A company’s constitution comprises the Articles of Association and any resolutions and agreements the company makes which affect the constitution.
Memorandum of Association under the Companies Act 2015
The memorandum is a simple document which states that the subscribers wish to form a company and become members of it.
Before the Companies Act 2015, the memorandum of association was an extremely important document containing information concerning the relationship between the company and the outside world – for example its aims and purpose (its objects).
The position changed with the 2015 Act and much of the information contained in the old memorandum is now to be found in the Articles of Association.
The essence of the memorandum has been retained, although it is now a very simple historical document which states that the subscribers (the initial shareholders):
(a) Wish to form a company under the Act, and
(b) Agree to become members of the company and to take at least one share each if the company is to have share capital.
The memorandum must be in the prescribed form and must be signed by each subscriber.
According to the Companies Act 2015, the constitution of a company consists of:
The Articles of Association
Resolutions and agreements that it makes that affect the constitution
The constitution sets out what the company does; if there are no restrictions specified then the company may do anything provided it is legal. Clearly this includes the capacity to contract, an
important aspect of legal personality. Also significant is the concept of ultra vires, a term used to describe transactions that are outside the scope of the company’s capacity.
Resolutions and agreements
In addition to the main constitutional document (the Articles of Association), resolutions and agreements also form part of a company’s constitution.
Resolutions are decisions passed by members which directly affect the company’s constitution as they are used to introduce, amend or remove provisions in the articles. Agreements made, for example between the company and members, are also deemed as amending the constitution.
Copies of resolutions, or agreements that amend the constitution, must be sent to the Registrar within 14 days of being passed or agreed. If a company fails to do this then every officer who is in default commits an offence punishable by fine.
Articles of association
The articles contain detailed rules and regulations setting out how the company is to be managed and administered. The Act states that the registered articles should be contained in a single document which is divided into consecutively numbered paragraphs.
The Companies’ Act, provides that articles shall be –
(a) In the English language; and
(b) Printed; and
(c) Divided into paragraphs numbered consecutively and
(d) Dated; and
(e) Signed by each subscriber to the memorandum of association.
CONTENTS OF THE ARTICLES OF ASSOCIATION
Appointment and dismissal of directors
Communication with members
Powers, responsibilities and liabilities of directors
Issue of shares
General meetings: calling, conduct and voting
Transfer of shares
Members’ rights Documents and records
These are standard articles that companies can adopt instead of drafting one.
Rather than each company having to draft their own articles, and to allow companies to be set up quickly and easily, the Act allows standard articles that companies can adopt. Different models are available for different types of company; most companies would adopt model private or public company articles.
Companies are free to use any of the model articles that they wish to by registering them on incorporation.
If no articles are registered then the company will be automatically incorporated with the default model articles which are relevant to the type of company being formed. Model articles can be amended by the members and therefore tailored to the specific needs of the company.
Alteration of the articles
The articles may be altered by a special resolution. The basic test is whether the alteration is for the benefit of the company as a whole.
Any company has a statutory power to alter its articles by special resolution. A private company may pass a written resolution with a 75% majority. The alteration will be valid and binding on all members of the company. Copies of the amended articles must be sent to the Registrar within 14 days of the amendment taking effect.
Making the company’s constitution unalterable
There are devices by which some provisions of the company’s constitution can be made
unalterable unless the member who wishes to prevent any alteration consents.
(a) The articles may give a member additional votes so that they can block a resolution to alter articles on particular points (including the removal of their weighted voting rights from the articles).However, to be effective, the articles must also limit the powers of members to alter the articles that give extra votes.
(b) The articles may provide that when a meeting is held to vote on a proposed alteration of the articles the quorum present must include the member concerned. They can then deny the meeting a quorum by absenting themselves.
(c) The Act permits companies to ‘entrench’ provisions in their articles. This means specific provisions may only be amended or removed if certain conditions are met which are more restrictive than a special resolution such as agreement of all the members.
Restrictions on alteration/Rules
Even when it is possible to hold a meeting and pass a special resolution, alteration of the articles is restricted by the following principles.
(a) Alteration of the Articles must not contradict the Companies Act. The alteration is void if it conflicts with the Companies Act or with general law.
(b) An existing member may not be compelled by alteration of the articles to subscribe for additional shares or to accept increased liability for the shares which they hold unless they have given their consent.
(c) An alteration of the articles which varies the rights attached to a class of shares may only be made if the correct rights variation procedure has been followed to obtain the consent of the class. A 15 percent minority may apply to the court to cancel the variation.
(d) An alteration cannot take away rights already acquired by performing a contract.
(e) An alteration must be in the best interest of the company as a whole
(f) The alteration must be legal
(g) The alteration must not be fraudulent
Expulsion of minorities
Expulsion cases are concerned with:
Alteration of the articles for the purpose of removing a director from office
Alteration of the articles to permit a majority of members to enforce a transfer to themselves of the shareholding of a minority
The action of the majority in altering the articles to achieve ‘expulsion’ will generally be treated as valid even though it is discriminatory, if the majority were concerned to benefit the company or to remove some detriment to its interests.
If, on the other hand, the majority was blatantly seeking to secure an advantage to themselves by their discrimination, the alteration made to the articles by their voting control of the company will be invalid.
Sidebottom v Kershaw, Leese & Co Ltd 1920
The facts: The articles were altered to enable the directors to purchase at a fair price the shareholding of any member who competed with the company in its business. The minority against whom the new article was aimed did carry on a competing business. They challenged the validity of the alteration on the ground that it was an abuse of majority power to ‘expel’ a member.
Decision: There was no objection to a power of ‘expulsion’ by this means. It was a justifiable alteration if made bona fide (good faith) in the interests of the company as a whole. On the facts this was justifiable.
Therefore if the majority intends that the power to acquire the shares of a minority is to be restricted to specific circumstances for the benefit of the company, they should ensure that this restriction is included in the new article.