LAWS10083 Company law notes -Establishment of companies; the Corporate Constitution, Study notes of Law

Download LAWS10083 Company law notes -Establishment of companies; the Corporate Constitution and more Study notes Law in PDF only on Docsity! Week 3 Establishment of companies; the Corporate Constitution Sources of Company Law and the Company’s Constitution Principle form of primary legislation for company law is the Companies Act 2006. In 1998 the Secretary of State commissioned for an independent review of company law which would be fundamental to the nation’s competitiveness. The commission in their final report came up with the conclusion that a company law must be produced that would be primarily enabling and facilitative and to strip out regulation that is no longer necessary. The result was an act with some 1300 sections and 16 schedules. After the enactment of the 2006 Act, any changes to be made to it were mainly made by way of secondary legislation. This was to ensure that the Government can respond quickly to changes in economic or technical factors, due to the lower level of Parliamentary scrutiny involved in DL. In addition to this, community obligations of the UK in relation to company law may be implemented by secondary legislation by way of the general powers conferred by the European Communities Act 1972. However, implementing rules through secondary legislation means that they will be subject to less democratic scrutiny. Despite the coming into force of the 2006 Act, there are many rules that remain uncodified and as such we refer to common law. Even where there has been codification of common law, some of these codification efforts are just restatements of the common law and therefore, common law will still be referred to. The Company’s Constitution Rule governing the internal relations of the company are not regulated by statute, but by the company itself. The rules governing the internal relations of the company are laid down in the constitution of the company, known as the articles of association. The principle is that the articles can deal with any matter which is not, or to the extent that it is not, regulated by any of the above sources of company law. This is an assumption upon which the Act is drafted. For example the articles can deal with the division of power between the board and the shareholders and the composition, structure and operation of the board. Thus, it can be claimed that in Britain, the shareholders constitute the ultimate source of managerial authority within the company and the directors obtain their powers by a process of delegation from the shareholder, albeit a delegation of a formal type, which so long as it lasts, may make the directors the central decision making body on behalf of the company. Model Articles: The Companies Act 2006 provides for model articles of association for different companies. There are separate models for public and private companies. When a limited company is formed, it will be treated as having adopted the model articles, except to the extent that it choses to have different articles, either in whole or part- s20 (1) CA 2006. The company can also expressly exclude the model entirely and adopt a set of articles that contain very different provisions. S. 20 (1)(b) indicates that the choice may be made implicitly, by adopting articles which in one or more ways is inconsistent with the model and then the model will apply to deal with matters expressly not dealt with by the company i.e. a gap filling role. Constitution: The 2006 Act defines the term company constitution as including the articles of association but is not limited to them. Also included in the definition is any resolution or agreement to which Chapter 3 applies (Ch 3 applies to any special resolutions of shareholders, any resolution or agreement made by a class of members binding on the whole of that class of members, any unanimous resolution or agreement adopted by the members of a class provided that it would otherwise not be binding on them. Common law tends to classify rule books of clubs, associations etc as contractual agreements. S 33. of the 2006 Act states that the provisions of the company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe it. Thus articles in essence constitute a contract between the company and its members. Thus, the articles will be enforceable as between members. The contract created by section 33 is therefore a multi-party contract. The contract becomes a public document at the formation of the company, this is to ensure that those who deal with companies have a legitimate expectation that the registered articles represent an accurate statement of the company’s internal regulations. Scott v Frank F Scott the CA held that the articles cannot be later rectified to give effect to what the incorporators had actually intended but failed to embody in the registered document, since the reader of those registered documents could have no way of guessing that any error had been made in transposing the incorporators agreement into the document (this being the policy). However, the policy is being undermined by the decision in which the doctrine of informal and unanimous shareholder consent has been applied to change the constitution, though any such alteration must be communicated to the registrar- ss. 29 and 30 of the 2006 Act. It must be noted that only parties to the contract can enforce the contract. Non members cannot enforce the contract even if they are intimately connected to the company. Hickman v Kent or Romney Marsh Sheepbreeders Association- a person is both a member and a director of the company. Can he or she enforce rights conferred by the articles, even if that right is conferred