The shares of Promotion Limited, a private company are held by members of three families, that is, the family of Mr. Karanja, Mr. Mutisya and Mr. Otieno.
Mr. Karanja and Mr. Mutisya hold 90% of the company‟s shares. However, they feel that, the company is in need of further capital but due to the squabbles among the families, Mr. Otieno is not willing to inject additional funds so long as Mr. Karanja still holds any shares in the company. Further, Mr. Karanja and Mr. Mutisya have reasonable cause to believe and do in fact believe that the family of Mr. Otiengo is running their own business which is competing with that of Promotion Limited. It is known as a fact that Mr. Otieno is obtaining information as a member of Promotion Limited, which he is using to the benefit of his competing business.
To resolve the problems, Mr. Karanja and Mr. Mutisya propose to alter the company‟s articles of association adding two new articles. The first article will enable the shareholders of 90% of the company‟s shares to compulsorily acquire the shares of the minority shareholder. The second one will require any shareholder who carries on competing business with company‟s business to transfer his shares to the nominee of the directors.
i) State the restrictions imposed both common law and statute law upon a company‟s
power to alter its articles of association.
ii) Discuss the validity of the proposed alteration
Under Section 13 (1) of the Companies Act a registered company has statutory power to alter add to its articles. Under Sec 13 (2) such alteration or addition is as valid as if originally contained in the articles and is alterable. It was so held in Walker v London Tramways Co.Ltd
i) However, this power is subject to both statutory and common law restrictions.
• Statutory Restrictions
• Under Section 13 (1) of the Act an alteration of the articles must be authorized a special resolution of members in general meeting.
• The alteration must not be inconsistent with any written law including the Companies Act.
• It must not exceed the conditions contained in the Memorandum of Association of the company.
• It must not increase the liability of members ore require them to take up more shares without written consent.
• It must not amend the provisions of Section 30 of the Companies Act if the company is to remain private.
• It must not be inconsistent with a court order made pursuant to Section 211 of the Companies Act for purposes of minority protection in cases of oppression.
• It must not be contrary to the rights of dissentient shareholders affected a variation of class rights pursuant to Section 74(1) of the Act, to apply to the court for the variation to be cancelled.
• Common law or judicial restriction
• The alteration must be bonafide for the benefit of the company as a whole i.e. regard must be had to existing and future shareholders of the company. As was the case in Sidebottom v Kershaw Leese & Co.. where the articles was altered to enable the company get rid of competitors from among its members. However, in Brown v British Abrassive Wheel where the articles were altered to enable the majority acquire the shares of the minority it was held that the alteration was not bonafide.
ii) This problem is based on the restrictions subject to which a company must alter its articles. Under the provisions the Companies Act a company has statutory power to alter its articles and it is on this basis that Karanja and Mutisya propose to alter the articles.
• Firstly, the alteration to enable holders of 90% of the company shares to compulsorily acquire the shares of the minority shareholder is not bona fide and cannot withstand judicial scrutiny. It is therefore invalid. This position is consistent with the decision inBrown v British Abrassive Wheel Co. Ltd whose facts were substantially similar.
• Secondly the alteration to require competing shareholders to transfer their shares to nominees of the directors is bona fide and valid since it is beneficial to get the company get rid of competitors from among its members. This position is consistent with the decision in Sidebottom v Kershaw Leese & Co whose facts were substantially similar.