

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Whatever the sympathies evoked by the sight of a slingless David confronted by a Goliath, there are in myview no facts and circumstances raising up any equityagainst the second defendant. It is purely a matter ofcontractual obligation and the plaintiff must be held tothe obligations he had undertaken.

The articles bind members in their capacity as membersonly, and not in any special or personal capacity, e.g.director. This is known as the qua member rule .Beattie v. E.F . Beattie L td [1938] Ch 708; [1938] 3 AllER 214.

d H h di

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Beattie v. E. F . Beattie L td. Here there was a dispute between a director and the co. The co. alleged that thedirector had mishandled certain money belonging to the co.The co. brought this action to recover this money. The

director was also a member of the co. There was anarbitration clause in the articles that provided that anydisputes should be referred to an independent arbitrator andtherefore disputes should not be taken to the courts. Thedirector sought to have the action struck out on the groundthat the co. should have gone to arbitration under thearbitration clause and so by alleging this he was seeking toenforce the articles. However, the Court of Appeal heldthat he could not do this. He was being sued in his capacityas a director and as a director he could not rely on thearticles. He could only have relied on the articles as amember. As a director he was an outsider to the statutorycontract. The director was not seeking to enforce a rightthat is common to himself and to all members. It was not

part of the general rights of the corporators. He seeks toenforce quite a different right.

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H ickman v. Kent or Romney M arsh Sheep- BreedersAssociation [1915] 1 Ch 881.H was a member of the defendant association which was

a non-profit making co. He brought an action against theassociation complaining of various irregularities in theaffairs of the association, including the refusal by theassociation to register his sheep in its published flock

book and a threat to expel him from membership of the

association. Article 49 of the articles provided that anydispute between the association and any of its membersshould be referred to arbitration. However, instead ofgoing to arbitration, H went directly to the courts and theassociation was successful in getting the action stayed.The arbitration article was binding on H.The court held that there was an obligation on H underthe articles to go to arbitration and the association couldenforce this against him.

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What is the position of an outsider ? i.e. someone who isnot a member of the co. or one who is a member butacting in a capacity other than that of a member.

An outsider to whom rights are purported to have beengiven by the articles in his capacity as such outsider,

whether he is or subsequently becomes a member,cannot sue on those articles treating the articles ascontracts between himself and the co. to enforce thoserights.

There has to be a separate or extrinsic contract with theco. i.e. a contract that exists outside the articles for the

outsider to be able to enforce his rights against the co.

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The articles do not therefore constitute a contract between the co. and someone who is not a member i.e. anoutsider:- Eley v. Positive Government Secur i ty LifeAssurance Co. L td. (1876) 1 Ex D 88, Court of Appeal.

Here a solicitor E, formed a co. He himself drafted thecompanys documents for registration. Article 118 of thecompanys article provided: Mr. William Eley, of No. 27,

New Broad Street, in the City of London, shall be the solicitor to the company and shall transact all the legalbusiness of the company, including parliamentarybusiness, for the usual and accustomed fees and charges,

and shall not be removed from his office except formisconduct. After a time the co. employed othersolicitors. E then sued the co. for breach of contract innot employing him as its solicitor. E had by the time ofthe action actu ally become a member and held 200

shares. It was held that he could not force the co. to obey

thi ti l Th ti l h d th ff t f ki

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this article. The articles had the effect of making acontract between the co. and the members, and E in hiscapacity as solicitor, was not a party to the contract. Thearticles conferred no rights on a member where the

member seeks to enforce a right in his capacity otherthan as a member. Eley was seeking to assert a right inhis capacity as a solicitor of the co. To do so, he shouldhave had a separate contract independent of the articles.See also: Raffles H otel L td. v. M alayan Banking L td. [1965] 1 MLJ 60 HC; [1966] 1 MLJ 206 FC

No article can constitute a contract between the co. and athird person;

No right merely purporting to be given by an article to a person, whether a member or not, in a capacity otherthan that of a member, as, for instance, as solicitor,

promoter, director, can be enforced against the co.;Articles regulating the rights and obligations of members

generally as such do create rights and obligations between them and the co. respectively.

