COMPANY LAW

COMPANY’S CONSTITUTIONCOMPANY’S CONSTITUTION

LECTURE 12LECTURE 12

Charles NicholsonCharles Nicholson

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The Memorandum, Articles & Shareholders’ AgreementThe Memorandum, Articles & Shareholders’ Agreement

Explain the Memorandum of Association (MA) and Explain the Memorandum of Association (MA) and Articles of Association (AA).Articles of Association (AA).

Examine the contractual and legal effect of the Articles Examine the contractual and legal effect of the Articles of Association of Association

What do you understand by the ‘objects clause’?What do you understand by the ‘objects clause’? Describe the conditions that need to be fulfilled before Describe the conditions that need to be fulfilled before

an article may be altered.an article may be altered. Examine the effect of an alteration of the AA.Examine the effect of an alteration of the AA. Explain the effect that the terms of a shareholders’ Explain the effect that the terms of a shareholders’

agreement will have on the co.agreement will have on the co.

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MEMORANDUM OF ASSOCIATIONMEMORANDUM OF ASSOCIATION

• Each company must have Memorandum of Association Each company must have Memorandum of Association (MA) before it can be registered–(MA) before it can be registered– S.S. 16(1) 16(1)

• It is the main constitutional document of the co.It is the main constitutional document of the co.

• S. 18S. 18 provides the contents of MAprovides the contents of MA Name of the co. Name of the co. Objects of the co.Objects of the co. The share capital clause The share capital clause The limited liability clause The limited liability clause An association clause – where subscribers agree to An association clause – where subscribers agree to

take up the numbers of shares statedtake up the numbers of shares stated Subscribers’ clause – states the names, addresses & Subscribers’ clause – states the names, addresses &

occupations of the subscribers to the MA occupations of the subscribers to the MA

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OBJECTS OF MAOBJECTS OF MA

The company’s powers must be defined.The company’s powers must be defined. The objects set out the purpose for which the co. exists.The objects set out the purpose for which the co. exists. It details all that the co. is permitted to do.It details all that the co. is permitted to do. The co. must act within its stated objects.The co. must act within its stated objects. What happens if a co. does an act which is not specified What happens if a co. does an act which is not specified

in its object i.e. if the act is outside the scope of its in its object i.e. if the act is outside the scope of its objects?objects?

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Ashbury Railway Carriage & Iron Co v. RicheAshbury Railway Carriage & Iron Co v. Riche(1875) LR 7 (House of Lords)(1875) LR 7 (House of Lords)

The objects clause in the co’s MA stated as follows – The objects clause in the co’s MA stated as follows – ‘‘to make, and sell, and lend or hire, railway carriagesto make, and sell, and lend or hire, railway carriagesand wagons . . ., to carry on the business of mechanicaland wagons . . ., to carry on the business of mechanicalengineers and general contractors’engineers and general contractors’. . The directors of the co. entered into contract to buildThe directors of the co. entered into contract to buildrailway. The co. then refused to proceed with therailway. The co. then refused to proceed with thecontract. The vendors sued the co. for breach of contract. contract. The vendors sued the co. for breach of contract.

HeldHeld: the construction of railway was not within the: the construction of railway was not within theobjects clause as stated in the co’s MA. The act wasobjects clause as stated in the co’s MA. The act wasultra vires ultra vires and the contract was therefore and the contract was therefore voidvoid and andthe vendors failed in their action against the co. –the vendors failed in their action against the co. –can’t be ratified by the co..can’t be ratified by the co..

Ultra viresUltra vires – in excess or outside/beyond the powers– in excess or outside/beyond the powersconferred by the MA – i.e. the co. does not have theconferred by the MA – i.e. the co. does not have thepower or capacity to enter into such contracts.power or capacity to enter into such contracts.

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ATTEMPTS TO DIMINISH THE OPERATION OF ATTEMPTS TO DIMINISH THE OPERATION OF ULTRA VIRESULTRA VIRES

To put a wide object clause.To put a wide object clause. S. 20 CA 1965S. 20 CA 1965 – – strikes out the absolute effect of strikes out the absolute effect of ultra ultra

vires.vires.

Alteration of objects in memorandum – Alteration of objects in memorandum – s. 28(1)s. 28(1)..• By By special resolution special resolution ((s. 152s. 152) the co. may alter the ) the co. may alter the

objects clause.objects clause.• The procedure for alteration laid down in The procedure for alteration laid down in s. 28s. 28 must must

be complied with.be complied with.• Holders of not less than 10% of the co’s issued Holders of not less than 10% of the co’s issued

shares/debentures can apply to the court to cancel the shares/debentures can apply to the court to cancel the alteration – must be made within 21 days from the alteration – must be made within 21 days from the date of the resolution - date of the resolution - s. 28(5)(6)s. 28(5)(6)..

