COMPANY LAW

COMPANYS CONSTITUTION

LECTURE 12

Charles Nicholson

The Memorandum, Articles & Shareholders Agreement Explain the Memorandum of Association (MA) and Articles of Association (AA). Examine the contractual and legal effect of the Articles of Association What do you understand by the objects clause? Describe the conditions that need to be fulfilled before an article may be altered. Examine the effect of an alteration of the AA.

MEMORANDUM OF ASSOCIATION

Each company must have Memorandum of Association (MA) before it can be registered S. 16(1) registered It is the main constitutional document of the co. S. 18 provides the contents of MA  Name of the co.  Objects of the co.  The share capital clause  The limited liability clause  An association clause where subscribers agree to take up the numbers of shares stated  Subscribers clause states the names, addresses & occupations of the subscribers to the MA

OBJECTS OF MA
    

The companys powers must be defined. The objects set out the purpose for which the co. exists. It details all that the co. is permitted to do. The co. must act within its stated objects. What happens if a co. does an act which is not specified in its object i.e. if the act is outside the scope of its objects?

Ashbury Railway Carriage & Iron Co v. Riche (1875) LR 7 (House of Lords) The objects clause in the cos MA stated as follows to make, and sell, and lend or hire, railway carriages and wagons . . ., to carry on the business of mechanical engineers and general contractors. contractors. The directors of the co. entered into contract to build railway. The co. then refused to proceed with the contract. The vendors sued the co. for breach of contract.

Held: Held: the construction of railway was not within the objects clause as stated in the cos MA. The act was ultra vires and the contract was therefore void and the vendors failed in their action against the co. cant be ratified by the co.. Ultra vires in excess or outside/beyond the powers conferred by the MA i.e. the co. does not have the power or capacity to enter into such contracts.

ATTEMPTS TO DIMINISH THE OPERATION OF ULTRA VIRES To put a wide object clause. S. 20 CA 1965 strikes out the absolute effect of ultra vires. Alteration of objects in memorandum s. 28(1). 28(1). 152) By special resolution (s. 152) the co. may alter the objects clause. The procedure for alteration laid down in s. 28 must be complied with. Holders of not less than 10% of the cos issued shares/debentures can apply to the court to cancel 7 the alteration must be made within 21 days from

S. 20 Co. Act 1965



 

S. 20(1) states that the validity of an act /contract/transfer of property by a co. cannot be challenged on the ground that it is ultra vires i.e. on the ground that the act was done in excess of the companys capacity or power. Effect an ultra vires act is valid pursuant to s. 20(1). 20(1). A s/h or debenture holder secured by a floating charge can restrain the ultra vires act s. 20(2)(a) The director or officer who had entered into an ultra vires transaction can be sued by the company or any member s. 20(2)(b). 20(2)(b).

The Minister can petition to the court to wind up the co. - s. 20(2)(c). 20(2)(c). If the unauthorised act or transfer is yet to be performed, then the courts have the power to restrain the performance of the act and to order compensation for loss or damage sustained by either party - s. 20(3). 20(3). Public Bank Bhd v. Metro Construction Sdn Bhd [1991] - where the court held that s. 20(1) abolishes the otherwise rigorous effect of the ultra vires doctrine

ALTERATION OF MA

The MA may be altered only to the extend and in the manner provided by the Act s. 21(1) If there are no specific provisions to alter then the MA cannot be altered. The following are alterable:  Change of company name s. 23  Conversion of unlimited to limited co. or vice versa s. 25  Conversion of private co. to public co. s. 26  Alteration of the objects of the co. s. 28(1)  To alter or reduce the share capital s. 64
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ARTICLES OF ASSOCIATION They are provisions that regulate the internal management and operation of the company. Matters set out in AA include: Division of power & relationship between general meeting of shareholders and BOD Method of appointment of directors Duties of directors Procedure of meetings Procedure for allotment and transfer of shares Manner dividends are declared Right and obligations of members etc.
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How to lodge an article?



All companies shall lodge with the Registrar the 16(1). memorandum and articles s. 16(1). A co. limited by shares need not lodge their own AA s. 30(1) If they elect not to lodge their own AA, they can adopt Table A Articles of the Fourth Schedule as their AA. A co. limited by guarantee must lodge its own AA.

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What is Table A of Fourth Schedule?