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ALTERATION OF ARTICLESSubject to the Act and to the MA the co. is free to alter oradd to its articles s. 31(1)However, certain conditions must be met:-

A special resolution (s. 152(1) ) has to be passed by notless than 75% of its members being entitled to vote atthe general meeting of which not less than 21 daysnotice had been given.Vote bona fide for the benefit of the co. as a whole Allen v. Gold Reefs of West Afr ica L td [1900]1 Ch 656

If it is provided under MA that the articles cannot bealtered, then AA is unalterableAlteration must be for a proper purpose and fair in allthe circumstances Gambotto v. WCP L td [1995] 13

ACLC 344.

A t d i it lf f th t i d i 31CA1965 t

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A co. cannot deprive itself of the power contained in s. 31 CA 1965 toalter the articles by any statement in the articles themselves.

Also a co. cannot contract out of the power to alter the articles.

Punt v. Symons & Co L td [1903] 2 Ch 506. By articles 95 and97 of the defendant co., Mr. GG Symons as governing director wasgiven the power to appoint and remove the companys directors, andafter his death the same power was exercisable by his executors. Theco. had also agreed in a separate contract relating to the purchase ofSymons business that it would not alter these articles. After the deathof Symons, the co. proposed to rescind the articles in question byspecial resolution. The executors applied for an injunction. They wererelying on the agreement. The judge, Byrne J., refused to hold that theagreement operated to prevent the articles being altered under the

provisions of s. 50 of the Companies Act, 1862. To make theagreement effective the judge would have had to grant an injunction to prevent the co. from acting on the altered articles and which he wasnot prepared to do. He however said that the executors might have theremedy of damages only.

Thi j dg d li it ti th bilit t lt it

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This judge-made limitation on the companys ability to alter itsarticles was laid down by the Court of Appeal in Al len v. GoldReefs of West Afr ica L td . [1900] 1 Ch 656.Here, the co. by Article 29 of its articles had a lien for debts and

liabilities of any member to the co. (a lien is a right to hold property belonging to someone else as security for the performance of anobligation). This lien was upon all the partly paid shares held bythat member. A shareholder, called Zuccani, had both partly paidand fully paid shares. In fact he was the only holder of fully paid

shares. When Zuccani died he owed money to the co. for calls made by the co. on his partly paid shares and which were overdue but hisassets were not sufficient to cover these debts. The co. then alteredArticle 29 giving them a lien on all shares whether fully paid or

partly paid. This had the effect of creating a lien on Zuccanis fully paid shares which was the whole purpose of the alteration. The plaintiffs were Zuccanis executors and they brought this action fora declaration that the defendant co. had no lien upon the fully paidshares and the question was, had the articles been validly altered?The Court of Appeal held that the co. had the power to alter itsarticles to extend its lien to the fully paid shares.

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Lindley MR stated:-

The power thus conferred on companies to alter theregulations contained in their articles is limited only bythe provisions contained in the statute and the conditionscontained in the companys memorandum of association. the power conferred by it must, like all other

powers It must be exercised, not only in the mannerrequired by law, but also bona fide for the benefit of thecompany as a whole, and it must not be exceeded. Theseconditions are always implied, and are seldom, if ever,

expressed.

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RELATIONSHIP BETWEEN CONTRACTAND ARTICLES

What happens if there is a separate extrinsic contract between an outsider and a co.?The articles can still be altered and the co. can act on itsaltered articles.But it would amount to a breach of contract and the co.can be sued for damages.

A co. cannot by altering its articles justify a breach ofcontract.

