IN THE SUPREME COURT OF NIGERIA
ON THURSDAY, THE 12TH DAY OF JULY, 1984
APPEAL NO: SC.89/1983
CITATION: SC (1983) 7 LLER 1
Before Their Lordships
AYO GABRIEL IRIKEFE, J.S.C.
MOHAMMED BELLO, J.S.C.
ANDREWS OTUTU OBASEKI, J.S.C.
ANTHONY NNAEMEZIE ANIAGOLU, J.S.C.
AUGUSTINE NNAMANI, J.S.C.
EDOKPOLO & COMPANY LIMITED
SEM-EDO WIRE IND. LTD & ORS.
A. COMPANY LAW
1.Pre-incorporation contracts—On whether same is ratifiable by the company
It is also settled that after incorporation a company cannot ratify such a contract purported to be made on its behalf before incorporation. In Kelner v. Baxter (1866) L. R. 2 C.P. 174 Erie C.J. explaining the rationale of the principle said: “as there was no company in existence at the time, the agreement would be wholly inoperative unless it were held to be binding on the defendant personally…where a contract is signed by one who professes to be signing as agent, but who has no principal existing at the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is bound thereby; and a stranger cannot by a subsequent ratification relieve him from the responsibility”.” Per Nnamani, J.S.C. READ IN CONTEXT
2. Derivative action: Minority Protection—The exceptions to the rule in Foss v. Harbottle
The contention that the company ought to sue touches on the wider principles usually referred to as the rule in Foss v. Harbottle (1843), 2 Hare 461. By it the court will not interfere with the internal management of companies acting within their powers. If there is a wrong done to the company for which redress is needed it is the company that must sue. The principle is based on a recognition of the implications of corporate organisation and management which must include, subject to well laid down exceptions, the supremacy of the majority. These exceptions which have been developed in several authorities include: (a) an act which is ultra vires the company or illegal (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company (c) a resolution which requires a qualified majority but has been by a simple majority. (d) where the rights of the shareholders are infringed or about to be infringed. A fifth exception appears to have developed from the cases. An individual minority shareholder can also sue where the interest of justice demands that he be so allowed to sue. Per Nnamani, J.S.C. READ IN CONTEXT
3. Pre-Incorporation Contract—Is a pre-incorporation contract binding on a company?
It is now a settled principle of company law that a company is not bound by a pre-incorporation contract being a contract entered into by parties when it was not in existence. No one can contract as agent of such a proposed company there being no principal in existence to bind. Per Nnamani, J.S.C. READ IN CONTEXT
4. Pre-Incorporation Contract—Whether a company can enter into a new contract re-enacting the terms of the pre-incorporation contract; effect of?
But there is nothing preventing the company after incorporation from entering into a new contract to put into effect the terms of the pre-incorporation contract. This new contract can be in express terms or can be implied from the acts of the company after incorporation as well as from the minutes of its general meetings and board meetings. Touche v. Metropolitan Railway Warehousing Co. (1871) 6 CH. App.671. Per Nnamani, J.S.C READ IN CONTEXT
5. Pre-Incorporation Contract—Effect of incorporating same into the memorandum of association
It is fairly common knowledge that most companies in drawing up the objects clauses of the memorandum of association cover a spectrum far wider than what they can accomplish immediately. It seems to me that the inclusion of the terms of the pre-incorporation agreement in the memorandum of association of a company is an indication of a strong desire by the contracting shareholders that the proposed company after its incorporation should execute the terms of the agreement so included. This can be taken together with the acts of the company after incorporation in determining whether a new contract has come into existence. Per Nnamani, J.S.C. READ IN CONTEXT
LEAD JUDGEMENT DELIVERED BY NNAMANI, J.S.C.
The appellant, the plaintiff in the substantive suit filed in the Federal High Court Warri, is a limited liability company incorporated under the Companies Decree 1968 and carrying on business principally in Benin City. Sometime in 1975, the appellant and a German based company SEM Nigerian Holding G.H.B.H. and Company Hamburg agreed to set up a wire industry in NIGERIA On the 27th October 1975 to be precise, they entered into an agreement for purposes of incorporating a Nigerian company to carry out the industrial project. This agreement which was prepared by the 2nd respondent herein, a legal practitioner, is a crucial element in this case. I shall therefore avert later in this judgment to some of its provisions. Suffice it for present purposes to say that under the agreement the appellant was to subscribe 40% of the share capital of the proposed company while the foreign partner was to subscribe 60%. This was in accord with the Nigerian Enterprises Promotion Decree 1972 then in force, the activity of the proposed company having fallen within Schedule 2 thereof. The provisions of the agreement principally evinced a desire on the part of both parties (i.e. the appellant and the foreign partner) that only two of them should be shareholders of the proposed company. The provisions of this agreement by the partners were incorporated in the memorandum of association of the proposed company. Pursuant to the agreement of October, 1975, the Sam-Edo Wire Industries Limited, 1st respondent herein, was incorporated on 5th December, 1975. It is pertinent at this stage to mention that one of the provisions of the October 1975 agreement apportioned the appointment of the directors of the proposed company between the two partners. It was the appellant who was to nominate the chairman of the board of directors of the proposed company. Although the process by which the chairman of Sam-Edo Wire Industries Limited was appointed is one of the matters on which the parties have joined issue, it is pertinent to mention that on incorporation, the 3rd respondent was appointed chairman of the board of directors.
