The Company Constitution

Wood v Odessa Waterworks Co (1889) 42 ch d 636

The directors of the company recommended that shareholders receive their dividends in debentures instead of cash. An ordinary resolution was passed by the members adopting this recommendation. W, a shareholder, alleged that this breached the articles which referred to ‘a dividend to be paid to the members’.

An injunction was granted to stop the directors issuing the debentures. The provision in the articles prima facie meant that the dividend should be paid in cash.

Stirling J stated: ‘The articles of association constitute a contract not merely between the shareholders and the company, but between each individual shareholder and every other’.

Rayfield v Hands [1960] 1 Ch 1.

Salmon v Quinn and Axtens Ltd [1909] ac 442

The articles of the company gave S, one of the company’s managing directors, the power to veto certain board resolutions relating to the purchase and letting of premises. When he tried to exercise his veto it was ignored and the directors resolved to acquire and let some premises. An ordinary resolution of the members later confirmed their decision. S sought an injunction restraining the directors from acting on the resolution.

An injunction was granted as the resolutions were inconsistent with the articles.

Lord Wedderburn, [1957] CLJ 194, relies on this decision to support his view that outsider rights can be indirectly enforced by a member so long as he sues in his capacity as a member and not as an outsider.

The Association, a registered company, refused to register H’s sheep in their pedigree flock book and sought to expel him from membership. The articles provided that all differences between the Association and any of its members were to be referred to arbitration. H commenced a court action to restrain the company from expelling him. The Association issued a summons to stay the proceedings relying on the articles which provided for arbitration.

The proceedings were stayed. Under s 14 CA 1985 [s 33 CA 2006] the articles amount to a statutory agreement between the members and the company as well as between the members inter se. Hickman was therefore bound to submit his case to arbitration.

Astbury J stated:

‘I think this much is clear, first, that no article can constitute a contract between the company and a third person; secondly, that no right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter, director can be enforced against the company; and, thirdly, that articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively’.

Astbury J introduced a limitation that a member can only rely on an article if it affects him in his capacity as a member but the section does not say this.

R ayfield v Hands [1960] 1 ch 1

The company’s articles provided that, ‘Every member who intends to transfer shares shall inform the directors who will take the said shares equally between them at a fair value’. The claimant notified the defendant directors that he intended to transfer his shares to them but they refused to take them. The claimant sought an order from the court that they should do so.

The directors were ordered to buy the shares as the articles have contractual effect between the members themselves (inter se) and they can be enforced by a member without the need to join the company as a party to the proceedings. The directors were required by the articles to hold qualification shares and this was therefore a dispute between the members themselves.

Vaisey J said:

‘the relationship here is between the plaintiff as a member and the defendants not as directors but as members’.

Vaisy J stressed that the company was a quasi partnership type of company and that his decision may not extend to the articles of every company. CA 2006 does not clear up the position so the issue remains a live one.

Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88

The articles of the company appointed E to be the company’s solicitor and that he should not be removed except for misconduct. Later on he also became a member but after acting as the solicitor for some time, the company then employed other solicitors to transact...