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Company Law I
Lecture 5: Corporate Constitution
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Constitution
• Two documents:
 Memorandum of
Association
 Articles of Association
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Memorandum of association
•
•
•
•
•
Standard forms: see Sch 1 Tables B-E.
CI 1: company name
CI 2: registered office
CI 3: objects of company
CI 4: liability of members limited [for limited liability
companies]
• CI 5: share capital clause - authorised capital and par
value [for companies limited by shares]
• Details of original subscribers.
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Objects of the company
• Objects: business or activities of company.
• Former doctrine of “ultra vires”: contract that
contravenes objects clause and outside of the
corporate capacity of the company is ultra vires the
company and void.
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Ashbury Railway Carriage and Iron Co Ltd v
Riche (1875) LR 7 HL 653 (House of Lords)
• Co objects:
 Make, sell, lease rail
carriages
 Mechanical engineering
and contracting
 Mining
• Co agreed to provide
Riche with finance to
build a railway in Belgium
• Held: contract void as
ultra vires, ratification is
wholly ineffective.
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Ashbury Railway Carriage and Iron Co Ltd v
Riche (1875) LR 7 HL 653 (House of Lords)
• Clause 4 of the Articles:
“an extension of the
company’s business beyond or
for other than the objects or
purposes expressed or implied
in the memorandum shall take
place only in pursuance of a
special resolution.”
• Is it a good case???
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Rationale and practical effects
of ultra vires doctrine
• Rationale of doctrine: protection of
shareholders and creditors.
• Injustices of doctrine in practice.
• Circumventing the doctrine: very wide objects
clauses drawn up.
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Abolition of ultra vires doctrine:
1997 amendments
• Company has capacity as a natural person: s 5A.
• Stating objects is optional: s 5(1A)(b).
- Unless members want to dispense with “Limited” in the
name: s 5(1A)(a).
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Where company does have objects
• Company must comply with objects clause: s 5B(1).
• Member may bring proceedings to restrain it from
acting contrary to objects: s 5B(2) (subject to
proviso).
• Action contrary to objects clause is not invalid by
reason only of the contravention: s 5B(3).
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Effect of ss 5A, 5B: examples
• Objects clause: restriction to business of running a
restaurant.
• Directors wish to venture into retailing clothes.
• Scenario 1: directors have not yet acted on
intentions.
• Scenario 2: directors have caused company to
contract with clothing manufacturer.
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Scope of s 5B(3)
• Difference between corporate capacity and directors’
authority.
• Company has capacity to act outside objects clause: see s
5A.
• Directors do not have authority under memorandum to act
outside objects clause: see s 5B(1).
• Company might not be bound to transaction outside
objects clause if third party has notice of directors acting
outside of authority.
• Third party will not have constructive notice of objects
clause: see s 5C (partial abolition of doctrine of
constructive notice).
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Operation of ss 5B(3) and 5C: examples
• Scenario 3: clothing manufacturer not aware of
restriction in objects clause.
• Scenario 4: clothing manufacturer does know of
restriction in objects clause (i.e. actual notice).
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Articles of association
• Regulate company’s internal management.
• Articles registered with memorandum.
• Companies limited by shares:
- registering articles is optional.
- Sch 1 Table A Pt 1 (public companies) and Pt 2 (private
companies) - default articles (see s 11).
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Matters covered in Table A
•
•
•
•
Capital - regs 2-48.
Members - regs 49-76 and 132-135.
Officers - regs 77-114.
Distributions and disclosure - regs 115-131.
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Contractual effect of
memorandum and articles
• S 23: statutory contract between:
- company and each member
- a member and each other member.
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Ng Kin Kenneth v HK Football Assn Ltd
• Ng, a football referee, was
dismissed. He alleged breach of
HKFA’s articles providing all
disputes to be settled by HKFA’s
council (by arbitration)
• Cap 341: arbitration agt to be in
writing
• Held: s 23 means AA constituted
a valid written agreement to
arbitrate between HKFA and
members within the Arbitration
Ordinance.
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Member enforcing against company
• Wood v Odessa Waterworks Co (1889) 42 Ch D 636
(Chancery Division)
 Articles provided for cash dividends to be paid to
shareholders, with the sanction of a general meeting of
members.
 Co resolved in general meeting (i.e., passing the ordinary
resolution) to issue debenture-bonds instead of paying
dividends.
 Wood sought an injunction.
 Held: general meeting resolution inconsistent with articles
and injunction granted.
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Company enforcing against member
• Hickman v Kent or Romney Marsh
SheepBreeders’ Association
[1915] 1 Ch 881 (Chancery
Division)
 Defendant is a non-profit-making co
 Art. 49 of the Articles provided for
arbitration of disputes between association
and its members
 Hickman went to court re: irregularities in
the affairs of the association
 Association was granted a stay of
proceedings on the ground that s 33 of the
Companies Act made Art. 49 an agreement
to arbitrate enforceable.
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Company enforcing against member
• Hickman v Kent or Romney Marsh
SheepBreeders’ Association
[1915] 1 Ch 881 (Chancery
Division)
 “It seems clear from many authorities that
shareholders as against their company can
enforce and restrain breaches of its
regulations … it is impossible to disregard.”
 Astbury J: “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, a solicitor,
promoter, director, can be enforced against
the company.”
 What other rules can help achieve the same
result?
