BLP T3_E1 The Company's Constitution PDF

The company’s constitution This element covers the company’s constitution and two important documents – the Memorandum and Articles of Association. Introduction: Constitutional documents The key statute governing company law is the Companies Act 2006 (CA 2006). CA 2006 came into force on 1 Octobe...

The company’s constitution This element covers the company’s constitution and two important documents – the Memorandum and Articles of Association. Introduction: Constitutional documents The key statute governing company law is the Companies Act 2006 (CA 2006). CA 2006 came into force on 1 October 2009. Prior to this, companies were governed by the principles of the Companies Act 1985 (CA 1985). In practice you will deal with many companies incorporated prior to CA 2006 therefore it is important to understand some of the provisions of CA 1985 which still affect those companies. CA 1985 required companies to have two constitutional documents: the Articles of Association and the Memorandum. Under s 17 CA 2006 the memorandum no longer forms part of the company’s constitution - it is only required as part of the procedure to register a company at Companies House. The memorandum of a company incorporated under CA 2006 simply amounts to a declaration on the part of the company’s subscribers (the first members of the company) that they wish to form a company and agree to become members of that company (s 8 CA 2006). Constitutional documents under CA Constitutional documents under CA 1985: Articles of Association and the 2006: Articles of Association only. Memorandum. Example memorandum under CA 2006 in prescribed form COMPANY HAVING A SHARE CAPITAL Memorandum of association of Bradford Enterprises Limited Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share. Name of each subscriber Authentication by each subscriber Martin Bradford M Bradford Dated [date] Memorandum Under the Companies Act 1985 (CA 1985) the memorandum formed part of the company’s constitution. Companies were required to include an objects clause setting out the purposes for which the company has been formed. Acting outside of this purpose was described as acting ‘ultra vires’ or outside the company’s capacity. Companies formed under CA 2006 have unrestricted objects (s 31 CA 2006) unless the objects are specifically restricted in the company’s Articles. The ultra vires rule is not applicable to a 2006 Act company unless it has chosen to insert an objects clause into its Articles. For older companies that were incorporated under the CA 1985, s 28 CA 2006 provides that any provisions in a memorandum must be treated as provisions of the company’s Articles. This includes the objects clauses included in the memoranda of all CA 1985-incorporated companies. Under CA 2006, therefore, the objects clause of an older company continues in force, operating as a limitation on that company’s capacity unless and until the Articles of that company are amended to remove its objects clause. Articles of association All companies must have articles of association (Articles) (s 18 CA 2006). Under CA 2006, the Articles form the main constitutional document of a company. The purpose of the Articles is to regulate the relationship between the shareholders, the directors and the company. Examples of the types of provisions which are included in the Articles of a company are: the number of directors required to transact business (both to form a quorum at board meetings and to take decisions at board meetings); the method of appointment of directors; the powers of directors; how board meetings are to be conducted; any special rights attaching to shares; how shareholder meetings are to be conducted; and how and to whom shareholders may transfer their shares. Relationship between CA 2006 and the Articles A company’s Articles must be interpreted However, there are some CA 2006 in the light of relevant legislation. There is provisions which override anything in a considerable scope for overlap between company’s Articles eg s 321 the right to the procedures set out in CA 2006 and demand a poll vote at a GM – this cannot those that may also be contained in the be removed or varied. company’s Articles. There are also powers available to The Articles must comply with the companies by default under the minimum provisions of CA 2006 (this is provisions of CA 2006 unless the known as the Legality Test). Articles provide otherwise eg the power of a private company to issue redeemable A company may in certain shares. circumstances provide a procedure in its Articles which is more onerous than It is important to always check the that contained in CA 2006 eg s 154(1) procedures set out both in the relevant CA 2006 provides that a private company legislation and in your client’s Articles. must have a minimum of one director. A company may provide in its Articles that it requires three directors. Form of Articles A company effectively has three choices as to the form of its Articles: 1. Model Articles (MA) / Table A There are prescribed MA for different types of company. If a new company does not register Articles at Companies House, s 20(1) CA 2006 provides that the relevant MA will constitute the company’s Articles in default. Note that there was a similar provision under the CA 1985. For companies incorporated under the CA 1985 the default Articles were known as Table A (which you may encounter in practice). 2. Amended MA Not all of the provisions contained in the MA are suitable for all companies. Many companies therefore choose to adopt the MA as their Articles, but elect to exclude, or modify the effect of, some of its provisions. 3. Tailor made Articles A client may wish their solicitors to draft Articles which are tailor-made for the particular company concerned. This is a very time-consuming process and therefore costly. Most small companies will prefer to adopt MA, subject to certain amendments. Amending the Articles Once a company has adopted Articles, it is able to alter them at any future date by special resolution (s 21(1) CA 2006). The basic rule is that, to be valid, any alteration must be made bona fide in the interests of the company as a whole. Section 22 CA 2006 permits the entrenchment of specific provisions within a company’s Articles, though this occurs relatively rarely in practice. An entrenched provision of a company’s Articles is one which can only be amended or repealed if specific conditions are met, or if procedures more restrictive than a special resolution are complied with. Entrenched Articles can nevertheless always be amended by the agreement of all of the members, or by a court order (s 22(3) CA 2006). Legal effect of the Articles The nature of the contract established by the Articles of a company is set out in s 33(1) CA 2006, which provides that the provisions in the company’s Articles bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions. Whatever form the company’s Articles take, therefore, they will be binding on both the company and its members and enforceable. The generally established rule is that the Articles evidence a contract between the company and its members in their capacity as members and with respect to their rights and obligations as members. Articles Company (contract between Members the company and the members) Articles as a contract between Articles as a contract between the members themselves the company and its members Generally, the courts appear to be of the Courts have been willing to prevent a opinion that members will only be able to company from infringing its members’ enforce provisions contained in Articles rights in breach of the Articles by granting through the company itself. an injunction. Each member, acting in his If a member is likely to wish to enforce capacity as a member, is similarly obliged rights against other members, he/she to the company to comply with the Articles. should be advised to enter into a However, a member may not enforce any shareholders’ agreement. A shareholders’ rights contained in the Articles against the agreement is a private agreement company that are not relevant to his between the shareholders which is capacity as a member. enforceable as a contract between the Rights contained in the Articles that would members. You will consider shareholders’ be enforceable by members under s 33 agreements later in this module. CA 2006 would be the right to vote or the right to receive a final dividend once it has been declared (ie approved by a resolution of the shareholders). The company’s Summary constitution Although previously of constitutional significance, in companies incorporated since CA 2006 came into force, the company’s memorandum is now merely a formality. The main constitutional document for a company is its Articles. The provisions in the company’s Articles bind the company and its members to the same extent as if they were covenants on the part of the company and each member to observe those provisions. Companies may have the standard Model Articles under CA 2006 or these may be amended. The Articles may be amended by special resolution (s21(1)). Any amendment must be made bona fide in the interests of the company as a whole. The Articles must always be interpreted alongside CA 2006. The Articles take effect as a contract between the company and its members in respect of their rights and obligations as members (s33).