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Do shareholders have to comply with a company's articles of association?

on Thursday, 11 August 2016.

In The Sherlock Holmes International Society Ltd v Aidiniantz the court determined that, in the particular circumstances of the case, the articles of association did not have to be followed.

Background

The sole shareholder (L) of a company applied to have the company wound up. The company's sole director (R) appealed the wind up petition on behalf of the company. L then applied to have this appeal struck out, on the basis that R had not been validly appointed and did not therefore have authority to take action on behalf of the company.

L had two grounds for contending that R had not been validly appointed as a director. First, that the company's articles of association (the Articles) specified that only shareholders could be directors of the company, and R was not a shareholder. Second, that R's purported appointment had been approved by a sole director, which did not meet the quorum of two directors specified by the Articles.

On the morning of the hearing L raised the additional point that, even should R's appointment as director have been valid, the appointment had technically lapsed. The Articles required that directors' appointments be renewed at the company's annual general meeting, which had not been held in the previous year. Therefore R was not a director at the time he appealed the wind up petition and did not have authority to make that appeal on behalf of the company.

The Court's Decision

The judge ruled that R had been validly appointed as director. The company had on four occasions appointed a director who was not a shareholder, and L had up to this point accepted those other individuals as directors. The judge determined that agreement to amend the articles, to allow the appointment of a non-shareholder as a director, could be inferred from this conduct of the shareholders.

The judge further determined that the Articles were to be understood as meaning that where there was only one director the quorum would be one, on the basis of provisions stating that the minimum number of directors would be one and that 'unless otherwise determined, two shall be a quorum'.

However, the judge also ruled that R's appointment as director had lapsed. The Articles specified that a board-appointed director would only hold office until the next AGM. As no AGM had been held in the preceding year, such a director was deemed to leave office on the last possible date the AGM could lawfully have been held, which was 31 December.

Therefore, acknowledging that R had validly been appointed as director, the judge declared that R had ceased to be a director on 31 December 2014, and had not had authority to appeal the wind up petition on behalf of the company.

Best Practice

It is important to pay attention to the nuances of the decisions made in this case. The case does not give shareholders of a company carte blanche to act as they wish and assume that the company's articles of association can be dealt with at a later stage.

The shareholders in this case repeatedly appointed and acknowledged directors contrary to provisions of the Articles requiring those directors to be shareholders, and the judge interpreted this as agreement to amend the Articles.

However, when the company failed to reappoint a director at an AGM as required by the Articles, the judge did not interpret the remaining shareholder's continued acknowledgment of that director as agreement to amend the Articles to remove the AGM reappointment requirement. Where a company wishes to act contrary to its articles of association, best practice remains to explicitly amend them in advance.


For more information, please contact Emma Cameron on 01923 690 038. 

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