Dealing with Outsiders & Insiders

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Alteration of Articles

- Section 28 of the Companies Ordinance 1984 – a company may alter its articles through a special resolution.

- Special Resolution means a resolution which has been passed by a majority of not less than three-fourths of the members of the company who have the power to vote through postal ballot at a general meeting.

- Where an alteration affects the substantive rights or liabilities of members or of a class of members, it shall be passed only if a majority of at least three-fourths of the members affected by that alteration agree to it.

Restrictions on Alteration

- Should not go against the provisions of Ordinance / Act.

- Should not go against the Memorandum of Association.

- must not be illegal.

- must not operate against the substantive rights of shareholders.

- must not increase the liability of existing shareholders

- must not be made to breach the contract with outsider

Brown v British Abrasive Wheel Co. Ltd.

- A Company needed funds

- Majority of the shareholders – i.e. 98 % - were ready to give them, provided that the 2% of the minority shareholders sell their shares to the majority.

- The majority passed a special resolution to force the minority to sell their shares.

- The Court ruled in favor of minority

- It said that since the alteration was aimed against the minority shareholders, three-fourths of their members should have voted in favor of the alteration.

Memorandum & Articles binding on Members and the Company

- A Company can sue its members for the enforcement of the Constitution.

- And can restraint them from committing a breach

- These documents bind the company just like they bind the members.

- A member can also sue the company for breach and can restrain it for committing any further breach.

Pender v Lushington (1877)

- Where the Article of Association gives a shareholder the right to vote, the Chairman in a general meeting cannot deprive him of it.

Memorandum & Articles binding on members inter se

- Members between themselves are also bound by the Constitution of the Company.

Rayfield v Hands & Others (1958)

- Article of Association provided that a member who wants to transfer his shares has to inform the Directors and the Directors will then purchase the shares at a fair value.

- In this case the Directors refused to take the share.

- The Court ruled against the Directors.

Memorandum & Articles not binding on Outsiders

- There is no contract with the outsiders, unlike the Members.

- An outsider cannot sue a Member with regard to enforcing their rights and obligations.

Brown v La Trinidad (1887)

- A was appointed for a fixed term as director

- The term was provided in the Articles of Association.

- His term expired.

- He sued the Company to stop them from removing him.

- The Court ruled in favor of the Company A was not part of the Company any more