1. Companies Act 1985, s 35A.

2. See Companies Act 1985, s 35, as amended.

3. For example, s 151, concerning financial assistance for the purchase of the company's shares.

4. [1974] 2 A11 ER 625, [1974] 1 WLR 1133.

5. There was no dispute that the directors could be enjoined to exercise best endeavours to procure the resolution and that they could be in contempt for breach of such an injunction: but see the last section of this article.

6. At 632.

7. At 633.

8. [1986] 2All ER 816 at 830–1.

9. [1986] 2 All ER 816 at 830.

10. [1940] AC 701.

11. At 715.

12. At 732.

13. However, in Southern Foundries the court would certainly have treated a general meeting resolution to dismiss a director as an act of the company: see [1940] AC 701, 716–717 per Lord Atkin.

14. At 728–9.

15. At 743. No injunction was sought to enforce the contract by reinstating the directorship; this can be accounted foreitheron the basis of the rule against enjoining contracts for personal services or as a rule of company law designed to protect shareholders.

16. This is quite distinct from the question that arises in criminal law of attribution of an actor's state of mind to the company for the purposes of establishing mens rea. An act may be that of the company for the purposes of contract law even if the actor is not to be equated with the company for the purposes of establishing criminal liability. However if the shareholders were responsible for procuring a criminal act by company employees, the state of mind of a controlling shareholder would presumably be attributable to the company for this purpose.

17. As in the case of Table A Article 70, where the general meeting may give directions by special resolution.

18. At 635. This is reminiscent of the minority view in Southern Foundries, above, text following n 10.

19. That is, assuming the company in general meeting to have an obligation to an outsider, the shareholders would have an obligation to the company in respect of the exercise of their votes.

20. North- West Transportation v Beatty (1887) 12 App Cas 589.

21. Directors of course have such an obligation, which includes the obligation to procure compliance with the company's outside obligations. The question of restrictions on a shareholder's freedom to vote usually arises in connection with a dispute between shareholders involving an allegation of minority oppression.

22. Although these matters may be relevant to determining who is authorised to assume an obligation on behalf of the company.

23. Pennington's Company Law (7th edn, London, 1995) pp 44, 858, citing Northern Counties Securities.

24. The misconceived tendency to equate the company with the directors alone and not the shareholders contrasts with the approach common in early company law cases of equating the company with the shareholders and treating the directors as their agents: see the discussion in R Grantham ‘The Unanimous Consent Rule in Company Law’ [1993] CLJ 245, 258.

25. See below, text following n 58.

26. MA Eisenberg ‘The Structure of Corporation Law’ (1989) 89 Columbia LR 1461.

27. For example, under Article 70 of Table A.

28. And, as discussed in connection with Southern Foundries, damages in such a case cannot depend on whether the contract is best construed as making the company responsible for the acts of the shareholders as third parties.

29. However the allocation of responsibilities under the company's constitution might be taken to affect the authority of directors to enter into a contract relating to the exercise of those responsibilities.

30. For example, Companies Act 1985, s 9 governs the alteration of the articles, s 121 governs the increase of share capital; s 303 governs removal of a director.

31. [1992] 3 All ER 161, [1992] 1 WLR 588.

32. In Russell, this was the equivalent in Northern Ireland of the Companies Act 1985, s 121. In fact in Russell the company's contract was with the shareholders, and it may be that the ratio does not extend generally to company contracts with outsiders: see P Jaffey ‘Restraining the Exercise of Corporate Statutory Powers’ [1994] Denning LJ at 67.

33. Thus Northern Counties Securities provides an alternative basis for the decision in Russell, although the case was not considered.

34. However in Russell it was also held the statutory empowering provision was not mandatory in the sense of rendering invalid a shareholders ‘agreement that restricted the shareholders’ freedom to vote on the exercise of the statutory power.

35. This is discussed in P Jaffey ‘Restraining the Exercise of Corporate Statutory Powers’ [1994] Denning LJ at 67. On Russell v Northern Bank, see also C Riley ‘Vetoes and Voting Agreements: Some Problems of Consent and Knowledge’ [1993] NILQ 34, BJ Davenport ‘What Did Russell v Northern Bunk Development Corporation Decide?’ [1993] LQR 553, E Ferran ‘The Decision of the House of Lords in Russell v Northern Bank Development Corporation’ [1994] CLJ 343. The distinction between mandatory and default provisions is discussed in Eisenberg, above n 26.

36. This is the assumption behind the so-called nexus of contracts theory; the old concession theory of incorporation appeared to treat companies more like public authorities exercising powers in the public interest. For a recent discussion of the nexus of contracts theory, see J Parkinson Corporate Power and Responsibility (Oxford, 1993) 25.