On the 27th February 1976 the two partners, i.e. the appellant and the foreign partner entered into another agreement principally for the purpose of increasing the share capital of Sam-Edo Wire Industries Limited from N1,000 000 to N1,500,000. Following this agreement the company duly passed a special resolution increasing its share capital from N1,000,000 to N1,500,000. The share capital has remained at that level.
Subsequently, the company alloted 2% and 3% of the shares in Sam- Edo Wire Industries Limited to 2nd and 3rd respondents. This allotment was taken out of the 40% of the shares which appellant was to subscribe. The appellant protested in vain to the managing director of the 1st respondent company (a nominee of the foreign partner SEM Nigerian Holding Company Hamburg). It then instituted the suit in the Federal High Court earlier referred to. In that suit it claimed the following reliefs:
“(1) A declaration that the plaintiff is entitled to 40% of the shares in Sam-Edo Wire Industries Limited, incorporated in Nigeria in 1975.
(2) A declaration that the share certificate issued to the 2nd defendant as evidence of his shareholding in Sam-Edo Wire Industries is null and void in that the transaction was without the knowledge and/or consent of the plaintiff who is the sole Nigerian partner and owner of 40% of the shares in Sam-Edo Wire Industries Ltd.
(3) A declaration that the share certificate issued to the 3rd defendant as evidence of his share holding as Nigerian partner in Sam-Edo Wire Industries Limited is null and void in that the transaction was without the knowledge and/or consent of the plaintiff who is the sole Nigerian partner and owner of 40% of the shares in Sam-Edo Wire Industries Ltd.
(4) An order for specific performance on the 1st defendant company to perform the obligations in the decisions of the board of directors of the company at the board meeting of 30th June, 1978.
(5) Any further order or orders which this Honourable Court would consider just and equitable in the circumstances of the case.”
Pleadings were ordered, filed and exchanged. After the appellant had filed a statement of claim and an amended statement of claim to which the respondents’ (defendants to the suit) replied with a joint and detailed statement of defence, the respondents in July 1980 brought an application before the said High Court praying that the appellant’s action be dismissed. The application was brought under the inherent jurisdiction of the court and/or Order 27 rule 1 of the Federal Revenue Court (Civil Procedure) Rules L.N.34 of 1976. The latter rule states –
“1. Where a defendant conceives that he has a good legal or equitable defence to the suit so that even if the allegations of the plaintiff were admitted or established, yet the plaintiff would not be entitled to any decree against the defendant, he may raise this defence by a motion that the suit be dismissed without any answer upon questions of fact being required from him”.
Ayinde, J. listened to extensive and detailed argument by counsel to both parties and after separately considering the application under the two arms of the jurisdiction of the court invoked refused it. The respondents dissatisfied with this ruling appealed to the Federal Court of Appeal (now the Court of Appeal). That court by a majority judgment (Ete and Okagbue JJCA., Agbaje, J.CA dissenting), allowed the respondents’ appeal and dismissed the appellant’s claims in the High Court. The appellant has now appealed to this Court.
For a full appreciation of the reasoning of the Court of Appeal, and indeed the main issue before this Court, I think I ought to set down some provisions of the agreement of 27th October, 1975 as well as portions of the parties’ pleadings. The relevant provisions of the October 1975 agreement were:-
(a) the first party has obtained government permission to establish a wire mesh factory in the Mid-Western State of Nigeria
(b) the first party has been hindered in the establishment of the said wire mesh factory because it lacks technical know- how, finance and raw materials required for the commencement and running of the business and is therefore desirous to find partners able to supply the required technical know-how finance and raw materials
(c) the second party has agreed to make available the required technical know how finance and raw materials
(d) the parties have agreed to co-operate and establish together a plant for the production of wire mesh and related wire products in NIGERIA NOW THIS DEED WITNESETH and the parties hereby agree to incorporate a company in Nigeria to be subscribed by the two parties,
(ii) The initial share capital shall be one million naira and shall be contributed as follows:
The first party shall be allowed to subscribe up to a maximum of 40%; the second party shall be allowed to subscribe up to a maximum of 60
(iii) Board of Directors
The chairman of the board shall be appointed by the first party. The chairman of the board shall at all times preside over the annual general meetings of the company and the meetings of the board ” (italics mine) the party of the first part is the appellant while the party of the second part is Sem Nigerian Holding G.M.B.H. and Company of Hamburg).
In paragraphs 7, 8, 14, 14(a), 19, 23 and 24 of the amended statement of claim the appellant pleaded as follows:-
“7. By agreements dated 27th October, 1975 and 27th February, 1976, the plaintiff the 1st party entered into agreements respectively with Sem Nigerian 50 Holding G.M.B.H. and Company Hamburg as the second party whereby they agreed to carry on business as Sam-Edo Wire Industries Limited.
