Constitutional Contract

Constitution as a Statutory Contract

The Companies Act, 1963 and its predecessors, deemed the registered memorandum and articles of association to bind the company and its members to the same extent as if signed and sealed by each member and as if it contained a covenant by each member to perform their provisions.   Members could accordingly enforce the provisions of the memorandum and articles directly against other members and the company. Equally, the company can enforce its terms against the members.

The Companies Act 2014 re-enacts the provision for the statutory contract. It provides that the company’s constitution constitutes a contract between the shareholders with each other and with the company.  This extends both to the provisions of the constitution and the provisions of the Act relating to the governance of the company.  Accordingly, it covers the operational matters provided for in the Act, which might formerly have been provided for by standard articles.

Provisions as to the governance of the company include those provisions of the Act that commences with words to the effect that it applies “save where the company’s constitution provides otherwise” or otherwise contains a qualification on the provision’s application by reference to the company’s constitution.

All money payable by any member to the company under the constitution shall be a debt due by him to the company. An action to recover a debt thereby created may not be brought after the expiration of 12 years from the date on which the cause of action accrued


Rights of Members as Such

The statutory contract does not apply to all rights and obligations in the constitution. The provision which a member seeks to enforce must relate to rights and duties conferred in his capacity as a member.  Rights conferred in some other capacity, such as in a private capacity or as director, are not enforceable in this way. They may, of course be the subject of a separate contract between the company and the member.

Where the rights concerned are of a private nature between parties, they should be incorporated into an appropriate contractual document, such as a contract of employment for reasons of clarity.  If a member or shareholder has rights against the company in another capacity which covers the subject matter, the court is less likely to interpret the right as one enforceable by the member as part of the statutory contract.,

The same general principles of interpretation apply to constitutions, as apply to contracts and statutes.  The courts will attempt to give them reasonable business efficacy. However, they will not readily imply in terms that are not present, unless they are necessary.


Shareholders Agreements

Shareholders agreements are private contracts between members regulating their rights and obligations in respect of a company. They are not subject to the special considerations applicable to the constitution. In particular, they cannot be amended by resolution.

Shareholders agreements are commonly entered in order to regulate and protect the rights of a minority which is otherwise vulnerable. They may govern a joint venture arrangement. The shareholders usually bind themselves to exercise their voting rights to give effect to the agreement.

Shareholders’ agreements have the advantage that they are private.  They need not involve all shareholders. Exceptionally, action taken under a shareholders’ agreement is capable of constituting oppression, abuse of the minority’s interests and even an abuse of the majority’s interests.

Commonly, shareholders enter a shareholders’ agreement, which overrides the constitution/ memorandum and articles of association, to some extent. It may be entered in conjunction with a revised constitution/ memorandum and articles of association, which embody some aspects of the arrangement, which the parties are content to register publicly, such as restrictions on transfer. See generally the sections on shareholders’ agreements.


Power to Amend

Under the pre-1963 Companies Acts, it was very difficult to alter the Memorandum of Association.  This made it easier to “entrench” particular provisions in it.  The 1963 Act allowed a company to alter its objects by special resolution by abandoning, restricting or amending any object or by adopting new objects or varying or abrogating class rights.

Under the 1963 Act, the minority who had voted against the change could apply to court within 21 days.  They must have held 15% of the issued share capital.  The court could confirm the alteration, cancel it, subject it to conditions or adjourn the matter for the purpose of purchase of the interests of the dissenting applicants. The court could make an order allowing the purchase of the dissenting applicant’s shares by the company itself.

The 2014 Act has re-enacted the provisions for alteration of the constitution, in broadly the above terms. It preserves the right of the dissenting minority to apply to the court, in order to cancel the alteration or to make another change. Alterations to objects clauses are no longer possible in the case of LTDs. Most other types of company (PLCs, DACs, etc.) still have objects clauses.

Subject to the provisions of the Companies Act, a company, may by special resolution amend its constitution. Any amendment so made of the constitution is, subject to the provisions of the Act, deemed to be as valid as if originally contained in it. It is subject in the like manner to further amendment by special resolution.


Limitations to Right to Amend

The fact that members can enforce the terms of the constitution does not preclude the alteration of the terms of the constitution by following the requisite procedure.  The constitution may be altered by special resolution.  The constitution as amended is valid in the same manner as if it was contained in the original constitution.

No member of the company shall be bound by an amendment made to the constitution after the date on which he or she became a member, if and so far as the amendment  requires him or her to take or subscribe for more shares than the number held by him or her at the date on which the amendment is made, or  in any way increases his or her liability, to contribute to the share capital of the company or otherwise pay money to the company.

A company may change its liability clause by increasing the liability of the members.  It may be made unlimited.  However, a member is not bound by an alteration after he becomes a member, without his consent. It is basic to membership of a limited liability company that the member may not be compelled to undertake a liability beyond existing unpaid calls on his shares, without his consent.  The member may agree in writing, either before or after the amendment is made, to be bound by the amendment.

A company may not bind itself by contract not to change its constitution.  It may be liable for damages for breach of such contract, but it nonetheless has the power to amend.  Accordingly, it appears that an injunction will not issue to restrain alteration. It may be, however, that the company may be restrained from acting on foot of the altered provision.

A company may not change its constitution so as to be inconsistent with general legislation. In older companies or in those that retain a memorandum and articles of association, the articles may be subject to the memorandum, in some respects, so that it may not be amended in a manner that is inconsistent with it.


