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[1986] 3 WLR 26

[CHANCERY DIVISION]

CUMBRIAN NEWSPAPERS GROUP LTD. v. CUMBERLAND & WESTMORLAND

HERALD NEWSPAPER & PRINTING CO. LTD.

1986 Feb. 12, Scott J.

13, 14, 17, 18,
19;
March 13

Company — Shares — Classes of shares — Articles conferring rights on

individual sHareholder — Rights not attached to particular sHares —
Whether class rights — Whether rights capable of being varied or
abrogated by special resolution passed by members — Companies
1
Act 1985 (c. 6), s. 125 —

The plaintiff and defendant, who were both publishers of newspapers,

negotiated a transaction whereby the defendant would acquire inter alia
one of the plaintiff's newspapers and the benefit of certain advertising
arrangements and the plaintiff would acquire inter alia 10 per cent. of the
defendant's share capital. The defendant duly issued the 10 per cent.
shareholding to the plaintiff and as part of the agreement under which the
sHares were issued amended its articles to grant to the plaintiff rights of
pre-emption over other ordinary sHares, rights in respect of unissued
sHares and the right to appoint a director. The purpose of such rights was
to enable the plaintiff, in its capacity as sHareholder, to be in a position to
be able to prevent a take-over of the defendant. After the arrangements so
embarked on had continued for several years the directors of the defendant
proposed to convene an extraordinary general meeting and to pass a
special resolution to cancel the articles which gave such special rights to
the plaintiff.

In an action by the plaintiff for (1) a declaration that the rights were
class rights which could not be abrogated without its consent and (2) an
injunction restraining the defendant from convening or holding the
extraordinary general meeting:—

Held , granting the declaration, (1) that the special rights granted by
the defendant's articles were rights that although not attached to any
particular sHares were conferred on the plaintiff in its capacity as
sHareholder in the defendant and were attached to the sHares for the time
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being held by the plaintiff without which it was not entitled to the rights;
that accordingly the plaintiff had “rights attached to a class of sHares” and
since section 125 of the Companies Act 1985 provided that class rights
could not be varied or abrogated without the consent of the class members
the special rights enjoyed by the plaintiff could not be varied or abrogated
without the consent of the plaintiff (post, pp. 37C , 38B , 42B–E , F–G ).

Bushnell v. Faith [1970] A.C. 1099, H.L.(E.) applied.

(2) That on the facts, the adoption of articles by the defendant

conferring the special rights on the plaintiff was a condition precEdent to
the agreement between the parties and was not a contractual obligation of
the defendant that, accordingly, it was not a term of the agreement
between the plaintiff and the defendant that the plaintiff would have the
benefit of the special rights conferred on it by the articles, nor could such a
term be implied (post, p. 43A–D ).

The following cases are referred to in the judgment:

Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, C.A. Andrews
v. Gas Meter Co. [1897] 1 Ch. 361, C.A. Bushell v. Faith [1969] 2 Ch.
438; [1969] 2 W.L.R. 1067; [1969] 1 All E.R. 1002, C.A.; [1970] A.C.
1099; [1970] 2 W.L.R. 272; [1970] 1 All E.R. 53, H.L.(E.) Eley v.
Positive Government Security Life Assurance Co. Ltd. (1875) 1 Ex. D.
20 Kirkness v. John Hudson & Co. Ltd. [1955] A.C. 696; [1955] 2
W.L.R. 1135; [1955] 2 All E.R. 345, H.L.(E.) Punt v. Symons & Co. Ltd.
[1903] 2 Ch. 506 Rayfield v. Hands [1960] Ch. 1; [1958] 2 W.L.R.
851; [1958] 2 All E.R. 194 Southern Foundries (1926) Ltd. v. Shirlaw
[1940] A.C. 701; [1940] 2 All E.R. 445, H.L.(E.) Welsbach
Incandescent Gas Light Co. Ltd., In re [1904] 1 Ch. 87, C.A.

The following additional cases were cited in argument:

Baily v. British Equitable Assurance Co. Ltd. [1904] 1 Ch. 374, C.A.;
[1906] A.C. 35, H.L.(E.) Beattie v. E. & F. Beattie Ltd. [1938] Ch. 708;
[1983] 3 All E.R. 214, C.A. British Murac Syndicate Ltd. v. Alperton
Rubber Co. Ltd. [1915] 2 Ch. 186 Browne v. La Trinidad (1888) 37
Ch.D 1, C.A. Hickman v. Kent or Romney Marsh. Sheepbreeders'
Association [1915] 1 Ch. 881 Inland Revenue Commissioners v.
Beveridge [1979] S.T.C. 592 London Sack & Bag Co. Ltd. v. Dixon &
Lugton Ltd. [1943] 2 All E.R. 763, C.A.

ACTION

The plaintiff, Cumbrian Newspapers Group Ltd. sought against the

defendant, Cumberland & Westmorland Herald Newspaper & Printing Co.
Ltd. by paragraph (1) of its statement of claim a declaration that upon
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their true construction the defendant's articles of association constituted

the plaintiff a separate class of the defendant's members and that
accordingly the special rights conferred upon the plaintiff by articles 5(a),
7, 9 and 12 might not be altered or abrogated otherwise than with the
consent of the plaintiff and/or pursuant to section 32 of the Companies Act
1980. The plaintiff also sought (2) a declaration that the defendant was
estopped or precluded from altering or abrogating the special rights
conferred upon the plaintiff by articles 5(a), 7, 9 and 12 of the defendant's
articles of association otherwise than with the consent of the plaintiff; and
(3) an injunction restraining the defendant from convening or holding any
meeting of its members the purpose whereof was to consider and if
thought fit pass a resolution purporting to alter or abrogate the special
rights conferred upon the plaintiff under articles 5(a), 7, 9 and 12 of the
defendant's articles of association otherwise than with the plaintiff's
consent and/or in accordance with the provisions of section 32 of the
Companies Act 1980.

The facts are stated in the judgment.

John Brisby for the plaintiff.

Nigel Howarth for the defendant.

Cur. adv. vult.

13 March SCOTT J. read the following judgment. The plaintiff company,

Cumbrian Newspapers Group Ltd., formerly known as Cumberland
Newspapers Ltd., is the holder of 10.67 per cent. of the issued ordinary
sHares in the defendant company, Cumberland & Westmorland Herald
Newspaper & Printing Co. Ltd. The plaintiff's sHares were issued to it in
1968. At the same time, and as part of the arrangement under which the
sHares were issued, the defendant adopted articles of association under
which, inter alia, the plaintiff was granted, first, rights of pre-emption over
the other ordinary shares in the defendant; second, rights in respect of
unissued sHares and, third, the right, so long as it held not less than 10
per cent. in nominal value of the issued ordinary sHares of the defendant,
to appoint a director of the defendant.

