Chapter 5 - The Constitution Of The Company

Question 1

What is meant by a company’s ‘objects’?

Answer 1

The purpose for which the company was formed (e.g. to operate a railway).

Question 2

What is meant by “ultra vires the capacity of the company”?

Answer 2

A company acting outside its capacities. This is now only applicable to charities.

Question 3

What is the capacity of a non-charitable registered company?

Answer 3

S 39 CA: “The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.”

Question 4

Are all companies required to have objects?

Answer 4

Companies registered since the 2006 need not have objects, unless specifically restricted within the Articles. (s 31)

Question 5

What is the impact of the CA2006 on the objects clause of a pre-2006 company?

Answer 5

A pre-2006 objects clause is now deemed to be a provision of the Articles.

Question 6

What are the consequences of a company acting outside its objects clause today?

Answer 6

A member can apply for an injunction to prevent a company from acting outside its constitution.

Question 7

What is the content of a new-style Memorandum of Association?

Answer 7

A statement that:

• the subscribers wish to forma company under the Act
• they agree to become a member and take at least one share each (s 8 CA).

Question 8

What role is played by the articles of association of a registered company?

Answer 8

The Articles state the internal rules of the company, including allocating powers to and between the directors and members.

Question 9

How many sets of model articles exist?

Answer 9

3:

• private limited by shares
• private limited by guarantee
• public

Question 10

Outline the key matters addressed by the model articles for public companies.

Answer 10

3 main sections:

• directors (powers, duties, appointments, insurance)
• members (decision making, rights)
• shares and distributions (issue of shares, transfer, dividends)

Question 11

Identify two statutory rights that cannot be overridden by provision to the contrary in the Articles of Association of a registered company.

Answer 11

1) Excluding a statutory right (e.g. the right to petition for a winding up)
2) The power to amend the articles

Question 12

What were the facts in Re Peveril Gold Mines Ltd?

Answer 12

A provision of the articles limited the statutory right of members to petition the court for a winding up. Held: The article was void.

Question 13

What were the facts in Bushell v Faith?

Answer 13

An articles provided that a director being removed gained three votes per share. The other directors petitioned that this prevented that director from ever being removed. Held: the article was fair.

Question 14

Between which parties does a s 33 statutory contract operate?

Answer 14

The company’s constitution forma a contract between the company and its members, and between the members themselves.

Question 15

Identify 6 characteristics of a s33 statutory contract that distinguish it from a typical contract.

Answer 15

1 amendment of a contract usually requires agreement by all parties, but articles can be amended by special resolution
2 a contract usually binds only those who agree to it, but the articles bind new members who were not involved in the drafting
3 the Articles cannot be challenged on the grounds of mistake, misrepresentation or undue influence
4 the court may not rectify the Articles, even if they do not reflect the intention of the members on incorporation.
5 the articles are exempt from the Contract Act 1999, so a third pay cannot enforce a provision under the Articles
6 The articles are not subject to s2-3 of the Unfair Contract Terms Act 1977

Question 16

What is an outsider right, for the purposes of enforcing a provision of a company’s Articles?

Answer 16

An outsider right is one attached to a person other than a member (e.g. the right to be company solicitor).

Question 17

Can a member sue to enforce outsider rights set out in the Articles? What are the relevant cases?

Answer 17

The position from case law is currently unclear. Salmon v Quinn & Axtens Ltd appears to support outsider rights, while Beattie v E & F Beattie Ltd does not.

Question 18

What were the facts in Beattie v E & F Beattie Ltd.

Answer 18

Beattie v E & F Beattie Ltd. Beattie was a member and director, and tried to use an arbitration clause in the articles to prevent court proceedings against him for breach of directors’ duties, stating that the matter needed to be resolved by arbitration. Held: he could not enforce rights to arbitration, even though he was a member, because this was not a dispute with him as a member, but as a director (outsider).

Question 19

What were the facts in Beattie v E & F Beattie Ltd.