upon the claimant in his capacity as director of the company? The answer is no. Ashbury J in the Hickman case said an outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes member, cannot sue on those articles, treating them as contracts between himself and the company, to enforce those rights. As a consequence of this interpretation, a promoter who becomes member cannot enforce a provision that the company shall reimburse him the expense he is incurred (English and Colonial Produce Re).The Hickman case concerned a provision in the articles that any dispute between a member and the company will be referred to for arbitration and this was enforced. In Beattie v Beattie Ltd on relying upon the dictum of Hickman, the CA held that a dispute between a company and a director (who was a member) was not subject to the arbitration provision on the articles because the dispute was between director qua director. In Rayfield v Hands the articles of the company contained a provision stating that a member who wishes to sell his shares will give notice to the directors who will take the said shares court's right to rectify the articles to bring in a provision obliging the executrix to offer the deceased's shares to the other shareholders at par. I do not need to quote specifically from the judgment of the court delivered by Luxmoore LJ. To my mind it is wholly inconsistent with that judgment that there should be any such power in the court to imply a term into the articles of association, such as Mr Asprey has contended for, which arises from the surrounding circumstances not apparent from the terms of the memorandum and articles themselves. In particular, it does not in the least appear from the memorandum and articles themselves that the purchasers of the various parts of the property are going to enter into covenants to contribute to the cost of the utilities but not covenants to contribute to the maintenance of the amenity areas; nor does it appear from the memorandum and articles that there was no intention to form some members' club to run the amenity areas for the benefit of those residents and others who wished to take advantage of the tennis courts and swimming pools. There is the further point in relation to Mr Oxborough that his conveyance came subsequent to the incorporation of the company, and so at the time of the incorporation of the company it would have been perfectly possible that terms might have been negotiated in his conveyance which did put a contractual obligation on him to contribute *475 to the development company a due proportion, whatever it may have been, of the cost of maintaining the amenity areas. The percentages also that are fixed for contribution to the upkeep of the utilities must make it highly doubtful whether contribution to the upkeep of the amenities was intended to be per shareholding in the company rather than by some other means related to user. In these circumstances, with all respect to the judge, I am wholly unable to agree that there is any term to be implied into the articles of association of this company. I would therefore allow this appeal. The Bratton position was slightly loosened in Equitable Life Assurance Society v Hyman- The defendant was a representative of the interests of approximately 90,000 policyholders who held retirement with-profits policies containing a guaranteed annuity rate with the plaintiff life assurance society. Under the defendant's sample policy, which was effected in 1979 and matured in 1998, the society agreed to pay, on maturity, the annuity increased by related bonuses, if any, or alternatively he could take an annuity at the society's current rate or from another provider. Under article 65 of the society's articles of association the amount of any bonus was within the absolute discretion of the directors of the society and their decision was to be final and conclusive. From 1994, when the current annuity rate started to fall below the guaranteed annuity rate, the society adopted a policy of declaring in relation to such policies a lower final bonus to policyholders who chose to take an annuity at the guaranteed rate than to those who elected to take one of the alternative options. On the society's summons for a declaration that it was entitled to adopt such a course, the judge held that that policy was in accord with both the society's articles of association and the terms of the defendant's policy and granted the declaration. The Court of Appeal reversed that decision. Held , dismissing the appeal, that on the terms of the policy taken by itself the society was not entitled to calculate the final bonus by the method it had adopted but that the terms of the policy had to be read in the light of the powers granted to the directors by the articles of association; that the language of article 65 contained no relevant express restriction precluding the directors from calculating the final bonus in a way which was inconsistent with the terms of the guaranteed annuity rate policies; that, however, the self-evident commercial objective of the inclusion of guaranteed rates was to protect the policyholder against a fall in market annuity rates by ensuring that if such a fall occurred he would be better off than he would have been with market rates; that, in such a context, the reasonable expectation of the parties must have been that the directors would not exercise their discretion in conflict with those rights; that, consequently, a restriction precluding the directors from resolving upon a differential policy designed to deprive the guarantees of any substantial value had to be implied into article 65 as such an implication was essential to give effect to the reasonable expectations of the