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Faculty of Law, University of Sydney
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Whincop, Michael J --- "A Relational and Doctrinal Critique of Shareholders' Special Contracts" [1997] SydLawRw 18; (1997) 19(3) Sydney Law Review 314

A Relational and Doctrinal Critique of Shareholders Special Contracts


1. Introduction

Legal scholars can get sucked into the vortex of whirling abstractions, and stay there for generations.
Ian Macneil[1]
In 1995, the received doctrine concerning the effect of a corporations articles of association, and amendments thereto, was revised substantially by two High Court decisions, Gambotto v WCP Ltd,[2] While Gambotto v WCP Ltd has frequently been the subject of analysis,[4] Baileys case has not. It may be that Baileys case has been less interesting to corporate lawyers, because the judgments seem to rely on precedent, whereas those in Gambotto v WCP Ltd articulated new law. The affinities between the two cases have so far gone unrecognised.

This article considers, and provides a critique of, the decision in Baileys case, by applying relational contract theory to changes of articles. Baileys case is pervaded by contractual themes. The articles constitute a statutory contract. The High Court used the device of a special contract between a member and the corporation in order to conclude that a change to the articles did not affect the member. This article uses a theory of contract as relation to interpret and analyse this approach. Part 2 discusses the concept of relational contract law, by contrasting it with classical contract. It also explains how these conceptions reconcile with the corporation. Part 3 shows how the High Courts analysis in Baileys case is pervaded, and arguably distorted, by classical concepts.

Part 4 addresses doctrinal issues raised by the case. As applied in Baileys case, the special contract concept involves an unacceptable circularity and resolves rights in a fictive, complex fashion. Baileys case also fits uneasily with precedent, despite projecting a superficial appearance of consonance. Part 5 develops a relational theory for examining changes to articles, which is applied to Baileys case. Part 6 is a conclusion.

2. Corporation as Contract; Contract as Relation: Issues in Synthesis

Standard positivist expositions suggest that contract comprises a small number of constituting elements. Contractual obligations are ascertainable from the promises comprising the contract. This view of contract, which Macneil has described as classical contract law, is a paradigm for legal thinking that exemplifies liberal individualism.[5] Any model of contract law deals with how parties project exchange into the future.[6] In classical contract law, promise is the means by which parties almost always two parties project exchange into the future. Two norms characterise this philosophy. The first is the enhancement of discreteness.[7] A discrete transaction is separate from all other past, present and future relations. The contractual promises are complete when the contract is formed, and constitute the only relevant obligations between the parties. The second norm is the enhancement of presentiation. Presentiation means that the course of the future is bound by present events, and that by those events the future has for many purposes been brought effectively into the present.[8] Promise achieves presentiation because it enables a promisee to constrain the promisors future conduct in accordance with the promise.

A discrete transaction permits a high degree of planning in projecting exchange into the future. However, the discrete contract ideal is less apt to deal with more complex, less well-defined projections of exchange which depend on relations between parties.[9] That relation might take the form of a recognisable contract, such as a partnership.[10] In such cases, however, a classical contract model generates a conflict. On one hand, the model emphasises ex ante specification of promises. On the other hand, relational exchanges are frequently characterised by incompleteness and flexibility.[11] Classical contract law attempted to address this conflict by using fictions of notional consent which rationalised flexibility and change.[12] By contrast, if a legal system moves to accommodate relations, it must recognise its inability to resolve legal issues by reference only to ex ante promises. Instead, the central norms become (1) the harmonisation of party conflicts within the relations internal matrix; and (2) the preservation of the relation itself.[13]

In general, the projection of exchange into the future by means other than dyadic, discrete promises, became the subject of non-contractual doctrine. Despite advocacy to the contrary,[14] the trust was non-dyadic and therefore perceived as non-contractual. Langbein has recently reasserted the idea of trust-as-contract.[15] Langbein stresses the relational quality of the trust contract.[16] The trust serves settlors needs for flexibility and change in a way that more discrete transactions cannot.

