The constitution of the company

§ A company’s constitution consists primarily of the articles of association, and agreements and
resolutions affecting the company’s constitution.
§ The Companies Act 2015 has significantly reduced the importance of the memorandum of
association, and the articles now form the company’s principal constitutional document.
§ The constitution forms a statutory contract between the company and its members, and
between the members themselves, but only those provisions relating to membership rights
will constitute terms of the statutory contract.
§ A company that acts outside the scope of its objects clause will be acting ultra vires.
§ Companies incorporated under the Companies Act 2015 have unrestricted objects by default –
CA 2015 s28.
§ A company can alter its articles by passing a special resolution, although statute and the
common law restrict a company’s ability to alter its articles.
§ Despite being the largest piece of legislation ever passed, the CA 2015 does not seek to
exhaustively regulate the internal affairs of companies. Much is left to the companies
themselves who will usually create their own internal rules via the company’s constitution.
§ A company’s constitution largely fulfils the same function as the constitution of a country,
namely, to set out the powers, rights and obligations of those who are subject to the
constitution.
§ Accordingly, a company’s constitution aims to set out the powers, rights and obligations of
the company’s members and directors, and also to lay down certain processes regarding
how the company is to be run.

The evolution of the corporate constitution

The CA 2015 has altered significantly the form and content of the corporate constitution.
Prior to the passing of the CA 2015, a company’s constitution consisted primarily of two
documents, namely (i) the memorandum of association, and (ii) the articles of association.

The CA 2015 does not define the word ‘constitution’, but Part III of the CA 2015 is titled “A
Company’s Constitution”. It is further divided into Division 1 — Articles of Association
(s20-26); and Division 2 — Resolutions and agreements affecting company's
constitution (s27-28).

It can therefore be understood that a company’s constitution will include:

1. the company’s articles, and

2. resolutions and agreements affecting the company’s constitution.

However, the constitution also encompasses other documents. Members of a company have a
statutory right to receive copies of the company’s constitutional documents. S29 of the CA
2015.

Accordingly, the memorandum no longer forms a principal component of the constitution and,
as is discussed, its importance and content are greatly diminished.

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 FIRM DISCUSSION

Read and understand Part III of CA 2015. From your reading of s29, what other
documents will form part of the company’s “constitution”?

The memorandum of association

Prior to the CA 2015’s enactment, the memorandum was of fundamental importance and formed
one of the two principal documents that formed a company’s constitution. To simplify company
formation and to make it easier to discover the constitutional workings of a company, the
importance of the memorandum was significantly reduced, and it no longer forms a principal
component of the company’s constitution.

Section 12 of the CA 2015 provides that the memorandum must state that the subscribers:
a. wish to form a company under the Act, and;
b. agree to become members of the company and, in the case of a company with a share
capital, to take at least one share each.

It can therefore be seen that, under the CA 2015, all that the memorandum does is to provide
an ‘historical snapshot’ that indicates the company’s state of affairs at the time it was created.

The articles of association

With the emasculation of the memorandum, the articles now form a company’s principal
constitutional document. The articles tend to regulate the internal workings of the company
and typically cover issues such as the balance of power between the members and the
directors, the conduct of general meetings, and certain issues pertaining to shares and the
distribution of assets. If a company chooses to limit its objects, the objects clause will also
form part of the articles (the objects clause is discussed later under, ‘The capacity of a
company’).

Every company must have a set of articles (CA 2015, s 13, 20) and promoters are free to draft
their own articles that suit the needs of their particular business requirements and submit
them upon registration. However, drafting articles is a complex and technical task and many
promoters (especially promoters of smaller companies) will lack the knowledge required to
draft suitable articles. Accordingly, statute has long provided a set of model articles that
companies may adopt if they so choose.

Note the differences between the model articles found under the repealed CAP 486 and the
CA 2015. The repealed Companies Act only provided model articles for companies limited by
shares (these model articles were known as Table A). Conversely, the 2015 Companies
Regulations provide model articles for a wider range of companies (except Unlimited
Companies).

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Note: Where the promoters of a limited company do not submit their own articles upon
registration, the applicable model articles will form the company’s articles (CA 2015, s
20). Even if the promoters do register their own articles, the relevant model articles will
still form part of the company’s articles, unless its registered articles modify or exclude
them (CA 2015, s 21). Companies incorporated under the prior Companies Act will not
be governed by the new model articles, but can adopt them if they so choose.