The board of directors of the defendant have made it known that they
desire to convene an extraordinary general meeting of the sHareholders of
the defendant, and to put before the general meeting a special resolution
designed to cancel the articles under which the plaintiff enjoys the special
rights I have mentioned.

The plaintiff contends that the special rights which it enjoys under the
articles in question are “class rights” which cannot be varied or abrogated
without its consent. Alternatively, the plaintiff contends that it is entitled
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to enjoy those special rights pursuant to an agreement made between

itself and the defendant in 1968, and that it is, in consequence, entitled
either to restrain the defendant from convening the proposed general
meeting, or at least to restrain the defendant from acting on any special
resolution abrogating, or varying, the plaintiff's special rights. The
defendant, on the other hand, denies that the plaintiff's rights under the
articles in question are class rights, denies the contractual entitlement of
the plaintiff to enjoy those rights, and asserts that it is entitled to alter
its articles in the manner prescribed by law.

These contentions raise some difficult questions of law. I must,

however, first relate the events of 1968 which gave rise to the adoption by
the defendant of the articles in question. Both companies are private
companies. As their respective corporate names indicate, they were and
are publishers of newspapers in Cumberland. The plaintiff published,
among other newspapers, the “Penrith Observer.” The “Penrith Observer”
was a weekly paper, published on Tuesdays and with a circulation of five
to six thousand copies, mainly in Penrith. Given the size of Penrith, the
paper had little or no scope for expansion. The defendant published the
“Cumberland & Westmorland Herald.” This, too, was a weekly paper. It
was published on Saturdays; it had a circulation throughout Cumberland
and, accordingly, a larger circulation than that of the “Observer.” For the
same reason it had, unlike the “Observer,” scope for expanding its
circulation. The “Herald” was the defendant's only newspaper.

The plaintiff was, as a company, a good deal larger than the defendant;
it published several newspapers. It was enabled, by its size and by the
number of its publications, to make certain arrangements with advertisers
under which its newspapers, and certain other newspapers, were combined
together as a group for the purpose of advertisements being placed
therein. The defendant's “Herald” was not a member of this group or of any
other group. Its ability to attract advertising suffered accordingly.

Both the “Observer” and the “Herald” were local newspapers, owned and
controlled locally. The chairman and chief executive of the plaintiff was Mr.
John Burgess, whose family had been associated with the “Observer” for
over 100 years. He later became Sir John Burgess and is still chairman,
albeit now non-executive, of the plaintiff. He gave evidence before me. It
was clear from his evidence that he and his board place, and have always
placed, very great importance on Cumberland retaining local newspapers,
locally owned and controlled.

By 1968 the large national newspaper groups had begun the process of
acquiring local newspapers up and down the country. Sir John Burgess and
his board were anxious that the local newspapers of Cumberland should
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not suffer that fate. In the early part of 1968 discussions began between
the plaintiff and the defendant, with a view to the “Herald” being added to
the plaintiff's group for advertising purposes. For the commercial reasons I
have mentioned, this was important to the defendant. It was recognised
that the joinder of the “Herald” to the plaintiff's group would not be
practicable if both the “Observer” and the “Herald” continued to be
published in Penrith. This problem was not insuperable. The plaintiff was
willing, in principle and provided satisfactory terms could be reached, to
allow the “Observer” to close, so that the “Herald” could become the only
local paper circulating in Penrith. The plaintiff required assurances, in
particular, that the “Herald,” if it became the only newspaper circulating in
Penrith, would remain an independent newspaper, locally owned and
controlled.

This was the background to the negotiations in 1968 which led to the
adoption by the defendant of the articles in question. On the plaintiff's
side the negotiations were carried on by its chairman, Sir John Burgess. On
the defendant's side, a senior director, Mr. Burne, carried on the
negotiations. Both gentlemen reported back to their respective boards from
time to time.

It is not surprising that in the period between 1968 and 1983 or 1984,
when the contentions that have led to this litigation began to emerge,
many of the documents evidencing the conduct of the negotiations have
been lost or destroyed. Nonetheless, a good deal of important
documentation, including the board minutes of each company, is still
available. Mr. Burne is now dead, but oral evidence has been given by Sir
John Burgess. His evidence has provided valuable background material
regarding the plaintiff and the defendant respectively, and regarding the
newspaper industry in Cumberland in 1968, but he was not, in my view,
able to add anything of real value to the contemporaneous documents, so
far as the negotiations are concerned. After the 18 years or so that have
elapsed since 1968, he has (as he frankly admitted) no reliable
independent recollection. The progress of the negotiations does, however,
clearly appear from the contents of the documents before me. Both sides
in the negotiations had the assistance of solicitors. The plaintiff had
instructed Linklaters & Paines. The defendant had instructed a local firm,
Little & Shepherd.

The minutes of a board meeting of the plaintiff held on 16 February

1968 set out the broad proposals at that early stage. The minutes record:

“Mr. Burgess reported that Mr. Burne was to retire and that he had discussed
with him the question of a joint advertising agreement on the following terms:

“1. Cumberland Newspapers Ltd. to take up sHares in the ‘Cumberland &

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Westmorland Herald’ equal to 10 per cent. of their share capital either by a cash
payment or exchange of sHares the value of this being approximately £6000.

“2. The articles of association of the ‘Cumberland & Westmorland Herald’

would be altered to give Cumberland Newspapers Ltd. the first option on shares
offered for sale.

“3. The copyright of the ‘Penrith Observer’ to be sold to the ‘Cumberland &
Westmorland Herald.’

“The board agreed that Mr. Burgess should proceed to negotiate on these
terms. Cumberland Newspapers Ltd. would be protected against the issuing of
any new sHares or a takeover bid and if Cumberland Newspapers Ltd. should be
taken over the above agreement would be null and void.”

Following 16 February 1968, negotiations continued between Sir John

and Mr. Burne. Linklaters & Paines drafted proposed new articles of
association for the defendant, intended to prevent the defendant being
taken over without the consent of the plaintiff. These proposed articles
were sent by Sir John to Mr. Burne. In certain respects Mr. Burne found
them unacceptable. Little & Shepherd drafted an alternative version. These
were sent to Sir John, for him to consider. An important meeting then took
place on 27 April 1968 between Sir John and Mr. Burne. Mr. Burne prepared
a note of their discussions. By letter to Mr. Burne dated 30 April 1968, Sir
John agreed that the note represented a correct record. I am satisfied that
I can rely on it.

The meeting began with discussions as to the respective merits of the

draft articles that had been prepared by Linklaters & Paines and by Little &
Shepherd, respectively. Mr. Burne is recorded as justifying the latter draft
in these terms:

“It had been felt that the draft proposals prepared by the Herald's solicitors,
coupled with a 10 per cent. holding and the other arrangements proposed, could
be justified to the sHareholders and at the same time were an assurance to
Cumberland Newspapers that the ‘Herald’ would not — and could not — be sold
to some outside organisation.”