Answer 19

Beattie v E & F Beattie Ltd. Beattie was a member and director, and tried to use an arbitration clause in the articles to prevent court proceedings against him for breach of directors’ duties, stating that the matter needed to be resolved by arbitration. Held: he could not enforce rights to arbitration, even though he was a member, because this was not a dispute with him as a member, but as a director (outsider).

Question 20

What were the facts in Salmon v Quinn & Axtens Ltd?

Answer 20

Salmon was a major shareholder and general manager of a company. The articles stated that Salmon had a veto on decisions. The company ignored his veto and secured an ordinary resolution to carry out the vetoed action. Held: Salmon was able to secure an injunction despite acting as an outsider (manager).

Question 21

How may a company amend its articles?

Answer 21

S.21 CA: by special resolution, which must be delivered to the registrar along with the new articles.

Question 22

Is a member bound by an amendment to the articles requiring them to take more shares or increases his or her liability?

Answer 22

A member is not bound by an amendment requiring him to take more shares or increase his liability (s25 CA).

Question 23

How may a registered company intrench provisions of its articles?

Answer 23

S 22 CA: a company’s articles may contain a provision for entrenchment, but this entrenchment may only be made on incorporation, or by unanimous consent by the members.

An entrenchment provision must be drawn to the attention of the registrar.

Question 24

What restrictions on the power of amendment of the articles were laid down in Allen v Gold reefs of West Africa?

Answer 24

The only member with fully-paid shares in the company died owing £6,000 to the company, but the articles prevented debt collection by those with fully-paid shares. The company amended the articles to allow this debt to be collected. The member’s beneficiary argued that this was unfair to the member.

Held: The amendment to the articles must be bona fide for the benefit of the company as a whole (and was).

Question 25

What are the three leading cases on squeeze-out provisions in the Articles?

Answer 25

Allen has been applied to cause a squeeze-out in three leading cases:
- Sidebottom v Kershaw, Leese and Co Ltd. - articles amended to allow any member competeing with the company to be forced to sell his shares.
- Brown v British Abrasive Wheel Co Ltd - 98% shareholder tried to force purchase the remaining 2%. This was barred, since it did not benefit the company as a whole.
2 Dafen Tinplate v Llanelly Steel Company - Articles were amended to provide the right of the majority to allow the directors to sell the minority’s shares to anyone they choose. Barred as not for benefit of company as a whole.

Question 26

What were the facts in Greenhalgh v Ardene Cinemas Ltd?

Answer 26

Pre-emption rights in the articles were amended to include a provision that ordinary resolution was required for any member to transfer shares to another (bypassing preemption rights), effectively taking away pre-emption rights for minority shareholders.. Held: the amendment was valid, as per Allen v Gold Reefs of West Africa.

Question 27

Why has the “Allen” principle not been adopted into statute?

Answer 27

Appropriate legal principles are difficult to create, and there is not much need, as any dissatisfied shareholder can take action under s 994 CA.

Question 28

What argument can a director make to secure the right to payment of a level of remuneration provided for in the Articles?

Answer 28

The terms of the articles form part of a contract with the directors, and so they can be entitled to the remuneration set out within.

Question 29

What limit on the availability of quantum meruit payments was confirmed in Guinness plc v Saunders?

Answer 29

Held: where parties to an agreement have agreed how remuneration is to be determined, the court with not award a quantum meruit even if the agreement has not been implemented.

Question 30

Why are shareholders agreements entered into rather than their provisions appearing in the Articles?

Answer 30

To provide clarity regarding enforceability, as it is not always clear whether articles can be enforced.

Question 31

Can a company contract out of the statutory power to amend its Articles by entering into an agreement the performance of which would have the effect of denying the company that power?

Answer 31

Russel v Northern Bank development Corporation:

- the company cannot contract to deny itself the ability to amend its articles.

Question 32

Which shareholders are bound by a shareholders’ agreement?

Answer 32

Only those who entered into the contract at the time (i.e. not future shareholders).

Question 33

What are the remedies to a breach of a shareholders agreement?

Answer 33

Sue for damages for breach of contract.