LAWS10083 Constitution of the Company Question and Answers, Study notes of Law

Download LAWS10083 Constitution of the Company Question and Answers and more Study notes Law in PDF only on Docsity! Constitution of the Company DISCUSSION QUESTIONS AND ACTIVITIES Discussion Questions 1) What is the role and relevance of the model articles of association? 2) What i s the main consequence of regarding the certificate of incorporation as conclusive evidence that the requirements of the CA 2006 as to registration have been met? 3) Compare and contrast the role of the memorandum of association before and after CA 2006. 4) What are the consequences of labelling the constitution a “statutory contract”? 5) To what extent, if at all, does s 33 of CA 2006 give a shareholder enforceable contractual rights against a company? 6) What are the limits to shareholders’ powers to amend the arti cles of association? 7)What is the purpose of shareholders’ agreements? What will be discussed: - Nature of the foundational documents of the company. - The way they are interpreted. - The relationship between a company’s constituencies. Avenues for creation - Incorporation by registration most important. Types of company Public company limited by shares; they have to be limited by shares. There is no requirement for a number of shareholders - you need to have the capital requirement - a nominal value for each share. It is doesn’t prevent unlimited liability - but it would defeat the purpose of having a public company. It incorporates in order to raise capital - it is impossible to raise capital by unlimited liability. Private companies can be unlimited.  What is a public company? What makes it public as opposed to private?  They are limited by shares that are available to public. In order to be a public, does it have to be traded by the stock market? No. It can offered to an unspecified recipients. They don’t have to be carried by a stock exchange. Could be a public offer outside a stock exchange. As long as there is no defined recipient. It has to be registered and stated as such that it is a public company. Issues shares to the public. One goes public so you can raise money by selling to the public. The private capital, with a private investor is usually for investors in venture capital. They sell the company and exit. At what point does it become public? When it is sold to an unspecific general group of people. Private companies can be limited by shares, guarantee or unlimited. If they undertake the guarantee, in case of insolvency they will provide a specific amount. They do not contribute equity - they just say we will give this given amount. Some organisations do not rely on share equity because of things like being not for profit. Community interest companies are a special type of company limited by guarantee - you need to have a certain purpose - which is of utility to the community and in order to obtain finance, they need to be of this type. Unlimited companies, - Here if the business losses its money, the debts extend to the members. It is more acceptable in certain professions, as you are not trying to use limited liability to avoid any debts. It refers to the idea of reputation and credit worthiness. If you are an accountant, you may want to show that you have good reputation and you incorporate. The idea refers to reputation and in certain circles that could give you an advantage. Unlimited liability still have share capital, but it is a question of that there will be unlimited liability - so the share capital has a significantly different role than in a limited liability company. They are liable to how much they own in The Company. Joint and severally liable. The transfer of shares will really depend on the articles of the company. Follows the articles of association.  Community Interest Companies - limited by shares or guarantee - they have to be certified.  European Company - European Public Company - It was meant to be a supranational company. Something that transcends national boundaries. Linked with the idea of being able to move around without having to liquidate your business, however the members of the EU were unable to agree on the legal regime especially in regards to mandatory employee representation in the The memorandum now is a vestigial document. Nothing the parties can add to that. Each subscriber agrees to become a member and agrees to take at least one share. It is one sentence. Once the procedure has been complied with it gives a certificate of incorporation.  It says the jurisdiction and provides the name, and the form of company. This is conclusive evidence that the requirements of the act as to registration have been met. There is nothing you can do to challenge the company once it is created with some exceptions (1) the attorney general can quash the incorporation when contrary to public policy and crime etc.  Trading certificate for public companies Certain companies need an extra document before starting. A certificate that a public company needs to have before they start operating. Why do they need this? They do not need the minimum of share capital, they have paid up 12.5K capital - this is what the trading certificate thing allows - it shows that they have this capital requirements. What happens when a private company reincorporates to a public company? The capital needs to be in place in order to incorporate as public. There is no gap between registration certificate and trading certificate. What if there is a business trading before they have found 50K in equity? The directors themselves could be liable, the transactions are not void. If the business has started, the transactions are valid, the directors will be personally liable. The creditors will have to demonstrate some sort of loss.  