eSign Articles of Association Made Easy

Sign articles of association

I'm looking at articles of association this is a big topic it's also an important topic a topic which is examined paper after paper actually it was examined in December 2008 it was a scenario question but we can't afford to ignore it because it is so important so let's go on to give ourselves some ideas of what we're talking about when we say articles of association look your characteristics well every company must have articles then man that tree and we describe the articles as the fundamental constitutional document of the company there are no mandatory contents but the kind of thing that we would expect to find in a company's articles are things like voting rights of members things like dividend rights of members things like procedures for the holding of board meetings or internal matters for the day-to-day running of the company and this is why we often describe the articles as the internal Constitution of the company well it is perfectly possible that company to file its own tailor-made articles when applying for registration this is where we get to look at what I call the model articles so what if the company doesn't file its own tailor-made articles well then the model articles automatically become the company's articles in their entirety and indeed even if a company does find its own articles then the model still applies to fill in any gaps that there might be in the company's own articles no I haven't given you in your notes a copy of the model articles for a number of different reasons firstly it runs to more than 68 pages which you read it probably not but secondly and more importantly you don't need to know the detailed contents of the model articles whenever we want to refer to the model articles in these recordings throughout company law for a specific example then I'll tell you that it comes from the model and we'll do it that way around although them to perhaps the most important topic to do with the articles that is to say what is the legal effect of the company's articles the starting point here is section 33 of the Companies Act and it deems the articles to be a contract a contract between the company and the members now it is a strange type of contract in that it's not at all like the contract we were looking at and we were doing contract law I mean there's no offer an acceptance no consideration or anything like that in that immediately you become a member of the company whether you acquire the shares from the company itself or indeed from an exist you automatically become party to this contract whether you agree with it or not we often then call the articles the statutory contract it's imposed on members whether they like it or not and indeed whether they've heard of the articles or not I mean think of an investor buying shares on the stock market he's probably never even heard of the articles too bad he's party to them well that's what the statute says but it's been left to the judges in the cases to flesh out the bare bones of section 33 and in fact case law shows that the articles are a three-way contract a contract binding the members to the company binding the company to the members and the members to the members so we must go on to look at each in turn so first of all the members to the company in other words what this means is that if a member breaches the articles then the company may sue him for breach of contract and the remedy most usually sought and given is not damages it's an injunction to stop remember breaking the articles well let's see what this all means how it pans out by looking at a case let's look at Hickman's case more properly called Hickman and the Kent or Romney Marsh sheep breeders Association but that's a very long name and we generally just call it Hickman's case and it tells you here the articles contained an arbitration clause in other words it said if there's a dispute between the company remember that dispute must be dealt with by arbitration rather than going to court you commonly find such a requirement for arbitration in the articles of small private car the aim behind an arbitration clause is that those proceedings are held in private they're not open to public scrutiny I'm sure you're aware that with a couple of exceptions court proceedings are open to the public including journalists to listen in on well carrying on with what happened in this case mr. Hickman he had a dispute with the company the dispute was about his expulsion from membership because you see he kept breeding his sheep on the wrong part of the marsh and they wanted to throw him out of membership with the company and he was disputing this well he ignored that arbitration clause and he took the dispute to court can he do so and the answer there is no he is contractually bound to refer that dispute to arbitration so in essence when he got to the court the judge said go away you have no right to be here or words to that effect anyway so that's the first effect that the articles are contract binding the members to the company let's move on to the second thing the judges have said that the articles are a contract binding the company to the members in other words if the company breaches its articles then any member can sue it again for breach of contract and again the remedy most usually sought and given is not damages its injunction to stop the company breaking the articles so let's look and see a case illustration of this and the one we're looking at tender and Lushington as it tells you here the articles of this company gave every share one vote and by the way that standard most company's articles will provide this indeed does the model articles and in your examination unless the examiner tells you otherwise always assume that every share carries one vote well it's the Pender he turned up to a general meeting of this company expecting to be able to cast the votes attaching to his shares as it tells you at that general meeting the Chairman refused to count his vote so he comes the question what kind of wrong has the Chairman caused the company to commit and by the way it is the company committing the wrong the Chairman is just the agent of the company so what kind of wrong well you should have answered breach of contract so what can mr. Pender do about it so what can mr. Pender do about it well he didn't get them injunction to stop this breach of contract or but he around the other way in effect it means he can force his votes to be counted this is actually then quite an important case because it does show that if the articles give you a right to vote then that