LOCUS CLASSICUS IN ENGLISH
CORPORATE LAW PRACTICE
Even though this article is tagged “ locus classicus in English corporate law practice”, the evolution of corporate law practice in Nigeria can never separate itself from its romance with Britain as a result of colonization. Many of her laws like the Companies Act even up till today are premised on English laws. Notable is the fact that countries who belong to the Commonwealth equally share this attribute. This piece is therefore relevant not only in the UK but virtually in all the Commonwealth countries. The cases mentioned therein are up till today remain “evergreen” as they formed basis of several principles in corporate law practice ranging from pre-incorporation contracts to winding up of companies. I hope this piece will broaden your horizon as you read. Happy reading!
1. Twycross v Grant (1877) 2 CPD 469
In describing the role and function of a promoter, Lord Cockburn said:
" A promoter, I apprehend, is one who undertakes to form a company with reference
to a given project and to set it going, and who undertakes the necessary steps to accomplish
that purpose...and so long as the work of formation continues, those who carry on that work
must, I think, retain the character of promoters. Of course, if a governing body, in the shape
of directors, has once been formed, and they take what remains to be done in the way of forming
the company into their own hands, the functions of the promoter are at an end."
2. Whaley Bridge Calico Printing Co v Green (1880) 5 QBD 109
A promoter negotiated the sale of a business from the seller to the company which he was intending
to form. The seller agreed to pay a share of the profit he received from the sale to the promoter.
It was held that the promoter was accountable to the company for that profit.
In an attempt to define the term "promoter", Bowen J said:
"The term promoter is a term not of law, but of business, usefully summing up in a single word a
number of business operations familiar to the commercial world by which a company is generally
brought into existence.
3. Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
A syndicate headed by Erlanger acquired the lease of an island in the Caribbean for £55,000. The
leaseholder was a nominee of the syndicate. The syndicate later incorporated the New Sombrero
Phosphate Co. At a meeting of the directors (some of whom were members of the syndicate) it was
agreed that the company would buy the lease from the nominee. The company issued a prospectus
which did not mention that anyone other than the nominee had any interest in the lease. Held: As
there had been no disclosure by the promoters of the profit they were making, the company could
rescind the contract and recover the price from Erlanger and the other members of the syndicate.
4. Gluckstein v Barnes  AC 240
A syndicate bought property intending to sell it to a company they were forming. They nominally
bought it for £140,000 but actually got it at a discount, so that it cost them £120,000. They then
sold it to the newly formed company, of which they had become directors, for £180,000. A prospectus
issuing to the public disclosed a profit of £40,000, but not the £20,000 discount. The company later
failed and the liquidator claimed repayment of the £20,000. The House of Lords upheld the liquidator's claim.
5. Re Leeds and Hanley Theatre of Varieties  2 Ch 809
F Co contracted to purchase two music halls for £24,000 and had the property conveyed to a nominee, R,
intending to sell it to the Leeds and Hanley when the company was formed. F Co then promoted the
formation of Leeds and Hanley and agreed to sell it the music halls for £75,000. The board of directors of
Leeds and Hanley was not an independent board. A prospectus for issuing shares to the public gave R as
the seller of the property and did not disclose the interest of F Co or the profit it was making. For breach
of fiduciary duty to those invited to take shares the promoters were liable in damages to the company; the
measure of damages being the promoters' profit.
6. Newborne v Sensolid (GB) Ltd  1 QB 45
Tinned ham was sold to Sensolid under a contract headed "Leopold Newborne (London) Ltd" and ending
"Yours faithfully, Leopold Newborne (London) Ltd" and signed by Leopold Newborne. Sensolid refused
to take delivery of the ham. Held: Neither the then unincorporated company nor Mr Newborne personally
could sue on the contract.
Lord Goddard said:
"This contract purports to be a contract by the company; it does not purport to be a contract by Mr
Newborne. He does not purport to be selling his goods but to be selling the company's goods. The only
person to have any contract here was the company, and Mr Newborne's signature merely confirmed the
company's signature...In my opinion, unfortunate though it may be, as the company was not in existence
when the contract was signed there never was a contract, and Mr Newborne cannot come forward and
say: "Well, it was my contract."
7. Cotronic (UK) Ltd v Dezonie  BCLC 721
Dezonie signed a contract relating to some building work at a residential home, signing for and on behalf
of his company, Wendaland Builders Ltd. Unknown to him, the company had been struck off the register
about five years earlier. On learning this Dezonie registered a new company with the same name and sought
to rely on s.36C to claim the benefit of the contract. Held: s.36C had no application here. This was not a case
where a contract had been entered into on behalf of a company not yet formed, but on behalf of a company
which had been formed many years before.
8. Phonogram Ltd v Lane  QB 938
A rock group intended to perform under the name "Cheap Mean and Nasty" and to form a company for the
purpose to be called "Fragile Management Ltd". Mr Lane accepted a cheque from Phonogram for £6,000,
signing his name "for and on behalf of Fragile Management Ltd". The money was to be used to finance
production of an album and was repayable if this was not achieved. When the album was not produced,
Phonogram sought to recover the money from Lane, the company having not been in existence at the time
the contract was made. Lane argued that his signature "for and on behalf of" the company amounted to an
agreement that he was not to be personally liable on it - an "agreement to the contrary" in terms of s.36C.
(Then s.9(2) of the European Communities Act 1972). Held: This was not sufficient to exclude the operation
of the section, which would be given full effect unless there was a clear and express exclusion of personal liability.
Lane was thus liable to repay the money.
Refusal to Register
9. R v Registrar of Joint Stock Companies, ex p More  2 KB 197
The Registrar refused to register a company because its main object was to sell in great Britain tickets
to a Republic of Ireland lottery known as the Irish Sweep. The company's promoters applied for judicial
review of the refusal to register. The court found that selling the tickets would have been an offence under
legislation then in force, and the Registrar was right to refuse to register a company which was not formed
"for a lawful purpose".
10. R v Registrar of Companies, ex p Attorney-General  BCLC 476
In 1979 Lindi St Clair, a prostitute, attempted on the advice of her accountants to register a private
limited company which had its stated object: "to carry on the business of prostitution". The Registrar
accepted the registration under the name "Lindi St Clair (Personal Services) Ltd". In 1980, the
Attorney-General applied to the court to quash the registration on the basis that the company had
been formed for an unlawful purpose. The court held that the registration should be quashed. Though
the company's objects did not necessarily involve the commission of a criminal offence, contracts for
the services of a prostitute would be illegal and unenforceable as contrary to public policy. The company
had not therefore been formed for a lawful purpose.
Separate Legal Personality:
11. Salomon v A Salomon & Co Ltd  AC 22
Salomon had run a bootmaking business as a sole trader. He formed a limited company and sold the
business to it for nearly £40,000 (an overvaluation of around £8,000). The subscribers to the memorandum were S and 6 members of his family, who subscribed for 1 share each. S also took 20,000
£1.00 shares in the company as part of the purchase price of his business, the remainder of the price being paid partly in cash and partly by way of a secured debenture for £10,000. The company did not prosper and was wound up a year later, at which time its liabilities, including the debenture, exceeded the assets by £7,700. The liquidator, on behalf of the unsecured creditors, resisted S's claim and argued that S should in fact be liable for all the debts of the company. The House of Lords held that S was entitled to be paid under the debenture, and that he could not be made liable for the company's other debts.
Lord Macnaghton said:
"The company is at law a different person altogether from the subscribers to the memorandum; and
though it may be that after incorporation the business is precisely the same as it was before, and the
same persons are managers, and the same hands receive the profits, the company is not at law the
agent of the subscribers or trustee for them. Nor are the subscribers liable, in any shape or form,
except to the extent and in the manner provided by the Act."
