Russell v Northern Bank Development Corpn Ltd [1992] 1 WLR 588 is the leading case on the subject of provisions in the Articles vs. provisions in the Shareholders’ Agreement.
Facts of the case
In this case the claimant was a party to a Shareholders’ Agreement to which the company was also a party. The agreement included a clause preventing any increase in the share capital of the company without the written consent of all the parties to the agreement.
An action was brought against the other parties for an injunction restraining them from increasing the share capital of the company.
The defendants argued that the agreement was void in its entirety both as regards the company and as between the shareholders inter se because it amounted to an unlawful and invalid fetter on the company’s statutory powers (namely, the power of a company to alter its articles of association by special resolution).
Judgment
It was held that an agreement outside the Articles between shareholders inter se as to how they would vote on a resolution to alter the articles was enforceable in so far as it amounted merely to a private agreement as to the exercise by the shareholders of their respective voting rights and an injunction could be granted to prevent a shareholder from breaching that agreement. A Shareholders’ Agreement did not constitute an unlawful and invalid fetter on the company’s statutory power to increase its share capital. The House of Lords held that the agreement between the company and the shareholders, which was void as being contrary to statute, could be severed from the agreement between the shareholders which was valid and enforceable.
Significance of the case
The significance of this case is that it puts beyond question the shareholders’ freedom to contract in respect of voting rights.