Re Charterhouse Capital Ltd [2015]

In Re Charterhouse Capital Ltd [2015] EWCA 536, the Court of Appeal extracted seven principles from case-law related to amendments to a company's articles of association. Notably, the court emphasised that when alterations impact conflicting interests among shareholders rather than conflicts between shareholders, the correct test is not the hypothetical person test but whether the amendment amounts to oppression of the minority or is otherwise unjust or outside the scope of the power.

The articles of association underwent amendments, introducing a drag-along clause that compelled a minority shareholder to sell their shares alongside the majority shareholder. A minority shareholder contested this, alleging unfair prejudice and claiming that their shares were sold at a gross undervalue.

The Court dismissed the appeal, affirming the validity of the alteration. Sir Terence Etherton MR elucidated several principles guiding the alteration of articles:
  1. The power to amend articles is subject to constraints based on the purpose of the power, with limitations in place to prevent arbitrary use.
  2. A power to amend is considered valid when exercised in good faith and in the interests of the company.
  3. Determining whether an alteration benefits the company is within the prerogative of the shareholders, not the court. An alteration is deemed not for the company's benefit if no reasonable person would consider it as such.
  4. The court refrains from investigating the quality of subjective views held by shareholders acting in good faith, even if some shareholders are mistaken.
  5. The mere fact that an amendment adversely affects minority shareholders does not invalidate it if made in good faith and in the interests of the company.
  6. Amendments not directly benefiting the company but serving the shareholders' interests can be valid if they do not amount to oppression of the minority or are otherwise unjust.
  7. The party challenging the validity of the amendment bears the burden of proving grounds for their challenge.

Sir Terence Etherton MR also addressed the Greenhalgh test, expressing a preference for a test based on vitiating factors described in Peters’ American Delicacy Co rather than focusing on the benefit to the corporators as a general body or a hypothetical member as in Greenhalgh. The court aimed to align the test with the vitiating factors outlined in prior judgments.

In essence, this case sets forth a comprehensive set of principles for evaluating the validity of alterations to a company's articles, emphasising good faith, shareholder authority, and the avoidance of oppression or unjust outcomes. The court's nuanced approach reflects the complexities involved in amendments impacting conflicting interests among shareholders.
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