37. Russell v Northern Bank [1992] 3 All ER 161, Welton v Suffery [1897] AC 299.

38. A large company exercises a significant degree of social power through the decisions it takes on production, supply, marketing and employment, and it is a controversial whether in consequence it should be treated as having public powers that should be exercised with due regard for the public interest, and if so by what means such a public duty should be enforced. The conventional view is that, even in the case of such a company, the company's powers need be exercised only in the shareholders ‘interests: see n 54 below. It is doubtful whether this concern could be the basis for interpreting the statutory empowering provisions as mandatory provisions requiring the powers to be exercised in the public interest: these provisions are not applicable only to such large listed companies, and in any case the powers conferred by them are not significant ones with respect to the issue of such companies’ social power.

39. Gordon sets out a number of public interest arguments for mandatory provisions based on the assumption that companies are set up to pursue interests of shareholders: see JN Gordon The Mandatory Structure of Corporate Law, 89 Colum LR 1549. Gordon suggests the Public Good Hypothesis, that there is a public interest in uniformity in the terms of company contracts that will benefit all company shareholders; the Innovation Hypothesis, that new types of provision need official sanction in order to attract credibility (but this seems to be at odds with the general presumption of contractual freedom, and could be achieved through official default terms, as in Table A); and the Opportunistic Amendment Hypothesis, that provisions that affect the power or return of managers must be incapable of alteration, at least by the usual means, because otherwise managers would be able to use their influence over the general meeting to procure alterations damaging to shareholders. These arguments are not based on a public interest in the content of a particular provision, and so do not rely on a claim that this can be judged better by the legislature or the courts than by the shareholders.

40. Appointment of directors by directors would be analogous to opportunistic amendment: see n 39 above, and P Jaffey [1994] Denning LJ at 67.

41. BJ Davenport ‘What Did Russell v Northern Bank Development Corporation Decide?’ [1993] LQR 553,553.

42. It might also be argued that contractual restrictions on the exercise by the company of the powers of alteration of its memorandum and articles should be precluded because they have the effect of denying power to incoming shareholders who may not know of the restriction when they join the company. But this difficulty is better dealt with by way of investigation by the incoming shareholder or through a requirement for a formal notice of the creation of such a restriction: see Ferran, above n 35,361ff, Riley, above n 35, 48.

43. For examples 155, concerning approval of financial assistance, and s 166, concerning approval of a purchase of the company's own shares.

44. If a statutory empowering provision, like a provision allowing for alteration of the articles, is understood to have been intended to give the company in general meeting a power that the company would not otherwise have had, the provision may reasonably be understood to allow the company to impose restrictions on the exercise of power, including restrictions created by contracts entered into by the directors, but not to facilitate the exercise of the power through provisions allowing the directors to exercise it or to accept an obligation requiring the company to exercise it in the future. See P Jaffey, above n 35 at 72.

45. [1974] AC 821 (Privy Council, Lord Wilberforce). See below, text at n 70.

46. In Russell v Northern Bank, the contract was entered into not for business purposes but for the purpose of securing an interest of shareholders in preserving their present degree of control in the general meeting and financial interest in the company.

47. [1974] AC 821, 837.

48. This is the approach of so-called hypothetical contracting, where the court determines what reasonable parties would have agreed with respect to the matter in question: see for example, CA Riley ‘Contracting Out of Company Law: Section 459 of the Companies Act 1985 and the Role of the Courts’ (1992) 55 MLR 782,787. Shareholders might reasonably confer on the directors authority to accept restrictions necessary for business purposes, for example for the purpose of giving additional reassurance to a lender. On the other hand they would be less likely to give the directors the power to enter into a contract binding the general meeting actually to make an alteration to the articles.

49. Russell v Northern Bank [1992] 3 A11 ER 161; Welton v Saffery [1897] AC 299.

50. Generally, it seems that a contract requiring a positive exercise of a statutory power would not have a business purpose, but a purpose relating to the control of the general meeting or the respective interests of shareholders in the company.

51. Howard Smith v Ampol Petroleum [1974] AC 821.

52. But the directors might be understood to have the power to restrict the company by contract from issuing shares. See the discussion below of Northern Counties Securities and Ferguson v Wilson, text at n 67.

53. See n 48 above.

54. This is the phenomenon described as ‘separation of ownership and control’, and originally identified in AA Berle & GC Means The Modern Corporarion and Private Property (New York, 1932, rev edn 1967). In such a company the loss of control over the directors by an independent decision-making body of shareholders does not mean that the directors' power is entirely unconstrained, since they are subject instead to the discipline imposed by the stock market through the company s share price and the threat of takeover and replacement of the directors. Whether this constraint is sufficient, however, or whether it is appropriate for it to be the only genuine influence on directors (apart from formal legal regulation) is of course a much discussed and controversial question: see, for a recent discussion, JE Parkinson Corporate Power and Responsibility (Oxford: Clarendon Press, 1993).

55. There is a difficulty in applying different presumptions in the construction of the articles for different types of company. Although there is a formal distinction between public and private companies, it does not reflect exactly the substantive difference in terms of shareholder control; and there is no formal distinction between companies in which the directors are the same as the shareholders and other private companies. Companies may easily evolve from one category into the next. This may create difficulties in applying different presumptions, and possibly in justifying them by reference to shareholder assent.

