Shareholders amend Articles of Association by conduct

In a recent case the High Court held a company’s articles of association were amended via shareholders’ conduct. This case, which concerned the appointment of directors in a company, highlights the potential for informal actions to amend a company’s constitution, write Sophie Alexander and Elizabeth Withers.

Background of the case

In Clarke v Lakha [2024] EWHC 51 (Ch), the claimants were members of a company which was established with the purpose of managing and maintaining the courtyard of a development of 4 office units. The ownership of these office units was tied to the company’s shares; when someone acquired an office unit, they also acquired the corresponding share in the company.

Appointment of directors

The Companies Act 2006, despite setting out how directors can be removed from office, does not have any provisions outlining how a director may be appointed. This responsibility is therefore typically outlined in the company’s articles of association. For companies incorporated after 1 October 2009, model articles of association apply unless explicitly modified by the company. Article 17 of the model articles states that directors may be appointed by either the existing board or through an ordinary resolution by the shareholders.

In this case, the court found that the company’s articles gave the power to manage the company, including appointing directors, to the existing board but did not specify the procedure for appointing directors. Over time, a practice had developed where new office unit owners would appoint a director by notifying the company, a process that all shareholders accepted and followed.

The court applied the Duomatic principle, which provides that informal but unanimous assent by shareholders can have the same effect as a formally passed resolution. The judge found that the shareholders had been aware that no formal board or members’ resolutions had been passed in relation to the previous appointments of directors. In this instance, the consistent practice of director appointments by the shareholders was deemed to have informally amended the articles of association. The shareholders had, through their conduct, effectively changed the articles to allow each shareholder the right to appoint one director.

Key takeaways

The ruling in Clarke v Lakha highlights how shareholder actions can informally change a company’s articles of association, a process that typically requires a formal special resolution. The fact that informal practices can lead to significant changes in a company’s governance has the potential to cause confusion and ambiguity.

Local authority companies should ensure that any modifications to their governance structures are explicitly stated in formal amendments to the articles of association to avoid potential disputes and ensure clear governance. Follow the current articles of association or amend them!

Sophie Alexander is an Associate and Elizabeth Withers is a Trainee Solicitor at Sharpe Pritchard LLP.

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