CAPACITY AND POWERS OF A COMPANY (Continuation)
ALTERATION OF MEMORANDUM OF ASSOCIATION
The first point to note is that except the memorandum provides otherwise, the law is that every provision of the memorandum can be altered. However, the memorandum being the basic constitutional document can only be altered to the extent permissible by the CAMA. Every of its provision except the registered office clause, can be altered unless the memorandum expressly provides to the contrary.
By S. 33 CAMA the articles of association (which prescribes regulations for the company) must be registered with the memorandum of association. Prior to the enactment of the CAMA, this condition was optional. The article of association is the document that governs the relationship between/among the shareholders of the company and its directors. It contains the internal rules and regulations that guide the management of the organization. This means that the information stated in the articles of association are different for different companies.
The Legal Effect of the Memorandum and Articles
1. The memorandum and articles have the effect of a contract under seal (S. 41 CAMA):
The effect of the above is that whatever the promoters might have intended but failed to embody in the documents will not be inferred. Thus, the courts will not imply terms into contractual relations from extrinsic documents.
2. The provisions are binding on the company and its members:
The basic rule here is that provided the provisions of the company’s article of association has not been altered, the company and its members are bound by the provision.
In Wood v Odessa Waterworks, a company’s article provided that the shareholders be paid in cash. Without altering the provisions of the company’s articles, the majority shareholders passed a resolution to pay dividend debenture. The court allowed the action brought by the minority shareholders. In Obikoya v Ezenwa, a company’s articles provided that a permanent director could not vote for the removal of another permanent director. Before the articles were changed, the vote was passed by the other PD. It was held that the purported removal was invalid. In Quinn & Axtens v Salmon, the company’s articles gave the MD of a company a power of veto with respect to some transactions. When the company sought to complete the transaction without the consent of the MD, the latter was able to obtain an injunction restraining the company from completing the action.
In Hickman v Kent, a provision in the article stated that any dispute between the company and a member should be referred to arbitration. This was enforced as a contract between the company and its members. In Beattie v Beattie, a company’s articles stated that a dispute between the company and its members should be referred to arbitration. The court held that a dispute between a company and a director (who was also a member) was not subject to the provisions because the dispute was admittedly in relation to the director’s right qua right. But where the dispute is in relation to the member’s right qua member as in Hickman’s case, the provisions of the company’s articles must be enforced. Please you must be able to distinguish the two cases noting the bases of the courts’ decisions in both cases.
3. The provisions are binding on the company and its officers (outsiders’ right):
The pre-CAMA position was that since there exists no contractual relationship between a company and an outsider (persons other than the shareholders), the articles do not bind such persons. Outsiders are persons like directors, solicitors, accountants. The position of the law is the same where such a person was initially an outsider but later became a shareholder.
In Eley v Positive Life Association, the articles provided that Eley should be the solicitor of the company for life and only removable for misconduct. He became solicitor and later became the shareholder. The company later dispensed with his services. His action for breach of contract failed because there was no contractual relationship between him and the company.
In Re New British Iron Company Limited ex parte Beckwith (1898): B was a director and a shareholder. The company failed to pay its directors, who sued for their salary (since they had contractual rights to it). However, they did not sue for a breach of the Articles, since there was no direct contract there. Their employment contract did not give an indication of how much they should be paid; the Articles gave a figure of £1000 per annum. The courts implied this sum into their employment contract.
From the above, it is clear that an outsider will only have a legal claim against the company where he is able to show there exists a contract between him and the company. He can rely on extraneous contract or documents but not the provisions of the memat. Thus, where a company dismisses a director in pursuance of the power conferred by the articles but in violation of the contract of service which makes provisions for the determination of the amount, such a dismissal will amount to a breach of contract for which the company will be liable (Shindler v Northern Raincoat).
Since the enactment of the CAMA, the position under Common Law no longer applies in Nigeria. This is because S. 41(1) CAMA makes it clear that the memat has contractual effect between the company and its officers.
By virtue of S. 299 CAMA, where a wrong has been done to a company or where an irregularity has been committed in the course of the company’s affairs, it is only the company that can sue to remedy that wrong and ratify the irregular conduct. S. 300 of the Act provides exceptions: a. the transaction is illegal or ultra vires b. doing ordinary resolution when the constitution says special resolution c. where the act complained of affects that of the applicant as a member d. fraud on the minority shareholders e. where a meeting cannot be conveyed on time to redress such wrong f. the directors have or are likely to derive a benefit from their breach or negligence.
See also the provisions of S. 41(2)-(4) CAMA.
4. The provisions are binding on the members inter se:
In Rayfield v Hands, Mr Rayfield sued the directors of Field Davis Ltd to buy his shares. Article 11 of the company’s constitution said ‘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 directors were refusing to follow this rule, and Mr Rayfield sought an injunction. The court granted the injunction sought.
5. They guide the future relationship as may be altered in the documents.
6. The companies must be managed in accordance with the provisions of memat
See Avop v A-G, Enugu and Okomu Oil v Iserhenrhien.
ALTERATION OF ARTICLES
By S. 48 CAMA, a company may by special resolution alter or add to its articles and such alteration shall be as valid as if originally contained therein. A company cannot be restrained from altering its articles, but it will be liable for breach of contract if there is a separate contract between it and the injured party and the alteration results into breach of contract.
In Allen v Gold Reefs of West Africa, the court stated that alterations could not be interfered with by the court unless a change was made that was not bona fide for the benefit of the company as a whole. The company’s articles gave it the right to retain possession on all partly paid shares held by any member for any debt owed to the company. Mr Zaccani held some partly paid up shares. He also owned the only full paid up shares issued by the company. He died insolvent. The company altered its articles by special resolution to create a lien on all fully paid shares. Mr Allen, one of the executors of Mr Zuccani sued to get the fully paid shares’ value. The court held that alteration of the company’s articles was valid to introduce a lien on fully paid up shares. So long as the resolution was done bona fide for the benefit of the company as a whole, restrictions on freedom of a company to alter its articles are invalid.
In Brown v British Abrasive Wheel, having failed to pursue the minority to sell, the majority proposed a special resolution adding to the articles a provision to the effect that any shareholder was bound to transfer their shares upon a request in writing of the holders of 90% of the shares. It was held that the addition of such a provision in order to enable the majority to expropriate the minority could not be for the benefit of the company as a whole but for the benefit of the majority. However, in Sidebottom v Kershaw Leese, alteration of the articles to empower the directors to require any shareholder who competed with the company to sell his shares at fair value to the nominees of the directors was upheld on the basis that it was for the benefit of the company.
The case of Greenhalgh v Arderne Cinemas states that if the effect of the alteration is to deliberately make evident discrimination between the majority and minority shareholders of the corporation, with the objective of giving the majority members a relative advantage, the alteration should then be not given permission to take place. Therefore, in this case, the applicant’s action failed because he could not show that the alteration was prejudicial primarily because it failed to consider the minority members of the company.