Companies' Constitutions
♥ Can’t choose a name already taken
♥ Can’t choose a name that could be considered offensive
♥ Can’t choose a name too similar to one on the register
♥ Collate documents:
o Memorandum of association
♣ Area of law has changed (very important document before Companies Act
♣ Says subscribers want to set up company
♣ Whether it will be public or private
o Application for registration
♣ All information needed is here
♣ Statement of Capital
• Who holds shares, what they are worth etc.
♣ Statement of Compliance
• Complying with the terms of the Companies Act in setting up the company
• Sent to companies house
• Low cost (£40)
o Certificate of Incorporation-effect is issued:
• ‘Birth certificate’
• Name, registered office, Ltd or PLC, country etc.
o Public Companies: Trading Certificate
♣ PLCs cannot trade or borrow without a trading cert
♣ Ltd can trade after incorp cert
♣ PLCs must apply for trading cert
♣ Must confirm that it has complied with Companies Act
♣ Confirm £50 000 worth of share capital
♣ Can trade after it has this cert
♥ Constitution of Company:
o Articles of Association (don’t HAVE to file this document)
o Comprise constitution of the company
o Definition for these purposes: s 17 Companies act 2006
o Documents of Companies House are public
o Most important part: Articles of Association
o Before Companies Act 2006 included memorandum
o Used the be the key document
o Objects Clause set out what business the company could engage in
o S 28 Companies Act 2006:
♣ Older companies
♣ Provisions treated as if they were part of articles of association
♥ The Articles:
o Vital document
o How the company is run
o Procedures at directors and shareholders meetings
o Share issuing
o Dividend declaration
o Some of the matters covered by the articles are also regulated under the Companies Act 2006
o Default model articles will apply unless excluded
o Articles of association are so important that you can’t have a company without them
o Small business people don’t need to draw up their own articles – the government drafted model articles which apply if the company doesn’t form their own
o Different models for different types of company
o Table A applies to companies incorporated pre-2006
o Company cannot agree to prevent alteration of the articles: articles must be able to be amended
o Shareholders make decisions by passing resolutions
o Ordinary resolutions need 50%+ votes by shareholders
o Special resolutions require 75% of the vote
o You can restrict alteration of the articles – creating provisions which may only be amended if onerous conditions are satisfied (e.g. unanimous consent required to make a resolution)
o Provisions can only be entrenched at the time of incorporation or later with the consent of all members of the company
o Must be told which provisions are entrenched
o Protects position and guards against alterations
o Bushell v Faith
♣ Resolution to remove director couldn’t be passed unless director agreed to it
♣ Could defeat any proposal to remove him because his vote was weighted stronger
o Shareholders’ agreements:
♣ Can enter into a separate contract (outside company) whereby they agree in a contract not to change the articles in particular ways
♣ Russell v Northern Bank Development Corp:
• Share capital agreed not to be increased without agreement of all members in external contract
• Increased share capital without agreement of one member
• Shareholder brought proceedings
• Company can’t agree to fix articles
♣ Minority are at the mercy of the majority who can change articles
♣ Common law says that the power to alter the articles must be exercised in the best interests of the company
♣ Show majority shareholders are acting in bad faith: minority can get the amendment set aside
♣ Courts are reluctant to exercise powers
♣ Theme in company law that company is a democracy (majority rules): go into a company knowing you’re a minority, can’t go to the courts because the majority win
♣ Courts are reluctant to get involved in internal management of companies
♣ Constitution: not the courts
♣ Allen v Gold Reefs of West Africa 1900
• Company should have a charge on any shares which hadn’t be paid for by a shareholder
• Shareholder can’t sell shares without consent of company
• Minority shareholder complained about change because he was the only one affected
• Unfairly targets him?
• Court said it wasn’t just targeting him, it was in the interest of the company
• Shareholders acting in good faith and explanation that it would benefit the company = win in court
• Courts tend to be hands off
♣ Majority alters articles to buy out minority shares when they wanted: courts said that is unfair
♣ Citco Banking Corp NV v Pusser’s Ltd 2007:
• Articles were amended to give control of company to one shareholder
• Minority shareholder objected to this
• Privy council said the amendment can be valid even if it affects/benefits one shareholder if it was for the benefit of the company
• Hoffman left open whether a provision of buying out could stand
o Effect of the constitution:
♣ Acts like a contract
♣ Isn’t a normal contract
♣ Shareholders can’t enforce it like a normal contract
♣ Hickman v Kent and Romney Marsh Sheepbreeders’ Association 1915:
• Company can enforce articles against members
• H had sheep and was a member of R
• Wanted sheep to be classified as pedigree
• Started court proceedings
• Company said he couldn’t litigate against them
• Disputes to go to arbitration
• Can members enforce articles against company? Or each other?