The company is another example. Coase regarded the firm as performing the function of resource allocation projecting exchange into the future more efficiently than discrete transacting.[17] Although contracts dyadic fixation lacked the dimensions to capture this insight, contract nonetheless remained a visible part of early company law. It supplied a means of ensuring that shareholders and officers complied with the companys terms and governance processes. Company trustees would not recognise the transfer of a members interest unless the transferee covenanted to comply with the settlement.[18] Early incorporation legislation absorbed this approach by providing that the memorandum and articles should bind the company and each member.[19] Thus, the corporations status as a relational contract was imitated by a series of dyadic contracts between the members and the company. This synthesis was consistent with classical contract law. The terms of the statutory contract needed to be certain at the time of incorporation and when new members were admitted. The contract therefore had to be confined to the written constitution, and was therefore inevitably incomplete.[20] Because the corporation has an indefinite life, the formal constitutions exchange planning capacity was limited to constituting corporate processes.[21] The fluid norms of the actors who animated these processes had no independent legal status. This corresponds with a hierarchical determination of the content of a contract: formal communications control informal communications which in turn control uncommunicated circumstances.[22] When this classical method is applied to contractual relations, it can be perilous:

The written parts of contractual relations, especially very formal parts, such as ... corporate charters ... [resemble] constitutions establishing legislative and administrative processes for the relation. Indeed, danger lurks in this formulation. The danger lies in reintroducing into the law of contractual relations such things as the hierarchies discussed above ... as a matter of general principle emanating from the concept of constitution. If that concept or terminology is used to resurrect constitutions long decayed and made obsolete by less formally established patterns of communications and behavior, we are as a matter of principle, back to a relationally dysfunctional neoclassicism. ... Giving them constitutional weight may be very dubious indeed.[23]

This article vindicates that insight. Baileys case demonstrates the perils of dealing with the formal constitution as if in a vacuum, divorced from the underlying relation.

3. Baileys Case

A. The High Court Decision

The case involved injuries sustained by Crawford during treatment by Dr Bailey at Chelmsford Hospital in 1973-4. Crawford began proceedings in 1980. Bailey was a member of the New South Wales Medical Defence Union (the Union). Members were entitled to indemnity under the Unions articles, although the Union was permitted to refuse to indemnify a member under certain (presently immaterial) circumstances. In 1977, the members (including Bailey[24] ) resolved to amend this article, by conferring a discretion to refuse to indemnify persons who ceased to be members, including deceased members. When Bailey died in 1985, the Union invoked that discretion. Baileys estate cross-claimed for indemnity against the Union in the Crawford proceedings.

The High Court upheld the estates right to indemnity. Bailey had a special contract with the Union, apart from the statutory contract. Brennan CJ, Deane and Dawson JJ concluded that a special contract was formed annually when members renewed their cover. That contracts terms were identical to the articles as they stood at the time of renewal. Because the article was amended before Crawford sued, Brennan CJ, Deane and Dawson JJ looked to the contract existing at the time Crawford was treated, not the contract existing at the time Bailey sought indemnity. Their Honours accepted that where the terms of a special contract are referable to the articles, the former may be changed by amendments to the latter.[25]

However, the parties may intend that the special contract remain the same. Brennan CJ, Deane and Dawson JJ considered that the terms of the contract subsisting at the time of Crawfords treatment were irrevocable. The purpose of the contract was to obtain cover for acts done during a specified period. The parties could not have intended that the Union should be able unilaterally to refuse indemnity in respect of claims arising after the period of the cover expired.[26]

McHugh and Gummow JJ concurred in the result, but considered that there was a continuing contract, not one from year to year.[27] Changes to that contract could not take away vested rights. McHugh and Gummow JJ observed that the statutory contract in the articles is unusual.[28] First, the contract may be changed by special resolution without the members consent. Second, members cannot seek equitable rectification of articles. Third, members may be unable to enforce the articles because of the rule in Foss v Harbottle.[29] Fourth, contractual obligations under the articles pass with shares. Finally, a shareholder has limited rights to sue for damages for breach of the articles. McHugh and Gummow JJ asserted that these curiosities[30] underlay the rule depriving articles of contractual effect if they conferred rights or obligations on a member that did not relate to membership.[31] Therefore, the contractual effect of Baileys indemnity could not derive from the articles. Their Honours simultaneously concluded that the indemnity derived from a continuing special contract affected only prospectively by the amended articles.

