The articles of association are the regulations for the internal arrangements and the management of the company.

“The articles of association are the regulations for the internal arrangements and the management of the company. The articles deal with the issue of shares, alteration of share capital, general meetings, voting rights, directors (including their appointment and powers), managing director, secretary, dividends, accounts, audit of accounts, winding up and various other matters.” (Morse 1999: 60)

Subject to the provisions of the Companies Act 1985, and to the conditions in the company’s memorandum, a company may by special resolution alter or add to its articles. An alteration or addition so made in the articles are as valid as if originally contained in them, and are subject in like manner to alteration by special resolution : section 9 CA1985.

Therefore, by section 9 of the Companies Act 1985, the power to alter a company’s articles is subject to the provisions of the Act. Also by section 9 of the CA 1985 a company’s power to alter its articles is subject to the conditions in the memorandum and consequently therefore an alteration of the articles must not conflict with the memorandum.

Finally, “under the general law the power to alter articles must be exercised bone fide for the benefit of the company as a whole.” (Morse 1999: 64) This was established by Lord Lindley M.R. in Allen v Gold Reefs of West Africa Ltd (1900) 1 Ch. 656, CA. when he said “the power conferred on companies to alter articles, must like all other powers, 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 not be exercised, not only in the manner required by law but also bone fide for the benefit for the company as a whole, and it must not be exceeded.”

In Shuttleworth v Cox Bros & Co. Ltd (1927) 2 K.B. 9, CA is an example of the precedent above being put into practise. The articles provided that S and four others should be permanent directors of the company unless they should become disqualified by any one of six specified events. S on 22 occasions had failed to account for the company’s money he had received. As S hadn’t been found to have committed occurring any of the specified events the articles were altered so that a seventh event could be added allowing S to be disqualified. It was held that the articles were subject to the statutory power of alteration and the alteration was seen to benefit the company.

Therefore as Bankes L.J. pointed out in the present case with reference to Sidebottom v Kershaw, Leese & Co (1920) 1 Ch. 154, CA it is for the shareholders, and not for the court to say whether an alteration of articles is for the benefit of the company, unless no reasonable man could so regard it i.e. it is an unfair alteration.

This is a preview of the whole essay

“Contracts outside the memorandum and articles are sometimes called extrinsic contracts. Where there is an extrinsic contract, an article may be expressly or impliedly incorporated into the extrinsic contract. In this event, any rights given by the article can be enforced under the contract without section 14 of the Companies Act 1985.” (Hicks & Goo 2001: 201)

However as established before, under section 9 of the Act a company can alter its articles at any time and as held in Swabey v Port Darwin Gold Mining Co. (1889) 1 Meg 385, the terms of the articles which are incorporated into an extrinsic contract can be altered from time to time but not retrospectively.

However, in Southern Foundries Ltd v Shirlaw (1940) A.C. 701, H.L, Lord Porter said “A company cannot be precluded from altering its articles thereby giving itself power to act upon the provisions of the altered articles– but so to act may nevertheless be a breach of contract if it is contrary to a stipulation in a contract validly made before the alteration.”

Alteration of Class Rights

A share has been defined by Farwell, J in Borland’s Trustee v Steel Bros & Co. Ltd (1991) 1 Ch. 279 as the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with [the Companies Act s. 14] and that the contract contained in the articles of association is one of the original incidents of the share.”

“A company can confer different rights on different classes of shares. Such classes may be described as orindinary and preference shares, but the name by which a class of shares is called gives only an indication of the rights attaching to it in any particular company, and to acertain the rights, reference must be made to the articles.” (Morse 1999: 178)

“A preference share is a share to which certain preferential rights are attached. Although there is no statutory definition to expose the specific nature of this type of share, the most common distinctive attribute attached to a preference share is the preferential payment of dividends in priority of other types of shares.” (Griffin 2000: 131)

The legal rights attached to a preference share holder will be determined by the construction of that part of the company’s constitution which governs the particular share issue as held in Scottish Insurance Co Ltd v Wilsons & Clyde (1949) AC 462. However, if specific rights of a particular share are absent from the company’s constitution then, the rights of the holders of all classes of shares are deemed to be the same. (Birch v Cropper (1989) 14 App Cas 525)

Table A, regulation 2, provides: “Subject to the provisions of the Act and without predjudice to any rights attached to any existing shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine.”

