The Importance of Checking a Company's Articles - a Valuable Lesson

When two brothers set up a property investment company, it is unlikely they ever thought their company would end up being deadlocked at shareholder level between two branches of the family and a judge declaring that the company had no director. But that is what happened in the case of Rolfe v. Rolfe.

There are important lessons to learn from this:

1. A company's articles of association should always be checked when a director is appointed. In this case, the articles provided that any director appointed by the board (rather than shareholders) had to 'retire by rotation', i.e. have his appointment confirmed by shareholders at the next Annual General Meeting (AGM). After one director died, and even though it meant leaving a company without directors, the judge found that a director appointed by the board had ceased to be a director at the following AGM. The judge made this ruling despite the fact that the parties appeared to think at the time of the director's appointment by board resolution that his appointment was permanent.
 

2. Retirement by rotation provisions may be found in private company articles which incorporate versions of Table A (model articles prescribed by the Government) pre-dating 1 October 2007. The government's later model articles do not contain such retirement provisions. The Rolfe case related to a 1948 version of Table A. It is not clear whether the same decision would have been reached had the company's articles incorporated relevant provisions of some later versions of Table A. Nevertheless, removing retirement rotation provisions from model articles and the removal of the requirement for a company to hold an AGM, is one of a number of ways in which company law has been simplified under the Companies Act 2006. Companies can take advantage of these changes and make running a company simpler: an example might be to amend or adopt new articles of association. For more information see the Change Review pages on the Mishcon de Reya website.

3. Although it was not discussed in the case, it appears that the articles of the company may not have contained adequate provisions to resolve deadlock. At Mishcon de Reya we specialise in carefully drafting articles so that they foresee future changes in shareholders (for example when shares pass to family members in case of death) and dealing with deadlock. Clearly, it is not in anyone's interests to leave a company unable to operate through lack of directors, or to be unable to resolve the situation at shareholder level. Furthermore in terms of the time and expense incurred by leaving the parties to resort to litigation, this case offers a valuable lesson.