214 14: Constitution of a company Part D The formation and constitution of business organisations
2.2.4 Restrictions on alteration
Even when it is possible to hold a meeting and pass a special resolution, alteration of the articles is
restricted by the following principles.
(a) The alteration is void if it conflicts with the Companies Act or with general law.
(b) In various circumstances, such as to protect a minority, the court may order that an alteration be
made or, alternatively, that an existing article shall not be altered.
(c) An existing member may not be compelled by alteration of the articles to subscribe for additional
shares or to accept increased liability for the shares which they hold unless they have given their
consent.
(d) An alteration of the articles which varies the rights attached to a class of shares may only be made if
the correct rights variation procedure has been followed to obtain the consent of the class. A 15 per
cent minority may apply to the court to cancel the variation.
(e) A person whose contract is contained in the articles cannot obtain an injunction to prevent the
articles being altered, but they may be entitled to damages for breach of contract. Alteration cannot
take away rights already acquired by performing the contract.
(f) An alteration may be void if the majority who approve it are not acting bona fide in what they
deem to be the interests of the company as a whole.
The case law on the bona fide test is an effort to hold the balance between two principles:(a) The majority are entitled to alter articles even though a minority considers that the alteration is
prejudicial to its interests.
(b) A minority is entitled to protection against an alteration which is intended to benefit the majority rather
than the company and which is unjustified discrimination against the minority.
Principle (b) tends to be restricted to cases where the majority seeks to expel the minority from the
company.
The most elaborate analysis of this subject was made by the Court of Appeal in the case of Greenhalgh v
Arderne Cinemas Ltd 1950. Two main propositions were laid down by the Judge.
(a) 'Bona fide for the benefit of the company as a whole' is a single test and also a subjective test
(what did the majority believe?). The court will not substitute its own view.
(b) 'The company as a whole' means, in this context, the general body of shareholders. The test is
whether every 'individual hypothetical member' would in the honest opinion of the majority benefit
from the alteration.
If the purpose is to benefit the company as a whole the alteration is valid even though it can be shown that
the minority does in fact suffer special detriment and that other members escape loss.2.2.5 Expulsion of minorities
Expulsion cases are concerned with:
Alteration of the articles for the purpose of removing a director from office
Alteration of the articles to permit a majority of members to enforce a transfer to themselves of the
shareholding of a minority
The action of the majority in altering the articles to achieve 'expulsion' will generally be treated as valid
even though it is discriminatory, if the majority were concerned to benefit the company or to remove
some detriment to its interests.
If on the other hand the majority was blatantly seeking to secure an advantage to themselves by their
discrimination, the alteration made to the articles by their voting control of the company will be invalid.
The cases below illustrate how the distinctions are applied in practice.