Memorandum and Articles of Association

Every company has a constitution, a set of founding rules that decide what the company may do and how it is run. In Nigeria that constitution is made of two documents, the memorandum of association and the articles of association. Examiners ask about them in two ways. Some questions test the contents of each document.

Others test their effect: who can enforce them, how they can be changed, and what happens when a company acts outside them. The rules are short, but the exam asks for precise lists, so this topic gives you each list in full.

This topic covers the contents of the memorandum and of the articles, how the two differ, the effect of registration, how each document can be altered, the ultra vires rule, the protection of outsiders, and the documents that are filed with the Corporate Affairs Commission.

The constitution of a company

A company is created by law, and it acts only through people. Its constitution answers two questions. The first is what the company exists to do, which is for the memorandum. The second is how it will be run day to day, which is for the articles. The syllabus describes the memorandum and articles as “the Constitution of the company” and as major documents of incorporation.

Both documents are filed with the Corporate Affairs Commission (CAC) together with the other documents of incorporation, at registration. They then become public documents. Anyone may inspect them at the Commission, which matters later when we look at the rule on outsiders.

The memorandum of association

The memorandum regulates the company’s external relations, that is, its relations with the world outside: creditors, customers and the public. It tells an outsider what kind of company he is dealing with. The syllabus lists its contents as follows.

The objects clause in more detail

The objects clause lists the businesses the company will carry on. A company registered to manufacture and sell furniture has stated its object as furniture. If its directors sign a contract to buy shares in an airline, the contract is outside the objects.

Because the memorandum is the document that fixes the powers of the company, an act outside it is called ultra vires, a Latin phrase meaning “beyond the powers”. The ultra vires rule is explained in its own section below.

The liability clause in more detail

The syllabus describes three kinds of company by liability. In a company limited by shares the memorandum limits each member’s liability to the amount, if any, unpaid on the shares he holds. A member who has fully paid for his shares owes the company nothing more.

In a company limited by guarantee the members’ liability is limited to the amount they have undertaken to contribute if the company is wound up. This kind of company does not distribute profits. It is a not-for-profit company that must apply its profits, if any, to its objects. In an unlimited company the members’ liability has no limit.

The articles of association

The articles regulate the company’s internal relations. They are the internal rules that govern its management. The syllabus says they are a contract of three kinds. They bind the members among themselves. They bind the members on one side and the company on the other. They bind the members, the company and its officers, such as the directors, secretary and internal auditor.

The model articles

A company must file articles with the other documents of incorporation. If it does not, it is bound by default by the model articles prescribed by the Minister of Industry, Trade and Investment. The application for registration must also include a copy of the proposed articles if the company is not relying on the model articles.

A company that files its own articles can adapt them to its own needs, and the articles of a private company can add the restrictions that make it private.

What the articles usually contain

The articles are not limited to a fixed list, but the examiners have accepted these matters in answers:

1. the name of the company;
2. restrictions on the transfer of shares, if any;
3. the classes of shares and how the shares can be transferred;
4. the names, addresses and descriptions of the shareholders;
5. forfeiture of shares;
6. commission and brokerage on issued shares;
7. alteration of share capital;
8. company meetings and their procedure; and
9. the appointment, powers, qualification and remuneration of directors, and other management matters such as shareholding qualification for directors.

The syllabus adds that a private company’s articles may restrict the transfer of its shares and may provide that the company will not sell assets of more than 50% of its total value without the consent of all members.

They may also forbid a member to sell to a non-member without first offering the shares to the other members, and forbid a member or group of members to sell more than 50% of the shares to a non-member unless that buyer offers to buy all the other members’ interests on the same terms.

Memorandum and articles compared

Which document does it belong in?

A favourite exam point is to give you a list of provisions and ask which belong in the articles. A good rule is that anything that tells the outsider what the company is belongs in the memorandum, and anything that tells the insiders how to run it belongs in the articles.

The effect of the registered documents

When the CAC is satisfied with the documents, it registers the memorandum and articles and issues a certificate of incorporation. The certificate is under the hand of the Registrar-General and is prima facie evidence that the Act has been complied with. The registered memorandum and articles then have the effect of a contract under seal between the company, its members and its officers.

In Nigeria, the officers include the directors, the secretary and the auditors.

What this means in practice

• Between the company and each member. The company must act as the articles say, and each member must obey them. A member may sue to stop the company from acting against the articles. In Wood v Odessa Waterworks Co (1889) a shareholder obtained an injunction to stop the company from paying dividends in a way the articles did not allow.
• Between the members themselves. Each member is bound to the others. In Hickman v Kent or Romney Marsh Sheepbreeders’ Association (1915) the articles required disputes between a member and the company to go to arbitration. The member had to follow that rule instead of suing in court.
• Between the company and its officers. Directors, the secretary and the auditors are bound by the provisions that concern them as officers.

