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The articles of association itself is a statutory contract binding between the company and members

(Hickman v Kent) and the members inter se. In Hickman v Kent, it was held that individual
shareholder could rely on articles against the company. The articles also bind future shareholders,
who are privy to the contract, for which this can avoid the difculties of having to renegotiate the
contract every time shares change hands. However, s33 is silent on whether a member can sue
another member and whether outsider rights are enforceable.

The rst issue: Is there a contract inter se members? Whether a member can enforce the
contract against another member OR is it against the company itself?

The meaning of inter se contract is that whether each member has a binding enforceable contract
with every other? This leads to the issue of whether each member can enforce the provision
against another shareholder.

Wood v Odessa Waterworks- inter se contract exists

Welton v Saffery- per Lord Hershell- not possible because rights could only be enforceable by
company against that member in breach of that provision - upheld the rule in F v H and the
company is the proper claimant

Salmon v Quin & Axtens: considered Wood v OW, inter se contract is possible but rarely
enforced by court

Rayeld v Hands: focusing on L. Hershells statement- inter se contracts allowed in exceptional
circumstances such as quasi-partnership companies, would not be a general rule but rather it is an
exception that an individual member to enforce the articles against other members

Barc & Bowen commented on L. Hershell only where quasi-partnership exists then the contract
would be enforceable by individual member

Davies favored an action enforce against a member by another member to reduce multiplicity of
litigations.

The second issue: Wrong done to individual member so that he can sue OR Wrong done to
the company so that only company can sue?

As a general rule, the company operates through its constitutional organs so that either the board
of directors or the general meeting agrees to take action. As a general rule individual members are
not empowered to initiate proceedings for a wrong done to the company.

Even if there is a wrong done to the company by breaching articles, the members could also ratify
the wrong or to do something that breaches the constitution. The minority shareholders may wish
to sue to enforce the contract if they have proven one of the exceptions set out in Edwards v
Halliwell or other statutory provisions.

A wrong done to the company would be illustrated in MacDougall v Gardiner where the court
refused to recognize an individual shareholders right to poll and reasoned that rights conferred by
the constitution would not be enforceable if the breach would likely to be ratied by majority
resolution.

On the other hand, Pender v Lushington considered that the shareholder is entitled to have his
vote recorded- an individual right in respect of which he has the right to sue. The member
successfully obtained an injunction stopping the director s acting on the resolution passed at the
meeting.

The case in Edwards v Halliwell illustrates that rules concerning voting at a union meeting were
broken. 2 individual members obtained a declaration invalidating a resolution. Jenkins LJ stated
that this is due to the personal rights of membership of each of them have been invaded by an
invalid alteration.

The issue where is the line to be drawn between personal rights and those which are not? Lord
Weddenburn considers that this is the very question that the court should address and gave a list,
such as voting rights, share transfer rights, pre-emption rights etc. Sealy & Worthington submitted
the rights involve proprietary interest of a shareholder. However, none of those analysis is
watertight, as Dignam & Lowry submits, membership rights contained in the articles can be
interpreted either way, as pure internal irregularities which only the company can put it right, or as
personal rights which allow the shareholders to sue.

The issue of categorizing the rights as personal and general is further clouded by the practice of
companies by adding outsider rights to the articles.


The third issue: What matters in the contract would be enforceable? AND enforceable by
individual members?

Eley v Positive Government - Eley sought to enforce the article to appoint him as the solicitor of the
company. It was held that he could not do so because any rights not conferred qua member would
not be enforceable. There is no relationship between member as solicitor and the company. The
fact that he acquired shares in a later date would not help him. The court accepted that the
contract formed part of the constitution but it is unenforceable.


In Hickman v Kent, it did not follow Eley and decided that
(i) no article can constitute a contract between the company and a third person
(ii) 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 (solicitor, promoter and director)
(iii) articles regulating the rights and obligations of the members generally as such do create rights
and obligations between them and the company respectively

Salmon v Quin & Axten - AA provided that the consent of both managing director was needed for
certain decisions. Mr Salmon was a managing director and member of the company and he
dissented from a decision to buy and let some property.

