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The Constitution Of The Company Notes

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The Constitution of the Company
Contents
The Constitution and Rights attaching to shares and the 'S33 contract'................................35
Gower, pp58-69: The Company Constitution................................................................................ 35
The Significance of the Constitution............................................................................................ 35
What Constitutes the Constitution?............................................................................................. 35
Legal Status of the Constitution..................................................................................................... 35
Cases.............................................................................................................................................................. 37
Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881. .37
Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2003] 1 BCLC 260
..................................................................................................................................................................... 37
AG Belize v Belize Telecom Ltd and anor [2009] 2 All ER 1127.......................................38
Pender v Lushington (1877) 6 Ch D 70...................................................................................... 38
MacDougall v Gardiner (1875) 1 Ch D 13.................................................................................. 38
R Drury, A Shareholder's Right to Enforce the Company Contract [1986] CLJ 219......38
Introduction........................................................................................................................................... 38
The use of contractual techniques................................................................................................ 39
The company as a long term relationship................................................................................. 39
The Extent of a Shareholder's Right to Enforce the Company Contract........................39
Summary................................................................................................................................................. 41
Alternation of the Constitution................................................................................................................ 41
Gower pp69-70: Altering the Contract............................................................................................ 41
Gower pp 636-645: Review of Shareholders' Decisions...........................................................41
The Starting Point................................................................................................................................ 41
Resolutions where the company's interests are centre stage...........................................42
Resolutions more generally............................................................................................................. 42
Resolutions to expropriate members' shares..........................................................................42
Other resolutions................................................................................................................................. 42
The future............................................................................................................................................... 43
Voting at Class Meetings................................................................................................................... 43
Cases.............................................................................................................................................................. 43
Citco Banking Corp NV v Pusser's Ltd [2007] BCLC 483.....................................................43
Re Charterhouse Capital Ltd [2015] EWCA Civ 536 (paras [89] to [108])..................43
Constable v Executive Connections Ltd [2005] 2 BCLC 483..............................................44 Shuttleworth v Cox Bros (Maidenhead) [1927] 2 KB 9........................................................44
Greenlagh v Aderne Cinemas Ltd [1915] Ch 286...................................................................44
Gambotto v WPC Ltd (1995) CLR 432......................................................................................... 45
Brown v British Abrasive Wheel Co [1919] 1 Ch 290...........................................................46
Allen v Goold Reefs of W Africa Ltd [1900] 1 Ch 656............................................................46
B Hannigan, Altering the AoA to Provide for Compulsory Transfers [2007] JBL 471..47
Shareholder Agreements............................................................................................................................ 50
Gower pp70-71: Shareholder Agreements.................................................................................... 50
Gower pp655-659: Shareholder Agreements............................................................................... 50
Prior Contracts...................................................................................................................................... 50
Binding only on the Shareholders................................................................................................. 50
Conclusion.............................................................................................................................................. 51
Cases.............................................................................................................................................................. 51
Russell v Northern Bank Development Cor Ltd [1992] BCLC 1016................................51
E Ferran, The Decision of the House of Lords in Russell v Northern Bank [1994] CLJ

343............................................................................................................................................................. 51
Alternations Involving Class Rights....................................................................................................... 52
Gower pp645-653: Class Rights......................................................................................................... 52
The Procedure for Varying Class Rights..................................................................................... 52
What Constitutes a Variation.......................................................................................................... 52
The definition of class rights........................................................................................................... 53
Other cases............................................................................................................................................. 53

The Constitution and Rights attaching to shares and the
'S33 contract'
Gower, pp58-69: The Company Constitution
The Significance of the Constitution
S18 CA 2006: Constitution (especially AoA) gives companies great freedom to regulate their internal affairs; may deal with any matter not regulated by law in AoA too. Main issues: balance of powers between board and shareholders, and composition, power and structure of the board of directors. Note that such matters are more closely regulated in other jurisdictions eg Germany and the US, although the US approach is to provide a prescriptive set of default rules which still may ultimately be modified inter partes.
However, the US approach is post-incorporation modification rather than ab initio freedom to decide; UK approach is to put ultimate control into the hands of shareholders. What Constitutes the Constitution?
Constitution = AoA but also includes Part 3 Chapter 3 resolutions (S17 CA), primarily special resolutions of shareholders but also resolutions binding on all members of a class. No longer included MoA.
Legal Status of the Constitution
Common law tends to classify rule-books of organisations as contractual in nation. Here,
this is codified by S33 CA - 'the provisions of the 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 it'.
This is quite a peculiar contract:

