35. Regulations for company Flashcards
- Regulations for company
General overview
[35.01] The entire s 35 of the Act was repealed and replaced with a new section which merged the memorandum and articles of association into one constitutional document called the constitution.
Regulations in the constitution
[35.02] Act No 36 of 2014 repealed s 35 and replaced it with a new s 35. The old Table A is now called the regulations. The model constitution which contains the regulations can be found in the Companies (Model Constitutions) Regulations 2015.
Preservation of Table A
[35.03] Section 35(3) provides that Table A in the Fourth Schedule which applies to any company existing on December 29, 1967 shall continue to apply to such companies. In this regard, s 181 of Act No 36 of 2014 repealed Table A in the Fourth Schedule. Formerly, Table A is the default articles of association which a company may adopt if it does not have its own articles. Table A has been replaced by model constitutions which are prescribed for private companies and companies limited by guarantee under s 36(1). These model constitutions may be more customised than the one-size-fits-all articles of association in Table A: s 36(2).
[35.04] Section 35(3) provides that the regulations that were in force in any company before the commencement of Act No 36 of 2014 shall continue to be in force whether as the registered articles, or were applicable in lieu of or in addition to the company’s registered articles by virtue of s 36(2), and shall be deemed as the regulations of the company until such times as the constitution is amended to replace those regulations.
Articles of association
[35.05] The articles (now called regulations) formed a statutory contract between the company and its members and amongst the members inter se. (Note: the New Zealand approach begins with a statutory structure, but allows contractual derogation from it. The UK, Australia and Singapore approach begin with a contractual structure which is given statutory force by virtue of s 39 of the Act: see the CLRFC, October 2002 at para 31). The articles often define the division of powers between the members and the board. As the articles are basically a contract, the usual rules of contractual interpretation apply. However, the construction of articles presents particular problems to the courts. Generally, the court has no jurisdiction to rectify the memorandum or articles of association: Scott v Frank F Scott (London) Ltd [1940] Ch 794, CA . The articles cannot be supplemented by additional terms implied from extrinsic circumstances: Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, CA . The power of the courts to imply terms in the articles should be used sparingly and cautiously. The implied terms must arise from an intention imputed to the parties to avoid absurdity: Equitable Life Assurance Society v Hyman [2002] 1 AC 408, HL ; applied Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 ; and Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 . The need for an implied term should be immediately apparent as the need not infrequently arose when the draftsman of a complicated instrument had omitted to make express provision for some event because he had not fully thought through the contingencies which might arise; that in such circumstances it could be obvious, after careful consideration of the express terms and the background, that only an implied term would be consistent with the rest of the instrument
[35.06] Where the articles limit the powers of the general meeting, such articles cannot be disregarded even by a special resolution, unless a formal alteration is made and acted upon: Imperial Hydropathic Hotel Co, Blackpool v Hampson (1882) 23 Ch D 1, CA . An amendment of articles takes effect from the day of the amendment, and will be strictly enforced to exclude preemption rights to allow a transmission to a deceased member’s beneficiaries under the Intestate Succession Act (Cap 146)
“Implied terms” in the constitution
[35.07] As the constitution is a statutory contract between the members and the company as well as amongst the members inter se, the courts’ approach follows contractual principles of interpretation. In the contextual approach, one seeks the common intention of the parties, even if, occasionally, this might yield an understanding that departs from the literal meaning of the words used in the contract. Where there is a gap in a contract arising from its silence on a particular issue, the gap ought to be filled because the parties are presumed to have intended that to be so although there is no principle of contract law that every gap must be filled: Sembcorp Marine Ltd v PPL Holdings Pte Ltd & Anor and Another Appeal [2013] 4 SLR 193; [2013] SGCA 43, CA ; applied Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 at [10.04] that “what is sought to be implied is based on an intention imputed to the parties from their actual circumstances”. The implication of terms in fact is the process by which the court fills a gap in the contract to give effect to the parties’ presumed intentions: Liverpool City Council v Irwin [1977] AC 239 ; South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 where the English court emphasised on “implying terms” into the agreement in its commercial setting. On the admissibility of extrinsic evidence to ascertain the intention of the parties in the contextual approach, the Court of Appeal in Sembcorp Marine Ltd v PPL Holdings Pte Ltd & Anor and Another Appeal (above) followed Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029 where the Court of Appeal held (at para 132(d)) that extrinsic evidence is admissible if it goes towards proof of what the parties, from an objective viewpoint, ultimately agreed upon, subject only to the limitation that the extrinsic evidence is relevant, reasonably available to all the