The note then records:

“Mr. Burgess stated that he had been advised that there was nothing to
prevent an outside group making an offer to the sHareholders to buy their
sHares provided the articles of association were altered — in which case the
articles could be altered provided there was the requisite vote. While he thought
this was a very remote possibility, he had to safeguard his position if his
company was to cease publishing a paper in Penrith.”
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This passage of the note is important. It was submitted by Mr. Howarth,

counsel for the defendant, that the passage shows that Sir John directed
his mind to the possibility that the proposed new articles might be altered
so as to enable a takeover bid to be made, that he regarded the possibility
as remote, and that he was prepared to take the risk provided the new
articles included the additional provisions referred to in the note. Those
additional provisions are: (a) that a clause be included that should any
sHares be issued in future they must not alter the proportion held by
Cumberland Newspapers; (b) that so long as Cumberland Newspapers held
10 per cent. they should have the right to nominate a director. I agree with
Mr. Howarth that that is the natural meaning of this part of the note. The
note then goes on to record discussions between Sir John and Mr. Burne
regarding the arrangements for issuing the plaintiff with a 10 per cent.
shareholding in the defendant and regarding the arrangements under which
the defendant would join the plaintiff's advertising group.

At their meeting on 27 April 1968, Sir John and Mr. Burne seem to have
reached broad agreement on the proposals under discussion. The proposals
were discussed and accepted at a meeting of the defendant's board held
on 3 May 1968. The minutes of that meeting record:

“On behalf of Cumberland Newspapers Ltd., Mr. Burgess had suggested a

working arrangement whereby their London advertisement office should on a
commissions basis act for the ‘Herald’ and that the ‘Herald’ should for purposes
of group advertising orders become associated with the Cumberland Weekly
Newspaper Group (all owned by Cumberland Newspapers Ltd.) and the Border
TV Area Group (which includes also papers in the south of Scotland in that
ownership) whereupon Cumberland Newspapers Ltd. would cease publication of
the ‘Penrith Observer’ with the ‘Herald’ agreeing to accept advertisements for
their papers, particularly the ‘Cumberland Evening News’ — all this subject to a
proviso that Cumberland Newspapers Ltd. would wish to be safeguarded against
the Herald company passing into other ownership. To this end it had been
suggested that the Herald company should allow Cumberland Newspapers a 10
per cent. holding of ordinary sHares, preferably on an exchange of sHares in
their company with certain provisions also that in the event of any holders of
ordinary sHares in the Herald company wishing to dispose of sHares outside
their families Cumberland Newspapers should have a right to purchase.”

The meeting resolved that the necessary extraordinary general meeting

be called.

On 2 August 1968, Sir John wrote two contractual letters to Mr. Burne.
The first letter was headed “To complete the formalities and for record
purposes.” It then continued:

“In consideration of Cumberland Newspapers Ltd. being appointed London

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advertising agents for the ‘Cumberland and Westmorland Herald,’ Cumberland

Newspapers Ltd. will undertake to issue to Cumberland and Westmorland Herald
Printing Co. Ltd. 2500 fully paid up £1 ordinary sHares in Cumberland
Newspapers Ltd. such sHares to rank pari passu in all respects with the existing
ordinary sHares of Cumberland Newspapers Ltd. Cumberland Newspapers Ltd.
on being appointed London advertising agents for the ‘Cumberland and
Westmorland Herald’ will include the ‘Cumberland and Westmorland Herald’ in its
group selling of advertising of Cumberland Newspapers Group and the Border
Weekly Group. Cumberland Newspapers Ltd. will charge ‘Cumberland and
Westmorland Herald’ a commission of 10 per cent. on all advertising booked by
them for the ‘Herald.’ Cumberland Newspapers Ltd. will use their best
endeavours to increase the advertising revenue of the ‘Cumberland and
Westmorland Herald’.”

This letter thus set out the contractual obligations being undertaken by
the plaintiff. The second letter started with this:

“I write to record the terms and conditions upon which Cumberland

Newspapers Ltd. (‘my company’) would be prepared to take a 10 per cent.
interest in the share capital of Cumberland & Westmorland Herald Printers Co.
Ltd. (‘Your company’) free from all charges liens and encumbrances and ranking
for all dividends and other distributions now or hereafter paid, made or
declared.”

There then followed five paragraphs. The letter ended:

“If you and your fellow directors are in agreement with the terms and
conditions herein set out, would you please sign and return the carbon copy of
this letter which is enclosed with the form of acceptance endorsed thereon duly
completed.”

The copy of the letter was signed by five of the defendant's directors,
including Mr. Burne, and returned to the plaintiff. The five signatories held
between them 2060 of the 2500 issued ordinary shares in the defendant.

Paragraph 1 of this letter contained an undertaking by the signatory

directors not to dispose of their sHares until the intended extraordinary
general meeting had been convened. By paragraph 2, the signatory
directors were required to procure the holding of an extraordinary general
meeting, in order to amend the defendant's articles:

“so as to provide inter alia — that sufficient unissued sHares in the capital of
your company are available for immediate issue to my company in accordance
with the provisions of paragraph 3 below.”

Paragraph 3 of the letter required the board of the defendant, after the
passing of the resolution specified in paragraph 2, to issue to the plaintiff
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ordinary sHares in the defendant amounting to 10 per cent. at least of the

issued share capital. The paragraph expressed these sHares “to be issued
in consideration of my company transferring to Your company the copyright
of the ‘Penrith Observer’.” Paragraph 4 of the letter contained a warranty
by the signatory directors regarding the affairs of the defendant. Paragraph
5 contained an undertaking by the signatory directors to vote in favour of
the resolutions to be put to the extraordinary general meeting.

There are some important features of this letter to which I should draw
attention. First, the signatory directors signed the letter as sHareholders
of the defendant. They were not expressed to sign as directors and were
not expressed to be signing on behalf of the defendant. The contractual
obligations to which this letter gave rise were not obligations of the
defendant — they were obligations of the individual signatories.

Second, the only resolution which the signatories undertook to place

before the extraordinary general meeting, was a resolution to amend the
articles of association so as to provide that sufficient unissued share
capital was available to enable the plaintiff to be issued with sufficient
sHares to give it a 10 per cent. holding. There is no doubt but that by 2
August 1968, the form of the proposed new articles, intended to assure
the plaintiff that the defendant would remain independent and based upon
Little & Shepherd's draft, had been agreed by both sides. It is an oddity
that this contractual letter did not impose on the signatory directors any
obligation to place those agreed articles before the extraordinary general
meeting for adoption.