8. By the said agreements the first party was to subscribe a maximum of 40% of the shares and the second party was to subscribe a maximum of 60% of the shares of the said Sam-Edo Wire Industries Limited
14. At the time of incorporating the company the agreement of 27th October, 1975 formed an object in the memorandum of association. The plaintiff will at the trial contend that it was not within the contemplation of the two parties that any other person should become a shareholder although Daniel Okion and Ronke Peters were the subscribers and directors for the purpose only of incorporation. The said Daniel Okion and Ronke Peters have never acquired any shares in the company after incorporation 14 (a) After the incorporation of the company the parties who were the only shareholders adopted the provisions of the said agreements at their general meetings and at the board of directors meetings in accordance with the objects of the memorandum of association. The relevant minutes will be relied on at the trial. Shares were not alloted to the parties again at any other meeting of the board of directors except as per the said agreement….
19. The plaintiff company in exercise of its option to appoint the chairman of the 1st defendant company had in fact nominated and/or appointed the 3rd defendant as chairman of the 1st defendant company.
23. Although the plaintiff has been alloted 516,00 ordinary shares of N1 each 20 the plaintiff has paid and/or contributed in cash and in kind the sum of N544,000 in payment of its shares in the company. The plaintiff will at the trial rely on letter dated 25/1/79 from 2nd defendant and its share certificate dated 26th November, 1978 and letter dated 21st December, 1978, from the 1st defendant’s managing director, Mr. Zimmerman”.
In paragraphs 9, 13, 17, 18, and 19 the respondents in their joint statement of defence pleaded as follows:-
“(9)The defendants deny paragraph 14 of the statement of claim and will contend at the trial that the plaintiff was neither subscriber to the 1st defendant’s memorandum and articles of association, nor was it one of those approved under the Immigration Act by the Ministry of Internal Affairs to carry on business with foreigners.
13.The defendants deny paragraph 19 of the statement of claim that the 3rd defendant was acting to its detriment and/or in collusion with foreign partners, and will contend at the trial that the appointment of the 3rd defendant as the chairman of the 1st defendant company since the coming into being of the 1st defendant, was by unanimous decision of the board and in accordance with the Companies Decree. At the trial, the defendants will rely on minutes of board meetings of 13th December, 1975 and 14th April, 1978.
17. In reply to paragraphs 22, 23 and 24 of the statement of claim, the defendants aver that the share holders of the 1st defendant company, each made the following contributions:-
(a) SEM Nigerian Holding of HAMBURG N948,625.84 made up of building and site developments, machine and equipment installations of this amount N900,000.00 shares, N48,625.84 as debentures and N30,000 contribution for Ogunmekan’s share.
(b) Plaintiff’s contribution N140,000 made up of lease of land and N404,000.00 cash.
(c) 2nd defendant N50,000.00 professional services (brokers fees) N30,000 contributions each by the foreign and Nigerian partners.
(d) 3rd defendant: N40,000 cash and N16,000 in rent.
18. It was agreed that the shareholders (a). (b) and (d) referred in paragraph 17 above should give up jointly of the company’s share equity of 4% to the 2nd defendant as payment of professional and/or brokers fees. 2% each are to be contributed by the Nigerians (Edokpolo and Bello Osagie) and the foreign partner. As a result of this agreement the share holdings of members were:
(i) Sem of Hamburg N870,000 58%
(ii) Plaintiff N516,000 34.45%
(iii) 2nd Defendant N60,000 4%
(iv) 3rd Defendant N53,000 3.5%
At the trial the defendants will rely on the following documents. Certificate of value issued by the Federal Ministry of Industry, 1st defendant’s minutes book and share register.
19. In reply to paragraph 24 of the statement of claim the defendants will contend that the plaintiff managing director was present at the meeting of 29th November 1976 when those decisions were taken”
In its consideration of the appeal before it the Court of Appeal treated the agreement of 27th October, 1975 as a pre- incorporation agreement. The majority was of the view that it seemed to be the basis of the appellant’s case. On well settled principles of company law the court held that that agreement could not bind the company Sam-Edo wire Industries Ltd. after its incorporation for it was never a party to it. Relying on the cases of Kelner v. Baxter (1867) L.R.2 CP 174; Natal Land & Colonisation Company v. Pauline Syndicate (1904) A.C.120 and Stephen v. Build Co. Nigeria Limited (1968) 1 All N.L.A. 183 the Court held that the company after incorporation could not ratify the said agreement of 27th October, 1975 such that it became an agreement between it and any of the original parties there-to.
After a review of more relevant authorities Okagbue J.CA concluded as follows:-
“It will be seen that none of these cases is authority in support of the proposition that a preincorporation contract can be imputed to a company registered under the Companies Act otherwise perhaps then (sic) by an Act of Legislature.
