From M&A to Constitution: What you need to know

November 2018
By Lee Shuk Yee (Tax Director) & May Ng (Corporate Secretarial Consultant), PwC Malaysia

The company Constitution is often relegated to a supporting role in the operations of a company, and it is in fact, widely overlooked as a key driver of a company’s corporate governance.

As part of good governance, the company’s Constitution should be reviewed from time to time to ensure that it reflects the company’s current objectives, activities and operations. It is also important to ensure that the company’s processes continue to meet practical needs. This means much greater flexibility and certainty in governance, and allows more control as the company grows or changes over time.

Because a company is governed by its internal rules as laid out by the Constitution and Companies Act 2016, the Constitution can obviously be the subject of legal challenge. The company would be at risk if the Constitution is unsuitable.

What’s a Constitution?

It is effectively a contract that outlines the relationships between the company and each of its members, its directors and the company secretary. It covers the duties governing a company including power, responsibilities, roles, principal activities (if applicable), allotment of shares, dividend payment, transfer of shares, appointment/re-election/removal of directors, and conduct of meetings, amongst others.

So, do you need a Constitution?

Companies are encouraged to adopt a Constitution for the following reasons:-

The Constitution provides directors and shareholders with peace of mind as it sets out a calibrated set of internal regulations to govern the management of the company;
The Constitution may be amended in accordance with the wishes of the members; and
The Constitution provides flexibility and greater certainty to the directors and shareholders to deal with the relevant authorities, facilitate dealings with banks and handle licensing matters with relevant parties.

M&A vs. Constitution

Under the Companies Act 1965, every company is required to have a Memorandum and Articles of Association (M&A). Pursuant to the Companies Act 2016 (the Act), the M&A are now collectively known as the Constitution.

However, a company may choose not to have a Constitution or prepare a Constitution based on its business requirements. In this scenario, the company, its directors and each member of the company shall have the rights, powers, duties and obligations set out in the Act.

If a company has a Constitution, the company, its directors and each member of the company shall also have the rights, powers, duties and obligations set out in the Act, except to the extent that such rights, powers, duties and obligations are permitted to be modified in accordance with the Act, and are so modified by the Constitution of the company. Regardless, any provision in the Constitution that contravenes the Act is invalid.

For an existing company, the existing M&A will become the company’s Constitution until the company acts on the following:-

Abolish its existing M&A - A company that opts to abolish the existing M&A will not have a Constitution, and is required to comply with the provisions in the Act; or
Amend its existing M&A or adopt a new Constitution that is aligned with the Act

As the Constitution is the main document setting out the processes and procedures of a company, any provision that a company fails to include in its Constitution could lead to ambiguities and difficulties. Drafting the Constitution to be in line with the Act and the main objective of the business would enable the right people to make decisions and address issues such as succession planning, signatories and use of technology.

Consider the following factors as you draft your company’s Constitution:-