Articles of Association Flashcards
Eley v Positive Government Life Assurance Co (1876) 1 Ex D 88
Facts:
- The articles of the company provided that Mr Eley would be the sole solicitor of the company
- Mr Eley later became a member and sued for misconduct following the company not employing him as a solicitor
Judgment:
- This was not a contract between Mr Eley and the company
Lord Cairns LC:
- Res inter alios acts (the plaintiff is no part to it)
- The matter is between the members and directors, not between the company and the plaintiff
- There are his personal rights, not his rights as a member
Lindley LJ:
- “There cannot be a contract between the association and B just because B happens to be a member, and the issue is not related to his capacity as a member”
Further Notes:
- Suggestion that Eley/Browne/Re Dale and Plant Ltd are better dealt with using employment contracts (reason the CRLSG did not want to reform this law for CA 2006)
Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881
Facts:
- Article 49 of the corporation’s articles stipulated that any disputes between the association and any of its members should be referred to arbitration
Judgment:
- The claimant was allowed to enforce article 49 as a member
Astbury J:
- This is a common type of article of corporations in place to protect members from prejudice in public trials
- There should be a separate contract between outsider and company if they want to enforce those rights
- The company in law is party to its own memorandum and articles… so clear that the company can enforce breaches etc. against members and vice versa
- In the present case P is seeking to enforce his rights as a member, relying on an article clearly intended to apply generally to all members, so it is reasonable on the evidence to allow him to resolve is dispute in arbitration
Notes:
- The CA 2006 makes an explicit mention of both the company and its members having enforceable rights against one-another
- Critique of decision: Asbury J paid little regard to the ratio of some of the cases cited and some statutes, so it is surprising to have been endorsed without any discussion by the CA in Beattie
- The qua member rule has been difficult to reconcile in some cases (see Pulbrook v Richmond, Blackpool v Hampson)
- Lord Wedderburn thinks that the outsider-member distinction should be dropped to allow any member to enforce any right (So in Eley any member could restrain the company from employing another solicitor)
- In Ebrahimi the HL did not feel constrained to put the same restriction on the statutory provision of just and equitable winding up
- ‘Relational’ contract rather than a simple contract, therefore requires some ‘give and take’ rather than outright right and wrong e.g. in MacDougall although wronged, the court declined to come to his aid because the matter could be put right by the company’s own internal mechanisms
Quin & Axtens Ltd v Salmon [1990] AC 442 (House of Lords)
Facts:
- S, A and W directors/chairman of the company
- Article 80 stated that the permission of both directors is needed in order to pass a resolution regarding letting or buying a company
- A property was purchased by ordinary GM (S opposed)
Judgment:
- S won, despite this being a right as a director: seen as an example of a member’s right which tangentially effected his rights as a director
- The members’ resolutions where inconsistent with the articles and granted an injunction restraining the company from acting on them
Lord Loeburn:
- The articles contain a bargain between shareholders
- It is not up to the court to decide that it was a failure of the company in not allowing these leases, that is a matter for the directors to resolve
- Suggest that it did effect his capacity as a member, and any non-director could have sought an injunction
Goldburg (MLR Article, 1972):
- This explanation does not seem correct, it would have cause a different result for Eley, displays the battle between majority rule and minority rights
Further Notes:
- Farwell LJ felt the rule in Wood v Odessa should not be followed in most cases, it is a “covenant as between individual shareholders”
- Note, opposite to Beattie
Allen v Gold Reefs of West Africa Ltd [1990] 1 Ch 656 (Court of Appeal)
Facts:
- The company altered its articles so its lien (can refuse to pay dividends etc.) application changed from all shares not fully paid, to all shares
- The only affected shareholder attempted to bring a claim against the enforcement of the lien
Judgment:
- At first instance the lien was refused, but the CA rejected the claim and allowed enforcement of the lien
Lindley MR:
- He joined the company with the understanding that the articles can change your rights as a shareholder by special resolution
- A company’s power to alter regulations is limited only by the provisions contained in the statute and the conditions contained in the company’s memorandum
- The power to alter articles must be exercised for the benefit of the company as a whole
- It is for the company to decide what a company does with its shares, not the courts
- If articles are altered bona fide for the benefit of a company they are valid and binding
- You can exercise your property right to vote (as shareholder) however you chose, you can be malicious (but minority can challenge the majority)
- A company cannot break its contract by altering articles but can break contracts dealing with revocable articles
- Was not in bad faith and was not singling P out just because he happened to be the only person without fully paid up shares…
Notes:
- How articles can be created initially for any purpose, not in good faith, so why can alterations only occur bona fide for the benefit of the company?
