Altering the Articles of Association with Members Voting Right in a Register Limited Company UK with relevant Case Studies

04 Jan

At the time of open ltd company in UK the company’s members are given certain authorities, amongst these authorities, is the power of voting. A member is generally free to exercise these voting rights while making decisions for the company either in annual general meetings or at the time of passing the resolutions. Articles of Association, that govern the distribution of powers within a company and are required to be prepared at the time of company register with companies house UK, can be altered via the votes of members for a special resolution. These articles should be altered with an intention to benefit the overall company. Different case studies have taken place, just to answer exactly how it can be known that whether a particular alteration is in favour of the company or not. Two case studies are mentioned in this article to highlight two scenarios relevant to alteration of articles in genuine interests of the company.

Case Study: Greenhalgh v Arderne

This case study demonstrates a difficult scenario that may arise after open ltd company in UK. The defendant side was a private company. It was mentioned in company’s articles that a right of pre-emption should be given to the current members of the company whenever any member wanted to auction his part in shares. The managing director, Mallard had led negotiations with a person outside the company, Sol Sheckman, to auction a controlling interest at 6s for each share. Mallard had obtained the acceptance of a special resolution to make this agreement effective. However, as a consequence to this agreement, the pre-emptive right was denied. It was claimed that the special resolution had been passed as a fraudulent towards the minorities. The declaration was refused by Court of Appeal.

Evershed MR held that:

  • The issue of the case is that the passing of resolution was not done bona fide and for the benefit of the company. As mentioned by Mr. Jennings, this case can be approached in two different ways. The complainant claims that the first approach has been ignored by Roxburgh J. The first approach is that, it involves a special resolution, whose authenticity according to Mr. Jennings, depends upon whether the people who passed it, did it in good faith and in company’s overall interests.
  • Mr. Jennings had given the reference of cases like Sidebottom v Kershaw, Leese & Co., the verdict given by Peterson J for Dafen Tinplate and also, Shuttleworth. Some rules deriving from these authorities can be stated. I believe that it is now clear that bona fide in company’s overall interests is a single thing. I think its interpretation is that when a shareholder votes, he considers honestly whether the resolution is in the overall interests of the company.
  • The second point is that by referring the company as a whole does not mean that the company has to be considered as a commercial body, separate from the corporators, in cases like the current one. It rather means the corporators in the form of a general body. So, a case of any hypothetical member may be considered, and it may be inquired that whether the resolution that was proposed was in that individual’s favour according to the honest views of those who supported the proposition.
  • In my views, the case would be stated in a more accurate and precise manner if it is viewed conversely and stating that such a special resolution could be impeached if it was creating an effect of discrimination between the majority and minority shareholders by giving the former a benefit that the latter was deprived from. After the examination of cases where resolutions have been accused successfully, the basis is that.
  • Therefore, it is not a compulsion that the individuals who are to vote upon any special resolution should separate themselves from their personal prospects and only consider that the resolution is in the best interests of the company. If any offer is made to the corporators regarding the purchase of all the shares by an outsider, and if it seems a fair deal, and any special resolution is passed by the corporators for this purpose, then just on the basis that the corporators considered their individual interests, the resolution cannot be impeached.
  • I believe, Mr Jennings accepted this fact and hence stated that there are some other grounds for impeachment of the resolution. These are: The resolution went beyond than required to make effective a specific auction of shares and that the resolution deprived the minorities from a right, given to them by the existing articles, to buy the shares of any majority who is willing to sell them, hence, prejudicing over the plaintiff and the minorities.
  • The argument made by Mr. Jennings is that while passing a resolution for changing the articles merely for the reason to make a specific transaction effective, it is sufficient to restrict it to that specific transaction. However, in this resolution, it is permitted for everyone who wants to sell his shares can deal at any time with any outsider given that an ordinary resolution is passed for the approval of the transferee. And if the majority wants to sell the shares, then they will easily get the resolution passed. This alteration in articles provides majority shareholders a leniency whereas with the alteration the minority shareholders are in a more difficult situation to sell their shares because the majority would probably not support the minority’s choice of transferee. However, this alteration just relaxes the restrictions that are imposed upon the transfer of shares in the existing articles of association and it should be kept in mind that the directors are authorised to register any transfer. Hence, a minority shareholder would have to face the directors’ rejection for transfer because the directors act in accordance with the majority.
  • For the second argument I felt pity for some time for the argument given by the plaintiffs, as, according to the articles, he could have stated: “Before you auction your shares to any outsider, you have to offer them to the current shareholders thus enabling me to purchase all the shares of Arderne Company”. The answer, I believe, is that, if any person joins any company, he does not have any authority to believe that the company’s articles will remain same as they were devised at the time of forming a limited UK company and that unless the proposed change in articles makes discrimination unfairly in a way that I have specified, it cannot be objected, given that the passing of resolution is done bona fide, that tender’s right for the shares held by majority would be taken away by taking off the restriction. I do not believe that such a discrimination can be termed as within the bounds of the rule that I have mentioned.

