ARTICLES OF ASSOCIATION

ARTICLES OF ASSOCIATION (A/A) 

The A/A is one of the documents required under s 16(1) of CA 1965 to form a company. It is the internal constitution of a company. It is known as the internal constitution because it contains matters concerning the company, its members and its officers.

The A/A governs the internal management and administration of the company. It should be noted that the A/A is subordinate to the M/A. Therefore, if there is a conflict between the A/A and the M/A, the M/A will prevail – Guinness v Land Corporation of Ireland Ltd (1882).

Usually the matters set out in the A/A concern the division of powers and relationship between the general meeting of the shareholders and the BOD; the method of appointment of directors; the procedure of meetings; the procedure for allotment and transfer of shares; the manner dividends are declared; and the rights and obligations of the members.

Table A (i.e. Fourth Schedule to CA 1965)

If a company is limited by shares, it may adopt its own A/A or Table A of CA 1965: s 29(1), CA 1965. Table A is a statutory sample provided in the Fourth Schedule to CA 1965 that constitutes a clear and comprehensive set of regulations.

A company can adopt all or any of the regulations contained in Table A: s 30(1), CA 1965. A company can also adopt a personalised set of rules to suit its particular circumstances. 

Even if a company adopts its own A/A, Table A will apply to the extent it is excluded or its clauses are modified: s 30(2), CA 1965. However if it is a company limited by guarantee or an unlimited company, it must adopt its own A/A as Table A is only meant for a company limited by shares.

IMPORTANCE OF M/A AND A/A

The M/A and the A/A are important to a company, its members, its officers, its employees and those dealing with the company. Section 33(1) of CA 1965 provides that the M/A and the A/A when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by each member to observe all the provisions of the memorandum and of the articles.

As a result of this provision, there are two legal effects, which will be discussed below.

First legal effect: Contract between the company and its members

The M/A and the A/A bind the company and its members as if it is contract between the company and its members. If a member does not observe the provisions of the M/A and the A/A, the company can enforce its rights. The decision below illustrates how the A/A governs a member.

HICKMAN v KENT OR ROMNEY MARSH SHEEP BREEDERS’ ASSOCIATION (1915)

Facts: The A/A provided that if there are any disputes between the company and its members, the dispute must be referred for arbitration. The plaintiff, a member in the company claimed that there were certain irregularities in the company. Hence, he brought the matter to the court.

Held: The matter cannot be taken to the court. It must be arbitrated. The A/A binds its members. The company can enforce its rights by ensuring that the member observes the provisions of the A/A.

The A/A will only bind a member in his capacity as a member, i.e. qua member. This means a member cannot simply bring an action if the provisions of the A/A are not complied with.

The action must concern membership matters and his rights as a member, e.g. his right to attend and vote at meetings or his right to receive dividends. The decision below illustrates what is meant by suing in the capacity of a member.

ELEY v THE POSITIVE GOVERNMENT SECURITY LIFE ASSURANCE CO LTD (1876)

Facts: The A/A provided that the plaintiff shall be the solicitor of the company and he can only be removed for misconduct. Subsequently, the company removed him even though there was no misconduct. The plaintiff sued the company for breach of contract. He relied on the A/A and claimed that the company could not remove him since there was no misconduct.

Held: Eley could not claim for breach of contract. He was not suing in the capacity of a member although he was a member of the company. The case was not concerning his membership rights but concerned his employment rights. The A/A is a constitution that protects a member’s rights.

BEATTIE v E & F BEATTIE LTD (1938)

Facts: The A/A provided that if there are any disputes between the company and the members, it should be referred to arbitration. The plaintiff who was a director and a member had a dispute regarding his directorship and he took the matter to arbitration.

Held: The plaintiff was not suing in the capacity of a member but in the capacity of a director. Therefore, he cannot rely on the A/A to take the matter to arbitration. He must take the matter to the court.

The above decision demonstrates that the A/A only binds the company and its members, and not its officers.

In the same manner, if a company does not observe the provisions of the M/A and the A/A, a member can enforce his rights against the company. But the member must be registered – KELAPA SAWIT (TELUK ANSON) SDN BHD v YEOH KIM LENG & ORS (1991).

The company can be sued by its members if any of the provisions in the A/A is breached, provided such breach affects their rights as members.

PENDER v LUSHINGTON (1877)

Facts: The chairman of the company refused to take the votes of certain shareholders into account. The A/A provided that the plaintiff had a right to exercise his voting power at the general meeting.

Held: The chairman who is representing the company is bound by the A/A and thus must observe the provisions of the A/A. The company is in breach for not complying with the provisions of the A/A. The member has a right to bring an action against the company to ensure that the company complies with the A/A.

Second legal effect: Contract between a member and all other members of the company

The M/A and the A/A bind a member and every other member in the company. This means that the M/A and the A/A is like a contract between a member and every other member in the company.

If a member does not observe any of the provisions in the A/A, another member in the company may bring an action, provided it concerns his personal rights – WOOD v ODESSA WATERWORKS CO (1889).

Essentially the member should be registered as a member before he can rely on s 33(1) of CA 1965, as explained in Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kim Leng & Ors (1991).

This is particularly important in pre-emption clauses. There are two types of pre-emption clauses:

Before a member can transfer his shares to an outsider, he must first offer the shares to existing members. If the existing members are not willing to take up the shares, then he is free to offer the shares to an outsider. If without offering to existing members, he offers the shares to an outsider, he is in breach of the pre-emption clause. Therefore, the existing members can bring an action by virtue of s 33(1) CA 1965.

Similarly, before a company can offer its shares to outsiders, it must first offer them to existing members. If the existing members are not willing to take up the shares, the company is then free to offer them to outsiders. If without offering to existing members, the company offers the shares to outsiders, the company is in breach of the pre-emption clause. Therefore, the existing members can bring an action.

RAYFIELD v HANDS (1960)

Fatcs:  The A/A provided that if any member wishes to transfer his shares, the directors who are also members must take up the shares at a fair value. The plaintiff who was a member of the company approached the defendant who was a director and a member, but the defendant refused to buy the shares. The plaintiff claimed that the defendant was bound by the provisions of the A/A to buy the shares.

Held: Although the defendant is a director of the company, he is bound by the provisions of the A/A in the capacity of a member. Therefore, the defendant must take up the shares.

Even if a provision in the A/A seems unfair to a minority shareholder, the provision is still binding on the shareholder.

WONG KIM FATT v LEONG & CO SDN BHD & ANOR (1976)

Facts: Holders of 7/10 of the issued share capital of the company may require the company to transfer the shares of the holders of 3/10. The issued share capital of the company was 300,00 ordinary shares. The second defendant held 250,000 ordinary shares and the plaintiff held 50,000 ordinary shares. The second defendant wanted the 50,000 shares to be transferred to him. The plaintiff claimed that the clause was unfair.

Held: The clause is not in conflict with CA 1965 and therefore it is binding on the plaintiff.

The M/A and the A/A do not act as a contract between the company and anyone dealing with the company, i.e. an outsider – FORBES v NEW SOUTH WALES TROTTING CLUB LTD (1979). Hence an outsider cannot rely on the A/A or the M/A to bring an action against a company for its non-observance of any of its provisions.

RAFFLES HOTEL LTD v MALAYAN BANKING BHD (No 2) (1966)

Facts: The A/A gave the lessor the power to appoint a director. The lessor appointed itself as a director. The lessee challenged the appointment.

Held: The A/A does not constitute a contract between the company and outsiders. The lessor was not a member of the company. Hence the A/A did not give the lessor the right to appoint a director.