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S. 20 Co. Act 1965S. 20 Co. Act 1965

S. 20(1)S. 20(1) states that the validity of an act /contract/transfer states that the validity of an act /contract/transfer of property by a co. cannot be challenged on the ground of property by a co. cannot be challenged on the ground that it is that it is ultra vires ultra vires i.e. on the ground that the act was i.e. on the ground that the act was done in excess of the company’s capacity or power.done in excess of the company’s capacity or power.

Effect – an Effect – an ultra viresultra vires act is act is validvalid pursuant to pursuant to s. 20(1)s. 20(1).. A s/h or debenture holder secured by a floating charge A s/h or debenture holder secured by a floating charge

can restrain the can restrain the ultra vires actultra vires act – – s. 20(2)(a)s. 20(2)(a) The director or officer who had entered into an The director or officer who had entered into an ultra viresultra vires

transaction can be sued by the company or any member transaction can be sued by the company or any member - - s. 20(2)(b)s. 20(2)(b)..

The Minister can petition to the court to wind up the The Minister can petition to the court to wind up the

co. - co. - s. 20(2)(c)s. 20(2)(c).. If the unauthorised act or transfer is yet to be If the unauthorised act or transfer is yet to be

performed, then the courts have the power to restrain performed, then the courts have the power to restrain the performance of the act and to order compensation the performance of the act and to order compensation for loss or damage sustained by either party -for loss or damage sustained by either party - s. 20(3)s. 20(3)..

Public Bank Bhd v. Metro Construction Sdn Bhd [1991] - where the court held that s. 20(1) abolishes the otherwise rigorous effect of the ultra vires doctrine

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ALTERATION OF MAALTERATION OF MA

• The MA may be altered only to the extend and in the The MA may be altered only to the extend and in the manner provided by the Act – manner provided by the Act – s. 21(1)s. 21(1)

• If there are no specific provisions to alter – then the MA If there are no specific provisions to alter – then the MA cannot be altered.cannot be altered.

• The following are alterable:The following are alterable: Change of company nameChange of company name – – s. 23s. 23 Conversion of unlimited to limited co. or vice versa –Conversion of unlimited to limited co. or vice versa –

s. 25s. 25 Conversion of private co. to public co. – Conversion of private co. to public co. – s. 26s. 26 Alteration of the objects of the co. –Alteration of the objects of the co. – s. 28(1)s. 28(1) To alter or reduce the share capital –To alter or reduce the share capital – s. 64s. 64

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ARTICLES OF ASSOCIATIONARTICLES OF ASSOCIATION

They are provisions that regulate the internal management They are provisions that regulate the internal management and operation of the company.and operation of the company.

Matters set out in AA include:Matters set out in AA include: Division of power & relationship between general Division of power & relationship between general

meeting of shareholders and BODmeeting of shareholders and BOD Method of appointment of directorsMethod of appointment of directors Duties of directorsDuties of directors Procedure of meetingsProcedure of meetings Procedure for allotment and transfer of sharesProcedure for allotment and transfer of shares Manner dividends are declaredManner dividends are declared Right and obligations of members etc.Right and obligations of members etc.

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How to lodge an article?How to lodge an article?

All companies shall lodge with the Registrar the All companies shall lodge with the Registrar the memorandum and articles – memorandum and articles – s. 16(1)s. 16(1)..

A co. limited by shares – need not lodge their own A co. limited by shares – need not lodge their own AA – AA – s. 30(1)s. 30(1)

If they elect not to lodge their own AA, they can If they elect not to lodge their own AA, they can adopt Table A Articles of the Fourth Schedule as their adopt Table A Articles of the Fourth Schedule as their AA.AA.

A co. limited by guarantee must lodge it’s own AA.A co. limited by guarantee must lodge it’s own AA.

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What is Table A of Fourth Schedule?What is Table A of Fourth Schedule?

Sometimes referred to as model AA.Sometimes referred to as model AA. It constitutes clear and comprehensive set of It constitutes clear and comprehensive set of

regulations for the management of a co. limited by regulations for the management of a co. limited by shares.shares.

