PQ Framework: Corporate Constitution
Introduction
Per s17, a company’s constitution includes the Articles of Association and the resolutions and
agreements set out in s29. Per s33, the constitution has the effect of binding the company and
its members to its provisions.
Outsider rights
An article holding that an individual be permanently appointed as [insert specific position] will
not be valid as there can be no enforcement of the articles by outsiders as the articles are a
matter between the shareholders and the company (Eley v Positive Life Assurance). Per
Hickman v Kent, only rights qua member can be enforced, so the outsider right cannot be
enforced by the articles.
Instead, the best the individual can do is argue that the articles provide evidence to support the
creation of an implied extrinsic contract, which they could then seek to enforce (Re New British
Iron), but this is unlikely as the relevant article right [usually a specific director position] is
already likely to exist in a separate extrinsic agreement, through which the individual may seek
recourse against the company separately for breach.
Moreover, while Quin seemingly allowed an outsider right to be enforced by a managing director
who was also a shareholder, it is of note that the Company Law Review Steering Group
declined to recommend an amendment to the law to effectively remove the Hickman ‘qua
member’ limitation, despite the academic debate on Quin.
Altering articles
Per s21(1), the articles may be altered by special resolution, which requires a majority of at least
75% to be passed (s283). This is a statutory power and a company cannot contract itself out of
the right to alter its articles (Walker v London Tramways Company) and the courts will not
enforce an extrinsic agreement between the company and an outside party not to alter the
articles (Punt v Symons). [Engage in analysis of whether the 75% threshold will be met].
Fettering the right to amend by shareholders
(1) Weighted voting rights: However, one may use weighted voting rights to protect against
particular alterations. In Bushell v Faith, a special article granted a director qua shareholder
being removed 3 votes per share instead of 1 vote per share, which, in effect, made it difficult to
remove a director. The majority judgement, delivered by Lord Donovan, upheld the application
of this article and held that the law does not prevent weighted voting rights as there may be
special circumstances where companies should have “freedom of maneuver” in their articles,
such as in family companies where such weighted votes may “safeguard against family quarrels
having their repercussions in the boardroom.” This reflects the private, self-regulation view of
the company that the articles are a matter for the company to determine. Though Lord Morris
,PQ Framework: Corporate Constitution
rightly dissented as the special article effectively embeds a director and the case has been
criticised for allowing formalism to triumph over substance, Bushell is still good law so such an
article will be valid.
(2) Entrenchment: Per s22, entrenching articles is allowed so long as more onerous conditions
than a special resolution are met, such as requiring a threshold higher than 75%.
(3) Common law restrictions: The majority can bind the minority in amending the articles, subject
to the Allen v Gold Reefs exception that votes must be exercised “bona fide for the benefit of the
company as a whole.” Shuttleworth v Cox rejected the two-stage approach in Dafen and
affirmed Sidebottom v Kershaw, holding that the test is a subjective one with an objective
element: if the shareholders had honest belief that the resolution was for the benefit of the
company, “provided there are grounds on which reasonable men could come to the same
decision”, then the amendment will be binding on the minority.
Regardless, the minority shareholder has the option to bring an unfair prejudice petition under
s994 to protest the alteration. However, the courts have been reluctant to interfere and may
reject the petition as they would have expected the minority to be aware that such amendments
may be made to the articles.
(4) Fetter through shareholders agreements rather than articles: Though Russell v Northern
Bank affirmed that the articles cannot fetter the right to amend, it held that shareholders are
allowed to contract in a shareholders’ agreement to restrict voting freedom as it is a personal
obligation only binding those who have signed the agreement. To avoid attracting damages
under contract law, shareholders party to the agreement will vote in line with the shareholders’
agreement, effectively amounting to a fetter in the right to amend. As Ferran criticises, this is
simply a “different, if slightly more tortuous means” of fettering the ability to amend the articles
through a private contract, and there is no reason for there to be an absolute ban if it can be
circumvented by other means. However, Russell is still good law so the article in the
shareholders’ agreement that restricts voting will still be valid.
Can the company avoid a contract with a third party?
When determining whether a contract is binding on a company it is necessary to show that: (i)
the company had capacity to enter into the agreement; and (ii) the individual signing the
agreement on behalf of the company had authority to do so.
(1) Corporate capacity is now easy to establish as the company’s objects are presumed to be
unlimited in statute unless otherwise stated (s31) and both the common law and statute provide
that the validity of an act is not called into question on the ground of lack of capacity (Rolled
Steel, s39).
, PQ Framework: Corporate Constitution
(2) Depends on D’s position:
● If D had actual authority as a de jure director: There is no issue of authority here as D is
a de jure director with express actual authority to bind the company.
