Memorandum Company Law

In the past a Memorandum of Association was seen as vital in providing information relating to the external affairs of a company. The importance of this document diminished over time with legal developments. Its worth will be limited further in consequence of the Companies Act 2006 content.

Discuss the accuracy of the above statement and analyse why the importance of the Memorandum of Association has diminished.

The most comprehensive review of British company law ever to have been made began in March 1998 when the Department for Trade and Industry (DTI) set up an independent Steering Group which carried out what was formally known as the Company Law Review (CLR). The task of the CLR was to develop a simple, modern, efficient and cost effective framework for carrying out business activity in Britain for the twenty-first century. (Palmer, 2006: 48)

One of the most interesting aspects of British company law that the Steering Group had to deal with was the fact that most of the law came from the middle of the nineteenth century and had developed very specifically to meet the demands of companies and business at that time. The law had failed to keep pace with changes in the economy and in society in the intervening years. Even in the past forty years, since 1962 when the Jenkins Committee carried out the last thorough review of company law, the business world had changed beyond recognition. With globalisation, the UK had to remain competitive in all fields and the complexity and overregulation of company law was a significant disadvantage to British Companies. The Government also recognised that the UK competed with other legal jurisdictions to attract companies and incorporations, especially large public corporations. An efficient company law would make the UK a more attractive jurisdiction in which new companies could incorporate. The CLR therefore vowed to bring forward proposals of a modern law for the modern world. (HMSO, 1998: cl.2.1)

This is the context in which the Memorandum of Association will be explored in this paper. The very fact that the Memorandum exists implies that at one point it must have been important. Under section 2 of the Companies Act 1985 the Memorandum was required to contain a statement of the company’s name, the location of its registered office, a description of the company’s objects, and details relating to the capital of the company including whether it was limited by shares or by guarantee, who the guarantors were if any and the amount they were liable for, or details of the various classes of share, their value, and who the subscribers were. There is little doubt that such details are still important and require to be disclosed. However, the Companies Act 2006 significantly curtails what is to be disclosed in a company’s Memorandum of Association. Under section 8 of the 2006 Act the Memorandum must disclose that the subscribers wish to form a company, become its members, and if there is a share capital, that they will be shareholders. There will be a prescribed form which the Memorandum will take, which will be determined by the Government. In effect, the Memorandum of Association is being reduced to a standard form that details the type of company that has been created. It will not contain any of the specific provisions relating to the company in particular (HMSO, 1998).

All the information mentioned above that was required by section 2 of the 1985 Act has been dispensed with, at least on an initial reading of section 8. Before looking at where and how such information will be disclosed in future, it is necessary to look in more detail at the pre-2006 Act Memorandum and the information it contained.

The information traditionally contained in the Memorandum has been described as the fundamental provisions of the company’s constitution (Pennington, 2001: 3). As mentioned above, there were certain items that were required by statute to be mentioned in the Memorandum. However, companies were also free to add other provisions of the company’s constitution to the Memorandum. Anything that might be dealt with in the Articles of Association could just as validly be placed in the Memorandum. Because of the public nature of the Memorandum, adding such extra clauses would have served to announce more publicly that certain provisions of the constitution were vital or central to the company and its identity more strongly than if they had simply been left to the Articles.

Tables B, C, D, E and F of the Companies Act 1985 set out standard form Memoranda which companies should strive to use insofar as it is possible or practical to do so. However, if the members felt that the prescribed Memoranda did not achieve what they desired for their company they were free to alter them as necessary. The case of Gaiman v National Association for Mental Health [1971] Ch 317is authority for the fact that where the contents of a company’s constitutional documents differ radically from the prescribed forms set out in the Act, or even where they conflict with the prescribed forms, they are still valid. This usually applies in relation to the Articles of Association because of the requirement to list certain particulars in the Memorandum. However, it also applies to the objects clause and any additional clauses that may be added to the Memorandum.

Section 2(1) of the 1985 Act required the Memorandum to disclose the name of the company. The name identified whether the company was a public limited company or a private limited company. The choice of name is restricted by certain statutes but apart from these limited restrictions the promoters of the company are free to choose any name. Choice of name is also restricted by the common law tort of passing off, which prevents companies from benefiting from the name or goodwill of another company.

Under the 2006 Act, much of the basic information formerly included in the Memorandum will instead be set out in a simple registration document. Section 9(1) of the Act states the requirement that the Memorandum of Association be accompanied with the registration document when the company is being founded and this document, under section 9(2)(a) will include the proposed name of the company.

Under section 9(2)(c) the registration document will also state whether the liability of the members of the company is to be limited and if so, whether it is to be limited by shares or by guarantee and under section 9(2)(d) it will also disclose whether the company is to be a private or a public company. Traditionally these were also clauses that were set out in the Memorandum of Association. As has been mentioned above, clarity and simplicity were two of the most important objectives of the CLR and it was felt that by stating this information clearly in registration documents was more logical and straightforward than having the information permanently embedded in the constitution of the company. The Memorandum was a document that retained importance throughout the life of the company and anyone who had an interest in the company had to examine carefully its contents. However, much of the information contained in the Memorandum would not have had any relevance or meaning during the course of the company’s life and is in fact only relevant at the moment of its creation. With the introduction of the registration documents the information that is predominantly relevant only at the creation of the company is therefore removed from the constitution of the company. The same is true of the information relating to the registered office of the company. Under section 9(2)(b) this is now to be included in the registration document rather than in the Memorandum.

