Many companies formed under the repealed Companies Act 1965 (Former Act Companies) have adopted new articles of incorporation under the new Companies Act, 2004 abandoning their former charter documents called the memorandum of association and articles of association. Without commenting on the legality of the present procedure employed to do so, it is interesting to look at the reasons why the adoption of articles of incorporation has proved attractive to some Former Act Companies.
Under the new 2004 Companies Act, all companies have the capacity, rights, powers and privileges of an individual. This was a desirable reform introduced by the new law and quite in keeping with modern company law regimes, because the memorandum of association which sets out the several objects and powers of a company, defined the activities that a company might legitimately exercise. Memoranda were therefore often prolix and cumbersome as the drafter tried to include in it as many objects and powers as possible to give the company the unfettered right to operate as the directors and shareholders desired. The ‘memo’ as it was, and still is, familiarly know, was also the document that persons about to or dealing with a company relied on to ascertain if, in fact, a company had the power to do what it was purporting to do, because, if it did not have power to, say, borrow a sum of money or enter into a contract, it could become impossible to enforce performance of the contract or repayment of the loan by the company and place undue hardship on a person dealing with the company in good faith. Accordingly, the reforming Act of 2004, not only gives a company the capacity, rights, powers and privileges of an individual thus freeing it to carry on business as an individual can, but it also protects persons doing business with the company from the risk that a company may have contracted to do something which it has no power to do.
Further, since there is a contending view that, notwithstanding the language of the new Act, if the memorandum is retained it will restrict a company to its stated objects, abandonment of the memorandum would ensure that the company is indeed free to exercise the rights and privileges of an individual.
Accordingly, under the reformed law, it has become unnecessary to retain the memo.
On the other hand, articles of association set out the rules or bye-laws that govern the internal organization and management of the company. Under the modernized regime, though to date, Former Act Companies are not compelled to adopt articles of incorporation, they may now be replaced by articles of incorporation in substantially the same form as articles of association enabling a Former Act Companies to take the best advantage of a number of new provisions that are introduced by the Companies Act of 2004 not otherwise available to those companies that retain articles of association.
For example, under the new law a company may, subject to certain conditions, give direct or indirect financial assistance to a party to acquire the company’s own shares by way of a loan, guarantee or otherwise. This relaxes the former rule under the repealed law that a company could not do so except in very limited circumstances. Further, under the new law a company may ‘buy back’ its own shares, an absolute prohibition against which was an important feature of the old regime. In employing a ‘buy back’ a company may, for example, gain a measure of control over the market price of its shares or reorganize its shareholding structure. Under the new law, a company may also purchase insurance for its director against liability for negligence provided the director’s liability does not arise from fraud, and, it may also indemnify its director against costs and judgments in any civil, criminal or administrative proceedings brought against the company where the director is sued in his capacity as director and provided the director acted in good faith.
The above examples of revolutionary reform in company law are the bases for the decisions taken by many Former Act Companies to adopt articles of incorporation. This is particularly so given that the relevant articles for a company are the articles in force at the date of the company’s registration. This means that even though the law may change from time to time, if the articles do not permit the giving of financial assistance, the buy back of shares and the insurance and indemnity of directors, the articles that are deemed to apply are the articles that were in force at the date of registration.
The adoption of articles of incorporation by many Former Act Companies is therefore not surprising given the important advantages for companies their directors and shareholders.
Janet E. Morrison
Attorney-at-law
DunnCox
Janet.Morrison@dunncox.com