This is simply because it is contrary to the fundamental concept of law which predicates that an agent must have a principal in existence when the agency is created. There is nothing to prevent the company to enter into an agreement on the same terms after incorporation but this is a far cry from ratifying a contract which it could not possibly have made or authorised”.
From its conclusion, the majority of the Court of Appeal seem to have held, even without evidence being led at the trial, that no new agreement existed. The Court of Appeal was not impressed either by the inclusion of the October 1975 agreement in the memorandum of association. Nor did it think that this was a proper case for an exception to the rule in Foss v. Harbottle (1843) 2 Hare 461 so as to permit the appellant and not the 1st respondent company to sue. Agbaje J.CA for his part equally accepted the 1975 agreement as a preincorporation agreement. Unlike his learned brothers he held that the issues between the parties ought to go to trial as it was only at the conclusion of evidence that it would be clear whether the 1st respondent company had adopted the provisions of the 1975 agreement as the terms of a new agreement between it and the appellant; whether 40% of the shares in the 1st respondent company had already been alloted to the appellant before the allotment to the 2nd and 3rd respondents. The learned Justice of Appeal concluded thus:
“By paragraph 14(a) of the statement of claim, the plaintiff pleads that the provisions of the preincorporation agreement were adopted by the company after its incorporation at its general meetings and at the board of directors’ meetings. An object clause in its memorandum of association enables the company to do this. It is pleaded in this paragraph that no allotment of shares of the 1st defendant company was made except in accordance with the provisions. The same paragraph also pleads that the minutes of the company would be relied upon in proof of the allegation in the paragraph. I daresay that at this stage we have to accept that the allegations in paragraphs 15, 22, 23, 24, 32 and 33 of the statement of claim are true. This means it was 2% and 3 1/2% from the shares already alloted to the plaintiff that were realloted to the 2nd and 3rd defendants respectively. Until it is shown by evidence that this is not so can one say the plaintiff has no right as shareholder in the shares alloted to the 2nd and 3rd defendants” (italics mine).
Only 1 ground of appeal was filed in this Court. In it the appellant complained in effect that having regard to the facts pleaded in the paragraphs set down above, which must be taken to be true, the Court of Appeal could not be right in its decision that at that stage the appellant could not establish any right in the shares purported to have been alloted to 2nd and 3rd respondents.
Very copious and well set out briefs of argument were filed by Chief Gani Fawehinmi learned counsel to the appellant and Chief F. R. A. Williams, SAN., learned leading counsel to the respondents. In his oral argument in expatiation of his brief, Chief Fawehinmi’s main point was that the 1st respondent company had adopted in its general meetings and meetings of its board of directors the provisions of the agreement of 1975 and that a new agreement between the appellant and the 1st respondent company had come into existence. He relied on Howard v. Patent Ivory Manufacturing Co. Ltd. (1888) 38 CH.D.156, at 157, 163, 164, 165 and 168.
If there was an enforceable contract between the appellant and the 1st respondent company he said then the appellant ought to succeed in its claims. Chief Fawehinmi also argued in his brief in extenso that the appellant was entitled to sue. Its case he contended falls into one of the exceptions to the rule in Foss v. Harbottle (supra). Again he relied on several authorities including Edwards v. Halliwell (1950) 2 All E.R. 1064 at 1067; Heyting v. Dupont (1964) 1 W.L.R. 843 at 851 and Burland v. Earle (1902) A.C. 83 at 93 (P.C.)
For his part, Chief Williams submitted that the agreement of 27th October 1975 was not a pre-incorporation agreement but a shareholders agreement between the appellant and the German company. This agreement could in no way bind the 1st respondent company. The remedy if there was one lay against the German company which was in any case not even a party to the suit. Relying on the cases of Tika Tore Press Limited & Ors. v. Abina (1973) N.M.L.R. Vol. 1 pages 220, 225; Bamford and Bamford (1970) 1 CH.D.212, 238 and Mac Dougall v. Gardier (1876) 45 1 CH.D 13 at 25 he submitted that since the main complaint was against the allotment of shares to the 2nd and 3rd respondents it was the 1st respondent company that ought to have sued and not the appellant.
In his brief of argument Chief Fawehinmi set down the issue for determination in this appeal as:
“Can the appellant who pursuant to the Enterprises Promotion Act, was to subscribe to 40% of the Shares of the 1st respondent, and after incorporation of the said 1st respondent, adopted’ with this foreign partner (who with the appellant are the only shareholders) the provisions of the shareholding agreement at the 1st respondent’s general meeting and the board of directors’ meetings in accordance with the objects of the memorandum of association SUE where part of appellant’s shareholding is given to other persons without the appellant’s knowledge and consent?”
Although the question whether the appellant can sue falls for determination too, I think that the principal issue is simply whether having regard to the pleadings, the nature of the application of the respondents at the High Court and the circumstances of this case, the appellant ought to be heard. At this stage the Court is not concerned with the merits of the appellant’s case. It is clear that by the nature of the application which the respondents made at the Federal High Court the facts as pleaded by the appellant were deemed to be true. Indeed rule II of Order XXVII of the Federal Revenue Court (Civil Procedure) Rules provides that:
“For the purposes of such application, the defendant shall be taken as admitting the truth of the plaintiff’s allegations, and no evidence respecting matters of fact, and no discussion of questions of fact shall be allowed”.
