Separation of Powers in Company Law

Author(s): O. Kahn-Freund
Source: The Modern Law Review, Vol. 7, No. 1/2 (Apr., 1944), pp. 73-74
Published by: Wiley on behalf of the Modern Law Review
Stable URL: https://www.jstor.org/stable/1089765
Accessed: 25-11-2019 06:32 UTC

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Modern Law Review, Wiley are collaborating with JSTOR to digitize, preserve and extend
access to The Modern Law Review

This content downloaded from 111.93.136.226 on Mon, 25 Nov 2019 06:32:42 UTC
All use subject to https://about.jstor.org/terms
receive a "we kly payment . . . of of I5 per cent on the capital for
NOTES OF CASES 73

economically indepelldent of their husbands. It is hard to believe that

after the war they will readily return to such a situation as has received
judicial recognition in Blackwell v. Blackwell, and on which, surprising
as it may seem, the Court had no comments to make.
A writer in the current number of the Law Quartetly Review has
doubted whether a law embodying the suggestion outlined above would
meet with public approval. If this is so, then it is high time the lasv
abandoned its traditional place and sought to mould rather than lag
behind public opinion. It is disturbing to find such a view prevailing in
these days of so-called enlightened equality of the sexes, and with great
respect it is submitted that it is neither just nor expedient to insist on the
continued economic inequality of the wife in an institution which is the
basis of the whole of our social structure.
I SOB EL MATSON .

Sepatation of Powers in Compamr Law

The extent to which the basic principle of "separation of povver" is
inherent in the constitution of a limited company was clearly demonstrated
by the decision of Lord Clauson in Scott v. Scott, [I943] I All E.R. 582.
That certain aspects of company management are reserved to the " legis-
lative powers" Sthe shareholders' meeting is elementary, but the decision
under review shows that an attempt made by the " legislature " to encroach
upon the sphere reserved to the executive is as unavailing as any measure
taken by the directors to usurp the functions of the meeting.
Table A, Arts. 89 and go (95 and 96 of the I908 Table) distributes, as
between directors and meeting, the various functions which may fall to
be exercised in connection with the declaration of dividends. The declara-
tion of a final dividend is a "legislative" function, but the fixing of a
maximum for the final dividend as well as the declaration of an " interim "
dividend belong to the sphere of the " executive." Moreover, Art. 67
(Art. 7I of I908) contains two overriding principles. It declares the
"management of the business " to be an executive function, and it estab-
lishes what in constitutional law might be termed a " presumption of
competence." All powers of the company which are not specifically
allocated to the meeting are to be exercised by the directors, so, however,
that-within the framework of the company's constitution contained in
the Act and in the articles the meeting may, by a simple resolution,
transfer specified functions to itself.
In the case under review, which was a family dispute under the guise
of a constitutional crisis within a private company, the meeting decided
that the holders of the I5 per cent cumulative preference shares were to

the time being paid up on the prefererce shares . . . by way of advance

(without interest) pending the declaration and payment of the dividend
. . . for the current year." The weekly payments were to be deductesl
from the final dividend, or repaid to the company within one month
after demand if the final dividend fell short of the total sum paid out by
weekly payments. Lord Clauson held this resolution to be "wholly in-
operative," on the ground that it was an encroachment upon the functions
of the directors. It was either despite the clause as to repayment-the
declaration of an interim dividend, or, if it was, as claimed by those who
supported it, a direction to pay certain loans, an interference with the

This content downloaded from 111.93.136.226 on Mon, 25 Nov 2019 06:32:42 UTC
All use subject to https://about.jstor.org/terms
 MODERN LAW REVIEW April, 1944
74

directors' powers of management. That power includes the management

of the company's financial affairs. "A resolution . . . which directs the
directors to make certain loans is a most obvious interference with the
very root of that which is committed to the directors, namely the manage-
ment of the business." Nor could the resolution be saved by a reference
to the clausula generalis in Art. 67. The right to transfer by resolution a
function from the executive to the meeting has no application to the
" management of the business." In order to allocate to itself a power of
management the meeting would have to change the articles, i.e. pass a
special resolution and act-if we may again borrow a phrase from consti-
tutional theory as " pouvoir constituant " and not simply as " pouvoir
ldgislatif."
The same was true of a resolutioIl by :rhich the meeting purported
to instmct a firm of accountants "to investigate the financial affairs of
the company" for the two last preceding financial years, "to report to
the company thereon as soon as practicable and prepare any fresh accounts
which they may consider necessary." It is, of course, within the powers
of the meeting to order an investigation, but this power can by Sect.
I37 of the Actzlly be exercised by special resolution. In doing so the
shareholders interfere with the management of the financial affairs of tht
company. Sect. I 37 breaks through the scheme of " sGparation des pouvoirs, "
but it requires the qualified majority which is characteristic of the exercise
of the constitution-making power. As it stood, the resolution in the case
under review was inoperative, an unwarranted interference with the
financial management.
The case was, as Lord Clauson said, "an easy one," but it stands out
as a characteristic expression of the modern tendency to safeguard the
continuity of the business management, if necessary by prescribing narrow
limits to the shareholders' rights.
O. KAHN-FREUND.

Contract-nplied Term-Restrictive Covenant Runnmg with

Chatbb
It is perhaps fortunate that the (fourt of Appeal in Gteenhalgh v.
Mallatd, [I943] 2 All E.R. 234, did not have to pronounce upon tlle
decision in Lotd Sttathcona S.S. Co. v. Dominion Coal Co., [I926] A.C. I08,
for had they done so they would apparently have disapproved it, and so
have helped to deprive English law of a hopeful line of development. The
facts of the instant case were that three directors of a company agreed with
the appellant, a shareholder, to vote with and support him. Afterwards
the three directors sold most of their shares, with the result that the
appellant lost control of the voting power. The purchasers had notice
of tlle agreement. It was held that no term could be implied in the agree-
ment to the effect that the directors would not sell their shares, and that
the undertaking to vote applied only to shares that the contracting parties
tnight happen to llave available. This being so, no question arose as to
the ?urchasers of the shares beirlg bound in equity by an implied negative
agreement not to vote against the appellant. Of the argument that they
were bound, which was based upon the Lord Strathcona case, Lord Greenej
M.R., said: "Those whose memory enables them to go back to the time
uThen that case was decided will remember that some of the observations
made in relation to constructive trustees and the running of restrictive

This content downloaded from 111.93.136.226 on Mon, 25 Nov 2019 06:32:42 UTC
All use subject to https://about.jstor.org/terms