Contracting parties embark upon joint ventures and enter into shareholders agreements in many instances without fully understanding the consequences of their contractual arrangements. Part of the problem is that the interplay between a company's Memorandum and Articles of Association on the one hand and a shareholders agreement on the other is sometimes a bit unclear. In some jurisdictions this interplay is more or less cumbersome than in others. The purpose of this article is to examine that dynamic in the context of a British Virgin Islands ("BVI") company and to shed some light on what contracting parties need to do and why they need to do it, when using a BVI vehicle and a non-BVI law shareholders agreement for a joint venture.

Memorandum and Articles ("M&A")

The starting point is the company's constitution. It is a statutory contract which according to BVI law is binding between (a) the company and each member and (b) between each member.

A BVI company is formed pursuant to an application, made to the Registrar of Corporate Affairs in the BVI ("Registrar"), for the incorporation of a company and various documents are required to be filed for that purpose including (a) a Memorandum of Association and (b) Articles of Association. If the Registrar is satisfied that the requirements of the BVI Business Companies Act, 2004 (as amended) (the "Act") have been met, the Registrar must upon receipt of the documents necessary to incorporate a company, register the documents, allot a unique number and issue a certificate of incorporation. So it is clear that a BVI company comes into existence by virtue of the Act and compliance with the requisite provisions.

In order to amend the M&A, the members (and in some instances the directors) must pass a resolution in relation to those provisions sought to be amended. The amendment to the M&A has effect from the date the notice of amendment or the date the restated M&A is registered by the Registrar; not before.

To sum up, the BVI company is a creature of statute, its M&A is a statutory contract and in order to amend that statutory contract, there is a specific statutorily mandated procedure.

The members of a company, and at times the company, may also enter into a shareholders agreement and the question that often arises is whether the shareholders agreement prevails over and therefore effectively amends the Memorandum and Articles of Association. In the English case of Scott v Frank F. Scott (London) Limited1, the court were in complete agreement with the first instance decision that "the court has no jurisdiction to rectify Articles of association of a company although they do not accord with what is proved to have been the concurrent intention of all signatories therein at the moment of signature." In referring to rectification of documents, including deeds the court said that "This cannot be the case with regard to the memorandum and articles of a company for it is the document in its actual form that is delivered to the Registrar and retained and registered by him and it is that form and no other that constitutes the charter of the company and becomes binding on it and its members." The judge went further when he said that "It seems plain that this section does not admit of any rectification of the memorandum and articles apart from alterations under the express powers of the [UK] Act, for the only contract is a statutory contract in which the company is included by reference to the registered documents and to no other documents." 

How then does one reconcile the BVI statutory position with other English decisions for example Re Duomatic2 and Cane v Jones3? Does English law differ from BVI law such that these decisions are not wholly applicable?

Shareholders Agreements

The shareholders agreement is like any other agreement and is subject to the ordinary rules of contract. Unlike the M&A it is only constrained by company law to a limited extent.

Like a resolution, a shareholders agreement may reflect the will of some or all shareholders. In Duomatic it was held that where it could be shown that all the shareholders with the right to attend and vote at a general meeting had assented to some matter which a general meeting of the company could carry into effect the assent was as binding as a resolution in general meeting. Similarly, in Cane v Jones where a shareholders agreement had been entered into, it was held that it was a basic principle of company law that all corporators of a company acting together could do anything which was intra vires the company. Section 10(1) of the Companies Act 1948 (UK) (same as section 10(1) of the 1929 Companies Act (UK) which applied to the Scott case) did not undermine that principle but merely laid down the procedure whereby some of the shareholders of a company could validly alter the Articles. Since the 1967 shareholders agreement in Cane v Jones, though not drafted as a resolution and though not signed by the signatories in each other's presence, represented a meeting of all the shareholders minds and since a meeting of the shareholders minds was the essence of a general meeting and the passing of a resolution, the 1967 agreement was effective to override the Articles in regard to the casting vote of the chairman and accordingly restricted the use of the chairman's vote; although it should be noted that Cane v Jones was a family dispute decided specifically on the facts. 

Thus Cane v Jones expanded the Duomatic principle in relation to whether the act of all of the shareholders is sufficient to effectively amend the M&A and it is clear therefore that as a matter of English law the decisions in those cases undermine to some degree the decision in Scott v Frank F Scott such that, before the enactment of the new Companies Act 2006 (UK), the M&A as available at Companies House in the UK may not have accurately reflected the full extent of the M&A.

BVI lawyers have been somewhat consistent in rejecting the English formulation but not always so. Some believe that the Duomatic type English law principles can be applied fully. This is a view which this firm does not share. 