It follows that although I have earlier set down the statement of defence of the respondents I shall as far as this appeal is concerned regard the facts as pleaded by the appellant as admitted. It is not in dispute that on the 27th October 1975 the appellant and Sem Nigerian Holding G.M.B.H. and Company Hamburg entered into an agreement that led to the incorporation of Sam-Edo Wire Industries Limited (1st respondent). The salient provisions of that agreement had been set down earlier in this judgment and were also pleaded in the appellant’s amended statement of claim. It is now a settled principle of company law that a company is not bound by a preincorporation contract being a contract entered into by parties when it was not in existence. No one can contract as agent of such a proposed company there being no principal in existence to bind. It is also settled that after incorporation a company cannot ratify such a contract purported to be made on its behalf before incorporation. In Kelner v. Baxter (1866) L. R. 2 C.P. 174 Erie C.J. explaining the rationale of the principle said:
“as there was no company in existence at the time, the agreement would be wholly inoperative unless it were held to be binding on the defendant personally…where a contract is signed by one who professes to be signing as agent, but who has no principal existing at the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is bound thereby; and a stranger cannot by a subsequent ratification relieve him from the responsibility”.
See also Natal Land and Colonisation company v.Pauline Syndicate (1904) A. C. 120; Caligara v. Giovsnni Sartori & Co. Ltd (1961) 1 All N.L.R. 534. Also Stephen 45 v. Build Co. (Nig.) Ltd. (1968) 1 All N.L.R. 188 where this Court upheld the same principle even where the parties to the preincorporation agreement became the only directors and shareholders of the new company. But there is nothing preventing the company after incorporation from entering into a new contract to put into effect the terms of the preincorporation contract. This new contract can be in express terms or can be implied from the acts of the company after incorporation as well as from the minutes of its general meetings and board meetings. Touche v. Metropolitan Railway Warehousing Co. (1871) 6 CH. App.671. In Howard v. Patent Ivory Manufacturing Company (1888) 38 CH.D. 156, 164 Kay J. quoted with approval a dictum of Sir George Jessel, M.R. in which the principles were fully set down. This was in Re Empress Engineering Company 16 CH.D 125, 128. He said:-
”The contract between the promoters and the so-called agent for the company of course was not a contract binding upon the company, for the company had then no existence nor could it become binding on the company by ratification, because it has been decided and as it appears to me well decided that there cannot in law be an effectual ratification of a contract which could not have been made binding on the ratifier at the time it was made because the ratifier was not then in existence it does not follow from that that acts may not be done by the company after its formation which make a new contract to the same effect as the old one, but that stands on a different principle”.
See also Firgos (Nigeria) Ltd v. Zetters (Nigeria) Pools Ltd 1965 N.L.R. 113.
In the instant appeal, it is the strong contention of the appellant that there is a new contract between it and the 1st respondent in the same terms as the reincorporation agreement of 1975. For purposes of emphasis I would repeat paragraph 14(a) of the amended statement of claim in which the appellant pleaded that: “After the incorporation of the company the parties who were the only shareholders adopted the provisions of the said agreements at their general meetings and at the board of directors meetings in accordance with the objects of the memorandum of association. The relevant minutes will be relied upon at the trial…”
The implication of this is clearly that after incorporation the company i.e. 1st 25 respondent in its meetings entered into arrangements similar to those contained in the 1975 agreement. It seems to me that one cannot know what these arrangements were unless the issues between the parties went to trial and the minutes of the board of directors as well as general meetings of the 1st respondent company were examined. Besides at the trial evidence will be led to ascertain whether there are acts of the company from which it can be inferred that a new contract has indeed been entered into between the 1st respondent and the appellant. On this issue of determining at the trial whether there has indeed been a new contract in similar terms with the 1975 agreement there is a subsidiary matter that I would wish to touch. The learned trial judge at the Federal High Court seemed to have assumed that because the 1975 agreement was incorporated into the memorandum of association of the 1st respondent company the terms were binding on that company. I respectfully agree with the Court of Appeal that this was a misconception of the true nature of the effect of the object clauses of the memorandum of association. The object clauses are no more than a list of the objects the company may lawfully carry out. They are certainly not objects that the company must execute. It is fairly common knowledge that most companies in drawing up the objects clauses of the memorandum of association cover a spectrum far wider than what they can accomplish immediately. It seems to me that the inclusion of the terms of the preincorporation agreement in the memorandum of association of a company is an indication of a strong desire by the contracting shareholders that the proposed company after its incorporation should execute the terms of the agreement so included. This can be taken together with the acts of the company after incorporation in determining whether a new contract has come into existence.
