Facts
- The case involved Northern Bank Development Ltd and a dispute over a shareholder agreement that required unanimous consent to increase share capital.
- The company’s articles of association permitted increases to share capital if proper procedures were followed, as granted under the Companies Act.
- Shareholders privately agreed among themselves not to approve any increase in share capital unless all agreed.
- The issue arose when action was taken in reliance on the company’s articles despite the private agreement.
- The case came before the House of Lords to determine if the shareholder agreement could be enforced, given the company’s legal powers.
Issues
- Whether a company can restrict powers granted by statute through amendments to its articles of association.
- Whether shareholders may enter into private agreements that govern the way they exercise their statutory powers as shareholders.
- Whether such a shareholders’ agreement is enforceable, even if it would have the indirect effect of restricting the company’s actions.
Decision
- The House of Lords held that a company cannot, by altering its articles of association, restrict or remove statutory powers granted by law.
- However, shareholders may, by private agreement, bind themselves not to exercise their voting rights in particular ways, even in relation to matters covered by statutory powers.
- In this case, the shareholders’ agreement did not alter the articles or diminish the company’s legal capacity; it simply contractually bound the shareholders as between themselves.
- The agreement was enforceable against the shareholders.
- The principle was distinguished from situations where companies have attempted to restrict or remove statutory powers directly through their articles, which is not permitted.
Legal Principles
- A company’s legal powers are defined by statute and its articles of association, but these powers cannot lawfully be removed or altered by amending the articles in contravention of statutory requirements.
- Shareholder agreements may operate independently of the articles and are enforceable as private contracts between shareholders.
- Such agreements can legitimately restrict the way shareholders exercise their powers, provided the company’s legal capacity is not itself limited.
- The distinction between the legal capacity of a company and the private conduct of its shareholders is fundamental in company law.
Conclusion
Russell v Northern Bank Development Ltd established that while a company cannot limit its own statutory powers via its articles, shareholders are free to contract privately to limit how they vote or exercise those powers, offering practical flexibility in managing company affairs within the boundaries of company law.
