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Amending Articles of Association by Conduct: The Sherlock Holmes International Society Ltd v Aidiniantz

In The Sherlock Holmes International Society Ltd v Aidiniantz [2016] EWHC 1076 (Ch) the court was asked, amongst other things, to determine whether the company’s articles had been amended by an informal agreement inferred from the conduct of the members.  

The question arose in relation to whether the sole director of the company was in fact qualified to be a director as he was not a member of the company as was required by article 33 of the company’s articles of association, which stated that “only persons who are members of the Company shall in any circumstances be eligible to hold office as a Director”.

The only members of the company were, and had always been, Mr Aidiniantz and his mother, Grace. The directors on the date of incorporation of the company were Grace and Mr Aidiniantz’s half-sister, Ms Riley. Since incorporation, the directors had changed as follows:

  • 24 March 2005: Grace resigned her directorship and was replaced by Ms Decoteau.
  • 1 August 2008: Grace was re-appointed as a director and both Ms Decoteau and Ms Riley resigned.
  • 1 April 2011: Mr Riley was appointed and Grace resigned.
  • 22 August 2011: Mr Riley resigned and Grace was re-appointed.
  • 28 October 2012: Ms Decoteau was re-appointed.
  • 17 October 2013: Grace resigned.
  • May 2014: Mr Riley was re-appointed with Ms Decoteau resigning shortly thereafter.

At the time of the court hearing, Mr Riley was the sole director of the Company, but was not a member.

Relevant Law

Section 21 of the Companies Act 2006 states that a company’s articles of association can be amended by a special resolution of the shareholders.

But, where all shareholders who have the right to attend and vote at a general meeting of the company agree to a matter, such agreement shall have the same effect as if such matter had been decided at a general meeting of the company (Duomatic); this includes where the matter agreed to is an amendment to the company’s articles of association (Cane v Jones).

To give effect to the principal above, the agreement of the shareholders must be given in full knowledge of the matter, but such agreement can be express or implied and acquiescence can be equal to consent.  

Court’s Decision

The court considered whether any intentions on the part of Mr Aidiniantz and Grace could be objectively inferred in relation to the director appointments and, if so, what those intentions were.

The court dismissed the notion that Mr Aidiniantz intended to admit as members those appointed directors who were not already members as it had always been acknowledged by all parties to the proceedings that the only members of the company were Mr Aidiniantz and Grace.     

According to the court, the most credible explanation for Mr Aidiniantz and Grace’s conduct around the director appointments was that they intended to do whatever was required to allow the directors to be validly appointed. As it was necessary to amend the articles in order to appoint the directors, Mr Aidiniantz and Grace’s conduct demonstrates their intention, with appropriate or full knowledge of the matter, to amend the articles to allow each of the appointed directors to serve as directors without being members. Therefore, the articles were amended, through the conduct of the members, to allow Ms Decoteau, Ms Riley and Mr Riley to be qualified to serve as directors both at the time of their respective original appointments and for all times in the future.

Comment

The case serves as a comprehensive guide to the law surrounding how amendments can be made to articles of association other than by way of a special resolution of the shareholders.

It is also a message to smaller companies, whose affairs are often less formally documented, that changes, welcome or otherwise, to a company’s formal constitutional documents can occur through conduct and, accordingly, it is important, for the sake of certainty, to ensure that articles of association are followed or, if no longer workable, amended as necessary through a special resolution of the shareholders.  

I think Sherlock Holmes, himself, with his famous expression can best sum up the court’s position on amending articles of association through conduct: “when you have eliminated the impossible, whatever remains, however improbable, must be the truth”.