The Company’s Constitution PDF

The Company’s Constitution 79 CHAPTER 4 The Company’s Constitution 4.1 Introduction 79 4.2 Definition...

The Company’s Constitution 79 CHAPTER 4 The Company’s Constitution 4.1 Introduction 79 4.2 Definition 79 4.3 The articles of association 79 4.4 Amending the constitution 84 4.5 The memorandum of association 87 4.6 Companies formed under the Companies Act 1985 87 4.7 Summary of options regarding articles 93 4.8 Provision of constitutional documents 93 LEARNING OUTCOMES After reading this chapter you will be able to: understand the role of the company’s constitution identify the legal rules governing the existence and content of the company’s constitution explain how and why a company can change its constitution. 4.1 INTRODUCTION Every company has a constitution. This comprises certain key documents which evidence the existence of the company, state its current share capital (the amount of money shareholders have invested in the company by buying its shares) and, most significantly, set out the rules which govern how the company should be run. The constitution is important not just for its content but because it represents a special type of contract between the company, as a separate legal person, on the one hand, and the shareholders, the owners of the company, on the other. It also represents a special type of contract between the shareholders themselves. We shall explore these issues further in this chapter. 4.2 DEFINITION The company’s constitution is defined in ss 17, 29 and 32 of the CA 2006. It includes: (a) the company’s articles of association; (b) its certificate of incorporation (see 3.16 above); (c) its current statement of capital (see 9.3.1 below); (d) copies of any court orders and enactments (ie legislation) altering the company’s constitution; (e) resolutions (shareholders’ decisions) affecting the constitution; (f ) agreements involving shareholders which affect the constitution (see 5.6.2.2 below). 4.3 THE ARTICLES OF ASSOCIATION The articles of association are the most important part of the company’s constitution. As we saw at 3.12, every company must have a set of articles of association which lays out the rules on 80 Business Law and Practice how the company is to be run (CA 2006, sb18(1)). The articles form the company’s internal rulebook. There are many legal rules governing how a company should be run, all of which must be complied with, principally in the CA 2006 but also in decisions of judges under the common law. Nevertheless, company law in the UK seeks to allow a certain amount of flexibility to companies regarding how they run themselves, in recognition of the fact that companies are set up for different purposes and can vary tremendously in size. Certain provisions of the CA 2006 will therefore apply only if they are expressly included by the company’s articles. The 2006 Act also allows certain, but by no means all, of its provisions to be excluded by the company’s articles. In other words, the owners of each company may decide for themselves, up to a point, how it should be run by what they put in its articles. The articles of a particular company are therefore essential to help clarify what the powers of the directors, as managers of that company, and those of the shareholders, as owners of that company, are. The articles will also shed light on how decisions should be taken in that particular company. It is possible to include restrictions on what a company can do in the articles too. The company’s articles will always be available for inspection by the public because they are available for inspection at Companies House. This allows those thinking of dealing with the company to see how that company should be run and, if they are included, any restrictions on its operations. The articles must be contained in a single document and be divided into consecutively numbered paragraphs (CA 2006, s 18(3)). This makes it easier for everyone involved in the company or dealing with it to obtain a complete and clearly laid-out copy of the company’s own rules. We saw at 3.12 that there are three options for a company’s articles, which will initially be chosen by those setting up the company. The articles will be: (a) unamended model articles of association; or (b) model articles of association with amendments; or (c) bespoke articles of association. The impact on a company of each of these options is examined below. 4.3.1 Unamended model articles A company registered with no other articles will by default have unamended model articles as its articles (CA 2006, s 20(1)) (see 3.12.1 above). For companies considered in this book, this will be the set of model articles for private companies limited by shares. They are set out in the Companies (Model Articles) Regulations 2008 (SI 2008/3229). They were drafted under powers given to the Secretary of State for DBT by s 19 of the CA 2006. They apply to all private companies limited by shares formed on or after 1 October 2009 where no other articles are registered. 4.3.1.1 Use of model articles The model articles comprise a set of minimum basic rules on running the company. They have been specifically drafted with small business owners in mind and to keep regulation to a minimum. They will therefore be used, rather than amended model articles or bespoke articles, if those forming the company are currently running a small business or do not wish to use anything more comprehensive, or if time is of the essence and a private company must be formed from scratch very quickly. However, remember that the entrepreneurs setting up a company have a choice and are not compelled to use the model articles. 4.3.1.2 Content of model articles Table 4.1 shows which articles cover which matters in the model articles for a private company limited by shares.  