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Implication of Hickman v Kent
• Beattie v E Beattie Ltd [1938] 1 Ch 708
 Case is brought by a s/er against one of the directors,
Ernest Beattie (who is a s/er too)
 Part of the action could be stayed due to the arbitration
clause (Art 133) in the articles.
 Sir Wilfred Greene MR:
“*Ernest Beattie+ … is not seeking to enforce a right to call
on the company to arbitrate a dispute which is only
accidently a dispute with himself. He is seeking, as a
disputant, to have the dispute to which he is a party
referred. That is sufficient to differentiate its from the right
which is common to all the other members of the
company under the articles.”
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Member enforcing against members
• Rayfield v Hands [1960] Ch 1 (Chancery Division)
 Art. 11 of the Articles: “every member who intends to
transfer shares shall inform the directors who will take the
said shares equally between them at a fair value…”
 Rayfield, a member, wanted 3 directors to buy shares
 Vaisey J: “*the article is+ very inarticulately drawn by a
person who was not legally expert”
 Held: directors AS MEMBERS had to buy
 Vaisey J: “ … the relationship here is between the plaintiff
as a member and the defendants not as directors but as
members …”
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Limits on enforcement
• Eley v Positive Government Security Life Assurance
Co Ltd (1876) 1 Ex D 88 (Court of Appeal)
 Art. 118 of the Articles: “Mr. William Eley … shall be the solicitor to the
company, and shall transfer all the legal business of the company,
including parliamentary business, for the usual and accustomed fees
and charges, and shall not be removed from his office except for
misconduct.”
 Eley acted as solicitor for a time, got fired, and then sued for breach of
contract.
 Held: articles did NOT create contract between company and Eley in
capacity as solicitor.
 “This article is either a stipulation which would bind the members, or
else a mandate to the directors.”
• Implied contract: Re New British Iron Co.
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Limits on enforcement
• Members can enforce articles only in capacity as members:
Eley; Hickman v Kent or Romney Marsh.
• Remedies for breach will not be damages but a declaration or
injunction.
• MacDougall v Gardiner (1875) 1 Ch D 13 (Court of Appeal)
 “irregularity principle”
 “this was a matter of internal management in which it should not
interfere.”
 “if what is complained of is simply that something which the majority
are entitled to has been done irregularly, … nobody should have a right
to set that aside.”
 Held: members cannot enforce articles in relation to rights vested in
company (as opposed to the members’ personal rights).
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Companies (Amendment) Ordinance 2003
• Effect of s 23(1A) (inserted by 2003 amendments).
- See SCCLR Corporate Governance Review - Consultation
Paper on Proposals Made in Phase I of the Review, July 2001,
paras 17.01-17.09.
• Possible limitations to the scope of enforcement of
articles by members under s 23(1A).
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Alterations to memorandum or articles
• Memorandum: can only alter in accordance with
Ordinance: s 7.
- Company name: s 22.
- Objects: s 8.
- Reduction of capital: ss 58-63.
- Increase of capital: s 53 (ordinary resolution).
- Arrangement or reconstruction: ss 166-67.
- Alteration of provisions in memorandum which could have
been in articles: s 25A.
• Generally special resolutions required for above. (See
also s 116).
• Articles: altered by special resolutions under s 13.
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General law restrictions on alterations
• Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch
656 (Court of Appeal)
 Art 29 of the Articles: “a first and paramount lien for debts owing by a
member to the company upon all shares (not being fully paid) held by
such member”
 Amendment is made to Art 29 deleting ‘not being fully paid’
 Lindley J said: “the power *to alter the articles+ must be exercised
subject to those general principles of law and equity which are
applicable to all powers conferred on majorities and enabling them to
bind minorities. … It must be exercised, not only in the manner
required by law, but also bona fide for benefit of company as a whole,
and it must not be exceeded.”
 Majority: No mala fides in present case.
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Meaning of the test in Allen v Gold Reefs
• Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286
(Court of Appeal)
 Articles: existing members should have pre-emptive rights
if a member wished to sell his shares
 Managing director negotiated with Sheckman for the sale
of a controlling interest, and procured the passing of a
special resolution to give effect, which negated
Greenhalgh’s pre-emptive rights as a member
 Greenhalgh claimed a declaration that the resolutions
were invalid
 Evershed J: “2 distinct approaches”
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Meaning of the test in Allen v Gold Reefs
• Whose interests are considered in looking at “benefit
of the company”?
• Subjective or objective test?
• Can members vote in own interests?
 Yes.
 But decision of majority must be for the benefit of
company - must not be for some personal gain not within
the contemplation of the parties in the conferral of power
on the majority
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Meaning of the test in Allen v Gold Reefs
 Is alteration always invalid where majority benefits at
expense of minority? Cf Greenhalgh v Arderne Cinemas Ltd
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Restrictions on alterations under statutes
• S 25: no member can be forced to take more shares
or increase liability - unless shareholder agrees in
writing to be bound by the alteration (before or after
made).
• Class rights: ss 63A, 64.
• Unfair prejudice remedy: s 168A.
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Brief summary of common law rules
• Common Law Rules
• 2 Doctrines depriving members’ chances of
enforcing articles
• Restrictions of majority rules
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For reference purposes only:
• H H Mason, “Fraud on the Minority – The Problem of
a Single Formulation of the Principle” (1972) 46 ALJ
67
• P G Xuereb, “The Limitation on the Exercise of
Majority Power” (1985) 6 Co Law 199
• F G Rixon, “Competing Interests and Conflicting
Principles: An Examination of the Power of Alteration
of Articles of Association” (1986) 49 MLR 446
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