Company Law Column Part 3: Articles of Association and its importance in Malaysia
１．What is Articles of Association
The Articles of Association (AoA) generally means a document serves as the constitution of the company that specifies the basic information and company’s operations rules and regulations. Countries that using U.S. law, including Malaysia, not only include the basic information of the company but also stipulated the agreement items among shareholders such as company decision making and issue of shares in detail in the articles of Association.
２．Changes in the Articles of Association due to the enforcement of the new company law
The New Company Act (hereinafter) has been enforced from January 31, 2017, and one of the important points revised from the previous Companies Act is the change in the notion of the articles of association. Under the previous Company Law, two types of documents called "Memorandum of Association" and "Articles of Association" were stipulated as the articles of Association. Under the new Company Law, the Memorandum and the Articles of Association replaced by a single document called "Constitution”.
3．Freedom of making the articles of association and its importance
With regard to the Corporation, preparation of the articles of association is optional. In the other words, it is possible to establish and operate the company without preparing the articles of association (Section 31 (1)). However, for existing companies already registered under the previous company law, their memorandum remain valid and enforceable under the new company act, unless otherwise resolved by the company. (Section 34(C), Section 619(3)). In addition, special resolution of shareholders' meeting is required to change / abolish the articles of Association (Section 36 (1)) *. When introduction or change of articles of association is made, it must apply for registration or notice to the company registration office (CCM) within 30 days from the resolution of shareholders meeting (Section 32 (4), Section 36 (3)).
* In the case of voting, Pass with three-quarters or more of voting rights holders (Section 292 (1) of the Companies Act)
In the event that the articles of association are abolished, in principle the operation of the company follows the provisions of the new company law (Section 31 (3)). In the first place, the articles of association generally describe procedures concerning basic operations of the company (general meeting of shareholders, board of directors, etc.), especially in the joint venture, the description of the articles of association is important to protect the rights of minority shareholders. Therefore, in abolishing or changing the articles of association, it is necessary to carefully consider whether it will not be disadvantageous to themselves. In addition, the section that supposes to prescribe in the articles of association under the provisions is stipulated in the text as "unless stated in the articles of association" etc.
4．Significance of preparing the articles of association
By creating the articles of association, it is possible to place various provisions from the provisions of the New Company Law (Section 31 (2)). In addition, issuance of class shares (Section90 (1)), weighting from the ordinary resolution of the resolution requirements of the shareholders meeting to the special resolution (Section 291 (4)) is stated in the articles of association, it is said to be executed. In the case where he / she is a minority shareholder, in order to stop the exclusive duties of majority shareholders, it is necessary to decide on the matters required unanimity at the shareholders meeting, which side of the shareholders will choose the number of the board of directors, etc., will be able to manage each of the company business according to the articles of associaition.
In addition, it is necessary to note that not being able to compete against third parties by stating in the articles of association (Section 39)
5．Joint-venture agreement and articles of association
In the case of establishing a joint venture with a local partner or as a joint venture after M & A, unless there is a special agreement, the company management that is convenient for majority shareholders will be executed, therefore it is important to describe matters concerning company management / joint venture in a joint venture agreement (JV contract) and it is desirable to reflect the contents of the joint venture agreement in the articles of association.
In the joint venture agreement, mainly comply with
Equity ratio / Holding of voting rights ratio
Constitution of the board of directors (number of people, chairman, how to choose from)
Structure of major directors (CEO / CFO / COO etc.)
Allocation of authority of the Board of Directors, General meeting of Shareholders / Reserved matters
Obligations for invest and financing
Distribution policy of surplus
Restriction on transfer of shares and exception (Right of First Refusal, Put Option, Call Option, etc.)
Obligation to ban competitionTermination / cancellation of the joint venture agreement (deadlock, serious contract violation, etc.)
Termination / cancellation of the joint venture agreement (deadlock, serious contract violation, etc.)
Because these positions are largely different depending on whether you are majority or minority, it is recommended that you decide with consultation with experts.