COMPANYS CONSTITUTION

The Memorandum, Articles & Shareholders

Agreement
* 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 shareholders
agreement 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 clause
An association clause where subscribers agree to
take up the numbers of shares stated
The names, addresses & occupations of the
subscribers 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 not
specified in its object? i.e. if the act is outside the
scope of its objects.
5
* Ashbury Railway Carriage & 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 . . ., to
carry on the business of mechanical engineers and general
contractors. The directors of the co. entered into contract to build
railway. The co. then refused to proceed with the contract. The
vendors sued the co. for breach of contract.
Held: the construction of railway was not within the objects clause
as stated in the cos MA. The act was ultra vires and the contract
was therefore void and the vendors failed in their action against
the co.
Ultra vires in excess or outside/beyond the powers conferred by
the MA i.e. the co. does not have the power or capacity to enter
into such contracts.
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ATTEMPTS TO DIMINISH THE OPERATION
OF ULTRA 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/transfer
of property by a co. cannot be challenged on the ground
that it is ultra vires i.e. that the act was done in in excess
of 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 an
ultra 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 loss
or 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 the
manner provided by the Act s. 21(1)
If there are no specific provisions to alter then the MA
cannot be altered.
The following are alterable:
Change of company name s. 23
Conversion of unlimited to limited co. or vice versa
s. 25
Conversion of private co. to public co. s. 26
Alteration 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 management
and 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 directors
Duties of directors
Procedure of meetings
Procedure for allotment and transfer of shares
Manner dividends are declared
Right and obligations of members etc.

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e How to lodge an article?

All companies shall lodge with the Registrar the
memorandum 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 can
adopt Table A Articles of the Fourth Schedule as
their AA.
A co. limited by guarantee must lodge own AA.

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e What is Table A of Fourth Schedule?

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

e If company lodges AA, what happens to Table A?
Contents in Table A apply to the extent that they are
not excluded or modified by the lodged articles
s. 30(2)



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e The legal and contractual effect of the articles
The starting point of looking at the effect of the articles is
s. 33(1) CA 1965 which provides the following:-
Subject to this Act the memorandum and articles shall
when registered bind the company and the members
thereof to the same extent as if they respectively had been
signed and sealed by each member and contained
covenants on the part of each member to observe all the
provisions of the memorandum and of the articles.
This is often referred to as the Statutory Contract and
any member has the right to enforce observance of the
articles by virtue of the contractual effect given to the
articles by the s. 33(1) CA 1965.
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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 individual
member have been infringed, he may sue in his own
name.
* Wood v. Odessa Waterworks Co. (1889) 42 Ch 636
Here, it was provided by the articles that a dividend was to be
paid on the shares to the shareholders. The general meeting by a
majority passed an ordinary resolution proposing not to pay a
dividend in cash but instead to grant debenture - bonds to the
shareholders. These were to be redeemable over 30 years. The co.
made profits and the dividends to be paid were loaned by the
shareholders 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 was
inconsistent with the articles. The question for the judge, Justice
Stirling, was whether it was within the power of the majority
shareholders that voted in the general meeting to bind the minority
shareholders who dissented. Wood was one of those who
dissented. And in answer to that question, he said the following:-

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The articles of association constitute a contract not
merely between the shareholders and the co., but between
each individual shareholder and every other; and the
question which I have just stated must in my opinion be
answered in the negative if there be in the articles a
contract between the shareholders as to a division of
profits, and the provisions of that contract have not been
followed Those articles provide that the directors
may, with the sanction of the general meeting, declare a
dividend to be paid to the shareholders. Prima facie that
means to be paid in cash. The debenture-bonds proposed
to be issued are not payments in cash; they are merely
agreements or promises to pay: and if the contention of
the co. prevails a shareholder will be compelled to accept
in 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 in
deciding whether it can be enforced. A members rights
and liabilities under the articles are purely a matter of
contractual obligation.

* In Wong Kim Fatt v. Leong & Co. Sdn. Bhd. [1976] 1
MLJ 140 the companys articles contained an article that
provided that, The holders of seven-tenths of the issued
capital of the co. may at any time serve the co. with a
requisition to enforce the transfer of any particular
shares not held by the requisitionists. The second
defendant held 250,000 shares out of 300,000 issued
shares. He served a requisition to buy out Wongs shares.
Wong objected to this. He obtained an interim injunction
to prevent the enforcement of the article. However, at the
hearing of the action the learned judge, Chang Min Tatt
J, 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 my
view no facts and circumstances raising up any equity
against the second defendant. It is purely a matter of
contractual obligation and the plaintiff must be held to
the obligations he had undertaken.