contracting parties and relates to a clear or obvious context. Zurich’s approach might entail a migration in the direction of the principles adopted in civil law jurisdictions toward admitting extrinsic evidence of pre and post negotiations between the parties. See the cases of Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 ; Jumbo King Ltd v Faithful Properties Ltd [1999] 3 HKLRD 757 ; AG of Belize & Ors v Belize Telecom Ltd & Anor [2009] 1 WLR 1988, PC ; Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61 ; and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 which held that “absolutely anything” other than evidence as to previous negotiations and declarations of subjective intent, may be admissible, such evidence being admissible only in an action for rectification (see Investors Compensation Scheme (above) at 913). This was emphasised in Jumbo King (above) where Lord Hoffmann explained (at 773) that “[t]he court is not privy to the negotiation of the agreement – evidence of such negotiations is inadmissible – and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession”. The Singapore Court of Appeal in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd (above) went slightly further than the aforesaid English cases by holding that “there should be no absolute or rigid prohibition against evidence of previous negotiations or subsequent conduct, although, in a normal case, such evidence is likely to be inadmissible”. The New Zealand Supreme Court has gone even further by holding that evidence of both pre-contractual negotiations and subsequent conduct may be admissible to aid in contractual interpretation: Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277 ; and Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444.
[35.08] The power of the courts to imply terms in the articles should be used sparingly and cautiously. The implied terms must arise from an intention imputed to the parties to avoid absurdity: Equitable Life Assurance Society v Hyman [2002] 1 AC 408, HL ; applied Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 ; and Luxor (Eastbourne) Ltd v Cooper (above); the need for an implied term should be immediately apparent as the need not infrequently arose when the draftsman of a complicated instrument had omitted to make express provision for some event because he had not fully thought through the contingencies which might arise; that in such circumstances it could be obvious, after careful consideration of the express terms and the background, that only an implied term would be consistent with the rest of the instrument. This approach was premised on the general concept of the reasonable person: AG of Belize & Ors v Belize Telecom Ltd & Anor (above). Belize (above) was not followed in Foo Jong Peng & Ors v Phua Kiah Mai & Anor [2012] 4 SLR 1267; [2012] SGCA 55, CA where the Singapore Court of Appeal preferred to apply the traditional “business efficacy” and “officious bystander” tests, to decide that it could not imply a term that the management committee of the Singapore Hainan Hwee Kuan had the power to remove office bearers.
[35.09] The Malaysian courts implied a term into the memorandum and articles of association of a “not-for profit” company run by the Seventh Day Adventist Church as a hospital when it was only reasonable and necessary as a matter of business efficacy that term be implied into the memorandum and articles of association that upon the defendant’s dismissal as CEO/president of the hospital, he should transfer his share to the person who replaced him both as CEO/president and as director of the hospital. The implied term could also be gathered from the practice all along, and also stated in the memorandum and articles of association that “the outgoing CEO/president would transfer his share in the hospital to his successor”
Alteration of articles
[35.10] See the cases on the alteration of the constitution under s 26. The question of alteration of articles is for the shareholders, and not for the court, to say whether an alteration of the articles is for the benefit of the company, provided that it is not of such a character as that no reasonable men could so regard it
Natural justice
[35.11] An article that provides for the expulsion of a member forthwith if requested by resolution of the council to resign but that he could appeal against that resolution to the association in general meeting is valid and did not offend the rules of natural justice: Gaiman & Ors v National Association for Mental Health [1971] 1 Ch 317; [1970] 3 WLR 42, Ch D. The court would not apply the rules of natural justice to a company where its articles preclude its application
Shareholders’ agreement
[35.12] Often times, in a closely-held company, the members supplement the constitution with a shareholders’ agreement. The distinction between the statutory contract and a shareholders’ agreement is laid out in Shalfoon v Valley Co-operative Dairy Co Ltd [1924] NZLR 561. The company and third parties may be made parties to the agreement subject to the rule in Russell v Northern Bank Development Corp’s case that the agreement cannot fetter the company’s statutory rights under the Act: Russell v Northern Bank Development Corp [1992] 1 WLR 588, HL . A contract by a company not to alter its articles will not be enforced by an injunction: Punt v Symons & Co Ltd [1903] 2 Ch 506, Ch D ; applied Re Ladies’ Dress Association Ltd (unreported). An alteration of articles may amount to a breach of an independent contract: Allen v Gold Reefs of West Africa [1900] 1 Ch 656, CA . A company may be sued for breach of a contract of employment even though it validly exercised its rights to alter its articles: Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 ; British Equitable Assurance Co Ltd v Baily [1906] AC 35, HL ; overturning the Court of Appeal’s decision in [1904] 1 Ch 374, CA.