A co. may adopt all or any of the regulations A co. may adopt all or any of the regulations contained in Table A –contained in Table A – s. 30(1)s. 30(1)

If a co. lodges it’s own AA, then the contents in Table A If a co. lodges it’s own AA, then the contents in Table A will apply only to the extent that they are not excluded or will apply only to the extent that they are not excluded or

modified by the lodged articles modified by the lodged articles – – s. 30(2)s. 30(2)

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The legal and contractual effect of the articlesThe legal and contractual effect of the articles

• The starting point of looking at the effect of the articles isThe starting point of looking at the effect of the articles is s.s. 33(1) CA 196533(1) CA 1965 which provides:-which provides:-

““Subject to this Act the memorandum and articles shall Subject to this Act the memorandum and articles shall when registered bind the company and the members when registered bind the company and the members thereof to the same extent as if they respectively had been thereof to the same extent as if they respectively had been signed and sealed by each member and contained signed and sealed by each member and contained covenants on the part of each member to observe all the covenants on the part of each member to observe all the provisions of the memorandum and of the articles.”provisions of the memorandum and of the articles.”

• This is often referred to as the ‘This is often referred to as the ‘Statutory Contract’Statutory Contract’ and and any member has the right to enforce observance of the any member has the right to enforce observance of the articles by virtue of the articles by virtue of the contractual effectcontractual effect given to the given to the articles by the articles by the s. s. 33(1) CA 196533(1) CA 1965..

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● The articles bind the co. and the members as if they had The articles bind the co. and the members as if they had been sealed by the co. on which the members can sue and been sealed by the co. on which the members can sue and be sued by the co. and where the rights of an individual be sued by the co. and where the rights of an individual member have been infringed, he may sue in his own member have been infringed, he may sue in his own name. name.

Wood v. Odessa Waterworks CoWood v. Odessa Waterworks Co.. (1889) 42 Ch 636(1889) 42 Ch 636IIt was provided by the articles that a dividend was ‘to be t was provided by the articles that a dividend was ‘to be paid’ on the shares to the shareholders. The general paid’ on the shares to the shareholders. The general meeting by a majority passed an ordinary resolution meeting by a majority passed an ordinary resolution proposing not to pay a dividend in cash but instead to proposing not to pay a dividend in cash but instead to grant debenture - bonds to the shareholders. These were grant debenture - bonds to the shareholders. These were to be redeemable over 30 years. The co. made profits and to be redeemable over 30 years. The co. made profits and the dividends to be paid were loaned by the shareholders the dividends to be paid were loaned by the shareholders to the co. in return for the debentures. to the co. in return for the debentures.

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The plaintiff, Wood, a shareholder sought an The plaintiff, Wood, a shareholder sought an injunction to restrain the co. from acting on the injunction to restrain the co. from acting on the resolution. He alleged that this proposal was resolution. He alleged that this proposal was inconsistent with the articles. inconsistent with the articles.

The The questionquestion for the judge, Justice Stirling, was, for the judge, Justice Stirling, was, whether it was within the power of the majority whether it was within the power of the majority shareholders that voted in the general meeting to bind shareholders that voted in the general meeting to bind the minority shareholders who dissented? Wood was the minority shareholders who dissented? Wood was one of those who dissented. And in answer to that one of those who dissented. And in answer to that question, the Judge said the following:-question, the Judge said the following:-

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““The articles of association constitute a The articles of association constitute a contractcontract not not merely between the shareholders and the co., but between merely between the shareholders and the co., but between each individual shareholder and every other; and the each individual shareholder and every other; and the question which I have just stated must in my opinion be question which I have just stated must in my opinion be answered in the answered in the negativenegative if there be in the articles a if there be in the articles a contract between the shareholders as to a division of contract between the shareholders as to a division of profits, and the provisions of that contract have not been profits, and the provisions of that contract have not been followed… Those articles provide … that the directors followed… Those articles provide … that the directors may, with the sanction of the general meeting, declare a may, with the sanction of the general meeting, declare a dividend to be paid to the shareholders. Prima facie that dividend to be paid to the shareholders. Prima facie that means to be paid in cash. The debenture-bonds proposed means to be paid in cash. The debenture-bonds proposed to be issued are not payments in cash; they are merely to be issued are not payments in cash; they are merely agreements or promises to pay: and if the contention of agreements or promises to pay: and if the contention of the co. prevails a shareholder will be compelled to accept the co. prevails a shareholder will be compelled to accept in lieu of cash a debt of the co. payable at some uncertain in lieu of cash a debt of the co. payable at some uncertain future period. In my opinion that contention ought not to future period. In my opinion that contention ought not to prevail…”prevail…”

See alsoSee also: : Pender v. LushingtonPender v. Lushington (1877) 6 Ch 70(1877) 6 Ch 70

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● The fairness or unfairness of an article is not relevant in The fairness or unfairness of an article is not relevant in deciding whether it can be enforced. A member’s rights deciding whether it can be enforced. A member’s rights and liabilities under the articles are purely a matter of and liabilities under the articles are purely a matter of contractual obligation. contractual obligation.

