Introduction
The concept of a company constitution, primarily embodied in the articles of association, is fundamental to corporate governance in the UK. Often described as an ‘odd form of contract’, the company constitution occupies a peculiar position in legal theory, blending elements of contract law with statutory obligations. This description stems from its dual nature: it functions as a binding agreement between the company and its members, yet it is subject to unique statutory rules that distinguish it from traditional contracts. This essay critically analyses the characterisation of company constitutions as an odd form of contract, focusing on the provisions of the Companies Act 2006, which provides the legal framework for corporate entities in the UK. The discussion will explore the contractual nature of the constitution, the statutory modifications that render it distinct, and the practical implications of these characteristics for corporate law. By examining these elements, the essay aims to evaluate whether this description is justified and to highlight the complexities inherent in the legal status of company constitutions.
The Contractual Nature of Company Constitutions
At its core, a company constitution, specifically the articles of association, is considered a contract under Section 33 of the Companies Act 2006. This provision states that the company’s constitution binds the company and its members as if it were a contract signed by each party (Companies Act 2006, s.33). This statutory recognition establishes a contractual relationship between the company and its members, as well as among the members themselves, creating mutual rights and obligations. For instance, members are bound to adhere to the rules set out in the articles, such as those governing share transfers or dividend rights, much like parties to a conventional contract are bound by agreed terms.
However, describing the constitution as a contract aligns with traditional contract law only to a limited extent. As Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881 illustrates, the courts have historically upheld the contractual nature of the articles, enforcing them as binding agreements where disputes arise over rights or obligations. Yet, unlike standard contracts, the constitution is not a negotiated agreement between parties. Typically, members—especially minority shareholders—rarely have a direct role in drafting or amending the articles, which are often adopted as model articles provided under the Companies Act 2006 (Hannigan, 2018). This lack of mutual negotiation challenges the conventional understanding of a contract as a product of consensus, raising questions about whether the term ‘contract’ is entirely appropriate.
Statutory Modifications and the ‘Odd’ Distinction
The description of company constitutions as an ‘odd form of contract’ becomes more evident when considering the statutory modifications imposed by the Companies Act 2006. Unlike traditional contracts, which are primarily governed by common law principles of offer, acceptance, and consideration, company constitutions are subject to specific statutory rules that limit their flexibility and alter their enforceability. For example, under Section 21 of the Companies Act 2006, the articles can be amended by a special resolution requiring a 75% majority of members (Companies Act 2006, s.21). This provision allows the majority to alter the terms of the constitution, potentially to the detriment of minority shareholders, without their consent—a feature absent from standard contractual agreements where unilateral changes are generally impermissible.
Furthermore, the enforceability of the constitution as a contract is restricted. While Section 33 establishes a contractual bond, the courts have clarified that not all provisions in the articles are directly enforceable by members. In the landmark case of Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88, it was held that the articles do not confer enforceable rights upon members in their capacity as outsiders (e.g., as directors or employees), even if the articles appear to grant such rights. This limitation deviates from conventional contract law, where agreed terms are typically enforceable by all parties, and underscores the peculiar, or ‘odd’, nature of the constitution as a contract.
Another statutory anomaly lies in the public nature of the constitution. Under Section 17 of the Companies Act 2006, the constitution must be registered with Companies House, making it a public document accessible to third parties (Companies Act 2006, s.17). This transparency contrasts sharply with the private nature of most contracts, further highlighting the unique status of the company constitution within legal theory (Sealy and Worthington, 2013). These statutory interventions collectively distinguish the constitution from a standard contract, lending credence to the notion that it is an oddity in contractual terms.
Practical Implications and Critical Perspectives
The characterisation of company constitutions as an odd form of contract carries significant practical implications for corporate governance and shareholder relations. On one hand, the contractual framework under Section 33 provides a mechanism for enforcing rights and resolving disputes, offering a degree of certainty and stability within the corporate structure. For example, shareholders can rely on the articles to challenge decisions that contravene agreed governance rules, as seen in cases like Pender v Lushington (1877) 6 Ch D 70, where voting rights enshrined in the articles were upheld by the court.
On the other hand, the statutory deviations from traditional contract law can create uncertainty and inequity, particularly for minority shareholders. The ability of the majority to amend the articles under Section 21, coupled with limitations on enforceability, may undermine the reliability of the constitution as a protective contract for all members. Indeed, some scholars argue that these features render the constitution more akin to a statutory instrument than a true contract, as its terms are heavily dictated by legislative oversight rather than mutual agreement (Davies and Worthington, 2016). This perspective suggests that the ‘odd’ description is not merely semantic but reflects a deeper tension between contractual theory and corporate regulation.
Moreover, the public nature of the constitution introduces additional complexity. While transparency aids accountability, it also means that third parties, such as potential investors, may rely on the articles in their dealings with the company. This external relevance further distances the constitution from the private, bilateral nature of a typical contract, reinforcing its anomalous status (Hannigan, 2018). Thus, while the contractual label provides a useful framework, its application to company constitutions is arguably incomplete without acknowledging these statutory peculiarities.
Conclusion
In conclusion, the description of company constitutions as an ‘odd form of contract’ is a fitting characterisation when viewed through the lens of the Companies Act 2006. While Section 33 establishes a contractual relationship between the company and its members, statutory provisions—such as those governing amendments, enforceability, and public accessibility—introduce significant deviations from traditional contract law. These distinctions, supported by case law and academic commentary, highlight the unique and complex nature of the company constitution, positioning it as a hybrid of contractual and statutory elements. The practical implications of this oddity are evident in the balance it seeks to strike between governance stability and flexibility, though not without challenges, particularly for minority stakeholders. Ultimately, this analysis underscores the limitations of applying a purely contractual framework to company constitutions and suggests a need for ongoing critical evaluation of their legal status within corporate law. Understanding these nuances remains essential for students and practitioners navigating the intersections of law and economics in corporate governance.
References
- Davies, P.L. and Worthington, S. (2016) Gower and Davies’ Principles of Modern Company Law. 10th edn. London: Sweet & Maxwell.
- Hannigan, B. (2018) Company Law. 5th edn. Oxford: Oxford University Press.
- Sealy, L. and Worthington, S. (2013) Sealy & Worthington’s Cases and Materials in Company Law. 10th edn. Oxford: Oxford University Press.
- UK Government (2006) Companies Act 2006. London: The Stationery Office.