B. Classicism Concealed: A Relational Critique

The High Court identified two relations to which Bailey was a party: he was a member of, and indemnified by, the Union. According to the High Court, the first relation is referable to the articles, the second, to a special contract. However, the special contracts terms were referable to the articles. The High Court reconciled the two contracts by regarding the insurance entitlement as deriving from a discrete contract, so separating it from the articles and any other relations.

McHugh and Gummow JJ stated that on becoming a member, a contract came into existence, which conferred entitlements to indemnity and assistance.[32] Bailey acquired vested or accrued rights under that contract.[33] The discreteness norm emerges when one considers the following factors. First, the contract came into existence at a certain time taking out membership. This is intensified in the majority analysis, by holding that the arrangement involved recurring one year contracts. Second, contract terms are precisely and classically identifiable from the terms of the articles. Third, the rights the contract confer vest from its inception, so making the course of all future events associated with insurance claims predictable on the basis of those terms. This demonstrates the presentiation norm. Fourth, the court treats the contract as having no past, and apart from performance of the promises, no future. No other circumstance is admitted that bears on the construction or discharge of the Unions promise to indemnify. The courts enhancement of discreteness permitted differentiation between the statutory contract and the special indemnity contract. The court projects a classical selfimage of passively enforcing the risk allocations and promises agreed by Bailey and the Union.

The court relied on authorities preventing members from enforcing articles unless they confer rights on members in their capacity as such (the qua member test). This principle is inherently classical. Classical contract treats individuals as interacting in segmented and circumscribed ways. It is capable of distinguishing between a members capacities as such and not as such by deriving these capacities from separate contracts.[34]

In contrast, relational analysis requires that a members insurance entitlements be viewed as part of a larger series of obligations from which it cannot sensibly be severed.[35] Relational analysis begins with the nature of a Union members interest. The interest derives not from a discrete, dyadic contract, but from a larger relation between all members. The relation projects exchange, including indemnity and related benefits, into the future. While a member may enter that relation at an identifiable time,[36] the relation has no clear beginning and no meaningful end. One important feature of being part of that relation is the coexistence of members interests in both their own professional indemnity, and (as its residual claimants) the efficient conduct of the mutual indemnity business. The coexistence of (relatively) fixed and residual claims implies that members will be sensitive to the efficiency of the terms on which the company offers indemnity. Members will seek to move towards an optimal set of terms for indemnity. The terms of indemnity therefore remain subject to a decision of the members to change them. It is inappropriate to regard the contract between members as a discrete transaction that precisely allocates future risk. Instead, it represents a working arrangement for risk sharing, within the matrix of a relation that leaves much of the exchange to be completed in the future.[37]

Does a relational approach shed light on whether members would intend an amendment to the articles to operate in a manner that defeats vested rights? Brennan CJ, Deane and Dawson JJ commented that the parties did not intend[] that the union should be able unilaterally to [refuse] indemnity.[38] As in a normal, dyadic insurance contract, the High Court envisages a present allocation of future risk by the member to the Union. It follows that one must look back to the terms of the allocation at the time of the treatment. If one rejects this analysis in favour of analysing the relation in the manner described in the last paragraph, the artificiality of regarding the contract as allocating risk to the insurer becomes apparent. The arrangement involves risk sharing within a relation. Because members bear the risk of claims from events occurring before and after any change to the express terms of indemnity, the members may choose to change the allocation inter se of risk arising from events occurring before and after the change. It is unrealistic to say that the Union unilaterally changed anything. The High Courts analysis implies that the alteration was zero-sum: the Union gained, the member lost. When seen as a relational contract, the change is positive sum because it changed risk sharing to an arrangement that members regarded as a better means of projecting their exchanges into the future.[39]

The High Courts construction of the articles was shown above to resonate with classical contract norms. In classical contract, litigation is essentially retrospective. The court awards an expectation remedy which follows the measure of the violated right.[40] Relational litigation is more complex because it involves a grievance about the operation of a relation, the express terms of which are incomplete and variable.[41] Therefore, a relational approach to Baileys case would focus on whether the change to the relations terms was valid. If it violated the relations norms, or was effected inconsistently with the relations governance processes, a case could be made out for judicial intervention. Part 5 returns to this issue. It suffices to note here that the plaintiff made no such claim.