The Company’s Constitution 81 Table 4.1 Content of the model articles for a private company limited by shares Article numbers Subject 1–2 Defined terms and liability of members 3–6 Directors’ powers and responsibilities 7–16 Decision-making by directors 17–20 Appointment of directors 21–29 Shares 30–35 Dividends and other distributions 36 Capitalisation of profits 37–41 Organisation of general meetings 42–47 Voting at general meetings 48–51 Administrative arrangements 52–53 Directors’ indemnity and insurance Such is the importance of the articles of a company that we shall be considering them throughout the remainder of this part of the book. The provisions of the model articles will be explained as and when they become relevant, as we examine how a company operates and how those involved with the company take decisions on its behalf. These model articles are likely to remain the same or predominantly the same for many years to come, so they will still have relevance well into your career in practice. One example of the content of the model articles will suffice for now. Article 21 states: (1) No share is to be issued for less than the aggregate of the nominal value and any premium to be paid to the company in consideration for its issue. (2) This does not apply to shares taken on the formation of the company by the subscribers to the company’s memorandum. This means that a company which adopts unamended model articles may issue only fully-paid shares after its formation (see 2.3.4 above). Issuing shares is a means by which a company may raise money for its purposes. Only those shares referred to in the company’s memorandum, namely the very first shares of the company, may be issued partly paid (see 2.3.4 above). In other words, although it is perfectly possible for a company to issue partly- paid shares under English law (ie shares for which the company does not receive all the money at the time they are issued), by adopting unamended model articles the owners have decided that under its rules (art 21) it should not be allowed to do so. The advantage of including this rule, even though it is not necessary, is that it ensures that the company will receive and be able to use all the money for the shares at the time they are sold. If it sells £10,000 worth of shares it will get all the money immediately, and not (say) £5,000 at the time of the sale and £5,000 at some point in the future. When considering the model articles it is important to ensure that you always check the definitions in art 1, as they will provide further clarification of the wording of the model articles. For example, the words ‘shares’ and ‘paid’ in art 21 are defined. 4.3.2 Amended model articles When a company adopts unamended model articles it must abide by all of the 53 articles (see Table 4.1 above). It will often be the case that some of these rules are not suitable for a particular company. For example, the company may wish to issue partly-paid shares, which would not be possible under art 21 of the model articles (see 4.3.1 above). Further, as the model articles represent a bare minimum set of rules, some entrepreneurs will want to set up their companies with additional articles to provide greater clarity on how the company should be run. In order to accommodate these changes, it is possible to adopt amended model articles (or adopt a different set of articles altogether, as explained at 4.3.3 below). 82 Business Law and Practice When setting up a new company with amended model articles, only a copy of the changes to the model articles need be submitted with the application for registration (in accordance with s 20(1)(b) of the CA 2006). The amendments or any new articles included are known as ‘special articles’ to distinguish them from the model articles themselves. The first article of the amended model articles will include wording which expressly states that the model articles shall be the articles of the company except where they are modified or excluded by or are inconsistent with the special articles. This means that only the amendments to the model articles and entirely new articles need to be written down. In practice this means that when considering the articles of such a company, you will need to get a copy of the unamended model articles, and then read the special articles to see which of the 53 model articles this company has retained unamended, which of the model articles it has amended (and how) and which special articles are entirely new (and what they mean). 4.3.2.1 Special articles Some examples of special articles which are used by companies amending model articles for a private company limited by shares are set out in 4.3.2.2 to 4.3.2.8 below. They represent some of the simpler amendments which are made to the model articles. 4.3.2.2 Directors’ meetings The provisions for holding directors’ meetings and the way in which directors can take decisions under the model articles are very flexible. It may be appropriate in some companies to amend the model articles to make decision-making by the directors more formal, for example by requiring a minimum period of notice be given before a directors’ meeting may be held (there is currently no such provision), or to limit the ability to take decisions by some electronic means, such as text messaging, by amending model art 10. 4.3.2.3 Directors’ interests in transactions In certain cases, art 14 of the model articles prevents a director who has a personal interest in a transaction with the company from voting at or participating in a board meeting dealing with the transaction. A special article may be included to allow directors to vote on and participate in any matter at board meetings, even where they have a personal interest in the transaction in question. Where the company has only one or two directors, such an article may prove useful, as it is common for directors in a small company to have such a personal interest (eg when discussing a proposed contract with another company in which one of the directors is a shareholder, or when deciding their own salaries). A personal interest might otherwise prevent a director from voting at a board meeting, and if an insufficient number of directors is present at the meeting who are entitled to vote, no decision can be taken on the transaction at the board meeting. (See further 8.4.3 below.) 4.3.2.4 Directors’ conflict of interests In situations other than those suggested in 4.3.2.3 above, a director may still be in a potential position of conflict with their company which may breach their duties as a director under s 175 of the CA 2006. For example, if a director takes a decision on a contract between two different companies when the director is a director of both companies. Section 175 of the CA 2006 expressly allows a private company to permit the directors to authorise a situation which would otherwise breach s 175 (see 7.11.1 below) provided the articles do not prevent this. The model articles contain no such provision and will need to be amended if they are to include one. 4.3.2.5 Number of directors The minimum number of directors for a private company is one, by virtue of s 154 of the CA 2006. The model articles do not state a minimum or maximum number of directors for a company, so any number may be appointed. However, some companies may wish to state  The Company’s Constitution 83 expressly that the minimum number of directors shall be two, or even more. This is because, under the model articles, a single director can act alone, with all the powers given by the articles and company law. The shareholders may decide that their company’s best interests are best served by there being at least two decision-makers on the board. 