When setting up a subsidiary in Malaysia, foreign investors are often told that a company constitution is optional. Under the Companies Act 2016, a Private Limited Company (Sdn. Bhd.) can operate without a constitution, relying solely on the Act's default provisions.
For a purely domestic business, this may be sufficient. But for multinational groups with subsidiaries in several jurisdictions, relying only on Malaysian statutory defaults is risky. These defaults are generic – they do not reflect the group's internal governance rules, approval processes, or reserved matters that typically apply across the parent's global structure.
A tailor-made constitution bridges this gap. It ensures the Malaysian subsidiary operates in harmony with the group's established practices, reduces compliance risks, and provides certainty in areas where Malaysian law would otherwise be silent.
This article explains why foreign investors should adopt a constitution for their Malaysian Sdn. Bhd., the advantages of doing so, and the risks of leaving matters unaddressed. Real-world case studies illustrate how things can go wrong without proper drafting – and how a constitution prevents disputes before they arise.
⮕ Are you already familiar with the advantages of having a tailor-made constitution and only want to set-up a Sdn. Bhd. in Malaysia? Contact us here.
⮕ Not sure yet what type of company you want to set up in Malaysia? Check out our comprehensive guide to setting up a business in Malaysia for foreign investors.
Why the Default Rules Don't Work for Foreign Investors
The Companies Act 2016 sets out certain rights and obligations of companies, directors and shareholders. If a company does not adopt a constitution, the Act itself provides "default rules".
However, these default rules are minimal and one-size-fits-all. They do not cover:
- Reserved matters – e.g. requiring parent approval for share transfers, major contracts, borrowings, or disposals of assets.
- Voting arrangements – e.g. ensuring the parent company retains control despite minority shareholders or nominee holdings.
- Board procedures – e.g. requiring two directors' signatures for certain transactions, or specifying quorum rules.
- Shareholder protections – e.g. deadlock resolution mechanisms in joint ventures.
For foreign groups with existing governance frameworks, the absence of these provisions creates a compliance gap. Malaysian subsidiaries may act inconsistently with group rules, creating legal and reputational risks for the parent.
Advantages of a Tailor-Made Constitution
1. Alignment with Group-Wide Rules
Most multinational groups have established subsidiary governance frameworks – from approval matrices to director authority limits. A tailored constitution allows these rules to be embedded legally in the Malaysian entity, ensuring consistency across jurisdictions.
2. Greater Control and Oversight
Foreign parents often want to reserve certain powers – such as approving dividends, capital injections, or material contracts. By enshrining these reserved matters in the constitution, the parent ensures that local directors cannot act unilaterally in ways that conflict with group policy.
3. Reduced Risk of Disputes
Without a constitution, disputes between shareholders or directors are resolved only under the generic provisions of the Act, which may not reflect commercial reality. A constitution provides clarity on decision-making, voting thresholds and dispute resolution, reducing the likelihood of costly litigation.
4. Protection Against Unintended Actions
A well-drafted constitution can prevent situations where a single director or minority shareholder exercises rights that disrupt the company's operations. It sets clear guardrails around what actions require broader approval. This is particularly important when you are unable to appoint a "person of trust" to act for your Malaysian subsidiary.
5. Confidence for Banks, Regulators, and Partners
When banks, regulators or business partners review a company's governance, a clear constitution demonstrates that the subsidiary is professionally structured and well-managed – giving confidence that it is backed by a serious foreign parent.
Case Studies: What Can Go Wrong Without a Constitution
Case Study 1 – Uncontrolled Share
Transfer
A European group incorporated a wholly-owned Malaysian Sdn.
Bhd. without a constitution. Later, one of the local nominee
shareholders (holding shares on behalf of the parent) transferred
shares to another party without seeking HQ approval. Under
Malaysian law, share transfers are generally free unless restricted
by a constitution. The group was forced into lengthy negotiations
to reverse the transfer – an issue that could have been
prevented with a simple clause restricting share transfers without
parent approval.
Case Study 2 – Director Acting
Alone
A multinational's global policy required two directors to
sign off on contracts above a certain value. However, its Malaysian
subsidiary – operating without a constitution – had no
such rule. One local director executed a major supply agreement
alone, binding the company to very unfavourable terms. Because
there was no constitutional restriction, the act was valid. The
parent had to absorb commercial losses in the millions.
Case Study 3 – Joint Venture
Deadlock
In a Malaysia–foreign joint venture, the parties chose
not to adopt a constitution, relying on the Companies Act defaults.
When disagreements arose, the Act provided no deadlock resolution
mechanism. The JV was paralysed – no dividends, no decisions,
no progress – until the matter went to court. A tailor-made
constitution with a deadlock clause (e.g. buy-sell or arbitration
mechanism) could have resolved matters far more
efficiently.
Why Lawyers – Not Company Secretaries – Should Draft Constitutions
Company secretaries play a crucial role in Malaysia – they handle statutory filings, maintain registers, and ensure routine compliance. However, they mainly administer companies and are less-suited to advise on risk management/strategic planning. Drafting a constitution for a foreign-owned subsidiary is not just administrative work. It is a legal exercise requiring knowledge of:
- How Malaysian corporate law interacts with group governance rules.
- How to draft enforceable provisions that achieve the parent's commercial objectives.
- How to anticipate disputes and prevent them through clear drafting.
Foreign investors often find that company secretaries struggle to replicate complex global rules in a constitution. By contrast, as lawyers focusing on foreign clients, we ensure that the constitution is both legally compliant in Malaysia and consistent with the parent's global framework.
This is where the advantage of engaging a law firm fully kicks in. It is the difference between a document that simply meets local filing requirements, and one that becomes a true instrument of corporate governance for the group.
The Process of Drafting a Tailored Constitution
When assisting foreign investors, we typically follow these steps:
- Review of key group policies: understanding the parent's governance requirements, approval matrix and director authority limits (must be provided to us by you).
- Assessment of Malaysian law: identifying where local rules differ and how they must be adapted.
- Drafting the constitution: embedding reserved matters, share transfer restrictions, director authority clauses, and dispute resolution mechanisms.
- Client review and alignment: ensuring the document mirrors the group's expectations.
- Lodgement with SSM: once adopted, the constitution is binding on the company and all its members.
Advantages in Practice
- Consistency: HQ knows every subsidiary follows the same governance rules.
- Accountability: Local directors understand their authority limits clearly.
- Protection: Prevents unauthorised share transfers or unilateral decisions.
- Efficiency: Reduces need for ad hoc board resolutions to deal with predictable issues.
Conclusion
For foreign investors, the Malaysian Sdn. Bhd. is an attractive and flexible vehicle. But without a tailor-made constitution, subsidiaries are exposed to risks – uncontrolled share transfers, unilateral director actions, shareholder disputes – that could undermine the parent's control and reputation.
A constitution is optional under Malaysian law – but for foreign-owned subsidiaries it is essential. It is the only way to replicate company-wide rules and ensure that the Malaysian entity is fully aligned with global governance standards.
By engaging lawyers experienced in drafting constitutions for foreign investors, companies can ensure that their Malaysian subsidiary is not only compliant locally but also seamlessly integrated into the parent's global framework.
The original article was published on Aqran Vijandran's website at [Tailor-Made Constitutions For Malaysian Subsidiaries: Why Foreign Investors Should Adopt Them].
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
