20110124120146t3-formation of companies

8/7/2019 20110124120146T3-Formation of Companies

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Company LawCompany Law

T3T3--Formation of CompaniesFormation of Companies



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IntroductionIntroduction

A company can be formed by complying A company can be formed by complyingwith certain basic procedureswith certain basic procedures

The main documents involved in theThe main documents involved in thecreation of a company are the Memorandumcreation of a company are the Memorandumand the Articles of associationand the Articles of association

Established by 2 documents:Established by 2 documents:

memorandum of associationmemorandum of association

articles of associationarticles of association



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Memorandum of AssociationMemorandum of Association

The memorandum of association defines the essentialThe memorandum of association defines the essentialcomponents of the structure of components of the structure of the companythe company

It particular it spells out the objects of the companyIt particular it spells out the objects of the company One of the reasons why the memorandum is significant One of the reasons why the memorandum is significant

is that it provides informationis that it provides information to those who do businessto those who do businesswith the companywith the company The memorandum of a company may only be altered toThe memorandum of a company may only be altered to

the extent and in the manner as provided for by thethe extent and in the manner as provided for by theCompanies Act Companies Act

Section 18 of CA 1965Section 18 of CA 1965 provides that the memorandum of provides that the memorandum of association must association must contain certain informationcontain certain information The matters set out below are some of theThe matters set out below are some of the

minimumminimum requirements:requirements:



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Cont«Cont«

the name of the companythe name of the company

the objects of the companythe objects of the company

the amount of companys share capitalthe amount of companys share capital the manner in which the companysthe manner in which the companys

share capital is divided into shares of share capital is divided into shares of fixed amount fixed amount

the full names, addresses andthe full names, addresses andoccupations of the subscribersoccupations of the subscribers

the names of the first directorsthe names of the first directors



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Articles of Association Articles of Association

AOA regulates the inner workings of a company AOA regulates the inner workings of a company

Governs the rights of members with theGoverns the rights of members with thecompany and vicecompany and vice--versaversa

Also regulates relationships between the Also regulates relationships between themembersmembers

Company may draw up their own articles, but Company may draw up their own articles, but

can be altered by passing a special resolutioncan be altered by passing a special resolution Any alteration must be made in the bona fide Any alteration must be made in the bona fide

interest of the companyinterest of the company



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Cont«Cont«

Establishes a contract between eachEstablishes a contract between eachmember and the companymember and the company

Contractually bound to the terms of theContractually bound to the terms of thecontract contract

Members are bound inter se to each otherMembers are bound inter se to each other

Only members may enforce the rights inOnly members may enforce the rights inthe MOA and AOAthe MOA and AOA



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Company CapacityCompany Capacity

Individual shareholders may bring an action if Individual shareholders may bring an action if they think that the company is engaging orthey think that the company is engaging orintending an ultra vires act intending an ultra vires act

Sec 20(1) CA 1965Sec 20(1) CA 1965-- to disable the company fromto disable the company fromentering the ultra vires transaction from avoidingentering the ultra vires transaction from avoidingthe transaction on the basis that it is ultra viresthe transaction on the basis that it is ultra vires

Sec 20Sec 20-- preserves ultra vires vispreserves ultra vires vis--àà--vis outsidersvis outsiders Sec 20(2)Sec 20(2)-- a member may still raise this right toa member may still raise this right to

restrain a company from ultra vires activitiesrestrain a company from ultra vires activities



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Bona FideBona Fide

Majority must not commit fraud on the minorityMajority must not commit fraud on the minority

Occurs when they fail to act bona fide for theOccurs when they fail to act bona fide for thebenefit of the company benefit of the company

(North(North--West Transportation v Beatty)West Transportation v Beatty)--thethedirector sold some property to the company. It director sold some property to the company. It was advised that a company could ratify thewas advised that a company could ratify the

transaction with a general resolution even withtransaction with a general resolution even withthe votes of the director in question in histhe votes of the director in question in hiscapacity as shareholdercapacity as shareholder



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Foss v HarbottleFoss v Harbottle

Two minority shareholders initiated legalTwo minority shareholders initiated legalproceedings against the directors of theproceedings against the directors of thecompany. They claimed that the directors hadcompany. They claimed that the directors hadmisapplied the company's assets. The court misapplied the company's assets. The court

dismissed the claimdismissed the claim 2 rules were established here:2 rules were established here: Proper plaintiff rule:Proper plaintiff rule: no individual member of theno individual member of the

company is allowed to maintain an action if thecompany is allowed to maintain an action if the

alleged wrong is binding on the companyalleged wrong is binding on the company Majority rule principle:Majority rule principle: if the alleged wrong canif the alleged wrong can

be ratified by a simple majority of members in abe ratified by a simple majority of members in ageneral meeting the court will not interferegeneral meeting the court will not interfere



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Legal Eff ectsLegal Eff ects

The articles bind the company to the membersThe articles bind the company to the members

-- (Pender v Lushington)(Pender v Lushington)--the chairman at thecompanys general meeting wrongfully refused

to accept the votes cast by the plaintiffsnominees

The articles bind the members to the company

-- (Hickman v Kent)(Hickman v Kent)--Hickman was a member of

the association but it proposed to expel him.He brought an action for an injunction toprevent the expulsion, but the articles providedfor disputes between the association and itsmembers to be referred to arbitration. Thecourts stayed the action



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Cont«Cont«

The articles do not bind the company to an outsiderThe articles do not bind the company to an outsider-- ((Eley v Positive Life Assurance)Eley v Positive Life Assurance)--Eley was seeking toEley was seeking to

assert a right in his capacity as a solicitor of theassert a right in his capacity as a solicitor of thecompany. In order to do so, he should have entered intocompany. In order to do so, he should have entered into

a separate contract independent of the constitutiona separate contract independent of the constitution The articles bind the members to each otherThe articles bind the members to each other-- (Rayfield v Hands)(Rayfield v Hands)--The articles provided that if aThe articles provided that if a

member of the company who intended to transfer hismember of the company who intended to transfer hisshares informed the directors of this, the directors wereshares informed the directors of this, the directors werebound to buy them. It was held this bound the directorbound to buy them. It was held this bound the directorto take the shares. The action was concerned with theto take the shares. The action was concerned with therelationship between the plaintiff as a member and therelationship between the plaintiff as a member and thedirectors in their capacity as membersdirectors in their capacity as members

20110124120146t3-formation of companies

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