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whether or not the liability of the members is limited, and the method of limitation,
and
-details concerning the companys share capital and the subscriber's of the
company's first shares.
Modern Role of Memorandum - S. 8, CA 2006
-provides that the memorandum must state that the subscribers:
(1)A memorandum of association is a memorandum stating that the subscribers
(a)wish to form a company under this Act, and
(b)agree to become members of the company and, in the case of a company that is
to have a share capital, to take at least one share each.
(2)The memorandum must be in the prescribed form and must be authenticated by
each subscriber.
The Articles of Association
with the emasculation of the memorandum, the articles now form a
company's principal constitutional document.
article regulates the internal workings of the company and covers issues such
as the balance of powers between the member and the directors, the conduct
of the general meeting and certain issues pertaining to shares and the
distribution of assets
if a company chooses to limit its objects, the objects clause will also form part
of the articles
every company must have a set of articles (CA 2006, s. 18(1)) and
promoters are free to draft their own articles that suit their needs of their
particular business requirements and submit them upon registration
The Companies (Model Articles) Regulations 2008 provide model articles
Resolutions and Agreements affecting the Company's Constitution - Section 29 CA
2006
certain resolutions and agreements will also form part of the company's
constitution
The Constitution as a Contract
the courts have long held that a company's articles form a contract between
a company and its members and between the members themselves
section 33(1) CA 2006 expands upon this by stating that:
o the provisions of the company's constitution bind the company and its
members to have the same extent as if there were covenants on the
part of the company and of each member to observe those provisions
Accordingly, the company's constitution forms what is known as the 'statutory
contract' and imposes obligations upon:
o the company when dealing with its members
o the members when dealing with the company, and
o the members when dealing with each other
breach of certain provisions of the company's constitution may therefore
constitute breach of contract, thereby allowing the non-breaching party to
commence a personal action and obtain a remedy
however, not all of the constitution's provisions will amount to terms of the
statutory contract
The Statutory Contract - s. 33
such persons provided capital on the expectation that the company would
pursue the lines of business for which it was set up and would not expend
capital on frolics outside the company's stated purposes.
the problem was that the rules relating to ultra vires were overly complex,
technical and vague and served to harm third parties who had innocently
contracted with the company
the ultra vires doctrine also served to inhibit a companys ability to diversify
into other areas of business that could prove profitable
accordingly, successive Companies Acts have weakened the ultra vires
doctrine with the CA 2006 significantly curtailing its scope, especially in
relation to companies incorporated under the CA 2006 and third parties, for
whom the doctrine is now largely irrelevant
there is no doubt that the CA 1985 and CA 2006 have substantially weakened
the doctrine of ultra vires, but it has not been abolished (despite what other
sources say)
The Abolition of the Requirement to Include an Object Clause
the requirement of an objects clause has been abolished by the CA 2006
(although companies can still include an objects clause if they so wish) and
such companies will accordingly have unrestricted objects (CA 2006, s 31(1)).
- unless a companys articles specifically restrict the objects of the company,
its objects are unrestricted.
For such companies, the ultra vires doctrine will be of little relevance as the
companys contractual capacity will not be limited
This is the default position for companies incorporated under the CA 2006
of course, companies incorporated under previous Companies Acts will still
have an objects clause but, as a result of the CA 2006's reforms relating to
the memorandum, such an objects clause will now be regarded as forming
part of the company's articles and not its memorandum
As the articles can be altered by passing a separate resolution (CA 2006, s
21(1)), such companies can accordingly delete the objects clause by passing
a special resolution to that effect and, in doing so, will acquire unrestricted
capacity
Inclusion/Retention of the Objects Clause
the objects clause and the doctrine of ultra vires are still relevant in 2
instances:
1. Although companies incorporated in the CA 2006 do not need to
include an objects clause in their articles, they may do so if they wish.
It is anticipated that very few companies incorporated under the CA
2006 will include an objects clause
2. Companies incorporated under prior Companies Acts may decide not
to, or may neglect to, remove their objects clause. As regards such
companies, the objects clause will serve t olimit the directors' authority
and the ultra vires doctrine will still be of relevance, although, it has
lost much of its force.
External issue: s. 39, CA 2006: (1) 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 companys constitution - nobody can raise an issue that it
is ultra vires-ensures issues of capacity cannot be raised -cures capacity
problem
the result of s. 29(1) and 40(1) is that if a company or director enters into an
ultra vires contract with a third party, then the contract cannot be attacked in
the ground that it is ultra vires. Therefore, from the point of view of a third
party, the ultra vires doctrine is or little relevance, which is why it is often
stated that the CA 2006 abolishes ultra vires externally, because it is of little
concern to third parties
Internal issue: s. 40 -Also see s. 171(a),Directors are required to act in
accordance with the constitution so while the shareholders have limited
powers to enforce the constitution, the directors are bound by their duties to
adhere to it.
members join the company on the basis that contract may be changed
at any time
o Allen Test: the alteration must be bona fide for the benefit of the
company as a whole
o subjective test: would those voting in favour of alteration consider
the change to benefit the members or company as a whole and would
the reasonable man come to the same decision?