Admittedly our Companies Decree appears to suggest that the company as well as the individual members are bound by the memorandum of association. Section 16(1) of the Companies Decree No.51 of 1968 provides:
“Subject to the provisions of this Decree, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member, and contain covenants on the part of each member, to observe all provisions of the memorandum and of the articles, subject to the provisions of this Decree”.
I am inclined to the view that the memorandum is only binding on the Company in the sense that it cannot repudiate the object clauses but not in the sense that the company must carry out a particular objects clause. Promoters have devised several ways of making their pre-incorporation contracts binding. One way which is close to the circumstances in the present case is to make an express provision in the company’s objects clause for the company to enter into an agreement in the terms of the preliminary contract. See Palmer’s Company Law 22nd Edition page 272 para. 27. 04).
The respondents had in pressing for the dismissal of the appellant’s claim contended that since appellant’s complaints appear to be mainly over the allotment of shares in the 1st respondent’s company it was the company and not the appellant that ought to sue. Undoubtedly allotment of shares is a matter for the company which it usually delegates to its board of directors. The principle of holding that it is the company that should sue is based on the theory that the shares alloted or purported to be alloted by the company belong to the company and only the company could be aggrieved by an improper exercise of the power of allotment. In Tika-Tore Press Limited v. Abina (Supra) following Bamford v. Bamford (Supra) the Court refused plaintiffs who were not members of the company the right to sue.
The allotment is also voidable at the instance of the company and until and unless set aside at the instance of the company is binding on it.
The contention that the company ought to sue touches on the wider principles usually referred to as the rule in Foss v. Harbottle (1843), 2 Hare 461. By it the court will not interfere with the internal management of companies acting within their powers. If there is a wrong done to the company for which redress is needed it is the company that must sue. The principle is based on a recognition of the implications of corporate organisation and management which must include, subject to well laid down exceptions, the supremacy of the majority. These exceptions which have been developed in several authorities include:
(a) an act which is ultra vires the company or illegal
(b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company
(c) a resolution which requires a qualified majority but has been by a simple majority.
(d) where the rights of the shareholders are infringed or about to be infringed.
A fifth exception appears to have developed from the cases. An individual minority shareholder can also sue where the interest of justice demands that he be so allowed to sue.
Only the 4th and 5th exceptions are relevant to the suit in hand. If the totality of the complaint of the appellant was the allotment of shares by 1st respondent to the 2nd and 3rd respondents a conclusion such as the Court of Appeal reached would have been inevitable. But that is not the case. On the facts pleaded by the appellant, which I must again emphasise must be regarded as admitted, the appellant is in effect complaining that its rights as shareholder have been infringed. In paragraph 14(a) of the amended statement of claim it pleaded in effect that 40% of the shares in the 1st respondent company have been allotted to it. In paragraph 22 it pleaded as follows:-
”The plaintiff company did not at any time transfer any of its shares in the 1st defendant company to the 2nd and 3rd defendants. The plaintiff will contend that at no time did it issue any transfer certificate to 2nd and 3rd defendants which was placed before the board of directors for consideration”.
In paragraph 23 it has given notice that it will rely on letter dated 25/1/79 from the 2nd respondent and its share certificate dated 26th November, 1978 and letter dated 21st December, 1978 from the 1st defendant’s managing director, Mr. Zimmerman.
In paragraph 24 the appellant asserted that it never “consented, ratified or acquiesced in the allotment and/or sale of the said shares to the 2nd and 3rd defendants”.
The effect of all this in my view is that the appellant alleges that 1st defendant having alloted it 40% which it has not transferred to any other shareholder purports now to allot 4% and 3% shares to 2nd and 3rd respondents respectively. In fact that portion of paragraph 14(a) of the amended statement of claim in which the appellant pleaded that
“shares were not alloted to the parties again at any other meeting of the board of directors except as per the said agreements”,
put the allotment of any shares at all to the 2nd and 3rd respondents under serious question. See Edwards and Anor v. Halliwell & Ors (1953) 2 All. E.R.1064, 1066; Pender v. Lushington (1877) 6 CH.D.70. Although I do not find it necessary to discuss the issue in any detail, I would wish to say that I do not think that the cases of Tika Tore Press (Supra) and Bamford v Bamford (Supra) to which reference was made are applicable here to deny the appellant the right to sue as an individual shareholder whose rights have been violated. In the Tika Tore case the plaintiffs were not members of the company whereas in the Bamford case the issue in contest concerned half a million unissued shares which the directors allotted as the articles empowered them to do.