● If D had implied authority as a de facto director: While D did not have express actual
authority to bind the company, it may be argued that he had implied actual authority. Per
Hely-Hutchinson, the board’s acquiescence in allowing D to act as de facto director and
D’s executive authority as inferred from conduct, is sufficient to grant D implied actual
authority to enter into transactions that would be within the ambit of a directors’ office.
○ Note: usually to do with a Managing Director role
● If D had ostensible authority that exceeded actual authority: Although D has actual
authority as a de jure director, Article XX states [limit] and D has exceeded his actual
authority by [performing act that exceeds that limit]. Per Freeman and Lockyer v
Buckhurst Park Properties, there are four conditions required to enforce a contract
without actual authority:
1. A representation was made (by words or conduct) that the agent had authority
○ Usually arises from conduct of company (eg allowing agent to sign
contracts)
2. That representation was made by a party with actual authority on behalf of the
company
○ Usually means board (since company is a fictitious legal entity)
3. The third party was induced by that representation
○ Ostensible authority can be lost on notice if third party knew the agent’s
authority was limited (The Ocean Frost)
4. The company had capacity to enter into the contract in question (but this is not an
issue per s39, and s40 also protects third parties)
However, s40 sets out statutory protections for third parties, stating that for a person dealing
with a company in good faith, the power of the directors to bind the company, or authorise
others to do so, is deemed to be free of any limitation under the company's constitution. The
good faith requirement is difficult to challenge, as good faith is presumed (s40(2)(b)(ii)), knowing
an act is beyond the powers of the directors does not presume bad faith (s40(2)(b)(iii)), and third
parties are also entitled to presume internal management rules have been complied with
(Turquand).
● If there is no issue: As such, the company is unlikely to succeed in preventing the third
party from enforcing his contractual rights.
● If there is an issue of bad faith: However, if the circumstances of the transaction are
clearly against the interest of the company (Wrexham Association Football Club) or
ought to have put the third party on notice, then the good faith test is not met (Criterion
Properties plc v Stratford UK Properties LLC). Since the third party knew [facts that
indicate the company should not have entered the contract], the good faith presumption
is unlikely to succeed and the company is likely to be able to avoid the contract.
● If the third party is connected with the director: However, per s41, where a transaction
relies on s40 for its validity and the parties include a director or a person connected with
a director, the transaction will be voidable at the instance of the company. [See s252-256
Introduction
Per s17, a company’s constitution includes the Articles of Association and the resolutions and
agreements set out in s29. Per s33, the constitution has the effect of binding the company and
its members to its provisions.
Outsider rights
An article holding that an individual be permanently appointed as [insert specific position] will
not be valid as there can be no enforcement of the articles by outsiders as the articles are a
matter between the shareholders and the company (Eley v Positive Life Assurance). Per
Hickman v Kent, only rights qua member can be enforced, so the outsider right cannot be
enforced by the articles.
Instead, the best the individual can do is argue that the articles provide evidence to support the
creation of an implied extrinsic contract, which they could then seek to enforce (Re New British
Iron), but this is unlikely as the relevant article right [usually a specific director position] is
already likely to exist in a separate extrinsic agreement, through which the individual may seek
recourse against the company separately for breach.
Moreover, while Quin seemingly allowed an outsider right to be enforced by a managing director
who was also a shareholder, it is of note that the Company Law Review Steering Group
declined to recommend an amendment to the law to effectively remove the Hickman ‘qua
member’ limitation, despite the academic debate on Quin.
Altering articles
Per s21(1), the articles may be altered by special resolution, which requires a majority of at least
75% to be passed (s283). This is a statutory power and a company cannot contract itself out of
the right to alter its articles (Walker v London Tramways Company) and the courts will not
enforce an extrinsic agreement between the company and an outside party not to alter the
articles (Punt v Symons). [Engage in analysis of whether the 75% threshold will be met].
Fettering the right to amend by shareholders
(1) Weighted voting rights: However, one may use weighted voting rights to protect against
particular alterations. In Bushell v Faith, a special article granted a director qua shareholder
being removed 3 votes per share instead of 1 vote per share, which, in effect, made it difficult to
remove a director. The majority judgement, delivered by Lord Donovan, upheld the application
of this article and held that the law does not prevent weighted voting rights as there may be
special circumstances where companies should have “freedom of maneuver” in their articles,
such as in family companies where such weighted votes may “safeguard against family quarrels
having their repercussions in the boardroom.” This reflects the private, self-regulation view of
the company that the articles are a matter for the company to determine. Though Lord Morris
,PQ Framework: Corporate Constitution
rightly dissented as the special article effectively embeds a director and the case has been
criticised for allowing formalism to triumph over substance, Bushell is still good law so such an
article will be valid.
