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Automatic Self-Cleansing Filter Syndicate Company, Limited v.

Cuninghame
[1906 A. 143.]
Court of Appeal
Collins M.R., and Cozens-Hardy Warrington J. L.J.
1906 Feb. 23 1906 March 22
Company--Directors--Powers--Vesting of Management in Directors--Resolution by
a simple Majority of Shareholders for Sale of Undertaking--Refusal of Directors to
comply with Resolution.
A company had power under its memorandum of association to sell its undertaking
to another company having similar objects, and by its articles of association the
general management and control of the company were vested in the directors,
subject to such regulations as might from time to time be made by extraordinary
resolution, and, in particular, the directors were empowered to sell or otherwise deal
with any property of the company on such terms as they might think fit. At a general
meeting of the company a resolution was passed by a simple majority of the
shareholders for the sale of the company's assets on certain terms to a new company
formed for the purpose of acquiring them, and directing the directors to carry the
sale into effect. The directors, being of opinion that a sale on those terms was not for
the benefit of the company, declined to carry the sale into effect:-Held, (affirming the decision of Warrington J.), upon the construction of the articles,
that the directors could not be compelled to comply with the resolution.
MOTION.
The Automatic Self-Cleansing Filter Syndicate Company, Limited, was incorporated
on June 10, 1896. The original capital of the company was 700l., divided into 700
shares of 1l. each; but the capital had since been increased, and there had now been
issued 2700 shared of 1l. each.
The objects of the company, as stated in clause 3 of its memorandum of association,
were (inter alia): (a) To acquire from*35 James Wilson the benefit of certain existing
inventions in relation to the filtration, treatment, purification, storage, application,
distribution, and use of liquids; and (k) to sell the undertaking of the company, or
any part thereof, for such consideration as the company might deem fit, and in
particular, for shares, debentures, or securities of any other company having objects
altogether or in part similar to those of this company.
The articles provided as follows:-"81.The company may by special resolution remove any director before the
expiration of his period of office and appoint another qualified person in his
stead ...."
"96.The management of the business and the control of the company shall be vested
in the directors, who, in addition to the powers and authorities by these presents
expressly conferred upon them, may exercise all such powers and do all such acts
and things as may be exercised or done by the company, and are not hereby or by
statute expressly directed or required to be exercised or done by the company in
general meeting; but subject nevertheless to the provisions of the statutes and of
these presents, and to such regulations, not being inconsistent with these presents, as
may from time to time be made by extraordinary resolution, but no regulation shall

invalidate any prior act of the directors which would have been valid if such
regulation had not been made.
97.Without prejudice to the general powers conferred by the last preceding clause,
and to the other powers and authorities conferred as aforesaid, it is hereby expressly
declared that the directors shall be entrusted with the following powers, namely,
power-(1.) To purchase or otherwise acquire for the company any property, letters patent,
rights or privileges which the company is authorized to acquire, at such price, and
generally on such terms and conditions, as they think fit; also to sell, lease, abandon,
or otherwise deal with, any property, rights, or privileges to which the company may
be entitled, on such terms and conditions as they may think fit."
"(16). To enter into all such negotiations and contracts and rescind and vary all such
contracts, and execute and do all such*36 acts, deeds, and things in the name or on
behalf of the company as they might consider expedient for or in relation to any of
the matters aforesaid, or otherwise for the purposes of the company."
The plaintiff A. H. McDiarmid, who was the holder of 1202 shares in the plaintiff
company, being desirous that the assets and undertaking of the plaintiff company
should be sold, arranged terms on behalf of the company for the sale of them to a
new company formed for the purpose of acquiring them, and had these terms
embodied in a contract which was engrossed ready for execution by the company.
On January 2, 1906, a meeting of the shareholders of the company, convened by the
directors in accordance with a requisition signed by the plaintiff McDiarmid and
other shareholders in the company, was held for the purpose of considering and if
thought fit passing the following resolution:-"That the company do sell the assets specified in the contract which has been
produced to the meeting at the price and on the terms therein mentioned and
contained and that the directors be and they are hereby directed to cause the
common seal of the company to be affixed thereto within seven days and to carry
the same into effect."
The meeting was adjourned until January 16, when the resolution was passed by a
majority of 304 votes, 1502 votes for and 1198 votes against it. Practically the whole
of the 1502 votes were given in respect of shares held by the plaintiff McDiarmid or
his friends.
The directors, being of opinion that it would not be in the interests of the plaintiff
company that the contract should be carried out, declined to comply with the
resolution.
This was a motion by the plaintiff company and by the plaintiff McDiarmid, suing
on behalf of himself and all other shareholders in the company, against the directors
asking that the defendants might be ordered forthwith to affix the seal of the plaintiff
company to the contract and to carry it into effect; that the defendants might be
restrained by injunction until judgment or further order from dealing with or
disposing of the assets of the plaintiff company intended to be comprised in the said
agreement*37 in any manner inconsistent with the terms thereof; and for the
appointment of a receiver of the said assets.
The motion was heard before Warrington J. on February 23, 1906.
Cave, K.C., and A. H. Jessel, for the plaintiffs. The directors are the agents of the
company, and as such are bound to obey the directions of their principal, the
company. The plaintiffs merely desire that the directors shall do what the company
in general meeting has ordered them to do.
[WARRINGTON J. Why not remove the directors?]