One can detect in early case law the presence of basic relational ideas. In The Lion Mutual Marine Insurance Association Ltd v Tucker,[42] the plaintiff was a company limited by guarantee that offered mutual marine insurance. Persons seeking insurance became members, and thus, insurers of other vessels. The memorandum contained a 5 guarantee provision. However, the articles provided that a member, as a mutual insurer, was liable to contribute to insurance liabilities. When the plaintiff was wound up, it succeeded in recovering from the defendant more than 5. Liability as a co-insurer did not arise by virtue of membership narrowly defined, but remained enforceable because membership and insurance were interwoven with each other:

The real effect of [the articles] is that the insurer and assured ... were to be interdependent upon one another, there being liabilities which each member undertook which really in substance were, although perhaps not in legal form, liabilities towards the other members ... It was the intention of the rules that the 39. corporate name of the association should be used as a machinery only between those who were seeking to enforce these liabilities and their fellow contributories.[43]

This judgment recognises three matters. First, the corporation is a convenient legal recognition of the mutual insurance relation between interdependent members. Second, membership must be perceived in connection with insurance, not separately from it. The nature of risk sharing in the relation was important to construing the articles. Third, restricting enforcement of the articles to the members narrower corporate capacity was inappropriate.

4. Doctrinal Difficulties With Special Contracts

A. Introduction

This Part examines the High Courts judgment with reference to four criteria: logic, simplicity, consistency with precedent and contribution to the law.

B. Paradox and Logic

Baileys case held that part of a contract was not enforceable, in order to enforce it. This paradox arises from conjoining the principle that articles cannot be amended inconsistently with other contracts to which the corporation is a party, with a principle that the articles may provide a basis for inferring the existence of special contracts. This conjunction virtually implies that the articles provide a reason why the articles cannot be varied. The High Court concluded that a special contract existed, because authority indicated that a member cannot enforce rights which fail the qua member test. However, to rely on such a principle of non-enforcement in a situation where the court has no intention of not permitting the member to enforce the article creates a discordant illogicality.

This use of a rule of non-enforceability for the sake of enforcement is central to the decision. If the articles were enforceable as such, it would follow that the Union was entitled to refuse to assist the estate. McHugh and Gummow JJ rationalise the result by arguing that the articles are not an efficacious contract by which to enforce promises, having regard to the factors differentiating the statutory contract from other contracts.[44] These factors provide no justification for the analysis. The issues regarding rectification, inability to sue for damages for breach, and transferability of contractual obligations, were completely irrelevant. The rule in Foss v Harbottle is irrelevant where the company enforces a contractual right, as in Baileys case.[45] The single significant factor was the ability to vary the contract by special resolution without the members consent. This issue was strictly immaterial, as Bailey consented to the change. More generally, this can only be a curiosity if one adheres to a classical conception of contract law. The implications of change from a relational perspective are discussed in Part 5 below.[46]

One must ask when, if ever, will a court not enforce a provision in the articles either as a statutory contract, or in pursuance of an implied special contract? If courts will always find a special contract where they do not enforce a provision under section 180, the special contract defeats whatever purpose is served by denying contractual effectiveness to certain articles. The special contracts only significance is to circumvent changes to the articles.

C. Simplicity and Fiction

The use of the special contract in Baileys case is built on fiction. Apart from applying the qua member test, the High Court never attempted to justify its separation of the statutory and special contracts as anything other than an analytical fiction. Fictions generally are used to reconcile a desirable anomaly with a dominant paradigm. Yet, in Baileys case, the need to interpolate a special contract in identical terms to the articles pro tempore is not apparent.

Fictions are sometimes used to simplify analysis. The fictional special contract in Baileys case depends on the operation of the qua member test, which is not simple either in application or justification. Generally, differentiation between membership and other capacities is difficult. The High Court does not attempt to explain where the line is drawn. Drawing the line in a narrow manner is problematic because it expands the need for enforcement by fiction (and therefore judicial reconstruction). McHugh and Gummow JJ refer to rights applicable alike to all shareholders.[47] As argued above, however, Union membership involved participation in a larger relation of risk sharing. The relevant amendment confirmed the connection between membership and insurance by qualifying the Unions obligation to indemnify with reference to cessation of membership.[48]