The constitution From reading; The articles may regulate or deal with any of the matters which is not mentioned through any of the aforementioned sources. It will determine the division of powers, the composition/structure and operation of the board of directors.” What does it include if not the memorandum? s.17 of the CA refers to the articles and other resolutions that affect the constitution to be included in the definition of the Company’s Constitution. Shareholders resolutions that amend the company’s articles. It could be unanimous agreements, it could be written or could be resolutions adopted by the members of a class that have constitutional value as well. It has to be a unanimous resolution which happens when it is writing a proposal by convening their shareholders. The shareholders agreements, is different. New members are not part of the shareholders agreement. The shareholder agreement is not necessarily applicable to new members. However, one exception is to do with the powers of the board to bind the company, in that sense shareholders agreements then are treated as the constitution - the powers of the board to bind the company. Shareholder agreements are not part of the constitution. Special resolutions of shareholders, they are adopted to amend the articles or are of an important constitutional relevance to the company. They automatically become the constitution. The law doesn't provide an exhaustive list - constitution includes the articles, the resolutions amending the articles. One ought to think in theory of constitutional value. The certificate of incorporation could be - but no question as to the rights or the ideas stemming from them. We are interested in defining the constitution because of the way the courts interpret and imply terms in the constitution.  The articles are the most important. We have model articles to reduce costs. Nature of Constitutional Documents AoA and the resolutions amending - They have a contractual nature. They are not a regular contract, but a statutory contract. Because it is its stat. contract, this has quite a few implications in the way it is enforced and the way courts can amend it. The parties to this stat. contract, are not only the members but the company. There are consequences regarding interpretation enforcement, alteration and publicity. Notes from reading: (i) The contract as a public document They are contractual, but they are clearly more than a private bargain among the company and its members. They become a public document at the moment of formation, either because the relevant model articles will apply (which are public documents) or because the company supplies to the registrar the document. It is a requirement. Standard contract law should apply with certain qualifications. The courts are reluctant to apply to the statutory contract those doctrines of contract law which might result in the articles subsequently being held to have a content substantially different from that which someone reading the registered documents would have understood them to have. The court has refused to give effect to what incorporators intended, but failed to embody in the registered document. Also they would refuse to imply terms into the statutory contract from extrinsic evidence of surrounding circumstances where that evidence would probably not be known to third parties. Also it cannot be defeasible on the grounds of misrepresentation, common law mistake, mistake in equity, undue influence or duress. The policy underlying this – protection of third parties by enabling the third party to rely on what he or she finds upon a search of the public registery. But a lot of the time informal unanimous decisions taken by the shareholders will not be registered in practice. Though it is a criminal offence to not inform the registrar, the validity of the alteration appears not to be effected by non compliance. Interpretation of the articles Main differences between articles and a regular contract       - The intention is important - but in the constitution it is all about what is written in the constitution. It is about what is there - what the parties meant to say, it is irrelevant, unless there is a way to imply from the actual text of the constitution what we ought to do.  Bratton Seymour Service Co v Oxborough      - was it possible to imply an obligation for the members to contribute maintain the premises of the building. This was not a provision of the articles of association. The company was created simply to hold residential premise. The court refused to imply such a term in the constitution. - Extract from the judgement; “The Articles of Association of a company differ very considerably from a normal contract.” - “The court has no jurisdiction to rectify the AoA of a company, even if those articles do not accord with what is proved to have been the concurrent intention of the signatories of the memorandum at the moment of signature.” - “It is possible to imply a term purely from the language of the document itself: a purely constructional implication is not precluded. But it is quite another matter to seek to imply a term into AoA from extrinsic circumstances.” - Individuals cannot “Seek to defeat the statutory contract by reason of special circumstances such as misrepresentation, mistake, undue influence and duress is furthermore not permitted to seek a rectification, neither the company nor any member The Hickman principle can be side-stepped in most or all cases by identification of an appropriate membership right. In Quinn & Axtens the court of appeal allowed a managing director to sue as a member to obtain an injunction restrainingg the company from completing transactions entered into in breach of the company’s articles which provided that the consent of to managing directors was required in relation to such transactions. So a member here, had a membership right to require that the company was to act in accordance