In In Wong Kim Fatt v. Leong & Co. Sdn. Bhd. & Anor.Wong Kim Fatt v. Leong & Co. Sdn. Bhd. & Anor. [1976] 1 MLJ 140 [1976] 1 MLJ 140 the company’s articles contained an the company’s articles contained an article that provided that, article that provided that, ‘The holders of seven-tenths of ‘The holders of seven-tenths of the issued capital of the co. may at any time serve the co. the issued capital of the co. may at any time serve the co. with a requisition to enforce the transfer of any with a requisition to enforce the transfer of any particular shares not held by the requisitionists’particular shares not held by the requisitionists’ .. The second defendant held 250,000 shares out of The second defendant held 250,000 shares out of 300,000 issued shares. He served a requisition to buy out 300,000 issued shares. He served a requisition to buy out Wong’s shares. Wong objected to this. He obtained an Wong’s shares. Wong objected to this. He obtained an interim injunction to prevent the enforcement of the interim injunction to prevent the enforcement of the article. article.

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However, at the hearing of the action the learned judge, However, at the hearing of the action the learned judge, Chang Min Tatt J, held that the article was enforceable. Chang Min Tatt J, held that the article was enforceable. He said:-He said:-

““Whatever the sympathies evoked by the sight of a Whatever the sympathies evoked by the sight of a slingless David confronted by a Goliath, there are in my slingless David confronted by a Goliath, there are in my view no facts and circumstances raising up any equity view no facts and circumstances raising up any equity against the second defendant. It is purely a matter of against the second defendant. It is purely a matter of contractual obligation and the plaintiff must be held to contractual obligation and the plaintiff must be held to the obligations he had undertaken”. the obligations he had undertaken”.

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The articles bind members in their capacity as members The articles bind members in their capacity as members only, and not in any special or personal capacity, e.g. only, and not in any special or personal capacity, e.g. director. This is known as the “director. This is known as the “qua member rule”qua member rule”..

Beattie v. E.F. Beattie LtdBeattie v. E.F. Beattie Ltd [1938] Ch 708;[1938] Ch 708;There was a dispute between B, a director, and the co. There was a dispute between B, a director, and the co. The co. alleged that the B had mishandled certain money The co. alleged that the B had mishandled certain money belonging to the co. The co. brought this action to belonging to the co. The co. brought this action to recover this money. B was also a member of the co. recover this money. B was also a member of the co. There was an There was an arbitration clausearbitration clause in the articles that in the articles that provided that any dispute should be referred to an provided that any dispute should be referred to an independent arbitrator and therefore disputes should not independent arbitrator and therefore disputes should not be taken to the courts. B applied to court to have the be taken to the courts. B applied to court to have the action struck out on the ground that the co. should have action struck out on the ground that the co. should have gone to arbitration under the arbitration clause and so by gone to arbitration under the arbitration clause and so by alleging this he was seeking to enforce the articles. alleging this he was seeking to enforce the articles.

However, the Court of Appeal However, the Court of Appeal heldheld that B could not that B could not do this. He was being sued in his capacity as a do this. He was being sued in his capacity as a director and as a director he could not rely on the director and as a director he could not rely on the articles. B could only have relied on the articles as a articles. B could only have relied on the articles as a member. As a director B was an member. As a director B was an outsideroutsider to the to the statutory contract. B was not seeking to enforce a statutory contract. B was not seeking to enforce a right that is common to himself and to all members. It right that is common to himself and to all members. It was not part of the general rights of the corporators. was not part of the general rights of the corporators. He seeks to enforce quite a different right.He seeks to enforce quite a different right.

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Hickman v. Kent or Romney Marsh Sheep-Breeders’ Hickman v. Kent or Romney Marsh Sheep-Breeders’ AssociationAssociation [1915] 1 Ch 881.[1915] 1 Ch 881.

H was a member of the defendant association which was H was a member of the defendant association which was a non-profit making co. He brought an action against the a non-profit making co. He brought an action against the association complaining of various irregularities in the association complaining of various irregularities in the affairs of the association, including the refusal by the affairs of the association, including the refusal by the association to register his sheep in its published flock association to register his sheep in its published flock book and a threat to expel him from membership of the book and a threat to expel him from membership of the association. Article 49 of the articles provided that any association. Article 49 of the articles provided that any dispute between the association and any of its members dispute between the association and any of its members should be referred to arbitration. However, instead of should be referred to arbitration. However, instead of going to arbitration, H went directly to the courts and the going to arbitration, H went directly to the courts and the association was successful in getting the action stayed. association was successful in getting the action stayed. The arbitration article was binding on H. The arbitration article was binding on H. The court The court heldheld that there was an obligation on H under that there was an obligation on H under the articles to go to arbitration and the association could the articles to go to arbitration and the association could enforce this against him.enforce this against him.