e The articles bind members in their capacity as members
only, and not in any special or personal capacity, e.g.
director. This is known as the qua member rule.
* Beattie v. E.F. Beattie Ltd [1938] Ch 708; [1938] 3 All
ER 214.
17
* Beattie v. E. F. Beattie Ltd. Here there was a dispute
between a director and the co. The co. alleged that the
director 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 an
arbitration clause in the articles that provided that any
disputes should be referred to an independent arbitrator and
therefore disputes should not be taken to the courts. The
director sought to have the action struck out on the ground
that the co. should have gone to arbitration under the
arbitration clause and so by alleging this he was seeking to
enforce the articles. However, the Court of Appeal held
that he could not do this. He was being sued in his capacity
as a director and as a director he could not rely on the
articles. He could only have relied on the articles as a
member. As a director he was an outsider to the statutory
contract. The director was not seeking to enforce a right
that is common to himself and to all members. It was not
part of the general rights of the corporators. He seeks to
enforce quite a different right.

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* Hickman v. Kent or Romney Marsh Sheep-Breeders
Association [1915] 1 Ch 881.
H was a member of the defendant association which was
a non-profit making co. He brought an action against the
association complaining of various irregularities in the
affairs of the association, including the refusal by the
association 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 any
dispute between the association and any of its members
should be referred to arbitration. However, instead of
going to arbitration, H went directly to the courts and the
association was successful in getting the action stayed.
The arbitration article was binding on H.
The court held that there was an obligation on H under
the articles to go to arbitration and the association could
enforce this against him.
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e What is the position of an outsider ? i.e. someone who is
not a member of the co. or one who is a member but
acting in a capacity other than that of a member.

An outsider to whom rights are purported to have been
given 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 as
contracts between himself and the co. to enforce those
rights.

There has to be a separate or extrinsic contract with the
co. 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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e The articles do not therefore constitute a contract
between the co. and someone who is not a member i.e. an
outsider:- Eley v. Positive Government Security Life
Assurance Co. Ltd. (1876) 1 Ex D 88, Court of Appeal.

* Here a solicitor E, formed a co. He himself drafted the
companys documents for registration. Article 118 of the
companys 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 legal
business of the company, including parliamentary
business, for the usual and accustomed fees and charges,
and shall not be removed from his office except for
misconduct. After a time the co. employed other
solicitors. E then sued the co. for breach of contract in
not employing him as its solicitor. E had by the time of
the action actually become a member and held 200
shares. It was held that he could not force the co. to obey
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this article. The articles had the effect of making a
contract between the co. and the members, and E in his
capacity as solicitor, was not a party to the contract. The
articles conferred no rights on a member where the
member seeks to enforce a right in his capacity other
than as a member. Eley was seeking to assert a right in
his capacity as a solicitor of the co. To do so, he should
have had a separate contract independent of the articles.
* See also: Raffles Hotel Ltd. v. Malayan Banking Ltd.
[1965] 1 MLJ 60 HC; [1966] 1 MLJ 206 FC
- No article can constitute a contract between the co. and a
third person;
- No right merely purporting to be given by an article to a
person, whether a member or not, in a capacity other
than 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 ARTICLES
Subject to the Act and to the MA the co. is free to alter or
add to its articles s. 31(1)
However, certain conditions must be met:-
A special resolution (s. 152(1)) has to be passed by not
less than 75% of its members being entitled to vote at
the general meeting of which not less than 21 days
notice had been given.
Vote bona fide for the benefit of the co. as a whole
Allen v. Gold Reefs of West Africa Ltd [1900]1 Ch 656
If it is provided under MA that the articles cannot be
altered, then AA is unalterable
Alteration must be for a proper purpose and fair in all
the circumstances Gambotto v. WCP Ltd [1995] 13
ACLC 344.


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A co. cannot deprive itself of the power contained in s. 31 CA 1965 to
alter 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 Ltd [1903] 2 Ch 506. By articles 95 and
97 of the defendant co., Mr. GG Symons as governing director was
given the power to appoint and remove the companys directors, and
after his death the same power was exercisable by his executors. The
co. had also agreed in a separate contract relating to the purchase of
Symons business that it would not alter these articles. After the death
of Symons, the co. proposed to rescind the articles in question by
special resolution. The executors applied for an injunction. They were
relying on the agreement. The judge, Byrne J., refused to hold that the
agreement operated to prevent the articles being altered under the
provisions of s. 50 of the Companies Act, 1862. To make the
agreement effective the judge would have had to grant an injunction to
prevent the co. from acting on the altered articles and which he was
not prepared to do. He however said that the executors might have the
remedy of damages only.
24
* This judge-made limitation on the companys ability to alter its
articles was laid down by the Court of Appeal in Allen v. Gold
Reefs of West Africa Ltd. [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 an
obligation). This lien was upon all the partly paid shares held by
that member. A shareholder, called Zuccani, had both partly paid
and 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 his
assets were not sufficient to cover these debts. The co. then altered
Article 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 for
a declaration that the defendant co. had no lien upon the fully paid
shares and the question was, had the articles been validly altered?
The Court of Appeal held that the co. had the power to alter its
articles to extend its lien to the fully paid shares.
25
Lindley MR stated:-

