ACCA F4 - Corp and Business Law (ENG)

Part D The formation and constitution of business organisations  14: Constitution of a company 215

Sidebottom v Kershaw, Leese & Co Ltd 1920

The facts: The articles were altered to enable the directors to purchase at a fair price the shareholding of

any member who competed with the company in its business. The minority against whom the new article

was aimed did carry on a competing business. They challenged the validity of the alteration on the ground

that it was an abuse of majority power to 'expel' a member.

Decision: There was no objection to a power of 'expulsion' by this means. It was a justifiable alteration if

made bona fide in the interests of the company as a whole. On the facts this was justifiable.

Brown v British Abrasive Wheel Co 1919

The facts: The company needed further capital. The majority who held 98% of the existing shares were

willing to provide more capital but only if they could buy up the 2% minority. As the minority refused to

sell, the majority proposed to alter the articles to provide for compulsory acquisition on a fair value basis.

The minority objected to the alteration.

Decision: The alteration was invalid since it was merely for the benefit of the majority. It was not an

alteration 'directly concerned with the provision of further capital' and therefore not for the benefit of the

company.

Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd 1920

The facts: The claimant was a minority shareholder which had transferred its custom from the defendant

company to another supplier. The majority shareholders of the defendant company sought to protect their

interests by altering the articles to provide for compulsory acquisition of the claimant's shares.

The new article was not restricted (as it was in Sidebottom's case above) to acquisition of shares on

specific grounds where benefit to the company would result. It was simply expressed as a power to

acquire the shares of a member. The claimant objected that the alteration was invalid since it was not for

the benefit of the company.

Decision: The alteration was invalid because it 'enables the majority of the shareholders to compel any

shareholder to transfer his shares'. This wide power could not 'properly be said to be for the benefit of the

company'. The mere unexpressed intention to use the power in a particular way was not enough.

Therefore if the majority intend that the power to acquire the shares of a minority is to be restricted to

specific circumstances for the benefit of the company, they should ensure that this restriction is included

in the new article.

Scenario questions on this area of law may concern a majority wishing to amend the company's articles to

allow the expulsion of a minority. If this is the case, pay close attention to the resolution as it may be

invalid under one of the cases above.

2.2.6 Filing of alteration

Whenever any alteration is made to the articles a copy of the altered articles must be delivered to the

Registrar within 15 days, together with a signed copy of the special resolution making the alteration.

2.2.7 Interaction of statute and articles

There are two aspects to consider.

(a) The Companies Act may permit companies to do something if their articles also authorise it. For

example a company may reduce its capital if its articles give power to do this. If, however, they do

not, then the company must alter the articles to include the necessary power before it may

exercise the statutory power.

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