12. Lee v Lee's Air Farming Ltd  AC 12
The husband of the plaintiff was the controlling shareholder and director of a company formed by him. He was also employed by the company as a pilot. The company had employer's liability insurance. He was killed in an accident when flying a company plane on company business and his wife claimed compensation from the company (effectively claiming from the insurers). Her claim was successful. It was held that Lee and the company had separate legal personalities and the deceased could, as director, enter into a contract on behalf of the company between the company and himself as an employee.
13. Macaura v Northern Assurance Co  AC 619
Macaura owned an estate in Ireland and insured some timber on the estate. He transferred the estate and the timber to a company (which he controlled), but failed to have the insurance re-issued in the company's name. There was a fire and the timber was mostly destroyed. Held: Macaura could not claim on the policy. The timber was no longer his to insure.
Companies and Crime:
14. Richmond on Thames Borough Council v Pinn & Wheeler  RTR 354
The company was charged with a driving offence. It was held that a company could not be guilty of an offence which required for its commission the physical act of driving a lorry.
15. Tesco Supermarkets v Nattrass  AC 153 (HL)
An assistant at a branch of Tesco had stocked shelves with washing powder showing the normal price when posters in the store were advertising a lower price. The store manager failed to notice the error and the company was charged with misstating the price under the Trade Descriptions Act 1968. s.24(1) of the TDA 1968 allowed a defence where the offence had been committed owing to the fault or default of another person and the accused had exercised all due diligence to avoid committing an offence. The prosecution argued that the defence did not apply as the manager had not done all he could to avoid the offence. Held: The store manager was not the directing mind and will of the company - the company had done all it could to avoid committing an offence and the offence was the fault of another person (an employee). The company was acquitted.
16. R v P & O Ferries (Dover) Ltd (1990) 93 Cr App R 72
P & O, along with five of its managers was indicted for manslaughter after the cross-Channel ferry "Herald of Free Enterprise" capsized in 1987 with the loss of 192 lives. The judge held that the indictment was valid, saying:
"..where a corporation, through the controlling mind of one of its agents, does an act which fulfils the prerequisites of the crime of manslaughter, it is properly indictable for the crime of manslaughter."
(In October 1990 the judge directed the jury to find all of the defendants not guilty, as there was insufficient evidence that any of the managers had the necessary mens rea - mens rea could not therefore be attributed to the company.)
17. R v Kite and OLL Ltd (1994) Unreported
OLL was a company specialising in organising outdoor activities. On a canoeing trip prganised by the company, four sixth year school pupils were drowned. There was evidence that the company did not employ qualified instructors and gave its instructors no training. The company was convicted of manslaughter and fined £60,000. Peter Kite, the managing director, who had total control of the company, was sentenced to three years in prison.
18. Transco plc v HM Advocate (No 1) 2004 JC 29; 2004 SLT 41
Transco plc, a gas transporter, had been charged with culpable homicide in Scotland, following a gas explosion that caused the death of a family of four. This was the first time that a company had been charged with this crime in Scotland, a crime for which proof of mens rea is required. To establish the criminal responsibility of the company, the indictment pointed to the collective knowledge of defects in pipes between various committees and post holders within the company, as the directing mind and will of the company, rather than to one individual. At first instance this argument was accepted, but on appeal the High Court of Justiciary held that the aggregation of separate states on mind belonging to different post holders and committee members to constitute mens rea was contrary to Scots criminal law; there was no individual or group if individuals who acted with the requisite mens rea in this case to make the organisation criminally liable for culpable homicide at common law.
19. R v Philippou (1989) 89 Cr App R (CA)
Philippou and another were the sole directors and shareholders of Sunny Tours Ltd which went into liquidation leaving unpaid debts of £11.5 million. They had withdrawn £369,000 from the company's account in London to buy themselves a property in Spain just before the company collapsed, and were charged with theft. It was argued for the accused that, as they were the sole will and directing mind of the company, if they consented to the removal of the funds, so did the company - there was therefore no dishonesty. Held: The money was effectively going into the pockets of the two shareholders. There was evidence from which it could be inferred that they had acted dishonestly and had intended to permanently deprive the company of its money. The charge was therefore relevant.
Piercing the Corporate Veil
20. Dimbleby & Sons Ltd v National Union of Journalists  1 WLR 427
The NUJ was involved in a trade dispute with T Bailey Forman Ltd. NUJ members had also been picketing a company called TBF (Printers) Ltd and the question arose as to whether this amounted to unlawful secondary picketing. The NUJ argued that it did not, as both companies were wholly owned subsidiaries of the same holding company, and were therefore both employers who were party to the dispute, within the meaning of s.17(3) of the Employment Act 1980.Held: Both companies were separate entities and the picketing was therefore unlawful. Lord Diplock said: "The corporate veil in the case of companes incorporated under the Companies Acts is drawn by statute and it can be pierced by some other statute if such other statute so provides; but, in view of its raison d'etre and its consistent recognition by the courts since Salomon v A Salomon & Co Ltd, one would expect that any Parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language."
21. Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd 1968 2 All ER 987
Durham Fancy Goods drew a bill of exchange on the defendants which was accepted on behalf of the company by M Jackson, who was a director and a company secretary. The bill and the form of acceptance, both of which were drawn up by the plaintiffs, referred to "M Jackson (Fancy Goods) Ltd", whereas the proper name of the company was "Michael Jackson (Fancy Goods) Ltd". The bill was dishonoured and the plaintiffs brought an action against M Jackson personally, arguing that by signing a document which did not correctly state the company's name, he had made himself personally liable on the bill.
Held: There was sufficient misdescription to impose personal liability under what is now s.349 CA 1985. (Mr Jackson in fact escaped liability because it was the plaintiffs who had prepared the bill with the incorrectly stated name - they were therefore personally barred from going back on their implied representation that it was acceptable to them.)
22. Gilford Motor Co v Horne  Ch 935
Horne had been employed by Gilford Motor Company under a contract in which he undertook not to compete with the company. He tried to evade the covenant by getting his wife to set up a company. All the shares in the company were held by Horne's wife and an employee. The new company then carried on business in competition with Horne's employer. The court was prepared to look behind the corporate identity and issued an injunction to prevent the company trading in competition with Gilford Motor Co.
Lord Hanworth said: "I am quite satisfied that this company was formed as a device, a strategem, in order to mask the effective carrying on of a business by Mr E B Horne.
23. Jones v Lipman  1 WLR 832
Lipman sold land to Jones by a written contract but refused to complete the sale, offering damages for breach of contract. To put the house out of reach of Jones, he bought a company "off the shelf" and conveyed the house to it. Jones brought an action against Lipman and the company for specific performance. The court granted the decree. "The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity."
24. Re Bugle Press  3 All ER 791
A company had three members, two of whom wanted to buy out the third, but he refused to sell. Under statutory provisions (now s.429 CA 1985), a takeover bidder which has acquired 90% of the target company's shares can compulsarily purchase the remaining shares. The two owned 90% of the shares so they formed a new company to make a takeover bid for the original one. They sold their 90% shareholding to the new company, which then attempted to compulsarily purchase the remaining 10%. The attempt failed. The court lifted the veil of incorporation to reveal that the new company was merely a tool to lever the third shareholder from the original company.
25. Smith, Stone & Knight v Birmingham Corporation  4 All ER 116
Premises owned by the plaintiffs were compulsarily acquired by the corporation. Questions arose as to whether the business for which the premises were used was being carried on by Smith, Stone & Knight or by its subsidiary - the distinction was important because an owner-occupier could get compensation, but a tenant-occupier could not. It was held that the plaintiffs were entitled to compensation. The business carried on at the premises by the subsidiary was being carried on by them purely as agents for the plaintiffs.