1. Parties to the contract: the company and each of its members - this is useful in protecting a right to pre-emption eg Borland's Trustees v Steel [1901] or enforcing a duty to buy the shares of a retiring member (less common) eg Rayfield v Hands
[1960]

2. The contract as a public document: S9, S14 CA - company constitution must be made publically available on the register. Those who deal with the company have a legitimate expectation to know how it functions. Hence, the standard contractual remedy of rectification is not allowed for a company's constitution -
Scott v Frank F Scott (London) Ltd [1940]. Similarly, there can be no implication of terms based on extrinsic factors where these would not have been obvious to a third party - Bratton Seymour Service Co Ltd v Oxborough [1992]. In that case,
Lord Steyn went even further and said that misrepresentation, duress, mistake or undue influence could not be pleaded either. This means that it is what was registered which counts, allowing third parties to rely on the register. SS26, 27 -
issue: it is possible to amend a constitution informally though agreement by shareholders; while failure to update the register is a criminal offence, noncompliance does not seem to affect the validity of the new constitution

3. Limitations to the provisions which can be enforced - only rights as a member:
only parties to a contract can enforce rights under that contract, and S6(2)
C(RTP)A 1999 specifically excludes company constitutions. Qua Member rule per
Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] where rights given to an outsider in that capacity happens to subsequently become a member,
those rights cannot be enforced. Same for contract between members inter se -
London Sack & Bag Co v Dixon & Lugton [1943]. Hence, a promoted who becomes a member cannot enforce a constitutional term saying he will be compensated for expenses incurred - Re English & Colonial Produce Co [1906]. Hence, directors should be careful to enter into service contracts, which can in turn incorporate terms form the corporate constitution. However, this can lead to strange results -
Hickman was about an arbitration clause in the constitution; so was Beattie v
Beattie Ltd [1938] but that was director qua director therefore the clause from the constitution could not be enforced. However, Lord Wedderburn (1957) said this can be circumvented most of the time eg Quinn & Axtens Ltd v Salmon [1909]
- MD suing as member enforced clause in constitution stating that certain transactions could only be entered into with the consent of two MDs - member has a more general interest and right in ensuring a company complies with constitution. Company Law Review considered if this should be reformed but ultimately had no strong feelings about it as it can be contracted around quite easily.

4. Further limits to enforcement - not mere procedural irregularities: these tend to be about rules concerning convening meetings or selecting the board. What counts as a mere internal irregularity is contentious and courts can be inconsistent in their approach eg MacDougall v Gardiner (1875) and Pender v
Lushington (1877) which were both about requests for polls per company constitutions - mere irregularity in MacDougall but a breach of shareholders personal rights in Pender. Smith (1978): only way to sort out difference is legal policy, which in today's context should be a question of legal policy - cf need to distinguish between rights of member against company and of company against agent - injunction restraining trade union ultra vires strike + claim for restitution
- Taylor v NUM (Derbyshire Area) [1985]. Professor Wedderburn alternatively argues that this distinction should be done away with because membership should ipso facto confer the membership right of enforcing compliance with the constitution.

