Corporate Constitution Notes

Corporate Constitution

The constitution defines how the company is governed and will define the structure of the company. This includes how powers are split between the directors and shareholders.

A company’s its articles of association and also any other resolutions or agreements which are deemed to be put the constitution defined in Companies Act 2006 ss.29k30. (Companies Act 2006 s.17)

The Section 33 Contract

The companies bind the company and its members as if it were a contract between them. (Companies Act 2006s.33)

However there are significant differences between the s.33 contract and a named one.

Who may enforce the contract?

The company may enforce the contract against its members.

The members may enforce the contract against the company

And the members may enforce the contract against other members.

Non members are not a party to the contract and so may not enforce it.

Members may only use the s.33 contract to enforce rights which they hold as a member.

Hickman

1. Rights which are accorded to a person in his capacity as an outsider may not be enforced through the articles of association even if the rights holder is also a member.

2. On the facts, a provision in the articles stating that any dispute between the company and a member would go to arbitration was enforceable.

Eley v. Positve Life

1. The articles of a company stated that the company would use a particular solicitor. The company stopped using him as their solicitor.

2. Held that because the right was not held as a member, he was unable to enforce the articles against the company.

Beattie v Beattie

1. The articles contained a similar provision to those in Hickman, requiring a dispute to be referred to arbitration, but the provision related to disputes with directors not disputes with members.

2. Held this was not enforceable on the articles because the director, who was also a member, held the right to have disputes referred to arbitration as a director.

Rayfield v. Hands

1. The articles provided that if a member wanted to sell the shares then notice should be given to the directors who would purchase at a fair price. This notice was given but the directors did not buy.

2. Held that the provision concerned the relationship between the members and the directors as members and so the articles were enforceable and the directors had to buy.

Lord Wedderburn has argued that the Hickman principle can be sidestepped by merely identifying an appropriate member right, e.g. in Quinn v. Salmon.

Quinn v. Salmon

1. A managing director, suing as a member, was able to obtain an injunction preventing the company breaking a provision in its articles which required the consent of the Managing director for certain transactions.

2. Held that members had a right to require the company to comply with its provision and so it could be enforced even though the indirect effect was to protect a right held as a director.

Which provisions of the constitution may be enforced?

Members may only enforce the section 33 contract in respect of personal rights; there is no ability to enforce provisions which only impose obligations on the company as these are merely internal irregularities.

To enforce an internal irregularity, the members must collectively decide to enforce the provisions of the article; it cannot be a decision from an individual member whereas an individual member may enforce personal rights.

MacDougal v. Gardiner

• Held the decision of the chairman to, wrongfully, refuse a request for a poll was an internal irregularity.

Pender v. Lushington

• Held the decision of the chairman not to recognise votes attached to shares held by nominee shareholders was a break of their personal rights.

Gower and Davies says that these two cases are irreconcilable. I disagree, in MacDougall v. Gardiner the right to request a poll has been respected and recognised, the wrongful decision to refuse the request indicates a failure to follow internal rules about considerations to be taken into account when deciding whether to grant the request.

If there was a desire for a poll then the shareholders could collectively decide to enforce the internal rules. On the other hand in Pender v. Lushington the member’s right to vote was not being respected or recognised and so the individual members was able to enforce the right themselves.

Differences between the section 33 contract and other contracts

Unlike a normal contract, the company constitution is a public document which is available from Companies House. This means that third parties can examine it to inform their dealings with the company, consequently courts are reluctant to apply some of the normal doctrines of contract law to the section 33 contract.

Scott

• The section 33 contract is not subject to the rules of rectification.

Bratton Seymour Service

• Terms may not be implied into the section 33 contract if the facts leading to the implication are not known to third parties.

Belize

• Lord Hoffman said that could imply terms into a section 33 contract if the facts leading to the implication are known to third parties.

Bratton Seymour Service

• Reluctant to apply doctrines of misrepresentation, mistake, duress, or undue influence to the section 33 contract where such would affect the rights of third parties.

Director’s relationship with the section 33 contract/ Articles of association

Rayfield v. Hands

• A director is not actually party to the section 33 contract and may not use it to enforce rights held as a director.

This was reaffirmed in Towcester Racecource.

Consequently directors did not have rights under the section 33 contract, but equally directors are protected against individual shareholder legislation.

Most professional directors will have a service contract with the company which gives them rights and so they are able to sue on the basis of their service contract.

Beckwith

• It is even fine for directors to have a separate contract with the company which is identified to the articles.

Model Articles (3-6) for...

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