26. Firestone Tyre and Rubber Co v Lewellin  1 All ER 561
A US company formed a wholly-owned subsidiary in England to manufacture and sell tyres in Europe. The subsidiary received the money for the tyres sold and, after deducting its manufacturing expenses plus 5%, if forwarded the money to the US company. Held: The American company was carrying on business in the UK through its English subsidiary acting as its agent. The US company was therefore liable to UK tax.
27. Adams v Cape Industries Ltd  2 WLR 657
Cape was an English company which mined asbestos in South Africa. Products were marketed in the USA through a complex range of subsidiaries. Factory workers in Texas who had contracted illnesses through exposure to asbestos dust obtained judgment in Texas against the holding company, Cape. They sought to have the judgment enforced against Cape in England, arguing that Cape had been present, through its subsidiaries, in the USA. Three arguments were put forward:
(1) The agency argument - that the subsidiaries were mere agents making contracts for their principal, Cape.
(2) The single economic unit argument - that Cape and its subsidiaries were really one economic unit, and
(3) The "facade" argument - that the separate identities of the subsidiaries was merely a facade concealing the true facts.
All of the arguments failed. The court stated that: "Save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v A Salomon & Co merely because it considers that justice so requires.
28. DHN Food Distributors v Tower Hamlets London Borough Council  1WLR 852.
DHN was a holding company which ran its business through two wholly owned subsidiaries: Bronze Investments Ltd and DHN Food Transport Ltd. Bronze owned the premises from which the business was conducted and Transport ran the business. The Council compulsarily purchased the land. Compensation could be paid under two heads: (a) the value of the land, and (b) disturbance of business. The Council was prepared to pay for the value of the land but refused to pay for disturbance of business because neither DHN or DHN Food Transport had any rights of ownership in the land. Lord Denning pierced the veil of incorporation to treat DHN as the owners of the land, which entitled them to payment of compensation. He felt that the group of companies was a single economic entity.
29. Woolfson v Strathclyde Regional Council 1978 SC (HL) 90
W ran a shop in Glasgow, which in 1966 was compulsarily purchased by the Council. Part of the shop premises was owened by W himself, the rest being owned by a company called Solfred Holdings Ltd, whose shares were owned by W and his wife. W and Solfred received compensation for the value of the land, but the Council refused to pay compensation for disturbance of the business, because the business was operated by M & L Campbell Ltd, another company owned by W and his wife. Campbell Ltd occupied the premises, but had no interest in the land. W tried to persuade the court that he and his two companies were, in reality, a single entity which both owned and occupied the land. The court did not accept this. It was held that W's case was distinguishable from the DHN case. Whereas, in that case, DHN had owned and totally controlled both its subsidiaries, W himself held only two-thirds of the shares in Solfred, and Solfred owned no shares in Campbell Ltd. The three were distinct entities.
30. Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd  AC 307
After war broke out with Germany, the tyre company, which was registered in England and had its registered office there, sued Daimler for the cost of goods supplied before war broke out. Daimler claimed that, as the members and officers of the company were German, paying the debt would amount to trading with the enemy, therefore the matter should not be permitted to go to trial. Held: The action should not go to trial. Though the domicile and nationality of a company is normally determined by its place of registration and the situation of its registered office, the court was prepared to lift the corporate veil to determine who was in control of the company. If the company was controlled by enemy aliens, the company could also be regarded as an enemy alien.
31. Re a Company  BCLC 333 (CA)
The case involved a complicated network of companies and trusts. The court allowed the veil to be lifted to establish exactly what the defendant owned and where it was located. The network of companies had been set up in an attempt to confuse and conceal. It was said that: "The court will use its powers to pierce the corporate veil if it is necessary to achieve justice."
32. Creasey v Breachwood Motors Ltd  BCLC 480
C was dismissed from his employment with a company called Welwyn Motors Ltd. W Ltd carried on business from premises owned by Breachwood Motors Ltd. The two people who were the sole directors and shareholders of B Ltd were also the only directors and shareholders of W Ltd. C sued his employers for wrongful dismissal and was awarded over £60,000. Unknown to C, the directors of W Ltd had already transferred all its assets to B Ltd, and W Ltd had been struck off the register of companies. B Ltd paid all of W Ltd's trade creditors, so as to maintain creditworthiness, but it did not pay C's claim. B Ltd then carried on W Ltd's former business from the same premises as before. B Ltd claimed it was not liable to pay the compensation to C because W Ltd and B Ltd were separate legal entities. The court lifted the corporate veil and determined that W Ltd was part of B Ltd, thus B Ltd was prima facie responsible for payment of the compensation. The court felt that lifting the veil was necessary in the interests of justice.
33. Ord v Belhaven Pubs Ltd  BCLC 447
The claimants bought the lease of a pub from the defendant company, and brought an action for damages for misrepresentation and breach of warranty. The defendant company was part of a group, which was restructured in a way that transferred the hotels that the defendant company
had owned into the name of the parent company, leaving the defendant without assets, apart from the pub leased to the claimants. The claimants sought leave to substitute the parent company and another subsidiary as the defendants in the case. This was allowed at first
instance, but reversed on appeal. The Court of Appeal held that in the absence of evidence that the transfer was a sham or a fraud, the veil of incorporation should be upheld and the decision in Creasey v Breachwood Motors Ltd was disapproved.
34. Yukong Line Ltd v Rendsburg Investments Corp  2 BCLC 485
The claimant (Y) was a ship-owning company, which agreed to charter a ship to Rendsburg (R) The charterparty to hire the ship was signed for R by Yamvrias as director of the brokers of R. Before the ship was delivered, Yamvrias gave notice to Y that R would be unable to carry out
the contract to hire the ship. On the same day Yamvrias transferred large sums of money out of R’s bank account to that of an associated company, in order to make the money unavailable in the event of litigation by Y against R. Litigation was commenced, and later amended to
include Yamvrias and the associated company as defendants, as R was insolvent. The court refused to lift the veil of incorporation: Yamvrias was held to be a shadow director of R, but although he was in breach of fiduciary duty to R, that would be actionable by R but not by Y.
However, if R were to be put into liquidation, the liquidator would be able to bring proceedings seeking compensation from Yamvrias for breach of fiduciary duty. As the company was not put into liquidation in this case, there was no remedy to Y.
35. Ewing v Buttercup Margarine Co Ltd  2 Ch 1
Ewing ran a dairy products business called the Buttercup Dairy Company, which sold margarine in 150 shops. The shops were only in Scotland and the North of England, but Ewing had plans to expand his business to the South of England. The defendant company was registered in 1916 to carry on the business of supplying margarine wholesale. Ewing brought an action for an injunction to prevent the company trading under its registered name. The defendants suggested that, as Ewing was a retailer and they were wholesalers, there would e no confusion. In addition, as the company would only operate around London, there would be no confusion between it and a trader who only operated in the North. Held: The injunction would be granted. Although the defendants were wholesalers, the objects clause of the memorandum did give power to retail which the company might exercise in future. In addition, the plaintiff intended to expand his business into the South of England. Confusion was a real possibility.
36. Dunlop Pneumatic Tyre Co Ltd v Dunlop Motor Co Ltd 1907 SC (HL) 15
The pursuers were in the business of manufacturing tyres, the defenders carried on business as a retail motor trader and car repairer. There was no evidence of any fraudulent intention on the part of the defenders. Interdict was refused, on the basis that confusion was unlikely to result.