The fiction of special contracts might be treated as a question of categorisation only. That is, shareholders enforcing rights not conferred on them as members do so under a special contract. However, the special contract analysis was used to underline the High Courts insistence that the articles cannot be used to breach special contracts, even those implied from the articles themselves. The special contract thus trumps changes to the articles, so giving a strange puissance to a fiction.[49] However, because the special contract is a fiction, its power depends on how a court reconstructs it. Thus, in Baileys case, changes to the articles, according to Brennan CJ, Deane and Dawson JJ, only took effect when the contract was renewed annually.[50] According to McHugh and Gummow JJ, changes took effect forthwith.[51] The parties are thus at the mercy of the court deciding what terms the implied special contract should have. A court may possibly imply a term that certain terms of the special contract could not be changed at all.[52] As Part 5 discusses, this approach resembles that in Gambotto v WCP Ltd.

How might parties deal with these uncertainties? Articles which confer rights on members might indicate that the right is conferred on the member qua member. The articles could also include a provision that identifies the effect of changes to the articles.[53] Would the courts respect members freedom to agree inter se how their relation is to be managed? Courts have long recognised shareholders agreements,[54] which enable shareholders to vary or supplement common law protections. If shareholders choose to contract expressly in the articles, they must be assumed to understand the significance, and accept the incidents, of that choice. A court inclined not to enforce such contracts would be required to explicate the norms that underlie that preference. At present, the special contract fiction conceals these norms from inspection and critique.

D. Consistency with Precedent

The High Courts ability to project an image of consonance between its decision and precedent owes much to disorder of the authority.[55] Nonetheless, the qua member tests history suggests that the decision cannot be justified. The qua member test can apply in two situations: where a member asserts the right, and where the corporation does. Baileys case is an example of the latter. The former situation is outside the purview of this article.

My thesis is that where articles confer rights on the corporation, or limit the assertion of rights against the corporation by members, the case for enforcing the article rests ultimately on a courts view of the provision itself. It does not depend on whether the incidents of the provision relate to a members capacity. The qua member test is merely a means for enforcing or not enforcing a provision of the articles, according to its merit or offensiveness. Three cases from last century are illustrative.[56] All involved enforcement by the company of articles subjecting members to certain liabilities. Although these now may be repugnant to section 180(3), the articles were upheld, notwithstanding that they were not liabilities qua member. The approach of the courts is exemplified by a famous dictum of Jessel MR: [I]t is no part of the duty of courts of justice ... to be astute in finding reasons for avoiding mens contracts which are otherwise reasonable.[57] Courts will enforce articles at the companys suit, if they are unobjectionable.

Hickman v Kent or Romney Marsh Sheep-Breeders Association[58] is the main authority cited for the qua member test. However, Astbury J seemed to direct most of his comments to cases where the member enforced the provision (which are outside the scope of this article). In contrast, Astbury J had less problem with the company enforcing its regulations.[59] The case before him involved enforcement by the company of an article requiring disputes to be referred to arbitration. The article was enforced even though the action involved, inter alia, a single members rights in an individual capacity (in particular his right to have his sheep registered).[60]

Under what circumstances might companies be prohibited from enforcing articles or changes thereto? The High Courts two earlier considerations of the question yield few clear principles.[61] Both cases involved provisions held to constitute restraints of trade, or penalties. Beyond these fatal objections, the qua member test found both doubt,[62] and support,[63] but it did not form the ratio decidendi for any judge. The same is true of the New Zealand decision in Shalfoon v Cheddar Valley Co-operative Dairy Company Ltd.[64] The only judge to consider the special contract concept was Salmond J. Salmond J said that a special contract can be used to uphold provisions that cannot be included in the statutory contract (such as articles requiring members to contribute more capital[65] ), which were otherwise valid at law and in equity. This decision was followed in Black, White and Grey Cabs Ltd v Gaskin.[66] These cases clearly do not justify the use, as in Baileys case, of the qua member test to prevent the company from enforcing an amended article, or justify the implication of an inconsistent special contract. On the contrary, Salmond Js approach uses special contracts to uphold the terms of the articles, not to thwart them.

