33. Alterations of objects in constitution Flashcards
- Alterations of objects in constitution
General overview
[33.01] The ability to alter the objects of the memorandum of a company extends to the constitution, which now replaces the memorandum. Essentially, a special resolution is needed to effect the alteration. Historically, the objects in the memorandum defined the capacity of the company, hence, giving rise to the ultra vires doctrine. This common law doctrine gave rise to many inconsistent cases that resulted from the judicial interpretation of the particular objects clause in the memorandum. As a result, the doctrine was abolished by s 25 of the Act. In view of s 23 which bestows full capacity, powers, rights and privileges on a company to carry on any business activity, it is hardly necessary to alter the memorandum except where the status and character of the company is changed. On the other hand, a host of cases have been decided by the courts with respect to the alteration of the articles: previous s 37. With the conflation of the memorandum and the articles into a single document called the constitution, it becomes an issue whether the aforesaid case law on the alteration of articles would apply generally to an alteration of the constitution. Presumably, where the provision sought to be altered is in the nature of an article, the existing law on the alteration of articles would apply. Alternatively, where the alteration involves the objects in the constitution, the relevant law on the alteration of objects would apply.
Alteration of objects
[33.02] Before Act No 36 of 2014, the constitutional framework of a company is contained in the memorandum and articles of association. The memorandum was the more fundamental document which the articles could not modify, and if there was any inconsistency, the terms of the memorandum prevailed: Guinness v Land Corp of Ireland (1822) 22 Ch D 349, CA. Note: in case of any inconsistency in the constitution between provisions that are in the nature of an “object” and provisions that are in the nature of an “article”, the court would likely approach the question as one of interpretation or construction of a contractual document. This is because the constitution is by virtue of s 39 a statutory contract.
[33.03] A company may alter the objects stated in its constitution by 21 days’ written notice to all its members and to all the trustees for debenture holders, or if there are no trustees, to all the debenture holders of that class whose names are, at the time of posting of the notice, known to the company: s 33(1) and (3). A special resolution is needed. A registered unlimited company with no shares or capital may alter its memorandum to enlarge the scope of its operations: Re North of England Iron Steamship Insurance Association [1900] 1 Ch 481, Ch D . A club, incorporated as a limited company, proposed to alter its objects to include all tourists, including motorists, was not sanctioned by the court as the alteration did not fall within s 1(5)(a) and (d) of the Companies (Memorandum of Association) Act 1890 (UK): Re Cyclists’ Touring Club [1907] 1 Ch 269, Ch D ; Hampstead Garden Suburb Trust Ltd [1962] Ch 806. Under the Companies (Memorandum of Association) Act 1890 (UK) where the “main purpose” of a company was the investment in government securities, an alteration in the memorandum, giving a power to invest in securities not guaranteed by the government, was refused at the instance of a minority of debenture-stock holders: Re Governments Stock Investment Co [1891] 1 Ch 649, Ch D . A petition to alter the objects in the memorandum of a company to extend it to other trades which had been carried out by the company for some time was sanctioned by the court: Re Bolsom Bros (1928) Ltd [1935] 1 Ch 41 3, CA. Sanctioned on condition that name of company is altered
What constitutes an alteration
[33.04] A change in the description of a share from 5s to 25p was not a change in the fixed amount of a share within the meaning of s 2(4) of the Companies Act 1948 (UK) and, therefore, did not constitute an alteration of a condition of the memorandum under s 61(1) of the said Act
Ultra vires doctrine
[33.05] The doctrine is abolished by s 25 of the Act. A company may alter its objects notwithstanding its new businesses were wholly different from and bore no relation to the company’s then existing business: Re Parent Tyre Co Ltd [1923] 2 Ch 222, Ch D . The objects of a company were altered to allow its members to be remunerated although the original objects prohibited the payment of any remuneration to, or the division of profits among, the members of the governing body as it was desirable for the purpose of more efficiently carrying out the main object of the company – namely, the improvement and encouragement of poultry breeding: Re Scientific Poultry Breeders’ Association Ltd [1933] 1 Ch 227, CA.
Application to court to cancel alteration
[33.06] Subsection (5) provides that an application by the holders of not less than the aggregate 5% of the total number of issued shares of the company or any class of those shares or, if the company is not limited by shares, not less than 5% of the company’s members; or the holders of not less than 5% in nominal value of the company’s debentures, may be made to court to cancel the alteration: s 33(5). In England, the court becomes involved only if the holders of 15% or more of the issued share capital of any class made an objection by applying to the court within 21 days. The court has an absolute discretion whether to confirm or disallow the alteration. Only the creditors and members of the company whose interests in the company itself will be affected by the alteration, are affected; and accordingly the court will not on a petition for confirmation of an alteration of the objects hear a person having an interest outside the company that will be injuriously affected by the alteration