37. Aerators Ltd v Tollitt  2 Ch 319
The plaintiff company was formed to work a patent for the instantaneous aeration of liquids. The defendants were in the process of forming a new company to be called Automatic Aerator Patents Ltd. The plaintiffs requested an injunction the restrain the defendants from registering that name on the basis that it would deceive the public, the work "aerator" being associated with the plaintiff company. The plaintiff's patent was a portable aerator for use in siphons, while the defendants' company was concerned with large installations. Held: No evidence had been brought to show there was any likelihood of confusion and the injunction would not be granted. The action was an attempt to monopolise a word in ordinary use and must be dismissed.
38. Exxon Corporation v Exxon Insurance Consultants International Ltd  Ch 199
The plaintiffs were internationally known producers of petroleum products. The defendants were motor insurance brokers. The plaintiffs successfully sought an injunction to restrain the defendants fom their use of the word "Exxon" even though the two businesses were unrelated to each other. The plaintiffs had an international reputation and "Exxon" was a distinctive invented word. There was a possibility of confusion.
39. Ashbury Carriage & Iron Co v Riche (1857) LR 7 HL 653
The company bought a concession for the construction of a railway system in Belgium and entered into an agreement to finance Riche to construct a railway line. The objects clause in the memoradum of the company stated that it was established to manufacture and sell railway carriages and other railway equipment and to buy and sell timber and coal. Riche began work on the contract and sums of money were paid over by the company in connection with the contract. The company later ran into difficulties, and the shareholders wanted the directors to take over the contract in a personal capacity, and to indemnify them against any loss. The directors then repudiated the contract on behalf of the company, and Riche sued the company for breach of contract. Held: The financing of the concession was ultra vires and void as it was not within the objects of the company - the company could use its money to make things for railways, but not to make railways as such. The contract with Riche was therefore void, and the directors were entitled to repudiate it.
Status of Memorandum
40. Re Duncan Gilmour & Co Ltd  2 All ER 871
A company had ordinary and preference shares. The memoradum provided that the holders of the preference shares should have a preferential right in the distribution of the company's assets in the event of a winding up. The articles provided that in a winding up the surplus assets should be divided between all the members in proportion to the capital paid up on their shares, ordinary or preference. Held: The rights conferred by the memorandum on the preference shareholders were exhaustive. The articles could not be referred to to extend the rights in the memorandum.
Limitations on Power to Alter Articles
41. St Johnstone Football Club Ltd v Scottish Football Association Ltd  SLT 171
One of the company's articles prohibited any member from taking legal proceedings of any kind against the company. It was held that this was contrary to public policy and therefore void.
42. Allen v Gold Reefs of West Africa Ltd  1 Ch 656 (CA)
The articles gave the company a lien for debts owed by members to the company on all partly paid shares held by such members. Zuccani was the only holder of fully paid shares although he also held shares which were not fully paid. The company altered its articles to extend the lien to fully paid shares, an alteration which would only affect Zuccani. Zuccani's executors challenged the alteration. Held: The alteration was bona fide for the benefit of the company as a whole, and the lien applied to all shareholders equally. It made no difference that Z was the only person practically affected at the time. The alteration was valid.
43. Greenhalgh v Arderne Cinemas Ltd  Ch 286 (CA)
Under the articles, existing members had a right ot pre-emption if any member wanted to sell his shares. M, who owned a controlling interest in the company, wanted to sell his shares to S, who was not a member. To achieve this, he procured a resolution to alter the articles so as to enable any member with the sanction of an ordinary resolution to transfer his shares to any outsider named in the resolution. The plaintiff sought a declaration that the alteration was invalid. Held: The alteration was valid, even though the minority not only lost their right of pre-emption, but possibly also the right to sell to an outsider, since they would require the concurrance of the majority to pass the necessary resolution. It was considered to be for the benefit of the company as a whole.
44. Brown v British Abrasive Wheel  1 Ch 290
The company required further capital. The majority, who represented 98% of the shareholders were willing to provide the capital but only if they were able to acquire the remaining 2% of the shares. The articles were altered to allow holders of 90% of the shares to compulsarily purchase the shares of the remaining shareholders. The alteration was held to be invalid - it was not for the benefit of the company as presently constituted, though it would have been valid if it had been contained in the original articles.
45. Dafen Tinplate Co Ltd v Llanelly Steel Co  2 Ch 124
The principal shareholders of the defendant company were other steel companies, and it was hoped that the member companies would buy their steel bars from the defendants, though there was no contract to this effect. The member companies did mostly buy their steel from the defendants, but in 1912 the plaintiff company began to buy steel elsewhere. The defendants then altered the articles in order to expel the plaintiffs. The alteration provided that the defendant company could, by means of an ordinary resolution, require any member to sell his shares to the other members. Held: The alteration was void. The power taken by the articles was a bare power of expulsion and could be used to expel a member who was not acting to the detriment of the defendant company.
Legal Effect of Memorandum and Articles
46. Hickman v Kent or Romney Marsh Sheep Breeders' Association  1 Ch 881
Hickman was a member of the association but it proposed to expel him. He brought an action for an injunction to prevent the expulsion, but the articles provided for disputes between the association and its members to be referred to arbitration. The court stayed the action so that the matter could be referred to arbitration - the article was binding between the company and its members.
47. Wood v Odessa Waterworks Co (1889) 42 Ch D 636
A company declared a dividend and passed a resolution to pay it by giving to the shareholders debenture bonds bearing interest and redeemable over 30 years. The articles empowered the directors to declare a dividend "to be paid" to the shareholders. Held: The words "to be paid" meant paid in cash. A shareholder could restrain the company form acting on the resolution on the ground that it contravened the articles.
48. Eley v Positive Government Life Assurance Co Ltd (1876) 1 Ex D 88
The articles provided that Eley was to be appointed as the company's solicitor, and that he should not be removed from office except for misconduct. Eley was employed as solicitor and he became a member of the company some time after its incorporation. When the directors ceased to employ him and used another solicitor, he sued for breach of contract. Held: The articles did not create any contract between the company and Eley in his capacity as solicitor.
49. Beattie v E & F Beattie Ltd  Ch 708
The company's articles provided for any dispute between the company and one of its members to be settled by arbitration. A director who was also a member sought a stay in legal proceedings brought against him concerning his conduct as a director, on the grounds that the matter should be referred to arbitration. Held: There was no contractual agreement to submit to arbitration a dispute between the company and a member in his capacity as director. The articles are enforceable as a contract only with regard to membership matters.
50. Re New British Iron Co, ex parte Beckwith  1 Ch 324
Beckwith was employed as a director, relying for his remuneration on a provision in the articles which said he should be paid £1000 per year. He brought an action against the company for payment of his fees. It was held that the articles did not form a contract between the company and Beckwith in his capacity as director, but he had taken office and worked on the basis of the articles, so the provisions had thus become an implied term of his contract of employment and the company was liable to pay him on this basis.
51. Salmon v Quinn & Axtens Ltd  1 Ch 311
Shares in the company were mostly held by Axtens and Salmon, who were both appointed directors along with one other person. The articles permitted either Axtens or Salmon to veto any board decision. Salmon tried to veto a decision, but the other directors went ahead and got approval for the decision by ordinary resolution at a general meeting. Salmon tried to restrain the company from carrying out the decision and the court issued an injunction. The company was trying to bypass its own rules regarding decision making without following the procedure for altering the company's constitution. Salmon as a member had the right to enforce the provisions of the articles and to prevent the company acting unconstitutionally - he sued as a member, not as a director.
52. Rayfield v Hands  Ch 1
The articles provided that if a member of the company who intended to transfer his shares informed the directors of this, the directors were bound to buy them. It was held this bound the director to take the shares. The action was concerned with the relationship between the plaintiff as a member and the directors in their capacity as members. It was not necessary for the company to be party to the action.
