Corporate Law and

Corporate Governance
Lecture 2
Agenda
• Salomon v Salomon
• Adam v Cape Industries
• Handout on separate legal personality and piercing the veil
• How a company deals with outsiders
• Constitution of the Company
• Memorandum of Association
• Object Clause
• Doctrine of ultra vires
• Special Resolution
• Articles of Association
• Memorandum & Articles as contract
Relevant readings
• Chapter 8, Dignam
• Chapter 12, Dignam
• Company is created by legal fiction – does not actually exist.

• It deals with outsiders through its employees, directors or agents.

Salomon v Salomon

• Mr Salomon carried on a business as a leather merchant

• In 1892 he formed the company Salomon & Co Ltd
• Mr Salomon, his wife and five children holding one share each in the
company
• Members of the family only held shares because law required so
• Mr Salomon was also the managing director
• The newly incorporated company then purchases the original shoe
trading business of Mr Salomon
• Mr Salomon valued his shoe trading business at 39,000 pounds
• The price was paid in 10,000 worth of debentures (creating a charge over all
the company’s assets)
• 20,000 in 1 pound shares
• 9,000 pounds cast
• Mr Salomon then paid off all the creditors of the sole trading business in full
• Mr Salomon became the majority shareholder in the business holding
20,001 shares while the remaining six shares were held by his family
• Additionally, because of the debenture he was a secured credit holder as
well
Court of Appeal’s opinion
• The statutes were intended to allow seven or more persons, bona fide
associated for the purpose of trade, to limit their liability under
certain conditions and to be come a corporation. But they were not
intended to legalize a pretended association for the purpose of
enabling an individual to carry on his own business with limited
liability in the name of a joint stock company.
House of Lords opinion
• The company is at law a different person altogether from the
subscribers….and though it may be that after incorporation the
business is precisely the same as it was before and the same persons
are managers, and the same hands receive the profits, the company is
not in law the agent of the subscribers or trustee for them. Nor are
the subscribers, as members liable, in shy shape of form, except to
the extent and in the manner provided by the Act.
How does it deal with the outside
world
• Articles delegate the power to its Board who may exercise the power
itself or sub delegate it to employees or agents.

• The employees or agents then contract with outside world on the

basis of delegated power.
So when a doubt on transaction
arises; two questions crop up
• Was the act within the power of the company?
• If no, transaction was void and unenforceable.
• If yes, we move to another question.
• If the act was within the powers of company, was the individual
authorized to carry out business on behalf of the company?
• If yes, then transaction valid, if no, voidable on the instance of the
company.
Constitution of the Company
• Both Articles & Memorandum form the constitution.

• Liberty to draft the initial constitution but constraints imposed on its

subsequent alteration.

• Provides for distribution of profit, risk & control within the company.
Object Clause
• In the nineteenth century it was impossible to change a company’s
objects clause.
• In 1989: the objects clause could only be changed in very limited
circumstances.
• Second, the doctrine of constructive notice could combine with the
ultra vires rule to leave outsiders with unenforceable contracts.
Doctrine of ultra vires
• Ashbury Carriage Company v Riche (1875) LR 7 HL 653: If a company
incorporated by, or under, statute acted beyond the scope of the
objects stated in the statute or in its memorandum of association
such acts were void as beyond the company’s capacity even if ratified
by all the members.

• A-G v Great Eastern (1880): The company could enter into transaction
that were incidental or consequential to its objects.
Object Clause: expanding universe
• 1960s: to carry on any trade or business whatsoever which can, in the
opinion of the Board, be advantageously carried on by the company in
connection or as ancillary to any of the above businesses or general
business of the company.
• 1980s: to carry out business as bankers, capitalists, financiers,
concessionaries and merchants…and generally to undertake or carry
out all such obligations and transactions as an individual capitalist
may lawfully undertake and carry out.
Unrestricted Objects
• In the UK, unless company that wishes to restrict its objects, s.31of CA
Act, 2006 provides for unrestricted objects.