4.3.2.6 Absence of directors There is no power in the model articles for a director to appoint a temporary replacement if the director should be out of contact for a period of time. Although the model articles do allow great flexibility as to the means by which directors may take decisions, some companies may nevertheless wish to include a formal arrangement to appoint an ‘alternate’ director, who will act during the director’s absence with the powers set out in the special article. 4.3.2.7 Company secretary A private company does not need to have a company secretary (CA 2006, s 270(1)), and this is reflected in the model articles. If the company does decide it needs one, it may choose to amend the model articles to include the powers of the secretary and the terms of such an appointment. However, this is not necessary and the appointment can be made under the directors’ general powers under model article (MA) 3. 4.3.2.8 Issuing shares to new shareholders This is a special article which gives the directors the freedom to sell new shares to new shareholders by removing the statutory pre-emption rights of existing shareholders. These rights, under s 561 of the CA 2006, allow the existing shareholders to be offered the chance to buy any new shares before they are offered to outsiders (see 9.3.3 below). This special article therefore enables the directors to get on with the business of issuing the new shares and raising the necessary capital for the company without having to call a shareholders’ general meeting to ask the existing shareholders to waive these pre-emption rights. 4.3.3 Bespoke articles A company may be set up with its own tailor-made set of articles without reference to the model articles. In this case the articles must be submitted when the company is set up (CA 2006, s 18(2)). A lawyer will be required to draft these bespoke articles, to ensure that the provisions of the CA 2006 and company law are complied with. The advantage of bespoke articles is that they can be drafted to the exact requirements of the private company’s owners. The bespoke articles will usually as a minimum cover the same topics as the model articles (sometimes using the exact wording of an article in the model articles), and may in addition include some or all of the special articles referred to at 4.3.2 above and other special articles dealing with additional matters affecting the company’s operations. 4.3.4 Effect of the articles Under s 33(1) of the CA 2006, the constitution of a company (of which the articles are the most important part) forms a contract between the company and each of its members. In addition, the constitution forms a contract between all the company’s shareholders. The effect of s 33 is to create contracts in circumstances when they would not otherwise exist under contract law. In particular, it ensures that parties have special contractual rights relating to the articles, which set out the rules of the company. For example, where a company, X Limited, issues shares to two different shareholders, there would ordinarily be no contractual relationship between the shareholders. Each shareholder has a separate contract with the company to buy shares. Section 33 creates an additional contract between the two shareholders on the basis of the articles. This helps to ensure that both shareholders abide by the articles, as a remedy may be available for breach of contract if the articles are not observed. (See Figure 4.1.) 84 Business Law and Practice Figure 4.1 Contract between the company and its shareholders under CA 2006, s 33 2. CA 2006, s 33 establishes contract Shareholder 1 Shareholder 2 1. issues shares to X LIMITED Section 33 also ensures that there is a contract where a shareholder in the company sells their shares to another shareholder. In Figure 4.2 below, s 33 creates a contract between the new shareholder and Y Limited, and they must both abide by the articles. Figure 4.2 Contract between the company and new shareholder under CA 2006, s 33 2. sells shares to Original Shareholder New Shareholder 1. issues 3. CA 2006, s 33 shares to establishes contract Y LIMITED Section 33 in effect provides a means for a shareholder to take action against the company or against another shareholder for breach of their contractual rights as set out in the articles and in the rest of the constitution. However, it is important to note that the s 33 contract is a very different type of contract from a trading contract to buy and sell goods or services. The contract allows for action to be taken only in so far as it deals with membership rights (Beattie v E and F Beattie Ch 708). These include such entitlements as the right to vote, the right to attend general meetings and the right to a dividend if one is declared (see 9.8 below). By contrast, anything which purports to bind the company and its members but which deals with rights other than those of a member in their capacity as member (such as the right to be a director (Read v Astoria Garage (Streatham) Ltd Ch 637), or the right to be appointed the company’s solicitor (Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 ExD 88) or how a shareholder will vote) will be unenforceable if included in the articles of the company. Such matters must therefore be dealt with in a separate contract, such as a shareholders’ agreement (see 5.6.2.2 below). It should be noted that the courts are much less keen to give effect to membership rights between shareholders of a company (ie as opposed to between a shareholder and the company) by a s 33 contractual claim. The only case in which an action between shareholders was successful was Rayfield v Hands Ch 1. There are, though, other possible remedies for an aggrieved shareholder, for example a petition to the court for unfair prejudice under s 994 of the CA 2006 (see 5.6.3.14 below). As the articles amount to a contract, it is possible for additional terms to be implied if necessary to give effect to the contract, for example as a result of court proceedings about a dispute over the meaning of the articles (Cream Holdings Ltd v Stuart Davenport EWCA Civ 1287). 