Company Law, s.33 CA '06

        The next issue that arises is how s.33 effects the relationship between the members acting in their capacity as a members, members inter se, early cases provide some confusion. In Wood v Odessa Waterworks Co  Stirling J considered that “the articles of association constitute a contract not merely between the shareholders and the company, but between each member and every other.” Lord Herschell in Welton v Saffrey  was of the opinion that “there is no contract between the individual members of the company.” And In Salmon v Quinn & Axtens Ltd  Farwell J stated :

the articles...are made equivalent to a deed of covenant signed by all the shareholders. The         act does not say with whom that covenant is entered into, and there have been         varying statements by learned judges, some of them saying it is with the company, some of them saying it is both with the company and the shareholders.

In Rayfield v Hands  where the matter for consideration was a pre-emption clause which not only gave the directors a right to pre-empt the purchase of shares by an outsider, but actually cast an obligation on them to buy the shares from the outgoing director , Vaisey J qualified that “it is,..., material that this private company is one of that class of companies which bear a close analogy to a partnership.” What now seems to be the settled is that the contract will be enforceable by the members inter se if the company is of a quasi-partnership type. Something the government failed to clarify in the new act.

        The next consideration is, in what capacity is a member able to enforce the terms of the contract, this deals primarily with the doctrine of insider and outsider rights. The doctrine becomes an issue not when a member is enforcing the rights he has as a member qua (insider rights), but when a member who serves in an official capacity for the company as an outsider and attempts to enforce the terms of the articles in relation to his outside role. This was set out by Astbury J in Hickman v Kent  in which he states that:

 ...no right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as a solicitor, promoter, director, can be enforced against the company.

 Astbury J was presented with the conflicting view of two lines of authority, the first being Eley v Positive Government Security Life Assurance Co  which purported “that a member cannot enforce all the terms of the section .14 contract, but only those which relate to him in his capacity as a member.” The other  from Salmon v Quinn & Axtens Ltd  where a member of  the company enforced his outsider right as managing director to prevent the company from acting on resolutions which went against an article that provided: “no resolution of a meeting of directors....should be valid unless notice had been given to each of the two managing directors and neither had dissented therefrom,” even though the resolutions were passed by a simple majority of shareholders at an extraordinary meeting. Affirmation of the approach taken in Hickman was qualified by the Court of Appeal in Beattie v E&F Beattie Ltd  where Greene M.R. said:

 it appears to me that this much, at any rate, is good law: that contractual force given to the articles of association by the section is limited to such provisions of the articles as apply to the relationship of the members in their capacity as members. I do not think in saying that I am in any way departing from or extending certain observations of Astbury J in ...Hickman.” In that case a director who was also a member sought to invoke an arbitration clause  contained in the articles, because he was being sued in his capacity as a director , not as a member, he could not rely on the statutory contract.

        It is shown that Hickman has laid some of the controversy to rest but a subsequent academic argument remains. This centres around the question; what personal rights bestowed on a member by virtue of his position within the company structure can be enforced. The first line of argument coming from Lord Wedderburn in his article “Shareholders' rights and the rule in Foss v Harbottle”   puts forward that:

 ...a member can compel the company not to depart from the contract with him under the articles even if that means indirectly the enforcement of  'outsider'-rights vested in either third parties of himself, so long as,..,he sues as member qua  member and not qua outsider.

This is in-line with the Hickman and Beattie decisions. The conflicting argument comes from Professor Gower, who proposed that “...the articles have no direct contractual effect in so far as they purport to confer rights or obligations on a member otherwise than in his capacity of a member.”  as a member would only be able to enforce those rights which affect him as a member qua, and not if the right confers a benefit in his capacity  as an outsider. A third line enunciated by G.D. Goldberg in his article believes that Professor Wedderburns  proposition is too wide and that Professor Gowers is too narrow, he proposes a middle way in which a member could only enforce a provision of the articles  which related to the functional capacity of the company “eventhough the enforcement of that right may incidentialy enforce also a right or power bestowed by the memorandum or articles on a person in a capacity otherwise than as a member of the company. 

Another theory is proposed by Graham Prentice, similar to that of Professor Goldberg, he argues; the terms of the contract that can be enforced “are only those terms which of necessity must affect and can only affect each and every member regardless of his individual capacity.” Each of these arguments attempt to understand the relationship that is created in the statutory contract between the interests of the company, the members inter se, and the management organ. Some clarity can be brought to the discussion when we understand that the contract created by s.33 does not conform to normal contractual principles,  there is a constant tension created between the parties, the ideal being a constant balance, it needs to be remembered that the company as a separate legal juristic person only exists by virtue of this contractual nexus,  from this abstract view of the company, the members are not separate from each other, they are a single body, the aim of the contract does not serve any end goal, rather it's purpose is the survival and growth of the company. This means that as Drury suggests a long term approach needs to be taken and that it is “inappropriate that a party could point to particular clauses and demand they be enforced.” This can also explain the reason for the conflicting arguments thus far.

        The issue of outsider rights becomes even more complex when we attempt to distinguish between personal proprietary rights and internal procedural irregularity. In his text  Pennington suggests

...the court will incline to treat a provision in the memorandum or articles as conferring a personal right on a member only if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of the constitution.”

