Legal Updates

Articles of Association must be construed according to their language and one can not read into them understanding that do not appear therein

October 7, 2020

Upon incorporation of a company the founders received the right, in the company’s Articles of Association, to appoint, each one, a director on his behalf. Afterwards, and after the company’s Articles of Association were amended several times, one of the founders passed away and his shares were transferred to his heir. The heir sought to appoint a director on her behalf although the Articles of Association, as amended while the late founder was still alive, do not include this right any more.
The Court held that the heir does not have the right to appoint a director on her behalf, due to the change made to the company’s Articles of Association. A company’s Articles of Association are, in fact, a contract between the company and its shareholder and between the shareholders themselves. When construing the Articles, special importance must be given to the Articles’ language, because the Articles constitute a future facing contract, where clarity is of the outmost importance. Any deviation, or reading different of the Articles, may affect not only the shareholders, but various other third parties. These third parties rely on the Articles as written, thus acknowledgement of agreements that do not appear in the Articles is impossible. Additionally, it must be taken into consideration, that a company’s Articles of Association are generally detailed documents which were professionally drafted - thus the actual language of the Articles must be given a dominant status as they are very likely to reflect the parties actual intent. Here, the amended Articles of Association clearly state that directors in the company will be appointed by the decision of the majority of the shareholders. Nowhere in the amendment did it imply that the founders will maintain their right to appoint directors on their behalf. The language of the Articles is clear and the late founder was present at the shareholder’s meeting which approved the amendment of the Articles. Additionally, reading into the existing Articles the founder’s right to appoint directors on their behalf may create a hidden understanding, which is not included in the Articles to which the other shareholders and third parties are privy. Therefore, once the Articles of Association were amended, the late founder no longer had the right to appoint a director on his behalf, and therefore, neither does his heir.