Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154

Facts

  • Kershaw, Leese & Co altered its articles of association to permit directors to acquire the shares of any member engaged in a business competing with the company.
  • Sidebottom and other minority shareholders, who were themselves running a competing business, objected to the validity of this change.
  • The minority shareholders claimed the amendment was used oppressively against them.
  • The central dispute was whether the expulsion clause was lawful and properly exercised.

Issues

  1. Whether a company’s articles of association may validly allow directors to compel the sale of shares held by members competing with the company.
  2. Whether the power to expel members could be exercised for the company’s genuine benefit rather than to disadvantage minority shareholders for personal gain.

Decision

  • The Court of Appeal upheld the alteration of the articles, finding the expulsion clause lawful.
  • The court held that the exercise of such a clause is permissible when genuinely aimed at protecting the company’s interests, such as removing competing shareholders.
  • The court distinguished between use of the clause for the company’s benefit and its use for directors’ or majority shareholders’ private advantage.
  • The court confirmed that directors must act in good faith and pursue the company’s overall good when exercising such powers.

Legal Principles

  • Directors may exercise powers conferred by articles of association to expel members if this is genuinely for the company’s benefit.
  • The “true benefit of the company” test requires that the primary motivation for exercising expulsion powers be the welfare of the company as a whole.
  • Actions disadvantaging individual shareholders may be permitted if the predominant objective is to benefit the company, not select shareholders.
  • Directors must consider the collective interests of all shareholders but are not precluded from acts that disadvantage some, provided their main goal is the company’s well-being.
  • The legality of expulsion clauses depends on their purpose and exercise, distinguishing legitimate business protection from actions serving private interests.

Conclusion

Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154 established that expulsion clauses in company articles are valid if exercised in good faith for the company's benefit. This principle guides both directors and shareholders on the limits and legitimacy of member removal within corporate governance.

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