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Company Law

T3-Formation of Companies

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Introduction
 A company can be formed by complying
with certain basic procedures
 The main documents involved in the
creation of a company are the Memorandum
and the Articles of association
 Established by 2 documents:

 memorandum of association
 articles of association
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Memorandum of Association
 The memorandum of association defines the essential
components of the structure of the company
 It particular it spells out the objects of the company
 One of the reasons why the memorandum is significant
is that it provides information to those who do business
with the company
 The memorandum of a company may only be altered to
the extent and in the manner as provided for by the
Companies Act
 Section 18 of CA 1965 provides that the memorandum of
association must contain certain information
 The matters set out below are some of the minimum
 requirements:

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Cont…
 the name of the company
 the objects of the company
 the amount of company’s share capital
 the manner in which the company’s share
capital is divided into shares of fixed
amount
 the full names, addresses and
occupations of the subscribers
 the names of the first directors
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Articles of Association
 AOA regulates the inner workings of a company
 Governs the rights of members with the
company and vice-versa
 Also regulates relationships between the
members
 Company may draw up their own articles, but
can be altered by passing a special resolution
 Any alteration must be made in the bona fide
interest of the company

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 Establishes a contract between each
member and the company
 Contractually bound to the terms of the
contract
 Members are bound inter se to each other
 Only members may enforce the rights in
the MOA and AOA

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Company Capacity
 Individual shareholders may bring an action if
they think that the company is engaging or
intending an ultra vires act
 Sec 20(1) CA 1965- to disable the company from
entering the ultra vires transaction from avoiding
the transaction on the basis that it is ultra vires
 Sec 20- preserves ultra vires vis-à-vis outsiders
 Sec 20(2)- a member may still raise this right to
restrain a company from ultra vires activities

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Bona Fide
 Majority must not commit fraud on the minority
 Occurs when they fail to act ‘bona fide for the
benefit of the company’
 (North-West Transportation v Beatty)-the
director sold some property to the company. It
was advised that a company could ratify the
transaction with a general resolution even with
the votes of the director in question in his
capacity as shareholder

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Foss v Harbottle
 Two minority shareholders initiated legal
proceedings against the directors of the
company. They claimed that the directors had
misapplied the company's assets. The court
dismissed the claim
 2 rules were established here:
 Proper plaintiff rule: no individual member of the
company is allowed to maintain an action if the
alleged wrong is binding on the company
 Majority rule principle: if the alleged wrong can
be ratified by a simple majority of members in a
general meeting the court will not interfere

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Legal Effects
 The articles bind the company to the members
- (Pender v Lushington)-the
Lushington)- chairman at the
company’s general meeting wrongfully refused to
accept the votes cast by the plaintiff’s nominees
 The articles bind the members to the company
- (Hickman v Kent)-Hickman
Kent)- was a member of the
association but it proposed to expel him. He
brought an action for an injunction to prevent the
expulsion, but the articles provided for disputes
between the association and its members to be
referred to arbitration. The courts stayed the action

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Cont…
 The articles do not bind the company to an outsider
- (Eley v Positive Life Assurance)-Eley was seeking to
assert a right in his capacity as a solicitor of the
company. In order to do so, he should have entered into
a separate contract independent of the constitution
 The articles bind the members to each other

- (Rayfield v Hands)-The articles provided that if a

member of the company who intended to transfer his
shares informed the directors of this, the directors were
bound to buy them. It was held this bound the director
to take the shares. The action was concerned with the
relationship between the plaintiff as a member and the
directors in their capacity as members

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