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Transactions With Outsiders Notes

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Transactions with Outsiders
Contents
Gower pp149-174: Chapter 7 - Corporate Actions......................................................................188
Introduction............................................................................................................................................. 188
Contractual Rights and Responsibilities....................................................................................... 188
Contracting through the board or shareholders collectively..........................................188
Constructive Notice and the Rule in Turquand's Case........................................................189
Statutory Protection for third parties dealing with the board.......................................190
Contracting through agents.......................................................................................................... 191
Agency Principles.............................................................................................................................. 192
Establishing the ostensible authority of corporate agents..............................................192
Knowledge........................................................................................................................................... 193
Knowledge of the constitution as an aid to third parties?................................................193
Ratification........................................................................................................................................... 193
Overall................................................................................................................................................... 193
The UV doctrine and the objects clause................................................................................... 193
Gower pp355-361, 365-366: The Board........................................................................................... 194
The Role of the Board........................................................................................................................... 194
Default provisions of the model articles.................................................................................. 194
The power of the board - the legal effect of the articles...................................................194
The mandatory involvement of shareholders in corporate decisions........................195
J Payne & D Prentice, Company Contracts and Vitiating Factors: Developments in the law of Directors' Authority [2005] LMCLQ 447...................................................................................... 196
Introduction............................................................................................................................................. 196
Criterion Properties v Stratford UK Properties [2004].............................................................196
Company law or fiduciary law?................................................................................................... 196
Excess of authority and abuse of authority............................................................................196
Smith v Henniker-Major [2002]........................................................................................................ 197
Lack of quorum.................................................................................................................................. 197
Can directors rely on S40?............................................................................................................. 198
EIC Services v Phipps [2004].............................................................................................................. 198
Bonus issues and 'deals with'....................................................................................................... 199
Shareholders as third parties....................................................................................................... 199
Conclusion................................................................................................................................................ 199 Smith v Henniker-Major & Co [2003] Ch 182.................................................................................200
Facts............................................................................................................................................................ 200
Robert Walker LJ (Diss)....................................................................................................................... 200
S40 issue............................................................................................................................................... 200
Ratification issue............................................................................................................................... 201
Amendment issue............................................................................................................................. 201
Decision................................................................................................................................................. 201
Carnwath LJ.............................................................................................................................................. 201
S40........................................................................................................................................................... 201
Decision................................................................................................................................................. 202
Schiemann LJ........................................................................................................................................... 202
S40........................................................................................................................................................... 202
Decision................................................................................................................................................. 202
Ford v Polymer Vision Ltd [2009] BCLC 160..................................................................................202
EIC Services Ltd v Phipps [2004] EWCA Civ 1069........................................................................202
Lovett v Carson Country Homes [2009] 2 BCLC 196...................................................................202
Lexi Holdings v Pannone & Partners [2009] EWHC 2590 (Ch)...............................................203
Hudson Bay Apparel Brands LLC v Umbro International Ltd [2011] 1 BCLC 259...........203
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480..........203
Facts............................................................................................................................................................ 203
Wilmer LJ................................................................................................................................................... 203
Pearson LJ................................................................................................................................................. 204
Diplock LJ.................................................................................................................................................. 204
Decision..................................................................................................................................................... 205
Hely-Hutchinson v Brayhead [1968] 1 QB 549................................................................................205
Facts............................................................................................................................................................ 205
At first instance....................................................................................................................................... 206
Lord Denning MR................................................................................................................................... 206
Lord Wilberforce.................................................................................................................................... 206
Lord Pearson............................................................................................................................................ 206
Panorama Developments v Fidelis Furnishings [1971] 2 QB 711.............................................207
Facts............................................................................................................................................................ 207
Lord Denning MR................................................................................................................................... 207
Salmon LJ................................................................................................................................................... 207
Megaw LJ................................................................................................................................................... 208 Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846....................208
Hopkins v TL Dallas Group Ltd [2005] 1 BCLC 543...................................................................... 208
Wrexham FC v Crucialmove [2007] BCC 139.................................................................................. 209
LNOC Ltd v Watford Association FC [2013] EWHC 3615...........................................................209
PEC Ltd v Asia Golden Rice Co Ltd [2014] EWHC 1583..............................................................209

