BUSINESS ARTICLE

The Role Of A Company Constitution In Corporate Governance

The Role Of A Company Constitution In Corporate Governance

The Role Of A Company Constitution In Corporate Governance

boardroomsuperadmin Business Insights, Corporate Secretarial

A company constitution is a foundational document that outlines the governance structure of a business. It serves as a legally binding agreement between the company and its internal members, defining shareholder rights, the appointment and powers of directors, meeting procedures (such as AGMs and EGMs) and rules on amending the constitution. A company constitution ensures that the company operates according to the shareholders’ intentions, enhancing governance practices and providing flexibility in decision-making and control.

While Malaysia’s New Companies Act 2016 allows new companies to rely on the Act for governance, a tailored constitution remains valuable and critical in some cases. A company constitution provides clearer control over internal operations, helping companies address unique needs beyond standard laws. Existing companies with constitutions – formerly called the Memorandum and Articles of Association – should keep them updated to ensure ongoing compliance.

In this article, we explain exactly what the constitution of a company is in corporate governance and highlight how BoardRoom can assist in maintaining an up-to-date constitution.

The Importance Of A Company Constitution In Corporate Governance

So, what is a company constitution? A company constitution is a crucial legal framework that governs the relationships between the company, its directors and its stakeholders. It aligns with corporate governance principles by establishing clear fiduciary duties for directors, ensuring they act in the best interests of the company and its shareholders.

Tan Ai Ning, Director, Corporate Secretarial at BoardRoom Malaysia says, “The company’s constitution is like a contract regulating how the stakeholders want the company to be governed.”

By outlining the rights and obligations of all parties, the constitution promotes transparency and accountability.

In addition, the constitution protects shareholder rights, allowing for customised governance rules that go beyond statutory requirements. Generally, provisions in a Constitution should not provide more stringent requirements than legal requirements (if there are already specific requirements in Companies Act 1965 unless provided therein).

This flexibility empowers shareholders and mitigates risks by clarifying decision-making processes.

A company constitution also plays a vital role in managing relationships among stakeholders. It regulates critical decisions regarding shareholder voting rights, board composition and governance policies, providing peace of mind to directors and shareholders alike.

Ai Ning says, “These internal regulations are good to have so that they govern the management of the company. These regulations facilitate smoother interactions with authorities and aid in licensing matters.”

Why Is A Regular Review Of The Company Constitution Necessary?

With the business landscape continually evolving, regular reviews of a company’s constitution are necessary to ensure it remains compliant with changing laws. As regulations change, companies must adapt their governing documents to reflect these shifts and maintain legal compliance.

Ai Ning highlights the recent amendments to the Companies Act that mandate the disclosure of beneficial ownership. She explains that, while this requirement is government-mandated, including a declaration clause within a company’s constitution provides an additional governance framework. This clause establishes a clear set of rules for directors and future owners, such as during mergers or acquisitions, to ensure consistent compliance. By embedding these guidelines into the constitution, companies strengthen their governance practices and demonstrate a proactive approach to regulatory compliance requirements.

In addition to legal compliance, businesses often face changes in their operating environment that necessitate a review of their constitution. These may include adopting new electronic signatures practices for passing resolutions, which contrasts with the traditional ink signatures practices specified in older constitutions.

“We need to keep up-to-date and relevant in light of the new business environment,” Ai Ning adds.

The question remains: does a company constitution need to be signed? This is one area where specific requirements can vary by jurisdiction, so it’s important to consult a corporate secretary familiar with local laws, such as BoardRoom, to ensure compliance.

Changes that may require an update to a company’s constitution may also arise from expansions into new markets, shifts in ownership structures or alterations in corporate strategy.

Furthermore, regular reviews can prevent potential conflicts among stakeholders by clarifying roles, responsibilities and procedures. For instance, as companies grow, their governance needs may evolve, requiring updates to provisions concerning board composition, decision-making processes or shareholder rights.

By proactively reviewing and updating the constitution, companies can mitigate risks and ensure that their governance framework remains effective and aligned with best practices.

Review Of Company Constitution

Consequences Of An Outdated Company Constitution

An outdated company constitution can lead to significant legal and compliance risks, conflicts and disputes among stakeholders. One critical area where ambiguity can arise is in the context of donations. Ai Ning explains that while charitable donations may appear straightforward, the complexities increase when it comes to political donations. Without a clear constitutional framework outlining the nature of permissible donations, companies may inadvertently find themselves in legal dilemmas.

Such situations can tarnish a company’s reputation and lead to potential legal repercussions, emphasising the need for clear guidelines within the constitution.

Additionally, a lack of clarity regarding shareholding thresholds can cause friction among shareholders. In a private limited company, maintaining a clear governance structure is crucial, as there’s a minimum number of members required for decision-making. For example, if a shareholder owning 5% of the company wishes to nominate a board member, but the constitution is outdated or unclear regarding the threshold for nominations, conflicts can arise.

“If the constitution sets a minimum threshold for shareholding, then you qualify to nominate a board member,” Ai Ning adds.

Failure to address these nuances can result in shareholder disputes, undermining trust and harmony within the company.

Moreover, companies may face compliance risks if their constitutions do not align with the latest legal requirements. Take the introduction of regulations around beneficial ownership, which necessitates that companies explicitly state disclosure obligations within their constitutions. Without these provisions, companies could find themselves non-compliant, which may lead to fines or legal actions.

Consequences Of An Outdated Company Constitution

Best Practices For Reviewing And Updating A Company Constitution

Regular reviews of a company constitution are essential for ensuring compliance with evolving laws and business practices. While there is no specific guidance on how often to conduct these reviews, staying up-to-date on legal changes and integrating any necessary adjustments in business practices is important.

Engaging stakeholders during the review process is vital to represent their interests effectively. Including directors, shareholders and key management personnel ensures that diverse perspectives are considered, contributing to a more robust constitution.

Ai Ning says, “We work together with stakeholders and if they have a legal counsel or lawyers, we review whatever joint venture (JV) agreements or shareholder agreements that they may have regulating their relationships as business partners. For amendments to Constitution to align with any JV or Shareholders Agreement, it is pertinent for a company secretary to review, as well as to state which will supersede in the event of any discrepancies between both.”

Furthermore, aligning the company constitution with current corporate governance codes is important for maintaining relevance and compliance. Regular checks against these codes help identify potential gaps or outdated provisions.

Seeking professional guidance during the review or update process is also a best practice. Engaging experts, such as a professional company secretary firm like BoardRoom, can provide invaluable insights. “It’s very important to have a good company secretary to help clients stay abreast with developments in law changes that are pertinent to their businesses,” Ai Ning adds.

By working with corporate services firms like BoardRoom, companies can ensure their constitutions remain effective tools for governance and risk management, ultimately fostering a healthier corporate environment.

Ensuring Sound Corporate Governance Through A Robust Company Constitution

A well-structured company constitution is essential for effective corporate governance, acting as a foundational document that guides the relationships among shareholders, directors and the company itself. Regular reviews and updates are crucial to ensure alignment with evolving laws and business practices.

BoardRoom’s company secretarial services play a pivotal role in this process, leveraging regional expertise to navigate local regulations effectively. By prioritising client interests and providing timely updates and comprehensive advice, BoardRoom helps organisations maintain a strong governance framework, ensuring they operate with both clarity and in full compliance.

Contact BoardRoom today to learn how our comprehensive corporate secretarial services can strengthen your governance framework.

Contact BoardRoom for more information:

Tan Ai Ning

Corporate Secretarial Services Director, BoardRoom Malaysia

E: [email protected]

T: +60 3 7890 4800

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