Case Review Edokpolo & Company Limited v. Sem-edo Wire Ind. Ltd & ORS. (1984) LPELR-SC.89/1983

What to note: This is a matter that was determined at the Supreme Court in 1983. It is an important case in company law. It deals with issues like pre-incorporation contract and minority protection.

Fact

The appellant was the plaintiff at the Federal High Court, Warri. The appellant is a limited liability company carrying on business mainly in Benin City. In 1975, the appellant in conjunction with a German company called SEM Nigerian Holding G.H.B.H and Company Hamburg entered into an agreement to set up a wire industry in Nigeria on October 27, 1975.

They agreed to incorporate a company in Nigeria to carry out the industrial project. The second respondent who is a legal practitioner prepared the agreement. 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 line with the 1972 Nigerian Enterprise Promotion Decree that was in force then. What can be deduced from the agreement is that the two parties to the agreement wish to be the only shareholders in the proposed company.

In accordance with the agreement of October 1975, Sam-edo Wire Industries Limited ( 1st Respondent) was incorporated on December 5, 1975. One of the provisions of the October 1975 agreement is that the appointment of the directors of the proposed company shall be made by the two parties. The appellant was to nominate the Chairman of the board of directors of the proposed company. On incorporation, the 3rd respondent was appointed as the chairman of the board of directors.

On February 27, 1976 the two partners entered into another agreement mainly for the purpose of increasing the share capital; of Sam-edo Wire Industries Limited from N1,000,000 to N1,500,000. The company then passed a special resolution increasing its share capital from N1,000,000 to N1,500,000. The company subsequently allotted 2% and 3% of the share in the company to the 2nd and 3rd respondents respectively. The said allotment was taken out of the 40% of the shares of the appellant. The appellant protested to the managing director of the 1st respondent company (a nominee of the foreign partner SEM Nigeria Holding Company Hamburg). The protest was in vain. The appellant then instituted an action at the Federal High Court claiming the reliefs below-

“(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 shareholding 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.”

It must be noted that the respondent brought an application for the matter to be dismissed. This is premised on the claim that the plaintiff/appellant does not have the right to sue- the wrong being complained of was committed against the company and it’s the company alone that can sue (rule in Foss V Harbottle. Also, the agreement being relied on is a preincorporation agreement which cannot be binding on the company that was later incorporated (1st respondent). Judgement was given in favour of the appellant at the High Court. The Court of Appeal ruled in favour of the respondent. The appellant being dissatisfied then appealed to the Supreme Court.

Issues for determination The appellant’s counsel (Chief Gani Fawehinmi) submitted one issue for determination. The issue is “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?”

Argument/submissions The appellant’s counsel (Chief Gani Fawehinmi) submitted that the 1st respondent company had adopted in its general meetings and board of directors meetings the provisions of the 1975 agreement and that a new agreement between the appellant and 1st respondent had come into existence. He further argued that the appellant is entitled to suebecause its case falls within the exceptions to the rule in Foss V Harbottle.

The counsel to the respondent (Chief FRA Williams) on the other hand contended that the agreement of 1975 was not a preincorporation 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. 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.

Judgement

With regards to the issue of preincorporation contract, the court held that “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”.

It was further held that “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.”

The court also stated that “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.”

On minority protection, the court held that “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 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.”

The court allowed the appeal and held that the claim of the appellant was founded on postincorporation agreement and not preincorporation agreement. Therefore, the rule governing preincorporation agreement will not be allowed. The court also held that the rule in Foss V Harbottle will not apply as the wrong that happened in this case was a wrong done against the appellant who is a minority shareholder. Therefore, he has the right to sue and this falls within the exceptions to the rule in Foss V Harbottle.

Conclusion

While preincorporation agreements cannot be binding on the company after it has been incorporated, a company can enter into a new agreement which validates the preincorporation contract. This new agreement can either be express or implied. Furthermore, the rule in Foss V Harbottle is not meant to encourage fraud on the minority. Therefore, the minority are empowered through the exceptions to the rule to take steps to correct any wrong that was done by the majority.