The importance to the plaintiff of those agreed articles is apparent from

the documents in evidence and underlines the oddity to which I have
referred. If articles, in the agreed form, had not been adopted then, I have
no doubt, none of the arrangements specified in the first letter of 2 August
1968 would have been brought into effect; the plaintiff would not have
accepted the 10 per cent. shareholding in the defendant and would not
have transferred the “Penrith Observer” to the defendant. In the
circumstances, the adoption by the defendant, at its intended
extraordinary general meeting, of articles in the agreed form must, in my
judgment, be regarded as a condition precEdent to the coming into effect
of the contractual obligations outlined in the first letter of 2 August 1968.

Pursuant to the arrangements which had been agreed upon, a number of

steps were taken. (1) On 29 August 1968, an extraordinary general
meeting of the defendant's ordinary sHareholders was convened. At this
meeting new articles of association in the agreed form, based upon Little
& Shepherd's draft, were adopted. (2) Immediately after the extraordinary
general meeting, a meeting of the defendant's board took place, at which
it was resolved unanimously that 280 of the defendant's ordinary sHares of
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£5 each, be issued to the plaintiff at par, in consideration of the issue to

the defendant by the plaintiff of 2500 ordinary sHares of £1 each in the
plaintiff. The plaintiff's 280 sHares in the defendant represented a little
over 10 per cent. of the defendant's issued share capital. The defendant's
2500 sHares in the plaintiff, represented about 1 per cent. of the plaintiff's
issued sHare capital. (3) On 30 August 1968 a meeting of the plaintiff's
board took place. It was resolved that 2500 £1 ordinary sHares be allotted
to the defendant in consideration of the allotment to the plaintiff of the
280 sHares in the defendant. In addition, it was agreed that Sir John
Burgess be the plaintiff's nominee to join the defendant's board, in
accordance with the new articles adopted by the defendant. (4) By a deed
dated 28 October 1968, the plaintiff assigned to the defendant the
copyright in, and goodwill of, the “Penrith Observer”. The consideration for
the assignment was expressed to be £1. The “Observer” was thereupon
closed down. (5) Finally, a formal agreement was entered into by the
plaintiff and the defendant, setting out the details of the arrangement
under which the defendant was to become a member of the plaintiff's
advertising group. The agreement was expressed to continue for 10 years
from 1 October 1968, and thereafter until termination by one year's notice
on either side.

The arrangements thus embarked upon are still continuing. The

advertising agreement has not been terminated. The plaintiff still holds
the 280 sHares issued to it on 29 August 1968. Those sHares still
represent more than 10 per cent. of the defendant's issued sHare capital.
The defendant still holds 2500 sHares in the plaintiff. The defendant,
however, now proposes to cancel the articles adopted on 29 August 1968,
so as to deprive the plaintiff of the rights enjoyed thereunder. The
members of the board of directors of the defendant are in a position, by
their own votes as sHareholders together with the votes of their
sHareholder adherents, to carry a special resolution altering the articles in
the manner proposed. This litigation will settle whether they are in law
entitled to do so.

I must, at this stage, set out more fully the contents of the articles in
question. The defendant's articles adopt Table A. There are no relevant
exclusions or variations. Under article 3, the sHare capital is declared to be
£25000, divided into 500 six per cent. preference sHares of £5 each, 2000
unclassified sHares of £5 each, and 2500 ordinary sHares of £5 each This
provision repeats a corresponding provision in the defendant's
memorandum of association.

Article 4 sets out the special rights attached to the preference sHares
and provides under paragraph (d):

“The said 2000 unclassified sHares shall subject to the provisions of article 5
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be issued either as ordinary sHares or with such preferred, deferred or other

special rights or with such restrictions whether in regard to dividend, voting,
return of capital or otherwise as the directors may from time to time determine
subject to any special rights previously conferred on the holders of any existing
shares or classes of shares.”

Article 5 provides:

“(a) Subject to any direction to the contrary by special resolution of the

company and subject also to paragraph (b) of this article, no unissued sHares in
the capital of the company shall be issued to any person save (i) Cumberland
Newspapers Ltd. (ii) a person who on 28 August 1968 was entered on the
register of members of the company (iii) persons who at the time of such issue
are in the full time employment of the company. (b) Subject to any direction to
the contrary by special resolution of the company in general meeting, all
unissued ordinary sHares shall, before issue, be offered to such persons as at
the date of the offer are registered as holders of ordinary sHares in proportion,
as nearly as the circumstances admit, to the amount of the existing sHares to
which they are entitled …”

This article 5 was obviously intended to give the plaintiff protection

against its percentage of the issued share capital in the defendant being
diluted by means of an issue of unissued ordinary sHares. The protection is
not, however, absolute. The provisions of the article are expressed to be
“subject to any direction to the contrary by special resolution.” Article 7
provides:

“The directors may in their absolute discretion and without assigning any
reason therefor decline to register any transfer of any share whether or not it is
a fully paid share not being a transfer to Cumberland Newspapers Ltd. under the
provisions of article 9.”

This article serves to ensure that if the plaintiff should exercise its right
of pre-emption over any sHares, the directors cannot decline to register
the transfer. Article 8 authorises the transfer of sHares (a) to other
members, (b) to certain relatives of the transferor member, (c) to
employees of the defendant and (d) to certain defined family trusts. Article
9 is the important pre-emption article. Except in the case of a transfer
expressly authorised by article 8, article 9 imposes, in respect of all sHares
in the company, a restriction on the right to transfer unless, in accordance
with a prescribed procedure, the sHares are first offered to the plaintiff.
Finally, article 12 provides:

“If and so long as Cumberland Newspapers Ltd. shall be registered as the

holder of not less than one tenth in nominal value of the issued ordinary share
capital of the company Cumberland Newspapers Ltd. shall be entitled from time
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to time to nominate one person to be a director of the company …”

The plaintiff contends that its rights under articles 5, 7, 9 and 12 are
class rights that cannot validly be varied or abrogated without its consent.

Section 9(1) of the Companies Act 1985 provides:

“Subject to the provisions of this Act and to the conditions contained in its
memorandum, a company may by special resolution alter its articles.”

Section 125 of the Act of 1985 is headed “Class Rights.” Several of its
subsections are relevant to the plaintiff's contention. Subsection (1)
introduces the section. It reads:

“This section is concerned with the variation of the rights attached to any
class of sHares in a company whose share capital is divided into sHares of
different classes.”

I draw attention to the phrase “rights attached to any class of sHares.”

It is a phrase which recurs in this section and is to be found also in article
4 of Table A. Section 125(2) deals with the case

“Where the rights are attached to a class of sHares otherwise than by the
company's memorandum, and the company's articles do not contain provision
with respect to the variation of the rights …”

In such a case, the subsection permits the variation of the rights only if

“(a) the holders of three-quarters in nominal value of the issued sHares of

that class consent in writing to the variation; or (b) an extraordinary resolution
passed at a separate general meeting of the holders of that class sanctions the
variation; …”

Section 125(4) deals, inter alia, with the case where the rights are
attached to a class of sHares otherwise than by the memorandum, and
where the articles do contain provision for their variation. In such a case,
the subsection permits the variation of those rights in accordance with
provision of the articles, but not otherwise.