Should a dispute arise, the courts may be required to interpret the provisions of the articles in
order to resolve the dispute. The courts have stated, on numerous occasions, that ‘the
articles of association of the company should be regarded as a business document and
should be construed so as to give them reasonable business efficacy’ (Holmes v Keyes
[1959]). The courts have even stated that the words of the articles are not to be given their
plain and obvious meaning if such an interpretation would produce a commercial absurdity
(Thompson v Goblin Hill Hotels Ltd [2011]).

Resolutions and agreements affecting the company’s constitution

Certain resolutions and agreements will also form part of the company’s constitution. These are
listed in s 27 of the CA 2015 and are referred to as ‘resolutions and agreements affecting a
company’s constitution’. However, the list of such resolutions and agreements is much wider
than this definition suggests and appears to go beyond agreements and resolutions that affect
the company’s constitution. For example, a special resolution will form part of the company’s
constitution, even though many special resolutions will involve decisions that have no bearing
on the company’s constitution.

The constitution as a contract

The courts have long held that a company’s articles form a contract between a company and its
members, and between the members themselves (Re Tavarone Mining Co (Pritchard’s Case)
(1873)).

Section 30(1) of the CA 2015 expands upon this by stating that:

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.

Accordingly, the company’s constitution forms what is known as the ‘statutory contract’ and
imposes obligations upon:

• the company when dealing with its members

• the members when dealing with the company, and
• the members when dealing with each other.

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Breach of certain provisions of the company’s constitution may therefore constitute
breach of contract, thereby allowing the non-breaching party to commence a personal
action and obtain a remedy. However, as will be discussed, not all of the constitution’s
provisions will amount to terms of the statutory contract.

Before discussing the extent to which the statutory contract can be enforced, it is important to
realize the ways in which the statutory contract differs from a standard contract.

The statutory contract

The statutory contract created by s 30 is a highly unusual one and, in several important ways, it
differs from a standard contract and is not subject to certain standard contractual rules. The
table below demonstrates the principal differences between a standard contract and the
statutory contract.

A standard contract The s30 statutory contract

Derives Derives its binding force from the Derives its binding force from s 30 of
binding force agreement between the parties. the CA 2015.
from?
Alteration of The terms of a standard contract As the articles can be altered by
terms against cannot usually be altered against the passing a special resolution, the
a party’s wishes of the parties. majority can alter the terms of the
wishes? statutory contract against the wishes
of the minority.

Enforcement Generally, third parties cannot Third parties cannot enforce the
by a third enforce a standard contract, but can statutory contract.
party? do so in certain circumstances.

Action for If any term of a standard contract is Only those terms of the constitution
breach of breached, it can give rise to an that relate to membership rights can
contract? action for breach of contract. form the basis for an action for
breach of the statutory contract.

Rectification The courts may be willing to rectify a The courts will not rectify the
of contract? standard contract if it fails to give statutory contract if it fails to give
effect to the parties’ intentions, or if it effect to the parties’ intentions, or if it
contains a mistake. contains a mistake (Scott v Frank F
Scott (London) Ltd [1940]).

Defeasible on Standard contracts can be defeated The statutory contract cannot be

certain on the grounds of mistake, defeated on the grounds of mistake,
grounds? misrepresentation, duress or undue misrepresentation, duress or undue
influence influence (Bratton Seymour Service
Co Ltd v Oxborough [1992])

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 One cardinal rule of contract law that does apply to the statutory contract is the doctrine of
privity of contract. The statutory contract is formed between a company and its (p. 50)
members–persons not party to the statutory contract (known as ‘outsiders’) are therefore not
permitted to enforce the provisions of the constitution.

Eley v Positive Government Security Life Assurance Co (1876) LR 1 Ex D

88 (CA)

FACTS:
The claimant solicitor drafted the defendant company’s articles, which were duly registered.
The articles provided that the claimant would act as the company’s solicitor and could not be
removed unless he engaged in some form of misconduct. Soon thereafter, the company
ceased to employ the claimant and engaged another firm of solicitors. The claimant alleged
that the company had breached the terms of the articles.

HELD:
The claimant’s action failed. The company might very well have breached the articles, but
as the claimant was not party to the statutory contract, he could not sue for such a breach.

1. The contract between the company and its members

As the constitution forms a contract between the company and its members, it follows that both
parties can enforce compliance with the terms of the constitution against the other. In the
following case, the company enforced the constitution against one of its members.

Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch

881 (Ch)

FACTS:
The articles of the defendant company provided that any dispute between it and a member
should be referred to arbitration before any legal proceedings were initiated. The defendant
purported to expel one of its members (the claimant) from its organization but, instead of
referring the dispute to arbitration, the claimant petitioned the High Court for an injunction
restraining his expulsion.

