#3566 - Company Constitution - Company Law

CORPORATE CONSTITUTION

Section 17: companies’ constitution includes:

1. articles of association;

2. special resolutions

   Is not possible to change constitution of company via ordinary resolution.

   i.e. in matters of substance, constitution cannot be deviated from via ordinary resolution

   e.g. Quin & Axtens v Salmon [1909]

   Section 18: all companies MUST have articles of association

   Articles may deal with any matter for which mandatory rules are not laid down by statute.

• British Company law much more liberal in this respect than other jurisdictions

Model Articles

Section 18: any company may choose the Model Articles as their articles of association.

In case of limited companies, model articles apply automatically in absence of contrary provision.

Section 20(1): limited company may exclude operation of model articles in whole or in part.

LEGAL EFFECT OF CONSTITUTION

Section 33: provisions of constitution bind the company and its members as though there was covenant on part of company and each member to observe it.

• Thus is a statutory form of contract.

• i.e. a “section 33 contract”

• Allows obligations and rights to be created without any consideration, offer/acceptance.

• Company Law Review debated whether it was still appropriate to treat articles as having contractual effect, but decided not to change anything.

Enforcement

• Section 33 contract is enforceable:

1. By members against company

   Quin & Axtens [1909]

2. By company against members

   Hickman [1915]

3. By members against other members

   Rayfield v Hands [1960]

   London Sack and Bag [1943]

   However is NOT enforceable by outsiders to company

   i.e. non-members

   Eley v Positive Life [1876]

   Additionally, Contracts (Rights of Third Parties) Act 1999 does not apply to company constitutions

   C(RTP)A 1999 section 6

   Limits

1. Capacity as a Member

• People only have rights or obligations under the constitution in their capacity as a member.

• i.e. where C seeks to enforce a right against D which does not relate to D’s membership of the company, cannot do so.

• Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915]

  “Hickman principle”.

Multiple Relationships to Company

• Some people who are members may have some other capacity in which they relate to company

• Thus such people can only bound by constitution where:

1. they are a member of company; and

2. the right is being enforced by/against them in their capacity as member

• And NOT in their capacity as director/solicitor etc.

• Eley v Positive Life [1876]

• Hickman [1915]

  Court have taken lenient view of when a right is being enforced ‘qua member’.

  Quin & Axtens [1909]

  Rayfield v Hands [1960]

Subsequent Attainment of Membership

1. Where an outsider with purported rights in a company’s articles is subsequently granted shares in company, does not make those prior rights enforceable.

• i.e. C’s claim in his capacity as outsider was unenforceable

  thus does not become enforceable merely because he has since become member

• Eley [1876]

• As interpreted in Hickman [1915]

2. However has been suggested this view is wrong

   i.e. once outsider is granted shares, becomes entitled to enforce his earlier right

   as any member of company is entitled to enforce its constitution

   See Lord Wedderburn (below)

Member-Member Disputes

Fact that two people are both members of company does not mean articles can be invoked in disputes which have nothing to do with their membership of company.

Rather the dispute must fall within the ‘company relationship’

London Sack and Bag [1943]

A general right to enforce constitution?

Is possibly case that any member has a general right to force company to act in accordance with its articles.

Quin & Axtens [1909]

View supported by Lord Wedderburn (below)

If this is case, articles can be enforced by/against member even where this has indirect effect of enforcing an ‘outsider right’

e.g. Rayfield v Hands [1960]

Would outflank Hickman principle in member-company/company-member actions.

thus would only continue to apply in relation to member v member cases

e.g. London Sack & Bag [1943]

2. “Internal Irregularities”

• Some articles which appear to confer rights upon members in fact only create obligations upon the company.

• Breach of such articles constitutes “mere internal irregularity” on company’s part.

  i.e. so that shareholder affected by breach has no personal right of action in respect of breach (see supervision 7)

  rather company is proper claimant

• “Internal irregularities” tend to arise in relation to articles dealing with convening and conduct of shareholder meetings.

  e.g. Macdougall v Gardiner [1875]

  Doubtful whether “internal irregularity” exception still exists to same extent today:

  Are cases contrary to it (e.g. Pender v Lushington [1877])

  Runs contrary to idea that company should be held to its constitution (e.g. Quin v Axtens [1909]

Lord Wedderburn (1957)

• There should be a general membership right to have affairs of company conducted in accordance with the articles.