♥ Eley v Positive Life Assurance Co 1876:
o Company said they’d use him as the solicitor
o Stopped using him as a solicitor
o Couldn’t enforce the articles because he wasn’t party to the constitution; wasn’t a shareholder
♥ Members can only enforce ‘membership rights’
o Pender v Lushington 1877
♣ Shareholder had 100 votes
♣ Chairman refused to take his vote
♣ One key right a member has is the right to vote
♣ Counted as a ‘membership right’
♣ Decision the company made was set aside
o Salmon v Quin & Axtens 1909
♣ Articles of Association said that the Board of Directors could not take certain types of decisions without the consent of both managing directors
♥ MacDougall v Gardiner 1875
o Can get rid of director with 50+% of the vote
1. Show of hands to vote
2. Shareholders can ask for a pool vote – amount of shares shareowners hold
o People who held most of the shares wanted to get rid of the director
o Chairman refused to hold the pool
o Not a membership right
o ‘Mere internal irregularity’
♥ Constitution isn’t a normal kind of contract
♥ Can be altered with majority consent
♥ Can’t make it impossible to amend the constitution
♥ Courts will not imply terms into the constitution and will not rectify them
What is a company?
Real entity theory (Corporate Realism) – it is more than a juristic idea; it is a social organism with a living nature. It is a new personality. It takes on a life of its own. If it were a real thing, it would be possible to hold the company liable for crimes it commits.
Fiction – it does not exist but is a mere artificial thing to allow people to associate together to carry on business
Aggregate – this stresses the fact that real person are involved in the company and the company has no existence apart from the members of the company. This means the company cannot be criminally liable – any decisions the directors makes is based on only the shareholders
Theories about the nature of the company:
♥ Concession theory
♥ Contractarian theory
o Companies are simply a series of contracts
o Company doesn’t really exist
o Not legal contracts: relationships between shareholders, employees, creditors etc.
o Private institution
♥ Can’t choose a name that could be considered offensive
♥ Can’t choose a name too similar to one on the register
♥ Collate documents:
o Memorandum of association
♣ Area of law has changed (very important document before Companies Act
♣ Says subscribers want to set up company
♣ Whether it will be public or private
o Application for registration
♣ All information needed is here
♣ Statement of Capital
• Who holds shares, what they are worth etc.
♣ Statement of Compliance
• Complying with the terms of the Companies Act in setting up the company
• Sent to companies house
• Low cost (£40)
o Certificate of Incorporation-effect is issued:
• ‘Birth certificate’
• Name, registered office, Ltd or PLC, country etc.
o Public Companies: Trading Certificate
♣ PLCs cannot trade or borrow without a trading cert
♣ Ltd can trade after incorp cert
♣ PLCs must apply for trading cert
♣ Must confirm that it has complied with Companies Act
♣ Confirm £50 000 worth of share capital
♣ Can trade after it has this cert
♥ Constitution of Company:
o Articles of Association (don’t HAVE to file this document)
o Comprise constitution of the company
o Definition for these purposes: s 17 Companies act 2006
o Documents of Companies House are public
o Most important part: Articles of Association
o Before Companies Act 2006 included memorandum
o Used the be the key document
o Objects Clause set out what business the company could engage in
o S 28 Companies Act 2006:
♣ Older companies
♣ Provisions treated as if they were part of articles of association
♥ The Articles:
o Vital document
o How the company is run
o Procedures at directors and shareholders meetings
o Share issuing
o Dividend declaration
o Some of the matters covered by the articles are also regulated under the Companies Act 2006
o Default model articles will apply unless excluded
o Articles of association are so important that you can’t have a company without them
o Small business people don’t need to draw up their own articles – the government drafted model articles which apply if the company doesn’t form their own
o Different models for different types of company
o Table A applies to companies incorporated pre-2006
o Company cannot agree to prevent alteration of the articles: articles must be able to be amended
o Shareholders make decisions by passing resolutions
o Ordinary resolutions need 50%+ votes by shareholders
o Special resolutions require 75% of the vote
o You can restrict alteration of the articles – creating provisions which may only be amended if onerous conditions are satisfied (e.g. unanimous consent required to make a resolution)
o Provisions can only be entrenched at the time of incorporation or later with the consent of all members of the company
