Re Hackney Pavilion Ltd - 1924

Legal Case Summary

Re Hackney Pavilion Ltd [1924] 1 CH 276¹

Transfer of shares without board consensus.

Introduction

The case addresses the transfer of shares in situations where the board fails to reach a consensus in passing a resolution and where the articles state that board approval is required. Conflicting or unclear articles can give rise to unintended consequences, such as the register of a member, despite the board failing to reach a sufficient majority to pass a resolution. This can occur even where the articles give the members the absolute right to reject a transfer of ownership on the basis that there is no casting vote to carry the declining vote.

Issues Raised

In small companies, shares can be unwittingly transferred to spouses on the death of the member husband. Provision should be made in respect of what should happen in event of such a transfer. Enabling the executor to take ownership in their own right could conflict with other provisions in the company’s articles enabling the directors to veto any transfer or appointment. If there is no casting vote, the failure to pass a resolution against the transfer will be sufficient to grant the transfer by default. This can be problematic in a small company where the membership rights could confer significant voting power that could undermine the management of the company. Table A articles make the transfer upon death to the executor an absolute right which can only be overridden by a resolution passed declining the transfer.

Facts

A company with three registered shareholders each holding one third of the company’s shares with the remaining share unallocated, had imposed a number of restrictions by virtue of its articles in respect of when and how shares could be transferred. Whilst the articles entitled the executor to become a member of the company, the directors retained an absolute discretionary right to decline the registration of a member. One of the three directors died and his wife as executrix applied to be registered as a member in her own name. The meeting met the required forum of 2 however, the articles did not provide for a casting vote and in the event of deadlock any resolution would fail. Of the two remaining directors, one voted in favour and one against and hence the resolution was not passed. The court however concluded that the right to reject membership required a resolution to be passed. Whilst the vote was equal with no casting vote the resolution could not be passed. This prevented the directors from rejecting the application of membership and hence the executrix was entitled to become registered.

Decision / Outcome

The case determined that the grant of ownership to the executor for the purposes of administrating the estate enabled the deceased’s wife to register as a member of the company on the basis that this was an absolute right granted to executors. Such right could only be defeated by a board resolution rejecting the transfer. Normally the mere failure to pass a resolution would be sufficient to prevent an activity from occurring. In this instance the articles required a successful resolution in order to prevent the activity. The vote which failed to either pass or reject the resolution could not in itself be treated as rejection.¹ The court based the decision on the reasoning that a “mere failure to pass the proposed resolution for registration was not a formal active exercise of the right to decline”.² The right of registration by the executrix was absolute and hence could only be dispelled by a resolution declining the registration.

Impacts

The case at first may appear to be a strange anomaly as there are few resolutions that can invoke a positive obligation on the company when they are not passed. Nonetheless section 771 Companies Act 2006 stipulates that directors rejecting to a transfer must state their reasons for objecting to a transfer.³ This enables the court to assess whether the rejection is in line with the company’s articles. If it is not, then the court has the power to intervene and overturn the directors’ decision.⁴ In this regard much is dependent on the content of the company’s articles. The decision in Hackney Pavilion was reached based on articles that were described as being almost identical to the Table A articles. As such, any company not wishing to be restricted in this way will need to ensure that the chairman has a casting vote. This would have ensured that there was either a positive rejection of the registration or a positive vote in its. This would have succeeded in preventing the entitlement of registration by default potentially against the company’s wishes. This case therefore determines that there needs to be clear provision as to what should happen to a deceased member’s shareholding.

This case was followed in Moodie v W&J Shepherd (Bookbinders) where the articles gave the directors the right to purchase the shareholding in addition to the right to object to registration.⁵ In an equal vote the directors again lacked the necessary casting vote to either reject or pass the resolution. As such they were unable to prevent the registration as this was based on an absolute right. As the reasons for rejection must be notified to the transferee within two months as stipulated within section 771(1) Companies Act 2006 it effectively imposes a time limit on the directors to come to a decision and vote on the matter.⁶ In closely held companies, where there are few directors, this has the potential to significantly alter the company’s membership and impact on the company’s decisions. It is therefore desirable to ensure that the directors have the overall right to object to the registration. This will only be available where there is a casting vote. Inevitably the same issue would have arisen if the articles required a quorum of 2 for the vote and the number of directors reduced to 1.

If the directors wish to avoid such provisions from forcing the transfer of membership upon the death of a member, they will need to make clear provision in the company’s articles. Nonetheless the application of section 771 Companies Act 2006 will leave their rejection open to challenge.

Footnotes

¹ D Keenan, Smith & Keenan’s Company Law (13^th edn, Longman 2007) 244

² Re Hackney Pavilion Ltd ¹⁹²⁴ 1 CH 276; Per Astbury J at 280.

³ P Davies, S Worthington, Gower and Davies: Principles of Modern Company Law (9th edition Sweet and Maxwell 2012) ^27-7.

⁴ Bede Steam Shipping Co, Re ¹⁹¹⁷ 1 Ch.123, Village Cay Marina Ltd v Acland and others (Barclays Bank Plc third party) ¹⁹⁹⁸ 2 B.C.L.C 327

⁵ Moodie v W&J Shepherd (Bookbinders) ¹⁹⁴⁹ 2 All E.R. 1044

⁶ P Davies, S Worthington, Gower and Davies: Principles of Modern Company Law (9th edition Sweet and Maxwell 2012) ^27-7.