Unless otherwise indicated, the company stated in this article refers to the private company incorporated in Malaysia in accordance with the Malaysian Companies Act 2016 (CA 2016).

The company’s Constitution is a legal document which sets out the objects and powers of a company and also governs internal affairs and management of the company. Under the Malaysian Companies Act 2016 (CA 2016), the M&A is replaced by Constitution. A company has the option of whether to have a Constitution as the CA 2016 has set out rights, powers, duties and obligations of company’s directors and shareholders which can be used in the absence of a Constitution. Those who have set up a company may create a Constitution either during or after registration and it can be adopted by way of special resolution by the shareholders.

1. What is a Constitution
   
   A Constitution serves as a contractual agreement among the company, its directors, and shareholders, establishing the framework that guides the company's operations and facilitates its growth. It outlines the company’s structure, including details about directors’ power, responsibilities, roles, major activities, allotment of shares, dividend payment, share transfer, appointment/re-election/removal of directors, and meeting behavior, and others. If the CA 2016 is silent on the method for decision making, the company’s Constitution can be used to fill in the gap. However, the Constitution of a company has no effect to the extent that it contravenes or is inconsistent with the provisions of CA 2016.
   
   
2. Importance of a Company Constitution
   
   While a Constitution it is not mandatory for private companies in Malaysia, having a well-drafted constitution can still be important for several reasons. Even though private companies can rely on the statutory provisions of the CA 2016, a Constitution offers additional benefits and flexibility. Here are some reasons why a company might find it beneficial to adopt a constitution:
   
   

   (1)	Flexibility and Customisation A Constitution allows a company to customise its internal rules and regulations to better suit its specific needs and requirements. This flexibility can be especially valuable as businesses evolve and encounter unique circumstances.
   (2)	Clear Governance Structure A Constitution elucidates the organizational framework of the company, delineating the specific roles and responsibilities of directors and officers, establishing the decision-making procedures, and defining the rights and obligations of shareholders.
   (3)	Ease of Reference A Constitution serves as a single, comprehensive document that consolidates the company's internal rules. This makes it easier for stakeholders, including directors, officers, and shareholders, to understand and reference the company's governing principles as compared to the CA 2016 which has more than 500 pages and contains 620 sections.
   (4)	Credibility and Transparency Having a documented Constitution can enhance the credibility of the company, particularly when dealing with external stakeholders such as investors, lenders, or business partners. It demonstrates a commitment to transparent and organised governance.
   (5)	Contracts and Relationship The Constitution provides a framework for entering contracts, agreements, and relationships with third parties. It defines the company’s powers and capacity to engage in various transactions, such as borrowing money, acquiring assets, or entering partnerships.

   
   
3. Reasons to Adopt Constitution
   
   Here are some reasons why Malaysian companies adopt Constitution:
   
   

   (1)	Governance and Management The Third Schedule of the CA 2016 outlines the initial protocols for the Board, including aspects such as directors’ voting entitlements, the process for passing board resolutions, the creation of committees and managing directors, and so on. As the procedures outlined are basic, a Constitution can be used to create more specific guidelines for the board’s functions, tailored to the company’s requirements.
   (2)	Additional Shareholder Protection Shareholders bear liability proportional to their contributed paid-up capital and can hold management reviews from time to time to offer recommendations to the board of directors. To safeguard shareholders' rights, additional provisions may be incorporated into the Constitution, such as: (a) Shareholders unable to attend meetings physically may delegate a representative to vote on their behalf. (b) Written resolutions are deemed rejected unless approved by a majority of directors/shareholders within a specified period from the date of circulation. (c) Voting is prohibited if the attendance at shareholder meetings falls below a specified percentage.
   (3)	When there is even number of directors or/and shareholders Generally, the resolutions in a board or shareholder meetings are passed through the casting of majority votes. A scenario of deadlock could arise when an equal number of directors or shareholders cast their votes in favor of differing outcomes. This situation can be solved when there are adequate voting rules in place. For example, the chairperson of the meeting will have a casting vote when there is a tie in voting.
   (4)	When two or more companies form a joint venture A joint venture materialises when two or more companies become corporate shareholders in a collaborative business venture. To safeguard the rights of the involved companies, the Constitution may incorporate additional provisions, such as: (a) Specifying the number of directors appointed for each corporate shareholder within the joint venture. (b) The shares of its corporate shareholder will be redeemed by the joint venture if one of the companies is struck off or wound up. (c) Defining the scope of business activities permissible for the joint venture.
   (5)	When the company wants to raise funds from investors The CA 2016 has clearly stated that without a Constitution, the company can only issue ordinary shares, which offer shareholders ownership in the company. However, if the company wishes to raise capital through the issuance of preference shares, a Constitution becomes necessary to determine the terms and rights of preference shares such as repayment of capital, participation in surplus assets and profits, redemption rights, payment of dividends and voting rights etc.

   
   
4. Alteration of a Constitution
   
   Pursuant to the CA 2016, there are certain procedures in place which allow for alteration of a Constitution by the company. According to Section 36(1) of the CA 2016, the alteration  of a Constitution is done by way of a passing of a special resolution by the shareholders who are entitled to vote.
   
   However, alteration to the Constitution may be subjected to certain restrictions if a provision under the Constitution expressly prohibits it to be altered and should only be done if it is being done in good faith for the benefit of the company as a whole.
   

Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.