with its articles, which was to protect his right as a director. That means the original principle has been outflanked. Further limits to the provisions which can be enforced: Individual rights not collective rights to correct procedural irregularities Suing another member may be defeated on the grounds that the provision does not confer a personal right on the member, but creates only an obligation on the company, breach of which constitutes “ a mere internal irregularity” on the company’s part. The decision to sue to enforce the provision therefore is a matter for the shareholders collectively. It is difficult to discern the principled basis to which the classification is carried out on. The company may be regarded as breaching its contract with the member if it seeks to act upon a resolution improperly passed and should be restrainable by the member, but for the loss caused to the company by the chair of the meeting in not conducting it in accordance with the company’s regulations, the company is the proper plaintiff. CLR; All duties imposed in favour of members under the constitution should be enforceable by individual shareholders. Suing would be possible then. But not every breach of the articles by a corporate officer would entitle each shareholder to sue the company for damages. Damages would be an available remedy only if the shareholder personally suffered loss. There may also be more appropriate remedies like injunction. This is subject to the qualification that it would be possible for the shareholders to opt for some or all of the articles not to be enforceable. Therefore, the relevant articles would not be enforceable as a contract. The general contractual enforcement of the articles would be the default rule and in any case it should be clear which articles were enforceable and which not. Enforcement by the company against the member Hickman v Kent - Article 49 of its articles of association provided that disputes between the association and any of its members should be referred to arbitration. This article was held to be enforceable as between the association and a member. -Extract from the judgement; - He claims to enforce his rights under the association’s articles -“ An outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member cannot sue on those articles treating them as contracts between himself and the company to enforce those rights. They do not apply to all shareholders and only exist by virtue of some contract between such person and the company. Several controversies followed this decision; 1. It is not easy to reconcile with the qua member rule. 2. There is an inherent conflict from the two proposition which may be deduced from the cases; (i) Any member has a right to have the provisions of the corporate constitution duly observed and (ii) s.33 cannot be relied on to enforce the rights of a non- member or the outsider rights of one who is a member. It is not possible to say that every right which the memorandum or articles purport to confer on a member is enforceable. It is a relational contract, establishing a framework for an ongoing set of relationships. It aims to give a relationship of give and take between the constituents. Also, constitutional irregularities are curable by a majority resolution of the members, or even capable of being condoned by acquiescence or inertia. Any claim that s.33 gives a member a right to have the terms of the constitution observed is wrong unless it acknowledges that the right is qualified in these sense. What kind of rights could members enforce against the company? - Something to do with a personal right that is attached to the shares. The board of directors acting as the company is part of the AoA so is bound by this contract, there is a right for shareholders to hold the board a.k.a the company as being liable to follow the provisions of the articles. However the courts made this slightly questionable by saying if a breach of the articles is a mere internal irregularity, adopting a decision that doesn’t fit the normal requirement or not all the steps follows, these are internal irregularities. The shareholder cannot sue personally against such an internal irregularity. This is not a direct loss; this should be a reflective loss - so they should go through other avenues such as a derivative claim, or unfair prejudice. We do not have a contractual claim based on the articles as we do when a shareholder would enforce a personal right that is attached to a share. Sometimes the same set of facts can be a mere internal irregularity or damage one of the shareholders rights they have.  Amendment of the articles of association   Notes from the reading: “ (i) Altering the contract It is crucial that the articles as part of the constitution can be capable of amendment. – s.21 of the act. Should be able to alter the articles by following a prescribed procedure and thus alter for the future, the contractual rights and obligations of individual shareholders. Some process of collective decision making is needed to adapt to changing circumstances in the business environment. There is also the potential of the majority binding the minority – in opportunistic behaviour on thepart of the majority towards the minority. 2 restirctions on the majorities power to alter the articles; (1) The consent of each individual member is required if he or she is to be bound by an alteration which requires members to subscribe for further shares in the company in the company or which increases liability to contribute to the company share capital or pay money to the company. (1) – s.22 allows for the shareholders to ‘entrench’ provisions of the company’s constitution – make them capable of amendment or repeal only if certain conditions or procedural requirements are met. While this does not make them completely unalterable, it makes it harder. If it is not made in the formation of the company, it requires unanimity.” The articles are changed via the rules of majority. If someone disagrees with the amendment, they are bound, but if they are oppressed or prejudiced they can seek relief. If not all they could potentially do is sell their shares or try and wind up the company, but that would be exceptional circumstance.  