Summary
Summary The Corporate Constitution
- Module
- Company Law
- Institution
- Cambridge University (CAM)
An in-depth description of the rules, from the CA 2006 and case law, in relation to the corporate constitution
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By: ya253 • 5 year ago
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II. COMPANY LAWTHE CORPORATE CONSTITUTION
1. INTRODUCTION
• The articles of association deal with any matter which is not, or to the extent that it is not, otherwise
regulated.
• This approach represents the view that shareholders constitute the ultimate source of managerial
authority within the company and that the directors obtain their powers by a process of delegation
from shareholders.
• This is in contrast to the German and American view whereby the allocation of powers to the organs
of the company is the result of a legislative act, even if (within limits) the shareholders are later able to
change the initial allocation.
• Despite this difference of principle, the practical allocation of power ultimately depends on the ease
with which the default rules may be overridden.
2. THE CONTENTS OF THE CONSTITUTION
• The constitution of a company defines the structure of the company and how it is governed (e.g. role
and powers of directors, rules governing shareholder meetings and decisions).
• According to section 17 the constitution includes:
i) The articles of association
ii) Any resolutions and agreements deemed by the CA 2006, ss.29 & 30 to form part of
the constitution
• The new memorandum of association does not form part of the constitution. The contents of old-
style memoranda still in force (i.e. memoranda of companies incorporated before the 2006 Act came
into force), are now treated as if they are part of the articles of association of these companies (s.28).
• Section 18(1): Every company must have a set of articles of association prescribing ‘regulations for
the company’.
• Section 20: If no articles for the company are registered, the (default) model articles will apply.
2.1. Model articles of association
• The current statutory models are contained in the Companies (Model Articles) Regulations.
• The regulations set out different models articles for different types of company. The articles prescribed
are model articles for:
Private companies limited by shares (‘Ltds’);
Private companies limited by guarantee; and
Public Companies (‘Plcs’).
, • Section 20(1): When a company is formed, it will be treated as having adopted the relevant model
articles, except to the extent that it chooses to have different articles, either in whole or in part.
• Section 20(2): The subsequent promulgation of a revise version of the model articles will not affect
companies already registered, but only those registered in the future.
• Given that under the British structure, a company cannot function effectively without elaborate
articles, the models aim to supply these to those who do not wish, or cannot afford, to work out their
own internal regulations.
3. THE ‘SECTION 33 CONTRACT’
• CA 2006, like previous Acts (s.14 CA 1985), deems the constitution of companies to be a ‘contract’
between the company and the members.
33. Effect of company’s constitution
(1) The provisions of a company’s constitution bind the company and its members to the same
extent as if there were covenants on the part of the company and of each member to
observe those provision.
• The wording of this section can be traced bay with variations to the original Act of 1844 which
adopted the existing method of forming an unincorporated joint stock company by deed of settlement
(which did constitute a contract between the members who sealed it).
3.1. The parties to the contract
• The articles constitute a contract between the company and each member. However, the contract is
enforceable among the members inter se such that it is a multi-party contract.
• The company’s articles become a public document from the moment of formation. Publicity means
that those who deal with the company have a legitimate expectation that the registered articles
represent an accurate statement of the company’s internal regulations.
3.2. Who many enforce the ‘contract’?
• Since it is members who are party to the contract with the company, it follows that non-members
cannot enforce the contract, even if they are intimately involved with the company e.g. as directors.
• The Contract (Rights of Third Parties) Act 1999, s.6(2): This Act does not apply to the company’s
constitution.
Hickman v Kent: The company against the members.
Quinn v Salmon: The members against the company.
Rayfield: The members against other members (without joining the company as a party).
, 3.2.1. The ‘qua member’ rule
• According to the rule in Foss v Harbottle, members only have rights and obligations under the contract
in their capacity as members and not in any other category e.g. as a director of the company or as a
creditor.
Hickman v Kent
A person who is both a member of the company and one of its directors cannot enforce
rights conferred by the articles where that right is conferred upon the claimant in his
capacity as director of the company.
• However, it is evident that this principle can be side-stepped by the identification of an appropriate
membership right.
Quinn v Salmon
Both the Court of Appeal and House of Lords allowed a managing director, suing as a
member, to obtain an injunction restraining the company from completing transactions
entered into in breach of the company’s articles which provided that the consent of the
two managing directors was required in relation to such transactions.
A member had a membership right to require the company to act in accordance with its
articles, which could be enforced by the member even though the result was indirectly to
protect a right which was afforded to him as director.
• The courts therefore do not appear to be interested in the motivations for the bringing of a claim.
3.2.2. Which Provisions of the Constitution may be enforced?
• Members may only enforce the contract in respect of personal rights and not in respect of internal
irregularities.
• This means that even though a member sues qua member to enforce a provision in the article which
appears to confer a right on the member, he may nevertheless be defeated if the provision does not
confer a personal right on the member but created only an obligation on the company.
• The decision whether to sue to enforce the provision is a matter for the shareholders collectively.
• The dividing line between personal rights and internal irregularities is not always clear.
For example, if the chairman of a shareholders’ meeting acts in breach of the provisions of the articles
governing meetings, is that an infringement of the shareholders’ personal rights or a mere internal
irregularity?
MacDougall
The decision of the chairman of the shareholders’ meeting wrongfully to refuse a request
for a poll was held to be an internal irregularity.
Pender v Lushington
The refusal of a chairman to recognise the votes attached to shares held by nominee
shareholders was held to infringe their personal rights.
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