Asquith concurred and Jenkins LLJ concurred.

Inferences from the Case Study

In the case of Clemens, there was a similar matter. However, it did not involve any alteration of articles. The court had given an opposite verdict. An interesting point is that all the issues that were complained about in the history of the Greenhalgh company, happened before there was any law enabling the court to give relief to the minority shareholders on the basis of oppression (Companies Act 1948 Section 210 or Companies Act 1985 Section 449). For the long record of ‘salami tactics’ by which the stake of Mr. Greenhalgh in the company was destroyed in a systematic manner, he might have been victorious in applying for a relief under these clauses. Although there are chances that these clauses might have been subjected to restriction as per the verdict of O’Neil. The verdict given for Greenhalgh is very different. Some problems raised by it can be presented, however, it is difficult to answer them in a confident manner. Hence this case depicts how strange scenarios can take place after forming a limited UK company.

Case Study: Stylo Shoes Limited

Some special resolutions were passed by the defendant register limited company UK which resulted in an increment in the share capital and doubled the voting rights for the shares of management. The reason for doing so was to secure the voting rights’ power of the shares of management. A large majority at the meetings carried these special resolutions.  And the ordinary shareholders approved them in a class meeting. The persons holding shares of management did not participate in any voting. The court gave the verdict that the resolutions were valid.

Pennycuick J stated:

  • I am not convinced that there is any oppression against the individuals holding ordinary shares. The company’s members excluding the holders of shares of management, have concluded that this is for the advantage of company to maintain the existing ground of control via the shares of management despite the fact that now the shares are representing smaller proportion of the capital issued.
  • In my opinion, the nature of the matter is of business policy and the court should not interfere in it. According to my knowledge, any company’s member that acts according to the Companies Act and that company’s constitution, and is subjected to any compulsory consent on behalf of any affected class, can change the relative powers of voting linked to different classes’ shares.
  • Obviously for passing every resolution proposing any alteration of articles, the intention of members should be in good faith and for the company’s interests as a whole. However, as per my knowledge there is no basis for which such a change can be objected.
  • Hence, in this case, the alteration has been supported by a majority of the shareholders who do not gain any personal benefit from the alteration and who have passed only for the best advantage of the company as a whole. This is on no grounds oppressive.

Inferences from the Case Study

In case studies like North-West Transportation and Northern Countries, it has been obvious that the persons holding management shares were not legally bound to refrain from voting. In contrast to the rule generally administering the directors’ acts, there is apparently no rule of common law any interested shareholders’ vote can make a decision null.  The practice of voting rights given by shares is clearly inappropriate in only one scenario where the genuineness of the shares is in danger, and when the permission for voting would be to plead for the question in issue. For more elaboration look at Hogg v Cramphorn case.

Suggestions have been given to alter the law by permitting some issues to be solved by the submission of them for the votes of only the members that are independent. However, the imposition of such a law would be very difficult and it would result in a deprivation of most of the persons at stake from having a meaningful role in the affairs of the company. Denial of the voting right of interested members is an easy way and there are some scenarios, where the persons holding interested shares are deprived from this right of voting under law. For instance, Section 239 of Companies Act 2006 as well as Sections 695 and 717 of the same act. They are also deprived by the listing rules regarding the business being done between listed companies and related party, that may be either any substantial director or shareholder.

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