parties; that, alternatively, since a discretion could not be exercised for purposes contrary to those of the instrument by which it was conferred, it was a breach of contract for the directors to exercise their discretion in such a way as to subvert the terms of the policy documents; and that, accordingly, the directors were not entitled to adopt a principle of making the final bonuses payable to guaranteed annuity rate policyholders dependent upon how they exercised their rights under the policy or award any other *409 differential bonuses which eliminated the benefit of the guaranteed annuity rate. The HL relaxed the rule of implying a term from extrinsic circumstances and it is a test of absolute necessity to avoid absurdity. Thus, it is a standard of strict necessity when implying a term to an article of association . “The critical question is whether a relevant restriction may be implied into [the articles]… Such a term may be imputed to parties: it is not critically dependent on proof of an actual intention of the parties… his principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text. The legal test for the implication of such a term is a standard of strict necessity.” Enforceability and outsider rights When a person holds rights in different capacities and they wish to enforce rights as members, they cannot do so i.e. a director who is a member cannot enforce rights of a director as capacity as member- this is because the statutory contract is between members and the company- non- enforceability of outsider rights: Eley v Positive Government Ltd (1876) 1 Ex D 88: [The articles] are an agreement inter socios… So far as [the plaintiff] is concerned, it is res inter alios acta, the plaintiff is no party to it. Hickman v. Kent or Romney Marsh Sheep Breeders’ Association [1915] 1 Ch 881, per Astbury J.:“no articles can constitute a contract between the company and third person;… no right merely purporting to be given by an article to a person, whether a member or not, in capacity other than that of a member as, for instance, as solicitor, promoter, director, can be enforced against the company…” Eley v The Positive Government Security Life Assurance Company- Articles of association contained a clause in which it was stated that the plaintiff should be solicitor to the company, and should transact all the legal business of the company for the usual and accustomed fees and charges, and should not be removed from his office unless for misconduct. The articles were signed by seven members of the company, and were duly registered, and the company incorporated under the Companies Act, 1862 . The plaintiff was not appointed solicitor to the company by any resolution of the directors, nor by any instrument bearing the corporate seal of the company, but he acted as such for some time. No resolution as to his ceasing to be solicitor was ever passed by the directors, but after a time they ceased to employ him, and employed other solicitors to do the legal business of the company. The plaintiff brought an action against the company for breach of contract in not employing him as solicitor, to transact their legal business, on the terms of the articles:—Held, by Cleasby and Amphlett, BB., that the articles of association were a contract between the shareholders inter se, and did not create any contract between the plaintiff, who was not a party to them, and the company. Amendment of the articles: They can only be amended by way of: 1. 75% of the members entitled vote who are present in person or in proxy- the vote is different from company to company- this position can be entrenched i.e. the bar can be raised to become 90% for example, but you cannot contract out of altering your articles. This would mean the majority can out power the minority and vote for change, this is allowed so long as it is in good faith and that the minority cannot show any evidence of an ulterior motive on the part of the majority. All amendments must be notified to the companies house- criminal offence of directors not to do so. Punt v Symons & Co Ltd- A company cannot contract itself out of its statutory right to alter its articles, even by an agreement independent of and outside the articles of association. The principle of Allen v. Gold Reefs of West Africa, [1900] 1 Ch. 656, applies to a case between the company and an outsider on a separate contract, as well as to a case between a company and a shareholder on the contract contained in the articles.Where shares had been issued by the directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power:—Held, applying the principle of Fraser v. Whalley, (1864) 2 H. & M. 10, that they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used. Allen v Gold Reefs of West Africa Ltd- A limited company by one of its articles provided that it should have a lien for all debts and liabilities of any member to the company “upon all shares (not being fully paid) held by such member.” The company, by way of purchase-money for the property acquired by it, allotted fully paid shares to Z., a nominee of the vendor to the company. Z. also applied for and had allotted to him shares not paid up. He was the only holder of fully paid-up shares. At his death he was indebted to the company in arrears of calls on the unpaid shares, but his assets were insufficient to pay the arrears. Thereupon the company, by special resolution under s. 50 of the Companies Act, 1862 , altered the above articles by omitting therefrom the words “not being fully paid,” thus creating a lien on Z.'s fully paid shares:— Held, by the Court of Appeal (Lindley M.R., Vaughan Williams and Romer L.JJ.), that the company had power to alter its articles by extending its lien to fully paid shares: