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

Business Day (Nigeria) - - LEGALPERSPECTIVESWITH -

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.

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