Altering Articles of Association and Breaches of Contract in Company Law, Exams of Business

Download Altering Articles of Association and Breaches of Contract in Company Law and more Exams Business in PDF only on Docsity! Charles Wild and Stuart Weinstein PEARSON At Pearson, we have a simple mission: to help people make more of their lives through learning. ‘We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning. From classroom to boardroom, our curriculum materials, digital learning tools and testing programmes help to educate millions of people worldwide — more than any other private enterprise. Every day our work helps learning flourish, and wherever learning flourishes, so do people. To learn more, please visit us at www.pearson.com/uk 138 Chapter 7 Altering the articles of association (c) As we have already seen, where the company has shares of more than one class, it cannot vary the rights of aclass of shares merely by altering them in the memorandum, or articles. Section 630 applies and requires the consent of three-quarters of the class and there are dissentient rights. Alteration of the articles by the court As discussed above, the articles are a contract between the company and each member and in this connection the court has power to rectify contracts. For example, if parties have agreed for a lease of land for 25 years that is written down in the lease by mistake as 21 years then if one of the parties is not prepared to co-operate in changing this provision of the lease the court can be asked to rectify the lease by an order inserting 25 years as the term of the lease provided the evidence shows to the satisfaction of the court that this was the intention of the parties. The court has ruled, however, that it does not have power to rectify the statutory contract set out in the articles. fe N-) 3 Scott v Frank F Scott (London) Ltd [1940] Ch 794 The defendant company was a private company with three members, Frank, Stuart and Reginald Scott, the business of the company being that of butchers. On the death of Frank Scott, his widow, Marie Scott, became entitled under his will to certain preference shares and ordinary shares in the company, as executrix. When she sought to be registered in respect of the shares, Stuart and Reginald Scott claimed that under a provision in the articles the shares must on the death of a member be offered to the other members at par, but the article was not so well drafted as to make this clear beyond doubt. This action was brought to interpret the article, and also to ask the court to rectify the article to carry a right to pre-emption if the article was not so drafted as to achieve this. Held — by the Court of Appeal - that the article did give the right of pre-emption claimed by Stuart and Reginald Scott. However, if it had not done so, the court could not have rectified it; the alteration could only be carried out by special resolution. However, the High Court departed from this general ruling when faced with an absurd result of bad drafting. fe N-) 3 Folkes Group plc v Alexander [2002] 2 BCLC 254 The Folkes family held a substantial proportion of the voting shares in the listed plc. The other shareholders had no voting rights unless the Folkes family holdings fell below 40 per cent. An article to ensure that this could never happen was drafted and agreed and became part of the articles. Later Questions 139 it was noticed that certain holdings of the Folkes family were excluded from the voting category so that their voting holdings fell to 23.9 per cent, thus triggering the voting rights of the other members. The former non-voting shares would not use their newly acquired voting power to change the articles to what was originally intended. The court did however do so by ordering the insertion of five words into the altered article to give it the effect intended. The judge's justification was that to leave the article as it was would flout business common sense and legal decisions might on occasion have to yield to business common sense following comments in the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Sodety [1998] 1 BCLC 493. Suggested further reading Drury, ‘The relative nature of a shareholder’s right to enforce the company contract’ (1986) CLJ 219. Griffin, ‘Companies Act 2006 s 33 - altering the contractual effect of the articles of association?’ (2010) Company Law Newsletter. Describe the procedure for alteration of articles and detail the considerations made in determining the validity of the alteration. - (The Institute of Company Accountants) nN H ple wishes to change its articles of association to add a clause which states ‘any director of the company may be removed from office if all other directors give notice in writing of their desire that the named directors be so removed’. You are required to explain the procedure for alteration and discuss the difficulties the company might encounter in adding this new clause. (The Chartered Institute of Management Accountants) Free Range Chickens R Us wishes to change its articles of association to add a clause which would state that ‘any director of the company may be removed from office if all other directors give notice in writing of their desire that the named directors be so removed’. You are required to explain the procedure for alteration and discuss the difficulties which the company might encounter in adding this new clause. w (Authors’ question) rs Perfect Puddings Ltd was incorporated to purchase the chocolate manufacturing business previously carried on by Louise. The contract of sale between the company and Louise provided, inter alia, that as long as Louise held 20 per cent of the shares of Perfect Puddings, she was entitled to be managing director of the company. The Articles of Association which otherwise follow the Model Articles reproduce this provision and also contain the following: David shall be entitled to be the company’s deputy managing director for life. On any resolution to remove him from office, the shares held by him shall carry three votes per share. 140 = Chapter 7 Altering the articles of association Louise, David, George, John and Claire each hold 20 per cent of the issued share capital of Perfect Puddings and George as well as Louise and David are the directors. Louise and David wish to develop a new product, but George, John and Claire are opposed to this. At a forthcoming meeting, George, John and Claire are planning to propose a resolution to remove Louise and David from their directorships. Advise Louise and David. (University of Hertfordshire)