Company Constitution & Case Law

• Lecture about Company Constitution & Separation of Power and Corporate Management

The Constitution of a Company

• Setting up a company according to s.7(1) requires one or more persons to subscribe to a memorandum of association and comply with registration requirements.
• A constitution is needed because companies are artificial legal entities that need provisions to make decisions and act.

Definition of Company Constitution

• S.17 of the Companies Act 2006 (CA 2006) defines it as the company's articles and any resolutions and agreements to which Chapter 3 applies.
• It's a body of rules that specifies how power is distributed between shareholders and the board, including how it is exercised.

The Memorandum of Association

• Historically, this was an important constitutional document setting out the companies’ "objects."
• S.8(1) of CA 2006 says the memorandum states that subscribers wish to form a company and agree to become members, taking at least one share each if applicable.

The Articles of Association

• s.18(1) states That a company must have articles of association prescribing regulations.
• s.18(2) says That unless 'model' (i.e. default) articles apply, 'it must register the articles'
• s.18(3)(a) states Articles need to be contained in a single document

Model Articles

• Model Articles are available under CA 2006 and Companies (Model Articles) Regulations 2008, SI 2008/2339.
• There are three types of Model Articles; Schedule 1: model articles for private companies limited by shares, Schedule 2: model articles for private companies limited by guarantee, and Schedule 3: model articles for public companies limited by shares
• Model articles apply unless excluded by tailor-made articles and form the core organizational structure of UK registered companies.

Typical Contents of Articles

• Can be seen in Model Articles for private companies limited by shares.
• Part 2 covers Directors topics, like general authority (Art.3), shareholders' reserve power (Art.4), decision-making & board conduct (Arts.7-16), and appointment & pay (Arts.17-20).
• Part 3 covers Shares & Distributions, including issue (Arts. 21-25), transfer (Arts. 26-29), and dividends (Arts. 30-36).
• Part 4 addresses Decision-making by shareholders, and the conduct of general meetings.

Effect of Constitution

• CA 2006, states that when registered, a company's constitution binds the company and its members as if there were covenants to observe those provisions.
• It forms a contract between members and the company, and among the members themselves.

A Contract between Company and Member

• Wood v Odessa Waterworks (1889) highlights that the articles of association constitute a contract between each individual shareholder and the company.
• Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] says that articles regulating members' rights and obligations create respective rights and obligations between the members and the company.
• The CA 2006 s.33 has clarified it is treated as a party to any contract within its own articles.

A Contract between Members inter se

• Rayfield v Hands [1960] notes the articles of association of Field-Davis Ltd stated that members intending to transfer shares should inform the directors, who will take the shares equally at a fair value. Vaisey J concluded there was a contract enforceable by one member against another.

Who can Enforce the Articles

• Corporate organs can enforce articles related to a wrong to the company.
• Individual shareholders can enforce articles related to a wrong to a member.
• Pender v Lushington (1877) says it is a matter of internal management.
• MacDougall v Gardiner (1875) involves a member's personal rights.

Establishing Members' Personal Rights

• Pender v Lushington (1877) was about splitting shares; Jessel MR noted that a member is entitled to have their vote recorded, which constitutes an individual right.
• MacDougall v Gardiner (1875) involved the adjournment of a general meeting; Mellish LJ stated that if the majority is entitled to do something regularly or legally, then litigation is useless.

Outsider Rights

• Eley v Positive Government Security Life Assurance Company Ltd (1876) held the articles of association were a matter between shareholders and did not create any contract with the claimant. Browne v La Trinidad also affirms the articles are a contract between companies and members, not with a member 'as director'.

Further Cases on Enforcement

• Only parties to the constitutional 'contract' can enforce its provision ( company and shareholders)
• Directors, employees and other 'outsiders' cannot enforce the constitution.
• Salmon v Quin & Axtens Ltd [1909] granted an injunction shows that a member had a membership right to require to act in accordance with its articles.
• Beattie v E and F Beattie Ltd [1938] failed to restrain legal proceedings as he sought to enforce terms as an outsider.

Alteration of Articles

• S 21 Companies Act allows alteration via special resolution (75% agreement) passed by members at a General Meeting
• Alterations of articles are subject to the provisions of the Companies Act & conditions in the Articles

Restrictions on the Alteration of Articles

• Entrenchment of articles (s 22 CA 2006) is when the articles may contain provision to the effect for provisions to be amended or repealed.
• Altered articles are void if they conflict with the Companies Act or with a Court Order

More Restrictions on the Alteration of Articles

• Shareholders must exercise their power to alter articles in good faith and for the best interests of the company as a whole.
• Alterations may be void if majority approval isn't acting bona fide.

