Dignam: Chapter 8
Hannigan: Chapter 5, pg 186-189, 17-73 to 17-80
Sealy Chp4, pp 26-27, 214-222, 228-247, 256-261
Lectures
Lecture 5a: Corporate constitution
What will be covered
1) Articles as contract
2) Outsider rights under the articles
3) Altering constitution
a) Formal alterations CA 2006 s21
b) Informal alterations Duomatic principle
4) Shareholder agreements
a) Members can agree how to exercise constitutional rights
What is a coy constitution
5) Body of rules that governs how a coy operates, what it can do and how it acts
6) Coy constitution consists (at minimum)
a) AOA
b) Special resolutions passed in general meeting (75% maj)
c) Resolutions agreed to all members under duomatic principle
d) Shareholder agreements
7) All these docx theoretically need to be registered with CH
8) Hannigan: shareholder agreements are rarely registered but still enforceable as ctts
Articles of association
9) Set out rules and regs which govern relationship between members and coy
10) Leg provides default articles applicable unless coy ex[ressly adopts it own: CA 2006 s.20
a) There are the model AOA
11) Many companies will not use default AOAs, rather their own tailored AOAs based on
model articles
12) When coy promoters seek registration, they may include with application, their proposed
alternative articles: CA 2006 s.9
, 13) Many coys remained governed by former default rules in table A CA 1985
14) S.17,.29, 32 important as well
a) S.17 is coy’s constitution, references include articles, resolutions, agreements
b) S,.29 is special resolution or resolutions agreed to by all members
c) S.28 existing coys, MOA is provisions of coy articles
d) S.32 is const docx provided to any member of coys on request
15) Constitution is abt corporate identity and docx
Function of articles
16) Under CA 2006 s.31, coys are deemed to have unrestricted objects unless they elect to
define their objects
a) Generally, commercial coys do this to give them flexibility to enter any line of
business
17) (if there are already objects, then) Where new objects are inserted or modified, these
must be notified to Registrar of Coys: CA 2006 s.18(2)
18) Existence of restricted objects is a fetter upon power of directors; breach lays them open
to actions for breach of duty owed to coys under CA 2006 s.171
19) When refer to articles or corp constitution, use art 3, art 4. Its not a section. So thats how
you distinguish
20)
Articles of Association
21) AOA is core constitutional docx
22) Typically will set out
a) Appointment and removal of directors
b) Directors powers
c) Conduct of directors and shareholders meetings
d) Voting procedures
e) Capital (types of share capital, rights attached to each class of shares,
pre-emption)
f) Declaration of dividends
23) Primarily is governing general meeting of shareholders and directors
24) Most important feature is allocation of power between both parties
25) This delegation is found in art. 3-4 of model articles
26) Director general authority = art.3
27) Art.4 : shareholders’ reserve power
28) While coy is going concern, directors have power. However, shareholders have special
power to take or refrain from taking action by way of special resolution
29) Pri power is with directors, reserve power is shareholders
30) Can directors take decisions that maj shareholders have disagreed with
, 31) This is balance of power between shareholders and directors
32) Shareholders can direct directors to do certain things with spec res, but in practice lord
wilberforce says: “the constitution of a limited company normally provides directors with
powers of management and shareholders with defined voting powers have power to
appoint director and take in general meeting, decisions not reserved for management. Its
established that directors in management may take decisions against maj of
shareholders. Indeed, shareholders cannot control them while they remain in office.
33) So does create discretion for directors in running of the coy.
34) Shareholders can guide directors but cannot override decisions already made.
Function of articles
35) S.168: ordinary member can remove someone on board
36) Power allocation between board and general meeting
37) Subject to the articles, the directors are responsible for management of coy’s business,
for which purpose they may exercise all powers of the coy
38) Shareholders may by special resolution, direct the directors to take or refrain taking
specified action
a) Arts. 3, 4 of the Model Articles (Public and pte)
Articles as a contract (Legal status)
39) Can be viewed as shareholders contracting to become a shareholder of the coy
40) There could be contractual provisions disallowing dilution for instance. Beneficial for
members
41) Implicit and negotiated corp ctt, role is much more important in corp ctt in pte coys
42) CA 2006 s.33 says constitution binds the coy and its members to the same extent as
if there were covenants on each part to observe the provisions
a) This is a deeming provision, there is no need for actual agreement by each
member at least to the articles
b) Binds coy, so shareholders as well. Its a deemed ctt. By transfer of shares, no
need for actual agreement. Its part of terms of ctt that constitution is binding on
you (member)
43) Dignam and Lowry state
a) The strength of the section … is that it allows shares to be freely transferable by
removing the need for each member to formally agree to the constitution each
time shares are traded. This avoids the difficulties of having to renegotiate the
contract each time shares change hands.
44) Does it bind?
a) Present and future shareholders
b) The company (Hickman v. Kent or Romney Marsh Sheep-Breeders Association
which held that the effect was to bind the company & members)
, i) Statutory recognition with coy as one of the parties is via CA rather than
common law as last time
ii) Binding effect is on the members only in their capacity as members, NOT
in their other capacities (even if they were directors)
c) Shareholders inter se (between themselves)
45)
Articles as ctt: relationship between coy & members
46) Who is bound by/ can sue on coy articles? -> Coy and members
47) In Hickman v Kent or Romney Marsh SBA (1915), Astbury J stated that the:
a) articles regulating the rights and obligations of the members … create rights and
obligations between them and the company respectively… The shareholders as
against their company can enforce and restrain breaches of its [articles].
b) Articles bind coy and members (in that capacity)
48) In the case itself, the company [an incorporated association] was able to insist that a
member resolve a dispute with it through arbitration rather than the courts.
49) Constitution can only be enforced by members to the extent that it affects their rights as
members and not to the extent that it affects their rights in any other capacity.
50) Shareholders have right to enforce a breach.
Enforcing the constitution: coy and members
51) Who can seek to enforce? Coy and members (future / present), members inter se
52) Are there any qualifications or limitations?
a) Member cannot enforce contract if non-compliance is deemed to be an
internal irregularity rather than a breach of members contractual rights
(personal right)
b) Members can only enforce contract in his capacity as a member and not in
any other capacity (not outsider rights?)
Member rights against the coy
- Fundamental principle is that a wrong done to the coy has to be actioned by the coy.
- Members do not have the right to sue to every wrong done to the coy
- If the wrong is done to the coy as a whole, the coy is the proper party, not the individual
shareholder. This is the Foss v Harbottle rule
53) Members/shareholders do not have rights to sue with respect to every wrong done to
the company.
54) The ordinary rule is that where the wrong is to the company as a whole, company is the
proper party: Foss v Harbottle (1843).
a) Note: ‘The company as a whole’ usually refers to the shareholders of the co –
present and future. The concern for future shareholders reflects a concern for
the future of the company as a going concern.