4.4 AMENDING THE CONSTITUTION As a company evolves over time, the directors and shareholders may find that elements of the constitution which were, or were thought to be, suitable are no longer so. Circumstances  The Company’s Constitution 85 change, and sometimes the company’s constitution must be amended to reflect this. For example, if a shelf company has been used to start up a new business (see 3.18 above) then changes may be necessary immediately in order to structure the company in the way the entrepreneurs wish (eg, amendments to the model articles, as explained at 4.3.2 above). Alternatively, a company which has been owned by family members may bring in investors from outside the family, and changes may therefore be needed to the constitution. The key constitutional document for a company is its articles. We therefore now consider how a company’s articles may be amended. Note that it is possible to make more than one change to the articles at the same time (indeed to replace them entirely) and for the company to make amendments to its articles at any time throughout its existence. There are two separate procedures for amending the articles. The first is for the amendment of ordinary articles. This will be relevant for the overwhelming majority of amendments to the articles. The second is for amending any so-called ‘entrenched’ articles. This is rarely used. 4.4.1 Amending the articles The shareholders of the company must usually pass a special resolution to change the articles of a company (CA 2006, sb21(1)). We consider shareholders’ resolutions in greater detail at 8.7.7.3 below. For now it is sufficient to be aware that a shareholders’ resolution is simply a decision of the shareholders, and that being ‘special’ it must be passed by a majority of not less than 75% (CA 2006, s 283(1)). This again demonstrates why the contract which arises under s 33 is different from an ordinary trading contract. The fact that the articles, part of the company’s constitution, can be changed without the complete agreement of all parties runs counter to the usual principles of contract law which ordinarily require unanimous agreement. The decision is made by the shareholders as owners of the company rather than by the directors managing the company, in recognition of the importance of the articles to the company’s existence. If the shareholders have sufficient votes to pass the special resolution, the articles of the company will be amended. The Registrar of Companies must be sent a copy of the articles as amended not later than 15 days after the amendment takes effect (CA 2006, s 26(1)). Usually the change takes effect immediately. In addition, a copy of the special resolution itself must also be sent to the Registrar of Companies within 15 days after it has been passed (CA 2006, s 30(1)). These two documents will be put on the company’s file at Companies House and thus will be publicly accessible. It should be noted that in a couple of exceptional cases the CA 2006 permits changes to the articles of a private company by an ordinary resolution of the company’s shareholders. An ordinary resolution may be passed by a simple majority (ie over 50%) (CA 2006, s 282(1)) and is therefore potentially easier to achieve than a special resolution. If the directors have authority under the articles to allot new shares in the company, an ordinary resolution of the shareholders may revoke, vary or renew this authority (CA 2006, s 551(8)). The reason why a special resolution is not required for such an amendment is that this directors’ authority is often not included in the articles, and in such a case a decision to change it is usually taken by an ordinary resolution under the CA 2006. The directors’ authority to allot is explained fully at 9.3.2 below. Another example of a change to the articles by ordinary resolution is found in s 685(2) of the CA 2006, which relates to a special type of shares, known as ‘redeemable’ shares, sometimes issued by a company. If necessary the court can rectify the articles, as seen in Folkes Group plc v Alexander 2 BCLC 254. In this case there was an amendment to the company’s articles which was disputed. The court said that the literal interpretation of the amendment led to an absurd 86 Business Law and Practice result. In order to give proper commercial effect to the articles, new words would be inserted in the articles by the court. Of course, this situation would arise only exceptionally. 4.4.2 Restrictions on amending the articles The shareholders are nevertheless restricted in a number of ways as to the changes they can make to their company’s articles. 4.4.2.1 Restrictions under the CA 2006 The shareholders cannot amend the articles so as to conflict with a mandatory provision of the CA 2006 (Allen v Gold Reefs of West Africa 1 Ch 656). The CA 2006 contains provisions which are both voluntary and mandatory. Voluntary provisions are either those that will apply unless they are excluded by the company’s articles, or those that will not apply unless the shareholders choose to include them in the company’s articles. An example is s 31(1) of the CA 2006. This provides that ‘unless a company’s articles specifically restrict the objects of a company, its objects are unrestricted’. The objects of a company are the powers of the company. In other words, the basic rule in s 31 is that a company has unrestricted powers unless the shareholders specifically choose to place a restriction in the articles, such as that the company shall not borrow more than £50,000. Mandatory provisions of the CA 2006 are those which cannot be excluded by the company’s articles. For example, s 355(2) of the CA 2006 requires a company to keep a record of the proceedings of shareholders’ meetings for 10 years. An attempt by the shareholders to include a provision in the company’s articles reducing this period to one year would be void, and would in fact be a criminal offence under s 355. How do you tell the difference between mandatory and voluntary provisions? Usually the voluntary provisions will explicitly state that they are subject to the articles. We saw that s 31 includes the wording ‘unless a company’s articles …’. This qualifier is expressed in the CA 2006 in a number of different ways, including by phrases such as ‘subject to the company’s articles’ or ‘this section applies where provision is made in the company’s articles to …’. Mandatory provisions often state that an offence will be committed for non-compliance. In addition, s 25 of the CA 2006 specifically provides that a shareholder is not bound by any change in the company’s articles which forces that shareholder to buy more shares in the company, unless they expressly agree in writing to be so bound. 