- Normal case law only reocgnises shareholders as a voting right, not a proprietary right, so this seems to be incoherent… to what extent should the courts be prepared to intervene in the internal affairs of the company?
Re Isle of Thanet Electricity Supply Supply Co Ltd [1950] Ch 161
Facts:
- Articles conferred the rights to assets in winding-up for preferential shares
- The company went into liquidation
- There was still a surplus after the winding up, and the question arose as to whether preferential shareholders could join on the surplus
Judgment:
- The articles of association where exhaustive, the preferential shareholders involvement in surplus was stipulated so they could not be involved
Roxburgh J:
(1) The onus was on the holders of preference shares to satisfy the court that upon the true construction of the document under which they claimed they were entitled to share in a surplus in a winding up
(2) In construing an article of association concerning rights to share in profits, the same principle was to be applied in construing both dividend rights and the rights to share in the company’s property in liquidation
(3) The principle to be applied in construing such an article was that, when the article set out the rights attached to a class of shares to participate in profits while the company was a going concern or to share in the property of the company in liquidation, prima facie the rights so set out of were in each case exhaustive
(4) On the true construction of art 3, the whole of the distributed profits were expressly dealt with
(5) Accordingly, the holders of the preference stock had no discharged the onus of showing that the article was not exhaustive, and they were not entitled to share the surplus assets
Cumbrian Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper and Printing Co Ltd [1987] Ch 1 (Chancery Division)
Facts:
- P acquired 10.67% of the ordinary shares of D as part of an arrangement to concentrate the local newspaper publishing business under one title
- The articles of D were then altered so P had preemption rights over other ordinary shares, rights in respect of unissued shares and the right to appoint a director so long as it held at least 10% of the shares
Judgment:
- These were class rights which could only be altered pursuant to (what is now) CA 2006 s630
Scott J:
- Three categories of rights:
(1) Rights or benefits which are annexed to a particular share (e.g. dividend rights, rights to participate in surplus assets on winding-up)
(2) Rights or benefits connected with administration of the company’s affairs such as in Eley are not class rights
(3) Rights or benefits that are not attached to any particular share but are conferred on the beneficiary in his capacity as a member/shareholder
- Bushell v Faith: triples share value in director votes in order to stop director being voted out, this was the purpose and this is a relevant “category 3” right/benefit
- Rayfield v Hands: presents “other side of the coin” there are members who are for the time being directors, and shareholders who were not for the time being directors (still third category)…
- The fact he needed 10% ownership to activate articles does not dispute their position as third category shares, this is analogous to the situation that the articles apply in their capacity as directors
Greenhalgh v Ardene Cinemas Ltd [1946] 1 All ER 512 (Court of Appeal)
Facts:
- The capital of the company consisted of 50p shares and 10p shares which each had 1 vote
- G owned most of the 10p shares and held nearly 40% of the shares, so was able to block a special resolution
- By ordinary resolution the other shareholders sought to subdivide their 50p shares into 5 individual shares and therefore increase their voting power (s.618(1)(a)(3) confers this power)
- G attempted to claim that the rights attaching to his 10p shares were varied by this manoeuvre
- G challenged the special resolutions as they had not been passed bona fide
- A confusing and contradictory judgment from Evershed J which is often cited
Lord Greene MR:
- The right to vote had not been taken away, that is the only right attached to these shares regarding voting
- If they had attempted to change it so there was only 1 vote attached to each 5 of those shares that would have been changing the rights of the shares
- In losing control his rights are affected as a matter of business, and not as a matter of law
(Unanimous decision)
Notes:
- In Re Saltdean Estate and House of Fraser plc v ACGE Investments Ltd, the cancellation of a class of shares on a reduction of share capital was allowed as it was consistent with the terms of issue of the shares in question
- Re Hellenic and General Trusts Ltd seems to dispute but is concerned with classes of members and not classes of shares
- There may still be a grant of relief to minority members under CA 2006 994
Clemens v Clemens Bros Ltd [1976] 2 All Er 268
Facts:
- P held 45% of shares in D and her aunt X owned 55% of shares in D
- Shareholders had a preemptive rights if another member wished to transfer their shares
- P had negative control and expected to take over full control following her aunt’s death
- The directors proposed to create more shares to increase the company’s capital (by selling to directors and an employee’s trust); X passed this at ordinary resolution
- It was claimed to be in the general interests of the company
Judgment:
- The court took the view that the real object was to deprive P of her degree of control and the resolutions where set aside
Foster J:
- P believe to be an oppressive resolution whereas X claimed to be acting honestly…
- Notes director’s fiduciary, but should there be a similar restraint on shareholders exercising their powers?
