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Company Law: Constitution of the Company
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- Company Law
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- Kings College London (KCL)
Comprehensive notes on Company Law in the UK: Constitution of the Company
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Company LawRevision Notes
PART ONE OF CONSTITUTION OF THE COMPANY: DEALING WITH INSIDERS
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INTRODUCTION
What is a corporate constitution?
What does a corporate constitution contain ? This contains the internal rules of the company called the
articles of association, resolutions, agreements and any objects clause which limit the power the company
may have. These rules operate alongside CA 2006.
Effect of a corporate constitution: s. 33, CA 2006 The constitution forms a statutory contract between the
company and its members, and between the members themselves, but only those provisions relating to the
membership rights will constitute terms of a statutory contract.
What constitutes a company’s constitution?
s. 17, CA 2006 states that it includes:
(i) the company’s articles (outlined in detail under s. 18, Chapter 2, CA 2006), and;
(ii) any resolutions and agreements to which Chapter 3 applies to. These resolutions and agreements are
outlined in s. 29. Following are the key items.
(1) special resolutions of company in general meeting (passed by 75% majority) (s. 29(1)(a), CA 2006); and
(2) resolutions (formal and informal) agreed to by all members under Duomatic principle (which pertains
unanimous agreement (s 29(b), CA 2006), and
(3) shareholder agreements (s. 29(d), CA 2006)
The definition in s 17 is non-exhaustive; there are other documents of constitutional relevance
for certain purposes.
(i) the certificate of incorporation summarises key information pertaining to the company such as whether it
is public or private limited; and
(ii) the memorandum of association, even though it is merely a formation document (s. 8 of the CA 2006),
for existing companies it is provided that the provisions contained in such memorandums are to be
treated as provisions of the company’s articles (s. 28 of the CA 2006).
! Note: The additional documents show that a constitution is about corporate identity as well as governance. But
in most instances, a reference to constitution will refer to company’s articles of association.
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,Company Law
Revision Notes
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ELEMENTS OF THE CONSTITUTION
I. ARTICLES OF ASSOCIATION
FUNCTION
Default articles: Legislation provides default articles applicable unless company expressly adopts its own:
CA 2006, s. 19. (see Model Articles in Companies (Model Articles) Regulations 2008).
! Note: Many companies will not use default articles, but their own tailored articles (usually a variation of Model
Articles).
Registration: When company promoters seek registration, they may include with application proposed
alternative articles: CA 2006, s 9.
! But note that many companies remain governed by former default rules in Table A, CA 1985.
Purpose: To set out rules and regulations which govern the relationship between the members and
company.
EXPLANATION: Articles deal with the practicalities of running a company by primarily providing for the operation
of the two organs (BOD and GM) to operate the company.
Content: Articles typically deal with the following.
(i) appointment and removal of directors,
(ii) directors’ powers,
(iii) conduct of directors’ and s/holders’ meetings,
(iv) voting procedures,
(v) capital (types of share capital, rights attached to each class of shares, pre-emption etc), and
(vi) declaration of dividends
! Note: Although ‘corporate objects’ were formerly an important element of articles, this is no longer so due to
operation of CA 2006.
Treatment of company objects:
(i) Under CA 2006, s. 31, companies are deemed to have unrestricted objects unless they elect to
define their objects. For most commercial companies, it is preferred to have unrestricted objects as it
gives them the flexibility to enter any line of business to earn profits.
(ii) Where new objects are inserted or existing objects are altered, these must be notified to Registrar of
Companies: CA 2006, s 18(2).
(iii) The existence of restricted objects is a fetter upon the power of directors as the ability to find
breach lays directors open to actions for breaches of duty owed to companies (CA 2006, s. 171).
Allocation of power between the board and the general meeting : This delegation of power is found in
Art 3 and 4, 2008 model articles (public and private).
Directors’ general authority (Art 3): Subject to the articles, the directors are responsible for
the management of the company’s business, for which purpose they may exercise all the powers of
the company.
Shareholders’ (members) reserve power (Art 4):
(i) The shareholders (members) may by special resolution, direct the directors to take or refrain from taking
specified action.
, Company Law
Revision Notes
(ii) No such special resolution invalidates anything which the directors have done before the passing of the
resolution.
Effect: The articles provide the board of directors with the power to run the business (primary power wielding
organ of the company).
Key question: Whether the delegation of power to run the company to the board creates a substantially
independent discretion for the directors? (i.e. could the directors take a decision which the majority of the
members disagreed with?)
Howard Smith Ltd v Ampol Petroleum Ltd (1974): Lord Wilberforce summed up the position as follows.
“[t]he constitution of a limited company normally provides for directors, with powers of management, and
shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting,
by majority vote, decisions on matters not reserved for management...it is established that directors, within their
management powers, may take decisions against the wishes of the majority of shareholders, and indeed
that the majority of shareholders cannot control them in the exercise of these powers while they remain
in office.”
! Remember: This discretion is of course tempered by the very practical fact that the majority of the members
can remove directors (s.168). Thus, the board cannot stray too far from shareholder wishes if they are to keep
their jobs.
Model Articles of Association: CA 2006 is silent on very significant issues about how company acts and
functions; it is left to members to determine. But, a constitutional blank page is not the answer for all
companies, especially small start-up companies. Therefore, legislature provides for a set of default articles,
articles that apply unless members decide not to apply them (s. 20, CA 2006 and Companies (Model
Articles) Regulations 2008 (SI 2008/3229). These are referred to as the Model Articles.
! Remember: Previously Table A, CA 1985 which were used for companies incorporated before 1 Oct 2009
(both public and private companies). But such companies could adopt the 1008 model articles if they wish so
by following through the amendment procedure.
Three sets are available at present:
(i) Model Articles for Private Companies Limited by Shares;
(ii) Model Articles for Public Companies Limited By Shares; and
(iii) Model Articles for Companies Limited by Guarantee.
Model articles contain rules in five primary areas:
(i) Distribution of power between board and shareholders;
(ii) Board appointment and decision making;
(iii) General meeting decision making;
(iv) Rules on rights attached to shares, share transfers and transmission of shares; and
(v) Rules on dividends and distributions.
! Note: Optionally they may provide for a benchmark governance standard.
ART 5, model articles: Directors may delegate 5.—(1) Subject to the articles, the directors may delegate any of
the powers which are conferred on them under the articles— (a) to such person or committee; (b) by such means
(including by power of attorney); (c) to such an extent; (d) in relation to such matters or territories; and (e) on
such terms and conditions; as they think fit. (2) If the directors so specify, any such delegation may authorise
further delegation of the directors’ powers by any person to whom they are delegated. (3) The directors may
revoke any delegation in whole or part, or alter its terms and conditions.
THE LEGAL STATUS OF THE CONSTITUTION: ARTICLES AS A CONTRACT
What is the effect of the rules ? The rules contained in the constitution can be viewed as contractual
terms (a contract) upon which shareholders agree to become associated with the company and
therefore, the corporate constitution is a corporate contract. Some of these contractual provisions will be
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