Meetings - Court Orders
53. Re Sticky Fingers Restaurant Ltd  BCLC 84
Wyman and Mitchell held shares in a restaurant. Disputes arose and Mitchell brought a s.459 petition on the basis that the conduct of the company was unfairly prejudicing his interest. It was then agreed that Wyman would buy Mitchell's shares. Mitchell refused to attend any meetings, but the quorum set by the articles was two, so the company could not carry out any formal business. Wyman applied to the court for an order calling a general meeting at which he could appoint two additional directors. The court granted the order, subject to certain conditions.
Meetings - Notice
54. Young v Ladies Imperial Club  2 KB 523
A member of a club was expelled by a resolution passed by committee. One member of the committee had not been sent a notice of the meeting, because she had informed the chairman that she would be unable to attend. Held: Failure to send her notice of the meeting invalidated the proceedings and made the expulsion void.
55. Re West Canadian Collieries Ltd  Ch 370
A company failed to give notice of a meeting to some of its members because plates were inadvertantly left out of a machine used for addressing envelopes. This was held to be an accidental omission, so the proceedings of the meeting were not invalidated.
56. Bradman v Trinity Estates plc  BCLC 757
Notices of a meeting were posted during a postal workers strike to shareholders living outside London. The only members of the company who attended the meeting were those living in London whose notice had been delivered by courier. The court refused to accept the usual concept that notice is deemed to have been delivered 48 hours after posting.
57. Baillie v Oriental Telephone & Electric Co Ltd  1 Ch 503
Directors of a holding company had been receiving payment for being directors of a subsidiary company for several years, without the knowledge of the shareholders of the holding company. Special resolutions were proposed to allow the directors to keep the payments received and to alter the articles to allow them to receive remuneration in future. A meeting was called to consider the resolutions, but the notice did not specify the amount of the remuneration, which was £45,000. Held: The resolution was not binding on the company as the notice had been insufficient.
Meetings - Quorum
58. Sharp v Dawes (1876) 2 QBD 26
The company was a mining company in Cornwall, with offices in London. Notice of a general meeting was properly given but, on the day, the meeting was only attended by the secretary, Sharp, and one shareholder. They conducted the meeting and agreed, among other things, to make a call on shares. Dawes refused to pay the call and was sued by Sharp on behalf of the company. Dawes' defence was that calls could only be made at a meeting and there had been no meeting, as no quorum was present. Held: The call on shares was invalid. A meeting could not be constituted by one member.
Meetings - Voting
59. Northern Counties Securities Ltd v Jackson & Steeple Ltd  2 All ER 625
The judgement in this case illustrates that, although directors voting at a board meeting owe a fiduciary obligation to the company, when voting as shareholders in general meetings they can vote in their own interests.
Walton J said: "..a director is an agent, who casts his vote to decide in what manner his principal shall act through the collective agency of the board of directors; a shareholder who casts his vote in general meeting is not casting it as an agent of the company in any shape or form. His act, therefore, in voting as he pleases cannot in any way be regarded as an act of the company."
Directors - Appointment
60. Re Altim Pty Ltd  2 NSWR 762
A bankrupt applied to the court for permission to take part in the management of a company. There was no evidence to suggest that the applicant had been dishonest in any way, but the application was refused. The court emphasised that the prohibition on bankrupts acting as company directors was not intended as punishment for the bankrupt individual but to protect the community. The applicant had a long history of failed businesses in the building industry and this demonstrated an incompetence from which the public deserved to be protected.
61. R v Brockley  1 BCLC 606
Brockley was convicted of taking part in the management of a company while he was an undischarged bankrupt. His defence was that he honestly believed the bankruptcy had been discharged automatically through lapse of time. Held: The honestly held belief of the accused that he was no longer bankrupt made no difference to the conviction. The prohibition was absolute and the offence was one of strict liability.
Directors - Disqualification Orders
62. R v Austen (1985) BCC 99
Mr Austen's company operated car dealerships, and he had been convicted of making fraudulent hire purchase arrangements in connection with cars sold from his showrooms. He was disqualified from taking part in the management of a company under s.2 of the Company Directors Disqualification Act 1986 (as being a person convicted of an indictable offence in connection with the promotion, formation or management of a company) His appeal against disqualification was dismissed. The section was wide enough to cover circumstances such as these.
63. Re Sevenoaks Stationers (Retail) Ltd  BCLC 325
Mr Cruddas was director of five companies which became insolvent leaving unpaid debts of £559,000. Though he was a chartered accountant, the court felt that the absence of proper financial control, which was his responsibility, was the main reason for the failure of the companies. Though there was no evidence that Cruddas was dishonest, the accounts of the companies had not been properly audited and the accounting records of one of them had not been properly kept. He had made loans from one company to another and Sevenoaks Stationers had guaranteed the debts of another of his companies. He had also continued to trade while the company was insolvent. He was disqualified from acting as a director for seven years (later reduced to five by the Court of Appeal) on the grounds that his conduct made him unfit to be concerned in the management of a company.
64. Re Firedart Ltd  BCLC 340
"In my judgment there are a number of matters which, if proved, would generally lead me to the conclusion that a director was unfit to be concerned in the management of a company. They include: trading while insolvent; taking personal benefits over and above any proper remuneration; failing to keep proper accounting records." (per Arden J).
Directors - Proceedings
65. Re Homer District Gold Mines (1888) 39 Ch D 546
Application was invited for 106,000 shares, and the directors resolved not to allot until 14,000 shares were applied for. A subsequent meeting was held at which only two directors (a quorum) were present, when a resolution was passed to allot the shares already applied for, about 3,000. The meeting was held at a few hours notice at 2 o'clock. This was much shorter notice than had ever been given before. One director did not receive his notice until the following day, and another gave notice that he could not attend until 3 o'clock. Held: The allotment was void owing to the inadequacy of the notice.
66. Browne v La Trinidad (1887) 37 Ch D 1
A meeting of directors decided that an EGM should be convened to remove Browne as a director. The resolution to remove him was subsequently passed at the EGM. Browne tried to claim that his removal was not valid as he had not received adequate notice of the board meeting. Held: The notice he had received of the directors' meeting was inadequate, but he should have complained straight away, and by failing to do so he had waived his right to challenge the resolution taken at the EGM. Further, the inadequate notice made no difference to the subsequent vote at the EGM (the members were unanimous). The court refused to interfere, as this would mean the whole procedure would pointlessly have to be gone through again.
67. Bentley-Stevens v Jones  1 WLR 638
It was held that a letter sent on Sunday convening a board meeting for Monday morning was not adequate notice, but the court refused to declare that a motion passed at the meeting was invalid, as the director's presence would not have influenced the vote.
68. Shaw v Tati Concessions Ltd  1 Ch 292
The chairman of a meeting at which a poll was demanded directed that the poll be held 6 weeks later. Because he had proxies for about 58,000 shares, Shaw would win the poll unless his opponents were able to use proxies they held for over 99,000 shares. On the day before the poll was to be taken, the court ruled that the documents appointing proxies for the 99,000 shares had not been delivered within the time limit set by the company's articles. They must therefore be disallowed. Though only a procedural matter, failure to observe it to the letter would make a real difference to the outcome.
69. Re North Eastern Insurance Co Ltd  1 Ch 198
Y and D, two directors of a company, had made advances to the company in consideration of receiving debentures. The company had four directors, three of whom were required for a quorum. A resolution was passed granting a debenture to Y. Y did not vote on this resolution. Another resolution was then passed granting a debenture to D, on which D did not vote. The two debentures ranked equally among themselves. Held: The issue of the two debentures formed one transaction in which Y and D were equally interested. One transaction could not be split into two so as to qualify directors to vote and both the resolutions were invalid for want of a quorum.