That would require a three-fourths majority. The company in general meeting has
power to direct and control the directors in the management of the affairs of the
company: Isle of Wight Ry. Co. v. Tahourdin. [FN1]
FN1 (1883) 25 Ch. D. 320.
[WARRINGTON J. The company has by article 96 delegated the management of its
business to the directors.]
The company can revoke that delegation.
[WARRINGTON J. The article can only be altered by a special resolution.]
[ Norton, K.C. , referred to Grant v. United Kingdom Switchback Railways Co.
[FN2], and Buckley on Companies, 8th ed. p. 557.]
FN2 (1888) 40 Ch. D. 135.
The articles are subject to the general rule that agents must obey the directions of
their principal.
[WARRINGTON J. If you are right in your contention a simple majority of the
shareholders might control the company.]
A company does not part with its powers by delegating them to its directors. The
Court will not force upon a company a policy of which it does not approve:
Bainbridge v. Smith . [FN3]
FN3 (1889) 41 Ch. D. 462.
Norton, K.C. , and L. Mossop, for the directors, were not called upon.
WARRINGTON J.
stated the facts, and continued:--The question I have to determine in this case is
whether the shareholders of a company have power by a resolution passed by a simple
majority*38 of their number to order the directors to seal an agreement for the sale of
the whole of the assets of the company notwithstanding that the directors may think
that the sale is improvident, and that the terms on which it is to be carried out are not
fit terms on which the company ought to carry out such a sale. To my mind this
question depends upon the true construction of the articles. The only articles which
are material are articles 96 and 97. [His Lordship read the articles, and continued:--]
The effect of this resolution, if acted upon, would be to compel the directors to sell the
whole of the assets of the company, not on such terms and conditions as they think fit,
but upon such terms and conditions as a simple majority of the shareholders think fit.
But it does not rest there. Article 96 provides that the management of the business and
control of the company are to be vested in the directors. Now that article, which is for
the protection of a minority of the shareholders, can only be altered by a special
resolution, that is to say, by a resolution passed by a three-fourths majority, at a
meeting called for the purpose, and confirmed at a subsequent meeting. If that
provision could be revoked by a resolution of the shareholders passed by a simple
majority, I can see no reason for the provision which is to be found in article 81 that
the directors can only be removed by a special resolution. It seems to me that if a
majority of the shareholders can, on a matter which is vested in the directors, overrule
the discretion of the directors, there might just as well be no provision at all in the

articles as to the removal of the directors by special resolution. Moreover, pressed to


