4 Neither the company nor the members are bound to
outsiders. This is illustrated by the following case.
1 The court will not allow an alteration to be enforced
if it is not for the benefit of the members as a whole, as
where the company takes a power of expulsion of mem-
bers for no particular reason.Part 2Business organisations
160
directors refused to take and pay for them, saying that
they had no liability to do so.
The court decided that the word ‘will’ indicated an
obligation to take the shares and that the clause imposed
a contractual obligation on the directors to take them.
This was in the nature of a collateral contract. When a
member bought shares he made a contract with the
company but also a collateral contract with the other
members to observe the provisions of the articles. Thus,
the members could sue each other and there was no
need for the company, with whom the main contract was
made, to be a party to the action.
Comment. Although the articles placed the obligation to
take shares on the directors, the judge construed this
as an obligation falling upon the directors in their capac-
ity as members. Otherwise the contractual aspect of
the provision in the articles would not have applied. The
articles are not a contract between the company and
the directors who, in their capacity as directors, are out-
siders for this purpose. (See below.)Eley v The Positive Government Security
Life Assurance Co Ltd (1876)
The articles of the company appointed Mr Eley as solic-
itor of the company for life. During the course of this
employment he became a member of the company.
Later he was dismissed and brought an action against
the company for damages for breach of the contract
which he said was contained in the articles. The court
decided that his action failed. There was no contract
between the company and Mr Eley. He was an outsider
in his capacity as a solicitor. The articles gave him rights
only in his capacity as a member.It should be noted that the Contracts (Rights of Third
Parties) Act 1999 does not apply to the statutory con-
tract set out in s 33. The 1999 Act specifically excludes
it to prevent third-party rights from arising. Thus, the
legal decisions set out above continue to apply and are
not affected by the 1999 Act or the CA 2006.
Alteration of the articles
The company may alter or add to its articles by a special
(or written) resolution (s 21), subject to certain restric-
tions of which the following are the most important.
Brown v British Abrasive Wheel Co
Ltd(1919)
The majority shareholders (98 per cent) in a company
agreed to provide more capital for the company on con-
dition that the 2 per cent minority (who were not pre-
pared to put more money in) would sell their shares to
the majority. Negotiations having failed, the articles were
altered to include a clause under which a shareholder
was forced to transfer his shares to the other members
at a fair value if requested to do so in writing. The court
decided that the alteration could not be allowed. The
clause could be used to deprive any minority share-
holder of his shares without any reason being given and
it was not for the benefit of the company (i.e. the mem-
bers) as a whole that any one or more of their number
should be expelled for no good reason.However, expulsion is allowed if it does benefit the
members as a whole, as where the member expelled is
competing with the company.Sidebottomv Kershaw Leese & Co
Ltd(1920)
Mr Sidebottom, who was a minority shareholder in the
company, carried on a business which competed with
the company. Because of this the articles were altered to
include a clause under which any shareholder who com-
peted with the company had to transfer his shares at a
fair value to persons nominated by the directors. The
Court of Appeal decided that the alteration was valid.
Although it only applied to a particular member at the
time, it could be applied in the future to any member who
competed with the company (but not, of course, to
members who did not). This would always be for the
benefit of the company in that its members would have
power to exclude a competitor.2 A company cannot justify breach of a contract out-
side of the articles by showing that the breach resulted
from an alteration of the articles.