Powers of Directors
70. Howard Smith Ltd v Ampol Petroleum Ltd  AC 821
Ampol Petroleum and Bulkships Ltd together owned 55% of the issued share capital of R W Miller (Holdings) Ltd. Ampol and Howard Smith Ltd were making competing takeover bids for Miller. The directors of Miller favoured Howard Smith's bid, which was higher, but there was no prospect of this bid succeeding because Ampol and Bulkships would not have accepted Howard Smith's offer. The evidence showed that Miller was in need of further capital. The directors of Miller resolved to allot new shares to Howard Smith for two purposes; first, to raise the capital needed, and secondly to reduce the holding of Ampol and Bulkships to enable Howard Smith's bid to succeed. Ampol challenged the validity of the allotment. Held: The allotment was not valid. Its dominant purpose was to alter the balance of power, and this was not the purpose for which the director's power to allot shares had been given.
Lord Wilberforce said: "The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of the shareholders, and indeed that the majority of the shareholders cannot control them in the exercise of these powers while they remain in office, so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist."
71. Barron v Potter  1 Ch 895
The articles gave the board of directors power to appoint an additional director. The company had two directors, but the business of the company had come to a halt because one of them refused to attend any board meeting at which the other was present. Held: Where the directors were unable or unwilling to exercise the powers given to them, as here, the members of the company could do so. The shareholders in general meeting thus had power to appoint an additional director.
72. Bamford v Bamford  Ch 212
The directors of a company wished to fight a takeover bid. They allotted 500,000 shares to a company which distributed their products because the distributors agreed not to accept the takeover bid. A shareholder brought an action claiming that the allotment was invalid, as it was not bona fide in the best interests of the company. Held: The allotment of shares was valid. It was an improper use of the directors' powers, but was not ultra vires, therefore the members could ratify the directors' actions by ordinary resolution in general meeting. This had been done.
Duties of Directors - Fiduciary Duties
73. Percival v Wright  2 Ch 421
Percival wished to sell his shares in the company and wrote to the company secretary asking if he knew of anyone willing to buy. After negotiations, the chairman of the board of directors arranged the purchase of 253 shares, 85 for himself and 84 for each of his fellow directors at a price based on Percival's valuation of the shares. The transfers were approved by the board and the transactions completed. Soon afterwards, Percival discovered that prior to and during the negotiations for the sale of his shares, another person was negotiating with the board for the purchase of the whole company and was offering various prices for shares, all of which exceeded the price paid to Percival. Percival then brought an action against the directors asking for the sale of his shares to be set aside for non-disclosure. Held: The directors are not trustees for the individual shareholders and may purchase their shares without disclosing that they are negotiating for the sale of the entire company.
74. Allen v Hyatt (1914) 30 TLR 444
The directors of a company induced the shareholders to give them options for the purchase of their shares so that the directors could negotiate for the sale of the shares to another company. Instead of selling the shares directly to the other company, the directors used the options to purchase the shares themselves and then resold them to the other company. Held: The directors had made themselves agents for the shareholders in the sale of the shares and must therefore account to them for the profit they had made on the sale.
75. Re W & M Roith Ltd  1 All ER 427
The controlling director of a company had given many years service without having a service contract. He was then given a service agreement providing for payment of a pension to his widow if he died while still a director. He was already in poor health at this time and he died two months later. The pension was paid for several years and then the company went into liquidation. The director's executors put in a claim in the liquidation for the capitalised value of the pension. The liquidator rejected the claim. Held: The claim could not be supported. The pension was not for the benefit of the company, nor incidental to the carrying on of the company's business.
76. Aberdeen Railway Co v Blaikie Bros [1843-60] All ER 249
The railway company agreed to buy chairs from a partnership, Blaikie Bros. Blaikie, a member of the partnership was also a director of the company. When the partners tried to enforce the contract the company successfully claimed that the contract was voidable owing to the director's conflict of interest.
Lord Cranworth said: "His duty to the company imposed on him the obligation of obtaining these iron chairs at the lowest possible price. His personal interest would lead him in an entirely opposite direction - would induce him to fix the price as high as possible. This is the very evil against which the rule is directed."
77. Guinness plc v Saunders  2 AC 663
Guinness plc was bidding for (and later acquired) all the shares in Distillers plc. Following a resolution of the board, the chief executive, Mr Saunders, and two non-executive directors, Roux and Ward, were constituted as a committee of the board to settle the terms of the offer to Distillers and to complete any necessary documentation. After the bid was successful, Ward submitted an invoice to Guinness for £5.2 million for advice and services given to Guinness in the course of the bid. Various scandalous circumstances concerning the bid later emerged and Guinness claimed to recover the payment. Ward asserted that the committee had agreed on behalf of Guinness to pay him 0.2% of the ultimate value of the bid, so the £5.2 million was properly paid for his services in negotiating the deal over a fourteen week period.
Held: Ward was not entitled to the payment for his services as he was in a conflict of interest position. He was supposed to advise the company whether to go ahead with the bid and on what terms, but he would only receive commission if the bid was successful and the more that Guinness paid for Distillers, the larger his commission would be. Further, disclosure of an interest as required by s.317 of the Companies Act 1985 had to be made to the whole board, it was not sufficient that the committee knew of it.
78. Neptune (Vehicle Washing Equipment) Ltd  3 All ER 811
It was held that a sole director could be in breach of s.317 by failing to declare his interest in a contract at a meeting. The declaration should have been made and recorded in the minutes of the meeting.
79. Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339
Ansell was a director of Boston and, on the company's behalf, contracted for the building of fishing boats. Unknown to the company, he was paid a commission on the contract by the shipbuilders. Ansell was also a shareholder in an ice company which, in addition to dividends, paid bonuses to shareholders who were owners of fishing boats and who employed the ice company to supply ice to those boats. Ansell contracted with the ice company to supply ice to Boston's boats and was paid the bonus. Held: Ansell must account to Boston for both the commission and the bonus, though Boston could not have received the bonus directly as it was not a shareholder in the ice company.
80. Regal (Hastings) Ltd v Gulliver  1 All ER 378
Regal owned one cinema and wanted to buy two others and sell all three together. Regal formed a subsidiary company to buy the two cinemas, but was unable to supply all the necessary capital. All but one of the directors of Regal subscribed for shares in the subsidiary to allow the necessary capital to be raised. The cinemas were then acquired and the shares in Regal and the subsidiary sold at a profit. Held: The directors who had subscribed for shares in the subsidiary had to account to Regal for the profit they had made, because it was only through the knowledge and opportunity they had gained as directors of Regal that they were able to obtain the shares.
81. Industrial Development Consultants Ltd v Cooley  1 WLR 443
The managing director of IDC attempted to secure a contract on IDC's behalf with the Eastern Gas Board. EGB indicated to him that they were not prepared to deal with IDC but might be prepared to contract with the director (Cooley) personally. Cooley then represented to IDC that he was ill and was allowed to terminate his contract at short notice. He then negotiated with EGB and obtained the consultancy for himself. Held: He must account to IDC for the profit he obtained for the contracts. He was in breach of duty and it was immaterial that IDC could not have obtained the contract itself.
82. Cook v Deeks  1 AC 554
Three directors of the Toronto Construction Co Ltd were supposed to be negotiating a construction contract on behalf of the company. Instead they formed another company and took the contract for themselves. They were holders of 75% of the share capital of Toronto Construction, and used this majority to pass a resolution at general meeting that the company had no interest in the contract. Held: A director can normally keep a personal profit if the company consents, but this consent is invalid if the director concerned controls the voting at general meeting. This was fraud on the minority.
