CHP 5: THE COMPANYS CONSTITUTION [p98]

All companies are required to lodge their constitution with the ACRA as part of the incorporation process under S19(1)
CA
Relationship between CA and constitution
If statutory provision states words eg notwithstanding the cos constitution then CA prevails
If statutory provision states words eg subject to the cos constitution then constitution prevails
If statutory provision does not say? Statute prevails. Constitution not valid.
NO constructive notice
Under the common law, a party who transacts with any company is deemed to have notice of the content of the
companys memorandum and articles of association regardless of whether or not the party has actually read the
documents. Ernest v Nichols 6HL Cas 401

Constitution

HOWEVER, S25A CA (statutory law) reversed this position, abolishing the doctrine of constructive notice in
relation to its application to a companys constitution. 3 rd Parties are not affected by/deemed to have notice/knowledge
of co.s constitution contents (to not put 3rd parties at a disadvantage, burden/risk not solely on 3 rd party).
The constitution defines the company. It sets out the nature and key characteristics of the entity that had
been created.
S22CA provides that a companys constitution must be dated and contain the following:
the name of the company;
for a company limited by shares, a statement that the liability of the members is limited;
for a company limited by guarantee, a statement that the liability of the members is limited to such an
amount specified in the constitution;
for an unlimited company, a statement that the liability of the members is unlimited;
if the company is an unlimited company or company limited by guarantee, the number of members
with which the company is applying to be registered;
the full names, addresses and occupations of the subscribers to the constitution;
a statement indicating the subscribers desire to form the company and (where the company is to
have a share capital) their agreement to take up shares in it.
The constitution generally contain provisions that regulate the internal management of the company. The
regulation deal with matters that relate to:
the issue of a share capital and the variation of rights attached to shares
liens and calls on shares as well as transmission and forfeiture of shares
procedures for general meetings of the company and notices relating to such meetings
directors appointments, powers and meetings
dividends and capitalization of profits, and
other ancillary matters
- Companies are generally free to decide on these regulations.
- Listed co must ensure that their constitutions meet the requirements in Appendix 2.2 of the SGX Listing
Manual.
- Prior to Jan 2015, unless expressly excluded, the articles contained in 4 th schedule (aka Table A) will apply,
should a company not have articles of its own or should a companys articles not deal with a matter that is
dealt with by Table A articles. Table A default set of articles in CA.
- If a company does not register any articles, or if registered, does not exclude/modify, Table A articles are
taken to be the articles of the co. as well.
- Now, we have model constitution where co. decide to follow the model or come out with their own.
OPTIONAL PROVISIONS can be added to constitution to customise the company.
Eg in a small private company, participants may want specific provisions such as special voting provisions,
management provisions

AMENDMENT OF CONSTITUTION [p102]

S26 CA Provisions included in constitution before 1st April 2004 cannot be altered (regarded as entrenched) unless all
members agree, except for clauses with specific provision: change of name (S28), converting between limited and
unlimited status (S30), change in public or private status (S31), alteration of objects, if any (S33), alteration of capital
structure and reduction of share capital.
All provisions (that were not entrenched) included on/after 1.4.04 may be altered by a special resolution (75%),
except for two things which require unanimous consent: 1) A provision which before 1 April 2004 cannot be altered
2) An entrenching provision
[SEE CHP8]
S26 CA company may alter or add to its constitution with exception of entrenched articles through the
General
passing of special resolution to that effect.
Rule
Procedure

Special resolution (>75%) lodge with Registrar a copy of the resolution effecting the amendment and
amended constitution within 14 days after passing resolution Registrar will register the resolution and
issue the company a notice of the registration Registrar will issue a notice of incorporation
Registrar will issue the company a certificate, confirming the incorporation.

Restrictions

Entrenching
Provisions
*stricter
quorum to
help
members

Power to alter must be exercised in bona fide for the benefit of the company as a whole
(equitable limitation on majority voting)
Resolution may be impeached if it is discriminatory (minority oppression S216)
Provision in memorandum or articles restricting companys right to amend (e.g. entrenching
provision)
Where companys capital divided into different classes of shares, there may be provision
specifying that alteration authorized only if specified proportion of the class consents
S39(3)CA provides that amendment to require members to take or subscribe for more shares
etc is unenforceable (i.e. cannot make subscriptions of shares compulsory)

S26A CA defines entrenching provision as a provision in a companys constitution to the effect that other
provisions in the companys constitution either:
may not be altered in the manner provided by the Act; or
may only be altered only where more than 75% of votes is necessary or some other conditions
are met
An entrenching provision may be included:
at the time the company was incorporated; or
inserted subsequently if all members of the company agree
An entrenching provision may only be removed or altered if all the members of the company agree.
Rights prior to the commencement of the Companies (Amendment) Act, while still regarded as being
entrenched because they existed in the companys memorandum prior to the commencement of the
2004 Act, may be amended or removed, but only if all the members of the company agree.