HELD:
The articles formed a contract between the company and its members. The company was
therefore permitted to enforce the term of the articles and require disputes to be referred to
arbitration. The High Court therefore stayed the legal proceedings initiated by the claimant, and
the claimant was subsequently expelled.

5
 A member can enforce compliance of a term of the constitution against the company, as
occurred in the following case.

Pender v Lushington (1877) 6 Ch D 70 (Ch)

FACTS:
The company’s articles provided that its members would have one vote for every ten shares, up to
a maximum of 100 votes. Consequently, members with over 1,000 shares would not have voting
power commensurate to their shares. To avoid this, members with over 1,000 shares transferred
some of their excess shares to several nominees (including the claimant), thereby unlocking the
votes within them. The company’s chairman (the defendant) refused to accept the nominees’ votes
and the claimant alleged that his votes were improperly rejected.

HELD:
The claimant’s action succeeded. The shares were properly transferred and registered to the
nominees, so refusing to accept their votes constituted a breach of the articles. The court
therefore issued an injunction restraining the rejection of the nominees’ votes.

However, it is vital to note that not all the terms of the constitution can be enforced in this way.
As Buckley LJ stated in Bisgood v Henderson’s Transvaal Estates Ltd [1908], ‘[t]he purpose
of the [constitution] is to define the position of the shareholder as shareholder, and not to bind
him in his capacity as an individual’. It follows that only the terms of the constitution that relate
to membership rights will form part of the statutory contract, and members must bring their
claim in their capacity as members (case law uses the phrase ‘member qua member’ with qua
meaning ‘in the capacity of’).

Beattie v E and F Beattie Ltd [1938] Ch 708 (CA)

FACTS:
The company’s articles provided that any disputes between it and its members should be
referred to arbitration. A director (who was also a member) was alleged to have improperly
drawn a salary without the authorization of the company or its members. The company
therefore initiated legal proceedings to recover this payment. The director alleged that,
because he was a member, the article provision applied and the dispute should be referred to
arbitration. He therefore sought to enforce the provision of the constitution.

HELD:
The director was relying on the articles in his capacity as a director, not in his capacity as a
member. Accordingly, the director could not enforce the relevant provision of the articles and
the legal proceedings were permitted to go ahead.

Accordingly, provisions of the constitution that relate to the rights of directors will not normally
form part of the statutory contract.

6
2. The contract between the members themselves

Just as the constitution forms a contract between the company and its members, so too does it
form a contract amongst the members themselves. Accordingly, a breach of the statutory
contract by a member can be enforced by another member, providing that the provision
breached concerns a membership right.

Rayfield v Hands [1960] Ch 1 (Ch)

FACTS:
The company’s articles provided that, if a member wished to sell his shares, he should inform
the directors, who would then purchase the shares between them. The claimant wished to
sell his shares and so notified the defendant directors, who then refused to purchase the
claimant’s shares. The directors were all members of the company, and so the claimant
sought an order requiring the directors to purchase his shares.

HELD:
The High Court ordered that the directors should purchase the claimant’s shares. As the
company was a quasi-partnership, the article provision affected the directors in their capacity
as members. Accordingly, the provision concerned a membership right and formed part of the
statutory contract.

The capacity of a company

As the company is a legal person, it can enter into contracts in much the same way as natural
persons can. However, historically, the company’s ability to enter into contracts was subject to
a significant limitation. Prior to the passing of the CA 2015, all companies were required to
state in their memoranda the objects or purposes for which the company was set up (this is
known as the ‘objects clause’). The objects clause serves to limit the contractual capacity of
the company and if a company entered into a contract that was outside the scope of its
objects clause, the company would be acting ultra vires (‘beyond one’s powers’) and the
contract would be void ab initio (Ashbury Railway Carriage and Iron Co Ltd v Riche
(1875)).