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What is the position of an What is the position of an outsideroutsider ? i.e. someone who is ? i.e. someone who is not a member of the co. or one who is a member but not a member of the co. or one who is a member but acting in a capacity other than that of a member. acting in a capacity other than that of a member.

● An outsider to whom rights are purported to have been An outsider to whom rights are purported to have been given by the articles in his capacity as such outsider, given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, whether he is or subsequently becomes a member, cannot sue on those articles treating the articles as cannot sue on those articles treating the articles as contracts between himself and the co. to enforce those contracts between himself and the co. to enforce those rights. rights.

● There has to be a separate or extrinsic contract with the There has to be a separate or extrinsic contract with the co. i.e. a contract that exists outside the articles for the co. i.e. a contract that exists outside the articles for the outsider to be able to enforce his rights against the cooutsider to be able to enforce his rights against the co. .

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The articles do not therefore constitute a contract The articles do not therefore constitute a contract between the co. and someone who is not a member i.e. an between the co. and someone who is not a member i.e. an outsider.outsider.

Eley v. Positive Government Security Life Assurance Eley v. Positive Government Security Life Assurance Co. Ltd.Co. Ltd. (1876) 1 Ex D 88, Court of Appeal.(1876) 1 Ex D 88, Court of Appeal.Here a solicitor E, formed a co. He himself drafted the Here a solicitor E, formed a co. He himself drafted the company’s documents for registration. Article 118 of the company’s documents for registration. Article 118 of the company’s article provided: company’s article provided: ‘‘Mr. William Eley, of No. 27, New Broad Street, in the Mr. William Eley, of No. 27, New Broad Street, in the City of London, shall be the solicitor to the company and City of London, shall be the solicitor to the company and shall transact all the legal business of the company, shall transact all the legal business of the company, including parliamentary business, for the usual and including parliamentary business, for the usual and accustomed fees and charges, and shall not be removed accustomed fees and charges, and shall not be removed from his office except for misconduct.’from his office except for misconduct.’

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After a time the co. employed other solicitors. E then After a time the co. employed other solicitors. E then sued the co. for breach of contract in not employing him sued the co. for breach of contract in not employing him as its solicitor. E had by the time of the action actually as its solicitor. E had by the time of the action actually become a member and held 200 shares. become a member and held 200 shares. It was It was heldheld that he could not force the co. to obey that he could not force the co. to obey this this article. The articles had the effect of making a contract article. The articles had the effect of making a contract between the co. and the members, and E in his capacity between the co. and the members, and E in his capacity as solicitor, was not a party to the contract. The articles as solicitor, was not a party to the contract. The articles conferred no rights on a member where the member conferred no rights on a member where the member seeks to enforce a right in his capacity other than as a seeks to enforce a right in his capacity other than as a member. Eley was seeking to assert a right in his member. Eley was seeking to assert a right in his capacity as a solicitor of the co. To do so, he should have capacity as a solicitor of the co. To do so, he should have had a separate contract independent of the articles. had a separate contract independent of the articles. See alsoSee also: : Raffles Hotel Ltd. v. Malayan Banking Ltd.Raffles Hotel Ltd. v. Malayan Banking Ltd. [1965] 1 MLJ 60 HC; [1966] 1 MLJ 206 FC[1965] 1 MLJ 60 HC; [1966] 1 MLJ 206 FC

No article can constitute a contract between the co. No article can constitute a contract between the co. and a third person; and a third person;

No right merely purporting to be given by an article No right merely purporting to be given by an article to a person, whether a member or not, in a capacity to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as other than that of a member, as, for instance, as solicitor, promoter, director, can be enforced against solicitor, promoter, director, can be enforced against the co.;the co.;

Articles regulating the rights and obligations of Articles regulating the rights and obligations of members generally as such do create rights and members generally as such do create rights and obligations between them and the co. respectively.obligations between them and the co. respectively.

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ALTERATION OF ARTICLESALTERATION OF ARTICLES Subject to the Act and to the MA – the co. is free to alter or Subject to the Act and to the MA – the co. is free to alter or

add to its articles –add to its articles – s. 31(1)s. 31(1) However, certain However, certain conditionsconditions must be met:- must be met:-

A special resolutionA special resolution ( (s. 152(1)s. 152(1)) ) has to be passed by not has to be passed by not less than 75% of its members being entitled to vote at less than 75% of its members being entitled to vote at the general meeting of which not less than 21 days the general meeting of which not less than 21 days notice had been given.notice had been given.