LEGAL EFFECTS OF CONSTITUTION [p104]

S39 CA states that the companys constitution, when registered, shall bind the company and the members as if they
respectively had been signed and sealed by each member to observe all the provisions of the Constitution
A statutory contract is created by S39 CA between
(a) existing and new members inter se (past members who have relinquished their memberships are not)
ie members can enforce his right directly against the other members
(b) company and members
to observe provisions of constitutions.

Company and Third parties

A person becomes a member when he is named in the application for registration of the company, or on his
name being entered in the companys register of members following the issue to him of new shares, or
transfer to him of existing shares from an existing shareholder. Must be registered as members to enforce!
Malayan Banking Pte Ltd vs Raffles Hotel Ltd - The court held that the articles of a company did not
constitute a contract between the company and a third party who was not a member of the company. The
provision in the article was therefore not binding on the co. as between company and the landlord, who was
regarded as an outsider. (Only members can enforce rights in the constitution qua member requirement)
However, non-member may have contract with co incorporating terms of the constitution for the time being:
It is always open to parties to have specific provisions of constitution incorporated into any contract that
they may have with the company (by express reference to the relevant provisions or implication from
circumstances surrounding formation of the contract)
- E.g. An auditor can infer, from his or her appointment, that provisions relating to indemnities for auditors
contained in companys regulations form part of the contract for services even though such a clause is not
expressly contained in the actual contract between the parties.
- It should be noted that if an actual contract incorporates provisions of the constitution in this manner, the
company can unilaterally (without consent of the other party) amend or vary the provisions of the contract
by amending the relevant provisions of its constitution as held in British Equitable Assurance Co Ltd vs
Baily. This is a deviation from the normal rules of contract whereby amendments or variations to a contract
may only be made with the agreement of both parties. Thus, better to have express terms in contract.
Company and Members [p107]

Enforcing the company constitution [p105]

S40(1) CA Companies must provide members with a copy of their constitutional documents upon request and at a
maximum fee of $5, else company and its officers who are parties to the default are guilty of an offence.
The privity of contract rule states that only parties to a contract can enforce it. Consequently, nonmembers not have the right to enforce the constitution under S39 CA. This applies equally to officers,
directors, employees or other associates of a company who are not members. MUST BE S/H.

S39 Constitution binds company and its members.

In other jurisdiction such as Australia and UK, the view is that constitution does not extend to rights conferred
on member in his capacity otherwise than as a member.
Eley v Positive Government Security Life Assurance Co Ltd - Eley had failed to enforce a relevant article
to fight for his rights as a solicitor as expressed in the M&A. It was held that the statutory contract established
by the section was enforceable only in relation to rights that are personal to members in their capacity as such
and not in relation to rights that they have in other capacities (i.e. as the companys solicitor in this case)
In Singapore, the Recommendation 3.19 of CLRFC report stated that all obligations imposed by the
companys M&A are enforceable by members against the company and other members unless the contrary is
provided in the constitution or unless the breach is trivial or the remedy is fruitless.

Consequence of not observing Constitution [p107]

- General law contract principles would apply.
o In the case of non-compliance by the company, member may obtain a declaration or injunction requiring
company/member to comply. A director or company secretary may also do the same.
o In the case of non-compliance by a member, another member or the company may be able to obtain declaratory
or injunctive relief, or damages.
o Rights of third parties are generally not affected by non-compliance.
- When a company acts outside its stated objects or breaches a restriction or prohibition, the act is NOT for this reason
only, invalid, but the officers that cause the company to breach the provisions may be liable to company for breach of
duty.
- Members and certain debenture holders may also commence proceedings restraining the doing of any act in
contravention of the companys constitution.
- Procedural irregularity: Provision in constitution breached is procedural in nature
S392 proceeding under CA is NOT invalidated because of procedural irregularity unless the Court is of the opinion that
the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the court, and
the court declares the proceeding to be invalid. [CHP 8 p175].
*Provisions in the CA about criminal liability + injunctions do not apply when theres non-compliance with the
Constitution

What would a SHs Agreement contain?