 

Sometimes referred to as model AA. It constitutes clear and comprehensive set of regulations for the management of a co. limited by shares. A co. may adopt all or any of the regulations contained in Table A s. 30(1)

If a co. lodges its own AA, then the contents in Table A will apply only to the extent that they are not excluded or modified by the lodged articles s. 30(2)
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The legal and contractual effect of the articles

The starting point of looking at the effect of the articles is s. 33(1) CA 1965 which provides:provides:Subject to this Act the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.

This is often referred to as the Statutory Contract and Statutory any member has the right to enforce observance of the articles by virtue of the contractual effect given to the 1965. articles by the s. 33(1) CA 1965.
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The articles bind the co. and the members as if they had been sealed by the co. on which the members can sue and be sued by the co. and where the rights of an individual member have been infringed, he may sue in his own name. Wood v. Odessa Waterworks Co. (1889) 42 Ch 636 Co. It was provided by the articles that a dividend was to be paid on the shares to the shareholders. The general meeting by a majority passed an ordinary resolution proposing not to pay a dividend in cash but instead to grant debenture - bonds to the shareholders. These were to be redeemable over 30 years. The co. made profits and the dividends to be paid were loaned by the shareholders to the co. in return for the debentures.
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The plaintiff, Wood, a shareholder sought an injunction to restrain the co. from acting on the resolution. He alleged that this proposal was inconsistent with the articles. The question for the judge, Justice Stirling, was, whether it was within the power of the majority shareholders that voted in the general meeting to bind the minority shareholders who dissented? Wood was one of those who dissented. And in answer to that question, the Judge said the following:following:-

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The articles of association constitute a contract not merely between the shareholders and the co., but between each individual shareholder and every other; and the question which I have just stated must in my opinion be answered in the negative if there be in the articles a contract between the shareholders as to a division of profits, and the provisions of that contract have not been followed Those articles provide that the directors may, with the sanction of the general meeting, declare a dividend to be paid to the shareholders. Prima facie that means to be paid in cash. The debenture-bonds proposed debentureto be issued are not payments in cash; they are merely agreements or promises to pay: and if the contention of the co. prevails a shareholder will be compelled to accept in lieu of cash a debt of the co. payable at some uncertain future period. In my opinion that contention ought not to prevail See also: Pender v. Lushington (1877) 6 Ch 70 also:
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The fairness or unfairness of an article is not relevant in deciding whether it can be enforced. A members rights and liabilities under the articles are purely a matter of contractual obligation. In Wong Kim Fatt v. Leong & Co. Sdn. Bhd. & Anor. [1976] 1 MLJ 140 the companys articles contained an article that provided that, The holders of seven-tenths of seventhe issued capital of the co. may at any time serve the co. with a requisition to enforce the transfer of any particular shares not held by the requisitionists. requisitionists. The second defendant held 250,000 shares out of 300,000 issued shares. He served a requisition to buy out Wongs shares. Wong objected to this. He obtained an interim injunction to prevent the enforcement of the article.
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However, at the hearing of the action the learned judge, Chang Min Tatt J, held that the article was enforceable. He said:said:Whatever the sympathies evoked by the sight of a slingless David confronted by a Goliath, there are in my view no facts and circumstances raising up any equity against the second defendant. It is purely a matter of contractual obligation and the plaintiff must be held to the obligations he had undertaken.

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The articles bind members in their capacity as members only, and not in any special or personal capacity, e.g. director. This is known as the qua member rule. qua rule. Beattie v. E.F. Beattie Ltd [1938] Ch 708; There was a dispute between B, a director, and the co. The co. alleged that the B had mishandled certain money belonging to the co. The co. brought this action to recover this money. B was also a member of the co. There was an arbitration clause in the articles that provided that any dispute should be referred to an independent arbitrator and therefore disputes should not be taken to the courts. B applied to court to have the action struck out on the ground that the co. should have gone to arbitration under the arbitration clause and so by alleging this he was seeking to enforce the articles.
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However, the Court of Appeal held that B could not do this. He was being sued in his capacity as a director and as a director he could not rely on the articles. B could only have relied on the articles as a member. As a director B was an outsider to the statutory contract. B was not seeking to enforce a right that is common to himself and to all members. It was not part of the general rights of the corporators. He seeks to enforce quite a different right.

