Memorandum and Articles

The key topics that we covered today were the Memorandum and Articles of Incorporation. The point of learning these things is to recognise the source of Law in a company. Of course, the main rules that govern a company are the various Statutes, chief of which is the Companies Act, and Common Law.

Aside from these two sources, the Memorandum and Articles of a company are two other sources of internal Law for each company. The Memorandum is essentially the charter of the company while the Articles are the actual rules that regulate the operation of a company.

The Company Act is of course, king of Laws. In general, the Act itself regulates all companies notwithstanding anything that is written in the M&A documents. However, many parts of the Act provide that unless the M&A say otherwise, the Act is king and this allows the M&A to override things. Also, there are some parts of the Act that allow the M&A to override the Act only if they provide increased protection than that provided under the Act.

Therefore, the M&A is very important.

That said, both these documents are changeable with special regulations. Alteration of the Memorandum is chiefly governed by the rules under S.21(1), (1A), and (1B) of the CA. Prior to 1996, it was difficult to change things in the Memorandum but now, it’s easier, although subject to a number of rules.

Same for the Articles, which can also be altered following the rules under S.31(1) of the CA. In general, it is easier to alter the Articles than the Memorandum, as it should be. However, there are also a lot of Common Law rules that prevent members from arbitrarily altering the rules, mainly protecting the minority party.

That’s essentially the key to M&A.

The next issue would be what if the company acts outside of it’s rules – particularly the doctrine of Ultra Vires, when a company acts outside its objects specified in the Memorandum. The Malaysian position with regards to this doctrine is unique, which allows a cow rearing company to engage in real-estate investments instead. The main section that governs this doctrine is the entirety of S.20 of the CA.

We also covered the issue of pre-incorporation contracts and provisional contracts. Pre-inc contracts are contracts entered into by the promoter of a yet-to-be formed Company, on behalf of and in the interest of the company. Provisional contracts are entered into post-incorporation but before a company is allowed to commence business, and so only applies to public companies.

The general rule with pre-inc contracts is governed by S.35(1) and (2) of the CA. In general, a company has the option to ratify any pre-inc contracts which then bind the company retrospectively. Otherwise, the promoter is personally bound instead, unless there is an exemption clause that escapes him.

The general rule with provisional contracts is that the contracts automatically come into effect and are binding on the company the moment the company receives the certification of business commencement. There is already a legal entity in place, unlike for pre-inc contracts.

An interesting question raised in class was what happens if a pre-inc contract is ratified by a public company but the company winds-up before commencing business. In such a situation, which party is bound by the contract is not very clear. However, I feel that in the interest of justice, the contract must be bound to the company regardless of whether it has commenced business or not.

Anyway, that’s the summary of today’s class.

Of course, a lot of detail has been discussed in class, particularly Common Law cases.

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Shawn Tan

Chip Doctor, Chartered/Professional Engineer, Entrepreneur, Law Graduate.

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