Question 1

CA 2006, s. 17 states:

“Unless the context otherwise requires, references in the Companies Acts to a company’s constitution include— (a) The company’s articles, and (b) Any resolutions and agreements to which Chapter 3 applies (see CA 2006, s. 29).”

Analyse the reference to resolutions and agreements in this context and any other agreements which impact on the constitution of the company.

Answer guidance

This question looks at the definition of the constitution of a registered company and the resolutions and agreements that have a bearing on the company’s constitution. The main points of focus are: the statutory framework through which changes are made to the company’s constitution and exceptions to this framework; and the role and enforcement of shareholder agreements as a supplement to the constitution of the company.

A brief explanation of what the company’s constitution is with reference to CA 2006, ss. 17 and 29 is sufficient to set the scene. Section 29 links neatly to consideration of both s. 21 (through the reference to special resolutions) and the unanimous consent rule (through the reference to agreements agreed to by all the members of the company). Examine case law showing a willingness to bypass the strict legal formality of the Companies Acts, such as Re Duomatic Ltd [1969] 2 Ch 365. Particularly important in relation to alteration of the articles is Cane v Jones [1981] 1 All ER 533 (see also Re Home Treat Ltd [1991] BCLC 705). Remember to consider both the benefits and criticisms of the departure from strict statutory requirements, and recognise the rule survives CA 2006 (s. 281(4)). You could also reflect on whether the same language in relation to decisions of a class (s. 29(1)(c)) means a unanimous consent rule also applies in relation to alteration of class rights.

You also need to consider how the constitution may be supplemented by means of a shareholders’ agreement, explaining what that is and how it operates. You should consider in particular how a shareholder agreement is enforced. This should include whether the company can be a party to the agreement (looking at Russell v Northern Bank Development Corpn Ltd [1992] 3 All ER 161) and enforcement of agreements to vote in a particular way (such as Greenwell v Porter [1902] 1 Ch 530). The limitations and benefits of a shareholder agreement over making formal constitutional changes should be discussed.

Question 2

The articles of Able Ltd contain the following clauses:

(a) Bert should have the right to nominate a director for as long as he continues to hold a 10 per cent shareholding,

(b) Claudia should be the company secretary for life, and

(c) the company’s senior manager shall receive an annual bonus of 2 per cent of the company’s profits.

Demi, the majority shareholder, has just sold his 75 per cent holding of shares to Eni. Eni proposes to alter the articles so that all the directors should be appointed by the general meeting, and that the annual bonus payable to the sales manager shall be reduced to 1 per cent. She also intends to appoint Farid as company secretary in place of Claudia.

The senior manager has a contract with the company that makes no provision for the payment of any bonus. Bert has a contract with the company stating that the company will not alter its articles so as to affect his rights without his consent.

Advise Eni.

Answer guidance

Explain CA 2006, s. 33 and the concept of the ‘statutory contract’. Recognise this has features unlike a standard contract, particularly in relation to alteration and enforcement.

For B you should discuss the statutory power to alter articles (CA 2006, s. 21(1)) and recognise it cannot be restricted contractually (Punt v Symons & Co Ltd [1903] 2 Ch 506) but alteration could lead to breach of contract: Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701. However, as B’s right is dependent on his shareholding, this could be a class right: Cumbrian Newspaper Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Co Ltd [1986] BCLC 286, so variation would have to be accordance with s. 630(2). Consider requirements and apply.

In relation to C you need to consider how the ability to enforce articles may be restricted to membership (or ‘insider’) rights. Discuss cases including Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch 881, Beattie v E & F Beattie Ltd [1938] Ch 708; Eley v Positive Govt Sec Life Assurance Co (1876) 1 Ex D 88. Consider the possibility of indirect enforcement along the lines of Quin and Axtens Ltd v Salmon [1909] AC 442.

Similar outsider rights problems arise for the senior manager so discuss the salary cases, and the effect of alteration of articles: Re New British Iron Co, ex p Beckwith [1898] 1 Ch 324; Swabey v Port Darwin Gold Mining Co (1889) 1 Meg 385.