General rules: -Amendment by special resolution - 75% of the members that allowed to vote. There are classes of shares who have no voting rights - 75% of those who can vote AND present at the meeting. In the CA all you need is 2 shareholders present or represented. That’s what happens when there is voting by poll. If the AoA allows certain decisions to make decisions by show of hands, it would be 75% of who showed up at the meeting.  Another exception: if the special resolution is passed not by having an actual meeting, but by circulating the agenda or remote decision - it is the 75% of people who are entitled to vote. It is 75% of the voting right.  (see presentation) If proportions are required is higher, it is to do with entrenching these provisions. Entrenchment is when you make something much harder to amend. Putting things in the memorandum used to make them unamendable - unless the CA said that you could amend them.  - The companies house must be notified of any amendment. The changing of constitution will only be enforceable by third parties if companies house is aware of it. The effects of the third s.8 – Provision regarding memorandum of association. To be a memorandum of association, it needs to state that subscribed wish to form a company and agree to become members and agree to take at least one share each. It shows intention to form a company and become members of that company on formation. CLR recommended that there should be a single constitution – the internal allocation of powers between the director and members of a company will be set out in one place; the articles of association. s.9 – States the requirements under registration and the application requirements. It states the contents fo the application for registration; the name, the office, the limit of its members, the private/public element, the initial sharehodlings. Also with proposed articles and memorandum. s.10 – The provision which details how a statement of capital and initial shareholdings should be like. Don’t fully get how this gets rid of the authorised share capital rule. s.15 – issue of certificate of incorporation. States what the certificate must state once the registration is complete. Conclusive evidence that the requirements of the act as to the registration have been met. s.17 – a new provision, a company’s constitution includes a company’s article and any resolutions and agreements. Before companies could divide their constitutional rules between their memoranda and their articles, with the terms of their memoranda being capable of being altered after formation in some respects but not in others. Now, the memorandum will be a very simple document of purely historic significance, evidencing an intention to form a company, and all the company’s key internal rules on matters such as the allocation of powers between the members of a company and its directors will be set out in the articles s.18 –articles of association. – This is required for a company. It must be registered unless the model articles apply. s.20 – default application of model articles – if the articles are not registered, or if they are registered and they do not exclude the relevant model articles, the relevant model articles form part of the company’s articles in tehs ame manner and to the same xtent as if articles in the form of those articles had been duly registered. The model articles operates as a safety net, which enables the memebrs and directors of such companies to take decisions in circumstances where a company has failed to provide the appropriate authority in its registered articles. s.31 – Statement of company’s objects – unless the articles restrict a company’s objects, its objects are unrestricted. This is a change from the new law. If there is a change in the articles to add/remove/alter the objects it must give notice to the registrar. Special rules for charity. And Scottish charities. s.33- The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company of each member to observe those provisions. s.755 – the prohibition of public offers by private companies. Private companies are also prohibited from allotting their shares or debenture with the intention tha thtey are offered to the public by someone else. If a private company does breach this provision, it will be required to re-register as a pub companies unless it appears to the court that the company does not meet the requirements for registration and that it is impractical or undesirable to require it to take stepts to do. (3) provides an exemption, if you attempt to re-register as a public in good faith it is fine. And if the offer states that it will re-register as a public company within a specified period. s.756 – Meaning of offer to the public – means an offer to any section of the public. It also sets out when it is not an offer to the public. It will not be public if it does not result in shares or debentures of the company becoming available to anyone other than those receiving the offer. (4) gives two further exemptions – persons already connected with the company and those for an employees share scheme. (5) defines those who are already connected with the company. Journal Articles Robert Drury, “The Relative Nature of a Shareholder's Right to Enforce the Company Contract” (1986) 45:2 Cambridge Law Journal 219 Gary Scanlan, “The Statutory Contract under s 33 of the Companies Act 2006: The Legal Consequences for Banks Pt I” (2008) 6 Journal of International Banking and Financial Law 304