“Section 125 applies to alterations governing the rights attaching to any class of shares in a company whose share capital is divided into shares of different classes.” (Morse 1999: 181)

Section 125(7) CA 1985 provides that an alteration of a provision contained in a company’s article for the variation of the rights of a class of shareholders, or the insertion of such a provision into the articles is to be construed as a variation of class rights. Section (8) further provides that references to a variation of class rights are to be read to include an abrogation of such rights.

“In determining whether a variation of class rights has taken place the courts have drawn a distinction between the rights of a class of shareholders and the enjoyment of those rights. Therefore to establish a variation of class rights, the rights of a class of shareholders must be fundamentally and specifically altered.” (Griffin 2000: 136)

In Greenhalagh v Arderne Cinemas Ltd (1946) 1 All ER 512, the plaintiff Greenhalagh objected to subdivision of shares on the grounds that it effected his class rights who before the resolution was passed held the bulk of the shares had control of over 40% of the membership votes whereas after the resolution his voting powers were reduced to less than 10% of the votes. The court held there was no variation of his rights as the company had merely acted to affect the rights of a class of shareholders and not expressly altering such rights. Therefore the company had merely changed the enjoyment of those rights.

“Case examples of which illustrate actual variation of class rights are rare. However one such example is Re Old Silkstone Colleries Ltd (1954) Ch 169. This case involved a nationalisation of a colliery by the National Coal Board. However the company which operated the colliery remained in existence to collect compensation. The company reduced its capital by returning part of the preference shareholders capital investment, the company nevertheless resolved that all its shareholders would participate in the compensation. However, a further reduction in capital was proposed resulting in the cancellation of the class of prference shares. The court held that such a proposal would if implemented have amounted a variation of class rights in that the preference shareholders had been promised a right to participate in the compensation payments.” (Griffin 2000: 137)

Reductions in Share Capital

“A company may wish to reduce its share capital for a number of reasons, for example, the company’s net assets may have fallen to a value below that of its share capital” (Griffin 2000: 163)

There are limitations imposed on a limited company with share capital to reduce its share capital by the Company Act 1985. “As a general principle it can do so only by a formal reduction of capital confirmed by the court in accordance with sections 131- 141 of the Act.” (Gower 1997 : 757)

The company must be authorised by its articles to reduce capital (authorisation is contained within the Table A articles by Art 34). An authorisation within the company’s memorandum is insufficient as held in Re Dexine Patent Packing and Rubber Co (1903) 88 LT 791. If the company is not authorised then the company merely has to alter its articles “by a special resolution conferring that authority.” (Gower 1997 : 758).

The company then will have to pass a special resolution to reduce its share capital and this the company may resolve to do “in any way.” (s. 135(1) CA 1985) The Act though under s. 135(2) does envisage that a company will normally do this in one of three ways:

reducing or extinguishing the amount of any uncalled liability on its shares
by cancelling any paid up share capital “which is lost or unrepresented by available assets
by paying off any paid-up share capital which is in excess of the company’s wants

The company must then apply to the court for an order confirming the resolution under s.136(1) CA 1985. The principle purposes of requiring confirmation by the court are to ensure that the prescribed formalities laid down in the Act have been strictly met and secondly consider the effect of the reduction upon the various classes of company shareholder. This can be illustrated by the Case Scottish Insurance Co Ltd v Wilsons & Clyde Coal Co Ltd.

In this case the colliery assets of a coal mining company had been transferred to the National Coal Board under the Coal Industry Nationalisation Act 1946. The company no longer trading intended togo into liquidation but first prosed to reduce its share capital by paying off the 7% cumulative preference shares. The shareholders objected to the reduction of capital on the basis that it was unfair. The house of Lords held that the reduction of capital was not unfair as the preference shareholder had the knowledge, as stated in the company’s articles, that if the company’ s circumstances changed there was a risk of such a reduction in capital being confirmed by the court.

“The court must also determine whether the reduction of capital would have the effect of varying the rights of a class of shareholder…” If this is the case, “then the consent of a class of shareholders must be obtained where a proposed reduction of capital would result in a variation of class rights (s.125 CA 1985).” (Griffin 2000; 164)