Held, also, by Lindley M.R. and Romer L.J. (Vaughan Williams L.J. dissenting), that the lien so extended, having been made in good faith, was enforceable against Z.'s fully paid shares, since he took them subject to the original articles and the power of altering them given to the company by s. 50 of the Act, and did not make any special or implied bargain that they should not be affected by any subsequent alteration of the articles; and that the fact of those shares being vendor's shares allotted in payment for the property purchased by the company, instead of being shares paid for in cash in the ordinary way, was immaterial.James v. Buena Ventura Nitrate Grounds Syndicate, [1896] 1 Ch. 456 , and Andrews v. Gas Meter Co., [1897] 1 Ch. 361 , considered as to the “retrospective” effect of an alteration by a company of its articles. Where, under a company's articles, notice of general meetings is to be given to “members,” and such notice may be served upon any “member” either personally or by sending it prepaid by post addressed to “such *657 member” at his registered address, it is not necessary, in the case of a deceased member, either to send a notice addressed to him at his registered address, or to serve his legal personal representatives unless they have themselves become “members” by formal registration. Shareholder agreement: These are agreements made between the members of the company who sign up to the agreement. The company may or may not be party to it. A company may not unlawfully fetter its statutory powers- Russel case- S agreement to which the company was party to- provision was valid only for members who signed and not for the company itself. Governed by standard laws of contract. Usual scope- rights of first refusal on transfer of shares; pre-emption rights on increase in share capital; procedure of dealing with stalemates, compulsory transfers. Advantage of this compared to the articles is that it is private- and only limited to all that have signed it. Confidentiality is the most important advantage. 3. SoS may require a name change if the company provided misleading or gave unfulfilled undertakings in order to be registered with the chosen name- s. 75 4. Or if in the opinion of the SoS the name is the same as or too like a name appearing at the time of registration in the registrar’s inde of company names- s.67. The SoS’s power is to direct the company to change its name and not a power to force the registrar to amend the register. Passing off actions- when the complaint is that the name is too similar to an existing company name, with both companies carrying out the same type of business, so that the newer company is in effect cashing in on the reputation of the older one, the claim is in the tort of passing off. The newer company will be liable in damages and may be restrained by an interdict. The offending company must change its name or dissolve. A passing off action requires the claimant company to demonstrate that the new company name presents a serious threat to their business. The 2006 Act sets up a new procedure whereby a person may apply to the company names adjudicator, at any time, for an order that the company’s name must be changed because it is either the same as a name associated with the applicant and in which the applicant has goodwill or it is sufficiently similar to such a name that its use in the UK would be likely to mislead by suggesting a connection between the respondent and applicant company- s.69. If this si proved then the applicant will succeed unless the respondent company can place itself in one of five categories (s.69(4)) the first is that the name was registered before the commencement of the activities upon which the applicant relies to show goodwill; the second is that the respondent company is operating under a name or has formerly orperated under the name and is now dormant , or is proposing to operate under it and has incurred substantial startup costs; thirdly, the respondent shows that the name was registered in the ordinary course of a company formation business and is available for sale on the standard terms of that business; fourthly, the respondent acted in good faith; fifth, the interest of the applicant have not been affected to a significant extent. If the adjudicator accepts the application an order must be made to the respondent to change its name and not to form another company with an offending name- s. 73. A company can elect to change its name voluntarily- this is effected through a special resolution or other procedures provided for by the articles. The effect of a name change- the registrar must be notified and will enter a new name in place of the old one and issue an amended certificate of incorporation- s.80. the change is effective from the date of the incorporation certificate s.81. S15 of the 2006 Act allows the AG to apply to court and obtain an certiorari to quash a registration- R v Registrar of Companies Ex p HM’s AG- prostitute incorporated a business under the name Lindi St Claire (personal services) Ltd with the main object being to carry on the business of prostitution. The court on JR at the at the instance of the AG quashed the registration on the grounds that the stated business was unlawful. Private to public co- ss90-96 a private company can become a public company by the passage of a special resolution indicating that it should be so re-registered as a public company. 3 conditions must be satisfied- sharecapital must meet the minimum £50,000 and the associated rules of payment for those shares must be met. The company must produce unqualified recent accounts showing net assets are not less than the aggregate of its called up share capital and undistributed reserves.