Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame PDF

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Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame English Ct of Appeal [1906] 2 Ch 34 Headnote: A company had power under its memorandum of association to sell its undertaking to another company having similar objects, and by its articles of association the general management and control of the company were vested in the directors, subject to such regulations as might from time to time be made by extraordinary resolution, and, in particular, the directors were empowered to sell or otherwise deal with any property of the company on such terms as they might think fit. At a general meeting of the company a resolution was passed by a simple majority of the shareholders for the sale of the company's assets on certain terms to a new company formed for the purpose of acquiring them, and directing the directors to carry the sale into effect. The directors, being of opinion that a sale on those terms was not for the benefit of the company, declined to carry the sale into effect:Held (affirming the decision of Warrington J.), upon the construction of the articles, that the directors could not be compelled to comply with the resolution. INTRODUCTION: The Automatic Self-Cleansing Filter Syndicate Co Ltd was incorporated on June 10, 1896. The original capital of the company was £700 divided into 700 shares of £1 each; but the capital had since been increased, and there had now been issued 2,700 shares of £1 each. The objects of the company, as stated in clause 3 of its memorandum of association, were (inter alia): (a) To acquire from James Wilson the benefit of certain existing inventions in relation to the filtration, treatment, purification, storage, application, distribution, and use of liquids; and (k) to sell the undertaking of the company, or any part thereof, for such consideration as the company might deem fit, and in particular, for shares, debentures, or securities of any other company having objects altogether or in part similar to those of this company. The articles provided as follows:"81. The company may by special resolution remove any director before the expiration of his period of office and appoint another qualified person in his stead. ...." "96. The management of the business and the control of the company shall be vested in the directors, who, in addition to the powers and authorities by these presents expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the company, and are not hereby or by statute expressly directed or required to be exercised or done by the company in general meeting; but subject nevertheless to the provisions of the statutes and of these presents, and to such regulations, not being inconsistent with these presents, as may from time to time be made by extraordinary resolution, but no regulation shall invalidate any prior act of the directors which would have been valid if such regulation had not been made. 97. Without prejudice to the general powers conferred by the last preceding clause, and to the other powers and authorities conferred as aforesaid, it is hereby expressly declared that the directors shall be entrusted with the following powers, namely, power (1) To purchase or otherwise acquire for the company any property, letters patent, rights or privileges which the company is authorized to acquire, at such price, and generally on such terms and conditions, as they think fit; also to sell, lease, abandon, or otherwise deal with, any property, rights, or privileges to which the company may be entitled, on such terms and conditions as they may think fit." "(16) To enter into all such negotiations and contracts and rescind and vary all such contracts, and execute and do all such acts, deeds, and things in the name or on behalf of the company as they might consider expedient for or in relation to any of the matters aforesaid, or otherwise for the purposes of the company." The plaintiff A. H. McDiarmid, who was the holder of 1,202 shares in the plaintiff company, being desirous that the assets and undertaking of the plaintiff company should be sold, arranged terms on 1

behalf of the company for the sale of them to a new company formed for the purpose of acquiring them, and had these terms embodied in a contract which was engrossed ready for execution by the company. On January 2, 1906, a meeting of the shareholders of the company, convened by the directors in accordance with a requisition signed by the plaintiff McDiarmid and other shareholders in the company, was held for the purpose of considering and if thought fit passing the following resolution:"That the company do sell the assets specified in the contract which has been produced to the meeting at the price and on the terms therein mentioned and contained and that the directors be and they are hereby directed to cause the common seal of the company to be affixed thereto within seven days and to carry the same into effect." The meeting was adjourned until January 16, when the resolution was passed by a majority of 304 votes, 1,502 votes for and 1,198 votes against it. Practically the whole of the 1,502 votes were given in respect of shares held by the plaintiff McDiarmid or his friends. The directors, being of opinion that it would not be in the interests of the plaintiff company that the contract should be carried out, declined to comply with the resolution. This was a motion by the plaintiff company and by the plaintiff McDiarmid, suing on behalf of himself and all other shareholders in the company, against the directors asking that the defendants might be ordered forthwith to affix the seal of the plaintiff company to the contract and to carry it into effect; that the defendants might be restrained by injunction until judgment or further order from dealing with or disposing of the assets of the plaintiff company intended to be comprised in the said agreement in any manner inconsistent with the terms thereof; and for the appointment of a receiver of the said assets.

What follows is a record of the argument presented to the Court by the plaintiff’s counsel. Cave, K.C., and A. H. Jessel, for the plaintiffs. The directors are the agents of the company, and as such are bound to obey the directions of their principal, the company. The plaintiffs merely desire that the directors shall do what the company in general meeting has ordered them to do. [WARRINGTON J. Why not remove the directors?] That would require a three-fourths majority. The company in general meeting has power to direct and control the directors in the management of the affairs of the company: Isle of Wight Ry Co v Tahourdin. [WARRINGTON J. The company has by article 96 delegated the management of its business to the directors.] The company can revoke that delegation. [WARRINGTON J. The article can only be altered by a special resolution.] The articles are subject to the general rule that agents must obey the directions of their principal. [WARRINGTON J. If you are right in your contention a simple majority of the shareholders might control the company.] A company does not part with its powers by delegating them to its directors. The Court will not force upon a company a policy of which it does not approve: Bainbridge v Smith.