Mr. Salmon sued as a member to enforce the articles requiring his consent as managing director to
the transactions. HOL accepted that a general personal right of members to sue to enforce articles
by way of injunction against the completion of transactions. The court viewed the issue as one of
enforcing a member right which tangentially affect his right as director rather than other way round
as witnessed in Beattie v Beattie, where the director sought to enforce the article to refer the
dispute to arbitration. It was held that it is a director-member action in which the enforcement of
directors outsider rights were central and has a tangential effect in enforcing members right.

The ignoring of Salmon case triggered debates among academics. Weddenburns view on Salmon
and Beattie was that the court have recognized a general personal right to have the articles
enforced and this was correct. This is the case even though it would indirectly enforce an outsider
right.


L. Weddenburn - Eley was bringing an action in the capacity as solicitor and naturally held that the
articles did not constitute a contract with him in that capacity.

Gregory- court held that there were just an agreement between S/H inter se, and thus could not
give rights to companies. Because Eley brought this action against Co, it could not possibly nd in
his favour

-the problem with this view is that in contrary to modern view that the company contract
binds the members and the company equally

Goldberg- Is it possible to divine how the court might have reacted to an action by Eley against his
fellow members for apparent disregard of his rights under the contract- Goldberg said that the court
held that "on proper construction of the articles when read as a whole, the power to appoint the
company's solicitor still resided in the board of directors"

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the problems lies in the result of conict between Eley's right to enforce art 118 and the right
of other S/H, if they wished, to enforce the conicting article empowering the directors to
appoint whoever they chose as the company's solicitor
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In such situation, it would be solved by the majority rule unless Eley could prove one of the
exceptions in Edwards v Halliwell
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The company could pass a resolution to support Eley, support board in appointing another
solicitor or altered the articles

Drury- submitted that the matter should be solved by majority rule, serving as a dispute resolution
machinery. Had it been solved, the case would never escalate to courts. He submitted only where
the exceptions enunciated in Edwards v Halliwell has been satised, then the company would be
exposed to a legal action. This is because a member's right to enforce the contract in favour to him
must be decided, like any other matters of internal management, in relation to the rights of other
members. Drury argued the essence of Foss v Harbottle rule is a dispute resolution mechanism to
resolve disputes without courts. To achieve this, one should look at competing rights of member
and arrive a conclusion by resolution, rather than by asserting the absolute nature of any
individual's rights to have the articles enforced.

Stephen Grifth - Eley would be overruled if view of Weddenburn was preferred. However, Eley
must acquire shares in later date before he sought to enforce his right. This is due to the fact that
he must sue qua member to enforce a tangential solicitor right.


Alteration of articles

s21 allowed alteration of articles effected by special resolution given that it does not conict with
any statutory provisions.

One additional check on members' ability to alter the articles which has such effect. The members
must exercise their power to alter the articles in good faith. In Allen v Gold Reefs of West Africa, it
was held that the right must be exercised bona de for the benet of the company as a whole. In
Clemens v Clemens Bros, allotment of shares having the effect of diluting the voting power of the
minority shareholder claimant was refused. The court would accept subjective view of company's
management.

Sidebottom v Kershaw - company's articles was altered for anti-competition purposes in that the
company was allowed to buy up all the shares from members carrying out similar businesses. CA
held that such alteration to the Articles was allowed because

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no malicious motive on part of management. The purpose was to do good to the company and
not to harm the claimant. Detrimental argument will not sufce, the courts will only intervene if
the purpose was 100% to harm the claimant
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Also, buy-out was at a fair price

Greenhalgh v Arderne Cinemas - it appears that wt benets the interests of the company basically
means benets to the interests of the shareholders