Directors Duties - Duty of Care and Skill
83. Re City Equitable Fire Insurance Co Ltd  Ch 407
The chairman of the company committed frauds by purporting to buy Treasury Bonds just before the end of the accounting period and selling them just after the audit. By this method a debt due to the company from a firm in which the chairman had an interest was reduced on the balance sheet by increasing the assets. The liquidator of the company attempted to make the other directors liable for failing to discover the fraud. (They had left the management of the company entirely in the hands of the chairman). The liquidator failed. Romer J laid down the duties of care and skill to be expected of a director:
(a) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from someone of his knowledge and experience.
(b) A director is not bound to give continuous attention to the affairs of the company.
(c) Where duties may properly be left to some other official, a director is justified, in the absence of grounds for suspicion, in trusting that official to perform his duties honestly.
84. Re Brazilian Rubber Plantations & Estates Ltd  1 Ch 425
A rubber company made serious losses in a ruinous speculation in Brazil. The directors, who had no experience in the business of rubber plantations, were sued for negligence. The action failed. Neville J said of a director's duty of skill and care: "He is, I think, not bound to bring any special qualifications to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which result from such ignorance."
85. Dorchester Finance Co Ltd v Stebbing  BCLC 498
Dorchester Finance was a moneylending company with three directors, only one of whom was involved in the business on a full-time basis. No board meetings were held and the other two directors rarely visited the company. All three directors were experienced accountants. The full-time director made loans to persons with whom he was connected and which did not comply with the Moneylenders Acts. Payment could not therefore be recovered by the company. The company sued all three directors for negligence. Held: All three were liable. The full-time director had only been able to do what he did because the others showed no interest in the affairs of the company, and had signed blank cheques at his request.
86. Norman v Theodore Goddard  BCLC 1028
Mr Quirk, a chartered surveyor, was a director of a property company. The shares in the company were the principle assets of a trust administered by Theodore Goddard, a leading firm of solicitors. A partner in the solicitors firm advised Quirk that tax would be saved if the company's surplus cash was lent on deposit to a company which the partner claimed was controlled by Theodore Goddard. In fact the company was controlled by the partner personally and was one of the devices he used to steal money from trust funds administered by his firm. It was held that Quirk was not negligent in relying on the partner's advice, but Hoffman J postulated a duty of care which was tougher than that laid down in earlier cases. He said that a director should have the skill that may reasonably be expected from a person undertaking those duties. "A director who undertakes the management of a property company is expected to have reasonable skill in property management, but not in offshore tax avoidance."
87. Re D'Jan of London Ltd  BCC 646
Mr D'Jan was held prima facie liable to the company for loss caused when the company's insurers refused to pay on a fire policy. He had signed an incorrectly completed proposal form without having read it.
Directors - Removal from Office
88. Bushell v Faith  AC 1099
Three directors each held 100 shares in a company with an issued share capital of 300 shares. A provision in the articles stated that, in the event of a resolution being proposed for the removal of a director, that director's shares would carry three votes per share. Two of the directors attempted to remove the third but could not obtain the necessary majority because of the weighted voting rights. A declaration was sought from the court that the resolution had been validly passed. Held: s.303 did not prevent companies attaching special voting rights to shares. The resolution was not valid.
89. Foss v Harbottle (1843) 2 Hare 461
Two minority shareholders brought an action against the company's directors alleging that they had defrauded the company in a number of ways, including selling land to the company at an exorbitant price. They asked the court to order the directors to make good the losses to the company. The court refused. The conduct of the directors was a wrong done to the company and only the company could sue. As the board was still in existence and it was still possible to call a general meeting of the company, there was nothing to prevent the company from determining to bring an action.
90. Edwards v Halliwell  2 All ER 1064
A trade union had rules equivalent to articles of association under which any increase in the contributions of members had to agreed by a two-thirds majority in a ballot of members. A meeting decided by simple majority to increase the subscriptions without holding a ballot. The plaintiffs, as a minority of members, applied for a declaration that the resolution was invalid. Held: The rule in Foss v Harbottle did not prevent a minority of members suing because the matter was one which could only be done or sanctioned by a greater than simple majority. Jenkins LJ identified four exceptions to the Rule in Foss:
(a) Fraud on the minority by wrongdoers in control.
(b) Invasion of the personal rights of members.
(c) Ultra vires acts.
(d) Material procedural irregularities.
Fraud on the Minority
91. Prudential Assurance Co Ltd v Newman Industries Ltd  Ch 204
Prudential owned 5% of the shares in Newman. They sought to bring an action against two directors who had allegedly defrauded Newman of £440,000. The two directors were not majority shareholders and had no overall voting control. The fraudulent transaction had been approved by a general meeting. Prudential claimed the shareholders had been misled into approving. The court said that the concept of control covered a broad spectrum - it would include situations where the wrongdoers had de facto control, i.e. where the majority vote was made up of the wrongdoer's votes plus those voting with him because of his influence or their apathy.
92. Pavlides v Jensen  Ch 565
The directors of the Tunnel Asbestos Cement Co sold an asbestos mine to Cyprus Asbestos Mines Ltd in which Tunnel held 25% of the issued shares. The sale was not submitted to a general meeting of Tunnel and a minority shareholder claimed the mine had been sold at undervalue and the directors were therefore negligent. It was held that as the sale was intra vires and no fraud was alleged, the sale could be approved by the shareholders and it was a matter for them.
93. Daniels v Daniels  2 All ER 89
Three minority shareholders wished to bring an action against the two majority shareholders, who were also the directors. It was alleged that the company, Ideal Homes Ltd, had sold property to one of the directors at a price considerably less than its true value. It was held that the claim should proceed, because if the breach was one of fiduciary duty, it should be allowed to proceed on the basis of Cook v Deeks, since the majority could control general meetings. If the breach was of duty of care (negligence) then it could proceed as an exception to Foss v Harbottle, because the alleged negligence had resulted in profit to one of the directors.
94. Menier v Hooper's Telegraph Works Ltd (1874) 9 Ch App 350
The European and South American Telegraph Co was formed to lay a transatlantic cable to be made by Hooper's, who was the majority shareholder in E & SA Telegraph. Hooper's then found they could make a greater profit by selling the cable to another company, but this company did not have the government concession to lay the cable. After negotiations with the government trustee, he arranged to transfer the concession and the second company then bought the cable from Hooper's. To prevent E & SA Telegraph from suing for the loss of the concession Hooper obtained a resolution to wind it up voluntarily. Menier was a minority shareholder in E & SA Telegraph who brought an action against Hooper's to make good the losses to the company. Held: The action was valid and Hooper's had to account for profit made on the sale. This was a blatant case of fraud and oppression, benefiting the majority at the expense of the minority.
95. Estmanco (Kilner House) Ltd v Greater London Council  1 All ER 437
The GLC owned a block of 60 flats and formed Estmanco to manage it. Estmanco was to try to sell all the flats to owner-occupiers and, when each was sold, one of 60 shares in Estmanco was transferred to the buyer. The GLC was to control the voting rights for all the shares until all 60 flats were sold. There was a change in the council at an election and it was decided that the remaining flats would not be sold, but would be let to council tenants. The directors of Estmanco brought an action for breach of contract, but GLC had voting control and resolved to discontinue the action. One of the flat owners was successful in bringing an action as an exception to the rule in Foss.
Unfairly Prejudicial Conduct
96. Re Bovey Hotel Ventures Ltd (1981) Unreported
It was said that to establish unfairly prejudicial conduct, the petitioner did not have to show that the persons controlling the company knew they were acting unfairly, or that they acted in bad faith. The test was whether a reasonable bystander, observing the consequences of the conduct, would regard it as having unfairly prejudiced the petitioner's interests. In this case, a company was owned in equal shares by a husband and wife. On the breakdown of the marriage the wife was excluded from management and the company incurred a large VAT bill. She applied for an order for the purchase of either her own or her husband's shares. It was held that the exclusion from management and loss of profit by payment of the unpaid VAT diminished the value of the wife's shares and this was unfairly prejudicial conduct.