Hickman v. Kent or Romney Marsh Sheep-Breeders SheepAssociation [1915] 1 Ch 881. H was a member of the defendant association which was a non-profit making co. He brought an action against the nonassociation complaining of various irregularities in the affairs of the association, including the refusal by the association to register his sheep in its published flock book and a threat to expel him from membership of the association. Article 49 of the articles provided that any dispute between the association and any of its members should be referred to arbitration. However, instead of going to arbitration, H went directly to the courts and the association was successful in getting the action stayed. The arbitration article was binding on H. The court held that there was an obligation on H under the articles to go to arbitration and the association could enforce this against him.
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What is the position of an outsider ? i.e. someone who is not a member of the co. or one who is a member but acting in a capacity other than that of a member. An outsider to whom rights are purported to have been given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating the articles as contracts between himself and the co. to enforce those rights. There has to be a separate or extrinsic contract with the co. i.e. a contract that exists outside the articles for the outsider to be able to enforce his rights against the co. co.

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The articles do not therefore constitute a contract between the co. and someone who is not a member i.e. an outsider. Eley v. Positive Government Security Life Assurance Co. Ltd. (1876) 1 Ex D 88, Court of Appeal. Here a solicitor E, formed a co. He himself drafted the companys documents for registration. Article 118 of the companys article provided: Mr. William Eley, of No. 27, New Broad Street, in the City of London, shall be the solicitor to the company and shall transact all the legal business of the company, including parliamentary business, for the usual and accustomed fees and charges, and shall not be removed from his office except for misconduct.
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After a time the co. employed other solicitors. E then sued the co. for breach of contract in not employing him as its solicitor. E had by the time of the action actually become a member and held 200 shares. It was held that he could not force the co. to obey this article. The articles had the effect of making a contract between the co. and the members, and E in his capacity as solicitor, was not a party to the contract. The articles conferred no rights on a member where the member seeks to enforce a right in his capacity other than as a member. Eley was seeking to assert a right in his capacity as a solicitor of the co. To do so, he should have had a separate contract independent of the articles. See also: Raffles Hotel Ltd. v. Malayan Banking Ltd. also: [1965] 1 MLJ 60 HC; [1966] 1 MLJ 206 FC 25

No article can constitute a contract between the co. 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, as, for instance, as solicitor, promoter, director, can be enforced against the co.; Articles regulating the rights and obligations of members generally as such do create rights and obligations between them and the co. respectively.

ALTERATION OF ARTICLES Subject to the Act and to the MA the co. is free to alter or add to its articles s. 31(1) However, certain conditions must be met:met: A special resolution (s. 152(1)) has to be passed by not 152(1)) less than 75% of its members being entitled to vote at the general meeting of which not less than 21 days notice had been given.  Vote bona fide for the benefit of the co. as a whole Allen v. Gold Reefs of West Africa Ltd [1900]1 Ch 656  If it is provided under MA that the articles cannot be altered, then AA is unalterable  Alteration must be for a proper purpose and fair in all the circumstances Gambotto v. WCP Ltd [1995] 13 circumstances ACLC 344.
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If the alteration of the articles affects the rights attached to any one class of shares, then there is an additional procedure Art. 4, Table A variation or modification of class rights. Consent in writing of the holders of three-fourths of the issued shares of that class, or With the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The holders of not less than 10% of the issued shares of that class may apply to the Court to have the variation or abrogation cancelled. S. 65(1)

A co. cannot deprive itself of the power contained in s. 31 CA 1965 to alter the articles by any statement in the articles themselves. A co. cannot contract out of the power to alter the articles. Punt v. Symons & Co Ltd [1903] 2 Ch 506. By articles 95 and 97 of the defendant co., Mr. GG Symons as governing director was given the power to appoint and remove the cos directors, and after his death the same power was exercisable by his executors. The co. had also agreed in a separate contract relating to the purchase of Symons business that it would not alter these articles. After the death of Symons, the co. proposed to rescind the articles in question by special resolution. The executors applied for an injunction. They were relying on the agreement.
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The judge, Byrne J., refused to hold that the agreement operated to prevent the articles being altered under the provisions of s. 50 of the Companies Act, 1862. To make the agreement effective the judge had to grant an injunction to prevent the co. from acting on the altered articles and which he was not prepared to do. He however said that the executors might have the remedy of damages only.

This judge-made limitation on the companys ability to judgealter its articles was laid down by the Court of Appeal in: Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch 656. Ltd. The co. by Article 29 of its articles had a lien for debts and liabilities of any member to the co. (a lien is a right to hold property belonging to someone else as security for the performance of an obligation). This lien was upon all the partly paid shares held by that member. A shareholder, called Zuccani, had both partly paid and fully paid shares and he was also the only holder of fully paid shares. When Z died he owed money to the co. for calls made by the co. on his partly paid shares and which were overdue but his assets were not sufficient to cover these debts. The co. then altered Article 29 giving them a lien on all shares whether fully paid or partly paid. This had the effect of creating a lien on Zs fully paid shares which was the whole purpose of the alteration.
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The plaintiffs were Zs executors and they brought this action for a declaration that the defendant co. had no lien upon the fully paid shares and the question was, had the articles been validly altered? The Court of Appeal held that the co. had the power to alter its articles to extend its lien to the fully paid shares. Lindley MR stated:stated:The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the companys memorandum of association. the power conferred by it must, like all other powers It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. 32