As to the 5th exception, I cannot see any better case in which the interest of justice dictates that the appellant, an obvious minority shareholder, should be allowed to sue. In this case the appellant and the German company as per the agreement of 27th October 1975 brought the 1st respondent company the Sam-Edo Wire Industries Limited to life. The provisions of the 1975 agreement as well as the pleadings of the appellant amply show the contributions made by the appellant towards the incorporation of the 1st respondent on 5th December 1975. The appellant is undoubtedly a minority shareholder even on his own case, the majority shares having been allotted to the German company which nominated the managing director of 1st respondent. In essence the appellant now alleges collusion between the German company, 2nd and 3rd respondents the result of which was the allotment to the 2nd and 3rd respondents of shares out of the 40% allotted to it. It would be unrealistic to expect that in the circumstances of this case the 1st respondent would bring an action to set aside the allotment made to 2nd and 3rd respondents. Assuming that the appellant can succeed in his claims at the trial, would it not have been a victim of grave injustice if it is shut out at this stage on the basis that only the 1st respondent can sue? In Edwards & Anor v. Halliwell & Ors (1950) 2 All E.R.1064, 1067 Jenkins L.J. discussing the rule in Foss and Harbottle (Supra) opined that “those exceptions’E2’80’a6show’E2’80’a6that the rule is not an inflexible 50 rule and it will be relaxed where necessary in the interest of justice” See also Swinfen Eady L.J. in Baillie v. Oriental Telephone Electric Co. Ltd. (1915) 1 CP. 503; and Romer J. in Cotter v. National Union of Seamen (1929) 2 CH.58, 69.
The last point I would wish to deal with is whether the German company i.e. Sem Nigerian Holding G.M.B.H. and Company Hamburg was a necessary party in this suit. Chief Fawehinmi for the appellant has argued that his clients have neither a claim nor a relief against the German company. Chief Williams on the other hand submitted that if the appellant wanted enforcement of the 1975 agreement the German company had to be a party to the suit. It is always essential to join all necessary parties in a suit so as to enable the court effectually and completely adjudicate upon and settle all questions in controversy. I do not personally think that the German company is a necessary party in this suit having regard to the reliefs claimed. The contention of the appellant is that it has a new contract with the 1st respondent in the same terms as the provisions of the 1975 agreement.
It is the 1st respondent which allotted the shares which are in dispute and against which the relief of specific performance is claimed. Nor do I think that even in respect of the appellant’s 1st head of claim i.e. a declaration that the appellant is entitled to 40% of the shares of the 1st respondent, the declaration cannot be granted in the absence of the German company or that it must necessarily be present.
Nevertheless if the matter goes to trial, as in my view it ought to, the matter of joinder of parties would still be at large. Order IV rule 5 of the Federal Revenue Court (Civil Procedure Rules) L.N.34 of 1976 provides that:
“(1) If it appears to the court, at or before the hearing of a suit, that all the persons who may be entitled to or who claim some share or interest in the subject matter of the suit or who may be likely to be affected by the result have not been made parties, the court may adjourn the hearing of the suit to a future day to be fixed by the court, and direct that such persons be made either plaintiffs or defendants in the suit as the case may be ”
The majority Justices of the Court of Appeal appear to have adopted an attitude similar to that adopted by the West African Court of Appeal in John Mills of Cape Caast v. Franklin Beatrice Awaanar Renner of Sierra Leone 6 W.A.C.A. Where that court said that
“it would be manifestly absurd to suggest that a court was bound to proceed to take a lengthy evidence of the parties to a suit where it appears that the whole suit could be decided upon the pleadings without any evidence being called.”
This posture of the Court of Appeal can be seen from the concluding portion of the lead judgment of Okagbue J.C.A. where the learned justice said:-
“If it were merely a question of allowing the case to proceed and evidence to be led to bring out the facts it would be most injudicious to drive a plaintiff from the seat of justice. However, as a matter of law there is just no case for the defendants to answer. The hypothesis on which the averments in the plaintiffs statement of claim are deemed correct does not and cannot pardon a presumption on the correctness of every piece of absurdity. Certainly no corporate lawyer can presume that a contract can be deemed to have been made with an entity which was not existent when it was made Unless the proper parties are before the court it will be futile to proceed to adjudicate on the issues in controversy as the action cannot be regarded as properly constituted. The parties to the contract are not before the court.”
It seems to me with the greatest respect that these conclusions arise from the fact that the Court of Appeal did not give due consideration to the case of the appellant which is that there is a new contract between it and the 1st respondent subsequent to its incorporation. The court’s whole consideration of the case appears to have been limited to the preincorporation contract.
This Court has repeatedly asserted its determination not to be caught in the web of technicalities and to do justice between the parties. In my view nothing short of allowing this matter to go to trial can meet that standard. Perhaps I ought to add that such an eventuality cannot but be beneficial to the respondents for how else except at a trial can the allegations of double dealing and sharp practice against the 2nd and 3rd respondents be met?
From the foregoing I have come to the conclusion that this appeal ought to succeed. The appeal is allowed. The Majority judgment of the Court of Appeal Benin Judicial Division, delivered on the 10th day of November 1982 is hereby set aside. The ruling of the Federal High Court, Warri (Ayinde, J.) is hereby restored and that shall be the judgment of that court. There will be costs in favour of the appellants which I assess at N300 in this Court and N250 in the court below.