97. Re Saul Harrison & Sons plc  1 BCLC 14
"The words 'unfairly prejudicial' are general words and they should be applied flexibly to meet the circumstances of the particular case...The conduct must be both prejudicial (in the sense of causing prejudice or harm to the relevant interests) and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests." (per Neill LJ).
98. Re London School of Electronics  Ch 211
The school was 25% owned by the petitioner and 75% owned by another company, CTC, which was mainly owned by two people. The petitioner was employed as a teacher by CTC until the relationship between the parties broke down, when there was a resolution to remove the petitioner as a director of LSE. CTC then transferred most of LSE's students to its own school. The petitioner left CTC and LSE and set up a rival institution, taking 12 former LSE students with him. He petitioned under s.459 and it was claimed by CTC that he was not entitled to a remedy because he had himself behaved prejudicially toward the company by taking 12 students away. Held: "Clean hands" were not an overriding requirement, though it might affect the relief the court was prepared to grant.
99. Re a Company (No 00477 of 1986)  BCLC 376
The petitioners held all the shares in a company (A Ltd) which they later sold to O plc in return for an issue of shares in O plc. The understanding was that the relationship between them and the controlling shareholders in O plc would be a "partnership". The petition was brought against the controlling shareholders of O plc on the ground that the dismissal of S, one of the petitioners, in breach of his service contract with O plc, was contrary to their agreement and unfairly prejudicial. Held: A member's interest in a company in which he has invested his capital may include a legitimate expectation that he will continue to be employed as a director and exclusion from management may be unfairly prejudicial.
100. Re Ghyll Beck Driving Range Ltd  BCLC 1126
The petitioner had joined three other men who were all to be equal partners in a joint venture in which they would each invest £25,000. All were to take part in the management but the petitioner thought the others were not pulling their weight financially or managerially and he quarrelled with them after which he was excluded from management. The others refused to purchase his shares. Held: The others must buy his shares at a quarter of the going-concern value of the company.
101. Re Sam Weller & Sons Ltd  Ch 682
The petitioners owned 42% of the shares in a family company. Their uncle was the majority shareholder and his conduct had caused the company to fail to increase its dividends in 37 years despite having been prosperous in recent years. At the same time, the directors of the company were receiving substantial salaries. This was held to be unfairly prejudicial conduct, even though the low dividends applied equally to all the members.
102. Re D R Chemicals Ltd (1989) 5 BCC 39
The majority had 60% and the minority 40% of the shares. The majority could thus pass ordinary resolutions but required the support of the minority for special resolutions. The majority shareholder issued shares directly to himself and increased his shareholding to 96%, diluting the minority to 4%, so that the minority had lost any control over the company. This was held to be unfairly prejudicial conduct.
103. Re Elgindata Ltd  BCLC 959
The petitioners made various complaints against the controlling directors, including exclusion from management, late payment of dividends, mismanagement and extravagance. The petition was eventually granted on the basis that the directors had used assets of the company for their personal benefit. On the issue of mismanagement, the court felt that serious mismanagement could amount to unfair prejudice, but the circumstances where this could be so would be rare.
104. Re Astec BSR plc  2 BCLC 556
A company E acquired a 51% holding in A plc, a listed company, but confirmed that it would not alter the composition of the board of directors, and that the increase in its holding would not affect the company generally. Unusually, E was not required to make a takeover bid for the rest of the shares, because A plc although a UK company, was resident in Hong Kong.
E sought to acquire more shares, but this was rejected by the board. E issued a press release, giving a cautious view of A plc’s trading position, urging acceptance of its offer for share purchase, and urging that the company cease making dividend payments. Despite what E had said, it did replace some of the independent directors with its nominee directors, and a board meeting reduced the proposed dividend payment.
The minority shareholders petitioned for relief on the ground of unfairly prejudicial conduct: the ground was either on the basis of the facts given above, or alternatively that E’s purchase of a 51% holding gave rise to a legitimate expectation that they would have their shares purchased.
The court refused the petition, and held that legitimate expectations had no place in public listed companies, as the need for credibility in the share market meant that the share purchasers had to be entitled to rely on the public documentation of the company’s constitution.
105. O’Neill v Phillips  1 All ER 961 (HL)
Phillips (P) had been the sole shareholder and director in a small construction company. O’Neill (O) was one of the employees who had impressed P. P gave O 25% of the shares and made him a director, and told him he would like O to take over the management of the business, and on that basis he would be given 50% of the profits. There was no formal undertaking to give O 50% of the shareholding, but P paid him 50% of the profits, and retired, leaving O as the sole director. O had mortgaged his house in support of a personal guarantee to the company’s bank for borrowings. However, the company was hit by the recession in the early 1990’s. Phillips took back control, although O remained a director, and reduced O to being the branch manager of the German branch and no longer paid him 50% of the profits. Relations between the 2 men broke down, and O took steps to set up a rival business, and petitioned the court alleging
unfairly prejudicial conduct under S459, based on P’s ceasing to pay O 50% of the profits, and on P’s refusal to allot the additional shares up to 50%. : O sought to have his shares purchased, despite the fact that P had already made such an offer, which had been rejected. The House of Lords held that unfairness had not been established in the absence of an agreed term in the articles that the shares would be repurchased, and that there had never been an agreement to give a 50% shareholding to O. The court attempted to limit the expansion of the concept of ‘legitimate expectations’ and held that there was no right of ‘no fault divorce’ for shareholders who fall out with their companies, except in exceptional cases where equitable principles so demand.
Just and Equitable Winding Up
106. Re Yenidje Tobacco Co Ltd  2 Ch 426
Two men were the sole shareholders and directors of a company, with equal rights of management and voting power. After some time they became very hostile to each other and disagreed about appointment of staff and other matters. All communications between them were made through the secretary. Despite this, the company made substantial profits. Held: Mutual confidence had been lost and the company should be wound up.
107. Ebrahimi v Westbourne Galleries  2 WLR 1289
Ebrahimi and Nazar had carried on business for several years in partnership. They then formed a limited company carrying on the same business and were appointed its first directors. Shortly afterwards, Nazar's son was made a third director, and both existing directors transferred some shares to him. Nazar and his son then had the majority at general meetings. The company made good profits. Ebrahimi was then removed as director by the other two and he petitioned that they should purchase his shares or, alternatively, that the company be wound up. Held: The winding up order should be granted. This was a quasi partnership and the basis of the relationship had broken down.
108. Loch v John Blackwood  AC 783
The directors representing the majority had refused to call meetings, submit accounts or recommend a dividend. The minority had lost confidence in the management and suspected that the majority were trying to force them to sell their shares at undervalue. Petition was granted.
109. Jesner v Jarrad Properties Ltd 1994 SLT 83
In this Scottish case, two companies – Jesner & Sons Ltd (Jesner) and Jarrad Properties Ltd (Jarrad) were run informally as one unit for the benefit of members of the Jesner family. Jesner was a trading company and Jarrad a property company. Two shareholders of Jarrad petitioned
under S459 for the purchase of their shares by Jarrad, Jesner, and four members of Jarrad who were also directors. They also petitioned for the company to be wound up on the just and equitable ground. The alleged unfair prejudice lay in the granting of security by Jarrad in
breach of its memorandum and articles of association and the grant of interest-free loans to prop up Jesner. A special resolution authorising the grant of security by Jarrad had been granted without a meeting taking place. The sheriff resulted to grant an order under S459 or to wind the company up on the grounds that managing the companies in this way had been done in good faith for the benefit of the family. On appeal, the Inner House of the Court of Session again refused the S459 petition, but did grant the winding up order, on the grounds that Jarrad had
been run in a manner that destroyed confidence.