o members are able to vote in their own favour
o weighed voting rights & class rights (to protect the minority)
Drag and Tag Provisions: if offer was made to A, B, and C, and D does not
agree, D must drag ie. Re Charterhouse (below)
Allen v Gold Reefs of West Africa Ltd - Allen Test : the alteration must be bona
fide for the benefit of the company
o It held that alterations could not be interfered with by the court
unless a change was made that was not bona fide for the
benefit of the company as a whole. This rule served as a marginal
form of minority shareholder protection at common law, before the
existence of any unfair prejudice remedy.
o Facts: Gold Reefs articles gave it a "first and paramount lien" (the right
to retain possession) on all partly paid shares held by any member for
any debt owed to the company. Mr Zuccani held some partly paid up
shares. He also owned the only fully paid up shares issued by the
company. He died insolvent. The company altered its articles by special
resolution to create a lien on all fully paid shares (deleting the words in
brackets of upon all shares (not fully paid) held by such members). Mr
Allen, one of the executors of Mr Zuccani (trying to get money back)
sued to get the fully paid shares value.
o Kekewich J held the company could not enforce the lien. The company
appealed.
o Lien Definition: a right to keep possession of property belonging to
another person until a debt owed by that person is discharged
o Judgement: Lord Lindley MR held the alteration of the company's
articles was valid to introduce a lien on fully paid up shares. So long
as the resolution was done bona fide for the benefit of the
company as a whole, restrictions on freedom of a company to
alter its articles are invalid. According to Lord Lindley MR the power
to change the articles is, "like all other powers [to] be exercised to
those general principles of law and equity which are applicable to all
powers conferred on majorities and enabling them to bind minorities. It
must be exercised, not only in the manner required by law, but also
bona fide for the benefit of the company as a whole, and it must not be
exceeded. These conditions are always implied, and are seldom, if
ever, expressed...
o How shares shall be transferred, and whether the company shall have
any lien on them, are clearly matters of regulation properly prescribed
by a companys articles of association...
o It is easy to imagine cases in which even a member of a company may
acquire by contract or otherwise special rights against the company,
which exclude him from the operation of a subsequently altered
article...
o
The altered articles applied to all holders of fully paid shares, and
made no distinction between them. The directors cannot be charged
with bad faith.
Shuttleworth v Cox Brothers & Co
o Facts: The company's articles provided that its directors (one of whom
was the claimant) would hold office for as long as they wished, unless
they became disqualified by virtue of one of six specified events. The
claimant engaged in a financial irregularity, but it did not fall within
one of the six specified events. The other directors therefore used their
shares to pass a special resolution altering the articles by adding a
seventh event, namely that a director must resign if all the other
directors required him to. Following the alteration, the claimant's codirectors demanded his resignation. The claimant challenged the
alteration
o Held: The test imposed by Lindley is predominately subjective,
meaning that if the majority shareholders honestly believed
that the alteration was for the company's benefit as a whole,
then the alteration would be valid, even if the court disagrees
with the majority's assessment. On this basis the court held that
the alteration was valid, as the other directors did believe that it was
for the companys benefit. The Court did however, impose an
objective requirement, namely that an alteration would not be
valid if 'no reasonable man could consider it for the benefit of
the company'
o It is therefore apparent that a minority shareholder who wishes to
challenge an alteration on this ground will face a difficult task. As our
system of company law is based heavily on the principle of majority
rule, the courts are reluctant to invalidate alteration of the articles
Entrenched Article Provisions
CA 2006, s 22 - Entrenched Provisions of the Articles - there is a lack of
clarity
o (1) A company's articles may provide that specified provisions of the
articles may be amended or repealed only if conditions are met, or
procedures are complied with, that are more restrictive than those
applicable in the case of a special resolution. This is referred to as
"provision for entrenchment".
a company cannot make its article unalterable, however, the CA 2006
introduced the ability to entrench article provisions, thereby making them
more difficult to alter (s. 22 CA 2006)
this could be done by requiring additional conditions to be met (eg. by
requiring unanimity instead of the normal special resolution) or by imposing
restrictive procedures to be adhered to (eg. by requiring the alterations to be
approved by certain specified members).
In order to prevent abuse, the Act imposes several safeguards:
o Entrenchment will not prevent alteration where all of the members
agree to an alteration, or where the court orders an alteration to be
made
o if a company wishes to entrench an article provision after the company
has been formed, it can only do so with the agreement of all members
of the company
Drag and Tag along Provision: A drag along right allows a shareholder of a
company (usually a majority shareholder or institutional investor) to force the
remaining shareholders to accept an offer from a third party to purchase the
whole company, where the majority shareholder has accepted that offer, on
the same terms. The other (usually minority) shareholders are then "dragged
along" and forced to sell their shares at the same time and at the same price
for each share.
The aim is to provide liquidity and an exit route to the majority shareholder or
institutional investor for its investment as most buyers will want to acquire
100% of the company and not be left with a (potentially uncooperative, or
even hostile) minority shareholder group. It is sometimes known as a
"squeeze out" provision.