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Ratification by the General Meeting

Published online by Cambridge University Press:  12 February 2016

Aharon Barak
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Extract

Can the members of a company in general meeting ratify a transaction of the directors by simple majority, when the latter—in breach of their fiduciary duties—have not acted “bona fide in the interests of the company”? This question is likely to prove of importance in a number of different contexts. In Bamford v. Bamford it arose in connection with the validity of an act of the directors in the sphere of the company's relations with a third party—the contention that the act was invalid having been made by the minority shareholders, who objected to ratification, and not by the third party himself. The possibility of ratification gives rise to two questions: is the general meeting of the company the competent organ to exercise this power? And, assuming that it is, can the act done in breach of a duty be ratified by it by simple majority? In the Bamford case it is only the former aspect of the problem that is considered.

The articles of the company vested the power to allot shares in the directors. In exercising this power the directors failed to act “bona fide in the interests of the company”. Their act was ratified by the members in general meeting by simple majority and the validity of the ratification was challenged. Both the judge of first instance and those sitting on appeal decided that it was valid. Plowman J., in the Chancery Division, held that, since the directors had been actuated by an improper motive, they thereby lost their power of allotment, which accordingly vested in the general meeting, as the organ of the company with residual power in this respect. The general meeting—he went on to hold—could ratify the directors' action by simple majority. Harman L.J. and Russel L.J., in the Court of Appeal, reached the same conclusion— but for different reasons. In their opinion, the fact that the directors allotted the shares for an improper motive does not mean that what they did was in excess of their powers; the allotment simply became voidable. The power to remedy the defect—they held—is in the hands of the general meeting, which can exercise this power by simple majority.

Type
Cases
Information
Israel Law Review , Volume 5 , Issue 2 , April 1970 , pp. 249 - 255
Copyright
Copyright © Cambridge University Press and The Faculty of Law, The Hebrew University of Jerusalem 1970

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References

1 For example : the company sues its directors for having acted in breach of their duties to it and the directors contend that the general meeting has ratified their act by simple majority; do they have a good defence here? Or, again, a shareholder brings a derivative action against the directors for having acted in breach of their duties to the company and they contend that, in accordance with the rule in Foss v. Harbottle, the action must be dismissed, since the general meeting is competent to ratify their act by simple majority; do they have a good defence in this case?

2 Plowman J., at first instance, regarded the action as a derivative action. Russell L.J. regarded it as a personal action. Both judges assumed—without going directly into the matter—that the minority shareholders had locus standi. The Bamford case, then, is of no real authority on the question of the exceptions to the rule in Foss v. Harbottle. Wedderburn holds otherwise in a note in (1968) 31 M.L.R. 688.

3 If the objection had been raised by the third party, it would have been pertinent to examine the application of the rule in Royal British Bank v. Turquand to our problem.

4 On this point, see Gower, , Modern Company Law (3rd ed. 1969) p. 566.Google Scholar

5 This was not a finding of fact, but simply an assumption which the parties agreed to make for the purposes of the hearing.

6 [1968] 3 W.L.R. 317.

7 [1969] 1 All E.R. 969.

8 See Shaw and Sons (Salford) Ltd. v. Shaw [1935] 2 K.B. 113; Scott v. Scott [1943] 1 All E.R. 582.

9 In Grant v. United Kingdom Switchback Railways Co. (1888) 40 Ch.D. 135, Cotton L.J. and Lindley L.J. attempted to overcome this difficulty by distinguishing between ratification of a past individual act and the conferring of a general power for the future. It is not easy to accept this distinction : see Pennington, , Company Law (2nd ed. 1967), p. 486.Google Scholar See further, Salmon v. Quin and Axtens [1909] 1 Ch. 311, [1909] A.C. 442.

10 Cf. Irvine v. Union Bank of Australia (1877) 2 App. Cas. 366.

11 For an excellent analysis of this approach, see Pennington, op. cit. 286. See also Gower, op. cit. 136. On the special status of the general meeting as the organ with residual power, see Wedderburn, , “The Powers of the Members in General Meeting”, Studi Di Privato No. VIII, p. 765.Google Scholar

12 To be precise, the directors are agents of the company, appointed by the general meeting by virtue of that organ's power to act independently in this matter.

13 This is the position under Article 80 in Table A of the English Companies Act and Article 70 of the Israeli Companies Ordinance.

14 Cf Hogg v. Cramphorn Ltd. [1967] Ch. 254.

15 It is clear that appropriate wording of the articles may have the effect of eliminating any residual power: see Bamford v. Bamford [1968] 3 W.L.R. at p. 332.

16 For further instances, see the authorities referred to in note 12 above.

17 It may be that a resolution of this kind would run into difficulties, in view of the provisions of Sec. 205 of the English Companies Act, whose Israeli counterpart is Sec. 77 of the Companies Ordinance.

18 See, in particular, at p. 332.

19 See, in particular, at p. 372.

20 See, in particular, at p. 975.

21 Cf. the distinction drawn in the field of vicarious liability between acting outside the course of employment and an improper performance within the course of employment.

22 (1888) 40 Ch. D. 135.

23 Deadlock—not excess of power. The existence of a state of deadlock is a sufficient basis for applying the principles of the residual power: see note 12 above. One must be cautious, however, not to come too readily to the conclusion that there is a deadlock. Only in the clearest circumstances, where the activities of the company are paralysed, can this be justified : cf. Salmon v. Quin and Axtens [1909] 1 Ch. 311; [1909] A.C. 442.

24 In the course of their judgments in the Bamford case, Harman L.J. and Russell L.J. stress more than once that the allotment there was not void butvoidable. This is correct and undoubtedly supports their approach to the problem. But even if the allotment is void, because of the conflict of interests, that does not necessarly mean that the act in question is an excess of power. Every act in excess of power is void from the company's point of view; but not every void act is an excess of power.

25 At p. 972.

26 Where the defect is not a fundamental one, the validity of the directors' act is not affected: see Sec. 180 of the English Companies Act and Sec. 72 of the Israeli Companies Ordinance, as interpreted in Morris v. Kanssen [1964] A.C. 459.