At the time of open Ltd company in UK, memorandum and articles of association are prepared by the company as a mandatory requirement for setting up a company UK. Different conditions are set in these documents including the management, working of company and shareholders agreement. Hence, these rules after open Ltd company in UK become a binding upon the shareholders and other members of that company. The priority of these documents on one another is determined via different company cases that arose in the past history. One such case is mentioned in this article.
The memorandum and the articles of association of a company formation London or UK govern the operation of a company. Both of them, have the effect of an agreement upon the company and members which has been signed by all the members of the company (as per Section 14(1) of Companies Act 1985) while setting up a company UK. However, the shareholders can sign agreements with one another, making them a binding upon themselves. These agreements act as a supplement to the company’s articles.
There are two rules that have been evolved from different case studies. These are:
- It is not mandatory upon the company to bind itself from not utilising the powers that have been given to the company by statutory laws. However, any agreement signed between the company’s members that they would not caste the vote in favour of any such resolution binds the members.
- The conventional rules of corporate that concern the alteration of articles of a company or imposing the responsibilities of directors, may be subjected to alteration via an agreement of shareholders.
A case study is presented to illustrate the first rule.
Case Study: Northern Bank Development Corporation Limited v Russell
A register Ltd company UK, denoted as TBL, came into existence in 1979. It was created as a holding company to a group of subsidiaries that were involved in the business of brick-making in Northern Ireland. 5 persons held shares in the parent company. Amongst them, one was the respondent Bank, which was given a total of 120 shares. The other 4 were the executives and of them, every shareholder held 20 shares in the parent company. The shareholders signed a contract together. The provisions of that agreement stated that there would be no additional issuance of the company’s share capital as long as all the shareholders assented to it. It happened in 1988 that the directors’ board made a proposition that the company’s share capital should be increased up to four million Euros via a rights issue. This proposal was opposed by Russell, who also was one of the five shareholders of the company and wanted to get an order that the shareholders were restricted by the agreement. He was successful in getting such an order.
It was held by Lord Jauncey of Tullichettle that:
- The matter of argument between this House’s parties was of the third article of the agreement imposing an unfair and illegal restriction on the power given to TBL by the statute, for bringing an increment in the company’s share capital or was it no more than a contract of the shareholders regarding their method of voting in any situation? Both the groups assented to the rule stating that a company cannot be refrained from its authority of bringing a change in the constitution of the company. As mentioned in the case of Allen v Gold.
- Lindley MR stated in Allen v Gold that:
- Under the statutory laws, it is allowed to a corporate body to bring an alteration in the provisions of its constitution via passing special resolutions. And if there is any provision in company’s articles that claims to keep the company from using this right of alteration, then such a provision will be deemed as invalid because it will be opposing the statutory law.
- Both the Judges in the lower courts, namely, MacDermott LJ and Murray J, believed that this principle is applicable on the right of a company to change the memorandum and I assent with them. Mr. McCartney QC for the party making the appeal, put forward numerous arguments supporting the point that the agreement did not contradict the above mentioned rule, in any manner because it was a mere contract signed between the company’s shareholders and it laid beyond the scope of the legislation of the company and it in no manner restricted the company from any of its statutory power of changing the company’s articles or memorandum.
- However, on the other side, Mr. Girvan QC, stated that the agreement played the role of an arrangement determining the voting between the shareholders as well as it was virtually equivalent to any provision in the company’s constitution that restricts TBL from making use of its power of altering the share capital.
- My Lords, as the situation is for a provision of the company’s article that prevents the alteration of company’s articles, that it is to be considered as invalid, the case may not be the same for any provision of an agreement, as it is outside the scope of articles of a company, stating about the manner in which the shareholders should utilise their votes on any resolution regarding the alteration of articles.
- In the case of Welton v Saffery, which was relevant to a clause in the company’s articles which was ultra vires and authorised the corporate body to give a discount while issuing shares. Lord Davey held:
- It is obvious that the shareholders are allowed to handle their interests via contracts as may seem suitable to them. However, such agreements made by either few of the shareholders or by every one of them, would result in personal regulations and would not be considered as an obligation on the company or bind the persons to whom the shares of the parties have been transferred or upon the new entrants or the dis-agreeing shareholders of the company.
