Company Constitution Notes

CORPORATE CONSTITUTION

Section 17: companies’ constitution includes:

1. articles of association;

2. special resolutions

   Is not possible to change constitution of company via ordinary resolution.

   i.e. in matters of substance, constitution cannot be deviated from via ordinary resolution

   e.g. Quin & Axtens v Salmon [1909]

   Section 18: all companies MUST have articles of association

   Articles may deal with any matter for which mandatory rules are not laid down by statute.

• British Company law much more liberal in this respect than other jurisdictions

Model Articles

Section 18: any company may choose the Model Articles as their articles of association.

In case of limited companies, model articles apply automatically in absence of contrary provision.

Section 20(1): limited company may exclude operation of model articles in whole or in part.

LEGAL EFFECT OF CONSTITUTION

Section 33: provisions of constitution bind the company and its members as though there was covenant on part of company and each member to observe it.

• Thus is a statutory form of contract.

• i.e. a “section 33 contract”

• Allows obligations and rights to be created without any consideration, offer/acceptance.

• Company Law Review debated whether it was still appropriate to treat articles as having contractual effect, but decided not to change anything.

Enforcement

• Section 33 contract is enforceable:

1. By members against company

   Quin & Axtens [1909]

2. By company against members

   Hickman [1915]

3. By members against other members

   Rayfield v Hands [1960]

   London Sack and Bag [1943]

   However is NOT enforceable by outsiders to company

   i.e. non-members

   Eley v Positive Life [1876]

   Additionally, Contracts (Rights of Third Parties) Act 1999 does not apply to company constitutions

   C(RTP)A 1999 section 6

   Limits

1. Capacity as a Member

• People only have rights or obligations under the constitution in their capacity as a member.

• i.e. where C seeks to enforce a right against D which does not relate to D’s membership of the company, cannot do so.

• Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915]

  “Hickman principle”.

Multiple Relationships to Company

• Some people who are members may have some other capacity in which they relate to company

• Thus such people can only bound by constitution where:

1. they are a member of company; and

2. the right is being enforced by/against them in their capacity as member

• And NOT in their capacity as director/solicitor etc.

• Eley v Positive Life [1876]

• Hickman [1915]

  Court have taken lenient view of when a right is being enforced ‘qua member’.

  Quin & Axtens [1909]

  Rayfield v Hands [1960]

Subsequent Attainment of Membership

1. Where an outsider with purported rights in a company’s articles is subsequently granted shares in company, does not make those prior rights enforceable.

• i.e. C’s claim in his capacity as outsider was unenforceable

  thus does not become enforceable merely because he has since become member

• Eley [1876]

• As interpreted in Hickman [1915]

2. However has been suggested this view is wrong

   i.e. once outsider is granted shares, becomes entitled to enforce his earlier right

   as any member of company is entitled to enforce its constitution

   See Lord Wedderburn (below)

Member-Member Disputes

Fact that two people are both members of company does not mean articles can be invoked in disputes which have nothing to do with their membership of company.

Rather the dispute must fall within the ‘company relationship’

London Sack and Bag [1943]

A general right to enforce constitution?

Is possibly case that any member has a general right to force company to act in accordance with its articles.

Quin & Axtens [1909]

View supported by Lord Wedderburn (below)

If this is case, articles can be enforced by/against member even where this has indirect effect of enforcing an ‘outsider right’

e.g. Rayfield v Hands [1960]

Would outflank Hickman principle in member-company/company-member actions.

thus would only continue to apply in relation to member v member cases

e.g. London Sack & Bag [1943]

2. “Internal Irregularities”

• Some articles which appear to confer rights upon members in fact only create obligations upon the company.

• Breach of such articles constitutes “mere internal irregularity” on company’s part.

  i.e. so that shareholder affected by breach has no personal right of action in respect of breach (see supervision 7)

  rather company is proper claimant

• “Internal irregularities” tend to arise in relation to articles dealing with convening and conduct of shareholder meetings.

  e.g. Macdougall v Gardiner [1875]

  Doubtful whether “internal irregularity” exception still exists to same extent today:

  Are cases contrary to it (e.g. Pender v Lushington [1877])

  Runs contrary to idea that company should be held to its constitution (e.g. Quin v Axtens [1909]

Lord Wedderburn (1957)

• There should be a general membership right to have affairs of company conducted in accordance with the articles.

• i.e. any member should be able to sue to uphold any company article, as this is a personal right.

  This view supported by Quin v Axtens [1909].

  Therefore Hickman’s interpretation of Eley was WRONG

  i.e. once C became member of company, was entitled to force company to adhere to its constitution

Davies

• This would defeat need for both:

1. “Outsider right” argument

   i.e. member has right to sue to ensure that constitution is enforced, even if this has indirect effect of upholding an ‘outsider right’

2. “Mere internal irregularity” argument

   i.e. as any breach of articles would be actionable by member in his personal capacity

Company Law Review:

recommended Wedderburn’s approach (at least insofar as it would destroy “internal irregularity” argument)

but recommended keeping Hickman principle

Problems with Hickman

• Hickman principle means there will be different outcomes depending on view court takes

  i.e. whether a right in articles is intended to be enforceable qua member often unclear

  e.g. Rayfield...

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