Company constitution and article of association

The company’s constitution and the article of association

A company constitution includes the articles and any resolutions and agreements affecting the company’s constitution (section 17 and 29).

Historically a memorandum of association was part of the company constitution, but today it only sets out the names of the subscribers who wish to form a company and who agree to be members of a company (section 8(1)).

The articles of association are the internal rules of the company. It contains the central governance arrangements for the interaction of the shareholders, company and the board. The article of association usually contains the allocation of power between general meeting (the members’ committee) and the Board of Directors (the management committee).

All companies must have its article of association and register it (section 18). On incorporation, the founders of a company are free to draft their own set of articles. If they do not provides such a set of articles, by default a set of model articles is provided by the Companies (Model Articles) Regulations 2008.  

The Previous Companies Acts have provided a single set of articles for both private and public companies; The CA 2006 and Companies (Model Articles) Regulations 2008 have now provided separate articles of association for public and private association.

You can download Companies Act 2006 here: http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf

Alteration of the company’s constitution

Section 21(1) provides that a company may amend its articles by special resolution (75 per cent).

Article of association cannot be made unalterable; Article of assosiation is always subject to alteration (Punt v Symons & Co Ltd).

According to Lindley MR in Allen v Gold Reefs Co of West Africa (1900), the alteration of the Article of association must be complied with the law and bona fide for the benefit of the company as a whole.

In Greenhalgh v Arderne Cinemas (1951), the articles provided that any member who wishes to sell their shares must first offer to the other members at a fair value (preemption right). The company amended its Article of association by special resolution in general meeting, allowing existing the shareholders to offer the shares to outsiders. It was claimed that the majority shareholder proposed and voted with the motive to achieve a personal dealing with an outsider. The court held that the alteration was mala fides and was therefore invalid.

In Clemens v Clemens Bros Ltd (1976), the court refused to recognize the allotment of shares proposed by the majority shareholder because the motive behind the share allotment was to dilute the voting power of the minority shareholder claimant.

The articles may also altered by the informal agreement of all the members. For example, in Cane v Jones all the members agreed to change an article which gave the chairman a casting vote. The court held that the alteration is valid and the chairman was then no longer had a casting vote.

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Section 33 Companies Act 2006 - Between the company and its members

Section 33(1) provides that the provisions in company’s constitution have a contractual effect that binds the company and its members.

In Hickman v Kent or Romney Marsh Sheep-Breeders' Association (1915), the constitution provided that any dispute between the company and its members shall be referred to arbitration. The court held in favour of the company, and held that the constitution is contractually binding between the company and its member.

In Pender v Lushington (1877), a provision in the company’s constitution provided that no member would be allowed to vote on more than 100 shares at any meeting, and each block of ten shares was counted as one vote. The claimant had 1000 shares, which he split and registered the holders under the names of a number of nominees. At the meeting the chairman refused to count the vote cast by the nominees. It was held that the nominees had a right to vote as the constitution allowed them to do so.

In Wood v Odessa Waterworks Co (1889), the directors recommended that members should be given debenture-bonds (instead of cash) and this was approved in the general meeting. The claimant applied for an injunction to prevent the dividends being paid out as proposed by the resolution.  He argued that the proposal of the directors was inconsistent with the company’s constitution and therefore ultra vires. The court held in favour of the claimant and stated that the majority shareholder could not bind the minority to accept a dividend payment in a means other than cash.

Section 33 Companies Act 2006 - Between the member inter se

In Wood v Odessa Waterworks Co (1889), Stirling J considered (dicta) that the article of association constitutes a contract not merely between the company and its members, but also between each individual members and every other.

Astbury J in Hickman v Kent or Romney Marsh Sheep-Breeders' Association (1915) considered (dicta) that since article of association regulates rights and obligations of the members, it does create rights and obligations between them and the company respectively. 

In Welton v Saffery (1897), Lord Herschell commended (dicta) that the article of association does not create contract between the members inter se and it is only enforceable by the company.    

In Salmon v Quin & Axtens Ltd (1909), Farwell LJ considered Stirling J’s dicta and was of the opinion (dicta) that the court would not enforce the article of association between the individual shareholders in most cases.

In Rayfield v Hands (1960), the article of association provided that every member who intends to dispose share must inform the directors of their intention and the directors must take the said shares equally between them at a fair value. The claimant wished to sell his shares and the directors refused to take the shares. It was held that the article of association intended for the directors to be bound as members in some situations (OTF to purchase the share) and therefore the directors were bound by articles in their capacity as members. The article of association is enforceable between the claimant as a member and the defendants not as directors but as members. It shall be noted that Vaisey J did not think that this decision was of general application; rather, it was a quasi-partnership that he was dealing with. Vaisey J has taken into account the obiter dicta statement made by Lord Herschell in Welton v Saffery (1897).