The reason that BVI law differs from English law in this area is a very fundamental one. Both Duomatic and Cane v Jones are based on an interpretation of the Companies Act 1948 (UK). Section 143 of that legislation (like Section 118 of the Companies Act 1929 (UK) which was referred to in the Scott case) requires special resolutions to be forwarded to the Registrar within 15 days after the passing or making thereof. Save in a few specific instances, the special resolution is however effective when it is passed. It does not have to be filed in order to be effective. The consequence of a failure to file the special resolution is a penalty payable by the company and every officer (and under new legislation a criminal offence for the directors involved4. It is clear therefore that the court in each decision regarded the unanimous agreement as not unlike a special resolution and allowed substance to win out over form. The Companies Act 1985 (UK)5 was amended after Cane v Jones to allow for the filing of "agreements" pursuant to the very same section that requires special resolutions to be forwarded to the Registrar. I regard this as recognition that such actions by the members whether in the guise of a shareholders agreement or a resolution, amount to the same thing the only difference being a matter of form.

By contrast, as mentioned above, BVI law requires the amending resolution to be filed in order for the amendment to be effective. Unlike English law the members may execute a shareholders agreement or pass a resolution and if it is never filed with the Registrar in the BVI the amendment is never effected. As explained above, under English law the amendment occurs at the time of the passing of the resolution.

So where does one go with these decisions which clearly are at odds with each other? My own view is that the Scott case is now wrong as a matter of English law because it appears to have been expanded by the principles from the Duomatic line of cases and which must be correct. Scott appears to ignore the fact that section 10 of the 1929 Companies Act (UK) permits amendments to a company's constitution by special resolution and that such resolutions are, pursuant to section 118 of that legislation, merely required to be forwarded to the Registrar of Companies within fifteen days after being passed. It is clear that such a resolution was, under the 1929 and the 1948 Companies Acts (UK), effective when passed and accordingly the amendment is effective at that time. If Scott had been decided on the basis of a BVI statute I would say that it would be quite accurate. On the other hand, the Duomatic cases whilst taking the correct line are inconsistent with the BVI position as the underlying BVI legislation precludes the same.

What It All Means

For parties to a shareholders agreement where a BVI company is the joint venture vehicle, it means that there are effectively two contracts (the M&A on the one hand and the shareholders agreement on the other) running parallel to each other and the task is to ensure that they do not conflict.

One obvious reason why they should not conflict is that it leaves the contracting parties with an uncertain state of affairs which can clearly never be a good thing. The other reason is that it is not always clear which prevails as a matter of company law. Thus for example where the Act states that, "Subject to any limitations or restrictions on the transfer of shares in the memorandum or articles, a share in a company is transferable." If then the Articles are silent on this issue the provisions of the Act apply in relation to a transfer of shares making any share freely transferable as a matter of law. At the same time, restrictions in a shareholders agreement on the transfer of the very same shares will bind the parties to that agreement but if the shares are transferred in breach of the agreement but in accordance with the law then the transfer cannot be undone (because it is valid as a matter of law) and the normal remedy for breach of the agreement would be in damages.

Remedies

Typically if there is a breach of the shareholders agreement the remedy is in damages or an injunction is possible. Specific performance is somewhat rare in commercial contracts as the courts are loathe to force parties together. On the other hand if there is a breach of the M&A, the thing purported to be done would probably be invalid. This is a big difference between the M&A and the shareholders agreement. The typical remedies mentioned above would apply in this case as well but there may be other remedies such as forfeiture.

Conclusion

Literally thousands of BVI companies have been used for joint ventures. A relatively common format is an English or New York law shareholders agreement and BVI JV Memorandum and Articles. The important points to bear in mind are (i) assuming all necessary steps have been taken, the shareholders agreement is valid, binding and enforceable like any other contract and a remedy for breach will flow in the normal way; and (ii) the BVI JV M&A is a statutory contract separate from a shareholders agreement and as (unlike English law) amendments to the M&A are only effective when filed with the Registrar, the M&A should be amended, in keeping with the BVI statutory requirements, to reflect the terms of the shareholders agreement. Neither a shareholders agreement nor a resolution unanimous or otherwise will, without more, be sufficient to amend the BVI M&A. The real driver in this process is to ensure so far as is possible that the parties avoid having two contracts covering the same subject matter but with the potential for quite different results should there be a breach of one or the other.

Footnotes

1. 1940 Ch. 794

2. 1969 2 Ch. 365

3. 1980 1 WLR 1451

4. Section 30 Companies Act 2006 (UK)

5. Section 380(4)(c) (the whole of section 380 is now replaced by section 29 of the Companies Act 2006 (UK))

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.