• i.e. any member should be able to sue to uphold any company article, as this is a personal right.

  This view supported by Quin v Axtens [1909].

  Therefore Hickman’s interpretation of Eley was WRONG

  i.e. once C became member of company, was entitled to force company to adhere to its constitution

Davies

• This would defeat need for both:

1. “Outsider right” argument

   i.e. member has right to sue to ensure that constitution is enforced, even if this has indirect effect of upholding an ‘outsider right’

2. “Mere internal irregularity” argument

   i.e. as any breach of articles would be actionable by member in his personal capacity

Company Law Review:

recommended Wedderburn’s approach (at least insofar as it would destroy “internal irregularity” argument)

but recommended keeping Hickman principle

Problems with Hickman

• Hickman principle means there will be different outcomes depending on view court takes

  i.e. whether a right in articles is intended to be enforceable qua member often unclear

  e.g. Rayfield [1960]

• Nevertheless, Hickman principle is cheap and easy to get around

  e.g. via shareholders’ agreement

  Shareholders’ agreement has disadvantage of not being binding on future shareholders

  Thus only practicable in private company

  Implied Outside Contracts

• Sometimes courts may imply separate contracts based upon terms of the Articles.

• Re New British Iron [1898]

• Is a way of getting round prohibition on outsiders enforcing Articles.

• i.e. as some of terms of Articles are enforceable through the extraneous contract.

  Interpretation of Articles

Implication

• Courts will not imply terms into articles from extrinsic evidence of surrounding circumstances.

• Bratton Seymour Service v Oxborough [1992]

• However courts will imply terms into articles where this merely makes express what they would have reasonably been taken to mean against relevant background.

• “Background” includes:

  scheme of articles themselves

  to a very limited extent, background facts that third parties involved with the company would reasonably have known

• AG Belize v Belize Telecom [2009]

Other Contractual Techniques

• Stated that articles cannot be amended/rendered void for

  common law mistake

  misrepresentation

  undue influence

  or duress.

  Bratton Seymour Service v Oxborough [1992] (Steyn LJ)

  Thus is clear that section 33 contract operates via different principles to ordinary contract

  Company’s articles become public at moment of formation

• either model articles apply, or company’s articles must be published

  Therefore those dealing with company have expectation that registered articles are accurate.

  For this reason, courts reluctant to incorporate aspects of contract law into proceedings involving company articles that might give articles any meaning different from that which is apparent on their face.

Relationship of Directors to Articles

• NB directors may be party to “section 33 contract” in their capacity as members (see above)

1. Director-company

   Directors gain their power to act (mandate) from articles (e.g. Model Art. 3)

   Articles may also give rise to implied contracts conferring rights upon directors against company

   but NOT obligations

   Re New British Iron [1898]

2. Director-members

   Directors do not have a direct contractual relationship with members

   directors act on behalf of company

   therefore the only duties they owe are to the company (see supervision 5)

   Towcester Racecourse [2003]

   Thus consequently, directors cannot owe implied contractual duties to members of company

   Towcester Racecourse v Racecourse Association [2003]

Approach of Other Jurisdictions

In Australia, directors have been made party to statutory contract

i.e. so that it is enforceable by/against them in their capacity as directors

Problem: power within a company resides with shareholders

Thus why should a director be able to enforce his rights under the statutory contract?

AMENDMENT OF ARTICLES

Special Resolution

Section 21

• Company may amend its Articles by special resolution.

• Special resolution can be passed by 75% majority of those voting on matter.

• NB does not need to be passed by 75% of all members, only those present at vote

• Where resolution passed, new copy of articles must be presented to Companies House.

• Section 1079: if this not done, permissible for third parties to rely upon old articles

Controlling Members’ Voting

Shareholder protection mechanisms in relation to the alteration of the constitution include:

1. Entrenchment

2. Good faith restriction

3. Capital restrictions

4. Self-help measures

   1. Specific provision in constitution

   2. Shareholder agreements

5. Unfair prejudice...