Hence it is unclear that out of a quasi-partnership situation, whether the article of association is directly enforceable by an individual member against another individual member. Barc and Bowen (1988) argue that Lord Herschell’s dictum, together with the quasi-partnership exception provided by Vaisey J, represents the correct position.

The CLRSG in their Final Report recommended that the law requires clarification and suggested that all rights in the constitution shall be enforceable against the company and its members unless the constitution provides otherwise.

It shall be noted that during the Grand Committee stage of the Bill in the House of Lords, Lord Wedderburn tabled an amendment to section 33 which would have clarified the relationship between the company and the members, but this was rejected by the government.

Section 33 Companies Act 2006 - Insider and outsider rights

The rule in Foss v Harbottle (1843) is that when a wrong has been committed against the company, the proper claimant in respect of that wrong is the company itself. An individual shareholder is not empowered to initiate proceedings for a wrong to the company.

If the breach in question is a wrong to the company then only the company can sue. However if it is classified as a personal right of the shareholder then the individual shareholder can sue.

According Astbury J in the case of Hickman v Kent or Romney Marsh Sheep-Breeders' Association (1915), then article of association does not create a contract between a company and a third person. A person, whether a member or not, in a capacity other than of a member, cannot enforce the article of association against the company. The article of association regulates rights and obligations of the members, thus it does create rights and obligation between them and the company respectively.

The Court of Appeal in Beattie v E & F Beattie Ltd (1938) was influenced by Hickman, held that a clause in article of association which referred any member disputes to arbitration was not enforceable by a member in his capacity as a director. The court suggested that the action was brought by the director in his capacity as a director; a claim may succeed if it was brought in his capacity as a member.

In Eley v Positive Government Security-Life Assurance Co Ltd (1876), the article of association it stated that a particular member of the company was to be appointed as the company’s solicitor. He was not appointed as the company’s solicitor and sued for breach of contract. The court held that he could not enforce the provision because he was attempting to enforce his rights as solicitor, not as member. There was no contractual relationship between member as ‘solicitor’ and the company.

In Salmon v Quin & Axtens Ltd (1909), the claimant was the member and also one of the managing directors of the company. The article of association provided that the consent of the company’s managing directors was required for certain decisions. He dissented from a decision to buy and let property, but the decision was later authorized by the board in a general meeting. He sought an injunction, in the capacity of member, to prevent the company acting in breach of the provision. The House of Lords affirming Court of Appeal, held that the claimant as a member of the company, was entitled to enforce the article of association against the company. However it shall be noted that the article of association was actually affected him in his ‘outside capacity’ as managing director of the company.

In Globalink Telecommunications Ltd v Wilmbury Ltd (2003), it was held a directors’ indemnity provision in the Article of association wound not be binding because the article of association does not constitute a contract between a company and its officers. It will only bind the company if the provision is contained in a separate contract between the company and the officer.

One may be argued that there are conflicting judgments in MacDougall v Gardiner (1875) and Pender v Lushington (1877). In Pender v Lushington, it was held that members could enforce their voting rights as provided in Article of association against the company. However in MacDougall v Gardiner, the chairman had adjourned a general meeting of the company without putting the question of adjournment to a vote as requested by a shareholder (in breach of the Article of association). The court considered that the voting right may not be enforceable if the breach complained of could be ratified by a majority resolution. The refusal did not infringe the personal right of the individual shareholder, but rather, it was a harm done to the company. Since the harm was done to the company the company is the proper plaintiff, unless the majority is abusing their power to deprive the minority’s rights (a derivative action would be available then).

Lord Wedderburn (1957) in his article on Foss v Harbottle suggests that the following have been considered personal rights in the past: voting rights, share transfer rights, a right to protect class rights, pre-emption rights, the right to be registered as a shareholder, the right to obtain a share certificate, the right to enforce a dividend that has been declared, the right to enforce the procedure for declaring the dividend, the right to have directors appointed in accordance with the articles and other procedural rights such as notices of meeting.  

Alan Dignam & John Lowry concluded that the outcome of the law is ultimately depending on the view of individual judges. Some judges hold strongly to the view that the courts should not interfere in the internal affairs of the company. In essence they view it as a private arrangement in which they should not interfere except in exceptional circumstances. Other judges prefer to emphasize the contractual nature of the company’s constitution and enforce it where they can.  

You can read the majority rule and overview of shareholder's remedies here: http://thewallyeffect.blogspot.my/2017/10/the-majority-rule-and-shareholders.html

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Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

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