Vote Vote bona fidebona fide for the benefit of the co. as a whole for the benefit of the co. as a whole Allen v. Gold Reefs of West Africa LtdAllen v. Gold Reefs of West Africa Ltd [1900]1 Ch 656[1900]1 Ch 656 If it is provided under MA that the articles cannot be If it is provided under MA that the articles cannot be

altered, then AA is unalterablealtered, then AA is unalterable Alteration must be for a proper purpose and fair in all Alteration must be for a proper purpose and fair in all

the circumstancesthe circumstances– – Gambotto v. WCP LtdGambotto v. WCP Ltd [1995] 13 [1995] 13 ACLC 344.ACLC 344.

If the alteration of the articles affects the rights attached to any one class of shares, then there is an additional procedure – Art. 4, Table A – variation or modification of class rights.

Consent in writing of the holders of three-fourths of the issued shares of that class, or

With the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class.

The holders of not less than 10% of the issued shares of that class may apply to the Court to have the variation or abrogation cancelled.S. 65(1)

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● A co. cannot deprive itself of the power contained in A co. cannot deprive itself of the power contained in s. 31 s. 31 CA 1965CA 1965 to alter the articles by any statement in the to alter the articles by any statement in the articles themselves. articles themselves.

● A co. cannot contract out of the power to alter the articles.A co. cannot contract out of the power to alter the articles.

Punt v. Symons & Co LtdPunt v. Symons & Co Ltd [1903] 2 Ch 506. [1903] 2 Ch 506. By articles 95 and 97 of the defendant co., Mr. GG By articles 95 and 97 of the defendant co., Mr. GG Symons as governing director was given the power to Symons as governing director was given the power to appoint and remove the co’s directors, and after his death appoint and remove the co’s directors, and after his death the same power was exercisable by his executors. The co. the same power was exercisable by his executors. The co. had also agreed in a separate contract relating to the had also agreed in a separate contract relating to the purchase of Symon’s business that it would not alter these purchase of Symon’s business that it would not alter these articles. After the death of Symons, the co. proposed to articles. After the death of Symons, the co. proposed to rescind the articles in question by special resolution. The rescind the articles in question by special resolution. The executors applied for an injunction. They were relying on executors applied for an injunction. They were relying on the agreement. the agreement.

The judge, Byrne J., refused to hold that the The judge, Byrne J., refused to hold that the agreement operated to prevent the articles being agreement operated to prevent the articles being altered under the provisions of altered under the provisions of s. 50 of the Companies s. 50 of the Companies Act, 1862.Act, 1862. To make the agreement effective the judge To make the agreement effective the judge had to grant an injunction to prevent the co. from had to grant an injunction to prevent the co. from acting on the altered articles and which he was not acting on the altered articles and which he was not prepared to do. He however said that the executors prepared to do. He however said that the executors might have the remedy of damages only. might have the remedy of damages only.

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• This This judge-made limitationjudge-made limitation on the company’s ability to on the company’s ability to alter its articles was laid down by the Court of Appeal in:alter its articles was laid down by the Court of Appeal in:

Allen v. Gold Reefs of West Africa LtdAllen v. Gold Reefs of West Africa Ltd.. [1900] 1 Ch 656. [1900] 1 Ch 656. TThe co. by Article 29 of its articles had a lien for debts he co. by Article 29 of its articles had a lien for debts and liabilities of any member to the co. (a lien is a right to and liabilities of any member to the co. (a lien is a right to hold property belonging to someone else as security for hold property belonging to someone else as security for the performance of an obligation). This lien was upon all the performance of an obligation). This lien was upon all the partly paid shares held by that member. A the partly paid shares held by that member. A shareholder, called Zuccani, had both partly paid and fully shareholder, called Zuccani, had both partly paid and fully paid shares and he was also the only holder of fully paid paid shares and he was also the only holder of fully paid shares. When Z died he owed money to the co. for calls shares. When Z died he owed money to the co. for calls made by the co. on his partly paid shares and which were made by the co. on his partly paid shares and which were overdue but his assets were not sufficient to cover these overdue but his assets were not sufficient to cover these debts. The co. then altered Article 29 giving them a lien debts. The co. then altered Article 29 giving them a lien on all shares whether fully paid or partly paid. This had on all shares whether fully paid or partly paid. This had the effect of creating a lien on Z’s fully paid shares which the effect of creating a lien on Z’s fully paid shares which was the whole purpose of the alteration. was the whole purpose of the alteration.

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The plaintiffs were Z’s executors and they brought this The plaintiffs were Z’s executors and they brought this action for a declaration that the defendant co. had no lien action for a declaration that the defendant co. had no lien upon the fully paid shares and the question was, had the upon the fully paid shares and the question was, had the articles been validly altered? articles been validly altered? The Court of Appeal The Court of Appeal heldheld that the co. had the power to that the co. had the power to alter its articles to extend its lien to the fully paid shares. alter its articles to extend its lien to the fully paid shares.

