## Facts

- A company’s memorandum permitted sale of the company’s undertaking on such consideration as the company thought fit.
- The articles vested “management of the business and the control of the company” in the directors, subject to “regulations” made by extraordinary (special) resolution, and also empowered directors to sell company property on terms they thought fit.
- A shareholder holding a bare majority sought a sale of substantially all company assets to a newly formed company.
- At a general meeting, shareholders passed an ordinary resolution approving the sale and directing the directors to carry it into effect.
- The resolution passed by simple majority (about 55%).
- The directors, acting in good faith and believing the sale was not in the company’s interests, refused to implement it.
- Proceedings were brought in the company’s name seeking to compel the directors to complete the transaction.

## Issues

1. Whether an ordinary resolution of shareholders could compel directors to implement a specific commercial transaction when the articles vested management authority in the directors.
2. Whether directors are merely agents of shareholders such that shareholders, as principals, may give binding directions by simple majority vote.
3. What mechanisms the shareholder majority must use, under the articles, to change or control directors’ exercise of management powers.

## Decision

- The Court of Appeal affirmed dismissal of the claim and held the directors could not be compelled to carry out the sale.
- The articles constituted a binding allocation of authority vesting management in the directors, subject only to alteration by extraordinary (special) resolution.
- An ordinary resolution could not override that allocation or substitute shareholder judgment for directors’ judgment on a matter committed to the board.
- If shareholders wished to change outcomes, they had to amend the articles by special resolution or remove and replace directors using the constitutionally prescribed procedure.

## Legal Principles

- Where a company’s constitution vests management in directors “subject to” regulations made by special/extraordinary resolution, shareholders cannot, by ordinary resolution, direct directors on matters within that management sphere.
- Directors are not simply agents of the majority shareholders; their authority derives from the company’s constitution and is exercisable independently within its limits.
- Shareholder control over management decisions operates through formal constitutional mechanisms (special resolution amendment) and board composition (removal/appointment), not ad hoc majority instructions inconsistent with the articles.
- Absent bad faith, fraud, or breach of duty, courts enforce the constitutional division of powers between the general meeting and the board.

## Conclusion

The court enforced the company’s constitutional allocation of power by holding that an ordinary shareholder majority could not compel directors to execute a sale where management authority was vested in the board and could be constrained only through special-resolution mechanisms or director replacement.


Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame, [1906] 2 Ch. 34 (C.A.)