4.4.2.2 Common law restrictions Generally, the shareholders can make a change to the articles only if it is ‘bona fide for the benefit of the company as a whole’ (Allen v Gold Reefs of West Africa 1 Ch 656). This is a complex test which has generated a large amount of case law and commentary. In very simple terms, whether or not the change is ‘bona fide for the benefit of the company as a whole’ is a subjective matter for the company’s shareholders to decide (Citco Banking Corporation NV v Pussers UKPC 13). It is therefore not for the court to decide what is in the company’s interests. However, objectively, there may be amendments to the articles which cannot be said to benefit the company as a whole. Usually such cases involve the situation where the intention behind amending the articles was to discriminate against minority shareholders rather than to benefit the company as a whole. This may be seen especially in cases involving a change to the articles to allow the company to buy out certain shareholders. Brown v British Abrasive Wheel Co Ltd 1 Ch 290 is an example of such an amendment which was held to be invalid; whereas the amendment to the articles in Shuttleworth v Cox Brothers and Co (Maidenhead) Ltd 2 KB 9 was held to be valid.  The Company’s Constitution 87 4.4.3 Entrenched articles Section 22 of the CA 2006 permits a company to include ‘provisions for entrenchment’ in its articles. We saw at 4.4.1 above that a special resolution under s 21 of the CA 2006 is the usual way to change a company’s articles. An entrenched article contains extra procedures or conditions, which makes it harder to change than other articles. An entrenched article may, for example, include a condition that on a shareholders’ vote to amend it, a particular shareholder alone will always have a greater number of votes than the rest of the shareholders put together. In other words, that one shareholder will decide the fate of the article if a change to it is proposed. Such a provision might be included in an article appointing a specified person as a director where the director is also a shareholder. In effect such an article means that the other shareholders cannot remove that person as a director of the company without their consent. Note that s 22(3) of the CA 2006 permits an entrenched article to be amended by agreement of all the company’s shareholders, or by order of the court, even if the conditions in that article are not met. The CA 2006 seeks to make it difficult for a company to include such provisions in its articles because they can significantly restrict the freedom of the shareholders to take decisions. Under s 22(2) of the CA 2006, the entrepreneurs forming a company will only be able to include entrenched rights in the articles either when the company is first set up, or with the agreement of all the shareholders once the company has been registered. This latter change would therefore require a higher threshold than applies when changing other articles, since these require only a 75% shareholder vote in favour. However, at the time of writing, s 22(2) of the CA 2006 had not yet entered into force. This is because of concerns that the subsection as currently worded traps commonly-used articles which were not intended to be caught. Therefore, until such time as this problem is resolved by the DBT, an entrenched article may still be included simply by passing a s 21 special resolution. The rest of s 22 is already in force. If the company’s articles are amended to include an entrenched article then, in addition to the special resolution and copy of the new articles (see 4.4.1 above), the company must also send Form CC01 (notice of restriction on the company’s articles, available on the Companies House website ) to the Registrar of Companies. If the company’s articles are amended to remove an entrenched article then, in addition to the special resolution and copy of the new articles (see 4.4.1 above), the company must also send Form CC02 (notice of removal of restriction on the company’s articles, available on the Companies House website noted above) to the Registrar of Companies. Where a company’s articles already include an entrenched article and any of the company’s articles are altered (whether the entrenched article or not) then, in addition to the special resolution and copy of the new articles (see 4.4.1 above), the company must also send Form CC03 (statement of compliance where amendment of articles restricted, available on the Companies House website noted above) to the Registrar of Companies. 4.5 THE MEMORANDUM OF ASSOCIATION This document was described in detail in 3.12 above and a copy may be found in Appendix 2. As the memorandum is a very simple document, and represents just a snapshot of the company and its owners at the time the company is formed, it does not form part of the company’s constitution. 4.6 COMPANIES FORMED UNDER THE COMPANIES ACT 1985 What has been described in this chapter up to this point explains the law affecting a company formed under the CA 2006, which came fully into force on 1 October 2009. From that point in time, all new companies had to be set up under the 2006 Act. However, at the start of 2023 88 Business Law and Practice approximately 6.5% of private companies currently in existence were not formed under the CA 2006 but under its predecessor, the CA 1985. Although the CA 1985 has been repealed, and the CA 2006 applies to all private companies whenever they were set up, the constitution of a company set up under the 1985 Act differs fundamentally from what has been explained above. The reality is that you will deal in practice with companies which were set up under the CA 1985 for many years to come. You will also therefore see the CA 1985 constitutional documents of such companies. They differ substantially from the documents for companies formed under the 2006 Act. It is therefore important to understand what these documents are and how they are now treated under the CA 2006. 