How Can Companies Amend their Constitution?

The Company’s Constitution is the core corporate governance document that binds the company and its members. The Constitution refers to the Memorandum and Articles of Association which govern the internal management and affairs of a company such asthe appointment of directors, conduct of meetings, and transfer of shares. A company may include any matter as it wishes to, so long as it does not contravene the provisionsof the Companies Act 2016 (“CA 2016”). 

At this point, it is worth noting that if you are the owner of a small business, the CA 2016 no longer requires all companies to adopt its own Constitution, except for companieslimited by guarantee. These companies would adopt the provisions of the CA 2016 by default, namely the proceedings of the Board in the Third Schedule of CA 2016 (passing of board resolutions) and Sections 290 to 296 CA 2016 (the passing of shareholders’ resolution) as basis for its corporate governance. 

However, if your company does have a Constitution, then it is important that you are aware of its provisions and their implications on the running of the company. Every company is unique and there is no “one size fits all” structure of internal governance. The Constitution is not a shareholder’s agreement and does not deal with the rights and interests of the shareholders between one another. Instead, the Constitution serves as a contract between the company and its members and any departure from the Constitution is deemed ultra vires the company and cannot be validated by assent of the members at a general meeting or by taking judgment against the company. 

As such, there will be instances where amendments will need to be made to the Constitution of a company in order to reflect the intentions of the company and its shareholders.

Amending the Constitution

It is within a company's statutory power to amend its Constitution and the company cannot deprive itself of such power either by agreement or by provision contained in the articles. The company may alter or amend its Constitution by way of: 

a. A special resolution (Section 36 of the CA 2016); or
b. A Court order (Section 37 of the CA 2016).

The requirement for a special resolution, i.e., a resolution passed by 75% of the valid votes cast (usually at a general meeting), is aimed at preventing alterations to the Constitution to the detriment or without reference to the minority shareholders of a company. Once such a special resolution has been passed, the amendments to the Constitution would take effect from the date of the resolution or at a later date as specified in the resolution.

In certain cases, a company may wish to alter the Constitution by replacing the same with a wholly new Constitution. To do so, the company is required to amend, abolish, or alter its constitution by way of three separate resolutions for each step of the exercise instead of passing a single resolution for all three steps.

Of course, amendments to the Constitution are subject to the provisions of the CA 2016. For instance, Section 194 of the CA 2016 provides that shareholders cannot be forced to acquire additional shares by way of an amendment to the Constitution and that the rights attached to different classes of shares may only be altered with the consent of a certain proportion of its shareholders. Such limitations to amendments are usually in place to protect the rights of minority shareholders although the law also takes into consideration the competing interests of the majority and the company whendetermining the validity of amendments. 

Alteration of Company’s Constitution By Way of Court Order

If the approval of shareholders cannot be obtained, Section 37 of the CA 2016 confers discretion on the Court to make orders to alter and amend the Constitution of a company if the Court is satisfied that it is not practicable to obtain the passing of a special resolution. 

The Court may, on the application of a director or member of a company, if it is satisfied that it is not practicable to alter or amend the constitution of the company using the procedures set out in this Act or in the constitution itself, make an order to alter and amend the constitution of a company on such terms and conditions as it thinks fit.

The keyword here is “practicable”. Examples of impracticability in this context include situations where there is persistent absence of a quorum at the meeting or where it is impracticable to call for a meeting of the company in any manner whatsoever or even to conduct the meeting in the manner prescribed by the articles of association of acompany.

It is emphasized that the word “impracticable” is not equivalent to “impossible”. The Court of Appeal set out a clear guideline on proving impracticability. One will need toadduce the evidence of attempts of efforts to call and hold a meeting and such attempts or effort have been futile. It is also necessary to show that the reason for the futility in calling or holding a meeting is attributed to some circumstances that make it almost impossible to hold the meeting, including but not limited to a deadlock situation, an intentional un-cooperative attitude of directors, a persistent effort to derail the meeting or deliberate non-attendance at meeting after a proper and valid notice had been issued so as to force the meeting to be called off for want of quorum.

In the High Court decision of Chew Meu Jong v Lysaght (Malaysia) Sdn Bhd [2018] 1 LNS 1132; [2018] MLJU 1087, the Court was asked to determine whether an application under Section 37 of the CA 2016 should be allowed on the ground that it would be impracticable to amend the Constitution by the passing of a special resolution by the shareholders. 

In this case, the Constitution of the company required a quorum of 2 Class A shareholders and 1 Class B shareholder for a shareholders’ meeting to be held. However, one of the Class A shareholders sold its shares to another shareholder of the same class, leaving only 1 Class A shareholder in the company. As a result, the Class B and C shareholders raised an objection based on the interpretation of Constitution and argued that the rules set out in the Constitution had not been properly complied with. In the ensuing dispute, the Class B shareholder and director refused to attend any further board meetings called, which resulted in quorum failure for subsequent meetings. 

Due to this quagmire, the Plaintiff, as a representative of the sole Class A shareholder, applied under Section 37 of the Companies Act 2016 for a Court order to amend the Constitution and the Court was asked to consider whether the desired meeting of the company could be conducted in a practical manner.

The Court held that it would not be practicable to amend the Constitution following theusual procedure by way of special resolution as it would be impossible to secure the quorum needed for the shareholder’s meeting. The company would never be able to satisfy the requisite quorum for a shareholders’ meeting of 2 Class A shareholders, as the share sale between the Class A shareholders had resulted in there being only 1Class A shareholder. In granting the order for amendment, the Court was also satisfied that the application would not cause any prejudice to other shareholders as it merely provided clarity to the Constitution of the company.

Amending a Constitution by way of Court order is undoubtedly a rather controversial exercise which has rarely been adopted as it bypasses the shareholders in the amendment process. Courts are also generally reluctant to interfere with the internal management of a company. However, the decision of Chew Meu Jong shows that the court will not be hesitant in granting an order for amendments to the constitution for the benefit of the company as a whole.