Shareholders’ Agreement: Russell v Northern Bank Development

Corporation Ltd.

Northern Bank Development Corporation Ltd. had invested substantial sums of

money in two brick making companies.1 One company failed while the other did
exceedingly well. On the bank’s initiative, the two companies came to be vested in a
new holding company, Tyrone Brick Ltd. (TBL). The authorised capital of TBL was
£1,000 divided into 1,000 shares of £1 each. A part of the arrangement was that the
four executives of the successful company, would manage TBL. To this end, the four
executives were allotted 20 shares each of TBL. The bank was allotted 120 shares.
The remaining 800 shares were not allotted.

A contract was signed by five persons, the four executives, Samuel Russell, Edward
Winston Napier, John Andrew Topping and Kenneth Calderwood Gore McIlgorm;
and the company TBL. The bank was to be a part of the agreement but had not
signed it. The contract was signed on November 14, 1979 and provided:

Whereas: 1. The corporation and the executives (hereinafter collectively called ‘the
shareholders') are the holders of the entire issued share capital of the company. 2. The
shareholders have agreed to regulate the relationship between them with regard to the
management and control of the company so long as they shall remain shareholders of
the company.

Clause 3 of the contract provided:

3. No further share capital shall be created or issued in the company or the rights
attaching to the shares already in issue in any way altered (save as is herein set out) or
any share transfer of the existing shares permitted, save in the following manner,
without the written consent of each of the parties hereto.

Almost a decade later, on 10 March 1988 the board of TBL gave a notice of an
extraordinary general meeting to the shareholders. The notice was to consider and
pass the two ordinary resolutions increasing the authorised share capital of the
company to £4,000,000 by creating further shares. Before the scheduled meeting,
one of the executive-shareholders, Samuel Russell, moved the court seeking an
injunction to restrain the other persons to the agreement to vote on the resolution.

The company law provided that a company could ‘if so authorised by its articles, may
alter the conditions of its memorandum’ including ‘increase its share capital by new
shares of such amount as it thinks expedient.’ Article 1 of the company provided:

The company may from time to time by ordinary resolution increase the share capital
by such sum, to be divided into shares of such amount, as the resolution shall
prescribe.

The House of Lords noted:

It follows that … T.B.L. had statutory power to increase its share capital.

1
Russell v Northern Bank Development Corporation Ltd., [1992] 1 W.L.R. 588
1
 The issue between the parties in this House was whether article 3 of the agreement
constituted an unlawful and invalid fetter on the statutory power of T.B.L. to increase
its share capital or whether it was no more than an agreement between the
shareholders as to their manner of voting in a given situation. Both parties accepted
the long established principle that “a company cannot forgo its right to alter its
articles:” “the company is empowered by the statute to alter the regulations contained
in its articles from time to time … and any regulation or article purporting to deprive
the company of this power is invalid on the ground that it is contrary to the statute. …
this principle applied also to the right of a company to alter its memorandum.

… while a provision in a company's articles which restricts its statutory power to alter
those articles is invalid an agreement dehors the articles between shareholders as to
how they shall exercise their voting rights on a resolution to alter the articles is not
necessarily so.

The House of Lords quoted Lord Devey in Welton v. Saffery [1897] A.C. 299 , 331:

Of course, individual shareholders may deal with their own interests by contract in
such way as they may think fit. But such contracts, whether made by all or some only
of the shareholders, would create personal obligations, or an exceptio personalis
against themselves only, and would not become a regulation of the company

The House of Lords drew from it that ‘shareholders may lawfully agree inter se to
exercise their voting rights.’ The court proceeded:

Turning back to clause 3 of the agreement it appears to me that its purpose was
twofold. The shareholders agreed only to exercise their voting powers in relation to
the creation or issue of shares in T.B.L. if they and T.B.L. agreed in writing. This
agreement is purely personal to the shareholders who executed it and as I have already
remarked does not purport to bind future shareholders. …

T.B.L. on the other hand agreed that its capital would not be increased without the
consent of each of the shareholders. This was a clear undertaking by T.B.L. in a
formal agreement not to exercise its statutory powers … As such an undertaking it is,
in my view, as obnoxious as if it had been contained in the articles of association and
therefore is unenforceable … T.B.L.'s undertaking is, however, independent of and
severable from that of the shareholders and there is no reason why the latter should
not be enforceable by the shareholders inter se as a personal agreement which in no
way fetters T.B.L. in the exercise of its statutory powers.

In these circumstances … the proper order would be a declaration as to the validity of

clause 3 of the agreement as between the shareholders.

Law in India on Shareholders’ Agreement

It is crucial to note that following a reading/misreading of the Supreme Court of
India’s judgement in the Rangaraj case 2, the High Courts in India have developed
the law that a shareholders’ agreement is not binding on the shareholders’, as a
contract, unless incorporated in the articles of association. This significantly limits the
utility of a shareholders’ agreement in India.

2
V. B. Rangaraj v. V. B. Gopalakrishnan, AIR 1992 SC 453.
2