10/23/23

1 A company’s constitution: part 1

Article and Memorandum and The Objective clause issue.

2 Over view of todays lecture

• How does a company work?
• What are the main decision making bodies in the company?
• How do they decide on matters pertaining to the company
• Where do they get their powers from ? The Constitution of the
Company!!
• What is the legal nature of the Constitution?
• How are rights of different classes of shareholders protected in the
Constitution?
3 Memorandum and articles of association
When you register your company you need:
• a ‘memorandum of association’ - a legal statement signed by all
initial shareholders agreeing to form the company
• ‘articles of association’ - written rules about running the company
agreed by the shareholders, directors and the company secretary
• https://www.gov.uk/limited-company-formation/memorandum-and-
articles-of-association
•
4 The AOA as a contract?
5 S.33 CA 2006 and sec 17 of CA 2017: defines the legal standing
of the AOA in very similar terms
• ‘The provisions of the 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’
6 Sec 17 of CA 2017
• 17. Effect of memorandum and articles.—(1) The memorandum
and articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively had
been signed by each member and contained a covenant on the
part of each member, his heirs and legal representatives, to
observe and be bound by all the provisions of the memorandum
and of the articles, subject to the provisions of this Act.
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 and of the articles, subject to the provisions of this Act.
•
7 Legal Effect of company constitution
• In statute ( sec 33 CA 2006/ 17 CA 2017) it is expressed as a
contract between company and member
• Why?:
• Contractual theories
• A. Contractarianism - nexus of contracts
• B. Historical origins of company in partnership
8 Current position ( sec 33 CA 2006 and sec 17 CA 2017)
• Contract equally binding on company and member
• Refers to company constitution i.e. the articles of association
• The company constitution is a ‘statutory contract’
•
9 Bratton Seymour Service Ltd v Oxborough [1992] BCLC 693
• Steyn LJ. ‘a statutory contract ... derives not from a bargain struck
by the parties but by the terms of the statute.’
• HOW?
• 1. members qua members
• 2. members cannot (usually) enforce terms in articles that do not
relate to their personal rights
•
10 So what does it actually mean?
• The articles bind members as members only (qua members)
• Beattie v E & F Beattie Ltd (1938) Ch 708
• Defendant director ( who was also a shareholder) wished to have
a dispute between the company and Himself( as a Director) be
solved through arbitration.
• He wanted to refer to arbitration as was provided for in art 133 of
articles of association.
• CA held: that the articles bind members equally BUT did not
apply to a director, who was not taking action in his capacity as a
shareholder.
•
11 Outsiders rights?
• Eley vs Positive Government Society 1876
• The articles provided for one of the founding members to be
appointed as the solicitor of the company.

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• The articles provided for one of the founding members to be

appointed as the solicitor of the company.
• The company did not appoint him as such. The shareholder tried
to enforce his right under the Articles.
• Held: his right to be appointed as a solicitor of the company was
not a right under the constitution of the company as it was NOT a
members ship right but an outsiders right!!
12 Enforceable by member against member
• Articles constitute a contract between individual members,
according to Wood v Odessa Waterworks Co (1889) Ch.D 637 .

•
13 Enforceable by member against company
• Wood v Odessa Waterworks Co (1889) 42 Ch 881
• Articles empowered the directors to declare a dividend ‘to be paid’
to shareholders –
• Directors planned to pay in debentures rather than cash, and to
that effect obtained an ordinary resolution at general meeting
• Wood, a shareholder obtained an injunction against this stating
that he had the right to have his rights as a shareholder enforced
against the company to be paid in cash, despite the resolution at
the General meeting.
• The court accepted that payment in articles referred to ‘cash’
payment and that the Shareholder could have his rights enforced
against the company.
•
14 Personal membership rights