• In fact now companies in the UK don’t need to have the statement of

objective in the memorandum of association.
Memorandum
• Relationship with the outside world.
• Name
• Purposes & objects of the company.
• 2(40) "memorandum" means the memorandum of association of a
company as originally framed or as altered from time to time;
Six Clauses
• Name Clause.
• Registered Office Clause.
• Limited Liability Clause.
• Capital Clause.
• Association Clause.
• Object Clause
Objects & Powers in the
Memorandum
• Relationship with the world outside.
• Purpose and the kind of activities a company can engage in.
• The clause limits the scope of its businesses.
• And if the company exceeds the scope, it is acting ulta vires
• They are drafted as loosely and broadly as possible.
• Power is legal ability by which a person may create, change or
extinguish legal relations
• It flows from the objects.
• Company incorporated to produce motor vehicles (Object); then it
follows it should have the power to hold land, build factories, hire
labor, have a bank account, institute litigation etc.
Alteration in the Memorandum
32. Alteration of memorandum.—(1) Subject to the provisions of this Act, a company
may by special resolution alter the provisions of its memorandum so as to—
(a) change the place of its registered office from.—
(i) one Province to another Province or Islamabad Capital Territory and vice versa; or
(ii) one Province or Islamabad Capital Territory to a part of Pakistan not forming part
of a Province and vice versa; or
(b) change its principal line of business; or
(c) adopt any business activity or any change therein which is subject to licence,
registration, permission or approval under any law.
(2) The alteration shall not take effect until and except in so far as it is confirmed by
the Commission on petition:
• To change the object clause or place of registered office, a special
resolution is needed.

• A special resolution can be passed to change the liability clause to

reflect unlimited liability of any of the director(s) with consent of
existing directors and if authorized by its articles.
special resolution
• It means a resolution which has been passed by a majority of not less
than three-fourths of such members of the company entitled to vote
as are present in person or by proxy or vote through postal ballot at a
general meeting of which not less than twenty-one days‘ notice
specifying the intention to propose the resolution as a special
resolution has been duly given:
BREAK
Articles of Association
• Articles are set of rules governing the running of the company.
• Draft your own articles or adopt the ones provided in the Ordinance.
• In essence they provide the running of the company on two tiers:
• General meeting of shareholders
• Directors
• Most important aspect is allocation of power to directors and
shareholders.
• Howard Smith Ltd v Ampol petroleum Ltd (1974)
• “…. it is established that directors, within their management powers,
may take decisions against the wishes of the majority shareholders and
indeed that the majority of shareholders cannot control them in
exercise of these powers while they remain in officer.”
38. Alteration of articles.
• (1) Subject to the provisions of this Act and to the conditions
contained in its memorandum, a company may, by special resolution,
alter its articles and any alteration so made shall be as valid as if
originally contained in the articles and be subject in like manner to
alteration by special resolution:
Fetters on alteration
• Alteration must not be in contravention to the provisions of
Ordinance.
• Alteration must not be in contravention to the Memorandum of
Association.
• Alteration must not legalize something which is illegal.
• Alteration must not operate against the substantive rights of
shareholders.
• Alteration must not increase the liability of existing shareholders
• Alteration must not be made to breach the contract with outsider
Brown v British Abrasive Wheel Co.
Ltd.
• Company needed additional funds and the majority of 98 % was ready
to provide them.
• On condition that 2% of the minority shareholders sell their shares to
them.
• Majority passed a special resolution that allowed them to compel the
minority into selling their shares to the majority.
• Minority went to the Court
• Court ruled in favor of minority as the alteration was aimed against
the substantive rights of the minority.
Memorandum & Articles binding on
members vis-à-vis the Company
• Company can sue the members for enforcement of the provisions.
• And members be restrained from committing the breach
Memorandum & Articles binding on
company vis-à-vis the members
• These documents bind the company just like they bind the members.
• A member can also sue the company for breach and may restrain it
for committing any further breach.
• Pender v Lushington (1877)
• Where articles confer a right of vote on shareholder; Chairman in the
meeting cannot deprive him of it.
Memorandum & Articles binding on
members inter se
• The members inter se are also bound by the documents.
• Rayfield v Hands & Others (1958)
• Articles provided, a member wishing to transfer his shares will inform
the Directors and the Directors will take the shares equally at fair
value.
• A did so, but Directors refused to take the share.
• Court found against the directors.
• 17. Effect of memorandum and articles.—(1) The memorandum and
articles shall, when registered, bind the company and the members
thereof to the same extent as if they respectively had been signed by
each member and contained a covenant on the part of each member,
his heirs and legal representatives, to observe and be bound by all the
provisions of the memorandum and of the articles, subject to the
provisions of this Act
Memorandum & Articles not binding
on outsiders
• There is no contract with the outsiders.
• A stranger, not privy to the contract, cannot bring a suit to enforce
rights/obligations with regards the contract.
• Brown v La Trinidad (1887)
• A was appointed for a fixed term as director provided in the articles.
• His term expired.
• On expiry he brought a suit against the company restraining them to
remove him.
• The court ruled in favor of the company.
CHEERS !!!