The Corporate Constitution Notes

Supervision 2 The Corporate Constitution Company Constitution The Constitution * * s17 CA 2006 defines the constitution as: * Company's Articles? * Resolutions and agreements to which Chapter 3 applies (ie: "special resolutions" of the Members or a Class of Members) The Articles are personal, but if none are sent to Companies House, the "Model Articles" will apply in default per s20 CA 2006. The "Statutory Contract" * * * * s33 CA 2006 states the Articles operate as a contract binding: * The Members inter se (Present and Future) * The Company & Its Members The Contract is bound by normal rules of contractual construction but "construction must be limited to what any reader would reasonably be supposed to know"? terms cannot be "implied" into the contract if they include "extrinsic facts which were known only to some of the people involved in the formation of the company" Misrepresentation, mistake and undue influence do not apply per Bratton Seymour v Oxborough. Nor can the Articles be rectified even if they do not give effect to the parties' intentions per Scott v Frank F Scott. This is to enable third party investors to rely upon what he finds in the public registry. Any updates must be communicated per s2930 CA 2006. Whilst failure to inform the registrar is a criminal offence, the validity of the alteration appears not to be affected by noncompliance, so there's a lacuna. How is it different to a normal contract? * * * * * Public Statutory Contract and not private? Binds Future Members? No Third Party Rights? s6(2) C(RTP)A 1999 disapplies Act to the Constitution. Normal contractual rules don't apply: rectification, duress, undue influence, implying terms? Variation 75% for s33, but unanimous for a normal contract. Members "Inter se" * * * * * Hickman v Kent Sheep Breeders Association The Articles only bind the Members inter se and not a third party even if the Articles purport to give a right to that Third Party. Eg Directors, Solicitors, Promotors. Thus we have to ask in what capacity is the person seeking to enforce the Articles? As a Member or an Outsider? Eley v Positive Government Life Assurance Co Article Provision guaranteed C would be solicitor of the company but C was fired in breach of Articles. HELD: This benefits C in his capacity as a solicitor, not a Member, thus he couldn't enforce the term as he was an outsider. Beattie v E&F Beattie Ltd Only rights conferred upon Members qua Members are enforceable. Thus, if a Director subsequently becomes a Member, he cannot enforce his Director's Contract in the Articles! Rayfield v Hands Articles stated Members must buy selling Member's shares equally at a fair value. C Member wanted to sell and D Members refused to buy. HELD: Contract bound all the Members, and thus C could enforce the contract against D? thus D ordered to buy shares at "fair value". Salmon v Quin & Axtens Articles gave right to Directors to veto the leasing of company 6 property unanimous consent of Directors required. HELD: The veto was a right of a director and thus an outsider. However, the injunction was granted to the Members seeking to enforce the constitution. * This case demonstrates that provided the case is phrased in the correct way, the courts can easily circumvent the qua member rule of the s33 Contract. # Enforcing the director's rights NO # Enforcing the Constitution as a Member YES CompanyMember Actions * Members may injunct the Company from acting contrary to the Articles. EG: * Towcester Racecourse v Racecourse Association Enforce payment of dividend or return of capital? * Salmon v Quin & Axtens Company property could not be leased without Director's unanimous consent. C Member objected. Injunction granted to restrain Company from leasing the property. Limits on Member's Right to Sue? * * * * * * * There is a distinction between "personal rights" (INDIVIDUAL ACTION) and "mere internal irregularities" (COLLECTIVE ACTION). The difference is between two ultimately irreconcilable cases: * MacDougall v Gardiner Chairman refused a request for a poll and this is a "mere internal irregularity" * Pender v Lushington Chairman refused to recognise Pender's shares after X transferred shares to Pender to bypass a limit on voting power. Refusal to give you the RIGHT TO VOTE is a collective action? Refusal to count an INDIVIDUAL VOTE is a personal action? In the MacDougall v Gardner, Members could collectively appoint a new chairman. In Pender v Lushington, an individual Member had no other recourse, so could only sue! Thus it's the usual principle of noninterference with private companies. If this is right, it's ex post determination You only know if you have the right to sue depending upon how your right is breached! Wedderburn argues it would be far easier to have a "general membership right" to sue. Company Law Review suggested all duties should be enforceable by individual Members. However, CA 2006 did not adopt these ideas, and the uncertainties remain. Alteration of the Contract * * * * * Compulsory Acquisition can be done on s979 CA 2006 where the majority acquires 90% of the voting power in the company. Hannigan states the bona fides test does not apply here, nor where the shareholder acquires shares subject to a compulsory acquisition clause from the outset. The bona fides test only applies to alterations to the Articles. The Articles may be amended under s21 CA 2006 by a special resolution of 75% per s283 CA 2006 unless the provisions are entrenched per s22 CA 2006. There are some limits on the alteration power: * s25 CA 2006 states a Member is not bound by an alteration if it requires him to (i) Take more shares or (ii) Increases his liability Except where he agrees in writing. * COMMON LAW A majority of shareholders cannot ratify a director's misappropriation of corporate property as ALL shareholders have a pro rata interest in company property, thus majority action would offend this equality. Any such majority action is ineffective. The key limitation is that the power to alter the Articles must be exercised "bona fides for the benefit of the company as a whole" per Allen v Gold Reefs of West Africa. The meaning of this test has caused much controversy in the law: * In Gambotto Meagher JA noted "these words [bona fides etc] have beguiled and confused the Courts ever since." * In Constable v Executive Connections Mr Christopher Nugee QC (deputy judge) said 7 

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