Eltham Co-operative Dairy Factory Company Ltd v Johnson,[67] a case involving an alteration of articles, comes closest to supporting the analysis in Baileys case. The alteration caused a shareholder to forfeit his entitlement to share in profits, unless he supplied all of his produce to the co-operative company. The court held that the plaintiff supplied his produce under special contracts, the terms of which accorded with the articles at the time at which he became a member.[68] Although the company could change its articles, the change could not affect a contract for the supply of produce that was still on foot.[69] However, the article would bind shareholders voting for it, and, on a prospective basis, those informed of the change.[70] The plaintiff did not vote in favour and did not know of the alteration. Baileys case is distinguishable on two grounds. First, unlike Eltham, Bailey knew, and voted in favour, of the change. Second, the sale of produce is a relatively discrete transaction. The time between contract formation and performance is very short. It is thus different to an insurance contract, which has important relational features. The insurance contract projects exchange much further into the future. Members have an interest in deciding the rights of persons who, at the time of making an insurance claim, have ceased to be members. Permitting these claims favours a nonmember, at the expense of members generally. It also enhances moral hazard problems, because a person who knows or suspects a claim may be made against her may cease to insure at a subsequent point in time. The resolution passed in Baileys case was therefore not unreasonable. It restricted equally the rights of members voting for it if they ceased to be members.[71]

The High Court in Baileys case also made much of Lord Lindleys dictum in Allen v Gold Reefs of West Africa Ltd,[72] that a company cannot break its contracts by altering its articles. However, Lord Lindley also said that, when dealing with contracts referring to revocable articles, ... care must be taken not to assume that the contract involves as one of its terms an article which is not to be altered.[73] This point is well illustrated by British Equitable Assurance Co v Baily.[74] The plaintiff became a policyholder with the defendant company, agreeing to abide by the deed of settlement and company regulations. A prospectus indicated that the profits of a department were credited to policyholders without a reserve fund deduction. Subsequently, the defendant proposed to incorporate on the terms of articles which proposed a deduction. The House of Lords rejected the finding below that the contract could not be varied by changing the articles. Lord Macnaghten could not apprehend any limit on the companys powers to amend its articles.[75] Nobody would effect an insurance in the belief that the laws and regulations of office which he selects are immutable.[76] Lord Lindley agreed in the result, but held that the articles could not be changed in a way that was not bona fide, or inconsistently with the purposes for which the power of alteration was conferred.[77] The significance of this test is considered in Part 5 below.

This section has considered the leading cases on enforcement by the company of rights, or amended rights, against its members. While a number of cases have restricted enforcement, the overwhelming majority did so on a view of the rights substance, not the capacity to which it related. While Elthams case provided a precedent of using special contracts to protect a shareholder from onerous amendments, it is easily distinguishable from Baileys case: it seems to raise only procedural barriers of notice to effecting any change. Judges have warned courts to exercise care in assuming an article is irrevocable where this is not indicated. Protection against majoritarian changes instead comes under the principles Lord Lindley stated in Allens case, and reaffirmed in British Equitable Assurance Co v Baily.

This historical approach has the advantage that articles are enforceable by a company according to their normal construction. Relational flexibility is preserved because a special majority can change the articles, subject to the noted equitable principles. These rules encourage parties seeking more secure arrangements to to lock up provisions using Corporations Law section 172(2). This is strongly preferable to the aberrant application in Baileys case of the qua member test to the company enforcing its own articles, while at the same time, and for inadequately explained policy reasons, protecting articles against change by means of the fictitious special contract. Both the qua member test and the implied special contract seem to emerge in the case law as attempts to rationalise the previous reviews of contract terms, in an (unsuccessful) attempt to give predictability to the law.[78] For all its appearance of conforming with authority, the High Court simply used these formalistic doctrines in order to reorder a relation.

E. Contribution to the Law

Section 180 of the Corporations Law provides:

(1) Subject to this Law, the constitution of a company has the effect of a contract under seal:
(a) between the company and each member;
(b) between the company and each eligible officer; and
(c) between a member and each other member; under which each of the above-mentioned persons agrees to observe and perform the provisions of the constitution as in force for the time being so far as those provisions are applicable to that person.