its logical conclusion, the result would be that when a majority of the shareholders
disagree with the policy of the directors, though they cannot remove the directors
except by special resolution, they might carry on the whole of the business of the
company as they pleased, and thus, though not able to remove the directors, overrule
every act which the board might otherwise do. It seems to me on the true construction
of these articles that the management of the business and the control of the company
are vested in the directors, and consequently that the control of the company as to any
particular matter, or the management of any particular transaction or any particular
part of*39 the business of the company, can only be removed from the board by an
alteration of the articles, such alteration, of course, requiring a special resolution.
No case has been cited to me which, in my opinion, has really any bearing on this
question, which depends on the construction of the articles. In Isle of Wight Ry. Co. v.
Tahourdin [FN4], which was a case under the Companies Clauses Consolidation Act,
1845, it was pointed out by the Court of Appeal that the resolution which it was
proposed to submit to the meeting, and upon which the question arose, was one which
could be carried by a simple majority of the company. Moreover, all that was there
decided was that the Court would not interfere to prevent a meeting of shareholders
being held. No decision was given as to what would be the result with reference to the
validity of any resolution which might be passed at the meeting.
FN4 25 Ch. D. 320.
On the whole, it seems to me that the resolution which was passed at the general
meeting on January 16, 1906, is not one which the directors are bound to carry into
effect. The consequence is, I must refuse the motion, with the usual result--that is to
say, the costs will be the defendants' costs in the action.
(W. I. C.)
The plaintiffs appealed. The appeal was heard on March 22, 1906.
Gore-Browne, K.C., and A. H. Jessel, for the plaintiffs. The question is whether a
company in general meeting has power to direct the course of action to be pursued by
the directors or whether the directors can refuse to do what the company in general
meeting directs them to do. The company is the principal or employer; the directors
are agents or servants. Every principal or employer has a right to the obedience of his
agents or servants in the case of all lawful commands. In the case of a company there
is a great difficulty in making its wishes known, and directors are properly allowed a
free hand; but when it does make known its wishes the directors must obey, in the
absence of fraud and oppression, such as occurred in Menier v. Hooper's Telegraph
Works. [FN5]Articles 96 and 97 cannot mean that the company is precluded from
doing any of those things which are entrusted to the directors--that the company is to
lose its right of controlling its own business beyond declaring a dividend and
appointing a managing director. No case can be found in which directors have come
to the Court and asserted the right to disobey the orders of the company. Even where
the articles nominate a particular man managing director without giving any power to
remove him, the Court will not compel the company to continue to employ him after
the company has expressed its desire in general meeting: Bainbridge v. Smith [FN6];
and see Browne v. La Trinidad. [FN7]That a company has powers concurrently with
its directors in matters entrusted to them by the articles is shewn by Grant v. United
Kingdom Switchback Railways Co. [FN8] Isle of Wight Ry. Co. v. Tahourdin [FN9]
also supports the plaintiffs' contention. That was the converse of this case. There the

Court refused to prevent a company from calling a meeting for the purpose of
interfering with the course taken by the directors in a matter within their powers
where the shareholders thought that that course was not for the benefit of the
company.
FN5 (1874) L. R. 9 Ch. 350.
FN6 41 Ch. D. 462, 474.
FN7 (1887) 37 Ch. D. 1, 13.
FN8 40 Ch. D. 135.
FN9 25 Ch. D. 320, 329.
[COZENS-HARDY L.J. That was a decision under the Companies Clauses
Consolidation Act, 1845, which contains a provision subordinating the directors to the
company. Is it not curious that Table A should not reproduce that?]
It must have been implied. If it is sought to make the master the servant and the
servant master, that ought to be done by express words.
Norton, K.C. , and L. Mossop, for the defendants. This case is really analogous to the
case of a partnership where, by the articles, one partner is appointed to manage the
business. By these articles the directors are to have the control of the company's
business, and that control is not to be interfered with except by extraordinary
resolution. Grant v. United Kingdom Switchback Railways Co. [FN10] is really an
authority in*41 favour of the defendants. It was there held that a company could by a
mere ordinary resolution affirm a contract made by the directors without authority
because that was not an alteration of the articles, but could not give the directors
power to do things in future which the articles did not authorize because that would be
an alteration of the articles, which, in that case, required a special resolution. So here
it is an alteration of the articles to tell the directors that they are to obey the behests of
the company made by a simple resolution in general meeting. That is contrary to the
express terms of article 96. [They also referred to North-West Transportation Co. v.
Beatty. [FN11]]
FN10 40 Ch. D. 135.
FN11 (1887) 12 App. Cas. 589.
Gore-Browne, K.C., in reply.
COLLINS M.R.
This is an appeal from a decision of Warrington J., who has been asked by the
plaintiffs, Mr. McDiarmid and the company, for a declaration that the defendants, as
directors of the company, are bound to carry into effect a resolution passed at a
meeting of the shareholders in the company on January 16. There are a number of
other incidental reliefs asked--for instance, that they be ordered to affix the seal of the
company, and that they may be restrained by injunction from dealing with the assets
of the company in any manner inconsistent with the agreement.
The point arises in this way. At a meeting of the company a resolution was passed by

