Q.

Martin, a wealthy environmentalist, is currently the sole director and shareholder of

Greenspaces Ltd, which he formed in 2010. He gave the company £10 million, which it has
used to purchase a large nature reserve. The company has unamended model articles of
association. Martin is now 70 years old, and wishes to transfer the running of Greenspaces
to his children, Tanya and Sabrina. He will appoint each of them to be a director of the
company, and give each of them 24% of his shares. He fears, however, that Tanya and
Sabrina may not share his passion for the natural environment, and may sell off the
company's existing nature reserve to a house-building company, which has expressed
interest in buying it. Advise Martin whether: a) as a 52% shareholder in Greenspace, he
would still be able to prevent Tanya and Sabrina from selling the company's existing
nature reserve; b) he would be able to stop such a sale if the company's articles were
altered to include the following clause: "the company's objects are limited to the
acquisition and management of areas of natural beauty'; and c) he would be able to stop
such a sale if the company's articles were altered to include the following clause: 'the
directors shall not enter into any contract over £5,000 without the consent of the
shareholders'.
The facts of the case indicate that Martin, owns Greenspaces Ltd (“Company”), which owns
a large nature reserve. Furthermore, as he now become old, he wishes to transfer the
running of the company to his children Tanya & Sabrina by appointing them the director of
the board of the company with himself and by giving each of them 24% of his shares and
retain 52%. He seeks our advice on various matters which revolve around the fact that
Tanya & Sabrina might not share his passion and may sell the nature reserve. We shall be
advising Martin in each of the situations separately, and our legal opinion shall be in light of
the UK Company Law provisions, relevant case laws, legal analysis and conclude the same.
Before, opining on specific queries, we note that the Company is considered as a separate
legal entity with its own corporate personality i.e., it can sue, be sued on its own name and
can own assets and have liabilities. The persons who invest equity in a company and
subscribe to its shares become the shareholders whose primary role is to supervise the
Company’s business, collectively. They also have the power to elect directors who are
empowered and responsible for running the operations of the company (s.168 Company
Act, 2006 (CA, 2006)). In our case, after M completes the transfer of his shares and
appointment of the directors, the Company will have three directors on their board namely
M (52%), T (24%) & S (24%). Based on this our opinion shall be as follows:
(a) In respect of whether M being a 52% shareholder and director of the company can
prevent/stop the sale of the nature reserve. We note that the sale of the reserve to
a house building company is as an operation matter which falls within the domain of
the Board of Directors who are bound to work in accordance with the CA, 2006 (the
“Act”). The allocation of powers between the directors and shareholders is set out
under the “Articles of Association (AOA)” which according to “s.33 of the CA, 2006”
is a contract between the shareholders and the company. We note that the
Company has adopted the model articles of association which under Article 2 & 3
clearly state that the management is with the Board of Directors. Board of Directors
are usually taken on ordinary resolution and each director has one vote (unless
 otherwise stated in the AOA). If the decision of selling the nature reserve goes to the
board, M will clearly be outvoted by 2:1 and the sale will be approved. Therefore, M
cannot do anything at the board level to stop the sale. However, being a shareholder
with 52% he can remove both T & S from directors’ post, in light of “s.168 of the
Act” which states that directors can be removed through ordinary resolution (51%)
of shareholders passed at a duty convened shareholder meeting. Nonetheless,
removal of directors does not invalidate any board resolutions which are already
passed. Accordingly, board decision can be vetoed by the shareholders subject to
passing a special resolution. However, M does not have 75% shareholding to pass a
special resolution. Therefore, in light of the above, our advice would be to M that if
he made T & S directors and if they decided to sell the nature reserve then M would
not be able to stop such sale.
(b) If M would incorporate a restriction in the Company’s objects that the business is
limited only to maintaining areas of natural beauty. Such restriction may be helpful
in stopping any sale of the nature reserve. Historically, if a company had their
principal line of business mentioned in the objects clause under its constitution, any
contract with a third party which is outside the principal line of business is ultra vires
and the third party was considered to have constructive knowledge of such
restriction as any company’s constitution is a public document available with the
Company’s Registrar. However, as flexibility was required, the law underwent
changes and the present law is set out under “s.31” read with “s. 39” of the Act. “S.
31” clearly states that a company has unlimited objects expressly restricted i.e., a
company can do any lawful business even if it is not mentioned in its principal line of
business in the Memorandum of Association (MOA) unless expressly restrictions of
not undertaking a specific business. This clearly creates a general right of
shareholders to enforce such restriction on the Company, in particular, if it is in the
Articles of Association (AOA) as it is a contract which is binding on the company.
However, M will only be able to enforce the AOA and obtain injunctive relief from
the courts to stop the Company to sell the nature reserve in breach of the AOA
restriction before any contract of sale has been entered into. However, if a contract
has been entered into then pursuant to s.39 of the Act, the Parliament has clearly
stated that no third-party contract can be held void due to any restrictions in the
objects clause in the company’s constitution.
(c) If a restriction is placed within the AOA that shareholders consent will be required to
enter into any contract above 5000 pounds. Pursuant to Section 33 of the Act, if the
board does not seek shareholder approval and proceeds to pass a resolution to sell
the nature reserve and enter into the sale contract which we presume is above 5000
pounds, there will be potential breach of a general right of all shareholders. Such
sale can be avoided by applying to the courts and enforcing the AOA and procuring
injunctive relief which the courts will give. However, this enforcement under Section
33 of the Act is only possible if the contract for sale has not been executed. If the
contract has been signed without internal authority of the AOA, the argument that
such contract should be void for lack of internal authority would fail. Historically, the
courts introduced the indoor management rule under common law which is now
enshrined under Section 40 of the Act which states that any contract which has been
entered into by the company with a third party without internal authority is valid if it
is signed by the directors or anyone with authority of the Board and the third party
has signed in good faith which according to Section 40 of the Act is presumed unless
bad faith is proven and just having knowledge of noncompliance of AOA by third
party is not enough. In our case, clearly T & S are director who would execute the
sale contract and if the third party buys it at market value with no dishonesty, then
clearly good faith will be proven. Hence, the contract will be valid.