Lindley MR stated:-Lindley MR stated:-““The power thus conferred on companies to alter the The power thus conferred on companies to alter the regulations contained in their articles is limited only by regulations contained in their articles is limited only by the provisions contained in the statute and the conditions the provisions contained in the statute and the conditions contained in the company’s memorandum of association. contained in the company’s memorandum of association. … the power conferred by it must, like all other … the power conferred by it must, like all other powers… It must be exercised, not only in the manner powers… It must be exercised, not only in the manner required by law, but also required by law, but also bona fide for the benefit of the bona fide for the benefit of the company as a whole,company as a whole, and it must not be exceeded. These and it must not be exceeded. These conditions are always implied, and are seldom, if ever, conditions are always implied, and are seldom, if ever, expressed”. expressed”.

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RELATIONSHIP BETWEEN CONTRACT RELATIONSHIP BETWEEN CONTRACT AND ARTICLESAND ARTICLES

What happens if there is a separate extrinsic contract What happens if there is a separate extrinsic contract between an outsider and a co.?between an outsider and a co.?

The articles can still be altered and the co. can act on its The articles can still be altered and the co. can act on its altered articles. altered articles.

But it would amount to a breach of contract and the co. But it would amount to a breach of contract and the co. can be sued for damages.can be sued for damages.

A co. cannot by altering its articles justify a breach of A co. cannot by altering its articles justify a breach of contract.contract.

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Southern Foundries (1926) Ltd v. ShirlawSouthern Foundries (1926) Ltd v. Shirlaw [1940] AC 701, [1940] AC 701, HL HL By a written service contract in 1933 S was appointed as the By a written service contract in 1933 S was appointed as the managing director of the appellant co. for ten years. There managing director of the appellant co. for ten years. There was a provision in the contract that said that S would cease was a provision in the contract that said that S would cease to be managing director if he ceases to be a director. to be managing director if he ceases to be a director. In 1936, the entire share capital was acquired by Federated In 1936, the entire share capital was acquired by Federated Foundries Ltd. A new article was placed in the co’s articles Foundries Ltd. A new article was placed in the co’s articles after the takeover which gave a power to the majority after the takeover which gave a power to the majority shareholders, Federated Foundries, to remove a director at shareholders, Federated Foundries, to remove a director at any time. In 1937 Federated exercised this power and any time. In 1937 Federated exercised this power and removed S from his directorship. S sued Southern Foundries removed S from his directorship. S sued Southern Foundries for breach of contract and Federated for wrongly procuring for breach of contract and Federated for wrongly procuring the breach of contract. It was the majority shareholders who the breach of contract. It was the majority shareholders who were ultimately responsible for causing a breach of contract. were ultimately responsible for causing a breach of contract. S was awarded £12,000 damages against both defendants. S was awarded £12,000 damages against both defendants.

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The court The court heldheld:-:-• A co. cannot be precluded from altering its articles A co. cannot be precluded from altering its articles

thereby giving itself power to act upon the provisions of thereby giving itself power to act upon the provisions of the altered articles. So an injunction will not be granted the altered articles. So an injunction will not be granted to prevent the adoption of the new articles.to prevent the adoption of the new articles.

• But to act upon the altered articles will render the co. But to act upon the altered articles will render the co.

liable in damages for a breach of the contract if it is liable in damages for a breach of the contract if it is contrary to a stipulation in a contract made before the contrary to a stipulation in a contract made before the alteration.alteration.

• If the altered articles had provided for the dismissal If the altered articles had provided for the dismissal without notice of a managing director previously without notice of a managing director previously appointed, the dismissal would be appointed, the dismissal would be intra viresintra vires the co. but the co. but the co. would nevertheless be liable to an action for the co. would nevertheless be liable to an action for damages if the appointment of the MD had been for a damages if the appointment of the MD had been for a term of say ten years and he were dismissed in less.term of say ten years and he were dismissed in less.

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Shareholders’ Agreement and ArticlesShareholders’ Agreement and Articles

A co.’s MA & AA may be supplemented by a A co.’s MA & AA may be supplemented by a shareholders’ agreement.shareholders’ agreement.

It is a contract entered into between the shareholders of a It is a contract entered into between the shareholders of a co. to regulate their conduct and define their duties and co. to regulate their conduct and define their duties and obligations obligations inter se inter se in the running of the co.in the running of the co.

