Company Law - The Formation of a Company (Part 3)

Criticisms of Hickman

Despite Hickmam attempting to clarify the ‘insider/outsider’ debate, it has itself come in for some criticism:

- s.14 clearly states “all provisions” – therefore, how could the court place any restriction on such a clearly worded statute?

- Is it even possible to draw a clear distinction between ‘insider’ and ‘outsider’ rights? For example, in Quin enforcing an ‘insider’ right had the inevitable effect of also indirectly enforcing the ‘outsider’ right.

- All of these rights have been incorporated into the articles following the proper procedures and with the clear intention to do so. Should the courts now be frustrating that clear intention?

Ways of avoiding the Hickman problem

Despite the criticism of Hickman, it is often possible to enforce what is essentially an ‘outsider’ right simply by framing it in a different way.

Weighted voting
: by giving a member extra votes per share when voting to remove a director, this may be sufficient to avoid a successful removal. This is effective because voting is an ‘insider’ right and therefore passes the Hickman test.

Right of nomination
: by giving a member the right to nominate a director provided that member holds a particular percentage of the shares, they can exercise this right to nominate themselves. Again, this is successful because the right to nominate is considered to be an ‘insider’ right and therefore passes the Hickman test.

A separate shareholders’ agreement
: because Hickman applies only to s.14, another way around the problem is to place the right in a separate agreement. Such an agreement can be between some shareholders, all shareholders, and may include the company. However, it should be noted that the agreement will not be enforceable if both the company is a party to it and it seeks to restrict a statutory power.

A claim for breach of contract
: most directors are employed under a contract. Therefore, removal may breach this contract giving rise to a claim for damages (note – this will not ensure that the director cannot be removed; rather, it will provide an incentive not to remove the director damages in the event that he or she is removed). 

A claim for unfair prejudice 

The Companies Act 2006

s.33 (1) CA 2006 contains a similar provision to s.14 CA 1985: “ The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions.”

It should be noted that the wording “all provisions” has been removed. However, it is as yet unclear as to how the courts will approach the question of ‘insider/outsider’ rights.

Alteration of the articles

Companies Act 1985

s.9: “Subject to the provisions of this Act and to the conditions contained in its memorandum, a company may by special resolution alter its articles”

This must be done bona fide in the interests of the company as a whole – Allen v Gold Reefs .

Companies Act 2006

s.21 (1) “A company may amend its articles by special resolution”. 
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