Corporate Law Update: 1 - 7 June 2024

This week:

Shareholders had varied articles of association by conduct

The High Court has held that the shareholders of a private company had amended the company’s articles of association by virtue of their conduct over the years.

Clarke v Lakha [2024] EWHC 51 (Ch) concerned a company that was established to own, manage and maintain a courtyard lying between four office units.

The four shareholders of the company were the owners of the four office units from time to time. Whenever a person acquired title to an office unit, the company’s articles required the corresponding share in the company to be transferred to that person.

The company’s articles of association did not set out how directors of the company were to be appointed. A dispute arose as to who the company’s directors were and how (and whether) they had been appointed.

How are company directors appointed?

UK companies are, by and large, regulated by the Companies Act 2006. This statute sets out (among other things) how directors can be removed from office and the details of directors that need to be filed at Companies House.

Perhaps surprisingly, however, the Companies Act 2006 does not set out how to appoint a director of a company. Instead, the method of appointing directors to a company’s board will normally be set out in the company’s articles of association (its principal constitutional document).

For companies incorporated on or after 1 October 2009, the relevant model articles of association will apply except to the extent the company specifically excludes or modifies them. There are separate forms of model articles for private companies limited by shares, private companies limited by guarantee and public companies.

For companies incorporated before 1 October 2009, the regulations in the applicable “table” apply. For private companies, this is Table A 1985 or, for older companies, Table A 1948. (Older versions exist but are now rarely seen.) However, many older companies have since transitioned to articles of association based on the applicable model articles.

Article 17 of the model articles for private companies limited by shares states that a new director can be appointed by either a decision of the existing directors or an ordinary resolution of the shareholders.

The position under Table A 1985 is more complex but, broadly speaking, regulations 78 and 79 of Table A 1985 also permit a new director to be appointed by a decision of the existing directors or an ordinary resolution of the shareholders.

In exceptional cases, a company’s articles of association may not contain any specific provisions for appointing directors. In this case, it will be a case of reading the company’s articles to decide whether that power has been delegated to the company’s board. If it has not, it will remain with the company’s shareholders, who will be able to appoint directors by ordinary resolution.

The court found that, under the company’s constitution, the power to appoint directors lay with the company’s existing board. This was because the company’s articles of association stated:

“The Directors shall manage the business of the Company, and all the powers of the Company which are not by the Statutes, these Regulations or the Regulations of Table A which apply to the Company required to be exercised by the Company in general meeting shall be exercised by the Directors.”

In the judge’s view, this meant that the company’s shareholders had handed the power to appoint further directors over to the company’s board of directors.

However, the judge also found that, over time, by virtue of their conduct, the company’s shareholders had informally amended the company’s articles of association under the Duomatic principle.

That principle treats a resolution as effectively passed if all of the company’s members informally assent to it.

Here, a practice had developed that, as and when a person acquired title to one of the office units (and, hence, a share in the company), they sent the company a notice appointing a director of the board. The shareholders of the company at the relevant times acquiesced in this and duly reported those persons as directors to Companies House.

The court found that, by virtue of this course of conduct, the shareholders had amended the company’s articles of association (which would normally require a special resolution) under the Duomatic principle to the effect that each shareholder had the right, by notice to the company, to appoint one director.

The decision is in many ways similar to that in a previous case – The Sherlock Holmes International Society Ltd v Aidiniantz [2016] EWHC 1076 (Ch) – in which the High Court found that, by their conduct, the shareholders of a company had implicitly amended the company’s articles of association to allow persons who were not members of the company to be appointed as members.

Although the decisions in both cases concern very particular sets of circumstances, they do illustrate a general principle: if all the members of a company start to act in a way that is contrary to the company’s articles, there is a risk they will be deemed to have amended those articles.

Because that amendment will not be formally documented, this can lead to confusion and a lack of clarity over the legal position. It is, therefore, where possible, always worth documenting decisions carefully and, if the members of a company wish to change the company’s governance arrangements, to formally amend the articles to that effect.

Access the High Court’s decision in Clarke v Lakha [2024] EWHC 51 (Ch) that a company’s articles were amended by conduct

Contract party was entitled to refuse payment in alternative currency and invoke force majeure

The Supreme Court has held that a party to a contract was entitled to invoke a force majeure clause on the basis that payments could not be made in the contract currency.

RTI Ltd v MUR Shipping BV [2024] UKSC 18 concerned a contract under which a charterer would pay a shipowner for using a ship to transport ore. The contract required payment in US dollars (USD).

As a result of the imposition of sanctions, payment in US dollars became either impossible or, at least, significantly more difficult. The shipowner therefore attempted to invoke a force majeure clause to excuse it from performing the contract.

The contract stated that a force majeure, for these purposes, was any of certain specified events that was beyond the parties’ control and could not be “overcome” by reasonable endeavours.

The charterer offered to pay the shipowner in euros instead and to reimburse the shipowner for any fees and exchange rate losses involved in converting from euros into USD (ensuring that the shipowner received an amount in euros equivalent to that which it would have received in USD).

The Supreme Court unanimously found that the shipowner was not obliged to accept payment in any currency other than USD.

To invoke the force majeure, the shipowner needed to be able to demonstrate that the failure to pay in USD could not be overcome by reasonable measures. That could have involved (for example) obtaining a licence from the relevant authorities.

However, it did not extend to payment in a different currency, as this was something different from what the contract required. The object of taking reasonable endeavours was to maintain contractual performance, not to substitute a different performance.

Read more about the Supreme Court’s decision that a force majeure was not overcome by payment in a different currency in our colleagues’ in-depth piece

Access the Supreme Court’s decision in RTI Ltd v MUR Shipping BV [2024] UKSC 18 that a force majeure was not overcome by payment in a different currency

Court interprets W&I policy as excluding coverage for breaches of anti-bribery warranties

The Court of Appeal has held that there was no mistake in the drafting of a warranty and indemnity (W&I) insurance policy and that the policy did not cover breaches of an anti-bribery warranty.

Project Angel Bidco Ltd v Axis Managing Agency Ltd and ors [2024] EWCA Civ 446 concerned the acquisition of shares in an engineering and construction company.

As is typical, the share sale and purchase agreement (SPA) contained numerous warranties relating to the state of the target business, including a warranty relating to anti-bribery and corruption (ABC).

In connection with the acquisition, the buyer took out buy-side W&I insurance to protect it against any potential breaches of warranty by the sellers.

Again, as is typical, the W&I policy contained a schedule listing out the warranties in the SPA and noting, against each one, whether breach of that warranty was covered, partially covered or not covered by the insurance policy. The schedule noted that the ABC warranty was “covered”.

However, the policy also contained an exclusion of loss arising out of any “ABC Liability”, which was defined as “any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”.

The buyer claimed that this contained a drafting error (see our in-depth piece on the case). It claimed that the exclusion of loss for ABC liabilities was squarely at odds with the idea that the ABC warranty was within the scope of coverage.

The Court of Appeal disagreed. It found there had been no obvious drafting error in the policy or mistake by both the buyer and the insurer.

Indeed, the court held that the exclusion of loss could only apply to warranties that were within the scope of coverage in the first place, so it made sense for the ABC warranty to be marked as “covered”.

Read more about the Court of Appeal’s decision that a W&I policy did not extend to breaches of anti-bribery warranties in this in-depth piece by our colleagues

Access the Court of Appeal’s decision in Project Angel Bidco v Axis Managing Agency Ltd that a W&I policy did not extend to breaches of anti-bribery warranties