Gower pp149-174: Chapter 7 - Corporate Actions
Introduction
How do we know when a company has 'done' something? Where its primary decisionmaking bodies, ie the board and / or members when so authorised act, it makes sense to attribute their acts to the company. However, for the sake of commercial expediency,
individual directors or employees may act on behalf of the company. In such situations,
their acts should at least sometimes be attributable to the company. Aside from ethical arguments, one key policy argument is that companies are major economic actors and hence attributing criminal or tortious liability to companies in certain situations will spur the management of these companies on to control the behaviour of the company more closely, preventing such harm from occurring in future.
Lord Hoffmann per Meridian Global Funds Management Asia Ltd v Securities Commission
[1994]: there are three layers of law applying to attribution in the context of companies:

Primary rules of attribution - where liability flows from the position of a body in the corporate constitution
General rules of attribution - based on the law of agency (not company-specific);
the common law has come up with some company-specific rules such as vicarious liability although its use can be controversial - to what extent can a company be said to have authorised / been aware of or said to be responsible for an act of one of its agents?
Special rules of attribution - where company law and the common law appear to be inadequate so special rules such as legislation on corporate manslaughter is needed to fill a lacuna in the law

Contractual Rights and Responsibilities
Two methods for a company to enter into a contract: first is when the board or members as a whole enter into the contract as the company; second is when an agent acts on behalf of the company. Usually, the result is the contract between the company and the third party; the individuals representing the company will not be personally liable under that contract. However, there are differences between the two methods in terms of legal implications.
Contracting through the board or shareholders collectively
Straightforwardly, where directors act as a board or where shareholders act collectively to enter into a contract which they are empowered to enter into by the constitution, this contract will bind the company. An issue arises where the board or shareholders purport to enter into a contract which is beyond their powers. Where the board has entered into a contract on a matter involving shareholders, or where a majority of shareholders have entered into a contract, the members or dissenting members may argue that the constitution of the company and its particular allocation of powers should be paramount, meaning those contracts should be void or voidable. However, while third parties would not expect the members to have general contracting powers, third parties would expect the board to have wide discretionary powers to enter into contracts as most AoAs, particularly the Model AoAs, are so structured. Thus, in recent years, company law now aims to give effect to the reasonable expectations of third parties although historically this was not the case.
Constructive Notice and the Rule in Turquand's Case
In the 19th century, the general norm was that the members had general powers to contract but the powers of the board were limited. As a result, if the board entered into a contract outside of its constitutional powers, the contract would be voidable in the sense that it would only bind the company if the members later decided to ratify the contract.
The doctrine of constructive notice developed so a party which entered into a contract would be taken to have read and correctly understood the contracting powers of the board as reflected in the company constitution: Ernest v Nicholls (1857).
However, this position was tempered by Royal British Bank v Turquand (1856) through the inside management rule of benevolent interpretation. In that case, the board had the power to enter into loan agreements under certain conditions. In this case, the relevant resolution from the members had not been obtained. However, the lender was entitled to infer that, where the company was doing something that it could possibly do constitutionally (ie which was not clearly forbidden by the constitution), the relevant internal authorisations had been obtained.
This was applied in Mohoney v East Holyford Mining Co (1875) by HL: a bank honoured cheques of a company where those cheques had been signed by individuals who claimed to be directors and the secretary but had never actually been so appointed. The bank was entitled to assume that one who purported to be an officer of the company (and where such an officer would have been entitled to enter into such a transaction) could validly act on behalf of the company. In addition, S161 CA makes similar provision for officers of the company who had been invalidly appointed [Mohoney is about cases of no appointment], where the director in question was not entitled to vote on that particular matter, and where that director had been appointed in breach of the individual appointment rule.
The indoor management was helpful but inadequate: if the AoA limits the powers of the board in a certain way expressly, there will not be a way to get around it. Further, the
Turquand rule will not apply where the contracting party has been put on notice or enquiry. This will be the case when some specific words or actions have occurred - B
Liggett (Liverpool) Ltd v Barclays Bank [1928]: Director 1 told bank that cheques could only be cashed if signed by D1 and D2 as D2 was suspected of making improper withdrawals from company funds. However, D2 added new director D3 as a signatory using a form with only his signatory. The bank was held to have been put on notice and therefore liable to pay back the sums paid out on cheques which had only been signed by D2 and D3 but not D1. Statutory Protection for third parties dealing with the board
The constructive notice rule, even tempered by the indoor management rule, is unattractive to third parties. Hence, to promote commercial certainty and to avoid due diligence transaction costs, statute has intervened to make certain transactions automatically binding on the company even where it is outside of the board's AoA
powers.
The company may still limit the powers of the board but a more obvious mechanism than the constitution must be used. S40 CA:
(1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitations under the company's constitution
This effectively repeals the constructive notice rule but is subject to certain limitations:

