COMPANY LAW 1.10 LEGAL EFFECTS OF THE MEMO AND ARTICLES
LEGAL EFFECTS AND NATURE OF THE MEMART[1].
- Articles are subordinate to the Memo and cannot modify it–Guinness V Land Corporation of Ireland. In Ashbury V Watson[2] the court held that the rights of preference shareholders set out in the article which conflicted with the memorandum were void to the extent of its inconsistency with the memorandum[3].
- The MEMART have the effect of a contract under seal–Section 41. Terms cannot be implied into the contractual relations nor is there need to furnish consideration on the contract. E.g. even if a member has not paid for his shares, he can still sue and be sued on the provisions of the MEMART.
- The Provisions are binding as between company and its members– Rayfield V Hands: In Wood V Odessa Waterworks Co. The articles provided for payment in cash but the company passed a resolution to pay its shareholders by debenture. Held: No. In Obikoya V Ezenwa, the articles provided that a permanent director shall not vote for the removal of another permanent director. This was done. Held that the purported removal was invalid. In Quinn and Axtens Ltd V Salmon[4], the articles provided that the consent of the two managing directors was required in relation a particular transaction. Consent not obtained. Court held that they must observe the provisions. In Hickman V Kent or Romney Marshes Sheepbreeders’ Association, the articles provided that disputes between the company and its members must first be referred to arbitration. Held, they must refer their dispute to arbitration[5]. In Exparte Beckwith, the articles required the directors to be paid E1,000 per year. Before they could be paid, the company went into liquidation. Court held that they could request for their salary by virtue of the provisions of the Articles which bound the company. In Pender V Lushingtonj[6], a shareholder was allowed to enforce his right to vote under the article.
- The Provisions are Binding as between the company and its officers: (Outsiders Rights): Initially (at common law), “officers” was regarded as “members” and no others. Therefore, articles could only bind members rather than directors, solicitors, accountants, etc. As was noted by Ashbury J in Hickman V Kent or Romney Marshes Sheepbreeders Association, an outsider cannot sue on the articles to enforce rights nor can the articles constitute a contract between the company and a third person. Only members of the company could sue on it. In Re English and Colonial Produce Company, a promoter sought to enforce a provision in the articles that the company shall reimburse him for the expenses incurred. Disallowed on the ground that at the time the contract was made, he was not a member of the company. In Eley V Positive Life Association[7], the articles provided that Eley should be a solicitor of the Company for life and can only be removed for misconduct. The company later dispensed with his services. Held that he could not enforce because he was not a member of the company. To evade this limitation, the plaintiff had to enter a separate contract with the company-Shinnder V NortherReincoat Company[8].
The position has changed. Section 41 (1) CAMA 1968 which provides that the MEMAT shall have contractual effect between the company and its officers.
Distinguish the cases of Hickman, Ex parte Beckwith with Foss V Harbottle. In relation to a member suing for wrong done to the company. Under the rule in Foss V Harbottle, a member/individual shareholder cannot initiate proceedings with respect to a wrong done to the company… only the company through its board of directors-Section 299 provides same.
In addition, Section 41(3 and 4) entitles any outsider that is affected by a breach of obligation together with the company to sue on behalf of himself and other affected members. Also, an outsider authorised by the memat can appoint/remove director from office. These provisions (Part X CAMA) constitute an exception to the rule in Foss V Harbottle.
- The Provisions are binding on the members inter se: Rayfield V Hands, the articles required that a member that wishes to transfer his right must give notice to the directors “who shall take the said shares equally between them at a fair value”. A member gave notice but the directors refused to buy. The court ordered them to buy.
- The MEMART guides future relationships.
- The companies must be managed in accordance with the provisions of the MEMAT–AVOP Plc V AG Ebugu State[9], Okomu Oil Palm Ltd V Iserhienrhien[10]. Same as the discussions above.
- Being Commercial documents, they must be interpreted to validate if possible. In Holmes V Keyes, Jenkins L.J noted that the provisions of the articles should be interpreted in such a way as to give them business efficacy and workability.
[1] Memorandum and Article of Association.
[2] (1885) 30 Ch.D 376.
[3] Although, now that Section 44 provides that only matters required by Section 27 and the Act should be contained in the Memorandum. Therefore, it is safe to conclude that once the matter in issue is NOT required to be in the memorandum, it may not override the provisions of the Article.
[4] [1909] 1 CH 311, CA.
[5] See however Beattie v Beattie where on similar facts a different conclusion was reached.
[6] [1877] 6 Ch. D. 70
[7] [1876] 1 Ex d 88.
[8] 1906 2 All ER 239.
[9] (2000) 7 NWLR 9pt. 669 260.
[10] (2001) 6 NWLR pt, 710 666