It may be entered into by the shareholders either at the It may be entered into by the shareholders either at the time of the co.’s formation or at some subsequent time time of the co.’s formation or at some subsequent time (e.g. when a family co. in need of extra capital to finance (e.g. when a family co. in need of extra capital to finance an expansion of its business, invites an outsider to join the an expansion of its business, invites an outsider to join the co. as an additional shareholder). co. as an additional shareholder).

For the shareholders’ agreement to be fully effective, it is For the shareholders’ agreement to be fully effective, it is necessary that all of the members for the time being are necessary that all of the members for the time being are made parties to the agreement, and so the use of a made parties to the agreement, and so the use of a shareholders’ agreement is practicable only if the shareholders’ agreement is practicable only if the membership is not too large. membership is not too large.

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A shareholders’ agreement only creates personal A shareholders’ agreement only creates personal obligations. obligations.

This principle was had been well established by Lord This principle was had been well established by Lord Davey inDavey in Welton v. Saffery Welton v. Saffery [1895-99] All ER Rep [1895-99] All ER Rep 567. 567. It was applied by the House of Lords inIt was applied by the House of Lords in Russel Russel v. Northern Bank Development Corp Ltd & Ors v. Northern Bank Development Corp Ltd & Ors [1992] 3 All ER 161.[1992] 3 All ER 161.

See also:See also: Beh Chun Chuan v. Paloh Medical Centre Beh Chun Chuan v. Paloh Medical Centre Sdn. Bhd. & OrsSdn. Bhd. & Ors..[1999] 3 MLJ 262 , [1999] 3 MLJ 262 , where the High where the High Court, referred to the case ofCourt, referred to the case of Tuan Haji Ishak bin Tuan Haji Ishak bin Ismail v. Leong Hup Holdings Bhd. & other appeals Ismail v. Leong Hup Holdings Bhd. & other appeals [1996] 1 MLJ, CA.[1996] 1 MLJ, CA.

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Beh Chun Chuan v. Paloh Medical Centre Sdn. Beh Chun Chuan v. Paloh Medical Centre Sdn. Bhd. & OrsBhd. & Ors..[1999][1999]A winding up petition was presented by the A winding up petition was presented by the petitioner, a minority shareholder of the co. under s. petitioner, a minority shareholder of the co. under s. 181 of the CA 1965. A shareholders’ agreement was 181 of the CA 1965. A shareholders’ agreement was executed whereby it was provided that all parties executed whereby it was provided that all parties shall procure that the memorandum and articles of shall procure that the memorandum and articles of association of the co. be amended so that the association of the co. be amended so that the provision in the memorandum and articles of provision in the memorandum and articles of association shall comply with the terms of the association shall comply with the terms of the shareholders’ agreement. However, until the date of shareholders’ agreement. However, until the date of the petition, no steps were taken by any of the parties the petition, no steps were taken by any of the parties to procure the amendment. The petitioner alleged that to procure the amendment. The petitioner alleged that the affairs of the co. were conducted in a manner the affairs of the co. were conducted in a manner oppressive to the petitioner. oppressive to the petitioner.

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The petitioner’s complaints of oppression appeared to The petitioner’s complaints of oppression appeared to have been based on the alleged breach of the terms of have been based on the alleged breach of the terms of the shareholders’ agreement that had not been the shareholders’ agreement that had not been incorporated into the AA of the co.incorporated into the AA of the co.

In dismissing the petition, the Court In dismissing the petition, the Court heldheld that in order that in order to ensure that the terms of a shareholders’ agreement to ensure that the terms of a shareholders’ agreement shall bind the shareholders under the Companies Act, it shall bind the shareholders under the Companies Act, it would be necessary to amend the articles to incorporate would be necessary to amend the articles to incorporate the terms in the shareholders’ agreement into the the terms in the shareholders’ agreement into the articles of the co. Here, nothing was done to amend the articles of the co. Here, nothing was done to amend the articles to incorporate the terms in the shareholders’ articles to incorporate the terms in the shareholders’ agreement into the articles. In the event, it follows that agreement into the articles. In the event, it follows that all the complaints put forth by the petitioner which all the complaints put forth by the petitioner which were based on the breach of the agreement must fail. were based on the breach of the agreement must fail.

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REMEDIES FOR BREACH OF AA AND MAREMEDIES FOR BREACH OF AA AND MA

The members can apply for injunction or declarationThe members can apply for injunction or declaration They seek to have the A/A observed –They seek to have the A/A observed – S. 33(1)S. 33(1) Sometimes, directors cannot prevent the co. from Sometimes, directors cannot prevent the co. from

terminating their appointment, but they can obtain terminating their appointment, but they can obtain damages for wrongful dismissal if they have a separate damages for wrongful dismissal if they have a separate service contract with the co..service contract with the co..