Section 125 is, in my judgment, intended to provide a comprehensive

code setting out the manner in which “rights attached to any class of
sHares” (whatever that phrase truly means) can be varied. I must decide,
therefore, whether or not the plaintiff's rights under articles 5, 7, 9 and 12
are, for the purposes of section 125, rights attached to a class of sHares.
If they are, they can only be altered in the manner provided by the articles
or, as the case might be, by the procedure described in subsection (2). But
if they are not rights attached to a class of sHares, section 125 has no
application to them.
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The articles adopted by the defendant on 29 August 1968 contained no

special article dealing with the alteration, either of the articles generally,
or of articles 5, 7, 9 and 12, in particular; Table A was, however,
incorporated, and article 4 of Table A contains provision for the variation or
abrogation of class rights. The article provides:

“If at any time the share capital is divided into different classes of shares, the
rights attached to any class (unless otherwise provided by the terms of issue of
the sHares of that class) may, whether or not the company is being wound up,
be varied with the consent in writing of the holders of three-fourths of the issued
sHares of that class, or with the sanction of an extraordinary resolution passed
at a separate general meeting of the holders of the shares of the class.”

The terms of this article underline the importance of the question

whether or not the plaintiff's rights can properly be described as rights
attached to any class of sHares. If the rights can be so described, both
section 125 and article 4 of Table A apply. The effect would be that articles
5, 7, 9 and 12 could not be altered without the plaintiff's consent. But if
the rights cannot be so described, then neither section 125 nor article 4 of
Table A apply. The articles could therefore, it is said, be varied or
cancelled by special resolution under the statutory authority granted by
section 9. In effect, the plaintiff could be deprived of the rights which it
enjoys under articles 5, 7, 9 and 12 by the other members of the company
who do not enjoy such rights. Moreover, that would have been the position
at all times since the adoption of the articles in August 1968.

I turn to the critical question: are the plaintiff's rights under articles 5,
7, 9 and 12, rights attached to a class of shares?

Rights or benefits which may be contained in articles can be divided into

three different categories. First, there are rights or benefits which are
annexed to particular sHares. Classic examples of rights of this character
are dividend rights and rights to participate in surplus assets on a winding
up. If articles provide that particular sHares carry particular rights not
enjoyed by the holders of other sHares, it is easy to conclude that the
rights are attached to a class of sHares, for the purpose both of section
125 of the Act of 1985 and of article 4 of Table A. It is common ground
that rights falling into this category are rights attached to a class of
sHares for those purposes. Mr. Howarth submitted at first that this
category should be restricted to rights that were capable of being enjoyed
by the holders for the time being of the sHares in question. Such a
restriction would exclude rights expressly attached to particular sHares
issued to some named individual, but expressed to determine upon
transfer of the sHares by the named individual. Palmer's Company
PrecEdents, 17th ed. (1956), Pt. I, p. 818, contains a form for the creation
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of a life governor's share in a company. Mr. Howarth accepted that the

rights attached to a share in accordance with this precEdent would be
rights attached to a class of sHares. He accepted, rightly in my judgment,
that a provision for defeasance of rights on alienation of the share to
which the rights were attached, would not of itself prevent the rights, pre-
alienation, from being properly described as rights attached to a class of
sHares. The plaintiff's rights under articles 5, 7, 9 and 12 cannot, however,
be brought within this first category. The rights were not attached to any
particular sHares. In articles 5, 7 and 9, there is no reference to any
current shareholding held by the plaintiff. The rights conferred on the
plaintiff under article 12 are dependent on the plaintiff holding at least 10
per cent. of the issued ordinary sHares in the defendant. But the rights are
not attached to any particular sHares. Any ordinary sHares in the
defendant, if sufficient in number and held by the plaintiff, would entitle
the plaintiff to exercise the rights.

A second category of rights or benefits which may be contained in

articles (although it may be that neither “rights” nor “benefits” is an apt
description), would cover rights or benefits conferred on individuals not in
the capacity of members or sHareholders of the company but, for ulterior
reasons, connected with the administration of the company's affairs or the
conduct of its business. Eley v. Positive Government Security Life
Assurance Co. Ltd. (1875) 1 Ex.D. 20, was a case where the articles of the
defendant company had included a provision that the plaintiff should be
the company solicitor. The plaintiff sought to enforce that provision as a
contract between himself and the company. He failed. The reasons why he
failed are not here relevant, and I cite the case only to draw attention to
an article which, on its terms, conferred a benefit on an individual but not
in the capacity of member or sHareholder of the company. It is, perhaps,
obvious that rights or benefits in this category cannot be class rights. They
cannot be described as rights attached to a class of sHares. The plaintiff in
Eley v. Positive Government Security Life Assurance Co. Ltd. was not a
sHareholder at the time the articles were adopted. He became a
sHareholder some time thereafter. It is easy, therefore, to conclude that
the article in question did not confer on him any right or benefit in his
capacity as a member of the company. In a case where the individual had
been issued with sHares in the company at the same time and as part of
the same broad arrangement under which the article in question had been
adopted, the conclusion might not be so easy. But if, in all the
circumstances, the right conclusion was still that the rights or benefits
conferred by the article were not conferred on the beneficiary in the
capacity of member or sHareholder of the company, then the rights could
not, in my view, be regarded as class rights. They would not be rights
attached to any class of shares.
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In paragraph 7 of the defence in the present case, it is pleaded that the

plaintiff's rights under articles 5, 7, 9 and 12 “are privileges personal to
the plaintiffs, whether or not they hold any sHares in the defendant
company.” If this plea were well-founded, the rights would fall into this
second category and would not be class rights. Mr. Howarth did not,
however, persist in this plea. In my judgment he was right not to do so.
The evidence in this case has clearly established that the adoption by the
defendant of articles 5, 7, 9 and 12, was inextricably connected with the
issue to the plaintiff, and the plaintiff's acceptance, of the 280 ordinary £5
sHares in the defendant. The purpose of the rights and privileges conferred
on the plaintiff by those articles, was to enable the plaintiff, in its capacity
as sHareholder in the defendant, to obstruct an attempted take-over of the
defendant. In my judgment, the plaintiff's rights under those articles do
not fall within this second category.

That leaves the third category. This category would cover rights or
benefits that, although not attached to any particular sHares, were
nonetheless conferred on the beneficiary in the capacity of member or
sHareholder of the company. The rights of the plaintiff under articles 5, 7,
9 and 12 fall, in my judgment, into this category. Other examples can be
found in reported cases.

