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Chapter 11

Article of association

Articles of association
The article forms the internal constitution
of the company.
They
1) Set out the manner in which the
company is to be governed
2) 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) Dividend
7) 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 CA06
1) Private Companies Limited by Shares
2) Private Companies Limited by Guarantee, or
3) 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 formation
b) 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 directorsfor 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
notbona fidefor the benefit of the company as a whole.
Held
The Court of Appeal dismissed the appeal holding that
the alteration of the articles wasbona fidefor the benefit
of the company and was valid. It reaffirmed thebona
fidetest laid down inSidebottom 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 buying
steelfrom 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 aspecial resolutionto include a power to
compulsorily purchasethe 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 companys


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 members
2) 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 name


The 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 Registrars 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
companys 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 adjudicators 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

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