ALTERATION OF ARTICLES OF ASSOCIATION

A company can alter its A/A by passing a special resolution: s 31(1), CA 1965.  If there is a clause in the A/A that prohibits the alteration of the A/A, such clause is invalid.

PETER’S AMERICAN DELICACY CO LTD v HEATH (1939)

Facts: There were two types of shareholders, fully and partly paid. The company’s constitution provided that bonus shares could be issued to all shareholders regardless whether their shares were fully or partly paid. Fully paid shareholders who were the majority shareholders altered the constitution so that bonus shares were to be given only to fully paid shares. The issue that arose was whether the act was bona fide in the interests of the company as a whole.

 Held: Even though it affected the partly paid shareholders, there was nothing to show that it was oppression or unjust. In fact, the alteration was bona fide in the company’s interests as  a whole.

The A/A is not freely alterable. There are certain restrictions, limitations and prohibitions as explained below:

—  The alteration cannot be in conflict with the CA 1965 or any other statute.

—  The alteration cannot be in conflict with the M/A since the A/A is subordinate to the M/A.

—  If there is a clause in the M/A which does not allow the A/A to be altered, then the A/A cannot be altered. In such a case, the M/A must first be altered to allow the A/A to be altered.

—  The M/A may contain further requirements to alter the A/A as allowed by s 31(1) of CA 1965, in addition to the special resolution.

—  If the alteration affects one particular class of shareholders whereby it amounts to variation of class rights, a further procedure must be followed as per the company’s A/A.

—  The alteration must be bona fide in the interests of the company as a whole.

—   The alteration must be for proper purpose and fairness – Gambotto v WCP Ltd (1995).

GAMBOTTO v WCP LTD (1995)

Facts: A majority shareholder holding 99% shares in a company wanted to alter the company’s constitution to allow any member who has more than 90% shares to compulsorily acquire all other issued shares. His reason for doing so was to reduce taxation and administrative cost.

Held: Alteration is only valid if the majority shareholder can prove that it is for a proper purpose and fair in all circumstances. Here, the reasons given were not fair. Therefore, the alteration is not valid. Examples of fair reasons are to prevent the company from suffering a serious loss or harm; the shareholders are competing with the company; or to meet legislative requirements.

If the alteration proposes to increase the liability of any member to contribute or subscribe to the company’s capital, the written consent of the member must be obtained: s 33, CA 1965.

Majority members cannot vote in favour of a resolution altering the A/A that is oppressive, unfairly prejudicial or unfairly discriminatory to a member within the meaning of s 181 of CA 1965.

If a member has made an application under s 181 of CA 1965 and the court has ordered the A/A to be altered, the A/A must be altered. However, in future, the company cannot alter its A/A unless the leave of the court is first obtained

The Bona Fide Test

The alteration of the A/A must be bona fide in the interests of the company as a whole.

The bona fide test was laid down in Allen v Gold Reefs of West Africa Ltd (1990), which referred to Greenhalgh v Arderne Cinemas Ltd (1951) wherein it was stated that the court would not impose its own ideas as to what is bona fide. It is for the members to determine whether the alteration is for the benefit of the company as a whole, so long as the decision taken is reasonable. Essentially, the majority shareholders should not treat the minority shareholders unfairly. Hence when a shareholder exercises his vote, he must ask himself whether in his honest opinion, the alteration is bona fide. Thus the term ‘company as a whole’ does not mean the company is a separate entity from its shareholders – it means shareholders as a general body.

An individual hypothetical member is asked whether what is proposed is in the honest opinion of those who voted in its favour, for that person’s benefit. If the effect of the alteration is such that the majority shareholders are discriminating the minority shareholders, then the alteration is not bona fide in the interests of the company as a whole. Therefore the alteration is not valid.

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd (1927)

Facts: The plaintiff was a director who had cheated the company 22 times. The A/A did not contain a clause allowing the company to remove the director. Thus the company decided to alter the A/A by including a clause that allowed the BOD to remove any director if they all agree to do so. The A/A was then altered. The plaintiff claimed that the alteration was not bona fide in the interests of the company.

Held: The alteration was bona fide in the interests of the company and therefore it was valid.

Sidebottom v Kershaw, Leese & Co Ltd (1920)

Facts: One of the shareholders in the company was a competitor of the company. Thus the other shareholders wanted to oust him from the company and they altered the A/A to allow for compulsory purchase at a fair price of the shares of any member who competed with the business of the company. The plaintiff claimed that it was not bona fide in the interests of the company.

Held: The alteration was bona fide in the interests of the company and therefore it was valid since it would not be in the best interests of the company to have shareholders who are competing with the company.

Brown v British Abrasive Wheel Co (1919)

Facts: The company approached the minority shareholders who owned 2% of the company’s capital to contribute to the company’s capital. They refused. The company then approached the majority shareholders who own 98% of the company’s capital. The majority shareholders were willing to do so only if they could buy the minority’s shares. As the A/A was silent on this issue, the majority shareholders decided to alter the A/A to give them the power to buy the minority’s share. The minority shareholders claimed that it was not bona fide.

Held: The alteration was not bona fide and therefore not valid. The majority shareholders were acting in their own interests and not the interests of the company.

As can be seen, the courts apply the bona fide test to check on the majority shareholders. The court’s duty is to strike an appropriate balance between the interests of majority shareholders and the minority shareholders.