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

• Articles limited a members vote in a general meeting to 100.
Certain SH’s transferred their shares to nominees to increase
voting rights. Chairman ruled out votes as out of order.
• Held: Plaintiff shareholder was entitled to an injunction against
director as he had a right to have his vote recorded.
•
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• But member against company actions allowed only in respect of
personal membership rights.
• e.g:
• Voting: Pender v Lushington (1877) 6 Ch.D 70
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• e.g:
• Voting: Pender v Lushington (1877) 6 Ch.D 70
• Dividend: Wood v Odessa Waterworks Co (1889) 42 Ch. 881
• Other instances e.g. registration as shareholder, obtaining share
certificate, share transfer rights, notice of meeting…
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16 Final thought
• Sec 33 ( sec 17 CA 2017), a statutory contract
• Contract between: members and Company!
• Members and members! ( academic opinion: this is more likely in
Smaller companies)
• But only in capacity ( for their rights as) as members: not as
outsiders ( e.g. member wanting to be appointed as a solicitor of
the company or even as Directors.
17 Types of companies limited by shares
1 Private company
2 • Capital can be 1 penny.
• Only 1 director needed
• May not have to use an auditor
• Must not offer its shares to the public i.e. to anyone other than its
current shareholders, employees and their family members
3 Public company
4 • Minimum capital of £50,000
• At least 2 directors and a secretary
• Must have its accounts audited
• Can offer its shares to the public insofar as it complies with the
Financial Services and Markets Act 2000.
18 The corporate decision making pyramid
19 Running the business
• The model articles, which are uniformly adopted by all companies
to this respect, delegate authority to run the business to the board
collectively.
• Individual directors have no automatic individual authority to act as
agents of the company unlike partners.
• In large companies boards always delegate the authority to run the
 agents of the company unlike partners.
• In large companies boards always delegate the authority to run the
business and therefore to enter into contracts to one amongst
them, described in business parlance as the Managing Director
(MD) or Chief Executive Officer (CEO).
• The MD or CEO then delegates parts of his authority to senior
employees (managers) who then delegate to mid-level managers
who then delegate to junior managers.
• Junior managers delegate ordinary transactions to shop floor level
workers such as cashiers in supermarkets.
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22 How do shareholders make decisions?

1 Public companies
2 • Shareholders can only pass resolutions at general meetings duly
convened
• Directors are obliged by the law to convene one general meeting
annually
• duty to hold annual GM ( sec 132 of CA 2017) within 16 months of
registration of the company
• Notice periods prescribed by the law
3 Private Companies
4 • Decisions can be made either in general meeting (as for public
cos) or by written resolution of the shareholders.
. duty to hold annual GM ( sec 132 of CA 2017 within 16 months of
registration of the company
23 Extra ordinary GM ( CA 2017)
• Sec 133; All general meetings of a company, other than the annual
general meeting referred to in section 132 and the statutory
meeting mentioned in section 131, shall be called extra-ordinary
general meetings.
• (2) The board may at any time call an extra-ordinary general
meeting of the company to consider any matter which requires the
approval of the company in a general meeting.
• (3) The board shall, at the requisition made by the members—
• (a) in case of a company having share capital, representing not
less than one-tenth of the total voting power as on the date of
deposit of requisition; and
• (b) in case of a company not having share capital, not less than
one- tenth of the total members;

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 • (b) in case of a company not having share capital, not less than
one- tenth of the total members;
• forthwith proceed to call an extra-ordinary general meeting.
•
24 Shareholder voting: the basics
25 Matters that must be decided by the shareholders
1 By Special Resolution
2 • Altering the articles of association (s. 21 CA 2006). ( sec 38 CA
2017)
• Converting from public to private and from private to public
• Reducing the legal capital
• Winding up the company
• Giving binding instructions to the board of directors (Model
Articles)
3 By Ordinary Resolution

