Chapter 11

Article of association

Articles of association • The article forms the internal constitution of the

company. • They1) Set out the manner in which the company is to be

governed2) To regulate the relationship between the company

and shareholder .3) There are no mandatory contents.

Main content of articles of association 1) Appointment and dismissal of directors 2) Power , responsibilities and liabilities of director 3) Director meetings 4) General meeting , calling , conduct and voting 5) Members right 6) Dividend7) issues of shares 8) Transfer of shares 9) Documents and records

Articles of Association(Model Articles)• If No articles are made then, Model Articles are imposed.• Model Articles will apply where :• A Company is formed without registering articles the Articles

registered do not exclude or modify the model articles.• Model Articles prescribed by the Secretary of State for

companies incorporates under CA061) Private Companies Limited by Shares2) Private Companies Limited by Guarantee, or3) Public Companies• A Company :• Adopt: model articles in Full or in Part• Deemed to have Adopted: if there is No Express or Implied

provision to exclude them, or• Draft its Own :unique articles

Model articles

• A company may file its own tailor made article on application for registration of company. If it does not , then statutory model articles applied automatically.

• The statutory model articles also apply to fill in any gaps in the company own tailor made articles.

Alteration(Amendments) of Articles

• General Rule• The articles can usually be altered by a special

resolution (75% majority).• Copies of the Amended Articles must be

Sent/Reported to the Registrar within 15 Days.

Exceptions• Entrenchment• It is possible to entrench some of the Articles. i.e. A

Specified procedure may be required to change them.(90% agreed, all members agree, Mr A agrees)

• Any provision for entrenchment may only be made:a) In the company articles on formationb) By an amendments to the article agreed to by all the

members • Members Increase Liability• CA06 prevents a member being bound by any alteration

made after he becomes a member that required him to increase his liability or contribute further to the company.

Exceptions• Common Law Restriction• Any change to the articles must be 'Bona Fide' in

interests of the company as a whole.• It is for the members to decide whether the change

is Bona Fide• Court will NOT interfere unless No reasonable

person would consider the change to be bona fide• Change will be Void if Actual fraud or oppression

takes place.• Alteration is Not Invalid merely because it causes a

breach of (One or Single) Contract

Expulsion against minority

Shuttleworth v Cox Bros and Co

• Facts • Cox Bros and Co (Maidenhead) had appointed a

board of directors for life, and had fixed this under its articles of association. Then it proposed to amend its articles so that a director would lose his position if the other directors requested in writing for him to resign. Mr Shuttleworth, who was targeted by the changes, brought a claim alleging that the alteration of the articles was not bona fide for the benefit of the company as a whole.

• Held • The Court of Appeal dismissed the appeal holding that the

alteration of the articles was bona fide for the benefit of the company and was valid. It reaffirmed the bona fide test laid down in Sidebottom v Kershaw, Leese & Co

Sidebottom vs Kerhsaw ,Leese &Co ltd• Facts• The articles were altered to enable the directors to

purchase the at the fair value of shareholding of any member who have competed with the company in the business. The minority against whom new was aimed did carry on a competing business. They challenged the validity of alteration on the grounds that it was to abuse the majority power to expel the members.

• Held • There was no objection to a power expulsion by this

means. It was justifiable alteration in made bona fide in the interest of the company as a whole. On the facts this was justifiable.

Brown v British Wheel Co.• Fact :• Articles were altered to enable the majority to

purchase at 'a fair value the shares of the minority‘• The intention was to invoke the clause against some

minority members which were refusing to inject further capital into the company. They objected on the alteration.

• Held • Alteration rejected by the court (Objection Sustained)• This was NOT a BONO FIDE alteration as it would

benefit the majority shareholder ONLY, rather than the company as a whole.

Allen v Gold Reefs• Fact • Z held fully paid up and partly paid up shares in the

company. The company's articles provided for a lien* for all debts and liabilities of any member upon Only All Partly Paid up Shares held buy the member. Company by special resolution altered so that the lien was available on Fully Paid up shares as well.