In Bushell v. Faith [1969] 2 Ch. 438, affirmed by the House of Lords

[1970] A.C. 1099, articles of association included a provision that on a
resolution at a general meeting for the removal of any director from office,
any sHares held by that director should carry the right to three votes. The
purpose of this provision was to prevent directors being removed from
office by a simple majority of the members of the company. The validity of
the article was upheld by the Court of Appeal and by the House of Lords;
the reasons do not, for present purposes, matter. But the rights conferred
by the article in question fall, in my view, firmly in this third category.
They were not attached to any particular sHares. On the other hand, they
were conferred on the director/beneficiaries in their capacity as
sHareholders. The article created, in effect, two classes of sHareholders —
namely, sHareholders who were for the time being directors, on the one
hand, and shareholders who were not for the time being directors, on the
other hand.

The present case is, and Bushell v. Faith was, concerned with rights
conferred by articles. The other side of the coin is demonstrated by
Rayfield v. Hands [1960] Ch. 1. That case was concerned with obligations
imposed on members by the articles. The articles of the company included
an article entitling every member to sell his sHares to the directors of the
company at a fair valuation. In effect, the members enjoyed “put” options
exercisable against the directors. Vaisey J. held that the obligations
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imposed by the article on the directors for the time being were enforceable
against them. He held that the obligations were imposed on the directors
in their capacity as members of the company. It follows from his judgment
that, as in Bushell v. Faith [1970] A.C. 1099, there were in effect two
classes of sHareholders in the company. There were sHareholders who
were not for the time being directors, and sHareholders who were for the
time being directors: the former had rights against the latter which the
latter did not enjoy against the former. The two classes were identifiable
not by reference to their respective ownership of particular sHares, but by
reference to the office held by the latter. But the rights of the former, and
the obligations of the latter, required their respective ownership of sHares
in the company. Accordingly, as a matter of classification, the rights in
question fall, in my view, into the third category.

In the present case, the rights conferred on the plaintiff under articles
5, 7, 9 and 12 were, as I have held, conferred on the plaintiff as a member
or sHareholder of the defendant. The rights would not be enforceable by
the plaintiff otherwise than as the owner of ordinary sHares in the
defendant. If the plaintiff were to divest itself of all its ordinary sHares in
the defendant, it would not then, in my view, be in a position to enforce
the rights in the articles. But the rights were not attached to any particular
share or sHares. Enforcement by the plaintiff of the rights granted under
articles 5, 7 and 9, would require no more than ownership by the plaintiff
of at least some sHares in the defendant. Enforcement by the plaintiff of
the rights granted under article 12, require the plaintiff to hold at least 10
per cent. of the issued sHares in the defendant. But any sHares would do.
It follows, in m{ judgment, that the plaintiff's rights under the articles in
question fall squarely within this third category.

The question for decision is whether rights in this third category are
within the meaning of the phrase in section 125 of the Companies Act
1985 and in article 4 of Table A, rights attached to a class of sHares. Mr.
Howarth relied on the natural meaning of the language used. Article 4 is
expressed to apply “If at any time the share capital is divided into
different classes of sHares.” Section 125 is expressed, by subsection (1) to
be dealing with companies “whose share capital is divided into sHares of
different classes.” This language, submitted Mr. Howarth, coupled with the
repeated references to the rights attached to any class of sHares, shows
that the legislature had in contemplation only the first category of rights.
It intended to protect rights attached to particular sHares; it withheld
protection from rights which were not attached to particular shares.

Mr. Brisby, on the other hand, submitted that whenever rights were
conferred by articles on individuals in their capacity as members or
sHareholders, the sHares that they for the time being held, and by virtue
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of which they were for the time being entitled to the rights, constituted a
class of sHares for the purposes of section 125 and article 4 of Table A. For
those purposes, the rights were, he submitted, attached to the sHares for
the time being held. This is a question on which there is, it seems, no
authority. It is a question to which the language of section 125 of the Act
of 1985 provides, in my view, no certain answer. I ought, therefore, I
think, to try and discern the legislative purpose behind section 125 and
take that purpose into account in construing the section.

The class rights, or alleged class rights, with which this case is
concerned, are contained in the articles; that is common practice. Class
rights may, however, as section 125 in terms recognises, be contained in
the memorandum. It is, and always was, clear company law that in the
absence of some statutory enabling provision, or unless the memorandum
itself provides a procedure for variation, rights embodied in the
memorandum cannot be altered: see In re Welsbach Incandescent Gas
Light Co. Ltd. [1904] 1 Ch. 87. This principle is recognised by section 17 of
the Companies Act 1985 , formerly section 23 of the Act of 1948.

Subsection (1) provides a limited power for the alteration of provisions

in a company's memorandum; but subsection (2) provides, inter alia, that
the section” ( b ) … does not authorise any I draw attention to the phrase
“rights of any class of members.” In the case of a company limited by
sHares, the phrase “rights of any class of sHareholders” can be
substituted.

Section 125(5) provides:

“If the rights are attached to a class of sHares by the memorandum, and the
memorandum and articles do not contain provision with respect to the variation
of those rights, those rights may be varied if all the members of the company
agree to the variation.”

Section 125(5), read in conjunction with section 17(2), suggests that in

relation to a company limited by sHares, the expressions, “rights of any
class of members” and “rights … attached to a class of sHares”, have the
same meaning. If that were not so, then third category rights would be
within the expression “rights of any class of members” but excluded from
the expression “rights … attached to a class of sHares.” That would,
apparently, leave third category rights contained in a memorandum
unalterable, even if all the members consented to the alteration, otherwise
than by a scheme of arrangement approved by the court. This would be an
anomalous state of affairs.

Class rights are, however, more usually to be found in articles than in

memoranda of association. There seems to have been at one time the
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view that sHareholders' rights, conferred by articles, could not be varied

unless special provision had been made in the articles for their variation:
see, for example, the cases cited in the argument of counsel for the
appellant in Andrews v. Gas Meter Co. [1897] 1 Ch. 361, 364. This view
was shown to be wrong by the decision of the Court of Appeal in Andrews
v. Gas Meter Co. The practice of including in articles of association special
provision for the variation of class rights on the lines now to be found in
article 4 of Table A, is said by the author of Gower's Modern Company Law,
4th ed. (1979), pp. 563–564, to have pre-dated that decision. It is
consistent with this view of the history of article 4, that it is couched in an
enabling form and not in a restrictive form. It enables class rights to be
varied by the procedure prescribed. It is not expressed to restrict the
variation of class rights otherwise than by the procedure prescribed. It
may, however, fairly be said to be implicit in article 4 of Table A that rights
attached to a class of sHares cannot be varied, at least by the members
themselves, otherwise than by the procedure there laid down.