[35.13] Judges have been known to imply terms into a shareholders’ agreement: Pennell Securities Ltd v Venida Investments Ltd (25 July 1974, noted Susan Burridge “Wrongful Rights Issues” (1980) 44 MLR 40). Shareholders of a company cannot restrain a company whose articles permitted the export of salt even though the company had entered into an agreement with a syndicate not to export salt: Egyptian Salt and Soda Co Ltd v Port Said Salt Association Ltd [1931] 1 AC 677, PC.
[35.14] Generally, a shareholders’ agreement is enforced under the rules of contract law. It cannot be altered like the constitution of a company by a special resolution. Members who joined subsequent to the formation of the agreement are not bound by it under the privity of contract rules: Qatar Islamic Bank v Asian Finance Bank Bhd & Ors [2015] 7 MLJ 445, HC. The terms and conditions of a shareholders’ agreement have to be clearly set out and the court will not imply one merely based on a purported directors’ resolution: Teo Chong Nghee Patrick & Ors v Han Cheng Fong and Another Appeal [2014] 3 SLR 595; [2014] SGCA 29, CA ; cf The Wellness Group Pte Ltd & Anor v OSIM International Ltd & Ors and Another Suit [2016] 3 SLR 729; [2016] SGHC 64, HC where it was necessary to imply a term in the shareholders’ agreement that the majority shareholder(s) (whoever they may be) would be entitled to appoint two directors, and the minority shareholder(s) would be entitled to appoint one director so long as they held at least 25% of the shares in the company.
[35.15] Shareholders’ agreements are often used in joint venture agreements and mergers and acquisitions or corporate restructuring agreements where the vehicle used is a company: Teo Choon Mong Frank v Wilh Schulz GmbH & Anor [1998] 2 SLR(R) 312; [1998] SGCA 28, CA; [1997] SGHC 222 ; followed Re A & BC Chewing Gum Ltd [1975] 1 WLR 579; [1975] 1 ALL ER 1017 . A shareholders’ agreement and articles that contained a preemption clause will not be enforced when an agreement for the transfer of shares had already been completed and performed: Lim Chin Lock v Khoo Tiam Siew Vince & Ors [1997] 1 SLR(R) 37; [1997] SGHC 4. A shareholders’ agreement was not enforceable by the shareholders against the liquidator of the company as a contract. The shareholders’ agreement did not impose on the liquidator a new contractual obligation superseding his statutory obligation to distribute the immovable properties of the company in specie pursuant to the terms of the special resolution: Low Gim Har v Low Gim Siah [1992] 1 SLR(R) 970; [1992] SGHC 108. The court had to construe the shareholders’ agreement in a commercially sensible manner without undue emphasis on technical interpretations and niceties of language: Qatar Islamic Bank v Asian Finance Bank Bhd & Ors (above). Class rights may be entrenched in a shareholders’ agreement: Harman & Anor v Bml Group Ltd [1994] 1 WLR 893, CA . A clause in a shareholders’ agreement that provided for the appointment of a chairman in the event of a deadlock by one joint venture shareholder was not inconsistent with Article 85 of Table A which provided that the directors shall elect a chairman from amongst themselves at the meeting
Implied terms in shareholders’ agreement
[35.16] It was necessary to imply a term in a shareholders’ agreement that the majority shareholder(s) (whoever they may be) would be entitled to appoint two directors, and the minority shareholder(s) would be entitled to appoint one director so long as they held at least 25% of the shares in the company
Winding up based on shareholders’ agreement
[35.17] The shareholders’ agreement might encompass the “legitimate expectation” of the members that are not reflected in the constitution so as to justify the court’s winding up of the company pursuant to the “just and equitable” ground under s 254(1)(i) of the Act. A shareholder’s agreement may also be used in oppression actions under s 216 and derivative actions under s 216A when the parties’ conduct contradict or breach the terms of the agreement
