In a previous post we explained how the conduct of parties could indicate that a contract existed between them. Another recent case between a shareholder and a company considered whether, despite the lack of a formal written amendment, a company’s articles of association could be amended by the conduct of its shareholders.
A company’s articles of association contained a provision stating that only shareholders of the company were eligible to hold office as a director. The articles also stated that a director appointed by the board (as opposed to by the shareholders) would cease to hold office at the company’s next annual general meeting (unless re-elected). Finally, although the articles specified that the minimum number of directors was one, they also stated that, unless the board decided otherwise, the quorum for any directors’ meeting was two directors.
In fact, over a number of years and in breach of the specific provision in the articles, several people had been appointed as directors even though they were not also shareholders of the company. In addition, the company only had one director which seemed inconsistent with the requirement in the articles for a quorum of two directors at any board meeting.
The dispute arose when the company’s sole shareholder obtained a winding up order against the company. The company, acting by its sole director, filed an appeal in relation to that winding-up order but the shareholder questioned the director’s authority to do this for the following reasons:
- the director was not a shareholder of the company (in breach of the specific requirement in the articles);
- the director had been appointed by a single director, meaning the board meeting that approved his appointment was inquorate (the articles required a quorum of two) and therefore the appointment was invalid; and
- the director had been appointed by the board and therefore his appointment had terminated at the last annual general meeting held six months earlier.
The company, in response, argued that:
- the company’s articles had been amended, by an informal agreement inferred from the conduct of the shareholders, to permit any person (not just a shareholder) to be a director; and
- as the minimum number of directors permitted under the articles was one, the articles should be interpreted as meaning that where there was only one director, the quorum for a board meeting was one.
The court agreed with the company. It said that the shareholders’ conduct, by allowing non-shareholders to be directors on numerous occasions, demonstrated that they intended the articles to be amended to allow those non-shareholders to act as directors, without becoming shareholders of the company.
On the quorum point, the court said that where there was only one director, every time that person decided to transact any business, they also decided that one director should be a quorum.
However, the court also declared that, in accordance with the articles, the sole director had in fact ceased to be a director on the last possible date on which an annual general meeting could have been held following his appointment.
What can we learn?
A company’s articles of association are a contract between the company and its shareholders. Like any contract, therefore, they can be amended by agreement between the relevant parties and that agreement could be an informal agreement, inferred by conduct. As demonstrated in this case, you shouldn’t always rely on what is written on paper and your actions could speak louder than written words!