Changing your company’s articles – could it be challenged?

The Court of Appeal case, Arbuthott v Bonnyman & others [2015], provided some useful guidance of when changes to a company’s articles of association will be valid.

This case involved the exit of founding members of the business. A shareholders agreement was in place containing a clause that, following a majority agreement for an exit strategy, the shareholders would agree to sell their shares on the same terms as the other shareholders.

The appellant opposed the valuation of the shares, which resulted in the remaining members altering the articles of association (without the Appellant’s consent) to enable the buyout.

Consequently, the appellant issued an unfair prejudice petition under s994 of the Companies Act 2006. The court dismissed the appeal.

Highlighted in the judgment, the following points are worth considering when updating a company’s articles of association:

• Amendments made in good faith and in the interests of the company are likely to be valid;
• Any evidence of improper motive may invalidate changes to the articles;
• A tidying up exercise to enable clarity and consistency across the articles and/or shareholders agreement is likely to be valid;
• If the shareholders consider the alteration to be for the benefit of the company then the changes are more likely to be considered valid;
• If a reasonable person did not consider the alteration to be for the benefit of the company then the alteration is potentially invalid;
• An amendment that adversely affects, and even if it is intended to adversely affect, one or more minority shareholders and benefit others may be deemed valid, if the amendment is made in good faith in the interests of the company;
• An amendment that amounts to oppression of the minority or is otherwise unjust or is outside the scope of the power would probably invalidate those changes.
• The issue that remains unclear is whether or not the introduction of drag-along rights for the first time will be invalid or potentially open a claim for unfair prejudicial conduct. However, whilst not specifically covered by this case the issues highlighted above will provide some guidance when amending articles to ensure that you do not fall foul of s994.

For further advice or information on updating or reviewing your articles of association, please contact the Corporate Commercial team on 01604 876697 for an initial non-obligation chat.