- It is in my understanding that Lord Davey accepts that it may be assented by the shareholders legally to make use of their rights of voting in a way which would have been unlawful if it was mentioned by the articles of the company making it bound.
- I will do a detailed analysis of the agreement. It is apparent from the provisions of the agreement, that the purpose of it was to govern the matters between the shareholders in relation to company, TBL’s control and its management. The first provision of the agreement prioritises the conditions of the contract signed by the shareholders, over company’s articles.
- It then states that if there is a contradiction between the articles of the company and the clauses of the agreement, then the contractual parties should co-operate together to make an adjustment of the articles in a way that the clauses of the agreement are taken into account. And then it also states that there should be no additional issuing or creation of the share capital of the company without the agreement of all the contractual parties in a written form.
- The third provision of this agreement is applicable only on the present parties of the agreement and does not impose a binding on the members who may later become the owners of shares in TBL after transfer or allotment. The third provision considers the agreement subordinate to the provisions of the constitution of the company, in relation to some of the shareholders. And as mentioned by MacDermott LJ, it is neither in contradiction nor a substitute to them.
- However, it should be kept in mind that the execution of the agreement was done by the shareholders along with TBL. In the case Bushell v Faith, an article of the company mentioned that whenever there was a voting done upon a resolution that suggested the removal of any director, the director who was to be removed would be given three votes for each share he held. The company’s capital which had been issued was distributed between 3 people in equal proportions. Two of them tried to remove the third person from the board of directors but failed to do so. The reason was that he owned three hundred votes as compared to the two hundred votes of the other two. The judge held in this case that the provision of the agreement remained valid despite the provision of the articles which entitled the company to make removal of a director via an ordinary resolution.
- It was stated by Russell LJ that:
- The argument was given that the company is not permitted to keep itself away through the articles or any other method, from making use of the right of alteration of articles via special resolution. But the matter is similar. Any provision claiming such a thing is invalid. But any clause that proposes, regarding the rights of voting, any condition to make the special resolution unable to get passed, such as when a specific party of shareholders or any particular shareholder, uses his authority of vote against the resolution of alteration, does not become invalid. Any provision in the articles mentioning that no change would be brought in the articles of the company if X contradicts it, will be deemed as opposing the Act and invalid. However, any clause related to the rights of voting is entirely different and hence cannot be treated in the same manner.
- The two opposing parties in the present case tried to seek relief from this verdict. The claimant party stated that any such provision was valid which concerned the utilisation of rights of voting, albeit, it involved prevention of passing a resolution. It was argued by the defendant party that the third clause had the same impact as any provision of the articles stating that no change should be brought in the articles if X does not assent to it.
- There is no doubt in my mind regarding this matter that if the third clause had been included in company’s constitution making it a restriction on the company and on all the present or future shareholders of the company, then it would have been deemed as invalid. However, it was not incorporated in the articles. I think, the point of significance in this verdict is the phrase “articles or otherwise”. It is apparent from this phrase that it is not a mere fetter on the authority of articles’ alteration, bestowed by the statutory laws, which are obnoxious.
- From the third clause of the agreement, it seems that the purpose of it was twofold. The shareholders would give their consent for using their voting powers for issuing or creating additional share capital if the company and the shareholders agreed to it in a written form. This is personal opinion of the shareholders and does not restrict the future shareholders.
- As was anticipated by Lord Davey in the case of Welton, it is a similar type of contract of private nature. It was assented by TBL that the share capital would be increased if all the shareholders assented to it. This was agreed upon by TBL in a formal agreement which was to remain effective as long as anyone of the shareholders who signed this contract held shares in TBL and quite later than TBL’s control’s transfer to the shareholders who did not sign the agreement.
- This agreement is obnoxious if it was included in company’s articles and hence, cannot be enforced as it contradicts the provisions of article 131 of Companies Order 1986. But the undertaking of TBL is not dependent to the undertaking of the shareholders and hence there is no logic why the shareholders cannot enforce their undertaking which does not handcuff TBL from using its statutory authorities.
- Hence, I would give permission to the appeal. The case may be forwarded to the Court of Appeal to make an appropriate decision about the relief that should be given to the plaintiff.