4.6.1 Memorandum of association under the CA 1985 Before the CA 2006 came into force, the memorandum of association had a much more important role to play. Unlike the current memorandum, the CA 1985 memorandum was relevant throughout the life of the company. The old-style memorandum comprised five main clauses: the name, registered office, objects, shareholders’ liability and authorised share capital. A draft copy of an old memorandum is included in Appendix 2. On 1 October 2009, when the CA 2006 came into force, the memorandum became much less significant (see 3.13 above), the five main clauses of the memorandums of companies already in existence automatically becoming provisions of their articles (CA 2006, s 28(1)). This meant that the clauses could be changed by the company following the procedure described in 4.4.1 above, with the shareholders passing a special resolution under s 21 of the CA 2006. 4.6.1.1 Liability clause The shareholders’ liability clause of the old-style memorandum simply stated: ‘The liability of the members is limited.’ This is now automatically a provision in the articles due to s 28(1) of the CA 2006, and of course it will not need to be changed unless the company wishes to convert to being an unlimited company. This would be extremely rare in practice. As all limited companies formed under the CA 2006 must state in their constitution that the liability of their shareholders is limited (CA 2006, s 3(1) – see, eg, art 2 of the model articles), both a company formed under the CA 1985 and a company formed under the CA 2006 are treated in exactly the same manner. 4.6.1.2 Objects clause All companies in existence before 1 October 2009 had an objects clause in their memorandum. This clause set out the purposes for which the company was formed and included a statement of what it was empowered to do. Historically, if a company acted outside of its objects set out in the objects clause then it was said to have acted ‘ultra vires’ (beyond its powers). At common law, a transaction which was ‘ultra vires’ would be void as it was beyond what the company could legally do (Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 673). If business people like one thing above all else (other than making money of course), it is certainty in their business dealings. The doctrine of ‘ultra vires’ introduced an unwanted element of uncertainty, as there was always the possibility that a company’s action would be found to be void for breaching its objects clause. Consequently, various devices were developed over time in order to minimise the risk of a company’s act being found to be ‘ultra vires’. One of these was the introduction by the CA 1989 of the ‘general commercial company’ objects clause, set out in the memorandum of association in Appendix 2. This wording allowed the company to carry on any business it wished and to do anything incidental or conducive to its business. However, this was introduced only in 1989, and companies set up before this date often have objects clauses running to many pages, comprehensively listing the business which the company was to carry on (so-called ‘long-form’ objects clauses) in order to avoid the company acting ‘ultra vires’.  The Company’s Constitution 89 Even companies formed after 1989 would usually still use these ‘long-form’ objects clauses, because it was unclear whether a ‘general commercial company’ objects clause permitted the company to do everything it might want to do, eg selling off its whole business or donating money to charity. The CA 2006 finally clarified the situation once and for all. It specifically removed the need for an objects clause altogether through s 31 of the Act, which provides that a company’s objects are completely unrestricted unless the constitution provides otherwise. Section 31 therefore allows a company to carry on whatever activity it wants (within the law, of course). Further, s 39 of the CA 2006 effectively abolishes the ‘ultra vires’ doctrine with regard to third parties dealing with the company. In other words, s 39 provides that an act undertaken by the company with an outsider (such as entering a contract) cannot be challenged if it is beyond the powers granted in the company’s constitution. Both the company and the other party to the transaction are bound by the act. This is backed up by s 40(1), which states that the powers of the directors to bind a company (eg by entering a contact) are deemed to be free of any limitation under the company’s constitution in favour of a person dealing with the company in good faith. Although we have seen that ss 39 and 40(1) of the CA 2006 thus prevent a challenge to an act of the company due to a breach of its constitution externally (ie with third parties), there are still some possible consequences internally (ie within the company) if the company’s objects are exceeded. If the company intends to act in breach of its objects (eg, by the directors deciding to enter a contract), there is a right for a shareholder to go to court to seek an injunction under s 40(4) to restrain the company from taking this action. However, this injunction must be sought before the act is undertaken (ie a legal obligation has been incurred). If the act has already been done (say, the contract has been signed), the shareholder can only take action against the directors (CA 2006, s 40(5)) for breach of their duty to the company. Directors are obliged under the CA 2006 to act within their powers, which includes observing any restrictions in the constitution (CA 2006, s 171). Section 31 does preserve the right of a company to limit its objects if it chooses to do so, but in the vast majority of cases companies will now be formed under the CA 2006 without this limitation, to avoid the possible problems that still may arise if its objects are exceeded. As mentioned at 4.6.1 above, the objects clauses of companies registered before 1 October 2009, being part of their memorandum of association, became part of the articles under s 28(1) of the CA 2006. In effect, such an objects clause will operate as an article which restricts the directors rather than the company (because of ss 39 and 40(1)). There is therefore still a risk of directors being held to be in breach of their duties to the company if they act outside the objects. The restrictions on these companies’ objects, now being contained in the articles, may be removed by the shareholders passing a special resolution under s 21 of the CA 2006 to amend the articles (see 4.4.1 above). There is therefore a big incentive for most companies incorporated with an old-style memorandum to change their articles and remove their objects clause to avoid any potential problems. If a company amends its articles so as to add, change or remove any part of (specifically) an objects clause, it must complete and send Form CC04 to the Registrar of Companies at Companies House (CA 2006, s 31(2)), together with the special resolution and a copy of the new articles. To summarise the position with regard to the objects clause: Company formed under CA 2006 (a) There is no need for an objects clause, as under s 31(1) the company’s objects are unrestricted. This will be the usual scenario. 