is a contractually enforceable right moving on then now to the third thing the judges have said that the articles are a contract binding the members to the members in other words if a member bridges the articles then any other member can sue him again for breach of contract and again the remedy most normally sought is injunction to stop that member breaking the articles as before let's look at the case that shows this Rayfield and hands as at Elysee the articles of this company required every director to hold shares in the company you sometimes see such an article in the articles of rather old-fashioned companies not so common today largely because directors actually like to have shares as part of their pay package so they don't need to be compelled to have them well that article actually is background it's the next article that much more directly concerns us the one which says that every member intending to transfer shares shall inform the directors school will take the shares equally between them at a fair value well P here called upon the directors to take his shares at a fair value and they refused to do so so here's the question are they bound to do so and the answer the court gave was yes that article imposed a contractual obligation on the directors and I'm now adding on some important words that I'll explain in a minute that article imposed a contractual obligation on the directors in their capacity as members so that then is the basic situation section 33 deems the articles a contract between the company in its members and case law shows that this is a three-way contract binding members the company company to members and members to members that's the general rule general position of course in law as I'm sure you are aware by now once we've done the general position basic rule we then have the exceptions or the backtracking the modifications and the next little bit in your note starts off with a big butt but case law shows the articles are not a contract binding the company to non-members and let's pause in the middle of that sense to have a look at the Illustrated case Ealy's case as it tells you the articles stated that mr. Ely should be solicitor to the company as you might imagine mr. Ely had a hand in drawing up that article well initially he was appointed solicitor but then he was given the sack he was dismissed and he wanted to sue the company for damages for breach of contract damages thinking back to your law of contract damages to cover him for what loss do you think well you should have thought that it's for loss of earnings what he would have earned had he continued on as solicitor so can he sue for damages for breach of contract Wow well he got to court the judge basically said to mr. Ely you're suing for damages for breach of contract where is your contract and mr. Ely said he said the ad article that's my contract well is that article a contract between the company and its solicitor and the answer is no articles are only a contract between the company and members not between the company and non-members so the answer the question could he sue for damages for breach of contract the answer is no so it's very important you realize them articles are not a contract between company and solicitor not a contract between company and company secretary not a contract between company and auditors and most importantly not a contract between company and directors only a contract between company and members well we post halfway through the sentence we ought to go back and have a look at the full sentence but case law shows the articles are not a contract between the company and non-members nor between the company and members acting in any other capacity so even with members the articles are only contractual to do with membership stuff and let's look at the case beetee's case B T and D FB T which shows this it's got in fact significant similarities to Hickman's case and in the same way as Hickman's case the articles contained an arbitration clause so in other words it said if there's a dispute must be dealt with by arbitration rather than by court proceedings well Mike Hickman mr. Beatty he was a member of this company he was also though a director unlike Hickman he had a dispute with the company I tell you it was a wide-ranging pretty dispute but the central issue was that he'd been denied access to minutes of board meetings well just like mr. Hickman he ignored that arbitration clause and he took the dispute the court well can he go to court think about it pause the tape for a minute to see what you think your answer should be well here your answer should have been yes in other words the result of this case is the opposite of Hickman's case and we need to make quite sure we understand why well if you go back to Hickman's case for a moment the dispute which mr. Hickman had with the company it was about his expulsion from members so he was quarreling with the company about membership matters and in that capacity the articles are a contract on him if we now look at B T's case the dispute it was a bad access to minutes of board meetings well who if anyone do you think has a right to have a look at the minutes of board meetings yeah directors not members I mean think if you had shares in BT could you go along and have a peek at the minutes of board meetings you know so mr. Beatty here is quarreling with the company about directors rights and in that capacity the articles are not a contract on him so in short then that article did not impose a contract on him as a director and this is back to this fundamental concept of company law where you might have one person paying the role as member and also playing a role as director when he's playing his role as member the articles are a contract but when he's playing his role as director the articles are not a contract well we need to go back and have another little look at Ealy's case wouldn't have made any difference if mr. Ely had been a member of this company and the answer you should have come up with is no not one iota of difference because he of course is suing for loss of earnings earnings as solicitor so he's quarreling with the company about solicitors matters and in that capacity that article gives him no contractual right and indeed by the way mr. Ely was a member of the company finally here we also ought just to go back and look again at Rayfield and hands and you can now see why I added on those words at the end in their capacity as members the support was to do with transfer shares membership matters so that then completes that really quite important topic the contractual affect of the articles