The Company's Constitution

Question 1

Outline the key constitutional documents of a company.

Answer 1

• CA 2006 (in force on 1 October 2009)
• CA 1985 – superseded by CA 2006 but some provisions still affect companies incorporated prior to 2006 Act.
• Articles of Association
• Articles of Memorandum

Question 2

What are the Articles of Memorandum of a company?

Answer 2

• This was a required part of a companies constitution under CA 1985.
• Under s 17 CA 2006 it is only required as part of the procedure to register a company at Companies House.
• It now simply amounts to a declaration on the part of the company’s subscribers of their wish to form a company and become members of that company (s 8 CA 2006).
• In CA 1985 this could include an objects clause setting out the purposes for which a company has been formed. Acting outside of this purpose is called ultra vires (beyond the powers).
• In CA 2006 companies have unrestricted objects (s 31 CA 2006) unless specifically restricted in the company’s articles (no ultra vires unless otherwise specified).
• For companies incorporated under the CA 1985, s 28 CA 2006 provides that provisions in a memorandum must be treated as provisions of the company’s Articles (i.e. are still in force), including object clauses, unless otherwise amended by the company.

Question 3

What are the Articles of Association?

Answer 3

• All companies must have articles of association (Articles) (s 18 CA 2006).
• Under CA 2006, Articles form the main constitutional document of a company.
• Its purpose is to regulate the relationship between shareholders, the directors and the company.
• Provisions include: number of directors required to transact business at meetings; method of appointment of directors; powers of directions; special rights attaching to shared; conduct of shareholders meetings; transference of shares.
• The Articles must comply with the minimum provisions of CA 2006 (known as the Legality Test).
• Some Article may be more onerous than those the requirements contained in CA 2006 (e.g. minimum of two directors could in Articles be four).
• Certain CA 2006 provisions override anything in a company’s Articles. For example, s 321 CA 2006 (the right to demand a poll vote at a general meeting) cannot be removed in the Articles.
• Some powers of companies are available by default under provisions of CA 2006.
• Always check the procedures set out in CA 2006/1985 and the company’s Articles.

Question 4

What are the three forms of Articles?

Answer 4

1. Model Articles (MA) – the Secretary of State has prescribed MA for different types of company (under s 19 CA 2006). If a company does not register Articles at Companies House, s 20(1) CA 2006 provides the relevant MA will constitute the company’s Articles in default.
2. Amended MA – many companies adopt the MA as their Articles, but exclude or modify some of its provisions.
3. Tailor made Articles – a solicitor drafts Articles for the company. Law firms often have a precedent form of Articles that can be adapted for this purpose.

Question 5

How can Articles be amended and what are the basic rules?

Answer 5

• By a special resolution (s 21(1) CA 2006), that is a decision of the shareholders
• Section 22 permits the entrenchment of specific provisions within a company’s Articles, which can only be amended or repealed if specific conditions are met or more restrictive procedures are used. Can always be amended by agreement of all members or by a court order (s 22(3) CA 2006).
• General rule – for an alteration to be valid it must be made bona fide in the interests of the company as a whole (Allen v Gold Reefs [1900] 1 Ch 656.
• Shuttleworth v Cox (1927) 2 KB 9 – an amendment to an article is not valid if no reasonable man could consider it to be for the benefit of the company.

Question 6

Name two case law examples of amending Articles.

Answer 6

• Sidebottom v Kershaw, Leese & Co Ltd (1920) 1 Ch 154 (Court of Appeal) – An alteration (provision allowing directors to buy out, at a fair price, the shareholding of any member who competed with the company’s business) initiated in good faith and bona fide in the interests of the company / to protect it was allowed to stand.
• Re Charterhouse Capital Ltd (2015) EWCA Civ 536 (Court of Appeal) – Amendment made (to permit compulsory acquisition of shares of a minority shareholder) was consistent with the terms of a shareholders’ agreement and was not open to challenge on other grounds such as unfair prejudice. The amendment was a tidying up exercise consistent with initial bargain of founding members. It was not made in bad faith, improper motive or irrationality, and there was no basis to challenge its validity.

Question 7

What is the Legal effect of the Articles?

Answer 7

• s 33(1) CA 2006 – provisions in the company’s Articles bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions (see also s 14 CA 1985).
• Binding on both the company and its members and enforceable.
• Generally established rule is that the Articles evidence a contract between the company and its members in their capacity as members and with respect to their rights and obligations as members (Hickman v Kent or Romney Marsh Sheep-Breeders’ Association (1915) 1 Ch 881 (Ch)).
• There is conflicting authority as to whether one member may enforce the Articles against another member directly (Rayfield v Hands (1960) Ch 1 (Ch)) or only through the company itself (Welton v Saffery (1897) AC 299). Key considerations in this are acceptance of a personal obligation to another member through the Articles. Otherwise a shareholders agreement should be used (private agreement between shareholders).