- Overview
- Valuation Method
- An Exit Route for Business Partners
- Dividend Policy
- Control Rights
- Life Insurance
- Confidentiality
Effectiveness:
- Does not have to be incorporated into articles to be effective: Contractually binding amongst parties
- Ensure incorporators understanding & objectives are not frustrated
- Provide method/option for resolution of major disputes
- Provisions in constitution might be ineffective if they are non-member rights
- Ideal for small companies
Limitations:
- Fetter rule Doubtful efficacy
- Not to be used for oppression
May be between:
Key differences:
1. Constitution: rights and obligations intertwined with membership of co. & binds each and every S/H.
SH agreement: rights and obligations personal to the original parties and can only be assigned
(transferred) pursuant to the rules in contract law. New S/H must sign the SH Agreement to be bound.
2. Constitution: can be amended as long as procedures for amendment are complied with.
SH agreement: need all parties to the agreement to agree for any amendment to take effect +
consideration must be given.
3. Constitution: to be valid, it must be within the scope of legislative authority given by CA to a company
over its shareholders.
SH agreement: subject merely to the general provisions of the law of contract, such as no obvious
intention to bribe or fraud.
4. Constitution: set out the basic rules governing the management and administration of the company.
SH agreement: set out basic plus comprehensive rules governing the management and
administration of a company.
membersCompany and its

SH Agreement

Why?

SUPPLEMENTING THE CONSTITUTION [p108]

Constitution provides inadequate record of their understanding
Statutory model may not deal with certain matters eg exit option, dispute resolution
To expressly provide against oppression, breach of agreement will carry contractual remedies (damages,
injunction)
A SH Agreement is an independent contract entered into by shareholders of a co. as individuals. It differs from
constitution in that the company is not a party to this contract and binds only the original parties.

All the members inter se

While there is nothing improper in all the SH agreeing to vote in a particular way at general meeting, such
agreements are of doubtful efficacy if they:
1. Provide for pecuniary (financial) benefit to a particular SH for voting in a particular way;
Basis: Constitute a bribe/fraud Stanford v Gillies
Not relevant if the SH agreement is an open one supported primarily or solely by mutual promises
- Consideration is part of a sale of shares or a mortgage advance on the security of the shares
valid
- Agreement provides a penalty for not voting in a particular way valid
2. Purport to bind members in the capacity of directors as to how they should vote as directors;
Basis: Fiduciary duties of a director Pennell v Venida Investments Ltd (English case)
Agreement requiring unanimity by the directors in every decision void
3. Purport to fetter(restrain) the companys power to alter its constitution
Directors: vote in companys best interests: cannot agree to vote together beforehand (eg. to
vote to ensure directors remain directors for life) invalid as fetter on their discretion Russell v
Northern Bank Development Corpn Ltd
Dividends: discretionary decisions, not obliged to be declared managements decision such
a clause guaranteeing divs invalid as fetter discretion)
Companies always have the right to alter constitution, increase capital and remove directors. Any provision in
the constitution that the company agrees not to do so (eg. provision agreeing not to alter constitution) will
be void. But S/Hs can agree not to vote to alter provision in constitution (use S/H agreement, and do NOT
try and agree to not alter provision in constitution).

Advantages & Limitations

SH Agreement

membersSome of the

Only directors cannot agree beforehand on how to vote, S/Hs can agree beforehand & also vote to serve
their own purposes UNLESS altering constitution, then need to serve cos purpose.
Same as above, but exercise of contractual provisions can work oppressively on members who are not
parties to the contract and may thus give ruse to minority shareholder remedies although the wronged
shareholder will face problems of proof.
Valid portions of the agreement may be severed and remain in force.
Secure director/employment positions if not a S/H:
1. Put in a provision in articles Next, place entrenching provision (But need to have at least 1 share)
a. However, it is not a members right to be a director/employee for life. NOT enforceable in
court
2. Need a shareholders agreement to secure position
S/H agreement: used to enforce non-member rights and to agree on things M&A cant agree on.
More Advantages of S/H agreement
Provision of clear structure
Minimizing uncertainty
Confidentiality
Investor relationship
Control rights. Eg. all of us can appoint 1 director. Vito certain things where everyone has power even if
dont have majority shareholdings
Use to fill in gaps that cannot be filled by constitution
Protection of rights and obligations - for alteration or repeal of constitution, company only needs a majority of
votes, however for SA, all contracting parties have to consent [Farrar]
Rights and obligations in SH Agreement are personal to the contracting parties, unlike constitution which
are tied with membership and extinguished once shares are transferred
SA is a private document and sensitive information can be hidden from the public, unlike the constitution
Limitations
SA is subject to Contract Law therefore leaves ambiguity in the interpretation of the wordings and intent of
certain provisions set out in the agreement as opposed to the standardised language used in constitution
SA only binds the parties thereto, unlike the constitution which automatically binds all shareholders,
therefore in the case of transfer of shares, transferee would not automatically be bound by SA, instead deed
of adherence needs to be established
If there is conflict between SA and constitution, follow general principles of interpretation under contract law
to see which take precedence

