Company Constitution

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Company Constitution

• Articles of Association
• Rosemary Craig BA LLB LLM PGCHEP

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Articles of Association

• Internal constitution
• Holding of Meetings
• Appointment of directors
• Declaration of dividends
• Appointment of company secretary
• Model Articles - Table A (CA 1985 s.8(2))

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S.14 CONTRACT

• s.14(1) -Subject to the provisions of this Act,
  the memorandum and articles, when registered,
  bind the company and its members to the same
  extent as if they respectively had been signed
  and sealed by each member, and contained
  covenants on the part of each member to observe
  all provisions of the memorandum and articles

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Special Features

• Unlike orthodox contract
• Court has no jurisdiction to rectify articles
• Prior to 1989 member could not sue for breach of
  his membership contract remedy limited to
  injunction or declaration
• S.131 CA 1989 - member can now claim damages

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Effect of Membership Contract

• Members are contractually bound to the company
  insofar as the articles give them rights in their
  capacity as members. S 14
• Company similarly bound to the members
• Articles constitute a contract between members in
  their capacity as members
• Company only bound to members in their capacity
  as members
• Rayfields v Hands (1958)

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Obligations enforceable by the membership of a
company

• Right of member to insist that once company had
  declared dividend, the dividend should be paid in
  accordance with the articles
• Right to share certificate
• Right to return of capital on winding up of
  company once creditors paid
• On valid transfer of shares, the right to have
  name on register of members

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Unenforceable Rights

• No articles can constitute a contract between a
  company and a third person
• No right purporting to be given by an article to
  a person, whether member or not, in a capacity
  other than that of a member can be enforced
  against the company
• Articles regulating the rights and obligations of
  the members generally as such do create rights
  and obligations between them and the company
  respectively

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Indirect Enforcement of outsider rights

• Theory A A member of a company has the right to
  enforce any obligation contained within the
  companys memorandum or articles, irrespective of
  whether the right is an insider or outsider
  right. However, the member must sue qua member
  and the enforcement of the obligation must
  constitute something more than the enforcement of
  an internal irregularity.

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Indirect Enforcement of outsider rights

• Theory B A member of a company has the right to
  enforce any obligation contained within the
  companys memorandum or articles. Nevertheless,
  where the member seeks to enforce an outsider
  right he can only do so where he sues qua member
  and the right is essential to the proper
  functioning of the company i.e. the right in
  question relates to the ability of a company to
  function within the constitutional framework of
  its own regulations and those imposed on it by
  statute.

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Alteration of the articles

• Special resolution CA85 s.9 Must be bona fide
  for the benefit of the company as a whole. Note
  test. Greenhalgh v Arderne Cinemas Ltd (1946)
• Special resolution S. 9(1) Malleson v National
  Insurance Guarantee Corporation (1894)
• Alteration may breach certain separate contracts
  of service and the company may be liable for
  damages
• Void if conflicts with memorandum
• Subscription for additional shares variation of
  class rights - special rules
• There are various methods for making articles
  unalterable weighted voting rights

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Is alteration bona fide?

• Two part test
• (1) Subjective - did the 3/4 majority
  honestly believe that the alteration would
  benefit the company as a whole? The Court will
  not substitute its own view
• (ii) Objective - was the alteration taken in
  good faith without the intention of producing a
  discriminatory effect on minority interests?

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The articles and new technology

• Notices of meetings of shareholders can be sent
  by e-mail
• Voting on a poll can be done electronically
• Proxies can be appointed by email
• Board meeting an take place through a series of
  video-conferences or telephone calls from the
  chairman
• The Companies Act 1985 (Electronic
  Communications) Order 2000 now applies