a majority--I was going to say a bare majority, but it was a majority--in favour of a
sale to a purchaser, and the directors, honestly believing, as Warrington J. thought,
that it was most undesirable in the interests of the company that that agreement should
be carried into effect, refused to affix the seal of the company to it, or to assist in
carrying out a resolution which they disapproved of; and the question is whether
under the memorandum and articles of association here the directors are bound to
accept, in substitution of their own view, the views contained in the resolution of the
company. Warrington J. held that the majority could not impose that obligation upon
the directors, and that on the true construction of the articles the directors were the
persons*42 authorized by the articles to effect this sale, and that unless the other
powers given by the memorandum were invoked by a special resolution, it was
impossible for a mere majority at a meeting to override the views of the directors.
That depends, as Warrington J. put it, upon the construction of the articles. First of all
there is no doubt that the company under its memorandum has the power in clause 3
(k) to sell the undertaking of the company or any part thereof. In this case there is
some small exception, I believe, to that which is to be sold, but I do not think that that
becomes material. We now come to clause 81 of the articles, which I think it is
important to refer to in this connection. [His Lordship read the clause.] Then come the
two clauses which are most material, 96 and 97, whereby the powers of the directors
are defined. [His Lordship read clause 96 and clause 97 (1.).] Therefore in the matters
referred to in article 97 (1.) the view of the directors as to the fitness of the matter is
made the standard; and furthermore, by article 96 they are given in express terms the
full powers which the company has, except so far as they "are not hereby or by statute
expressly directed or required to be exercised or done by the company," so that the
directors have absolute power to do all things other than those that are expressly
required to be done by the company; and then comes the limitation on their general
authority--"subject to such regulations as may from time to time be made by
extraordinary resolution." Therefore, if it is desired to alter the powers of the directors
that must be done, not by a resolution carried by a majority at an ordinary meeting of
the company, but by an extraordinary resolution. In these circumstances it seems to
me that it is not competent for the majority of the shareholders at an ordinary meeting
to affect or alter the mandate originally given to the directors, by the articles of
association. It has been suggested that this is a mere question of principal and agent,
and that it would be an absurd thing if a principal in appointing an agent should in
effect appoint a dictator who is to manage him instead of his managing the agent. I
think that that analogy does not strictly apply to this case. No doubt for some purposes
directors are agents. For whom are they agents? You have, no doubt, in theory and
law*43 one entity, the company, which might be a principal, but you have to go
behind that when you look to the particular position of directors. It is by the consensus
of all the individuals in the company that these directors become agents and hold their
rights as agents. It is not fair to say that a majority at a meeting is for the purposes of
this case the principal so as to alter the mandate of the agent. The minority also must
be taken into account. There are provisions by which the minority may be over-borne,
but that can only be done by special machinery in the shape of special resolutions.
Short of that the mandate which must be obeyed is not that of the majority--it is that
of the whole entity made up of all the shareholders. If the mandate of the directors is
to be altered, it can only be under the machinery of the memorandum and articles
themselves. I do not think I need say more.
One argument used by Warrington J. strongly supports that view. He says in effect:
"There is to be found in these articles a provision that a director can only be removed