• Held• Alteration was accepted (Objection Overruled)• The company had power to alter its articles by

extending the lien to Fully Paid Shares Also

Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd

• Fact • Dafen Tinplate Co Ltd was a shareholder in Llanelly Steel

Co. Llanelly realised that Dafen were buyingsteel from an alternative source of supply, and also to buy up the company's shares (an attempt which failed). Llanelly responded by altering its articles through a special resolution to include a power to compulsorily purchase the shares of any member requested to transfer them. Dafen Tinplate argued the alteration was invalid.

• Held• The court held that the alteration was too wide to be valid

Legal effect of Company's Constitutional Documents (Articles)

• CA06 states that the provisions of a 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 those provisions.

• This means that the articles form a contract between the company and its members, and the members between themselves, even if they do not sign them. The Articles form a Statutory Contract even if they do not sign, between the :

1) Company and its members2) Members and the company 3) Members themselves

The Articles are enforceable - By the Company against the Members

• Hickman v Kent Association• The company's articles included a clause to the

effect that All Disputes between the Company and its members were to be referred to Arbitration (Negotiation). Members brought the case to court proceeding against the company.

• Held• Clause was Valid (Objection Overruled)• The proceedings were stopped. The company could

enforce the arbitration clause against a member.

The Articles are enforceable - By the Members against the Company

• Pender v Lushington• Facts • The articles provided for one vote per ten shares, with No

member to have more than 100 votes. A member with more than 1,000 shares transferred the surplus to a nominee and directed him how to vote. The chairman refused to accept the nominee's votes.

• Held • Nominee Votes transfer was Valid (Objection Sustained)• The right to vote was enforceable against the company and

should have been recognized by the company as a breach of the articles.

The articles also operates as a contract between individual members in their capacity as members.

• 1. Rayfield v Hands• Facts • The Articles required every director to hold shares in the

company and also stated every member who intends to transfer shares shall inform the directors who will take the said shares equally between them at fair value. Shareholder called the directors to purchase his shares at fair value they refused to do so.

• Held :• This was enforceable against the directors in their capacity

as members , because articles imposed contractual obligation on the directors.

2.Eley v Positive Govt. Security Life Assurance(Articles are not a binding contract

company to Non members

• Fact :• The Articles provided that the Eley should be Solicitor to

the Company for Life.(By constitution) and was also the shareholder. After 10 years they fired the solicitor.

• Held • This was NOT a Right given to him as a member and he

could not rely on the articles as a contract for professional services The right to be a Director of a company has also been held to be an outsider right (I.e. a Non-Membership) right.(in their capacity as a members)

3. Beattie v EF Beattie• The Company's articles contained as Arbitration

(Negotiation) clause. B, a Member and Director of the company, was in dispute with the company concerning his right as director because company denied asses to minutes of directors meetings. He Brought Court proceedings against the company.(Can not rely on the contract)

• Held :• He was NOT Bound by the Arbitration clause since

he was acting in his capacity as Director, not a member.

Object clause and Ultra virus

• Object clause • The articles of some companies will contain an

articles setting out the business of the company , such an article is called as object clause.

• Ultra virus • Problem arises where a company engages in a

business or makes a contract that is outside its objects such a business/Contract is classed as ultra virus

1.Ashbury railways carriage vs Riche

• Object clause: To build rolling stock trains, engines , carriage which roll a long the rail.

• Company build a railway line• This the ultra virus activity

2. Re German date coffee• Object clause:• To work a German patient for the manufacturing

of coffee from dates. Company was unable to obtain German patient but it obtained a Swedish patient form which it successfully manufactures coffee from dates .

• Ultra virus activity

Effect of Ultra virus • Third parties can enforce ultra virus contract against

the company.• The company may ratify an ultra virus contract by

special resolution.• Any member can get an injunction to stop the

company entering into an ultra virus.• The Director commit a breach of duty if they cause

the company to act ultra virus.• If the company is unable to carry out its business

within the limits of its object clause any member can apply to the court for a winding up order on the grounds of just and equitable basis.