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Warrington J. After stating the facts continued:- The question I have to determine in this case is whether the shareholders of a company have power by a resolution passed by a simple majority of their number to order the directors to seal an agreement for the sale of the whole of the assets of the company notwithstanding that the directors may think that the sale is improvident, and that the terms on which it is to be carried out are not fit terms on which the company ought to carry out such a sale. To my mind this question depends upon the true construction of the articles. The only articles which are material are articles 96 and 97. [His Lordship read the articles, and continued:-] The effect of this resolution, if acted upon, would be to compel the directors to sell the whole of the assets of the company, not on such terms and conditions as they think fit, but upon such terms and conditions as a simple majority of the shareholders think fit. But it does not rest there. Article 96 provides that the management of the business and control of the company are to be vested in the directors. Now that article, which is for the protection of a minority of the shareholders, can only be altered by a special resolution, that is to say, by a resolution passed by a three-fourths majority, at a meeting called for the purpose, and confirmed at a subsequent meeting. If that provision could be revoked by a resolution of the shareholders passed by a simple majority, I can see no reason for the provision which is to be found in article 81 that the directors can only be removed by a special resolution. It seems to me that if a majority of the shareholders can, on a matter which is vested in the directors, overrule the discretion of the directors, there might just as well be no provision at all in the articles as to the removal of the directors by special resolution. Moreover, pressed to its logical conclusion, the result would be that when a majority of the shareholders disagree with the policy of the directors, though they cannot remove the directors except by special resolution, they might carry on the whole of the business of the company as they pleased, and thus, though not able to remove the directors, overrule every act which the board might otherwise do. It seems to me on the true construction of these articles that the management of the business and the control of the company are vested in the directors, and consequently that the control of the company as to any particular matter, or the management of any particular transaction or any particular part of the business of the company, can only be removed from the board by an alteration of the articles, such alteration, of course, requiring a special resolution. No case has been cited to me which, in my opinion, has really any bearing on this question, which depends on the construction of the articles. In Isle of Wight Rly. Co v Tahourdin which was a case under the Companies Clauses Consolidation Act, 1845, it was pointed out by the Court of Appeal that the resolution which it was proposed to submit to the meeting, and upon which the question arose, was one which could be carried by a simple majority of the company. Moreover, all that was there decided was that the Court would not interfere to prevent a meeting of shareholders being held. No decision was given as to what would be the result with reference to the validity of any resolution which might be passed at the meeting. On the whole, it seems to me that the resolution which was passed at the general meeting on January 16, 1906, is not one which the directors are bound to carry into effect. The consequence is, I must refuse the motion, with the usual result - that is to say, the costs will be the defendants' costs in the action.

Collins M.R. This is an appeal from a decision of Warrington J., who has been asked by the plaintiffs, Mr McDiarmid and the company, for a declaration that the defendants, as directors of the company, are bound to carry into effect a resolution passed at a meeting of the shareholders in the company on January 16. There are a number of other incidental reliefs asked - for instance, that they be ordered to affix the seal of the company, and that they may be restrained by injunction from dealing with the assets of the company in any manner inconsistent with the agreement.