(2) Entrenchment: Per s22, entrenching articles is allowed so long as more onerous conditions
than a special resolution are met, such as requiring a threshold higher than 75%.
(3) Common law restrictions: The majority can bind the minority in amending the articles, subject
to the Allen v Gold Reefs exception that votes must be exercised “bona fide for the benefit of the
company as a whole.” Shuttleworth v Cox rejected the two-stage approach in Dafen and
affirmed Sidebottom v Kershaw, holding that the test is a subjective one with an objective
element: if the shareholders had honest belief that the resolution was for the benefit of the
company, “provided there are grounds on which reasonable men could come to the same
decision”, then the amendment will be binding on the minority.
Regardless, the minority shareholder has the option to bring an unfair prejudice petition under
s994 to protest the alteration. However, the courts have been reluctant to interfere and may
reject the petition as they would have expected the minority to be aware that such amendments
may be made to the articles.
(4) Fetter through shareholders agreements rather than articles: Though Russell v Northern
Bank affirmed that the articles cannot fetter the right to amend, it held that shareholders are
allowed to contract in a shareholders’ agreement to restrict voting freedom as it is a personal
obligation only binding those who have signed the agreement. To avoid attracting damages
under contract law, shareholders party to the agreement will vote in line with the shareholders’
agreement, effectively amounting to a fetter in the right to amend. As Ferran criticises, this is
simply a “different, if slightly more tortuous means” of fettering the ability to amend the articles
through a private contract, and there is no reason for there to be an absolute ban if it can be
circumvented by other means. However, Russell is still good law so the article in the
shareholders’ agreement that restricts voting will still be valid.
Can the company avoid a contract with a third party?
When determining whether a contract is binding on a company it is necessary to show that: (i)
the company had capacity to enter into the agreement; and (ii) the individual signing the
agreement on behalf of the company had authority to do so.
(1) Corporate capacity is now easy to establish as the company’s objects are presumed to be
unlimited in statute unless otherwise stated (s31) and both the common law and statute provide
that the validity of an act is not called into question on the ground of lack of capacity (Rolled
Steel, s39).
, PQ Framework: Corporate Constitution
(2) Depends on D’s position:
● If D had actual authority as a de jure director: There is no issue of authority here as D is
a de jure director with express actual authority to bind the company.
● If D had implied authority as a de facto director: While D did not have express actual
authority to bind the company, it may be argued that he had implied actual authority. Per
Hely-Hutchinson, the board’s acquiescence in allowing D to act as de facto director and
D’s executive authority as inferred from conduct, is sufficient to grant D implied actual
authority to enter into transactions that would be within the ambit of a directors’ office.
○ Note: usually to do with a Managing Director role
● If D had ostensible authority that exceeded actual authority: Although D has actual
authority as a de jure director, Article XX states [limit] and D has exceeded his actual
authority by [performing act that exceeds that limit]. Per Freeman and Lockyer v
Buckhurst Park Properties, there are four conditions required to enforce a contract
without actual authority:
1. A representation was made (by words or conduct) that the agent had authority
○ Usually arises from conduct of company (eg allowing agent to sign
contracts)
2. That representation was made by a party with actual authority on behalf of the
company
○ Usually means board (since company is a fictitious legal entity)
3. The third party was induced by that representation
○ Ostensible authority can be lost on notice if third party knew the agent’s
authority was limited (The Ocean Frost)
4. The company had capacity to enter into the contract in question (but this is not an
issue per s39, and s40 also protects third parties)
However, s40 sets out statutory protections for third parties, stating that for a person dealing
with a company in good faith, the power of the directors to bind the company, or authorise
others to do so, is deemed to be free of any limitation under the company's constitution. The
good faith requirement is difficult to challenge, as good faith is presumed (s40(2)(b)(ii)), knowing
an act is beyond the powers of the directors does not presume bad faith (s40(2)(b)(iii)), and third
parties are also entitled to presume internal management rules have been complied with
(Turquand).
● If there is no issue: As such, the company is unlikely to succeed in preventing the third
party from enforcing his contractual rights.
● If there is an issue of bad faith: However, if the circumstances of the transaction are
clearly against the interest of the company (Wrexham Association Football Club) or
ought to have put the third party on notice, then the good faith test is not met (Criterion
Properties plc v Stratford UK Properties LLC). Since the third party knew [facts that
indicate the company should not have entered the contract], the good faith presumption
is unlikely to succeed and the company is likely to be able to avoid the contract.
● If the third party is connected with the director: However, per s41, where a transaction
relies on s40 for its validity and the parties include a director or a person connected with
a director, the transaction will be voidable at the instance of the company. [See s252-256