Cases
Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881
Facts: D = association incorporated as a non-profit making company; Art 49 of its AoA
provided that disputes between the association and any of its members should be referred to arbitration. Hickman = member; brought action complaining of various irregularities in the affairs of the association, including refusal to register his sheep in its published flock book and a threat to expel him form membership. Association granted a stay of proceedings on the ground that the statutory provisions corresponding to current S33 made Art 49 an agreement to arbitrate, enforceable as between the association and the member.
Astonbury J:
If there has been a valid arbitration agreement within the meaning of the Arbitration
Act, then the court has a duty to 'act upon' such an agreement.
Art 49 constitutes such an agreement and to give effect to such an agreement would be consistent with the qua member rule as past precedents which did not treat the articles as a contract were to do with the purported conferral of rights on persons other than members. Normally, a company can only be bound by statute or contract - statutory rule to treat company as a member to the AoA contract thus a welcome clarification.
Based on established authority, it is clear that a company can enforce and restrain breaches of its regulations as against its members, and members have a reciprocal right as against the company.
Looking on the cases as a whole, no article can constitute a contract 'between the company and a third person'; ''no right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member…can be enforced against the company'; articles regulating 'the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively'.
On the facts, the arbitration clause in the AoA binds - the member should not be allowed to breach his obligations under Art 49.
Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2003] 1
BCLC 260
Wrt S33 contract - does not bind directors - no term can be implied which would have the effect of making the company or its directors contractually liable to its members for the way it carried out its functions.
AG Belize v Belize Telecom Ltd and anor [2009] 2 All ER 1127
Wrt company AoA and power to appoint directors for golden shareholders - what happens to nominee when relevant shareholder ceases to hold the threshold number of shares to remain a golden shareholder? Held: to step down.
On the implication of terms - Lord Hoffmann took a quasi-reasonableness approach but
Marks and Spencer confirms that the old tests of necessity / business efficacy are not irrelevant.
Pender v Lushington (1877) 6 Ch D 70
Facts: Pender had split his shareholdings among nominees to defeat a provision in the articles that fixed the maximum number of votes to which any one shareholder was entitled. Chairman refused to accept the nominee's votes and accordingly declared lost a resolution proposed by Pender which would have otherwise carried.
MR granted Pender an injunction restraining the directors from acting on the basis that the nominee's votes had been bad; Pender also had a right to sue in the name of the company at least until held otherwise at GM.
Jessel MR on the S33 contract: there is also a proprietary nature to votes - 'This is an action by Mr Pender for himself. He is a member of the company, and whether he votes with the majority or the minority he is entitled to have his vote recorded - an individual right in respect of which he has a right to sue… He has a right to say, 'Whether I vote in the majority or minority, you shall record my vote, as this is a right of property belonging to my interest in this company, and if you refuse to record my vote I will institute legal proceedings against you to compel you.' What is the answer to such an action? It seems to me it can be maintained as a matter of substance…'
However, there can sometimes be a personal right to sue eg under some basic constitutional provisions like the right to vote.
MacDougall v Gardiner (1875) 1 Ch D 13
Facts: G = chairman of Emma Silver Mining Co; G adjourned a GM without acceding the request of shareholder McD and others that a poll be held on the question of adjournment. McD now claimed a declaration that the chairman's actions were improper, and an injunction restraining the directors from taking further action.
CA: held that it was a matter of internal management in which it should not interfere -
the 'irregularity principle'. Mellish LJ: when something has been done irregularly or illegally but it is something which the majority would have been entitled to do in substance anyway, then 'there can be no use in having litigation about it' - except in cases of minority oppression, no-one would have a right to complain except the company itself about the improper procedure.

R Drury, A Shareholder's Right to Enforce the Company Contract
[1986] CLJ 219
Introduction
A company is a voluntary association and so relations between members are contractual. The AoA is explicitly described as contractual in CA 2006. This governs relations between members inter se and between members and the company. The classical contractual model is still valid notwithstanding supplementary rules from statute and the common law. This is an idea that is more fully developed in French jurisprudence on the société in the théorie de l'institution but this applies to English law too.
The use of contractual techniques
Does the normal contractual model apply in full? Could it be said that the classical approach of contracts is more suited to one-off transactions rather than ongoing relationships? This is why such one-off transactions can be resolved via contentious,
winner-takes-all litigation where a dispute develops. This would not necessarily be suitable for an ongoing relationship. Litigation really is a remedy of last resort - if two companies wish to do business again in the future, any form of ADR would be preferable.
Expressly planned remedies like an arbitration clause or a liquidated damages clause become more important than general contractual remedies.
The company as a long term relationship
A company is a long-term relationship and company law works to provide a structure that will apply notwithstanding variation of the underlying rights and obligations eg amalgamation / sale of shares. Flexibility is required - eg AoA changed by ¾ majority rather than by traditional contractual approach of novation - the rules of contract may be modified to fit the long-term nature of the company relationship. Therefore, the remedy of litigation may not always be available - the more appropriate remedy may be through a vote at the General Meeting - Scott v Frank F Scott (London) Ltd [1940].
The Extent of a Shareholder's Right to Enforce the Company Contract
 The relational approach - AoA as a contract only makes sense if we understand that a different approach is needed for dispute-resolution - there should be less focus on specific rights and obligations in isolation. If eg a shareholder finds himself out-voted on a special resolution then he should first look to internal company dispute resolution mechanisms. Any court decisions on the matter should consider what result such internal mechanisms did or would have arrived at.
 Outsider rights

The problem: a member may enforce his rights under the AoA per Salmon v Quin & Axtens Ltd but this is subject to the qua member rule - why is this so? When is someone enforcing their AoA rights as an 'outsider'?
o Proposed solutions: Some like Goldberg (1972) suggested that all AoA
rights conferred onto members are conferred so as to protect their rights

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