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The Company Constitution (2) - Coggle Diagram
The Company Constitution (2)
Insider/Outsider Debate
We know then that the Articles act as a contract
But who is it between?
S.33 Effect of a company's constitution:
(1) 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 and of each member to observe those provisions
The result is we have a contract between:
(1) The members, and
(2) The members themselves
Clarified by S.33(1) CA 2006
Each member can therefore enforce the statutory contract as they are "insiders" i.e. individuals captured by the statutory contract
Lord Wedderburn [1957]:
Every member has a personal right (S.33) to see the company is run according to the articles, except cases identified as involving internal procedures
Enforceability:
Rayfield v Hands
[1960] - member can enforce articles directly against other members
Wood v Odessa Waterworks
- '... a contract not merely between the shareholders and the company, but between each individual shareholder and every other'
Welton v Saffery
[1897] - explains why such actions are unusual
But we also know then that members can hold a position other than that of simply a member
e.g. member and director
So what happens in these situations?
Basic position -
Hickman v Kent [1915]:
"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. Those rights are not part of the general regulations of the company applicable alike to all shareholders and can only exist by virtue of some contract between such person and the company, and the subseuqnet allotment of shares to an outsider in whose favour such an article is inserted does not enable him to sue the company on such an article."
What does this mean?
Simply, the articles are not binding, either:
on the company or any member to an
outsider
or a member acting in
in some other capacity
e.g.
Bob is a shareholder of company A. He is also a director of Company A.
The articles give Bob a right to continue indefinitely as a director
The other shareholders vote to remove him as a director
As the provisions relate to Bob is a capacity, OTHER THAN A MEMBER, he cannot enforce the article as a director
There are also other ways that he can attempt to enforce the article, such as S.994 Unfair Prejudice claim (talk about this later in the course)
Any more views?
This is an area of great academic debate
Gregory, 'The Section 20 Contract' [1981] supports Wedderburn
But, see Prentice [1980]: only those articles 'definite of the power of the company to function' have contractual effect
Hickman v Kent [1915]:
Attempts to reconcile the debate
Judgement has a twofold effects
(1) Who is attempting to enforce a provision? An insider or an outsider?
(2) Type of right the person is trying to enforce. Is it a right to make sure company is running property or is it a right given to them in order in some kind of personal capacity?
Pending issues in Hickman:
Can a judicial limitation be imposed on a statutory provision?
Exact distinction between membership (insider) rights and non-membership (outsider) rights?
Mayson: contract concepts hard to apply to the articles
Extrinsic Contracts
One idea is that they could be extrinsic contracts
Contracts outside articles and memorandum
Outside rights, sometimes an extrinsic contract can be made
Articles may be expressly or impliedly be incorporated into the contract (
Globalink Telecommunications Ltd v Wilmbury Ltd
[2003]: not much evidence is needed to show this, but there has to be somthing - so quite a low bar)
Rights given by the articles can be enforceed under the contract without relying on S.33
The power to alter articles cannot be excluded by an extrinsic contract (you're still given the power to do it)
Altering the articles
Can we do it?
S.21:
A company may alter its articles by special resolution
A special resolution being 75% of the voting shares and over
Any protective devices?
Weighted voting rights
Bushell v Faith
[1969],
Amalgamated Pest Control Pty Ltd v McCarron
[1995]
The right gives individuals a higher proportion of votes than their shareholding would initially assume (my shares or whoever shares are worth more than they actually are in terms of voting rights)
Shareholders' agreement
- a contract between the shareholders (not the articles!)
Separate contract between all the shareholders, not the articles themselves
Entrenched provisions
To make certain articles more difficult to change or decisions more difficult to pass than they normally would be
By statute:
S.25:
a statutory restriction
on article amendment
Subscription for more shares or increased liability not allowed, unless
member agrees in writing
Special provisions relating to
rights attached to classes of shares
Articles altered by
special resolution:
This can lead to injustice for minority shareholders
More issues:
Consent needed
if member is to subscribe for more shares
Company cannot
contract out
of the power to alter its articles unless
special rules
under S.22 apply: entrench provisions
There are
restrictions imposed by the Court
under Statutory Powers: S.98(6); S.721(7); S.996(2)
General Law
The power to alter articles must be exercised
bona fide
for the benefit of the company as a whole
cannot just benefit a minority of shareholders, but must genuinely benefit the company as a whole
Allen v Gold Reefs of West Africa Ltd [1900]
Alterations?
It is for the
shareholders,
not the court to say whether an alteration is for the benefit of the company (internal management principle)
Unless no reasonable man would so regard it.
Shuttleworth v Cox Bros & Co Ltd
[1927]
Is the proposed alteration
so oppressive as to cast suspicion,
or so extravagant that no man could really consider it for the benefit of the company? -
Greenhalph v Ardene Cinemas
[1951]
Greenhalph v Ardene Cinemas
[1951]:
'[A] special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give the former an advantage of which the latter were deprived'
There must be some kind of advantage given to the majority shareholders, which is not available to the minority shareholders
An alteration is liable to be set aside if it
discriminates unfairly
It is
immaterial that it prejudices a minority of the members:
Sidebottom v Kershaw
[1920]
Some members are naturally gonna lose out, but that could just be the case of not being on the winning side of the argument, rather than any kind of proper effort to actually deprive them fo anything unfairly
Compulsory share transfers
A type of court order mandating the company purchases the shareholder's shares at fair market value
Court is generally very reluctant to interfere in the inner workings of the company
Sidebottom; Shuttleworth
: challenge failed
Brown v British Abrasive Wheel Co Ltd
[1919];
Dafen Tinplate Co Ltd
[1920]
Constable v Executive Connections Ltd
[2005]: law still unclear
Charterhouse Capital Ltd, Arbuthnott v Bonnymann [2014]:
This was a legitimate "tidying-up exercise"
No evidence of bad faith or improper motive
Not inconsistent with the original arrangements
The amendments made "commercial common sense"
'Implied term' of a fair and reasonable price
Why is it hard for Members to succeed
Mainly due to the reluctance of the courts to get involved
becuse of those internal management principles and a worry that they are not experts in business realities
Bona fide test itself many not be the most appropriate in the best interest of the company
because that gives quite a lot of leeway to the company to defend itself and for the members not complaining to defend themselves
Alternatives?
Content to apply S.994 CA 2006 (the unfair prejudice remedy)
A company cannot agree not to alter its articles
Allen v Gold Reefs of West Africa Ltd
[1900]
Damages against the company if in breach of contract:
Southern Foundries (1926) v Shirlaw
[1949]
Remedies
Injunctions, damages