Introduction to the Constitution of the Company
Introduction:
This note will discuss the meaning of the constitution of a company, its effects, and highlight the types of constitution recognised under the Companies Act, 2019 (Act 992).
Meaning of "Constitution of a Company":
This is a document that regulates the activities, management, powers, and rights, among others, of the company and the persons that constitute it, in addition to and subject to the provisions of the Companies Act, 2019 (Act 992). Under the old Companies Act, 1963 (Act 179), the constitution of a company was referred to as "Regulations," a word that captures the fact that a company’s constitution regulates the company and its activities.
Effects of the Constitution of a Company:
The effects of a company constitution are provided in Section 29 of Act 992 .
1. A Contract Under Seal
Per Black’s Law Dictionary, 9 th ed., a contract under seal is “a formal contract that requires no consideration and has the seal of the signer attached.”
Per Section 29(1), the company constitution:
...has the effect of a contract under seal
(a) between the company and each member or officer; and
(b) between the members or officers themselves by which they agree to observe and perform the functions contained in the constitution as amended from time to time, in so far as they relate to the company, the members or the officers.
In the case of Adehyeman Gardens Ltd. and Another v. Assibey [2003-2005] 1 GLR 391 , a similar provision in Act 179 was interpreted as follows:
Once registered, the regulations have, inter alia, the effect of a contract under seal between:
(i) the company and its members;
(ii) the company and its officers;
(iii) the members and the officers of the company;
(iv) the members of the company inter se; and
(v) the officers of the company inter se.
What does it mean to say the constitution is a contract under seal between the above classes of persons? From our discussion of the meaning of a company constitution above, it was clear that the constitution can confer rights and powers on the company and the persons that constitute it and can also limit rights and powers. By saying that the constitution is a contract under seal, the legislature is emphasising that the provisions of the constitution is like an agreement between the various classes of persons (members, officers, the company), which can be enforced as a contract. For example, in the case of Adehyeman Gardens Ltd. and Another v. Assibey (supra) , the respondent had taken 20% of the shares of Adehyeman Gardens Ltd. and was yet to pay for it. Under the company’s regulations (what is now referred to as the constitution), he was to pay ¢200,000 for his shares. However, the second appellant later informed the respondent that in light of the increase in the company’s value, the respondent was to pay ¢47,410,258.20 for his shares, which represents 20% of the value of the company’s net assets. The Supreme Court of Ghana, in holding this to be wrongful, advanced that:
The respondent, by subscribing to the regulations of the company, contracted to pay, in consideration of his 200,000 shares, an amount of ¢200,000. Since there was no other agreement under which the respondent agreed to pay any other amount in consideration for his said shares, that is the extent of the liability the respondent undertook when he subscribed to the regulations. As has already been pointed out above, this is an agreement under seal and is binding not only as between the respondent and the company, but also between the respondent and other members as well as between him and the officers of the company. The value of the company’s fixed assets is irrelevant to the ascertainment of the consideration payable by the respondent or any of the other subscribers, for that matter, for his shares in the company, since it was fixed in the regulations and there was no evidence that any part of the shares were to be paid otherwise than in cash.
Summarily, the Regulations/Constitution of Adehyeman Gardens Ltd. fixed the amount the respondent was to pay for his 20% shares to ¢200,000. The amount to be paid by the respondent is to be considered an agreement (a contract) between the respondent and the company, and also between the respondent and other members of the company that he will pay that amount. Consequently, he cannot be asked to pay an amount calculated using the company’s net assets, as doing so will amount to a breach of contract for being different from the amount that was earlier agreed upon as the value of the shares.
However, note that the constitution of a company is not a contract between the company or its members and third parties and cannot thus be enforced by such parties. In Eley v. Positive Government Life Assurance Co. Ltd. (1876) 1 Ex D 88 , the Articles of Association of the defendant company provided that Eley was to be the company’s solicitor and could only be removed on grounds of misconduct. At the time the articles were registered, Eley was not a member of the company. Eley was removed as solicitor, and he instituted an action to enforce the Articles of Association. Per Lord Cairns,
No doubt he thought that by inserting it he was making his employment safe as against the company; but his relying on that view of the law does not alter the legal effect of the articles. This article is either a stipulation which would bind the members, or else a mandate to the directors. In either case it is a matter between the directors and shareholders, and not between them and the plaintiff.
Thus, Eley, who was not a member at the time the constitution was being registered and signed, was not a party to the contract and could not enforce the provision in the Article of Association granting him security of employment.
2. Exercise of Power to Appoint or Remove a Director or Officer of the Company:
In Subsection 2 of Section 29, it is provided that:
Where the constitution empowers a person to appoint or remove a director or any other officer of the company, that power is enforceable by that person although that person is not a member or officer of the company.
This provision is emphasised in Section 172(4) of Act 992 , which reads:
The constitution of a company may provide for the appointment of a director or directors by a class of shareholders, debenture holders, creditors, employees or any other person.
For example, a company constitution can give the power to appoint or remove directors to a chief, and that chief can appoint or remove a director even if he is not a member of the company.
3. Enforcement of an Obligation Owed Under the Constitution, it must be done in a Representative Capacity:
Per Section 29(3) of Act 992,
In an action by a member or an officer to enforce an obligation owed under the constitution to that member or officer and any other member or officer, that member or officer shall, if any other member or officer is affected by the alleged breach of the obligation, sue in a representative capacity on behalf of that member or officer and all other members or officers who may be affected other than any who are defendants and the provisions of Section 205 shall apply.
Types of Constitution under the Companies Act, 2019 (Act 992(:
Under Act 992, there are two types of constitution:
The definition of a company in the First Schedule of Act 992 includes both types of constitutions. These types of constitutions are discussed in subsequent notes.
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