90 Business Law and Practice (b) The company may choose to place restrictions on its objects (s 31(1)) by passing a special resolution to amend its articles (s 21). This will be rare in practice. (c) If it does so and the company acts in breach of its objects, it will have no impact on outsiders dealing with the company (s 39) but shareholders may either seek an injunction (s 40(4)) or sue the directors for breach of duty (s 40(5)). Company formed under CA 1985 (a) The existing objects clause in the company’s memorandum became part of its articles on 1 October 2009 (s 28(1)). (b) If the company acts in breach of its objects clause, it will have no impact on outsiders dealing with the company (s 39) but shareholders may either seek an injunction (s 40(4)) or sue the directors for breach of duty (s 40(5)). (c) The company may choose to amend its articles by passing a special resolution (s 21) to remove (or amend) the objects clause. If it removes its objects clause, its objects are unrestricted under s 31(1). 4.6.1.3 Authorised share capital A company in existence before 1 October 2009 had to have a clause in its memorandum stating its authorised share capital. This was a cap on the amount of money which a company could raise by issuing shares to its shareholders. For example, in the memorandum set out in Appendix 2 the company has an authorised share capital of £100 made up of 100 shares of £1 each. The company could not raise more than £100 from shareholders without following a complex statutory procedure to raise this amount. Under the CA 2006 the concept of an authorised share capital has been abolished. Instead, a statement of capital is made on incorporation of the company (see 3.7 above) and each time it decides to issue more shares after incorporation. A company formed before 1 October 2009 will have had its former authorised share capital clause moved from the memorandum to the articles by s 28(1) of the CA 2006. It then operates as a restriction under the articles, and would need to be removed by amending the articles if the directors wished to issue more shares that would exceed the cap. So if a company had the clause mentioned above and it wanted to raise more than £100, it would need to amend its articles. How this is done is explained at 9.3.1 below. 4.6.1.4 Other clauses A company formed under the CA 1985 may alter its name and registered office in the same way as a company formed under the CA 2006 (see 3.19.4 and 3.19.6 above). 4.6.2 Articles of association under the CA 1985 As has already been noted, a minority of private companies currently in existence were incorporated before the CA 2006 came into force. When these companies were set up, mainly under the CA 1985, a different set of model articles for a private company limited by shares could be chosen by the company’s owners, or would automatically apply on incorporation if no other articles were registered. They are known as Table A articles (or more usually just ‘Table A’). Table A could be adopted unamended or with amendments, as with the model articles (see 4.3 above). Table A is still important today, because although new companies can no longer be formed with them, existing companies using Table A were not required to change their articles when the law changed on 1 October 2009. Existing companies were allowed to keep Table A. It is therefore essential for a corporate lawyer to be familiar with both versions of the articles. We shall refer to provisions of both the model articles and Table A where relevant throughout this part of the book.  The Company’s Constitution 91 4.6.2.1 Use of unamended Table A Table A was intended to be a more comprehensive set of articles than were the model articles that replaced them. In particular, they were not specifically drafted for smaller companies but for all sizes of company. It follows, therefore, that Table A is considerably longer than the CA 2006 model articles, and covers more aspects of a company’s operations. Although companies with Table A articles may continue to operate under these rules (CA 2006, s 19(4)), as a number of major changes have been made to company law by the 2006 Act, certain Table A articles will be redundant, impose unnecessary extra administrative burdens or operate in a different manner under that Act. As a consequence, there are advantages for many existing private companies in amending their existing Table A articles to conform to the changes in the law. While some private companies have already done so, the reality is that many have not, particularly where legal advisers are not employed on a regular basis to advise a company. 4.6.2.2 Content of Table A Table A’s 118 articles were set out in the Companies (Tables A to F) Regulations 1985 (SI 1985/ 805) (amended in 2000 to allow for electronic communications in a company). The main areas covered in Table A are as shown in Table 4.2 below. Table 4.2 Content of Table A articles of association Article numbers Subject 1 Definitions 2–35 Share capital and shares 36–63 Shareholders’ general meetings 64–98 Directors and board meetings 99–101 Company administration 102–110 Company profits 111–116 Notices 117–118 Winding up and indemnity The clauses of the old-style memorandum of association also became provisions of the company’s articles with effect from 1 October 2009 (see 4.6.1 above). 4.6.2.3 Differences between the model articles and Table A Some of the differences are listed here for ease of reference, but note that the practical significance of any difference will be explained where relevant throughout this part of the book when discussing the company’s activities. The key differences (there are others) between the new model articles for a private company limited by shares and Table A are that the new model articles: include a reference to the limitation of the members’ liability (art 2) which was not in Table A (see 4.6.1.1 above); refer only to shareholders’ ‘general’ meetings (art 37), whereas Table A refers to two different types of shareholder meeting: annual general meetings (AGMs) and extraordinary general meetings (EGMs); do not require the holding of an AGM, unlike Table A; do not include notice provisions for shareholders’ meetings, unlike Table A; do not allow the use of a chairperson’s casting vote in a shareholders’ meeting, unlike Table A; do not deal with written resolutions, unlike