This restriction on a company’s capacity was introduced to protect persons who provided a
company with capital, namely members and creditors. Such persons provided capital on the
expectation that the company would pursue the lines of business for which it was set up and
would not expend capital on frolics outside the company’s stated purposes. The problem was
that the rules relating to ultra vires were overly complex, technical, and vague and served to
harm third parties who had innocently contracted with the company. The ultra vires doctrine
also served to inhibit a company’s ability to diversify into other areas of business that could
prove profitable. Accordingly, successive amendments to the Companies Act have weakened
the ultra vires doctrine with the CA 2015 significantly curtailing its scope, especially in relation
to companies incorporated under the CA 2015 and third parties, for whom the doctrine is now
largely irrelevant. CA 2015 S33-34

7
FIRM DISCUSSION

1. Discuss the evolution of the law relating to ultra vires. There is no doubt that the CA
2015 have substantially weakened the doctrine of ultra vires, but it has not been
abolished (despite what other sources might state). Do you think the doctrine of ultra
vires should be completely abolished? CA 2015 S33-34
2. Discuss the common law concept of quasi-partnerships. Under what
circumstances would a court find that articles of association are subject to equitable
constraints developed from the law of partnership? Review Ebrahimi v
Westbourne Galleries Ltd

The abolition of the requirement to include an objects clause

The requirement of an objects clause has been abolished by the CA 2015 (although
companies can still include an objects clause if they so wish) and such companies will
accordingly have unrestricted objects (CA 2015, s 28). For such companies, the ultra vires
doctrine will be of little relevance as the company’s contractual capacity will not be limited.
This is the default position for companies incorporated under the CA 2015. Of course,
companies incorporated under previous Companies Acts will still have an objects clause but,
as a result of the CA 2015’s reforms relating to the memorandum, such an objects clause will
now be regarded as forming part of the company’s articles and not its memorandum. As the
articles can be altered by passing a special resolution (CA 2015, s 22), such companies can
accordingly delete the objects clause by passing a special resolution to that effect and, in
doing so, will acquire unrestricted capacity.

Inclusion/retention of the objects clause

The objects clause and the doctrine of ultra vires are still relevant in two instances:

1. Although companies incorporated under the CA 2015 do not need to include an

objects clause in their articles, they may do so if they wish. It is anticipated that very few
companies incorporated under the CA 2015 will include an objects clause.
2. Companies incorporated under prior Companies Acts may decide not to, or may
neglect to, remove their objects clause. As regards such companies, the objects clause
will serve to limit the directors’ authority and the ultra vires doctrine will still be of
relevance, although, as will be discussed, it has lost much of its force.

As was noted, historically, if a company entered into an ultra vires contract, then that contract
would be rendered void ab initio. Unfortunately, this served to harm the innocent third party
who contracted with the company and who often had no idea of the scope of the company’s
objects clause. This is no longer the case as s 33 of the CA 2015 provides that ‘[t]he validity
of an act done by a company shall not be called into question on the ground of lack of
capacity by reason of anything in the company’s constitution’.

It may be the case that a transaction is within the capacity of the company, but the director
who caused the company to enter into the transaction had no authority to do so. In such a
case, the issue is not one of corporate capacity, but of directors’ authority. Again, the Act
seeks to protect third parties, with s 34(1) of the CA 2015 stating ‘[i]n favour of a person

8
 dealing with a company in good faith, the power of the directors to bind the company, or
authorize others to do so, is deemed to be free of any limitation under the company’s
constitution.’

The result of ss 33) and 34(1) is that if a company or director enters into an ultra vires contract
with a third party, then the contract cannot be attacked on the ground that it is ultra vires.
Therefore, from the point of view of a third party, the ultra vires doctrine is of little relevance,
which is why it is often stated that the CA 2015 abolishes ultra vires externally, because it is of
little concern to external third parties.

However, whilst the CA 2015 may have rendered the ultra vires doctrine largely irrelevant to
persons outside the company, it remains relevant to persons inside the company for two
reasons:

1. If a member of a company discovers that the company is about to enter into an ultra
vires transaction, the member has a personal right to petition the court for an order
preventing the company from entering into the transaction (this right arises from the
statutory contract that exists between a company and its members (discussed above,
‘The constitution as a contract’)). However, this right only arises if a legal obligation has
yet to arise (CA 2015, s 34(4))—the right is lost once the company has entered into the
contract. In practice, most members will only become aware of a contract once the
company has entered into it, and so this right will be of little use.

2. Where the directors of a company cause the company to enter into an ultra vires
transaction, or where the directors exceed the authority bestowed upon them by the
constitution, then they will likely be in breach of the statutory duty to act in accordance
with the company’s constitution (CA 2015, s 142(a)— ‘Duty to act within the company’s
powers’).

Note:

§ As the constitution forms a contract between the company and its members, acting ultra
vires might place the company in breach of the statutory contract created by s 30 of the CA
2015 (‘The constitution as a contract’).
§ As acting ultra vires can amount to a breach of duty, the members may be able to bring a
derivative claim (‘The derivative claim’) on behalf of the company against the directors who
have acted ultra vires.
§ If the company acts ultra vires because it has become impossible for it to fulfil the purposes
for which it was set up, it may be wound up on just and equitable grounds (‘The petition for
winding up’).