 The importance of distinction is shown in contrasting two cases from the 19th century MacDougal v Gardiner and Pender v Lushington  Both of these cases were taken before the court on a similar facts, in the former the decision of a director to wrongfully refuse to allow members request for a poll which had been a right provided in the articles of the company was held by James L.J. to be “that the member does not have the right to complain of “irregularities” even if they contravene the articles.” And in the later a member who wished to enforce his right to vote, a proviso of the articles, succeeded in his claim as it was found to be an infringement of his personal proprietary rights, Jessel M.R. said that a member has: “ a right to say, 'whether I vote in the majority or minority, you shall record my vote, as that is a right of property belonging to my interest in this company, and if you refuse to record my vote I will institute legal proceedings against you to compel you.” It is impossible to comprehend how either of these situations is different from the other.  As is made clear by Paul L. Davies “In truth, there is a conflict here between proper recognition of the contractual nature of the company's constitution and the traditional policy of non-interference by the courts in the internal affairs of companies.”

         This brings us to Professor Rajak's contention and asks the question what are the personal rights and obligations of members that with certainty can be enforced and has this been addressed in the new legislation. In March 2000 the CLRSG produced an initial consultation document “Developing the Framework”, it's purpose was to “analyse and make proposals on the key areas of “governance” of companies.” The document described s.14 of the 1985 act “obscure and misleading” and decided  to review the act despite the result of  Law Commissions report that no action need be taken on the section. They considered, what rights were personal to shareholder  and how best to achieve clarification on this issue, recommending a number of reforms, including a definition of the rights held by a member in a non-exhaustive list . Nothing came of these proposals, the identification of what members rights can be enforced remains open and subject to the Hickman  doctrine and the anomalies created between MacDougall and Pender. What can be argued is that the relevance of such tight restraints on the membership contract in today's conditions, where the interests of other stakeholders such as employees, to whom a duty may be owed, form part of the decision making process for any company. 

        An area which can't be ignored in the modern context is the increasing prevalence of shareholder agreements in small closely held companies. Shareholder agreements have the advantage of being subject to the common law rather than statute, they can include any terms the parties to the agreements wish to include and can effectively sidestep the effectiveness of the articles of association. They lend themselves perfectly to the small company as the agreement will require the consent of all members in order for them to be effective. The application of a shareholder agreement will make many of the disagreements relating to the articles of association which are subject to s.33 redundant, as the terms of the agreement can only be altered by the parties rather than majority voting or special resolution. In Russell v Northern Bank Development Corpn Ltd  the  House of Lords upheld the validity of a clause in a shareholder agreement between the members, giving the judicial “green light” to shareholder agreements.

        

        The Companies Act 2006 has for the first time brought some much needed efficiency and cohesion to English corporate law, such as the codification of directors duties, and introduced changes to the formation of companies. It can easily be argued that as a whole the document heralds  a new era in corporate governance. However as we have shown the simple rewording of s.33 falls far short of this claim in relation to the companies constitution,  the change to s.33(1) is superficial and only manages to codify an area of law already decided, s.33(2) does redress the imbalance, but this was an obvious need. The core issues still remain, how the membership of the company relates to each other in their capacity as 'insiders' and 'outsiders', the identification of  rights a member can claim, particularly  those which also effect him as an outsider and how best to achieve a consistent application of enforcement of those rights. All of the academic argument still remains, particularly in relation to the the distinction between a members personal proprietary rights and internal irregularities, in the writers opinion this conflict is not one which can be defined in a statute as the long term approach argued by Drury applies and each case is best judged on it's own merits. Some clarity could have been brought by a statutory distinction of how the section relates to public companies with a large membership base and private closely held companies 'quasi partnerships' which takes account of a relational approach and judges each case on it's merits allowing for an equitable remedy on a case by case basis. One final criticism is that the failure to incorporate the position of shareholder agreements within the company constitution, undervalues their position as a beacon of individual consistency relating to members interests.

Word count: 3226 including footnotes.

Bibliography

Books;

Paul L. Davies, Gower and Davies Principles of Modern Company Law, 8th edition, Sweet & Maxwell (2008)

John Lowry & Arad Reisberg, Pettet's Company Law, 3rd edition, Pearson Education Limited (2009)

Sealey & Worthington, Cases and Materials in Company Law, 8th edition, Oxford University Press (2008)

Simon Goulding, Company Law, 2nd edition, Cavendish Publishing Limited (1999)

Dignam & Lowry, Company Law, 4th edition, Oxford University Press (2006)

Journal Articles;

R.R. Drury, “The Relative Nature of a Shareholder's Right to Enforce the Company Contract.” [1986] Cambridge L.J.219

Roger Gregory, “The Section 20 Contract” [1981] Modern Law Review 526

K.W. Weddedburn “Shareholders Rights and the rule in Foss v Harbottle.”1957 Cambridge L.J. 194

K.W. Weddedburn “Shareholders Rights and the rule in Foss v Harbottle (continued)” [1958] Cambridge L.J. 93

Carey & Leonowicz, “Company Constitutional Documents as Contracts” [2003] Irish Law Times 3

P.Finn “Shareholder Agreements” [1978] 6 ABL Rev 97

Scanlan & Ryan “The accrual of claims for breach of contract under s.14 Companies Act 1985 and s.33 Companies Act 2006: the continuing obligation” [2007] Company Lawyer 367

Katherine Reece Thomas, “The section.14 contract: limitation issues” [1997] C.J.Q.318

Other Sources;

White Paper, Company Law Reform (March 2005) 6456

White Paper, Modernising Company Law (July 2002) Cm 5553-I and Cm 5553-II

DTI, Modern Company Law for a Competitive Economy, Final Report (2001) (URN 01/942 and 01/943)

Law Commission Report 246 (1999)

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