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The Decision of the House of Lords in Russell v. Northern Bank Development Corporation Limited
Published online by Cambridge University Press: 16 January 2009
Extract
This article seeks to consider whether it is, or should be, possible for companies to give covenants which amount to fetters on their statutory powers. The companies legislation confers many powers on companies but perhaps the most important are the powers to alter objects and articles by special resolution, and the power to alter share capital provided that there is authority to such effect in articles of association. The question whether it is possible to contract out of these statutory powers has received much recent attention because of the decision of the House of Lords in Russell v. Northern Bank Development Corporation Ltd.
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References
1 Companies Act 1985, s. 4 (objects) and s. 9 (articles).
2 Companies Act 1985, s. 121.
3 [1992] 1 W.L.R. 588.
4 [1991] B.C.C. 517.
5 [1991] B.C.C. 517 at 523.
6 This point is discussed in detail below
7 Leading authorities are Pender v. Lushington (1877) 6 Ch.D. 70; Northern Counties Securities Ltd. v. Jackson & Steeple Ltd. [1974] 1 W.L.R. 1133; North-West Transportation Co. Ltd. v. Beatty (1887) 12 App.Cas. 589.
8 The legitimacy of shareholder voting agreements has been recognised in a number of cases including Greenwell v. Porter [1902] 1 Ch. 530; Greenhalgh v. Mallard [1943] 2 All E.R. 234; Ringuet v. Bergeron (1960) 24 D.L.R. (2d) 449 at 459 where Judson J. acknowledged that such an arrangement is not prohibited either by law, by good morals or public order”. Shareholders' agreements have also been afforded statutory recognition in a number of jurisdictions including Canada and the USA.
9 [1987] A.C. 299 at 331.
10 [1970] A.C. 1099.
11 At 1106, adopting the phrase used by Ungoed-Thomas J. at first instance.
12 Gower, , Principles of Modern Company Law (5th ed., London 1992 p. 154Google Scholar.
13 Prentice, “Removal of Directors From Office” (1969) 32 M.L.R. 693, 695 noting the decision of the Court of Appeal. See also the criticisms of their Lordships' “desolating logic” voiced by Collier [1970] C.L.J. 41Google Scholar
14 Schmitthoff, , “House of Lords Sanctions Evasion of Companies Acts” [1970] J.B.L. l.Google Scholar
15 Shapira, “Voting Agreements and Corporate Statutory Powers” (1993 109 L.Q.R. 210Google Scholar.
16 Finn, , “Shareholder Agreements” (1978 6 A.B.L.R. 97 at 101–102Google Scholar.
17 [1992] 1 W.L.R. 588 at 592.
18 Walker v. London Tramways Co. (1879) 12 Ch.D. 705; Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656 at 671; Southern Foundries (1926) Ltd. v. Shirlaw [1940] A.C. 701 at 739.
19 [1969] 2 Ch. 438 at 447–448 .
20 [1992] 1 W.L.R. 588 at 594.
21 Or alter its memorandum in any other respect: it is clear from Lord Jauncey's opinion that the same principles govern this situation.
22 Davenport, “What Did Russell v. Northern Bank Development Corporation Ltd. Decide?” (1993) 109 L.Q.R. 553.
23 For example, Riley, “Vetoes and Voting Agreements: Some Problems of Consent and Knowledge” (1993) N.I.L.Q. 34 at 38; Sealy, “Shareholders' Agreements—An Endorsement and a Warning from the House of Lords” [1992] C.L.J. 437; Shapira, “Voting Agreements and Corporate Statutory Powers” (1993) 109 L.Q.R. 210.
24 [1991] B.CC. 517 at 541.
25 At 544.
26 Andrews, N.H., “Reporting case law: unreported cases, the definition of a ratio and the criteria for reporting decisions” (1985) 5 L.S. 205 at 209 notes that this is a jurisprudential controversy of great interest. The author reviews the relevant literature and, from this, identifies four main possible definitions of a ratio.Google Scholar
27 Cross, and Harris, , Precedent in English Law (4th ed., Oxford 1991), p. 72. The text explains that the reference to any rule of law is to be read as “any ruling on a point of law”Google Scholar.
28 Davenport, note 22 above at 571.
29 [1987] Ch. 1.
30 The same goes for section 121 (increase of share capital) and other statutory powers such as that under section 4 of the Companies Act 1985 to change the objects clause in the memorandum.
31 [1991] B.C.C. 620.
32 Following Howard Smith Ltd v. Ampol Ltd. [1974] A.C. 821, 837 where Lord Wilberforce characterised as “unconstitutional” an allotment of shares by directors purely for the purpose of destroying an existing majority or creating a new majority which did not previously exist.
