Учебный год 22-23 / Critical Company Law

Company constitution 85

(2)For this purpose the rights attached to shares are not regarded as di erent from those attached to other shares by reason only that they do not carry the same rights to dividends in the twelve months immediately following their allotment.90

And, on the face of it, the statutory definition is much narrower than that in Cumbrian Newspapers. Section 630(2)(a) states that class rights may only be varied according to the provisions of the company’s articles or, if none exist, if consent of the class subject to the variation has been given.91 This consent must either be in the form of written consent from the holders of three-quarters of the nominal value of the issued shares in this class,92 or a special resolution passed at a separate meeting of the holders of these shares.93 Further rights exist for the holder of at least 15 per cent of the issued shares in the class in question who did not consent to, or vote for, the variation to apply to the court to have the variation cancelled.94 If the court after hearing the application is satisfied ‘having regard to all the circumstances of the case’ that the variation would ‘unfairly prejudice’ the class of shares the applicant represents, it will disallow the variation. The application must be made within 21 days of the consent being given95 and the e ect of making the application is that the variation has no e ect until it is confirmed by the court.96 Members of companies without share capital are similarly provided for under ss 631 and 634.

Good faith, to promote the success of the company for the benefit of the members as a whole

We deal more generally with directors’ duties in Chapter 5, and in particular with the codification of general duties found in ss 170 to 187. Here, the issue is the way in which the long-standing requirement that a director should act ‘bona fide and for the benefit of the company’ has a ected the ability of companies, or their directors, to make alterations to the articles of association.

That requirement has now been put in statutory form, in s 172 of the 2006 Act. This provides that a director must act ‘in the way he considers, in good faith, would be most likely to promote the success of the company for the

90This reproduces the provision in s 128(2) that shares are not to be treated as a di erent class from existing shares if the only di erence is that dividends are not payable in the same way for the first 12 months from allotment.

91Section 630(2)(b).

92Section 630(4)(a).

93Ibid.

94Section 633(2).

95Section 633(4)(a).

96Section 633(4)(b).

86 Critical company law

benefit of its members’. A director, in so doing, is required to have regard to the long-term consequences of decisions; the interests of employees, the environment, and the wider community; the maintenance of a reputation for high standards of conduct, and of good relations with suppliers and customers; and the need to act fairly as between members of the company. This appears to give an expansive reading to the interests of the company. Nevertheless, existing case law on what would be considered as bona fide and for the benefit of the company in respect of an article amendment will probably still generally apply. Having said that, one area that might lead to new departures is the additional statutory requirement for a director to have regard to the need to act fairly between members of the company.

Allen v Gold Reefs of West Africa Ltd 97 has been good authority on the kinds of circumstances and principles the court will consider in respect of an alteration to the articles. The company’s articles provided that it should have a lien for all debts and liabilities of any member to the company ‘upon all shares (not being fully paid) held by such member’. In exchange for certain property, the company allotted Z fully paid up shares. Z also applied for shares not paid up. On his death he was indebted to the company for arrears of calls on the unpaid shares, but his assets were insu cient to pay these arrears. The company, therefore, by special resolution under the provisions contained at this time in s 50 of the Companies Act 1862, altered the above article by omitting the words ‘not being fully paid up’, thus creating a lien on the paid-up shares. The court held that a company may alter the terms of a contract if that contract was made in relation to an article that could by special resolution be altered. This power, which could be used against the interests of minorities, was provided for under statute but could only be exercised bona fide and for the benefit of the company. As statute was clear on these powers and their exercise benefited the company as a whole, it was made bona fide, notwithstanding that the alteration was a disadvantage to one shareholder. Such powers under statute:

must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it.98

Following Allen, it was the view of the courts that the bona fides of an alteration was an issue upon which shareholders should decide, and it was to

97[1900] 1 Ch 656.

98Ibid, p 672.

Company constitution 87

be presumed that an alteration agreed by the members was bona fide. The court may intervene when the alteration is one which the reasonable man would not have thought of as beneficial for the company as a whole. In particular, an alteration would be suspect where it was ‘so oppressive as to cast suspicion on the honesty of the persons responsible for it, or so extravagant that no reasonable man could really consider it for the benefit of the company’. However, the courts generally have not presumed that an alteration is made fraudulently or oppressively, indeed it falls to the complainant to prove that the alteration of the articles represents an improper exercise of power.