S23(1)(a) CA: Companies have full capacity to carry on or undertake any business or activity, do any act or
enter into any transaction. It also has full rights, powers and privileges in relation to its capacity.
A company is a legal person, that is, an entity that, although artificial, is recognized by the law as being capable of
acting in a manner that has legal effect, same as that of a natural person.
S23(1A) CA Objects Clause. Purpose(s) for which company was formed. Outside of objects clause, UV.
Companies, are free (no longer compulsory), to include an objects clause in their constitution if they wish to have
such a clause so as to restrict the powers of it directors to matters specified in the clause.
It is provided in S23(1B) CA that the constitution of a company may contain a provision restricting its capacity,
rights, powers or privileges. Scope of the companys ability to act/transact. (Restriction can be removed through a
special resolution)
Those limitations to the legal capacity of the co. will have to be adhered to not only by the original parties to the
agreement, but also by the co. and any person who becomes a member or officer of the co. at a later time.

Corporate capacity (p50-52)

Under Common Law, if the effect of an act by the company falls outside the scope of the companys capacity
(objects and powers) as limited by the companys constitutional documents, such action is regarded as legally void
and of no legal effect. It cannot be ratified or authorized by shareholders, not even by unanimous decision. This is
often referred to as ultra vires act. (An act beyond the cos capacity)
Ultra Vires transactions are nullities and have no legal effect; contract is void from the beginning because coy
could not make the contract. The question is not the legality of the contract, but the competency & power of the
coy to make the contract.
Ultra Vires Doctrine : Protect S/Hs
object clause defining corporate capacity of co. by specifying what the co. can do
i.e. the principal activities and purposes for which the company is formed not compulsory
Can include to restrict powers of directors, which will be particularly useful where companies are used
in joint ventures or as special purpose vehicles in cases where investors wish to ensure that company
does not carry out activities other than those for which it was originally set up.
Hence: engaging in contract outside its objects/activities not permitted: regarded as ultra vires +
void against the company
However, S25(1) CA provides that no act or purported act of a company shall be invalid by reason only of the
fact that the co. was without capacity or power to do such act or to execute or take such conveyance or transfer.
Third parties can enforce obligations incurred by companies even when incurred in breach of internal
restrictions. Hence, not considered a UV act; refer to:
Rolled Steel v British Steel Corp Granting of guarantee was ultra vires BUT directors acted in excess or abuse
of their powers and 3rd party was aware of such excess/abuse. Guarantee is unenforceable
It was held that as long as a company had the legitimate power to exercise, even though it was outside the
companys objects, it did not render the exercise of the power ultra vires. This wrongful exercise of a corporate
power (directors acted outside authority) had nothing to do with the capacity of the coy but everything to do with
the authority of the agents who exercised the power on the coys behalf. Hence, the resulting transaction was not
void, but was voidable at the option of the coy and only if the other contracting party had notice of the wrongdoing
or breach of duty.
Not UV in common law, not void. Cannot use S25(1) as without objects is not without capacity or power. | S25B
Power of directors to bind company shall be deemed to be free of cos constitution Contract valid. OR
Not UV in common law, not void. S25(1) supports it as without objects is without capacity, not invalid. Say you
prefer this! | S25B Power of directors to bind company shall be deemed to be free of cos C. Contract valid.
Attorney-General v The Great Eastern Railway Co Ltd The House of Lords held that a coy had the implied
capacity and power to enter into transactions that were necessarily incidental to the carrying out of the authorized
objects, even if those transactions did not fall strictly within the objects expressly provided for in the coys C.

If outside capacity or power under S25(1) CA:

Law does allow members of the company and specific debenture holders or trustees to bring court proceedings
to restrain such acts that are out of the capacity or power of the company under S25(2)(a) CA.
Allow member or company to bring proceedings (sue) against the present or former officers of the company
(may or may not have loss) S25(2)(b) CA.
If just & equitable, court may set aside & restrain performance of transaction. It may order compensation for
any loss or damage sustained (except anticipated profits) by any party as a result of its decision. S25(3) CA.
Ultra vires acts: May amount to a breach of the statutory contract represented by the Constitution [EFFECT IN
CHP 5] or a breach of duty or wrongful conduct on part of a person (e.g. director) who caused the company to do
act [CONSEQUENCES IN CHP 11]. S25(2)(b) to sue directors for not adhering to the objects clause Essentially
directors pay.