Challenges to Alteration

The company itself must exercise its power to alter the constitution in good faith, for the benefit of the company as a whole.  This is notwithstanding the general principle that shareholders may act in their own exclusive interests in exercising their rights as shareholders.

Alterations must be made bona fide in the interests of the company as a whole.  Many cases interpret this to refer to the benefit of the company itself.  Other cases, interpret the requirement to refer to the shareholders’ collectively.

The test is essentially subjective.  Provided that the members honestly believe that the alteration is in the interests of the company, the court will not usually override their opinion on the matter.  If there is no reasonable basis for believing that the alteration is made in good faith, this may be sufficient evidence of the absence of good faith.

Traditionally, the courts looked at the motive of the shareholders in making amendments to the constitution.  If they were motivated by bona fide intentions in the interests of the company as a whole, this was sufficient.

However, it appears that the courts will now interpret the shareholders’ motives more critically. If the alteration is 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 to be made for the benefit of the company, it will not be upheld.  The company’s interests will usually be protected by the taking of reasonable measures.


Variation of Class Rights I

Where there is a variation of the rights attached to any class of shares in a company whose share capital is divided into shares of different classes, whether or not the company is being wound up, the following provisions apply.

Where the rights are attached to a class of shares in the company otherwise than by the constitution and the constitution does not contain provisions with respect to the variation of the rights, those rights may be varied if, but only if

  • the holders of 75 percent in nominal value of the issued shares of that class, consent in writing to the variation; or
  • a special resolution passed at a separate general meeting of the holders of that class sanctions the variation; and
  • any other requirement (however it is imposed) in relation to the variation of those rights is complied with.

Where the rights are attached to a class of shares in the company by the constitution or otherwise, the constitution makes provision for the variation of those rights,and the variation of those rights is connected with the giving, variation, revocation or renewal of an authority for the allotment of shares or a reduction of the company’s capital, then those rights shall not be varied unless the above provisions have been complied with and  any requirement of the constitution in relation to the variation of rights of that class is complied with to the extent that it is not comprised in the above requirement.


Variation of Class Rights II

Where the rights are attached to a class of shares in the company by the constitution or otherwise, and they do not relate the matters set out in the last paragraph, then

  • where they are so attached by the constitution;
  • it contains a provision with respect to their variation which had been included in the constitution at the time of the company’s original incorporation; or
  • where they are so attached otherwise, the constitution contains such provision (whenever first so included),

those rights may only be varied in accordance with that provision of the constitution.

Where the rights are attached to a class of shares in the company by the constitution, and it does not contain provisions with respect to the variation of the rights, those rights may be varied if all the members of the company agree to the variation.


Variation of Class Rights  III

Where a resolution for the variation of class rights is to be proposed at a meeting of members holding a particular class of shares the necessary quorum at any such meeting, other than an adjourned meeting, shall be 2 persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class in question and at an adjourned meeting, one person holding shares of the class in question or his or her proxy. Any holder of shares of the class in question present in person or by proxy may demand a poll.

Any amendment of a provision contained in the constitution of a company for the variation of the rights attached to a class of shares or the insertion of any such provision in the company’s constitution shall itself be treated as a variation of those rights. A variation of the rights attached to a class of shares in the constitution shall include their abrogation.

Save where the company’s constitution provides otherwise, the rights conferred upon the holders of the shares of any class issued by a company with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.


Court Application to Cancel Variation

If in the case of a company the share capital of which is divided into different classes of shares, the rights attached to any such class of shares are at any time varied pursuant to statute, one or more members who hold, or together hold, not less than 10 per cent of the issued shares of that class, being members who did not consent to or vote in favour of the resolution for the variation, may apply to the court to have the variation cancelled.

Where any such application is made, the variation shall not have effect unless and until it is confirmed by the court. An application may be made within 28 days (or such longer period as the court, on application made to it by any member before the expiry of the first mentioned 28 days, may allow) after the date on which the consent was given or the resolution was passed, as the case may be. It may be made on behalf of the members entitled to make the application by such one or more of their number as they may appoint in writing for the purpose.

On any such application, the court, after hearing the applicant and any other persons who apply to the court to be heard and appear to the court to be interested in the application, may if it is satisfied having regard to all the circumstances of the case that the variation would unfairly prejudice the shareholders of the class represented by the applicant, disallow the variation and shall, if not so satisfied, confirm the variation.

The decision of the court on any such application shall be final. An appeal shall lie to the Supreme Court from the determination of the court on a question of law.


Registration of Amendments

Changes to the constitution must be registered with the CRO in accordance with the requirements which apply to special resolutions generally.   Alterations to the constitution must be filed in the Companies Registration Office within 15 days.  The company shall deliver to the Registrar, in addition to the amendment, a copy of the text of the constitution as so amended. They are required to be notified and published in the CRO Gazette.  This is usually undertaken by the CRO itself.

If the minority dissents but no application is made to the court within 21 days, (where such a right is applicable), the company must deliver the copy altered as amended within 15 days further. This gives a period in which the minority may apply to the court. Where an application is made and determined, any court order cancelling or varying the alteration must be filed in the Companies Registration Office.  The company’s officers are personally liable for the filing obligations.


References and Sources

Primary References

 

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)     Courtney

Keane on Company Law 5th Ed. (2016) Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Palmer’s Company Law