In relation to fairness between members the Australian case of Gambotto v WCP Ltd 99 might impact on the company’s decision to alter the articles notwithstanding that the CRL specifically rejected its usefulness in English Company law.100 In Gambotto, an amendment to the company’s articles to enable a person holding 90 per cent of the shares to compulsorily purchase a minority shareholder’s stake, was held to be invalid by the Australian High Court. The amendment would have enabled the company to save around $4 m in tax, but was not ‘bona fide and for the benefit of the company’, because it involved the appropriation of the ‘valuable proprietary rights attaching to shares’.101 Such an appropriation could not be justified unless the minority shareholder’s continued ownership of his shares would seriously harm the company’s interest. In this case the majority shareholder (through a number of wholly owned subsidiaries) held 99.7 per cent of the share in WCP Ltd. And, unlike most cases where a shareholder’s expectations have been protected, this was a large public company, not a small quasi-partnership company where members might be bound by informal understandings. The decision was based on a specific elevation of the proprietary rights of shareholders per se, which the court stated it was bound to protect except in very extreme situations. In this respect, it is a decision in line with the current political elevation of shareholders’ interests in company law reform, justified by the shareholder’s ‘ownership’ status. Thus while the 2006 Act codifies the CLR’s view that the test should be honest promotion of the company’s success under s 172 above, and not Gambotto, the political emphasis on promoting shareholder proprietary interests may yet lead to an interpretation of s172(1)(f) along the lines of Gambotto.102

Gambotto bears a number of similarities with the much-criticised case of Brown v British Abrasive Wheel Co Ltd.103 In Brown, an alteration of the articles to allow the 98 per cent majority shareholder to compulsorily

99(1995) 69 ALJR 266.

100CLR Final Report, p 169.

101Gambotto, p 271.

102Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286.

103[1919] 1 Ch 290; 88 LJ Ch 143.

88 Critical company law

purchase the 2 per cent minority shareholder’s interest was held to be invalid. The company was in financial di culty and the majority shareholder would only inject further capital if he was the sole owner. The court held this did not justify the alteration. The resolution was not made for bona fide reasons because it disappropriated the minority shareholder. The alteration, however, would have benefited the company as a whole but this was not enough in the absence of the requisite bona fides. Shortly after this decision, another case involving a similar alteration to the articles was held to be valid and the court reverted back to the definition of ‘bona fide and for the benefit of the company’ stated in Allen v Gold Reefs. Brown was criticised for holding an alteration invalid simply because the majority were found to have acted in their own interest.104 Lord Sterndale MR and Warrington LJ stated that the judge in Brown, Ashbury J, was wrong to have divided the bona fides of a decision from the benefit of the company. If the majority expressed an opinion in a resolution then it was necessarily bona fide and for the benefit of the company. The was a rmed in the later case of Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd 105 where an alteration was upheld which allowed a lifetime appointed director to be removed provided that all the other directors wrote to him requesting his resignation. The alteration was intended to e ect the removal of a director who was considered to be inadequate. The court held that if in the opinion of the members the alteration was bona fide and in the interests of the company then the court would question that decision no further.

This position was modified in Greenhalgh v Arderne Cinemas Ltd 106 where Evershed MR held that the validity of any alteration must be judged according to two principles. First, the decision should be made honestly for the benefit of the company as a whole. And second, the phrase ‘company as a whole’ does not mean the company as a commercial entity but the body of shareholders. Thus the interests of a minority shareholder might be taken into account to the extent that an alteration should not discriminate against him while simultaneously giving an advantage to the majority shareholders.

The statutory duty to promote the success of the company was intended to codify the CLR’s recommendation (partly based on Greenhalgh) that when assessing the validity of an alteration to the articles the test should be ‘whether the majority honestly believe that their vote is best calculated to promote the success of the company for the benefit of its members as a whole’.107 Thus unlike Greenhalgh this test does not require that the interests of all individual members be considered, or that discrimination will automatically render a

104Sidebottom v Kershaw, Leese & Co Ltd [1920] 2 Ch 124; 89 LJ Ch 346.

105[1927] 2 KB 9.

106[1951] Ch 286.

107CLR Final Report, p 169.

Company constitution 89

resolution to e ect an alteration invalid, although it will be a factor to be considered. However, the statutory statement in s 172(1) reflects the Shuttleworth/Greenhalgh common law principles which were established when the notion of shareholder’s proprietary rights were at an all time low.108 Today, that is not the case and much of the orientation of company law reform in line with a general political outlook has supported the notion of shareholder primacy, the only real explanation for Gambotto. Thus decisions which a ect the proprietary interests of shareholders outside those already provided for in the Companies Act may be decided according to a more pro-shareholder interpretation of ‘the need to act fairly as between members of the company’.