- There shouldn’t be a principle of bona fide rights for the company as a whole, it depends on the circumstances of each case… quotes Lord Wilberforce declaring that you cannot exercise aright as you freely please but that a right is ‘subject… to equitable considerations… which may make it unjust… the exercise [it] in a particular way’
- Although X may like to see shares in the hands of the directors, Foster J believes the construction of this resolution was for the sole purpose of depriving P of control and this is inequitable…
- Foster J cannot comment on whether it is good for the company or not (commercial considerations; not the judges place?)
Notes:
- It is felt that the judge’s use of authorities contrasts with other approaches, such as quoting Greenhalgh… he considered whether passing the resolution is for the benefit of P, which goes beyond the general equity test (this may be seen as contrary to the ruling in Bentley-Stevens v Jones, 1974)
- Judge did not disagree that was benefit of the company, but felt for equitable reasons the resolutions had to be set aside, as where only to reduce her into negative control
Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287
The court may at common law imply supplementary provisions into the articles, such as in this case an implied term of co-operation of reasonableness
Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3
Lord Wilberforce highlights that directors can make managerial decisions against the wishes of the shareholders while in office, shareholders do not hold such powers
CA 2006, s.33(1)
“The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company of each member to observe those provisions”
- Improvement on s.14 of the 1985 Act
- Odd contract, can constantly be varied by special resolution, even where all parties do not agree… binds parties who are not privy to it (such as future shareholders)
- This allows shares to be freely transferable by removing the need for each member to formally agree to the constitution each time shares are traded
- Before Companies where recognised as separate legal entities in statute the courts found them so (Hickman v Kent)
Wood v Odessa Waterworks Co (1889) 42 Ch D 636
Stirling J: “The articles of association constitute a contract not merely between the shareholders and the company, but between each individual shareholder and every other”
(In Salmon v Axtens it was thought this should not be followed in most cases)
Welton v Saffery [1897] AC 324
Lord Herschell:
- Clearly no contract between the individual members
- The articles do have effect inter se, only enforceable through the company
Rayfield v Hands [1960] Ch 1
Vaisey J:
- Focuses on Welton v Saffery
- There is a contract which is directly enforceable inter se
- It is not a rule of general application and only in quasi-partnership companies
[Viewed by Lord Herchell (dicta)*need to see what case? and Barc and Bowen (1988) as in line with quasi-partnership exception, as the correct position]
Foss v Harbottle (1843) 67 ER 189
Individual members cannot enforce a rule against the company, except for the exceptional circumstances where the majority commit fraud against the minority… and depending on how the breach is perceived, they may be able to enforce s.33 on the company
- Wrong to the company: only the company can sue
- Wrong to the shareholder’s personal right: the individual shareholder can sue
Mozley v Alston (1847) 1 Ph 790
Directors failing to retire by rotation is a wrong to the company, not individual rights regarding re-election - therefore no personal right of action to bring a claim
MacDougall v Gardiner (1875) 1 Ch D 13
The right to vote is not recognised under the constitution if it could be ratified by the majority of shareholders in vote.
Rights given in the constitution may not be enforceable if the breach complained of could be ratified by a majority resolution… court refused to recognise an individual member’s rights to poll
Pender v Lushington (1877) 6 Ch D 70
Every member was entitled to 10 votes per share, to a maximum of 100 votes over-all. Pender transferred his share to various nominees, and the BoD refused to count the votes of the nominees. He got an injunction stopped the directors from refusing to count his votes. This was an individual right in which Pender could take action….
Gained an injunction against and action that had been passed at a meeting where his votes where refused… Jessel MR consider that the shareholder is entitled to have this vote recorded…
Seems to be the opposite to Mozley
Edwards v Halliwell [1950] 2 All ER 1064
Two members of a trade union wanted to prevent the union from increasing members subscriptions. The union rules required a member ballot and 2/3 majority vote. The court did not allow the increase, the failure to follow procedure, the rule in Harbottle does not apply and the members individual rights had been violated.
Allowed a declaration invalidating a resolution (both this and Pender explicitly differentiate from the doctrine of F v H), Jenkins LJ recognised the importance of the individual rights of members not being invaded, they have a right to be protected