➥ CASE SUMMARY OF:
Edokpolo & Company Limited v. Sem-Edo Wire Ind. Ltd & Ors. (1984) – SC
by “PipAr” Branham-Paul C. Chima.
Supreme Court – SC.89/1983
➥ JUDGEMENT DELIVERED ON:
Thursday, the 12th day of July, 1984
➥ AREA(S) OF LAW
Minority shareholder right to sue.
➥ PRINCIPLES OF LAW
⦿ A COMPANY IS NOT BOUND BY A PRE-INCORPORATION CONTRACT
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 … 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. — Nnamani, JSC.
⦿ OBJECT CLAUSES OF A COMPANY IN ITS 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. — Nnamani, JSC.
⦿ APPELLANT CASE WAS BASED ON THE POST-INCORPORATION CONTRACT
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. — Bello, JSC.
➥ LEAD JUDGEMENT DELIVERED BY:
⦿ FOR THE APPELLANT
Chief Gani Fawehinmi.
⦿ FOR THE RESPONDENT
Chief F. R. A. Williams, SAN.
➥ CASE FACT/HISTORY
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.
Pursuant to the agreement of October, 1975, the Sam-Edo Wire Industries Limited, 1st respondent herein, was incorporated on 5th December, 1975.
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.
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.
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.
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.
➥ ISSUE(S) & RESOLUTION(S)
I. 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?
RULING: IN APPELLANT’S FAVOUR.
A. THE APPELLANT BEING A MINORITY SHAREHOLDER CAN SUE
“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.”
“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.”
“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.”
“ 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.”
➥ MISCELLANEOUS POINTS
➥ REFERENCED (CASE)
⦿ RATIONALE BEHIND NULLITY OF PRE-INCORPORATION CONTRACT
In Kelner v. Baxter (1866) L. R. 2 C.P. 174 Erie C.J. explaining the rationale of the principle [pre-incorporation contract] 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”.
➥ REFERENCED (OTHERS)