The limits: rights as an outsider

The articles bind a person as a member or officer. They do not give him a right in some other capacity. In Eley v Positive Government Security Life Assurance Co (1876) the articles named Eley as the company’s solicitor. He sued the company when it stopped employing him. He lost, because the right was given to him as a solicitor, not as a member.

If he had a separate contract of employment with the company, he could have sued on that contract. The articles themselves could not give him the right.

Another limit: personal rights of a member only

A member can enforce only those rights that are given to him as a member. If the matter is one for the company as a whole, such as a wrong done to the company, the court follows the rule in Foss v Harbottle, which the topic on directors explains. The company is the proper person to sue.

Altering the articles and the memorandum

Altering the articles

A company may alter its articles by a special resolution. A special resolution needs at least 75% of the votes cast by members entitled to vote, at a meeting of which 21 days’ notice of the intention to propose it as a special resolution was given. Holders of at least 95% of the nominal value of the shares, or of the total voting rights, may agree to a shorter notice. A copy is filed with the CAC.

The power to alter is not unlimited:

1. It must be for the benefit of the company as a whole. The alteration must be made in good faith for the benefit of the company as a whole. In Allen v Gold Reefs of West Africa (1900) the articles gave the company a lien on partly paid shares. The company altered them to extend the lien to fully paid shares, which affected a member who owed money to the company. The alteration was held valid because it was for the good of the company, not aimed at one person.
2. It must not conflict with the Act or the memorandum. An alteration that is contrary to Companies and Allied Matters Act (CAMA), or that contradicts the memorandum, has no effect.
3. It may not be a fraud on the minority. In Brown v British Abrasive Wheel Co (1919) the majority tried to change the articles so that they could buy out the minority compulsorily. The alteration was set aside because it benefited the majority, not the company.
4. It cannot increase a member’s liability without his written consent. A member cannot be forced to take more shares or to pay more than he agreed, unless he consents.

Altering the memorandum

The memorandum may be altered only as the Act permits, and the alteration needs a special resolution. Some clauses carry extra safeguards.

The syllabus does not set out every one of these steps in detail, but the special resolution and the matters needing it are in the list that the topic on meetings gives: altering the memorandum or the articles, changing the company’s name, reducing capital, making the liability of directors unlimited, winding up voluntarily and re-registering a private company as public.

The ultra vires rule

An act of a company that is outside the powers given by the objects clause of its memorandum is ultra vires. May 2016 Section A tested this directly: an action of a limited liability company is ultra vires where it is not contained in the object or business clause.

The classic case

In Ashbury Railway Carriage and Iron Co v Riche (1875) the company’s objects were to make and sell railway carriages and wagons and to act as general contractors. The directors agreed to finance the building of a railway in Belgium. The House of Lords held the contract was outside the objects and void.

Even if every member had approved it, no one could ratify it, because the company had no power to make it.

Why the rule matters

• It protects investors. A shareholder knows the purposes for which his money may be used.
• It protects creditors. A creditor knows what kind of business the company may carry on and so what risks his debt faces.

What the courts and the Act now do

The old rule could be harsh on an outsider who had dealt with the company in good faith. The Companies and Allied Matters Act reduces this harshness. A company is not allowed to say that a transaction was beyond its capacity against a person who dealt with it in good faith. A member can still apply to the court to stop a company from doing something outside its objects.

The directors who authorise an act outside the objects can be personally liable to the company for the loss. A company that wants to enter a new field should alter its objects first, by special resolution, rather than rely on the court’s protection.

Ultra vires and irregular acts: not the same thing

Outsiders and the documents: constructive notice and the indoor management rule

The memorandum and articles are public documents. Under the old rule of constructive notice, everyone who dealt with a company was treated as knowing their contents, whether or not he had read them. If a director lacked authority under the articles, the outsider could not complain that he had not known it.

That rule would have been harsh, so the courts developed the indoor management rule, from Royal British Bank v Turquand (1856). An outsider who deals with a company in good faith may assume that its internal procedures have been followed. In that case the directors borrowed money without the resolution that the articles required. The lender was allowed to recover, because he was entitled to assume the resolution had been passed.

The rule does not protect a person who knew about the irregularity, or who had reason to be suspicious. Commentators note that CAMA 2020 reduces the force of constructive notice, but the indoor management rule remains a central protection for outsiders.