IRIKEFE, J.S.C.: I had the advantage of a preview of the judgment just read by my learned brother, Nnamani, J.S.C. and I am in complete agreement with the reasoning and conclusions therein both on matters of fact where relevant, as well as matters of law. I have not the slightest doubt in my mind that the majority justices of the Court of Appeal were in error when they ruled in limine that this action should not proceed to trial on its merit. I also would hold that the ruling of Ayinde J. in the court of first instance in this matter should be restored in full and that the action do proceed to trial with liberty in the parties to apply to amend their pleas as they may deem necessary in the interest of the justice of the case.
This appeal is accordingly allowed. I adopt the order on costs in the lead judgment of my learned brother, Nnamani aforesaid.
BELLO, J.S.C.: I had a preview of the judgment delivered by my learned brother, Nnamani J.S.C. For the reasons stated therein the appeal should be allowed. The judgment of the Court of Appeal including the order as to costs should be set aside and in its stead the judgment of the Federal High Court be restored. I agree with the order as to costs made by Nnamani J.S.C.
The facts averred in the statement of claim which are deemed to be true for the purpose of the objection taken in limine show that the appellant and the 1st respondent company entered into a new contract in the terms of the preincorporation contract after the 1st respondent company had been incorporated. In the circumstance, the rule of company law that a company is not bound by a preincorporation agreement entered into by its promoters and that the company cannot ratify such agreement after its incorporation is inapplicable to the facts of the case as pleaded in the statement of claim. As the appellant alleged that his claim was founded on the post-incorporation agreement whereas the respondents said the claim was based on the preincorporation contract, the dispute cannot be resolved in limine. The issue can only be determined upon the hearing of the case on the merits.
I also think the rule in Foss v. Harbottle (1843) 2 Hare 461 to the effect that only the company can sue for redress for a wrong done to it, the company, is inapplicable. The alleged wrong in the case in hand was done to the appellant, a minority shareholder, who has the right to sue for redress. The rule is not intended to do injustice to a minority shareholder and for that reason his right to sue for redress for a wrong done to him by the majority shareholders is one of the exceptions to the rule.
OBASEKI, J.S.C.: I have had the advantage of reading in draft the judgment just delivered by my learned brother, Nnamani, JSC. and I find myself in complete agreement with him on his opinion on all the issues raised before us in this appeal.
I agree with him that the appeal be allowed, the judgment and order of the Court of Appeal dismissing the appeal be set aside and the ruling of Ayinde, J. refusing respondents’ application to dismiss the appellants’ case without hearing evidence be restored. The justice of this case demands that evidence be heard to resolve the issues joined on the pleadings. It is in the interest of all parties particularly the 2nd and 3rd respondents having regard to the serious allegations of breach of trust and fraud made on the pleadings against them to decide this matter after hearing evidence. I also endorse the order as to costs made by my learned brother, Nnamani, JSC.
ANIAGOLU, J.S.C.: My learned brother, Nnamani, J.S.C., had kindly made available to me the draft of the judgment he has just read and I am in complete agreement with his reasoning and conclusion.
It is clear from the pleadings that the plaintiff/appellant did not base his claim on a pre-incorporation agreement but on the terms of an agreement reached by the company, in its general meetings and meetings of its board of directors, after it had become incorporated, which agreement happened to be in the same terms as the agreement the appellant and the German company Sem Nigerian Holding G.H.B.H. and Company Hamburg – entered into before the formation of the 1st defendant company. And so, on the face of the pleadings the case did not come within the principles expressed in In re Empress Engineering Company (1880) 16 25 Ch.D. 125 at 128 respecting the non-binding effect, on a company, after it had become incorporated, of a preincorporation agreement by the so-called agents of the company. Had the appellant been allowed to testify, all the various aspects of the discussions by all the parties concerned, before and after the incorporation of the 1st defendant, would have been examined in order to test those averments in the pleadings. As it turned out the appellant, by the majority judgment of the Court of Appeal, had been guillotined out of court and out of justice before opening his mouth. This court – a court of law and equity – cannot, in the circumstances of this case, allow that to happen.
It appears to me that this is a clear case in which a minority shareholder should, in the interest of justice, be allowed to sue as one of the exceptions to the rule in Foss v. Harbottle (1843) 2 Hare 461. Left unexplained, the impression left by the allegations in the statement of claim must be that the plaintiff took all the trouble-time, finance and industry – to bring in a German company into Nigeria with which it incorporated a Nigerian company, only to see the said Nigerian company high-jacked by the 2nd and 3rd respondents in collusion with the German company. As my brother, Nnamani J.S.C., has rightly stated in his judgment, it is, indeed, in the interest of all the respondents that an opportunity be granted them, in an open trial, for them to explain away the opprobrious imputation that they have ganged up with the German to cheat the plaintiff of his interest in a company which he, al-most single handedly, has brought into being.
I would also allow this appeal and hereby allow it. The judgment of the Court of Appeal is hereby set aside and in its place I hereby order that the judgment of Ayinde, J., of the Federal High Court, Warri, be and is hereby restored. I abide by the order for costs as decreed by Nnamani, J.S.C.
Chief Gani Fawehinmi For the Appelants
Chief F.R.A. Williams, S.A.N. (with him T.E. Williams) For the Respondents