'in favour of a person dealing with a company in good faith': this provision is for the benefit of third parties - the company cannot use this to enforce a contract as against a third party where the agent of the third party was not properly authorised (unless they are contracting with another company then the analysis is simply reversed). If the 'good faith' issue is brought into question, S40(2) sets a high threshold for showing bad faith - the third party is 'not bound' to carry out any inquiry into the powers of the board; good faith is presumed unless and until bad faith is shown; actual knowledge of lack of power will not necessarily result in a finding of bad faith. In the context of ECA 1972 bad faith, Nourse J per
Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] held that actual knowledge alone is not enough to show the third party was not acting in good faith but perhaps little needs to be added to this to show bad faith (unclear where the line is drawn).
'dealing with the company': S40(2) says this is any transaction - whether contractual or eg a payment of money - where the company is involved.
However, the courts are reluctant to bring gratuitous transactions within this remit: EIC Services Ltd v Phipps [2004].
'persons': there was an estoppel-type rule that prevented directors or shadow directors from claiming the benefit of the Turquand rule - as insiders, they had a duty to actually check the constitution and hence are not really third parties -
Morris v Kanssen [1946]. However, Roskill J per Hely-Hutchinson v Brayhead Ltd
[1946] narrowed this to transactions by a director so intimately connected with his responsibilities that it would be impossible for him to have not known the limitations of the offices of the persons with whom he dealt. S41 has solved this problem - any transaction with a director which is outside the scope of the relevant company agents is voidable at the option of the company. Further, both the company representatives and the relevant director will be liable to indemnify the company against any losses arising from that transaction whether or not it is avoided. Hence, if the company has no practical alternative to continue with the contract, it can still get damages from the relevant director, subject to the S41(4)
bars. Note, however, the doubtful Smith v Kenniker-Major [2002] decision which held that S40 will be dissapplied where the contracting director is also the chairman of the board and is thus effectively contracting with himself and is 

responsible for his own error. As the transaction falls outside of S40, there is less protection for third parties - it will only bind if the company then ratifies it.
Robert Walker LJ's dissenting argument is more convincing - the issue of insider trading is expressly addressed in S41 so there is no need to narrowly construe
'person' in S40
'directors': Directors or their agents may bind the company. However, those who contract with the shareholders at the general meeting are still subject to the perils of the common law rules of notice subject to the indoor management rule.
Pre-2006 per Smith v Henniker-Major, it was thought that a contract with an inquorate board would be a nullity but the change in 2006 from 'board of directors' to 'directors' indicates that third parties would be protected in this case. However, in Henniker-Major per Robert Walker LJ who thought that 'board of directors' should be construed as 'directors', still thought that there was an
'irreducible minimum' for S40 to operate - there must be a 'genuine decision taken by a person or persons who can on substantial grounds claim to be the board of directors acting as such' - ie a third party cannot rely on S40 absolutely.
'any limitation under the company's constitution': S40 overrides all and any of the formal rules laid down by the members of the company or any class of them,
including ordinary resolutions - S40(3); does not just refer to AoA.