The references to an agreement to observe and perform the constitution so far as those provisions are applicable to that person substantially changed the provision that preceded it.[79] The section suggests no basis for distinguishing between membership capacities.[80] Although the section was not applicable at the relevant times in Baileys case, one would have thought that in handing down judgment in 1995, the High Court would have ventured obiter dicta on this crucial question. Given the critical importance of the qua member test and the implied special contract to its decision, the High Court should have indicated whether or not these concepts (articulated in a time of a different statutory contract provision) continued to be valid under section 180. We also continue to await a determination of whether or not some of the curiosities of the statutory contract noted by McHugh and Gummow JJ remain accurate.[81]

5. A Relational Theory of Alterations to Articles

A. Introduction

This part offers a normative theory of the judicial role in relational alterations. It begins by showing that Baileys case embodies the norm rejecting relational change that dominated Gambotto v WCP Ltd. It then looks at changes to contracts under classical and relational perspectives. Change in relations is inevitable, thus details of future exchanges are left incomplete. In a corporation, however, rights to distribution of assets and income are often specified, and legal disputes often concern changes to these terms. How should the law react to changes effected by a majority? Three responses are contrasted: a classical perspective requiring unanimous consent; a perspective typical of modern corporate law which prescribes preconditions of validity (for example, a proper purpose requirement); and the rule in Allen v Gold Reefs of West Africa Ltd,[82] which uses a test of abuse of power. The last test is shown to conform most closely to relational contract norms. The test balances cognitive limitations of courts with the need to harmonise party conflicts within a relations internal matrix.

B. Gambotto and Bailey: Same Norms, Different Method?

Gambotto v WCP Ltd and Baileys case both concerned alterations to articles that prejudiced a members rights. Gambotto v WCP Ltd involved a majority expropriation of minority shareholdings. Baileys case involved a discretion to refuse indemnity to a deceased member. The High Court refused to enforce both alterations. The Gambotto court regarded alterations to expropriate as invalid, except where a proper purpose existed, and the expropriation did not operate oppressively.[83] The High Court rejected the principle formulated in Allens case, namely, that the power of alteration be exercised bona fide for the benefit of the company as a whole.[84] This test inquires whether a majority have committed a fraud on the power of alteration.[85]

In contrast, Baileys case defeated an alteration by implying a special contract. The implications of this approach are ambiguous, because they depend on how a court construes other terms of this contract, and how amended articles affect it. Nonetheless, both cases restrict majoritarian changes to relations. The next section examines changes to contracts from classical and relational perspectives.

C. Relational Change

The typical relation in classical contract theory was static, determinable from ex ante agreement, and uninteresting. In relational contract theory, the relation itself, and not the promise, is the primary projector of exchange into the future. That relation is inherently dynamic. Even where a written contract exists, it usually leaves important issues for future resolution, and it permits agreed issues to be revisited. Relational change takes place in different ways. First, change can occur imperceptibly, as the patterns of relational interaction respond to various internal and external stimuli.[86] This rarely affects the express contract, since much of the ordering of relations stands outside the express terms. Second, some change occur through command.[87] The contract may empower these command structures, just as the articles empower the board in a corporation. Substantial change may occur through the boards fiat.[88] Third, changes may require negotiation and agreement, if they have been embedded in written contracts.[89] A good example, which is studied below, is rights to distribution of assets. We are concerned with changes to such express rights by negotiation and agreement amongst members.

In a world of discrete contracting, distribution is uninteresting it simply describes changes in resource allocation after market transacting. However, distribution among various claimants is a fundamental issue to complex, multiperson relations, such as the corporation. Resolving rights of distribution can occur in various ways. The least interesting example is the publicly listed corporation. Shares generally have standardised rights to distribution by dividends. Standardisation facilitates pricing and trading of shares in efficient capital markets. Financial economists have shown that in perfect markets, dividend policy is irrelevant, as investors can replicate any dividend policy by borrowing and lending.[90]

Dividend irrelevance does not hold in unlisted private companies. First, their shares do not trade in efficient markets. Second, there are barriers to exit, as share transfers often depend on the boards consent. The effect of these inefficiencies is that shareholders will be sensitive to arrangements for sharing risk and return, and related governance considerations.[91] Sensitivity to distribution is also true of trade associations. As argued in section 3(B), membership of these relations is enmeshed with the distribution of benefits such as indemnity or produce prices. Consistently with distributions importance, it often is the subject of express contractual provision and protection, either in the articles (for example, class shares) or a shareholders agreement.

