Constitution & Internal Workings
To understand how companies are run and how they transact their day-to-day business, in particular to understand:
To develop an appreciation for why entrepreneurs may choose to organise themselves through a company;
The crucial functions of the Articles of Association and their status in law;
The methods by which a meeting of members and the board can be called and to be familiar with the written resolution procedure for member meeting;
How decisions are taken by the board and by members.
The following sections of the Companies Act 2006 (“CA 2006”) and the Model Articles for Private Companies Limited by Shares (“MA”)
- Re Generally and as regards Articles of Association:
CA: 7, 8 (1), 17, 18, 20, 21, 33
- Re: Board Meetings: MA , 7, 9, 11-3 &
- Re: Board Resolutions: MA 17 (1), 18 (f) and 26
- Re: General Meetings: CA 302, 307-311, 318, 320, 323, 324, 325 and 3MA 39 and 42
- Re: Shareholder Resolutions: CA 77, 281-283
PREPARATION: EXERCISES
Please come to this seminar prepared to discuss the following questions:
A share = a unit of ownership.
98% : private companies
2% : public companies
A public company can offer its shares to the public. You can advertise in a newspaper for example.
A kind of public company : A listed company is a company on the stock exchange = it’s a screen that people connect to. It’s an electronic system that matches buyers of shares with sellers of shares.
In a limited company (either by share or by guarantee), the liability of the members must be limited by the constitution (amount unpaid of shares).
The liability of the members of the company is limited on the amount unpaid of shares.
A partnership is two or more people having a common purpose, carrying out business together. You’re each working for your own account. They don’t have to disclose their accounts.
Ltd Partnership
Section A (Company Constitution)
What are articles of association; they are part of the company’s constitution, but what does this mean? (usually abbreviated to ‘articles’). In particular:
What is the effect/s of MA 3 and 4 (this is short hand for paragraphs 3 and 4 of the Model Articles)?
The articles are a contract bw the shareholders and the directors. They bind everyone in the company. The articles of association cannot contradict the CA.
Ordinary resolutions : more than 50% must agree
What are model articles of association (or ‘MA’)?
They are default articles which apply to a limited company. They set out the internal rules and regulations which govern the relationship between the members and the company.
Every company has to have a set of articles. The CA gives the govt the power to draft model articles which take effect in the event where the company doesn’t adopt its own.
If there are 10 shareholders each owning 10% of Company A Limited, how many need to vote in favour of the special resolution in order to change a provision in the company’s articles? CA 21 (1)
CA 283 (1) A SR must be passed by a majority of not less than 75%.
8 need to vote.
What are the pro and cons of adopting model articles (versus drafting one’s own)?
PROS : cover individual circumstances (issues concerning share transfers / appointment of directors)
CONS
Explain the Hickman Test.
You can’t change something if it’s against the interest of the company. You don’t put in the articles that could damage the company on the long run.
Section B (Internal Workings of the Company)
(To answer this question read section 77 of the CA first).
Birthday Magic Limited is a company which provides party magicians for childrens’ birthdays. Its shareholding is divided in the following way:
John 10 %
Maria 10 %
Francis 15%
Yves 15%
Arvind 25%
Heather 25%
John and Maria are also the only directors. The Board decides to change the name of the Company and passes a Board Resolution to that effect, changing the name to Clowning Around Limited.
The other shareholders are very angry at this change as they believe the company has built up important and very positive brand recognition in their previous name. They agree that, on their behalf, Francis will ask the Board to call a General Meeting in order for the shareholders to pass a special resolution (“SR”) to change the name back. Before doing so, however, the shareholders have asked you, as their lawyer, to advise as to what procedure:
In an exam question, you have to ascertain if it’s model articles or if it’s something else.
The Board needs to have gone through in order for their resolution to be deemed valid (who would call the meeting/ what notice must there have been to hold the meeting / what is the quorum); and
CA 302 : Any director can call a meeting for reasonable notice
CA 303 (2) (a) Members’ powers to require directors to call General Meetings if they represent at least 5% of the capital of the company
CA 307 (1) A General Meeting of a private company (“Ltd”) must be called by notice of at least 14 days.
CA 318 (2) two qualifying persons are a quorum, that is an individual who is a member of the company.
The minimum of persons that need to attend the meeting in order for it to be valid.
CA 22 Entrenched provisions : you put a provision in the articles and you say that to change those articles you need a specific percentage higher than that required for a SR.
Can the shareholders just hold a general meeting without the directors calling it?
CA 305 (1) (b)
If not what procedures need to be followed: who calls / quorum / what notice is required / what is short notice, and does it apply here /will they be able to pass a SR (if all but Maria and John want to change the company’s name back to Birthday Magic Limited?
CA 303 (2) (a) Francis is 15%, he has the power to call the meeting.
CA 318 (2) Any two members of the company may attend the meeting.
CA 307 (5) (a) The short notice must be agreed to by a majority in number of the members having a right to attend and vote at the meeting, being a majority who together hold not less than 90% of the shares giving a right to attend and vote at the meeting
Francis + Yves + Arvind + Heather = 15 + 15 + 25 + 25 = 80%
They won’t be able to call for a short notice.
CA 283 (1) A SR must be passed by a majority of not less than 75%.
Francis + Yves + Arvind + Heather = 80%
Francis, Yves, Arvind and Heather will be able to change the company’s name back to Birthday Magic Ltd.
If a SR is passed (as above) is there anything the shareholders can do to prevent the board in future from just simply changing the name of the company again?
CA 168 : shareholders have the mandatory right to remove directors by a simple majority
La Trininidad
Advise the shareholders.
Alan has the right to nominate, there’s nothing contradictory to that in the CA. The CA doesn’t say how long can someone be a director; however, to give someone an enforceable right for life could be problematic and against the company’s interest cf Hickman test. It doesn’t breach the Act, it breaches common law.
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