Some of the provisions in the articles can be enforced by a member, whether against the company (as in Wood v Odessa Waterworks Co (1889) 42 Ch D 636, below) or against other members (as in Rayfield v Hands [1960] Ch 1, below).
tutor tip
“Link claims by shareholders to enforce the articles based on s 33 with the availability of the broader-based right to petition the court for a remedy based on unfairly prejudicial conduct under s 994”
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CASE EXAMPLE
Wood v Odessa Waterworks Co (1889) 42 Ch D 636
Provisions in the articles of association governed the rights of the members in respect of the division of the profits of the company. A member, on behalf of himself and all other members, brought an action for an injunction to restrain the company from acting on an ordinary resolution supporting a board proposal that profits be used to give debenture bonds to members instead of dividends, on the ground that to do so contravened the articles of association of the company. Held: Per Stirling J: ‘What I have to determine is, whether that which is proposed to be done is in accordance with the articles of association as they stand, and, in my judgment, it is not, and therefore the Plaintiff is entitled to an injunction so far as relates to the payment of dividends.’
CASE EXAMPLE
Rayfield v Hands [1960] Ch 1
Articles provided that a shareholder wishing to sell his shares must offer them to those members who were directors and those member/directors were required to buy the shares at a fair price. The member/directors refused to buy the shares and Mr Rayfield sued them to enforce the provision in the articles. Held: Mr Rayfield could enforce the article against the member/directors who were ordered to take the shares. Note that Vaisey J sounded a note of caution as to the range of application of this principle of direct enforcement by one member against another: ‘The conclusion to which I have come may not be of so general application as to extend to articles of association of every company, for it is, I think, material to remember that this private company is one of that class of companies which bears a close analogy to a partnership.’
It appears that some types of provisions in the articles may not be enforceable by members. The cases in which the courts have imposed restrictions on enforcement fall into two categories, cases concerning enforcement of outsider rights and cases concerning internal irregularities.
Can a member sue to enforce outsider rights in the articles?
It is unclear, even today, whether or not a member can sue to enforce an article that confers on him an ‘outsider right’. An outsider right is a right that attaches to a person in a capacity other than as a member (such as the right to be a director or the company solicitor) rather than in his capacity as member (such as the right to attend and vote at meetings). The case law is inconsistent, rendering this a moot issue.
The more widely held view appears to be that a member cannot sue to enforce outsider rights. The cases of Eley v Positive Government Security Life Assurance Co (1876) 1 ExD 88 (CA), Browne v La Trinidad (1887) 37 Ch D 1, Hickman v Kent or Romney Sheep Breeders Association [1915] 1 Ch 881 and Beattie v E & F Beattie Ltd [1938] Ch 708 (CA), are commonly cited in support of this restriction on enforcement.
CASE EXAMPLE
Eley v Positive Government Security Life Assurance Co (1876) 1 ExD 88 (CA) Articles required the company to employ Eley as its solicitor unless he had been guilty of misconduct. The company used a different solicitor and Eley sued the company for breach of contract arguing that the articles formed a contract between himself and the company. Eley was treated as suing in his capacity as an ‘outsider’, not as a member. Held: Eley could not rely on or enforce the articles which were ‘a matter between the directors and shareholders, and not between them and the plaintiff.’ The court also rejected the argument that the relevant article was evidence of an agreement between the company and Eley separate from the articles.
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THE ARTICLES OF ASSOCIATION
Eley clearly supports the proposition that the articles can only confer rights on a member, not on a third party or ‘outsider’. However this is merely an illustration of the doctrine of privity: the outsider is not a party to the contract and therefore cannot enforce the contract. In fact, although he was not a member at the time the articles were adopted (on incorporation of the company), Eley was a member of the company at the time of the court case but this fact does not seem to have been brought to the attention of the court as it was not addressed in the judgment. It is not clear that this case would have been decided the same way if Eley had sued as a member (‘qua member’), rather than as an outsider. On its face, the case is not authority for the proposition that a member cannot enforce outsider rights, but for the more limited and obvious common law proposition that a non-party to a contract cannot sue to enforce the contract.
CASE EXAMPLE
Browne v La Trinidad (1887) 37 Ch D 1 (CA)
Articles entitled Mr Browne to be a director for a fixed period. Browne was a member of the company but could not enforce the right to be a director, even in his capacity as a member, as it was a matter ‘not connected with the holding of shares’.