A similar approach has been adopted with the capital arrangements for the company, which were also traditionally contained within the Memorandum. Section 9(4) sets out that the registration documents must state if the company is going to have a share capital, how much that capital is going to be and who the shareholders are going to be. If the company is going to be limited by guarantee then a statement of the guarantee must be included, and the company’s initial officers are also disclosed. Since the capital arrangements of the company are likely to change over the course of its lifetime it is again unnecessary in most cases to know what the capital arrangements were at the moment of incorporation.

The movement of such important details from the Memorandum also reflects the ease with which such information as the name of the company, it’s type, and it’s capital arrangements can now be obtained from Companies House. Obtaining such information from Companies House has become standard practice and no one would rely on the Memorandum to give an accurate or up to date view of such information. It is also more reliable to obtain such documents from Companies House (HMSO, 1998).

Traditionally, one of the most important and most interesting elements of the Memorandum of Association was the company’s objects clause. This was required under section 3(1) of the Companies Act 1985. The objects clause sets out the scope of activity that the company can engage in and the purposes that the company was set up to achieve. A company and its directors are only authorised to engage in activities that are set out in the objects clause. Any activity that the directors engage in that is outside the scope of the objects clause is ‘ultra vires’. In the past this was seen as an important means for members to keep control of the directors. If directors acted ultra vires then the members could seek an injunction in court that would prevent them from doing so. Transactions entered into which were ultra vires could even be voided by the court even if the third party was unaware of fact. This position was modified by sections 35, 35A and 35B of the Companies Act 1985 which provided that third parties could not be prejudiced by the fact that the directors acted ultra vires.

Another important consequence of acting ultra vires is that it makes directors personally liable to the company for any transactions that are entered into which are ultra vires. While it is important that directors remain within the limits of what they have been employed to do, it was also the case that the directors of most companies are diligent and honest and would not wittingly act ultra vires. However, because of the danger of becoming personally liable for ultra vires acts, the principle created difficult compliance costs as directors sought to have objects clauses drafted so wide as to be completely meaningless and also had to seek legal advice before entering certain transactions to ensure that such transactions would not attach personal liability to the directors (Pennington, 2001: 14).

In fact, an entire legal industry had developed that concentrated solely in avoiding the implications of the ultra vires rule and narrow objects clauses. Many company objects clauses included a power to do all such other things as are incidental or conducive to the attainment of the above objects or any of them. While it was hoped that this would protect the directrors from personal liability, the court in Evans v Brunner, Mond & Co [1921] 1 Ch 359 at 364 found that it did not widen the objects of the company beyond the specific objects that were set out in the objects clause and was therefore ineffectual.

Another paragraph that received attention from the courts is the objects set out in any paragraph of this clause shall not be in any way limited by reference to or inference from the terms of any other paragraph or by the name of the company. The intention of this paragraph was to make each part of the objects clause a separate stand alone power that would act as if it were the dominant or main aim of the company. In the case of Cotman v Brougham [1918] AC 514 the House of Lords found that this could be effective in preventing objects clauses from being read in light of the main aims of the company, however, in Re Introductions Ltd, v National Provincial Bank [1968] 2 All ER 1221 it was found that if the clause itself implied that it was ancillary or dependent on other clauses than it would be read restrictively. The fact that such cases are held as so important shows how vital the question was to companies and how much of an issue the law had become.

For this reason, it was decided that the law should be changed. Firstly, the objects of the company are now regarded as a purely internal matter of interest only to the company’s members and directors and will not affect the company’s relations with third parties. Also, under section 31(1) of the 2006 Act the objects clause is deemed to be unrestricted unless a company’s articles specifically restrict the objects of the company. This saves the formality and effort that usually goes into drafting a limitless objects clause that only serves to lengthen the company’s constitution and make relevant provisions less clear. It also allows for the flexibility of restricting objects clauses in the less common situations when this is necessary.

In conclusion therefore, it can be seen that much of the information that was traditionally contained in the Memorandum is in fact relevant only at the moment of incorporation and the new law therefore rightly requires that it be disclosed in a registration document rather than in a Constitutional document. The law has also removed the need for an objects clause in most cases and if one is necessary, it can be contained in the Articles. Because the ultra vires rule will not void transactions with bona fide third parties the objects clause is no longer relevant to the general public and therefore has rightly been moved to the Articles. The Memorandum has become redundant for almost all purposes and therefore now exists in its abridged form which serves the needs of today’s companies without adding meaningless and unnecessary details to the constitution of the company.
Bibliography

Palmer’s Company Law Annotated Guide to the Companies Act 2006, Thompson, Sweet and Maxwell, London, 2007, page 48

Modern Company Law for a Competitive Economy, HMSO, 1998, cl.2.1 available online at http://www.berr.gov.uk/files/file23283.pdf, accessed 1.11.07

Pennington, Pennington’s Company Law, 8^th ed., Butterworths, London, 2001, page 3

Cases

Evans v Brunner, Mond & Co [1921] 1 Ch 359 at 364

Gaiman v National Association for Mental Health [1971] Ch 317, [1970] 2 All ER 362

Cotman v Brougham [1918] AC 514

Re Introductions Ltd, v National Provincial Bank [1968] 2 All ER 1221

Legislation

Companies Act 1985

Companies Act 2006