Company - Majority rule & minority protection: The articles of association - Notes (1)
IV. Majority Rule & Minority Protection: The Articles of Association
Majority Rule – Majority are entitled to cast their votes in their own interests, rather than thinking (and doing) what is best for all the shareholders; or for the company.
Alternatives to majority rule:
1/ Require unanimity
Bowthorpe Holdings v Hills 2002
- Unanimous consent of the members will not validate a mala fides act. The same applies if the act raises:
- Solvency issues or
- Affects the position of the company’s creditors
Euro Brokers Holdings v Monecor 2003
- Unanimous informal agreement could alter procedures agreed in a shareholders’ agreement
2/ Require that decisions be taken ‘for the good of the company’
3/ Let some third party (e.g. arbitrator, courts) decide what should happen (by what criteria?)
Advantages of majority over the alternatives:
- Democratic & fair
- Efficient
- Avoids deadlock
- Avoids judicial interference in the company’s internal affairs
Risks of majority rule:
- All shareholders suffer at the hands of their directors
- The minority of shareholders is oppressed
Exceptions to majority rule:
(i) Personal Rights under Articles of Association
- 1985 CA s14
Hickman v Kent or Romney Marsh Sheep-Breeders’ Association 1915
- This is the leading case on the contractual effect of s14 CA 1985 (but attracted a lot of criticism)
- It is decided that only a member complaining about an article which affects him in his capacity as a member can enforce the articles: If the article in question affects the member in an outside capacity only, such as in his capacity as a director, then no reliance can be placed on the s14 contract
- The objection to this is that it does violence to the actual wording of s14, which refers to binding the company and its members in relation to ‘all the provisions of the memorandum and of the articles’, without any reference to the capacity in which the shareholder is affected.
- Implied & express ‘extrinsic contracts’
Pender v Lushington 1877
- Where a personal right of a member is infringed the rule in Foss v Harbottle has no application and the member can bring a personal action in his own name
Towcester Racecourse v Racecourse Association 2002
- The court declined to imply a term inconsistent with express terms in the articles into the articles of association
- 3 problems:
(a) Debate over ‘outsider’ rights:
Eley v Positive Govt Security Life Assurance 1876
- This case is cited as authority for the point that the articles do not constitute a contract between the company and outsiders. An outsider is either one who is not a member at all, or one who is a member but who is trying to rely on an article in an outside capacity, such as in his capacity as a director
- CA rejected the argument that even if the articles did not constitute a contract, they could be relied upon as evidence of an extrinsic agreement outside the articles
Beattie v E & F Beattie 1938
- CA accepted and applied the decision in Hickman’s case
- CA confirmed the traditional view of the s14 contract, that it can only be enforced by a member in his capacity as a member
- Here, Beattie was trying to enforce the arbitration article in his capacity as a director, which was fatal to his claim
Globalink Telecommunications v Wilmbury 2002
- A director’s indemnity provision in the company’s articles would not always be binding because the articles do not constitute a contract between the company and its officers. It will only bind the compnay if the provision is contained in a separate contract between the company and the officer.
(b) The ‘problem’ of internal irregularities
Pender v Lushington 1877
- see above
MacDougall v Gardiner 1875 (?)
- A company is entitled as against its members to enforce and restrain breaches of its regulations
(c) The problem of alteration
CA 1985 s9
Allen v Gold Reefs of West Africa 1900
- The statutory right of a company to alter its articles by a special resolution under s9 CA 1985 is subject to the test established in this case, namely, that the alteration must be ‘bona fide for the benefit of the company as a whole’
- If an alteration results in the breach of an extrinsic contract between the company and the shareholder, the company will not be able to justify the breach
- This decision shows that the alteration of an article will not necessarily be invalid merely because it affects only one individual shareholder
Russell v Northern Bank Development 1992
- A shareholders’ agreement not to increase the share capital of the company was valid and enforceable
- Although the company itself cannot be a party to an agreement not to alter its articles, the shareholders can so long as the agreement is contained outside the articles
- This represents a severe restriction on the statutory right of the company to alter its articles by a special resolution under s9 CA 1985
- The decision is being criticized by Farrar that it confirms the absolute prohibition on a direct contracting out of the statutory power but allows it effectively to be circumvented by agreement between shareholders: another triumph of form over substance in the law!