Table A; 92 Business Law and Practice allow proxies to vote on a show of hands, unlike Table A; do not make provision for the use of alternate directors, unlike Table A; do not require the directors to retire by rotation, unlike Table A; specify that directors’ decisions are reached by majority decision or by unanimity, unlike Table A; specify that a unanimous decision of the directors may be made in any manner, whether or not there has been a formal board meeting, unlike Table A; and permit board meetings to be held by any method so long as each director can communicate to all of the others, and regardless of where each director is located, which is a much more relaxed regime than under Table A. Some of these differences reflect the fact that rules which were in Table A are now contained in the CA 2006, but others reflect the deregulatory aspect of current company law in the UK for private companies, and the idea that private companies should be subject to the lightest regulation possible whilst still protecting investors and the public. 4.6.2.4 Amended Table A As with the model articles, a company which adopted unamended Table A had to abide by all of its articles. In order to achieve rules more suitable for their purposes, many companies adopted special articles amending provisions of Table A. The first article of a company which adopted amended Table A articles will include wording which expressly states that the Table A articles shall be the articles of the company except where they are modified or excluded by or are inconsistent with the special articles. When considering the articles of a company with amended Table A articles, you will need to get a copy of the unamended Table A and then read the special articles to see which of the 118 articles this company has retained unamended, which of the model articles it has amended (and how), and which special articles are entirely new (and what they mean). Although companies with amended Table A articles may continue to operate under these rules (CA 2006, s 19(4)), as a number of major changes have been made to company law by the CA 2006, certain Table A articles will be redundant, impose unnecessary extra administrative burdens or operate in a different manner under that Act. As a consequence, as with unamended Table A articles, there are advantages for many existing private companies in amending their current amended Table A articles to conform to the changes in the law. As explained at 4.6.2.1 above, many private companies will not yet have done this. 4.6.3 Table A 2007 The provisions of the CA 2006 affecting private companies came into force in stages from 2007 until 1 October 2009. In order to deal with new companies which were set up in this period, when parts of the CA 2006 had already been implemented and before the new model articles came into effect on 1 October 2009, an interim set of Table A articles (‘Table A 2007’) was produced which companies could choose to use. They are based on the original Table A articles, but with amendments to reflect the changes made by provisions of the CA 2006 which came into force on 1 October 2007. Table A 2007 was ultimately replaced by the model articles. This means that only private companies formed between 1 October 2007 and 1 October 2009 could have these articles (assuming that they did not decide to adopt bespoke articles). As the number of companies which adopted Table A 2007 represents a very small percentage of the total number of companies in existence, and as this percentage is shrinking every year, we do not consider Table A 2007 separately in this book, particularly as many of the issues which arise are covered in our analysis of Table A or the model articles. If you wish to consult  The Company’s Constitution 93 Table A 2007, you can find a copy on the Companies House website. 4.7 SUMMARY OF OPTIONS REGARDING ARTICLES In light of the number of options which the law permits, and which you may come across in practice, there follows a summary of the different options for articles which may apply to private companies currently in existence, whether they were set up under the CA 2006 or before then. Only one of these options can apply. Remember that a company may change its articles at any time by following the statutory procedures in the CA 2006. You can check which articles apply to a company by searching the company’s file at Companies House, as the latest version must always be submitted there. Company formed under CA 2006 A private company formed on or after 1 October 2009 may have as its articles: (a) unamended model articles; or (b) amended model articles (with special articles); or (c) bespoke articles. Company formed under CA 1985 A private company formed before 1 October 2009 may have as its articles: (a) Table A unamended with clauses from an old-style memorandum (usually where the articles have not been changed since 1 October 2009); or (b) amended Table A (with special articles) and clauses from an old-style memorandum (usually where the articles have not been changed since 1 October 2009); or (c) bespoke articles and clauses from an old-style memorandum (usually where the articles have not been changed since 1 October 2009); or (d) Table A 2007 unamended with clauses from an old-style memorandum (usually where the company was formed between 1 October 2007 and 1 October 2009, and the articles have not been changed since 1 October 2009); or (e) amended Table A 2007 and clauses from an old-style memorandum (usually where the company was formed between 1 October 2007 and 1 October 2009, and the articles have not been changed since 1 October 2009); or (f ) unamended model articles (if expressly adopted by special resolution since 1 October 2009); or (g) amended model articles (if expressly adopted by special resolution since 1 October 2009); or (h) bespoke articles taking account of changes in the CA 2006 (if expressly adopted since special resolution after 1 October 2009). 4.8 PROVISION OF CONSTITUTIONAL DOCUMENTS A company must send a shareholder at their request a copy of certain of the company’s constitutional documents, as set out in s 32 of the CA 2006. These include an up-to-date copy of the company’s articles, its certificate of incorporation and its latest statement of capital. If the company does not do so, the officers of the company (eg the directors and any company secretary) may be liable to a fine. This provision ensures that the owners of a company have access to the key documents governing its existence and operation. 94 Business Law and Practice