Section 125 of the Companies Act 1985 , reproduces (with variations not
here relevant) section 32 of the Companies Act 1980. Section 32 was,
however, new. Previous statutory provision regarding the variation of class
rights, had been contained in section 72 of the Companies Act 1948, which
now forms part of section 127 of the Act of 1985. Section 72 of the Act of
1948, like section 32 of the Act of 1980 and section 125 of the Act of 1985,
was expressed to apply to a company whose sHare capital “is divided into
different classes of sHares,” and to be dealing with “the variation of the
rights attached to any class of sHares.” Section 72, therefore, leaves open
the same question, namely, whether third category rights, as well as first
category rights, were within its scope. Section 72(1) was expressed to
apply only where

“provision is made by the memorandum or articles for authorising the

variation of the rights … subject to the consent of … the holders … or the
sanction of a resolution passed at a separate meeting …”

The section gave the right to a dissentient minority of at least 15 per

cent. to apply to the court, and gave the court a discretion whether or not
to confirm the variation. Section 72 of the Act of 1948 did not, therefore,
apply where neither the memorandum nor the articles contained any
variation of class rights provision. So, where the class rights were
contained in the articles, section 72 only applied where the articles
contained some such provision as article 4 of Table A.

It has been forcefully pointed out by Professor Gower that this

distinction made little or no sense, except on the footing that, in the
absence of some variation of rights provision contained in the articles,
class rights could not be varied at all: see Gower's Modern Company Law,
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p. 564. If, in the absence of such an article, class rights contained in the
articles could be altered by a special resolution passed at a general
meeting, why was not a dissentient 15 per cent. minority given the same
rights as those conferred by section 72 of the Act of 1948? Professor
Gower's suggested answer was that it should be regarded as implicit in
section 72 that if the memorandum or articles did not contain any provision
for the alteration of class rights, then there could be no alteration of them
— save, of course, an alteration forming part of a scheme of arrangement
approved by the court. This argument is unexceptional so far as class
rights contained in the memorandum are concerned: see section 23 of the
Act of 1948, now section 17 of the Act of 1985. But so far as class rights
contained in the articles are concerned, the argument regards the statutory
power to alter articles (section 10 of the Act of 1948, now section 9 of the
Act of 1985) as limited by the implicit limitations of section 72 of the Act
of 1948.

The particular point made by Professor Gower has been overtaken by a

combination of section 125 and section 127 of the Companies Act 1985 .
Rights attached to a class of sHares can, if contained in the articles, now
be varied, even if no provision for variation is contained in the articles: see
section 125(2). A dissentient minority is given the same protection
whether or not provision is made in the articles for the variation of the
rights: see section 127(2).

But if Mr. Howarth is right in contending that there can be class rights
which are not rights attached to any class of sHares, within the meaning of
section 125, then, as it seems to me, Professor Gower's argument is still
relevant. If the rights are contained in the memorandum there is no
problem. They cannot be altered: see section 17 of the Act of 1985. If, on
the other hand, the rights are contained in the articles, can they be altered
by special resolution pursuant to the statutory power contained in section
9 of the Act of 1985, or is section 125 to be read as excluding, by
implication, the statutory power to alter class rights that are not rights
attached to any class of shares?

The statutory power to alter articles by special resolution is expressed

to be “subject to the provisions of this Act.” The question is whether
section 72 in the Act of 1948, and sections 125 and 127 in the Act of 1985,
provide any sufficient context to justify restricting the breadth of the
statutory power granted by section 9. In my judgment they do not. Section
72 was enacted in order to provide a benefit to certain members of a
company in certain circumstances. The reason why the benefit was not
extended to cover certain other circumstances may well have been, as
Professor Gower has suggested, that the legislature was proceeding on a
mistaken assumption as to the law. But that would not, in my view, justify
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reading into the section a restriction on the power of a company to alter

its articles in circumstances not covered by the section. As Viscount
Simonds remarked in Kirkness v. John Hudson & Co. Ltd. [1955] A.C. 696,
714, “the beliefs or assumptions of those who frame Acts of Parliament
cannot make the law.” If, as I conclude, section 72 of the Act of 1948 did
not prevent the alteration, by special resolution, of articles containing
class rights in cases where the articles contained no provision for the
alteration, it must, a fortiori, be the case that sections 125 and 127 of the
Act of 1985 do not do so.

In my judgment, if it is right, as the defendant contends, that third

category rights are not rights attached to a class of sHares, for the
purposes of section 125, it must follow that articles containing such rights
can be altered by special resolution pursuant to section 9 of the Act of
1985. This conclusion is, I think, relevant to the question whether the
defendant's contention is right. It would, in my opinion, be surprising and
unsatisfactory if class rights contained in articles were to be at the mercy
of a special resolution majority at a general meeting, unless they were
rights attached to particular sHares. If the articles of a particular company
grant special rights to a special class of members, it would be odd to find
that members not in that class could cancel the rights simply by means of
a special resolution.

A number of considerations lead me to the conclusion that the purpose

of sections 125 and 127 of the Act of 1985, and of section 32 of the Act of
1980, was to deal comprehensively with the manner in which class rights in
companies having a share capital could be varied or abrogated. They are
these: first, chapter II of Part V of the Act (which includes sections 125 to
129) is headed “Class Rights.” The side note to section 125 reads
“Variation of class rights.” The language seems to treat “class rights” as
synonymous with “rights attached to any class of sHares,” at any rate so
far as companies with a sHare capital are concerned. Second, the use in
section 17(2)( b ) of the Act of 1985 of the expression “rights of any class
of members” in connection both with companies having a share capital and
with companies having no share capital, underlines the point that the
expression “rights attached to any class of sHares” in section 125, must
have been regarded by the legislature as synonymous with the former
phrase, so far as companies with a share capital were concerned. Third,
the evident intention of the legislature to protect rights attached to any
class of sHares against variation or abrogation by the mere alteration of
articles, would, if coupled with an intention to provide no such protection
against variation or abrogation of class rights of the third category, be
anomalous and arbitrary. Fourth, if the variation or abrogation of third
category rights are not dealt with by section 125, then the conclusion
would seem to follow that if the rights were contained in the
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memorandum, the rights could not be varied or abrogated at all. The

enabling provisions of section 125 of the Act of 1985 would obviously not
apply, nor would the enabling provisions of section 17 of the Act of 1985.
The terms of section 17, to my mind, strongly suggest a legislative belief
that section 125 would deal with the variation or abrogation of any “special
rights of any class of member” contained in the memorandum. Fifth, the
combination of the considerations thirdly and fourthly abovementioned,
leads to a further point. What sense could there be in a result under which
third category rights contained in articles were more freely alterable than
rights attached to any class of sHares contained therein, but under which
third category rights contained in the memorandum were less freely
alterable than rights attached to any class of sHares contained in the
memorandum? The distinction would not be merely anomalous; it would, to
my mind, be perverse.