The third case cited in support of the unenforceability of outsider rights by a member is Hickman (above), yet, on its facts, Hickman involved membership rights, not outsider rights. The right in the articles enforced by the court was the right of members and the association to have disputes between members and the association arbitrated rather than litigated. Also, the underlying dispute between the member and the association related to membership rights (including the right of all members to have their flocks listed in the flock book published by the association). Consequently, anything said in that case about enforcement of outsider rights is strictly obiter dictum, not being necessary to support the decision in the case. It is unfortunate, therefore, that the Court of Appeal in Beattie placed such importance on two oft-quoted passages from the judgment of Astbury J in Hickman:
JUDGMENT
‘An outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating them as contracts between himself and the company to enforce those rights. Those rights are not part of the general regulations of the company applicable alike to all shareholders and can only exist by virtue of some contact between such person and the company.
... no right merely purporting to be given by an article to a person, whether as a member or not, in a capacity other than that of member, as, for instance, as solicitor, promoter, director, can be enforced against the company.’
The most important case supporting the unenforceability of outsider rights is Beattie v E
& F Beattie Ltd [1938] Ch 708 (CA).
CASE EXAMPLE
Beattie v E & F Beattie Ltd [1938] Ch 708 (CA)
A derivative action was brought on behalf of the company by a member seeking an injunction stopping a director, Ernest Beattie (EB), from denying the member access to the books and accounts of the company. In effect, the company was suing a director for breach of duty in his capacity as director. EB was both a director and a member of the company. He applied to have the action stayed on the ground that the articles contained a provision requiring all disputes between members of the company or between members and the company to be referred to arbitration. (If a valid arbitration clause exists the courts will normally ‘stay’ or pause court proceedings to enable the dispute to be resolved by arbitration.)
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Held: EB could not invoke the article and insist on arbitration as this was not a dispute between the company and himself as a member. It was an action against him in his capacity as a director (an outsider) and the articles were not relevant. Per Wilfred Greene MR: ‘[T]he contractual force given to the articles of association by [s 33] is limited to such provisions of the articles as apply to the relationship of the members in their capacity as members.’
Note that Ernest Beattie was not seeking to enforce the articles ‘qua member’. Rather, in proceedings already underway in which he was being sued in his capacity as a director, he sought to assert his contractual rights as a member of the company. Focusing on this aspect of the case, it could be said that this case, like Eley, is simply an illustration of privity: Ernest Beattie, the director, was not, in that capacity, a party to the contract in the articles. Nor was the dispute between him and the company a dispute between the company and a member as member. As Greene MR commented, by seeking to have the dispute referred to arbitration, ‘he is not, in my judgment, seeking to enforce a right which is common to himself and all other members’. The question was left open in this case whether the court would have stayed the derivative action if an action had been brought by a member (even Mr Beattie himself), as member, to enforce the arbitration clause in the articles, thereby requiring what was a dispute between members and the company (about access to company records) to be arbitrated.
Turning to the authorities for the proposition that outsider rights in the articles are enforceable, in the leading case, Salmon v Quinn & Axtens Ltd [1909] 1 Ch 311 (HL), the House of Lords permitted a shareholder to enforce a veto given to him in the articles in his capacity of managing director.
CASE EXAMPLE
Salmon v Quinn & Axtens Ltd [1909] 1 Ch 311 (HL)
Messrs Axtens and Salmon held a large majority of shares in the company. By the articles:
n General management of the company was given to the board of directors subject to the right of members, by ordinary resolution ‘being not inconsistent with the articles’, to decide matters.
n Each of two managing directors (Messrs Axtens and Salmon) was given power to veto decisions of the board relating to acquiring and letting premises.
In accordance with the articles, as managing director, Mr Salmon (S) vetoed a decision but his veto was ignored and the other directors secured an ordinary resolution of the members to support their decision. S, in his capacity as a member of the company enforcing the articles, sought an injunction to restrain the decision being carried out. Held: The House of Lords granted the injunction reasoning that this was an attempt to by-pass rules on decision-making contained within the articles. It was an attempt to amend the articles by an ordinary resolution rather than by a special resolution (see the next section on amendment of articles). The court would prevent the company acting on a decision taken unconstitutionally.
Mr Salmon, a director and member of the company, in effect enforced the rights in the articles given to a managing director. The managing director’s veto right was not common to all shareholders, thus Mr Salmon enforced an ‘outsider’ right. He enforced this ‘outsider’ right by bringing an action as a member to enforce the articles. Lord Wedderburn has argued that this case establishes that members can indirectly enforce outsider rights in the articles by suing as members to require the company not to depart from the contract in the articles (Wedderburn (1957)).