Last Updated on Thursday, 7 July, 2022 at 10:23 am by Andre Camilleri
Krista Pisani Bencini is a senior associate within the Commercial and Corporate Department of Fenech & Fenech Advocates.
This is the third part of a series of FAQs regarding the Memorandum and Articles of Association of a company incorporated in terms of the Companies Act, 1995 (Chapter 386 of the Laws of Malta). This third part will delve into the objects clause set out in the Memorandum of Association.
Why is a Company set up – what is its purpose?
The persons setting up a company never set up a company in a vacuum. They always have a reason for doing so. This “reason” must be stated in the Memorandum in the clause referred to as the “objects” clause.
Are there any restrictions on what a company may be set up to do?
The Companies Act, 1995 (Chapter 386, Laws of Malta) squarely states in its opening provisions (Art4(3)) that a “a company may be formed for any lawful purpose”. Companies may not be set up with an illegal object. Like physical persons, companies must operate within the remit of law. Generally speaking, there is no restriction, as such, as to what a company may lawfully do.
How generic can the objects be?
Can we register a company with objects which are very wide and which state that the company is set up to carry out “any lawful purpose” or trade in general? No – the Companies Act (Art 71) specifically prohibits this. The objects clause needs to be quite specific as to the intention behind the setting up of the company in question.
Do specific types of companies have particular restrictions with respect to their objects clause?
The law entails that particular companies have certain specifications in their objects clause. The objects of a single member companies, for instance, must specify which activity of the company shall be its main activity and its business must consist principally of that activity (Art.212(1), CA).
Restrictions are also laid down when it comes to the objects clause of an investment company with variable share capital (Art.84(2)(b), CA). The objects, in this case must, amongst other things, be limited to either the collective investment of its funds in securities and in other movable and immovable property, or in any of them, with the aim of spreading investment risk or to act and operate as a retirement scheme within the meaning of articles 2 of the Retirement Pensions Act (Chapter 514, Laws of Malta).
Licenced entities also have some restrictions in terms of the relevant laws regulating them. In the case of companies carrying on the business of insurance, one of the conditions for the issuance of a licence under the Insurance Business Act (Chapter 403, Laws of Malta) is specifically related to the objects of the company in question specifying the required business to be carried out by the relevant licensee.
In the case of banks, although the Banking Act (Chapter 371, Laws of Malta) does notspecifically mention the objects clause as such, it is a sine qua non for the obtaining of a licence that the authorisation will relate to the company in question being authorised to carry out the business of banking. BR/01 para 10 states that:
“An institution which, pursuant to its Memorandum and Articles of Association, has the formal possibility to engage in the banking activities mentioned in the definition in paragraph 8 [i.e. of the ‘business of banking’] above falls within the scope of the Act.”
The ‘possibility’ relates to an objects clause drafted to include the acceptance of deposits of money from the public withdrawable or repayable on demand or after a fixed period or after notice or who borrows or raises money from the public (including the borrowing or raising of money by the issue of debentures or debenture stock or other instruments creating or acknowledging indebtedness), in either case for the purpose of employing such money in whole or in part by lending to others or otherwise investing for the account and at the risk of the person accepting such money. (Art.2(1), definition of the “business of banking” in the Banking Act).
Objects vs. Powers
The objects clause in a Memorandum is typically divided into two parts – the first part which sets out the specific objects and the second, which delineates the “powers”. The Companies Act only makes reference to the objects as required ad validatem in the Memorandum – so why do we normally include a specific list of powers?
The “objects” set out the core, activities of the company i.e. the main purpose for which the company was set up, while the “powers” would then set out a longer list of activities which would be related to the objects, such as the opening of bank accounts or the granting of security. The powers are therefore required in order for the company to carry out its object during the course of the daily running of its activities.
What happens when a company acts beyond its objects – that is, it acts “ultra vires” and beyond its powers?
Art.137(6), CA states that:
“Where an act of the company falls outside the company’s objects, the company shall not be bound if it proves that, when the act was done, the third party knew that it was outside the company’s objects or the third party could not in view of the circumstances have been unaware thereof…”
This provision essentially protects third parties dealing with the company. The onus of proof therefore rests with the Company and it cannot invoke the publication of the memorandum and articles of the company alone to prove that the third party knew that the act was outside the company’s objects.
In the absence of such proof, acts entered into by the company which go beyond its objects are validated, unless the company itself proves that the third party knew that the company was acting outside its objects or could not have been unaware of it.
Look out for the next set of FAQs which will focus on shareholders’ agreements in the context of the Memorandum and Articles of Association.