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Entrenching the constitution of a company

The Companies Act 2006 stripped almost every type of company of the

ability to entrench provisions in its articles against unanimous

amendment:

for-profit companies
companies limited by guarantee that are too political to be CICs
companies limited by guarantee that are charities
companies limited by guarantee that are for worthy causes that are ineligible for CIC status
companies limited by guarantee that simply don't want to be CICs

The only exception is companies that have CIC status, that is, Community Interest Companies.

Community Interest Companies

The relevant provision of the Companies Act, s22(3)(a), was slipped in at committee stage in the Commons, thus after the minister had certified that the bill did not infringe on fundamental rights, such as freedom of association. There is a good reason for preventing entrenchment, just as four hundred years ago there was and still remains a good reason for the rule against perpetuities: capital can get locked up in obsolete causes. The same problem has been known in Islamic law for over a thousand years, and was known to the Romans.

The mischief contemplated by those who introduced the provisions undermining entrenchment is roughly this: an older member of a family firm with a sentimental attachment to its current products or strategy entrenches that preference in the articles of association of the company which formally owns the business, while her descendants are left holding the shares they have been given or earnt but cannot use their voting rights to change the company's course, even if it is being led to destruction. Now it is perhaps one thing to say that companies should be able to override their kamikaze founders, but possibly another to say that non-profit organisations should be able to do the same thing. Otherwise, organisations can misuse their donations the moment the donor's/founder's back is turned. This may well be attractive to those who make their livings working for non-profits, which I have done myself in the past, but over time it is harmful.

Effectively, when it was decided to strip companies of their ability to entrench parts of their constitutions, provision had to be made for circumstances in which this was undesirable, and that provision was too narrow, being limited to CICs. It is almost as though CICs were invented as a solution to the problem (CICs were introduced around the same time as the most recent consolidation of UK company law in 2006).