Introduction
Shareholder ratification, a core rule in company law, lets shareholders approve actions by directors that went beyond their authority after they happen. This power comes from shareholders’ role as company owners, letting them accept decisions that might not have had correct initial approval. For ratification to work, the action must be one shareholders could have approved earlier. This idea was shown in Grant v United Kingdom Switchback Railway, a key case for knowing the limits of shareholder ratification.
The Facts of Grant v United Kingdom Switchback Railway
The disagreement focused on a contract between the directors of the United Kingdom Switchback Railway Company and Mr. Grant for building a railway. The directors did not get required shareholder approval set out by the company’s articles of association. Mr. Grant later tried to enforce the contract, claiming that later shareholder agreement made the directors’ actions valid.
The Court’s Decision and Implications
The High Court of Justice ruled that shareholders could not backdate approval for the contract. The court stressed that the company’s articles clearly needed prior shareholder agreement for such contracts, limiting both the directors’ power and later ratification. This decision shows that shareholder approval cannot make actions valid if they break a company’s internal rules.
Limits of Shareholder Ratification: Ultra Vires Doctrine
Grant supports the ultra vires doctrine, which stops companies from acting outside powers given by their memorandum and articles of association. If directors go beyond these powers, their actions are invalid, and shareholder ratification cannot fix this. This rule protects against directors putting companies or shareholders at risk without proper approval.
Ratification and Director-Shareholder Conflicts in Company Law
Shareholder ratification deals with conflicts by allowing shareholders to check and approve directors’ actions. Directors might act against shareholder interests, and ratification gives a way to handle such cases. However, Grant sets strict limits, showing that company rules apply to both directors and shareholders.
Grant’s Role in Modern Company Law
Though old, Grant v United Kingdom Switchback Railway still matters. It continues to mark the limits of shareholder ratification, making clear that approval cannot ignore company rules. Later cases, like Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246, have used its ideas in disputes over director power and ratification.
Guidance for Directors and Shareholders
Grant gives clear rules: directors must follow company rules for major choices, getting shareholder approval when needed. Shareholders should know that ratification has limits and cannot approve all unauthorized acts. Regular checks on director actions help make sure company rules and legal duties are met.
Conclusion
Grant v United Kingdom Switchback Railway stays important for knowing the limits of shareholder ratification. The case confirms that company rules override backdated approval, supporting the ultra vires doctrine. Its ideas still affect company law, keeping directors and shareholders within set limits while balancing power and responsibility.
