4 - Legally binding the company Flashcards
3 ways by which company can enter contract
- Affixing its common seal to a document
- By a person who has authority to contract on company’s behalf
- By complying with rules in S.44(2)
What decides who may use a common seal, and how it is used?
The company’s articles
What do model article say on use of common seal?
Can only be used with directors’ authority, and the document to which it is affixed should also be signed by an authorised person
Though it is not still a legal requirement, which companies may retain common seal?
Those that trade internationally, due to requirements in other countries
When is a document validly executed by a company? (2)
- Signed by two authorised signatories
or - Singed by a director in the presence of a witness
Who are automatically authorised signatories?
Directors and CoSec
What makes up company’s constitution?
- Articles
- Resolutions and agreements affecting constitution
- Memorandum (technically not but it used to)
What does post-CA2006 memorandum state?
Subscribers wish to form company, agree to become members, and agree to take at least one share each
Example of statutory rule which can be excluded or modified by articles
Pre-emption rights
3 areas which articles establish rules and procedures on
- Directors (powers, responsibilities, appointment, removal)
- Meetings (board and members)
- Capital (allotments, dividends, borrowing powers)
3 sets of model articles
- Private limited by shares
- Private limited by guarantee
- Public companies
4 choices for promoter of private limited by shares co - articles
- Model articles in full
- Own articles, adopting all terms of model articles
- Own articles, adopting some of model articles and modifying or excluding others
- Own articles, completely excluding model articles
To what degree can and cannot courts interpret articles?
They can imply terms into the articles, but they cannot add words to make them fairer or more reasonable
What is the confusion regarding implying terms into the articles?
Disagreement between courts on whether terms can be implied on reasonableness, or only on necessity
How are articles amended?
By special resolution (or in limited cases, if ordered to do so by the courts)
2 notable limitations on amending articles
- Restricted by statute
- Restrictions imposed by court
Example on restriction to amend articles by statute
Requirement of higher majority or even unanimity
4 limitations/consequences imposed by court on alteration of articles
- Amendment is invalid if it deprives member of right that already occurred
- Invalid if not for the benefit of the company as a whole
- Company cannot contract out of ability to alter its articles
- Liable for breach of contract if amendment to articles breach separate contract
The constitution of a company is a contract between who?
- The company and its members
and - The members themselves
What is the S.33 contract?
The constitution
3 consequences of S.33 contract forming contract between company and its members, and members themselves (breaches of contract)
- Company can sue a member if member breaches
- Member can sue the company if company breaches
- Member can sue another member for breach
2 limits on ability of company and its members to enforce constitution
- Outsiders and outsider rights
- Internal irregularities
Outsiders and outsider rights - limits re. articles
Outsiders cannot enforce constitution (by making claim), nor can a member do so on behalf of an outsider
There is an exception
When can constitution be enforced by outsider?
If separate agreement outside of constitution allows for such enforcement
Internal irregularities - limits re. litigation
Result of ‘principle majority’ rule - prevents one individual from frustrating wishes of company as litigation cannot be brought on internal matters where a majority of shareholders could have prevented occurence
Relationship between shareholders’ agreements and articles
Shareholders’ agreements do not form part of constitution but do supplement it
What is a shareholders’ agreement?
An agreement entered into by two or more members, setting out certain rules regarding relationship of those members
Shareholders agreements are typically only used by which companies
Those with a small amount of members
3 advantages to placing certain rights in shareholders’ agreement, as opposed to articles
- Confidential
- All the terms of agreement bind all the parties to it - therefore avoiding inability to enforce outsider rights as in articles
- All parties must agree to amendment rather than majority
What is meant by a company’s contractual capacity?
A company’s ability to enter into contracts
What is meant if a company is acting ‘ultra vires’?
It is exceeding its contractual capacity
How can a company’s contractual capacity be limited or restricted?
By its constitution
Which directors duty is breached if directors are acting ultra vires?
171(a)
Historically, how was a company’s contractual capacity (and capacity more generally) restricted?
Through an objects clause in the memorandum
2 key issues arising from ultra vires doctrine/objects clause
- Restricted objects
- Effects on innocent third parties (as contracts became void)
How was ‘restricted objects’ issue with corporate capacity overcome?
CA 2006 - removing the need for an objects clause in the memorandum, meaning that a company’s objects become unrestricted
How was ‘effects on innocent third parties’ issue with corporate capacity overcome?
CA 2006 - provided that a contract cannot be invalidated on grounds that is outside the scope of a company’s contractual capacity
Has the ultra vires doctrine now been abolished? S.39(1)
From the view of third parties, yes
From the view of directors and members, no, as they can still be found to be in breach of duty and sued via a derivative claim
Two principal types of authority
- Actual authority
- Apparent authority
Define actual authority
A legal relationship between the principal and agent ascertained through applying ordinary principles in construction of contracts
Two types of actual authority
- Express actual authority
- Implied actual authority
Example of express actual authority
Model arts conferring authority upon an agent to engage in specified acts
2 instances where agent may be found to have implied actual authority
- Agent has implied actual authority to engage in activities incidental to another activity for which he has express actual authority
- Being effectively appointed into role without formal appointment
Define apparent authority
The authority of an agent as it appears to others
3 requirements that need to be satisfied to establish an agent’s apparent authority & brief explanation of each
- There must be a representation (ie. agent is presented as being in a certain position, eg. MD)
- That representation must be relied upon (third party are aware of representation, and are not aware of lack of authority)
- The person relying on the representation must alter their position (eg. entering into contract)
Which S of CA2006 is re. enforcement of ultra vires contracts?
S.40
Who/what is and isn’t protected by S.40?
The contract is (and therefore third parties are) protected
The directors are not
2 considerations re. S.40
- Third party must have acted in good faith
- Third party not bound to enquire as to any limitation on powers of directors to bind company
When is a third party considered to have acted in good faith re. S.40?
They are presumed to unless the contrary is proved
When does S.40 rule become more complex?
When a director enters into a contract, on behalf of the company, with himself
Transactions with whom will be voidable at the company’s instance, in spite of S.40?
- A director of the company
- Any person connected with a director
Director that authorised transaction is liable to account for any gain and to indemnify company
Can S.40 rule apply to actions of one director, or must it be directors?
Probably directors but clarification needed
What can third parties use if S.40 does not apply?
‘Indoor management’ rule
What is the ‘indoor management’ rule?
Third parties that deal with company can assume company’s internal rules have been complied with
2 key case laws to reference for share expropriation provisions
Dafen Tinplate Co Ltd v Llanelly Steel Co - where such a provision is overly wide, it is likely to be deemed to be invalid
Sidebottom v Kershaw Leese & Co Ltd - where a provision is more limited in scope, it may be deemed valid - provision empowered Board to purchase shares of any shareholder who competed with the company
What is the most significant of the limitations imposed by the court on a company’s ability to amend its articles? Which case?
Allen v Gold Reefs of West Africa
The power to alter articles must be exercised not only lawfully, but also ‘bona fide for the benefit of the company as a whole’
Company means corporate entity.
What is meant by bona fide?
‘bona fide for the benefit of the company as a whole’
If members honestly believed the amendment is for the benefit of the company as a whole