SouthernF oundries(1926)L tdv Shir law [1940] AC 701

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Southern F oundries (1926) L td v. Shir law [1940] AC 701,HLBy a written service contract in 1933 Shirlaw was appointedas the managing director of the appellant co. for ten years.There was a provision in the contract that said that Shirlawwould cease to be managing director if he ceases to be adirector.In 1936, the entire share capital was acquired by Federated

Foundries Ltd. A new article was placed in the cos articlesafter the takeover which gave a power to the majorityshareholders, Federated Foundries, to remove a director atany time. In 1937 Federated exercised this power andremoved Shirlaw from his directorship. He sued Southern

Foundries for breach of contract and Federated for wrongly procuring the breach of contract. It was the majorityshareholders who were ultimately responsible for causing a

breach of contract. Shirlaw was awarded 12,000 damagesagainst both defendants and the award was upheld by theCourt of Appeal and also by the House of Lords.

Th h ld

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The court held:- A co. cannot be precluded from altering its articles

thereby giving itself power to act upon the provisions of

the altered articles. So an injunction will not be grantedto prevent the adoption of the new articles

But to act upon the altered articles will render the co.liable in damages for a breach of the contract if it iscontrary to a stipulation in a contract made before thealteration.

If the altered articles had provided for the dismissal

without notice of a managing director previouslyappointed, the dismissal would be intra vires the co. butthe co. would nevertheless be liable to an action fordamages if the appointment of the MD had been for a

term of say ten years and he were dismissed in less.

* Shareholders Agreement and Articles

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* Shareholders Agreement and Articles

A co.s MA & AA may be supplemented by ashareholders agreement. It is a contract entered into between the shareholders of aco. to regulate their conduct and define their duties andobligations inter se in the running of the co.It may be entered into by the shareholders either at thetime of the co.s formation or at some subsequent time(e.g. when a family co. in need of extra capital to financean expansion of its business, invites an outsider to join theco. as an additional shareholder).

For the shareholders agreement to be fully effective, it isnecessary that all of the members for the time being aremade parties to the agreement, and so the use of ashareholders agreement is practicable only if themembership is not too large.

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A shareholders agreement only creates personalobligations.

This principle was had been well established by LordDavey in Welton v. Saffery [1895-99] All ER Rep567. It was applied by the House of Lords in Russelv. Northern Bank Development Corp L td & Ors[1992] 3 All ER 161. See also: Beh Chun Chuan v. Paloh M edical CentreSdn. Bhd. & Ors .[1999] 3 MLJ 262 , where the High

Court, referred to the case of Tuan H aji I shak binI smail v. Leong H up H oldings Bhd. & other appeals[1996] 1 MLJ, CA.

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Facts:-A winding up petition was presented by the petitioner, a minority shareholder of the co. under s.181 of the CA 1965. A shareholders agreement wasexecuted whereby it was provided that all partiesshall procure that the memorandum and articles ofassociation of the co. be amended so that the

provision in the memorandum and articles ofassociation shall comply with the terms of theshareholders agreement. However, until the date ofthe petition, no steps were taken by any of the parties

to procure the amendment. The petitioner alleged thatthe affairs of the co. were conducted in a manneroppressive to the petitioner.

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The petitioners complaints of oppression appeared tohave been based on the alleged breach of the terms ofthe shareholders agreement that had not beenincorporated into the AA of the co.

In dismissing the petition, the Court held that in orderto ensure that the terms of a shareholders agreementshall bind the shareholders under the Companies Act, itwould be necessary to amend the articles to incorporatethe terms in the shareholders agreement into thearticles of the co. Here, nothing was done to amend thearticles to incorporate the terms in the shareholdersagreement into the articles. In the event, it follows thatall the complaints put forth by the petitioner whichwere based on the breach of the agreement must fail.

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REMEDIES FOR BREACH OF AA AND MA

The members can apply for injunction or declarationThey seek to have the A/A observed S. 33(1)Sometimes, directors cannot prevent the co. from

terminating their appointment, but they can obtaindamages for wrongful dismissal if they have a separateservice contract with the co..