Alteration of the articles

As a company, or the market within which it operates, evolves, it may become necessary for it
to alter its articles. Section 22 of the CA 2015 provides that a company may amend its
articles by passing a special resolution and, in certain cases, the courts also have the power to
amend the articles. However, it should be noted that the ability to alter the articles is not

9
limitless and both statute and the common law impose restrictions on a company’s ability to
alter its articles.

Statutory restrictions

Statute may limit a company’s ability to alter its articles. Examples of such limitations include:

§ The ability to alter the articles is limited by the provisions of the Companies Acts (Allen v
Gold Reefs of West Africa Ltd [1900]).
§ A member is not bound by any change in the articles made after he became a
member if the effect of the change is to require him to take or subscribe for more
shares than the amount he had at the date of the alteration, unless he expressly
agrees in writing to the change (CA 2015, s 23).
§ In certain situations, statute empowers the court to prohibit a company from altering its
articles without the court’s permission (e.g. where the members of a public company
object to it re-registering as private. CA 2015, s 78.

Common law restrictions

Perhaps the most important limitation on a company’s ability to alter its articles was laid down
by Lindley MR in Allen v Gold Reefs of West Africa Ltd [1900], who stated that the power
to alter the articles must:

like all other powers, be exercised subject to those general principles of law and equity which
are applicable to all powers conferred on majorities and enabling them to bind minorities. It
must be exercised, not only in the manner required by law, but also bona fide for the benefit
of the company as a whole …

The test imposed by Lindley MR, whilst flexible enough to grant the court a wide discretion, is
rather vague, to the extent that the High Court of Australia described it in one case as ‘almost
meaningless’ (Peters’ American Delicacy Co Ltd v Heath [1939]). Accordingly, in the following
case, the Court of Appeal aimed to provide some much-needed guidance.

Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9 (CA)

FACTS:
The company’s articles provided that its directors (one of whom was the claimant) would
hold office for as long as they wished, unless they became disqualified by virtue of one of
six specified events. The claimant engaged in a financial irregularity, but it did not fall
within one of the six specified events. The other directors therefore used their shares to
pass a special resolution altering the articles by adding a seventh event, namely that a
director must resign if all the other directors required him to. Following the alteration, the
claimant’s co- directors demanded his resignation. The claimant challenged the
alteration.

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 HELD:
The test imposed by Lindley MR is predominantly subjective, meaning that if the majority
shareholders honestly believed that the alteration was for the company’s benefit as a
whole, then the alteration would be valid, even if the court disagrees with the majority’s
assessment. On this basis, the Court held that the alteration was valid, as the other
directors did believe that it was for the company’s benefit. The Court did, however, impose
an objective requirement, namely that an alteration would not be valid if ‘no reasonable
man could consider it for the benefit of the company’.

It is therefore apparent that a minority shareholder who wishes to challenge an alteration on

this ground will face a difficult task. As our system of company law is based heavily on the
principle of majority rule, the courts are reluctant to invalidate alterations of the articles, as the
following case demonstrates.

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA)

FACTS:
The company’s articles provided that a shareholder could not sell his shares directly to an
outsider if an existing shareholder was willing to purchase them. The company’s managing
director was also its majority shareholder and he wished to sell his shares to an outsider.
Accordingly, in his capacity as majority shareholder, he altered the articles to permit a
shareholder to sell his shares to an outsider, without first offering them to an existing
shareholder, providing that an ordinary resolution was passed (which would be a certainty
given that he was the majority shareholder). A minority shareholder challenged the
alteration.

HELD:
The phrase ‘the company as a whole’ meant the shareholders as a body and the court
should take the case of a hypothetical member and ask whether the alteration was for his
benefit. On this basis, if an outsider was to wish to purchase the shares of a hypothetical
member, it might well be in that member’s benefit to sell his shares directly to an outsider.
Further, the advantage obtained by the majority shareholder was also obtained by all the
other shareholders, so the alteration was not discriminatory. Accordingly, the alteration was
deemed valid.

Entrenched article provisions

A company cannot make its articles unalterable (Walker v London Tramways Co (1879)).
But can make them more difficult to alter. This could be done by requiring additional conditions
to be met (e.g. by requiring unanimity instead of the normal special resolution) or by imposing
restrictive procedures to be adhered to (e.g. by requiring the alteration to be approved of by
certain specified members).

