Similar to Memorandum of Association, Articles of Association (“AOA”) is another important constitutional document for a company. Under the Companies Act 1965, a company limited by share must register its AOA with the Companies Commission of Malaysia. If no AOA is registered, then by default, the company is deemed to have adopted Table A of the 4th Schedule of the Companies Act 1965 as its AOA. Table A of the 4th Schedule is known among the people in the corporate world as the default AOA.
What is AOA?
Generally speaking, AOA is the rules of the company. It provides the regulations and procedures for the operation of the company. If Memorandum of Association can be said to govern the relationship between the company and outsiders, AOA on the other hand governs the relationship between the company and its shareholders.
AOA is important to ensure that the company’s business and administration is conducted in the manner intended by its shareholders. AOA is also important to maintain a sense of fair play between the shareholders, especially when the shareholders with substantial shareholding are able to dominate the company at the expense of the minority shareholders. In such situation, AOA will protect the minority shareholders because even though the majority shareholders are able to influence the direction of the company, they can only do so in the manner allowed by the rules in the AOA.
Importance of AOA
In order to ensure the survival of the company and the continuity of its business, it is important for the company to adopt an AOA that is suitable to the company’s trade and consistent with the shareholders’ aspiration, whether to expand or restrict the membership of the company to outsiders.
Many novice businessmen made the mistake of choosing to either draft the AOA on their own or to simply adopt Table A of the 4th Schedule as their company’s AOA. More often than not, once they chose to do so, they often find themselves disappointed because when problem arise, the AOA is not able to help to solve the problem. In fact, it may even become a hindrance in solving the problem.
One may ask how AOA can become a hindrance to solve a problem. An AOA can become the hindrance if it was inflexible or drafted without taking into account the shareholders aspiration or the company’s nature of trade. In that case, such problem can only be solved by amending the AOA, which involve a tedious and time consuming process.
Given the importance of the AOA to the smooth running of the company, the shareholders should strive to adopt a good AOA when the company first incorporate. The features of a good AOA are as follows:-
AOA should be an AOA that shareholders can refer to in order to solve their dispute and thereby preventing deadlock situation. There are many instances where shareholders dispute has caused their company to break down when it could have been solved easily only if a proper AOA was adopted by the company.
A good AOA should also be drafted in a way that would give flexibility to the directors of the company to conduct the company’s business efficiently and at the same time ensure that there are proper procedural safeguards in the AOA to reduce the risk of the directors’ abusing their power and squandering the resources of the company.
Admittedly, drafting a good AOA requires knowledge of the corporation laws and experience of corporate practice. Such is the reason why seasoned businessmen will always procure the assistance from the secretary firm in Johor Bahru in the industry to craft their AOA. For them, it is better to incur a little bit of cost now rather than to suffer devastating loss in the future.