#3565 - Company Constitution Cases - Company Law

Company Law Supervision II – Cases

THE CORPORATE CONSTITUTION

Legal Status

Company Against Member

Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915]

Articles provided that any dispute between member and company should be solved by arbitration. C was a member of company, and company refused to register C’s sheep. C complained and sued company for declaration that his sheep were entitled to be registered; company applied for action to be stayed on basis that dispute should go to arbitration. C argued that arbitration clause did not apply, as the dispute was unrelated to C’s membership of the company – rather it was related to . Held:

Enforceability of Articles

1. Where an outsider purports to be given rights by articles in their capacity as an outsider, are not enforceable.

• This case even if outsider is or subsequently becomes a member.

• Hence fact that an outsider purportedly given rights in a company’s articles is subsequently granted shares in company does not make a previous claim enforceable.

2. In addition member of a company can only enforce his rights under constitution in his capacity as a member.

   • And not e.g. as director, solicitor etc.

3. Where articles purport to grant rights to an outsider, if outsider subsequently becomes member this does not mean that he can enforce those earlier rights

   • i.e. as these rights are still not in his capacity as a member

   • regardless of fact that outsider has since become a member

Facts

• C’s claim is to enforce his rights as a member of D.

• Arbitration article deliberately addresses disputes amongst members themselves.

• Therefore case stayed in favour of arbitration.

Members Against Company

Quin & Axtens Ltd v Salmon [1909]

Company had two managing directors. Director A (Salmon) was given a veto by articles over any decision of company to deal with property. Director B acted contrary to requirement, and got ordinary resolutions from shareholders authorising company to act in this way. Salmon sued company to stop it acting contrary to his veto. Held:

Ordinary Resolution

• Is not permitted to act upon ordinary resolutions which are inconsistent with substantive requirements in articles.

  • i.e. in matters of substance, constitution can only be deviated from by special resolution.

• Thus existence of ordinary resolution is irrelevant to whether company is breaching its articles.

Qua Member

• Director A was also a member of the company.

• Therefore had power in his capacity as member to force company to adhere to its constitution.

  • i.e. by not dealing with property where he had used his veto.

• Thus injunction granted against company acting upon the resolutions passed.

Members Amongst Themselves

Rayfield v Hands [1960]

Articles provided that where a member wished to dispose of shares, in certain circumstances directors had an obligation to purchase those shares offered. C wished to sell his shares and a director, who was also a member, refused to take them. Held:

• Company’s articles intended for the directors to be bound as members in this situation.

  • i.e. as matter related to purchase of shares.

• Therefore directors were bound by articles in their capacity as members.

Eley v Positive Life [1876]

Articles stated that C was to be the solicitor of Positive Life. However he was not appointed so sued for breach of the articles. At time articles were created, C was not a member. However by time C brought action, C was a member. Held:

• C could not enforce the articles.

• This because outsiders to company cannot enforce rights purportedly granted to them under articles.

• Articles only have legal effect as between members.

• NB court did not look at all at whether fact that C had subsequently become a member meant he had right to enforce articles…

London Sack & Bag [1943]

C and D were both members of a trade association company. Articles of association stated that ‘trade disputes’ should be submitted to arbitration. Dispute between two members arose as to a transaction between them; one of pair refused to submit to arbitration and sued. D sought to have court case stayed. Held:

• No rights of action can arise under articles in relation to matters which arise outside the ‘company relationship’

• Matter under dispute was a commercial trading transaction

  • Thus transaction had nothing to do with C and D’s membership of company.

• Thus article could not be enforced against C.

Implied Contracts

Re New British Iron [1898]

Company’s articles provided for remuneration of directors at a certain rate. Issue was whether directors could enforce this. Held:

• C could not enforce articles in his capacity as director.

• However a separate contract could be implied upon same terms in article.

• This separate contract could be enforced.

• NB Directors’ service contracts must now be evidenced in writing – s.227-229.

  • thus this result would no longer be possible

Implication of Terms

Towcester Racecourse v Racecourse Association [2003]

C argued that it was implied term of articles of association that any inquiry into a member would be proper, efficacious and open to its members; and that therefore directors could be directly liable to shareholders for breach of this duty. Held:

• Directors do not have direct contractual relationship with members of company.

• Directors act on behalf of company

  • And not on behalf of shareholders

  • Thus the only duties they owe are to company

• Therefore directors cannot owe implied contractual duties to shareholders.

Bratton Seymour Service v Oxborough [1992]

C claimed that courts should imply a term into articles of association to effect that a company should contribute to upkeep of an amenity area in a housing development, so as to give articles business efficacy. Held:

• Courts will not imply terms into articles from extrinsic evidence of surrounding circumstances.

• This because such evidence is only known to a few people.

• Thus would be prejudicial to third parties.

AG Belize v Belize Telecom [2009]

Articles provided that certain special shares gave their holders a right to appoint two directors of the company. C purchased some of these voting shares, but fell into financial trouble and later sold them. Issue was whether directors appointed by C were required to vacate office one C sold his shares. Held:

• Courts will imply terms into articles where this merely makes express what they would have reasonably been taken to mean against relevant background.

• Court only has power to ascertain the meaning of the articles as a whole.

• And NOT individual terms.

• Thus courts can imply terms in fact based upon meaning of articles as a whole.

• Therefore “relevant background” includes:

1. Scheme of Articles themselves

2. To a very limited extent, background facts that third parties involved with the company would reasonably have known

• On facts, anyone reading document as a whole would have reasonably understood that directors were required to vacate office.

• Therefore terms could be implied to this effect.

Alteration of Articles

Common Law Protections

Allen v Gold Reefs of West Africa [1900]

• Shareholders’ powers to alter the articles via special resolution must be exercised “bona fide for the benefit of the company as a whole”.

Expropriation

Brown v British Abrasive Wheel Co [1919]

Company needed urgent capital. Shareholders, holding 98% of shares, were willing to put money up on condition that they could buy out remaining 2% of shareholders. Majority proposed special resolution adding provision to articles to effect that any shareholder was bound to transfer his shares upon request from the holders of over 90% of shares. C, part of 2%, challenged it. Held:

• Majority had acted in good faith when proposing the resolution.

• However provision was not for benefit of company as a whole.

• But simply for benefit of majority.

• Therefore alteration of articles was invalid.

• Very objective test. Notwithstanding majority’s good faith, were held not to be acting in interests of company.

Dafen Tinplate Co v Llanelly Steel Co [1920]

Resolution inserted new article empowering majority to buy out “any shareholder as they thought proper”. Held:

• Article was invalid.

• This because it was self-evidently wider than could be necessary in interests of company.

Sidebottom v Kershaw [1920]

Company altered its articles by adding provision allowing directors the power to buy out, at a fair price, any shareholder who competed with the business of the company. A minority shareholder, who carried out a competing business, challenged alteration. Held:

Is entirely for benefit of company that members who compete with company be bought out

i.e. if they are members, more likely that they will get benefit of information which will help them compete with company.

Thus alteration is valid.

Subjective v Objective

Stylo Shoes Ltd [1965]

Company issued new shares. To ensure continuity of management, was decided to double voting rights on shares owned by managers so that they retained same degree of control. Resolution was challenged. Held:

• Majority believed in good faith that it was in interests of company for management to retain control.

• Therefore was no oppression involved.

• Objective test. Did not matter that certain shareholders stood to benefit from the resolution, as those who had supported it genuinely believed it was in interests of company.

Greenhalgh v Arderne Cinemas [1951]

Director of company wanted to sell shares to a third party. Company’s articles provided for right of pre-emption for existing members. Director successfully got special resolution passed removing this right of...