Internal effect on lack of authority: S40(4) preserves shareholders' rights to bring an action against directors for acting outside of their constitutional powers, including an injunction to restrain breach if the directors have not yet committed the company to a binding contract. S40(5) correspondingly preserves the liability of directors and 'any other persons' for who cause the company to contract in breach of any limitations preserved in its constitution. Similarly, a third party who is bound to hold property for the company on constructive trust following such a breach would still be liable to return the property - International Sales and Agencies Ltd v Marcus [1982].
Contracting through agents
Company contracts with agent acting on its behalf a necessary tool for convenience and to cut transaction costs. A contracts with T for P, resulting in a contract that binds T and
P but not A except potentially in the case of the undisclosed principle case. Company P
can therefore authorise manager A to enter into certain contracts without seeking explicit board consent.
How does corporate P confer authority upon manager A? May be through AoA but more common is sub-delegation or delegation of the board's managerial powers. This is a highly flexible system. Contracting power may thus be widely dispersed in large businesses.
This is fine as long as A actually has the power to contract. Where A exceeds his authority, as a matter of policy, should the law prefer the rights of P or T? Two subissues: was it reasonable for T to believe A had the power to contract as he had? Also - if
T could have found out the true extent of A's authority, was he under a duty to find this out? S40 removes this problem in relation to contracting with the board but Ts should know that sub-boards or individual managers would have circumscribed authority. To that extent, one must turn to the law of agency.
Agency Principles
P is bound by the transactions on its behalf by A if A acted within either:

The actual scope of authority conferred upon them by P prior to the transaction or by subsequent ratification; or
The apparent / ostensible scope of their authority

Actual scope - must be conferred either expressly or impliedly; reasonably incidental acts to the main act authorised will be deemed to be impliedly authorised unless expressly forbidden - Hely-Hutchinson per Lord Denning. Actual authority can thus be inferred in appropriate cases. Further, where A has previously been authorised to act by
P in a certain way, A may thereby acquire actual authority to continue to so act.
Ostensible authority - two parts:

Authority which a person in A's position and in the type of business concerned can reasonably be expected by T to have
The authority which the particular A has been held out to T by P as having

These two doctrines seek to balance the rights of P against T. However, note that A
cannot confer ostensible authority onto himself by holding himself out to have more authority than he actually had - Armgas Ltd v Mundogas SA [1986]. This is an estoppeltype approach.
Establishing the ostensible authority of corporate agents
Courts are reluctant to infer ostensible authority for individual NDEx as they do not usually have managerial authority - Rama Corp v Proved Tin & General Investments Ltd
[1952]. In contrast, note that a board may often allow a member to act as if MD but not actually be appointed MD - in such a case, his ostensible authority would include everything an actual MD could do - Biggerstaff v Rowatt's Wharf Ltd [1896]. It is possible for an individual NEx Chairman of the board to be deemed to have ostensible authority of an MD - Hely-Hutchinson.
When a director has a specific title like 'sales directors', ostensible authority will generally exist within but not outside their area of competence.
T may deal with officer / employee below D. A manager may be found to have ostensible authority to enter into certain minor transactions, particularly where they are within his sphere of competence - Armgas v Mundogas. Secretary may be deemed to have similar authority in relation to administrative matters - Panorama Developments. In a trading company, even a very junior employee may have some limited authority to bind the company such as a cashier in a department store - but this has not caused any real problems.
In these cases, the question is whether the agent had actual or apparent authority to contract on behalf of the company. A company may further be bound where an agent did not have the ostensible authority to enter into the contract but had the ostensible

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