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 Key cases

Case Facts Principle

Allen v Gold The company’s articles granted it a An alteration to the articles will only be valid if
Reefs of West lien over partly paid shares. The it is bona fide for the benefit of the company
Africa Ltd articles were amended to extend as a whole.
[1900] 1 Ch 656 the lien to cover fully paid-up
(CA) shares.

Beattie v E and A company initiated legal A member seeking to enforce the constitution
F Beattie Ltd proceedings against one of its must be acting in his capacity as a member.
[1938] Ch 708 directors. The director sought to rely Constitution provisions that do not relate to
(CA) on a provision of the articles, which membership rights will not normally form part
stated that disputes would first be of the statutory contract.
referred to arbitration.

Eley v Positive The company’s solicitor attempted Outsiders are not party to the statutory
Government to enforce a provision in the contract created by the constitution and so
Security Life company’s articles in order to cannot enforce its provisions.
Assurance Co prevent his removal.
(1876) LR 1 Ex
D 88 (CA)

Greenhalgh v The company’s managing director The phrase ‘the company as a whole’ refers to
Arderne and majority shareholder sought to the shareholders as a body. The court should
Cinemas Ltd alter the articles to remove the ask whether or not the alteration was for the
[1951] Ch 286 members’ pre-emption rights, and benefit of a hypothetical member.
(CA) allow them to sell shares to an
outsider, without first offering them
to existing members.

Hickman v A member initiated legal The constitution forms a contract between the
Kent or proceedings against the company, company and its members. Accordingly, the
Romney March even though the company’s articles company could enforce the constitution and
Sheepbreeders’ stated that disputes would first be the legal proceedings were stayed.
Association referred to arbitration.
[1915] 1 Ch 881
(Ch)

12
Pender v The articles limited the voting power The shares were validly transferred. Therefore,
Lushington of members who held a large the company had no right to reject the
(1877) 6 Ch D amount of shares. These members nominees’ votes. The nominee members were
70 (Ch) transferred their shares to nominees therefore permitted to enforce the constitution
in order to circumvent the limitation. against the company.
The company’s chairman rejected
the nominees’ votes.

Rayfield v The articles provided that if a The constitution forms a contract between the
Hands [1960] member wished to sell his shares, members themselves, which can be enforced
Ch 1 (Ch) the directors would purchase them. by a member, providing that the provision
The directors refused to purchase a breached concerns a membership right. In
member’s shares. quasi-partnership companies, rights conferred
upon the directors will likely be regarded as
membership rights.

Shuttleworth v The company wished to alter its The test imposed in Allen was primarily
Cox Brothers & articles in order to remove a director subjective, although an alteration would not be
Co who had engaged in financial valid if no reasonable man could consider it to
(Maidenhead) irregularities. be for the benefit of the company.
Ltd [1927] 2 KB
9 (CA)

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 FIRM DISCUSSION

‘The contract created by the company’s constitution is a highly unusual one, but the
ability to enforce the constitution provides the members with a powerful source of
protection.’ Discuss

Problem question

The objects clause of Karibu Ltd, a company incorporated in 2009, provide that the business of
the company is to design and create websites for charities. The company’s two directors, Mike
and Paul, own 25 per cent of the company’s shares, with the remaining shares split equally
between three private investors (Atieno, Jane, and Amina). Atieno, Jane, and Amina are
concerned that the company could become burdened by debt, so they pass a special resolution
directing the board not to borrow any capital unless first approved by an ordinary resolution.

Karibu’s business prospects are not good and the directors believe that the company will need
an injection of capital if it is to continue trading. Atieno argues that the company should expand
its business by designing and creating websites for any corporate client, not just charities, and if
the directors agree to this, she will lend the company £100,000. A meeting is convened, but Jane
and Amina do not believe that the company should take on more debt, although Jane does
believe that the company should not limit its client base to charities. Accordingly, Jane and
Amina vote against the loan. Believing the loan to be in the interests of the company, the board
accepts the loan and use it to expand their business by taking on corporate clients. The
expansion of business is a success and Karibu begins to make a profit. However, Amina believes
that the company should stick to its original aim of only designing websites for charities, and
argues that, in not doing so, it is acting outside the scope of its constitution. The board, Atieno
and Jane become tired of Amina’s complaints and insert a provision in the articles, which
provides the majority with the power to compulsorily purchase the shares of any minority
member. They exercise this power and expel Amina as a member.

Advise Amina.

14