Chapter 6Companies3 Shareholders’ rights are contained in the articles.
Obviously, these rights can be changed by a special reso-
lution of the company in general meeting. There would
seem to be no objection to the use of the written resolu-
tion by private companies because under the CA 2006
these resolutions no longer require unanimity. Instead,
they need only be signed by the majority that would
have been required to pass the resolution at a general
meeting. However, if the company has more than one
class of shares, e.g. A Ordinaries and B Ordinaries, then
the special resolution is not enough.
Under s 630 a special resolution is not effective unless
holders of three-quarters of the issued shares of each
class consent in writing, e.g. by returning a tear-off slip
on a letter to indicate their agreement or not, or by
means of an extraordinary resolution at a class meeting.
A private company cannot insist on unanimous objec-
tion by the unanimous written resolution approach be-
cause objection by only three-quarters is enough.
In addition, s 633 applies; under this 15 per cent of
the class who did not vote for the variation may apply
to the court within 21 days of the resolution which
altered the articles. Once such an application has been
made, the variation will not take effect unless and until
it is confirmed by the court.
The point of this is that those holding the A Ordin-
ary shares may well be able to get a special resolution
in general meeting and so weaken the position of the B
Ordinary shareholders, but they cannot do so without
the necessary class consent of the B Ordinary share-
holders. The changes do not need the consent of those
holding A Ordinary shares because their rights have not
been varied, each A Ordinary shareholder having one
vote per share as before.Alteration of the articles by the court
The articles are a contract and the court has power to
rectify (alter) contracts where the parties have orally
agreed something which they have written down incor-
rectly but where one party will not co-operate in making
a change usually because the written contract is more
favourable to him or her than the oral one. If the court
is satisfied that what is written does not represent what
was agreed, it will alter the contract by order to fit the
genuine agreement of the parties.
The court, however, is reluctant to use this power
on the articles, preferring that the members make the
alteration by the requisite resolution (see Frank Scott
v Frank Scott (London) Ltd(1940)).
However, the court did make an alteration in the
articles in Folkes Group plcv Alexander(2002) where
because of bad drafting an alteration to the articles took
away the voting control of the Folkes family in the
group. The other shareholders were not prepared to co-
operate in the necessary resolution and on the articles
as wrongly altered the Folkes family shareholders could
not get a special resolution without them. The High Court
changed the articles to what had been intended and
restored the control of the Folkes family. The judge said
he had been faced with an absurd result consequent
upon a serious drafting error in the original alteration.
He felt able to make an order changing the articles to
reflect what had been intended.Financing the company
We shall now deal with the raising of money for the
company.Share capital
The capital of a company may be divided into preference
and ordinary shares. In addition, both of these classes of
shares may, under s 684, be issued as redeemable by the
company at a future date.161Southern Foundries Ltdv Shirlaw (1940)Mr Shirlaw, who was a director of Southern Foundries,
was appointed managing director of that company for
ten years by a contract outside the articles. The com-
pany was taken over by Federated Industries. With their
voting power they altered the articles to provide that
Federated Industries had power to remove any director
of Southern Foundries and that the managing director of
Southern Foundries must also be a director. Mr Shirlaw
was subsequently removed from his directorship and
therefore could no longer qualify as managing director
and his contract was terminated while it still had some
years to run. The House of Lords decided that the com-
pany was liable in damages. Although a company always
had a legal right to change its articles, if by doing so it
caused a breach of an outside contract, then, while the
alteration could not be prevented, the company was
liable in damages if there was a breach of a contract out-
side of the articles as a result of the alteration.