Limitation on the company name • Except in relation to specifically exempted

companies, such as those involved in charitable work, companies are required to indicate that they are operating on the basis of limited liability. Thus private companies are required to end their names either with the word ‘limited’ or the abbreviation ‘ltd’, and public companies must end their names with the words ‘public limited company’ or the abbreviation ‘plc.

• Companies Registry maintains a register of business names, and will refuse to register any company with a name that is the same as one already on that index.

Tort of passing off • Must avoid tort of passing off:• company by use of its name gives impression it is another company• can be restrained by injunction from using name/claim damages• must be a genuine risk of confusion• (yellow m registered mark, British air ways , British hairways)• The action of ‘passing off’ was developed to prevent one person from

using any name which is likely to divert business their way by suggesting that the business is actually that of some other person, or is connected in any way with that other business. It thus enables people to protect the goodwill they have built up in relation to their business activity. In Ewing v Buttercup Margarine Co Ltd (1917), the plaintiff successfully prevented the defendants from using a name that suggested a link with his existing dairy company. It cannot be used, however, if there is no likelihood of the public being confused, where, for example, the companies are conducting different businesses (Dunlop Pneumatic Tyre Co Ltd v Dunlop Motor Co Ltd (1907)

Limitation on company name• Certain categories of names are, subject to the decision of

the Secretary of State, unacceptable , as follows:• (i) names which in the opinion of the Secretary of State

constitute a criminal offence or are offensive• (ii) names which are likely to give the impression that the

company is connected with either government or local government authorities

• (iii) names which include a word or expression specified under the Company and Business Names Regulations 1981

• This category requires the express approval of the Secretary of State for the use of any of the names or expressions contained on the list, and relates to areas which raise a matter of public concern in relation to their use.

Limitation on company nameThe Secretary of State has power to require a

company to alter its name under the following circumstances:

• (i) where it is the same as a name already on the Registrar’s index of company names.

• (ii) where it is ‘too like’ a name that is on that index. The name of a company can always be changed by a special resolution of the company, so long as it continues to comply with the above requirements .

company names adjudicators• A new procedure has been introduced to cover situations where

a company has been registered with a name.• (i) that it is the same as a name associated with the applicant in

which he has goodwill, or• (ii) that it is sufficiently similar to such a name that its use in the

United Kingdom would be likely to mislead by suggesting a connection between the company and the applicant

• Section 69 can be used not just by other companies, but by any person, to object to a company names adjudicator, if a company’s name is similar to a name in which the applicant has goodwill. There is a list of circumstances raising a presumption that a name was adopted legitimately; however even then, if the objector can show that the name was registered either to obtain money from them, or to prevent them from using the name, then they will be entitled to an order to require the company to change its name.

company names adjudicators• Under s.70, the Secretary of State is given the power to appoint

company names adjudicators and their staff and to finance their activities, with one person being appointed Chief Adjudicator.

• Section 71 provides the Secretary of State with power to make rules for the proceedings before a company names adjudicator.

• Section 72 provides that the decision of an adjudicator and the reasons for it are to be published within 90 days of the decision.

• Section 73 provides that if an objection is upheld, then the adjudicator is to direct the company with the offending name to change its name to one that does not similarly offend. A deadline must be set for the change. If the offending name is not changed, then the adjudicator will decide a new name for the company.

• Under s.74, either party may appeal to a court against the decision of the company names adjudicator. The court can either uphold or reverse the adjudicator’s decision, and may make any order that the adjudicator might have made.

EXAM IMPORTANT• In examination question - Check the capacity in

which the person is claiming. Is it as a member, or in some other capacity, such as a director or an accountant?

• Obviously the articles have no effect as a contract between the company and a person who is NOT a member even it they are named in them and given apparent rights against the company

• i.e. Articles is only Valid between :• Company --- Member only