Working through the rules

Counting the vote to alter the articles

Suppose a company wants to alter its articles. At a properly called meeting, 1,000 votes are cast. If 760 are in favour and 240 against, the resolution has 76% and passes. If 740 are in favour, it has 74% and fails. The test is 75% of the votes cast, not 75% of all the members or all the shares. Members who do not attend and do not vote are not counted.

Notice of a special resolution

The notice of the meeting must state the intention to propose the resolution as a special resolution, and it must be given at least 21 days beforehand. If only 14 days’ notice is given, the resolution is invalid, unless the holders of at least 95% of the nominal value of the shares, or of the voting rights, agree to the shorter notice.

Documents to be filed with the CAC

The memorandum and articles are two of the documents filed to incorporate a company (sections 35 to 40).

The full list is:

• the memorandum and articles of association, stamped by the Commissioner of Stamp Duties
• the application for registration, stating the proposed name, the registered office and head office, whether liability is limited (by shares or guarantee) and whether the company is private or public
• the name and address of the agent if the application is delivered by an agent
• the particulars of the directors with their consent to serve
• the statement of the proposed registered office
• a copy of the articles if the company is not relying on the model articles
• a statement of the initial issued share capital and initial shareholding
• a statement of guarantee, if the company is limited by guarantee
• a statement of compliance (or a statutory declaration by the legal practitioner)
• any other document the CAC may require

The Commission may refuse to register the documents if they do not comply with CAMA, if any of the businesses or objects is illegal, if a subscriber is incompetent or disqualified under section 20, if another law on registration is not complied with, or if the name conflicts with a registered trade mark or business name.

Worked problems

Problem 1: a solicitor named in the articles

1. The issue. The articles have the effect of a contract between the company, its members and its officers. The question is whether Mr Bako can enforce a right given to him by the articles.
2. The rule. A person can enforce the articles only in his capacity as a member or an officer. A right given to an outsider, such as a solicitor, is not enforceable under the articles (Eley v Positive Government Security Life Assurance Co).
3. The application. Unless Mr Bako is a member suing about a member’s right, he cannot sue on the articles. If he had a separate written contract of retainer, he could sue on that.
4. Advice. His action on the articles will fail. He should look for a separate contract.

Problem 2: the majority wants to buy out the minority

1. The rule. The articles can be altered by a special resolution, but the alteration must be made in good faith for the benefit of the company as a whole.
2. The test. An alteration that mainly benefits the majority at the expense of the minority is not for the benefit of the company as a whole (Brown v British Abrasive Wheel). An alteration aimed at protecting the company itself, as in Allen v Gold Reefs, is valid.
3. The application. The 80% group passed the resolution on its own votes and used the power to remove a minority it did not want. That is likely to be treated as a fraud on the minority.
4. Advice. The shareholder should apply to the court to set aside the alteration.

Problem 3: an act outside the objects

1. The issue. Whether buying aircraft for a charter business is within the objects clause.
2. The rule. An act beyond the objects clause is ultra vires (Ashbury Railway Carriage v Riche).
3. The application. Furniture manufacture does not include air charter. The act is outside the objects. The shareholder may apply to the court to restrain the company, and the directors who authorise it may be liable for any loss. A seller who dealt in good faith may be protected by the Act.
4. Advice. The company should not proceed unless it first alters its objects clause by special resolution, following the procedure for altering the memorandum.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Putting the objects clause in the articles. It is in the memorandum.
• Confusing external and internal relations. The memorandum is external. The articles are internal.
• Saying a company with no articles has no rules. The model articles apply.
• Saying alteration of the articles needs an ordinary resolution. It needs a special resolution.
• Forgetting the limit on the power to alter: the alteration must be for the benefit of the company as a whole.
• Saying that an outsider named in the articles can sue on them. He cannot, as an outsider.
• Saying ultra vires means “against the articles”. It means beyond the objects in the memorandum.
• Listing too few documents for incorporation. The questions ask for eight, so learn the whole list.

Quick revision

• Memorandum: external relations. Name, registered office, objects, nature (private or public), liability, capital statement, subscription clause.
• Articles: internal relations. Meetings, shares, transfers, forfeiture, directors, dividends. Model articles apply if none is filed.
• Name endings: Ltd for private, Plc for public, Ltd/Gte for guarantee, Ultd for unlimited.
• Registered documents have the effect of a contract under seal between the company, members and officers (directors, secretary, auditors).
• Articles are altered by special resolution (75% of votes cast, 21 days’ notice), in good faith for the benefit of the company as a whole.
• Ultra vires means beyond the objects clause. Ashbury is the case.
• Outsiders are protected by the indoor management rule (Turquand).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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