Can a company’s Articles of Association be amended by conduct?

It is rare when a private company’s articles of association have been changed thirty years ago without the current or even the previous shareholders knowing. This was the outcome of the recent decision handed down by Judge Barber in Re Bramber Road Management Limited. The case is both an illustration of the Duomatic principle and a cautionary note to stakeholders of private companies.

What are articles of association?

A company’s articles of association (articles) regulate the internal affairs of a company. The articles represent the terms of the contract made with the company by its shareholders and are relied upon by its shareholders, its directors, and its creditors as the rules by which it will be owned and managed.

The Companies Act 2006 allows for amendments of a company’s articles upon its shareholders passing a special resolution, which requires approval of at least 75% of them.

The Case

Bramber Road centred on whether one of its directors had been validly appointed without following the procedure in the articles for appointment of directors. The company had been incorporated in 1987, and its articles said that new director appointments should be made by the board. The judge examined the documentary evidence of how the company dealt with its affairs in the period between 1987 and 1990 and she found that in that period each new director was appointed unilaterally by each shareholder, apparently believing that each shareholder had the right to appoint one director regardless of board approval.

Relying on the Duomatic principle, the court found that the articles had been amended not by special resolution, but by the implied agreement of its shareholders evidenced by their conduct thirty years earlier.

The Duomatic principle

The Duomatic principle enables shareholders to make decisions through informal unanimous consent without the need for a general meeting to pass resolutions. It is often used when a business needs to make time-sensitive decisions, allowing the shareholders greater flexibility to do so. The principle has two elements:

1. Consent must be unanimous, and
2. The consent must be informed, meaning all shareholders must have full knowledge of the matter being decided.

Applying the Duomatic principle, the judge in Bramber Road found that informal unanimous consent had been given by a course of conduct by the previous shareholders, not by the current shareholders who were involved in the proceedings.

The decision means that shareholders who acquired shares in the company after 1990 would have been wrong to assume that the articles meant what they said about how directors are appointed. Future shareholders of Bramber Road Management Limited should no longer be fooled. The judge ordered that her statement confirming the changes to the company’s rules should be filed at Companies House for all to see.

If you have concerns or questions about the issues raised in this article, please contact Garry Turkie.