26 The appointment and removal of directors

27 CA 2017
• But CA 2017 does provide for the appointment of Directors under
sec 155 to sec 162
• Sec 163. Removal of directors.—A company may by resolution in
general meeting remove a director appointed under sections 157,
161 or section 162 or elected in the manner provided for in section
159
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28 Enforcement of articles
29 The corporate constitution: the articles of association under
CA 2006
• If no articles are registered, the model articles apply. Similar
provision in CA 2017 ( Table A Schedule 1)
• If articles are registered, the model articles apply unless expressly
excluded or inconsistent with the registered articles (s. 20 CA
2006)
• There are three sets of model articles for different types of
companies:
• Model articles for public companies
• Model articles for private companies limited by shares
• Model articles for private companies limited by guarantee
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 • Model articles for private companies limited by shares
• Model articles for private companies limited by guarantee
30 Articles of Association CA 2006 s.18
• No need for a Memorandum by the Company.
• No need for an objective clause. But may keep one if so desired.
Sec 31
• Sets out the internal management of the company
• Good practice to keep under review
• May register own articles (s.18(3) or use Model articles fill gaps
s.19 (SI 2008/3229)
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•
31 Model Articles apply if none registered s. 20 ( similar to table A
of CA 2017)
• Latest versions for private and public companies
• https://www.gov.uk/guidance/model-articles-of-association-for-
limited-companies#contents
• Applicable to all incorporations from October 2009
• Companies keep articles from time of formation, unless resolution
to change
• Cover matters such as directors’ powers and responsibilities,
shares and distributions, conduct of meetings etc.
• Standard form for companies to use if they wish or amend
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•
32 Sec.21 CA 2006, Right to amend the articles of association
• The act provides that the articles of association can be altered/
amended through a special resolution of the total votes i.e. at least
75% of the total votes allowed must vote to amend the articles ( or
even one article)
• However, there is a provision in law where the articles ( or some of
the articles) may be entrenched. Which means that the articles
can themselves provide that specific articles may only be
amended through higher than 75% votes, making them more
difficult to amend.
• But, there is no possibility of a ‘ no alteration’ clause! i.e. the
articles cannot say that certain articles can never be changed.
33 Sec 31 CA 2006
Unrestricted Objectives Clause
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33 Sec 31 CA 2006
Unrestricted Objectives Clause
34 Retaining the Objective clause under the CA 2017
• One major difference between the English CA and Pakistani CA is
the fact that CA 2017 continue to have a statutory requirement for
all companies to have an Objective clause. Where as the English
law has now abolished the requirement.
• Sec 26 CA 2017.
• Business and objects of a company.—(1) A company may carry on
or undertake any lawful business or activity and do any act or
enter into any transaction being incidental and ancillary thereto
which is necessary in attaining its business activities:
• Provided that—
• (i) the principal line of business of the company shall be
mentioned in the memorandum of association of the company
which shall always commensurate with name of the company; and
• (ii) any change in the principal line of business shall be reported
to the registrar within thirty days from the date of change, on the
form as may be specified and registrar may give direction of
change of name if it is in violation of this section.
•
35 principal line of business under CA 2017?
• Explanation.—“principal line of business” means the business in
• which substantial assets are held or likely to be held or substantial
revenue is earned or likely to be earned by a company, whichever
is higher.
• (2) A company shall not engage in a business which is—
• (a) prohibited by any law for the time being in force in Pakistan; or
• (b) restricted by any law, rules or regulations, unless necessary
licence, registration, permission or approval has been obtained or
compliance with any other condition has been made:
•
36 Alteration to the MOA and the Objective Clause under sec
32CA 2017

• Sec 32 Alteration of memorandum.—(1) Subject to the provisions

of this Act, a company may by special resolution alter the
provisions of its memorandum so as to—
• (a) change the place of its registered office from
• (b) change its principal line of business; or
 • (a) change the place of its registered office from
• (b) change its principal line of business; or
• c)adopt any business activity or any change therein which is
subject to licence, registration, permission or approval under any
law.
• The alteration shall not take effect until and except in so far as it is
confirmed by the Commission on petition

This restriction on the alteration of the objective clause has

unintended consequences.
Can you explain what those are?

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•
37 Companies Act 2006: the current law
sec 31 Statement of company's objects
(1) Unless a company's articles specifically restrict the objects of
the company, its objects are unrestricted.
Sec 39 A company's capacity
(1) The 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.
•
38 Retaining the Objective clause under the CA 2017
• One major difference between the English CA and Pakistani CA is
the fact that CA 2017 continue to have a statutory requirement for
all companies to have an Objective clause. Where as the English
law has now abolished the requirement.
• Sec 26 CA 2017.
• Business and objects of a company.—(1) A company may carry on
or undertake any lawful business or activity and do any act or
enter into any transaction being incidental and ancillary thereto
which is necessary in attaining its business activities:
• Provided that—
• (i) the principal line of business of the company shall be
mentioned in the memorandum of association of the company
which shall always commensurate with name of the company; and
• (ii) any change in the principal line of business shall be reported
to the registrar within thirty days from the date of change, on the
form as may be specified and registrar may give direction of

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 to the registrar within thirty days from the date of change, on the
form as may be specified and registrar may give direction of
change of name if it is in violation of this section.
•
39 principal line of business under CA 2017?
• Explanation.—“principal line of business” means the business in
• which substantial assets are held or likely to be held or substantial
revenue is earned or likely to be earned by a company, whichever
is higher.
• (2) A company shall not engage in a business which is—
• (a) prohibited by any law for the time being in force in Pakistan; or
• (b) restricted by any law, rules or regulations, unless necessary
licence, registration, permission or approval has been obtained or
compliance with any other condition has been made:
•
40 Alteration to the MOA and the Objective Clause under sec
32CA 2017

• Sec 32 Alteration of memorandum.—(1) Subject to the provisions

of this Act, a company may by special resolution alter the
provisions of its memorandum so as to—
• (a) change the place of its registered office from
• (b) change its principal line of business; or
• c)adopt any business activity or any change therein which is
subject to licence, registration, permission or approval under any
law.
• The alteration shall not take effect until and except in so far as it is
confirmed by the Commission on petition

This restriction on the alteration of the objective clause has

unintended consequences.
Can you explain what those are?

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•