RELATIONSHIP BETWEEN CONTRACT AND ARTICLES

What happens if there is a separate extrinsic contract between an outsider and a co.? The articles can still be altered and the co. can act on its altered articles. But it would amount to a breach of contract and the co. can be sued for damages. A co. cannot by altering its articles justify a breach of contract.

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Southern Foundries (1926) Ltd v. Shirlaw [1940] AC 701, HL By a written service contract in 1933 S was appointed as the managing director of the appellant co. for ten years. There was a provision in the contract that said that S would cease to be managing director if he ceases to be a director. In 1936, the entire share capital was acquired by Federated Foundries Ltd. A new article was placed in the cos articles after the takeover which gave a power to the majority shareholders, Federated Foundries, to remove a director at any time. In 1937 Federated exercised this power and removed S from his directorship. S sued Southern Foundries for breach of contract and Federated for wrongly procuring the breach of contract. It was the majority shareholders who were ultimately responsible for causing a breach of contract. S was awarded 12,000 damages against both defendants.

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The court held:held: A co. cannot be precluded from altering its articles thereby giving itself power to act upon the provisions of the altered articles. So an injunction will not be granted to prevent the adoption of the new articles. But to act upon the altered articles will render the co. liable in damages for a breach of the contract if it is contrary to a stipulation in a contract made before the alteration. If the altered articles had provided for the dismissal without notice of a managing director previously appointed, the dismissal would be intra vires the co. but the co. would nevertheless be liable to an action for damages if the appointment of the MD had been for a term of say ten years and he were dismissed in less.
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Shareholders Agreement and Articles A co.s MA & AA may be supplemented by a shareholders agreement. It is a contract entered into between the shareholders of a co. to regulate their conduct and define their duties and obligations inter se in the running of the co. It may be entered into by the shareholders either at the time of the co.s formation or at some subsequent time (e.g. when a family co. in need of extra capital to finance an expansion of its business, invites an outsider to join the co. as an additional shareholder). For the shareholders agreement to be fully effective, it is necessary that all of the members for the time being are made parties to the agreement, and so the use of a shareholders agreement is practicable only if the membership is not too large.
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A shareholders agreement only creates personal obligations. This principle was had been well established by Lord Davey in Welton v. Saffery [1895-99] All ER Rep [1895567. It was applied by the House of Lords in Russel v. Northern Bank Development Corp Ltd & Ors [1992] 3 All ER 161. See also: Beh Chun Chuan v. Paloh Medical Centre Sdn. Bhd. & Ors.[1999] 3 MLJ 262 , where the High Ors. Court, referred to the case of Tuan Haji Ishak bin Ismail v. Leong Hup Holdings Bhd. & other appeals [1996] 1 MLJ, CA.

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Beh Chun Chuan v. Paloh Medical Centre Sdn. Bhd. & Ors.[1999] Ors. A winding up petition was presented by the petitioner, a minority shareholder of the co. under s. 181 of the CA 1965. A shareholders agreement was executed whereby it was provided that all parties shall procure that the memorandum and articles of association of the co. be amended so that the provision in the memorandum and articles of association shall comply with the terms of the shareholders agreement. However, until the date of the petition, no steps were taken by any of the parties to procure the amendment. The petitioner alleged that the affairs of the co. were conducted in a manner oppressive to the petitioner.

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The petitioners complaints of oppression appeared to have been based on the alleged breach of the terms of the shareholders agreement that had not been incorporated into the AA of the co. In dismissing the petition, the Court held that in order to ensure that the terms of a shareholders agreement shall bind the shareholders under the Companies Act, it would be necessary to amend the articles to incorporate the terms in the shareholders agreement into the articles of the co. Here, nothing was done to amend the articles to incorporate the terms in the shareholders agreement into the articles. In the event, it follows that all the complaints put forth by the petitioner which were based on the breach of the agreement must fail.

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REMEDIES FOR BREACH OF AA AND MA

  

The members can apply for injunction or declaration They seek to have the A/A observed S. 33(1) Sometimes, directors cannot prevent the co. from terminating their appointment, but they can obtain damages for wrongful dismissal if they have a separate service contract with the co..

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