For these reasons I conclude that section 125 of the Act of 1985 was
intended by the legislature to cater for the variation or abrogation of any
special rights given by the memorandum or articles of a company to any
class of members — that is to say, not only rights falling into the first
category I have described, but also rights falling into the third category. I
must, therefore, construe section 125 so as to give effect to that
legislative intention if the language of the section so permits. In my
judgment, it does.

Subsection (1) refers to “the rights attached to any class of sHares in a

company whose share capital is divided into sHares of different classes.”
In my judgment, if specific rights are given to certain members in their
capacity as members or sHareholders, then those members become a
class. The sHares those members hold for the time being, and without
which they would not be members of the class, would represent, in my
view, a “class of sHares” for the purpose of section 125. The class would
include those sHares the ownership of which for the time being entitled
the members of the company to the rights in question. For the purposes of
section 125, the share capital of a company is, in my judgment, divided
into sHares of different classes, if shareholders, qua shareholders, enjoy
different rights.

This construction of section 125 has the consequence that sHares may
come into or go out of a particular class on acquisition or disposal of the
sHares by a particular individual. I do not see any conceptual difficulty in
this. Mr. Howarth pointed out certain administrative difficulties that might
follow, mainly regarding the details to be included in annual returns. These
seem to me to be capable of administrative solution. I do not think they
have any real weight on the question of construction of section 125.

In my judgment, a company which, by its articles, confers special rights

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on one or more of its members in the capacity of member or sHareholder

thereby constitutes the sHares for the time being held by that member or
members, a class of sHares for the purposes of section 125. The rights are
class rights. I have already expressed the opinion that the rights conferred
on the plaintiff under articles 5, 7, 9 and 12, were conferred on the plaintiff
as member or sHareholder of the defendant. It follows that, in my
judgment, the sHares in the defendant for the time being held by the
plaintiff constitute a class of sHares for the purpose of variation or
abrogation of those rights.

The conclusion I have reached on the plaintiff's first point disposes of

this action. However, the second point, the contractual point, has been
fully argued. I think, therefore, that I should deal with it. The contractual
point is based upon the allegation first, that in or about 1968 the plaintiff
and the defendant entered into an agreement of which it was a term that
the plaintiff would have the rights conferred on it under articles 5, 7, 9 and
12 and, secondly, that it was an implied term of that agreement that those
articles would not be altered or abrogated without the prior consent of the
plaintiff. This point fails, in my judgment, on the facts.

There was, in my judgment, no agreement ever entered into between

the plaintiff and the defendant, under which the defendant agreed that the
plaintiff would have the rights in question. I have already set out the
relevant history; I will not repeat it. The agreement evidenced or
constituted by the second letter of 2 August 1968, was not an agreement
between the plaintiff and the defendant. It was an agreement between the
plaintiff and the directors of the defendant, as individuals. These directors
did not agree that the plaintiff would have the rights in question. At most
they agreed that a resolution for the adoption of the agreed articles would
be put before a general meeting of the defendant. I have already stated
my opinion that the adoption of those articles represented a condition
precEdent to the coming into effect of the rest of the agreed arrangement.
There was no contractual obligation on the directors, let alone on the
defendant, to ensure that the articles would be adopted. In these
circumstances, the contention that there was an agreement between the
plaintiff and the defendant that the plaintiff would have the rights in
question is, in my judgment, unsustainable.

The implied term argument fails for the same reasons. There was no
agreement between the plaintiff and the defendant that the articles would
be adopted, so how could there be an implied term that the articles would
not be changed? Moreover, as Mr. Howarth pointed out, the right to alter
articles by special resolution is not a right of the company; it is a right of
the members. A contract made by the company cannot deprive the
members of that right. It is, of course, possible that a company might,
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nonetheless, contract that an article would not be altered, but it would be

a strong thing to imply an agreement by a company to that effect. In Allen
v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, 673 Sir Nathaniel
Lindley M.R. said:

“when dealing with contracts referring to revocable articles, and especially

with contracts between a member of the company and the company respecting
his sHares, care must be taken not to assume that the contract involves as one
of its terms an article which is not to be altered.”

When, on 29 August 1968, the defendant issued to the plaintiff, and

the plaintiff accepted, the 280 ordinary sHares of £5 each, the plaintiff
became a sHareholder in the defendant with its new articles. The new
articles had been adopted with a view to the issue of the sHares. It may
very well be the case, as Mr. Brisby submitted, that both parties thought
the arrangement would be permanent, but that does not justify, in my
judgment, saddling the defendant with an implied agreement that the
articles would not be altered. The directors of the defendant were careful
to keep the defendant free of any contractual commitment as to the
content of its articles. It would be quite wrong, in my judgment, to imply
the term contended for.

I have had considerable argument as to what the consequences would

have been had I concluded that the defendant ought to be saddled with
the alleged implied term. I ought shortly to state my views on those
arguments. First, it is, in my view, as I have already stated, well-
established that a company cannot, by contract, deprive its members of
their rights to alter the articles by special resolution: see Punt v. Symons
& Co. Ltd. [1903] 2 Ch. 506. Second, if a company does contract that its
articles will not be altered, nonetheless its members are entitled to
requisition a meeting and pass a special resolution altering the articles.
Third, if the articles are validly altered, the company cannot be prevented
from acting on the altered articles, even though so to act may involve it in
breach of its contract. The law is, in my view, correctly stated in an obiter
passage from the judgment of Lord Porter in Southern Foundries (1926)
Ltd. v. Shirlaw [1940] A.C. 701, 740:

“The general principle therefore may, I think, be thus stated. A company

cannot be precluded from altering its articles thereby giving itself power to act
upon the provisions of the altered articles — but so to act may nevertheless be
a breach of contract if it is contrary to a stipulation in a contract validly made
before the alteration.”

Mr. Brisby submitted that this dictum did not represent the law. In my
view, it does. Fourth, where a company has contracted that its articles will
not be altered, I can see no reason why it should not, in a suitable case,
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be injuncted from initiating the calling of a general meeting with a view to

the alteration of the articles. But an injunction could not, in my view, be
properly granted so as to prevent the company from discharging its
statutory duties in respect of the convening of meetings: see, for example,
section 368 of the Companies Act 1985 .

In the event, however, the plaintiff's case, in my judgment, succeeds on

the class rights point. I am prepared to make a declaration accordingly.

Judgment for plaintiff with costs.

Declaration as claimed in paragraph (1) of statement of claim.

Solicitors: Cartmell Mawson & Main, Carlisle; Harrison Grainger & Reed,
Penrith.

[Reported by SARAH WADHAM, Barrister-at-Law]

1. Companies Act 1985, s. 125(1)(2) : see post, pp. 34H–35B.

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