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The point arises in this way. At a meeting of the company a resolution was passed by a majority - I was going to say a bare majority, but it was a majority - in favour of a sale to a purchaser, and the directors, honestly believing, as Warrington J. thought, that it was most undesirable in the interests of the company that that agreement should be carried into effect, refused to affix the seal of the company to it, or to assist in carrying out a resolution which they disapproved of; and the question is whether under the memorandum and articles of association here the directors are bound to accept, in substitution of their own view, the views contained in the resolution of the company. Warrington J. held that the majority could not impose that obligation upon the directors, and that on the true construction of the articles the directors were the persons authorized by the articles to effect this sale, and that unless the other powers given by the memorandum were invoked by a special resolution, it was impossible for a mere majority at a meeting to override the views of the directors. That depends, as Warrington J. put it, upon the construction of the articles. First of all there is no doubt that the company under its memorandum has the power in clause 3 (k) to sell the undertaking of the company or any part thereof. In this case there is some small exception, I believe, to that which is to be sold, but I do not think that that becomes material. We now come to clause 81 of the articles, which I think it is important to refer to in this connection. [His Lordship read the clause.] Then come the two clauses which are most material, 96 and 97, whereby the powers of the directors are defined. [His Lordship read clause 96 and clause 97 (1).] Therefore in the matters referred to in article 97 (1) the view of the directors as to the fitness of the matter is made the standard; and furthermore, by article 96 they are given in express terms the full powers which the company has, except so far as they "are not hereby or by statute expressly directed or required to be exercised or done by the company," so that the directors have absolute power to do all things other than those that are expressly required to be done by the company; and then comes the limitation on their general authority - "subject to such regulations as may from time to time be made by extraordinary resolution." Therefore, if it is desired to alter the powers of the directors that must be done, not by a resolution carried by a majority at an ordinary meeting of the company, but by an extraordinary resolution. In these circumstances it seems to me that it is not competent for the majority of the shareholders at an ordinary meeting to affect or alter the mandate originally given to the directors, by the articles of association. It has been suggested that this is a mere question of principal and agent, and that it would be an absurd thing if a principal in appointing an agent should in effect appoint a dictator who is to manage him instead of his managing the agent. I think that that analogy does not strictly apply to this case. No doubt for some purposes directors are agents. For whom are they agents? You have, no doubt, in theory and law one entity, the company, which might be a principal, but you have to go behind that when you look to the particular position of directors. It is by the consensus of all the individuals in the company that these directors become agents and hold their rights as agents. It is not fair to say that a majority at a meeting is for the purposes of this case the principal so as to alter the mandate of the agent. The minority also must be taken into account. There are provisions by which the minority may be over-borne, but that can only be done by special machinery in the shape of special resolutions. Short of that the mandate which must be obeyed is not that of the majority - it is that of the whole entity made up of all the shareholders. If the mandate of the directors is to be altered, it can only be under the machinery of the memorandum and articles themselves. I do not think I need say more. One argument used by Warrington J. strongly supports that view. He says in effect: "There is to be found in these articles a provision that a director can only be removed by special resolution. What is the use of that provision if the views of the directors can be overridden by a mere majority at an ordinary meeting? Practically you do not want any special power to remove directors if you can do without them and differ from their opinion and compel something other than their view to be carried into effect." That argument appears to me to confirm the view taken by the learned judge. [edited]

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Cozens-Hardy L.J. I am of the same opinion. It is somewhat remarkable that in the year 1906 this interesting and important question of company law should for the first time arise for decision, and it is perhaps necessary to go back to the root principle which governs these cases under the Companies Act, 1862. It has been decided that the articles of association are a contract between the members of the company inter se. That was settled finally by the case of Browne v La Trinidad if it was not settled before. We must therefore consider what is the relevant contract which these shareholders have entered into, and that contract, of course, is to be found in the memorandum and articles. I will not again read articles 96 and 97, but it seems to me that the shareholders have by their express contract mutually stipulated that their common affairs should be managed by certain directors to be appointed by the shareholders in the manner described by other articles, such directors being liable to be removed only by special resolution. If you once get a stipulation of that kind in a contract made between the parties, what right is there to interfere with the contract, apart, of course, from any misconduct on the part of the directors? There is no such misconduct in the present case. Is there any analogy which supports the case of the plaintiffs? I think not. It seems to me the analogy is all the other way. Take the case of an ordinary partnership. If in an ordinary partnership there is a stipulation in the partnership deed that the partnership business shall be managed by one of the partners, it would be plain that in the absence of misconduct, or in the absence of circumstances involving the total dissolution of the partnership, the majority of the partners would have no right to apply to the Court to restrain him or to interfere with the management of the partnership business. I would refer to what is said in Lindley on Partnership, 7th ed. p.574: "Where, however, the partner complained of has by agreement been constituted the active managing partner, the Court will not interfere with him unless a strong case be made out against him" - that is to say, unless there is some case of fraud or misconduct to justify the interference of the Court. Nor is this doctrine limited to a case of co-partners. It is not a peculiar incident of co-partnership: it applies equally to cases of co-ownership. I think in some of the earlier cases before Lord Eldon with reference to the co-owners of one of the theatres, he laid down the principle that when the co-owners had appointed a particular member as manager the Court would not, except in the case of misconduct, interfere with him. And why? Because it is a fallacy to say that the relation is that of simple principal and agent. The person who is managing is managing for himself as well as for the others. It is not in the least a case where you have a master on the one side and a mere servant on the other. You are dealing here, as in the case of a partnership, with parties having individual rights as to which there are mutual stipulations for their common benefit, and when you once get that, it seems to me that there is no ground for saying that the mere majority can put an end to the express stipulations contained in the bargain which they have made. Still less can that be so when you find in the contract itself provisions which show an intention that the powers conferred upon the directors can only be varied by extraordinary resolution, that is to say, by a three-fourths majority at one meeting, and that the directors themselves when appointed shall only be removed by special resolution, that is to say, by three-fourths majority at one meeting and a simple majority at a confirmatory meeting. That being so, if you once get clear of the view that the directors are mere agents of the company, I cannot see anything in principle to justify the contention that t...