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.
ARTICLES OF ASSOCIATION
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