o Must be told which provisions are entrenched
o Protects position and guards against alterations
o Bushell v Faith
♣ Resolution to remove director couldn’t be passed unless director agreed to it
♣ Could defeat any proposal to remove him because his vote was weighted stronger
o Shareholders’ agreements:
♣ Can enter into a separate contract (outside company) whereby they agree in a contract not to change the articles in particular ways
♣ Russell v Northern Bank Development Corp:
• Share capital agreed not to be increased without agreement of all members in external contract
• Increased share capital without agreement of one member
• Shareholder brought proceedings
• Company can’t agree to fix articles
♣ Minority are at the mercy of the majority who can change articles
♣ Common law says that the power to alter the articles must be exercised in the best interests of the company
♣ Show majority shareholders are acting in bad faith: minority can get the amendment set aside
♣ Courts are reluctant to exercise powers
♣ Theme in company law that company is a democracy (majority rules): go into a company knowing you’re a minority, can’t go to the courts because the majority win
♣ Courts are reluctant to get involved in internal management of companies
♣ Constitution: not the courts
♣ Allen v Gold Reefs of West Africa 1900
• Company should have a charge on any shares which hadn’t be paid for by a shareholder
• Shareholder can’t sell shares without consent of company
• Minority shareholder complained about change because he was the only one affected
• Unfairly targets him?
• Court said it wasn’t just targeting him, it was in the interest of the company
• Shareholders acting in good faith and explanation that it would benefit the company = win in court
• Courts tend to be hands off
♣ Majority alters articles to buy out minority shares when they wanted: courts said that is unfair
♣ Citco Banking Corp NV v Pusser’s Ltd 2007:
• Articles were amended to give control of company to one shareholder
• Minority shareholder objected to this
• Privy council said the amendment can be valid even if it affects/benefits one shareholder if it was for the benefit of the company
• Hoffman left open whether a provision of buying out could stand
o Effect of the constitution:
♣ Acts like a contract
♣ Isn’t a normal contract
♣ Shareholders can’t enforce it like a normal contract
♣ Hickman v Kent and Romney Marsh Sheepbreeders’ Association 1915:
• Company can enforce articles against members
• H had sheep and was a member of R
• Wanted sheep to be classified as pedigree
• Started court proceedings
• Company said he couldn’t litigate against them
• Disputes to go to arbitration
• Can members enforce articles against company? Or each other?
♥ Eley v Positive Life Assurance Co 1876:
o Company said they’d use him as the solicitor
o Stopped using him as a solicitor
o Couldn’t enforce the articles because he wasn’t party to the constitution; wasn’t a shareholder
♥ Members can only enforce ‘membership rights’
o Pender v Lushington 1877
♣ Shareholder had 100 votes
♣ Chairman refused to take his vote
♣ One key right a member has is the right to vote
♣ Counted as a ‘membership right’
♣ Decision the company made was set aside
o Salmon v Quin & Axtens 1909
♣ Articles of Association said that the Board of Directors could not take certain types of decisions without the consent of both managing directors
♥ MacDougall v Gardiner 1875
o Can get rid of director with 50+% of the vote
1. Show of hands to vote
2. Shareholders can ask for a pool vote – amount of shares shareowners hold
o People who held most of the shares wanted to get rid of the director
o Chairman refused to hold the pool
o Not a membership right
o ‘Mere internal irregularity’
♥ Constitution isn’t a normal kind of contract
♥ Can be altered with majority consent
♥ Can’t make it impossible to amend the constitution
♥ Courts will not imply terms into the constitution and will not rectify them
What is a company?
Real entity theory (Corporate Realism) – it is more than a juristic idea; it is a social organism with a living nature. It is a new personality. It takes on a life of its own. If it were a real thing, it would be possible to hold the company liable for crimes it commits.
Fiction – it does not exist but is a mere artificial thing to allow people to associate together to carry on business
Aggregate – this stresses the fact that real person are involved in the company and the company has no existence apart from the members of the company. This means the company cannot be criminally liable – any decisions the directors makes is based on only the shareholders
Theories about the nature of the company:
♥ Concession theory
♥ Contractarian theory
o Companies are simply a series of contracts
o Company doesn’t really exist
o Not legal contracts: relationships between shareholders, employees, creditors etc.
o Private institution