Chapter 5 The Constitution of the Company, Study notes of Organization Theory and Design

Download Chapter 5 The Constitution of the Company and more Study notes Organization Theory and Design in PDF only on Docsity! Chapter 5 The Constitution of the Company Here, basic guidance to the end-of-chapter questions will be provided. 1. Define the following terms:  model articles;  entrenched article provisions;  statutory contract;  outsider;  outsider rights;  shareholders’ agreement. Term Definition model articles Articles that can be used by a company if it does not wish to register its own articles, or which can be used alongside registered articles. The model articles can be found in the Companies (Model Articles) Regulations 2008 entrenched article provisions An article provision that can only be amended if ‘certain conditions are met, or procedures are complied with, that are more restrictive than those applicable in the case of a special resolution (CA 2006, s 22(1)) statutory contract The contract that exists between the company and its members, and between the members themselves, that is created via s 33 of the CA 2006 outsider A person who is not a party to the s 33 statutory contract outsider rights Rights granted to a member other than in his capacity as a member shareholders’ agreement An agreement entered into by two or more shareholders (the company may also be a party) that establishes rules regarding the relationship between the members, and/or the company 2. State whether each of the following statements is true or false and, if false, explain why:  a company’s constitution consists of its memorandum and its articles;  if a company drafts its own set of articles, then the model articles will not apply;  a company cannot make its articles unalterable;  the constitution forms a contract between the directors and the members;  a member can enforce any term in the constitution.  A company’s constitution consists of its memorandum and its articles: This statement is false. Whilst these documents do form part of the company’s constitution, there are other documents that ca form part of the constitution (e.g. the certificate of incorporation).  If a company drafts its own set of articles, then the model articles will not apply: This statement is false. The model articles will continue to apply insofar as the registered articles do not modify or exclude the model articles.  A company cannot make its articles unalterable: This statement is true.  The constitution forms a contract between the directors and the members: This statement is false. The constitution forms a contract between the company and its members, and amongst the members themselves.  A member can enforce any term in the constitution: This statement is false. Only those constitutional terms that relate to membership rights can be enforced. 3. ‘The contract created by the company’s constitution is a highly unusual one, but the ability to enforce the constitution provides the members with a powerful source of protection.’ Discuss. Introduction  Every essay should begin with a succinct introduction that demonstrates that you understand the essay question. Briefly explain what the essay is about and set out what the essay will discuss and how it will be structured.  This essay requires you to discuss (i) the nature of the s 33 statutory contract and; (ii) the extent to which it provides protection to members. The s 33 statutory contract  Begin by explaining what s 33 states, namely that the constitution forms a contract between the company and its members, and between the members themselves.  The s 33 contract is indeed unusual. Briefly set out the ways in which it differs to a standard contract. Table 5.2 on p 122 of the text sets out these differences. Enforcement of the s 33 contract  The key issue in terms of the protection afforded to members by s 33 is the extent to which the members can enforce provisions in the company’s constitution.  Point out that as the constitution forms a contract between the company and its members, and between the members themselves, a member can enforce the constitution if its breached by the company or another member.  However, this protection is limited in one important respect, namely that it cannot for used to enforce outsider rights, namely those rights granted to a member in his capacity other than a member (e.g. a director). What this means in practice is that the member must bring his claim as a member and can only enforce those constitutional rights that relate to his membership.  Unfortunately, as noted at p 125, the courts have not been consistent in determining what amounts to a membership right and there have been cases where members have been permitted to enforce rights granted to them in a non-member capacity (e.g. as a