The power thus conferred on companies to alter the
regulations contained in their articles is limited only by
the provisions contained in the statute and the conditions
contained in the companys memorandum of association.
the power conferred by it must, like all other
powers It must be exercised, not only in the manner
required by law, but also bona fide for the benefit of the
company as a whole, and it must not be exceeded. These
conditions are always implied, and are seldom, if ever,
expressed.

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RELATIONSHIP BETWEEN CONTRACT
AND ARTICLES

e 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 its
altered 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 of
contract.


27
* Southern Foundries (1926) Ltd v. Shirlaw [1940] AC 701,
HL
By a written service contract in 1933 Shirlaw was appointed
as the managing director of the appellant co. for ten years.
There was a provision in the contract that said that Shirlaw
would cease to be managing director if he ceases to be a
director.
In 1936, the entire share capital was acquired by Federated
Foundries Ltd. A new article was placed in the cos articles
after the takeover which gave a power to the majority
shareholders, Federated Foundries, to remove a director at
any time. In 1937 Federated exercised this power and
removed Shirlaw from his directorship. He sued Southern
Foundries for breach of contract and Federated for wrongly
procuring the breach of contract. It was the majority
shareholders who were ultimately responsible for causing a
breach of contract. Shirlaw was awarded 12,000 damages
against both defendants and the award was upheld by the
Court of Appeal and also by the House of Lords.


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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 granted
to 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 is
contrary to a stipulation in a contract made before the
alteration.
If the altered articles had provided for the dismissal
without notice of a managing director previously
appointed, the dismissal would be intra vires the co. but
the co. would nevertheless be liable to an action for
damages if the appointment of the MD had been for a
term of say ten years and he were dismissed in less.

29
* Shareholders Agreement and Articles

A co.s MA & AA may be supplemented by a
shareholders agreement.
It is a contract entered into between the shareholders of a
co. to regulate their conduct and define their duties and
obligations inter se in the running of the co.
It may be entered into by the shareholders either at the
time of the co.s formation or at some subsequent time
(e.g. when a family co. in need of extra capital to finance
an expansion of its business, invites an outsider to join the
co. as an additional shareholder).
For the shareholders agreement to be fully effective, it is
necessary that all of the members for the time being are
made parties to the agreement, and so the use of a
shareholders agreement is practicable only if the
membership is not too large.
30

A shareholders agreement only creates personal
obligations.
This principle was had been well established by Lord
Davey in Welton v. Saffery [1895-99] All ER Rep
567. It was applied by the House of Lords in Russel
v. Northern Bank Development Corp Ltd & Ors
[1992] 3 All ER 161.
* See also: Beh Chun Chuan v. Paloh Medical Centre
Sdn. Bhd. & Ors.[1999] 3 MLJ 262 , where the High
Court, referred to the case of Tuan Haji I shak bin
I smail v. Leong Hup Holdings Bhd. & other appeals
[1996] 1 MLJ, CA.

31
* 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 was
executed whereby it was provided that all parties
shall procure that the memorandum and articles of
association of the co. be amended so that the
provision in the memorandum and articles of
association shall comply with the terms of the
shareholders agreement. However, until the date of
the petition, no steps were taken by any of the parties
to procure the amendment. The petitioner alleged that
the affairs of the co. were conducted in a manner
oppressive to the petitioner.
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The petitioners complaints of oppression appeared to
have been based on the alleged breach of the terms of
the shareholders agreement that had not been
incorporated into the AA of the co.

In dismissing the petition, the Court held that in order
to ensure that the terms of a shareholders agreement
shall bind the shareholders under the Companies Act, it
would be necessary to amend the articles to incorporate
the terms in the shareholders agreement into the
articles of the co. Here, nothing was done to amend the
articles to incorporate the terms in the shareholders
agreement into the articles. In the event, it follows that
all the complaints put forth by the petitioner which
were based on the breach of the agreement must fail.
33
e REMEDIES FOR BREACH OF AA AND MA

The members can apply for injunction or declaration
They seek to have the A/A observed S. 33(1)
Sometimes, directors cannot prevent the co. from
terminating their appointment, but they can obtain
damages for wrongful dismissal if they have a separate
service contract with the co..