(ii) Shareholder agreement
(iii) Statutory remedies
Majority Rule – Majority are entitled to cast their votes in their own interests, rather than thinking (and doing) what is best for all the shareholders; or for the company.
Alternatives to majority rule:
1/ Require unanimity
Bowthorpe Holdings v Hills 2002
- Unanimous consent of the members will not validate a mala fides act. The same applies if the act raises:
- Solvency issues or
- Affects the position of the company’s creditors
Euro Brokers Holdings v Monecor 2003
- Unanimous informal agreement could alter procedures agreed in a shareholders’ agreement
2/ Require that decisions be taken ‘for the good of the company’
3/ Let some third party (e.g. arbitrator, courts) decide what should happen (by what criteria?)
Advantages of majority over the alternatives:
- Democratic & fair
- Efficient
- Avoids deadlock
- Avoids judicial interference in the company’s internal affairs
Risks of majority rule:
- All shareholders suffer at the hands of their directors
- The minority of shareholders is oppressed
Exceptions to majority rule:
(i) Personal Rights under Articles of Association
- 1985 CA s14
Hickman v Kent or Romney Marsh Sheep-Breeders’ Association 1915
- This is the leading case on the contractual effect of s14 CA 1985 (but attracted a lot of criticism)
- It is decided that only a member complaining about an article which affects him in his capacity as a member can enforce the articles: If the article in question affects the member in an outside capacity only, such as in his capacity as a director, then no reliance can be placed on the s14 contract
- The objection to this is that it does violence to the actual wording of s14, which refers to binding the company and its members in relation to ‘all the provisions of the memorandum and of the articles’, without any reference to the capacity in which the shareholder is affected.
- Implied & express ‘extrinsic contracts’
Pender v Lushington 1877
- Where a personal right of a member is infringed the rule in Foss v Harbottle has no application and the member can bring a personal action in his own name
Towcester Racecourse v Racecourse Association 2002
- The court declined to imply a term inconsistent with express terms in the articles into the articles of association
- 3 problems:
(a) Debate over ‘outsider’ rights:
Eley v Positive Govt Security Life Assurance 1876
- This case is cited as authority for the point that the articles do not constitute a contract between the company and outsiders. An outsider is either one who is not a member at all, or one who is a member but who is trying to rely on an article in an outside capacity, such as in his capacity as a director
- CA rejected the argument that even if the articles did not constitute a contract, they could be relied upon as evidence of an extrinsic agreement outside the articles
Beattie v E & F Beattie 1938
- CA accepted and applied the decision in Hickman’s case
- CA confirmed the traditional view of the s14 contract, that it can only be enforced by a member in his capacity as a member
- Here, Beattie was trying to enforce the arbitration article in his capacity as a director, which was fatal to his claim
Globalink Telecommunications v Wilmbury 2002
- A director’s indemnity provision in the company’s articles would not always be binding because the articles do not constitute a contract between the company and its officers. It will only bind the compnay if the provision is contained in a separate contract between the company and the officer.
(b) The ‘problem’ of internal irregularities
Pender v Lushington 1877
- see above
MacDougall v Gardiner 1875 (?)
- A company is entitled as against its members to enforce and restrain breaches of its regulations
(c) The problem of alteration
CA 1985 s9
Allen v Gold Reefs of West Africa 1900
- The statutory right of a company to alter its articles by a special resolution under s9 CA 1985 is subject to the test established in this case, namely, that the alteration must be ‘bona fide for the benefit of the company as a whole’
- If an alteration results in the breach of an extrinsic contract between the company and the shareholder, the company will not be able to justify the breach
- This decision shows that the alteration of an article will not necessarily be invalid merely because it affects only one individual shareholder
Russell v Northern Bank Development 1992
- A shareholders’ agreement not to increase the share capital of the company was valid and enforceable
- Although the company itself cannot be a party to an agreement not to alter its articles, the shareholders can so long as the agreement is contained outside the articles
- This represents a severe restriction on the statutory right of the company to alter its articles by a special resolution under s9 CA 1985
- The decision is being criticized by Farrar that it confirms the absolute prohibition on a direct contracting out of the statutory power but allows it effectively to be circumvented by agreement between shareholders: another triumph of form over substance in the law!
(ii) Shareholder agreement
(iii) Statutory remedies
posted by pompom at 12:11 AM
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