Company names

The purpose of examining the law on company names is to show how highly regulated this area is. The incorporators have very little choice in both the character and formation of the name and the procedures in relation to adopting or changing a name. The company name also underpins the nature and importance of separate corporate personality because a company must be clearly identifiable with a name (which is its name only) because those that contract with the business are contracting with the entity, the company. The company name locates the company and enables those such as creditors to make claims against the company, in that company’s name. The name also shows if the company’s members have limited liability, a key piece of information for creditors.

The incorporators may choose the company’s name to the extent that it conforms with the general restrictions set out in the Companies Act and may continue to use it to the extent that it does not o end any statutory or common law principle. Under the 1985 Act general restrictions were set out in s 26, which stated that a company should not be registered by a name which includes:

•‘limited’, ‘unlimited’ or ‘public limited company’ other than at the end;109

•names including abbreviations of the above words;

•the same name as another on the registrar’s index of company names;

•a name which would constitute a criminal o ence in the opinion of the Secretary of State;

•a name which would be o ensive in the opinion of the Secretary of State;

•in the opinion of the Secretary of State, would be likely to give the

108See Chapter 4.

109Under the Companies Act 1985, s 30, a private company limited by guarantee could exclude the word limited if (a) the objects promote commerce, art, science, religion, charity etc., and

(b) the profits are not used to pay dividends.

92 Critical company law

Britain and that it was not possible to register and ‘own’ the noun buttercup. Other companies had used the name buttercup in advertising. Furthermore, the defendant company was a wholesaler and the plainti was a retailer. However, the court held on appeal that the prohibition under the tort of passing o on the use of existing names was not limited to using names in a manner that was ‘calculated to deceive’. It was su cient to prove that the plainti ’s goodwill would be compromised by the confusion to the public and other business associates, and the defendant company had su cient power in its memorandum to become a retailer as well as a wholesaler.

Under s 69 the applicant may object to a company’s name on the ground:

(a)that it is the same as a name associated with the applicant in which he has goodwill, or

(b)that it is su ciently similar to such a name that its use in the United Kingdom would be likely to mislead by suggesting a connection between the company and the applicant.

Under s 69(4), if those grounds are established the objection will be upheld and the companies names adjudicator112 will apply the remedies provided in s 73,113 unless the respondent can show:

(a)that the name was registered before the commencement of the activities upon which the applicant relies to show goodwill; or

(b)that the company –

(i)is operating under the name, or

(ii)is proposing to do so and has incurred substantial start-up costs in preparation, or

(iii)was formerly operating under the name and is now dormant;

or

(c)that the name was registered in the ordinary course of a company formation business and the company is available for sale to the applicant on the standard terms of that business; or

(d)that the name was adopted in good faith; or

(e)that the interests of the applicant are not adversely a ected to any significant extent (s 69(4)).

The Secretary of State also has powers under ss 75 and 76 to require the company to change its name if misleading information has been given for the purposes of the company’s registration or the name gives a misleading indication of its activities likely to cause harm to the public. Failure of a person to

112Appointed by the Secretary of State under s 70.

113The respondents have a right to appeal against the adjudicator’s judgment under s 74.

Company constitution 93

comply with either order results in liability on summary conviction to a fine and a further daily fine for each additional day of non-compliance. A company may continue to choose to change its own name following a special resolution under s 78.

Phoenix companies and prohibitions on the re-use of company names

Further restrictions on company names exist in order to prevent the abuse of limited liability through measures that prevent the re-use of the name of an insolvent company. Under s 216 of the Insolvency Act 1986, a person who was a director or shadow director of a company that has gone into insolvent liquidation any time during the last 12 months of its existence may not be connected to another company with a prohibited name for five years. Under s 216(2), a name is prohibited if it was either the exact or similar name of the insolvent company. A person is connected to a company if they are directors, or are

in any way, whether directly or indirectly . . . concerned or take part in the promotion, formation or management of any such company, or, in any way, whether directly or indirectly . . . concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.114

Such persons may not, without leave of the court, be connected to a company that uses a prohibited name for a period of five years.115 Breach of s 216 is a criminal o ence.116

Further to this, s 217(1)(a) states that a director or shadow director who acts in contravention to s 216 will be personally liable for all relevant debts of that company. Liability also arises for a person involved in the company’s management who acts on the instructions of somebody he knows to be in contravention to s 216.117 Relevant debts are those incurred when a person who is liable under s 216(1)(a) was involved in the management or, in the case of liability for a person acting under instructions, for the times when he was acting under instructions.

In Thorne v Silverleaf,118 Mr Thorne had been the director of three companies, each of which had had the words ‘Mike Spence’ in its name. The first company was incorporated in 1968, and was subsequently named Mike

114Insolvency Act 1986, s 216(3)(b) and (c).

115Section 216(3).

116Section 216(4).

117Section 217(1)(b).

118[1994] BCC 109.