33 Joint venture company articles usually provide for the quorum at board and general meetings to be each of the joint venturers or their representatives. However, quorum provisions will not be allowed to stand in the way of the normal running of a company's business, and, if necessary, a court may order a meeting to be convened with a quorum different from that which is specified in its articles: Companies Act 1985, s. 371. This power was used in Re Opera Photographic Ltd. [1989] 1 W.L.R. 634 and Re Sticky Fingers Restaurant Ltd. [1991] B.C.C. 754.
34 The Legal Risk Review Committee, the forerunner to the Financial Law Panel, was established by the Bank of England in April 1991 to review any potential legal risks in the UK wholesale financial markets. This move was largely prompted by the local authorities swaps cases (in particular Hazell v. Hammersmith and Fulham LBC [1992] 2 A.C. 1) in which, to the surprise of many participants in the market, many massive transactions were held to be void on the grounds of ultra vires.
35 Little, “The Financial Law Panel” [1993] 3 J.I.B.L. 113.
36 [1903] 2 Ch. 506.
37 At 514.
38 [1915] 2 Ch. 186
39 [1904] 1 Ch. 373 (reversed by the House of Lords ([1906] A.C. 35), but not on grounds relevant to this point).
40 [1915] 2 Ch. 186 at 195.
41 [1940] A.C. 701.
42 Lord Atkin at 719.
43 At 723.
44 At 740—741.
45 Although, if injunctions were too freely granted, in practical terms this could be seen as effectively negating the power to alter the articles.
46 [1900] 1 Ch. 656 at 672.
47 Quoted by Lord Wright in Shirlaw at 725.
48 On this point see Trebilcock, “The Effect of Alterations to Articles of Association” (1967) 31 Conv. (N.S.) 95 at 113–116.
49 [1900] 1 Ch. 656 at 674 per Lindley M.R.
50 [1940] A.C. 701 at 739 per Lord Porter.
51 If the corporate decision is not unanimous but rather is made by a majority of the shareholders, minority shareholders are a further concern. This issue is not separately pursued but later remarks about the position of future shareholders who acquire a minority stake are relevant also to this situation.
52 For example, substantial property transactions involving directors (Companies Act 1985, s. 320) and loans and other credit transactions with directors (Companies Act 1985, s. 330 ff).
53 Companies Act 1985, s. 319(6).
54 Note Chapter 10 of the Yellow Book which imposes a shareholder consent requirement by reference to the size of the transaction, not the identity of the parties. (Chapter 11 deals separately with transactions between a listed company and related parties such as directors and, in certain circumstances, imposes a consent requirement.)
55 Lee Panavision Ltd v. Lee Lighting Ltd. [1991] B.C.C. 620.
56 The shareholders' interest in having the statutory framework upheld could be viewed as yielding to the higher corporate purpose of obtaining finance on proper terms. Sealy, “The Enforcement of Partnership Agreements, Articles of Association and Shareholder Agreements”, chapter 4 in Finn, (ed.), Equity and Commercial Relationships (1987) at p. 109 discusses further the idea that normal rules should be capable of modification in favour of higher corporate purposes.Google Scholar
57 Which is what is done in respect of directors' service contracts: Companies Act 1985, s. 318.
58 [1992] 1 W.L.R. 588 at 594.
59 [1980] 1 W.L.R. 1451.
60 Fulham Football Club Ltd. v. Cobra Estates plc [1992] B.C.C. 863.
61 Riley, “Vetoes and Voting Agreements”, note 23 above at p. 48.
62 Although shareholder decisions may in certain circumstances be invalidated if the shareholders voted otherwise than in the best interests of the company (Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656), shareholders are not fiduciaries to each other (Peter's American Delicacy Co. Ltd v. Heath (1939) 61 C.L.R. 457) and they cannot be required to vote or to cast their votes in particular ways. Cf. the doubtful case of Clemens v. Clemens Bros. Ltd. [1976] 2 All E.R. 268.
63 Multinational Gas and Petrochemical Co. Ltd. v. Multinational Gas and Petrochemical Services Ltd. [1983] Ch. 258.
64 Atwool v. Merrywealher (1867) L.R. 5 Eq. 464n; Menier v. Hooper's Telegraph Works (1874) 9 Ch.App. 350; Burland v. Earle [1902] A.C. 83.
65 Re George Newman & Co. [1895] 1 Ch. 674.
66 West Mercia Safetywear Ltd. v. Dodd ( 1988) 4 B.C.C. 30.
67 [1992] B.C.C. 863 at 876.
68 Companies Act 1985, s. 309.
69 The Companies Act 1985, s. 35(3) expressly provides that any breach of duty committed by directors in entering into an ultra vires transaction can be ratified by a special resolution.