by special resolution. What is the use of that provision if the views of the directors
can be overridden by a mere majority at an ordinary meeting? Practically you do not
want any special power to remove directors if you can do without them and differ
from their opinion and compel something other than their view to be carried into
effect." That argument appears to me to confirm the view taken by the learned judge.
The cases cited do not really apply. Indeed, I do not think that Mr. Gore-Browne, who
argued this case with his usual ability and fairness, looked upon them as more than
presenting some analogy, and the only case which, at first sight, appeared to me at all
near this case was Isle of Wight Ry. Co. v. Tahourdin [FN12]; but when that is looked
into, as was pointed out by Cozens-Hardy L.J., it rests upon a different statute, a
statute differing in the most essential point, namely, in the limitation of the directors'
authority. Therefore that case has no direct bearing on the case before us, and on these
grounds, which in substance are the same grounds as those of the learned judge below,
I am of opinion that this appeal fails.
FN12 25 Ch. D. 320.
*44 COZENS-HARDY L.J.
I am of the same opinion. It is somewhat remarkable that in the year 1906 this
interesting and important question of company law should for the first time arise for
decision, and it is perhaps necessary to go back to the root principle which governs
these cases under the Companies Act, 1862. It has been decided that the articles of
association are a contract between the members of the company inter se. That was
settled finally by the case of Browne v. La Trinidad [FN13], if it was not settled
before. We must therefore consider what is the relevant contract which these
shareholders have entered into, and that contract, of course, is to be found in the
memorandum and articles. I will not again read articles 96 and 97, but it seems to me
that the shareholders have by their express contract mutually stipulated that their
common affairs should be managed by certain directors to be appointed by the
shareholders in the manner described by other articles, such directors being liable to
be removed only by special resolution. If you once get a stipulation of that kind in a
contract made between the parties, what right is there to interfere with the contract,
apart, of course, from any misconduct on the part of the directors? There is no such
misconduct in the present case. Is there any analogy which supports the case of the
plaintiffs? I think not. It seems to me the analogy is all the other way. Take the case of
an ordinary partnership. If in an ordinary partnership there is a stipulation in the
partnership deed that the partnership business shall be managed by one of the
partners, it would be plain that in the absence of misconduct, or in the absence of
circumstances involving the total dissolution of the partnership, the majority of the
partners would have no right to apply to the Court to restrain him or to interfere with
the management of the partnership business. I would refer to what is said in Lindley
on Partnership, 7th ed. p. 574: "Where, however, the partner complained of has by
agreement been constituted the active managing partner, the Court will not interfere
with him unless a strong case be made out against him"--that is to say, unless there is
some case of fraud or misconduct to Justify the interference of the Court. Nor is this
doctrine limited to*45 a case of co-partners. It is not a peculiar incident of
copartnership: it applies equally to cases of co-ownership. I think in some of the
earlier cases before Lord Eldon [FN14]with reference to the co-owners of one of the
theatres, he laid down the principle that when the co-owners had appointed a

particular member as manager the Court would not, except in the case of misconduct,
interfere with him. And why? Because it is a fallacy to say that the relation is that of
simple principal and agent. The person who is managing is managing for himself as
well as for the others. It is not in the least a case where you have a master on the one
side and a mere servant on the other. You are dealing here, as in the case of a
partnership, with parties having individual rights as to which there are mutual
stipulations for their common benefit, and when you once get that, it seems to me that
there is no ground for saying that the mere majority can put an end to the express
stipulations contained in the bargain which they have made. Still less can that be so
when you find in the contract itself provisions which shew an intention that the
powers conferred upon the directors can only be varied by extraordinary resolution,
that is to say, by a three-fourths majority at one meeting, and that the directors
themselves when appointed shall only be removed by special resolution, that is to say,
by three-fourths majority at one meeting and a simple majority at a confirmatory
meeting. That being so, if you once get clear of the view that the directors are mere
agents of the company, I cannot see anything in principle to justify the contention that
the directors are bound to comply with the votes or the resolutions of a simple
majority at an ordinary meeting of the shareholders. I do not think it true to say that
the directors are agents. I think it is more nearly true to say that they are in the
position of managing partners appointed to fill that post by a mutual arrangement
between all the shareholders. So much for principle. On principle I agree entirely with
what the Master of the Rolls has said, agreeing as he does with the conclusions of
Warrington J.
FN13 37 Ch. D. 1.
FN14 See Waters v. Taylor, (1808) 15 Ves. 10; (1813) 2 V. & B. 299.
When we come to the authorities there is, I think, nothing even approaching to an
authority in favour of the appellants'*46 case. Isle of Wight Ry. Co. v. Tahourdin
[FN15] at the utmost contained a dictum which at first sight looked in favour of
appellants; but, treating it as an authority, it was an authority upon an Act which
differed in a vital point from the Act which we are now considering, because although
by s. 90 of the Companies Clauses Act the directors have powers of management and
superintendence very similar to those found in Table A, article 55, and in articles 96
and 97, that section contains these vital words: "And the exercise of all such powers
shall be subject also to the control and regulation of any general meeting specially
convened for the purpose." If those words had been found in the present Act of
Parliament the appellants' case would have been comparatively clear. I see no ground
for reading them into the Companies Act, 1862, or into the memorandum and articles
of association of this company. For these reasons I think that the appeal must be
dismissed.
FN15 25 Ch. D. 320.

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