Further Cases on Good Faith Check:

• Greenhalgh v Ardene Cinemas Ltd [1951] involved deleting a provision for pre-emption rights, emphasizing that alterations must benefit the company as a whole as a general body of corporators.
• Other included cases are Sidebottom v Kershaw Leese & Co Ltd [1920] and Clemens v Clemens Brothers Ltd & Anor [1976].

Shareholder Agreements

• Shareholder Agreements provide protections and or special rights for certain shareholders.
• These rights may be to sit on the Board of Directors or appoint nominee, exercise special voting rights in general meeting and pre-emption rights on transfer of shares

Pros and Cons of Shareholder Agreements

• Enforceable as of right is a pro of the agreement creating rights and obligations between members.
• Unanimity is needed for variation and there is privacy because there is no need to register
• A con is privity because the new owner of the shares is not bound by the agreement.
• Agreements are not always binding on the company if the subject matter affects statutory company obligations.

Legal Importance of Articles - A Summary

• The articles bind members to company, company to members and members to other members
• Articles do not bind company to third persons
• There are important restrictions on alteration to protect other interested parties

Corporate Management and Separation of Power

• Organs of a company Includes those who can act as the company, according to the constitution.
• The members are shareholders in the "general meetings" and the directors are the "board of directors"

The Role of the Articles and CA 2006

• The articles of association the backbone of the company's constitution.
• It determines the division of power and provides how organs "act."
• Default rules are rules are expressed to apply "subject to any provision of the company's articles", e.g. general rules of voting
• Mandatory Rules include amendment of articles (s.21); removal of directors

Allocation of Power between 'Organs'

• Allocation of Power between 'Organs' derived from company law legislation, Articles of association and model articles
• Art 3 states the Directors’ general authority is subject to the articles and are responsible for the management of the company's business
• Art 4 says Shareholder possess reserve power by special resolution to direct the directors to take, or refrain from taking specified action

Distinguish between 'Organs' and 'Agents' of Company

• Organs act as the company. such as the CEO.
• Agents, are appointed by organs to act on behalf of the company

Rise of Board Autonomy

• Buckley LJ states that Directors are not servants and bound to serve the shareholders as their principals.
• The members as Shareholders are unable and uninterested in exercising control

The Effect of Board Autonomy

• Greer LJ states if powers of management are vested in the directors, they and they alone can exercise these powers.
• The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles.

Matters Reserved to Members by Statute

• Includes the alteration of articles (s.21)
• The Approval by GM of certain transactions between company and directors
• Provisions as to Capital (e.g. s. 551: authorisation to allot share)
• Removal of directors by ordinary resolution: s.168

Other instances of Members Exercising Power

• Alexander Ward & Co Ltd v Samyang Co Navigation Ltd, state that is in the absence of an effective board the general meeting of members has residual authority to use the company powers
• Appointing of directors
• Affirmation/ratification of unlawful act by Board of Directors

Options For Shareholders Who Do Not Agree With the Board of Directors

• Options include exiting the company, altering the articles, refusing to re-elect directors, removing directors with an ordinary resolution and derivative action.

Resolutions

• An ordinary resolution by the members which is passed by a simple majority (S 282)
• A special resolutions by the members meaning a resolution passed by a majority of not less than 75%(S 283)

Directors

• S.250 the Companies Act 2006 director includes any person occupying the position of director
• S.154 states minimum number requirement for private companies os 1 director and for public companies is 2 directors
• S.157 states the minimum age requirement is 16

Categories of Directors

• Categories include Executive and non-executive directors
• de jure and de facto directors
• Shadow director, defined as a person in accordance with whose directions or instructions the directors of the company are accustomed to act
• All directors above are subject to the same duties

Removal of Directors

• A company may by ordinary resolution at a meeting remove a director, notwithstanding anything in any agreement (s 168)
• Bushell v Faith stated that by resolution where shares carry the right to three votes per share.

Board Structures

• A unitary board is has a single governing body and have both Executive and or non-executive directors
• A Two-Tier (Dual) Boards has a supervisory board and an executive management board and the management board is responsible for the running of the business.
• A system of corporate governance has the UK unitary board.

Explore company constitutions, emphasizing key cases like MacDougall v Gardiner and Eley v Positive Government Security Life Assurance Company Ltd. Understand the role of articles of association and their impact on company governance. The constitution is used to establish rules to govern power distribution.