Bushell v Faith [1970] AC 1099 is a landmark case in UK company law concerning the weighting of votes in a company’s articles of association and the implications for the removal of directors. The case primarily examined the interpretation of section 184 of the Companies Act 1948, which allowed directors to be removed by an ordinary resolution (i.e., a simple majority of shareholder votes).
The House of Lords’ decision in Bushell v Faith affirmed the principle that weighted voting provisions in a company’s constitution were permissible unless expressly prohibited by statute. The case remains significant for private companies, highlighting how corporate structures can be tailored to protect directors from removal, thereby impacting corporate governance.
Facts of Bushell v Faith
The dispute in Bushell v Faith arose in the context of a private company, Bush Court (Southgate) Ltd, which owned a block of flats. The company had a small share capital of £300, divided among three family members:
- Mr Faith held 100 shares.
- His two sisters, Mrs Bushell and Dr Bayne, together held 200 shares.
Under Article 9 of the company’s articles of association, the voting rights attached to shares were structured such that, in the event of a resolution to remove a director, that director’s shares would carry three votes each. This provision effectively tripled Mr Faith’s voting power when a resolution was proposed to remove him from the board.
When his two sisters sought to remove him through an ordinary resolution, Mr Faith invoked Article 9, which gave him 300 votes (3×100 shares) against their combined 200 votes (1×200 shares). As a result, the resolution to remove him failed.
Procedural History
The case was first heard by Ungoed-Thomas J, who ruled that Article 9 violated section 184 of the Companies Act 1948 and was therefore invalid. However, this decision was overturned by the Court of Appeal, which held that the provision was legally permissible. The case was then brought before the House of Lords, where the validity of Article 9 was upheld by a 3:1 majority.
Legal Issue
The central legal question in Bushell v Faith was:
- Whether Article 9, which granted weighted voting rights to directors facing removal, was invalid under section 184 of the Companies Act 1948.
- Whether Parliament intended to prohibit such provisions explicitly or if companies retained the freedom to structure voting rights as they deemed fit.
Relevant Law:
Section 184 of the Companies Act 1948 Section 184 stated that a company may, by ordinary resolution, remove a director notwithstanding anything in its articles of association. The intention behind this provision was to prevent companies from entrenching directors by requiring special resolutions or higher voting thresholds for their removal. However, the section did not explicitly prohibit weighted voting provisions, leaving room for interpretation.
House of Lords Judgment in Bushell v Faith
In Bushell vs Faith, the House of Lords upheld the Court of Appeal’s decision, ruling that Article 9 was valid and did not contravene section 184. The majority judgment was delivered by Lord Reid, Lord Upjohn, and Lord Donovan, with Lord Morris of Borth-y-Gest dissenting.
Majority Opinion
Lord Reid (Reluctant Acceptance)
Lord Reid acknowledged that Article 9 was clearly designed to evade section 184 but ultimately ruled that there was no statutory prohibition against such a provision. He stated:
“With some reluctance, I agree with the majority of your Lordships that this appeal must be dismissed. Article 9 is obviously designed to evade section 184… but we must take the law as we find it.”
He further noted that the Companies Act 1948 did not prohibit weighted votes, and Parliament could have drafted the law differently if it wished to explicitly restrict such provisions.
Lord Upjohn (Strong Approval)
Lord Upjohn fully supported the validity of weighted voting rights and reinforced the argument that:
- The Companies Act 1948 did not prevent companies from structuring voting rights in any way they chose.
- Parliament had deliberately left companies free to determine voting rights through their articles of association.
- Parliament could have specified a “one vote per share” rule if that was its intent, but it did not do so.
- Section 184 merely required that an ordinary resolution suffice to remove a director; it did not dictate how shares should be weighted when voting on such a resolution.
He dismissed the argument that allowing weighted votes “made a mockery” of section 184, asserting that corporate law had always left voting rights to the discretion of shareholders.
Lord Donovan (Literal Interpretation)
Lord Donovan adopted a strict constructionist approach, focusing on the actual wording of section 184. He argued that since the statute did not expressly prohibit weighted voting, there was no basis for invalidating Article 9. He noted that small private companies, especially family businesses, often required protective mechanisms to prevent conflicts from destabilising the company.
Dissenting Opinion
Lord Morris of Borth-y-Gest (Opposed to Article 9)
Lord Morris dissented, arguing that Article 9 undermined the purpose of section 184. He viewed the provision as a deliberate device to circumvent the removal process, stating:
“Its unconcealed effect is to make a director irremovable. If the question is posed whether the shares of the respondent possess any added voting weight, the answer must be that they possess none whatsoever beyond, if valid, an ad hoc weight for the special purpose of circumventing section 184.”
He contended that allowing such artificial vote-weighting made a mockery of the law, as it directly frustrated Parliament’s intent.
Conclusion
Bushell v Faith [1970] AC 1099 remains a crucial precedent in UK company law, particularly regarding the interpretation of section 184 of the Companies Act 1948. The ruling confirmed that companies retain the freedom to structure their voting rights, even when those provisions effectively protect directors from removal.
While the decision raised concerns about the potential circumvention of statutory protections, the House of Lords held that the absence of explicit legislative prohibition meant that weighted voting rights were valid. Bushell v Faith continues to influence corporate governance, demonstrating the importance of clear statutory drafting and the balance between shareholder rights and director protection in private companies.