56. However if the limitation on authority is taken to be imposed by the statutory empowering provision itself, s 35A will not assist the outsider, unless the statutory empowering provision can be regarded as a provision of the company's constitution.

57. Section 35A(2)(b).

58. See below, n 89.

59. If the company goes into insolvent liquidation, shareholders can be required to contribute, but only up to the amount, if any, due on their shares.

60. [1940] AC 701,711.

61. [1920] 3 KB 497.

62. The creditor can recover from the company.

63. The director is liable for breach of his duty to the company not in consequence of a breach by the company of a particular contract, but if he runs the business generally in a way that will not promote the likelihood of creditors generally being paid off. The issue is discussed generally in DD Prentice Directors, Creditors, and Shareholders, in E McKendrick ed Commercial Aspects of Trusts and Fiduciary Obligations (Oxford: Clarendon Press, 1992).

64. See above, text at n 20.

65. Under RSC Ord 45, r 5 (Supreme Court Practice, 1993). an order against a company may be enforced by way of sanctions against the directors personally. See CJ Millar, Contempt of Court (Oxford: Clarendon Press, 1989) pp 435–436. The director cannot be liable for contempt merely by virtue of being a director; he must have knowledge and responsibility for the non-compliance: see Director of Fair Trading v Buckland [1990] 1 WLR 920. Agents and employees may also be liable for procuring or assisting the commission of a breach of an order: see Millar, Ibid.

66. See s 39 of the Supreme Court Act 1981; RSC Ord 45, r 8 (Supreme Court Practice, 1993). Cf s 461 of the Companies Act 1985.

67. It must surely be open to doubt whether a resolution of the general meeting passed in compliance with an injunction to enforce an obligation of the company should be treated as satisfying the Stock Exchange regulations.

68. (1866) 2 Ch App 77.

69. (1866) Ch App 77 at 86–7.

70. Or the contract could be interpreted as being unenforceable for lack of authority to the extent that the authority was exceeded. Alternatively the judgment could be understood to anticipate Northern Counties Securities in denying that an injunction can ever be granted against the general meeting.

71. [1986] 2 All ER 8 16 at 831. Nor according to Scott J would the injunction extend to the convening of a meeting by management in response to a shareholder's requisition under the right of requisition under the Companies Act 1985.

72. Above, text at n 54.

73. See generally PD Finn Fiduciary Obligations (Sydney, 1977) Ch 7.

74. [1990] BCLC 895 per Templeman J at 916 and 920.

75. [1990] BCLC 460 per Vinelott J at 466.

76. In fact the cases are not entirely clear whether they mean to say that the contractual undertaking is unenforceable or whether it is properly construed to be subject to an implied qualification that the directors are free to exercise their discretion freely in the company's best interests.

77. [1992] BCC 863.

78. The court rejected the public policy argument that an undertaking not to object to a planning application constituted an improper interference in judicial or quasi-judicial proceedings and so should be unenforceable.

79. As Neill LJ said at 875, such a wide interpretation ‘could well prevent companies from entering into contracts which were commercially beneficial to them.’.

80. (1964) 112 CLJ 597. The court in Fulham v Cabra pointed out that Thorby v Goldberg was not cited in either Rackham or John Crowrher.

81. Thorby v Goldberg [1964] 112 CW 597, per Kitto J at 601, quoted by Neill W at 875.

82. See generally PR Craig Administrative Law, (London: Sweet & Maxwell, 3rd edn, 1994) pp 699–703.

83. Subject to the issue of outsider protection: see below, text following n 90.

84. See Grantham ‘The Powers of Company Directors and the Proper Purpose Doctrine’ (1994–95) 5 Kings College LJ 16, esp at 41–43.

85. See above n 48.

86. Cf GH Treitel The Law of Contract (London, 9th edn, 1995) p 186.

87. Unless, as here, all the shareholders are party to the contract.

88. [1990] BCLC 560.

89. [1990] BCLC 560,563. However the situation in Dawson International is different in certain respects from that in Rackham and John Crowther, although not in any way that changes this conclusion. The duty owed by directors to shareholders to act honestly when they give advice on the sale of shares is not an aspect of their status-based fiduciary duty to the company. It is a duty owed to shareholders individually, and appears to arise by application of general principles of law concerning misrepresentation to the particular circumstances in which directors offer advice. Thus, strictly speaking, because it is not part of the discretion attached to the office to offer advice to shareholders individually in relation to the private sale of their shares, it may not be appropriate to say that an undertaking by the directors fetters their discretion. However this does not affect the conclusion, because the directors cannot relieve themselves by prior contract with a third part of their duty under the general law not to mislead shareholders.

90. Although the question whether there should be a damages claim remains: see PR Craig Administrative Law (London: Sweet & Maxwell, 3rd edn, 1994) p 703.

91. An analogous issue arises in connection with the much discussed issue of restitutionary claims at common law and in equity: see eg P Birks ‘Civil Wrongs: A New World’, in Butterworths Lectures (1990–91) (London: Butterworths, 1992) pp 55, 98.

92. See Grantham, above, n 84.

93. See text following n 57.