The reordering of distribution rights may be compelled by changes in the relation itself or changed exogenous influences. To give effect to such a change requires negotiation by the parties in order to change the express contractual terms. The change may not be uniformly agreeable to all members. However, the corporate form permits a majority of 75% to use the special resolution procedure to effect a change to the articles.[92] The concept of majority rule is complicated in corporations as the majority usually is of voting shares, not of voting members. Accordingly, a minority of members holding a majority of votes might change the articles. How might the law limit the majoritys pursuit of self-interest, and other prejudicial changes? Three responses are explored in the next section.

D. Classical, Modern and Relational Tests of Alterations

A classical response to relational alterations is that a member is entitled to enforce the terms of the contract that he or she originally agreed to, which, as part of a consensual transaction, are presumptively fair for all parties. Changing the contract without a shareholders consent usurps his or her property rights.[93] Existing property allocations should only be transferred by consensual transactions. Permitting a group to bind an individual violates the individualistic premises of classical contract and neoclassical economics. This is instantiated by the comment by Brennan CJ, Deane and Dawson JJ in Baileys case that the parties did not intend that the Union might unilaterally refuse the indemnity.[94]

A different response might be to subject the alteration to modern judicial review. Jacobs J foreshadowed this approach in Crumpton v Morrine Hall Pty Ltd:[95]

The courts in each generation or in each decade have set up a line up to which shareholders have been allowed to go in affecting the rights of other shareholders by alterations of Articles of Association, and beyond which they have not been allowed to go ... The decision has in the past turned, and must turn ultimately, on a value judgment formed in respect of the conduct of the majority.

The majority must defend an impeached alteration according to some criteria. Gambotto v WCP Ltd adopts such reasoning, and uses the proper purposes and absence of oppression criteria as the basis of review. Conditioning an alteration to the articles on such judicial review has several problems. First, it demands that the judge understand the relations norms, and the conformity of the alteration to those norms. Schwartz has shown that judicial passivity in the enforcement of contracts often results from the difficulties courts face in verifying information relevant to the contract.[96] Courts refrain from implying terms because they lack information needed to assess their desirability. This is the problem of modern judicial review it is difficult to get from the adversarial trial process a working knowledge of relational norms; hence these norms do not feature explicitly in the substantive law. Second, this approach runs the risk of becoming legalistic, with the review criteria being interpreted as having a content independent of the relation. Third, such a test creates an inadequately justified presumption against change.

A third approach resolves issues relating to alterations in a manner that is more consistent with the relation itself. Such an approach rejects the classical approach, because allocations of property and risk in a relation are fundamentally provisional. It rejects the second approach, because of its distorted recognition of relational issues, and its bias against change. The next section argues that a relational perspective endorses the use of the historical (or old judicial review) test in Allens case[97] to judge alterations to articles.

E. Power, Good Faith and Reasonable Expectations in Relations

Issues of power are ignored in classical analysis.[98] Contractual promises bring the future into the present in a way that deprives contractual power of significance. However, unilateral power, such as a majoritys ability to change the articles, characterises many relations. The test in Allens case, as applied in subsequent decisions,[99] recognises the existence of this power.

In British Equitable Assurance Co v Baily, Lord Lindley, unlike Lord Macnaghten, recognised a judicial role in limiting abuses of majority power. That limitation was the test in Allens case the power must be exercised bona fide for the benefit of the company as a whole, and it must not be exceeded.[100] This section addresses the appropriateness of this limitation.

Relational theory posits that conflicts within a relation are primarily resolved within the internal matrix of the relation.[101] Mechanisms such as the general meeting and other governance processes to which the shareholders have access enable members to contribute to the final form of alterations.[102] These formal opportunities may not stop a majority bent on opportunistic self-enrichment. However, majority opportunism is a much larger problem than the formal alteration issue: it evidences a malaise of the relation. Setting a test that presumes dysfunctional relations is not obviously sound reasoning. Anglo-Australian law has come to provide various remedies for those prejudiced by majorities. Oppression provisions, such as Corporations Law section 260, and discretionary winding up powers can be used to restrain abuse of power within relations.[103] Conversely, a minority may attempt to extract from the relation a greater degree of quasi-rents than it has any claim to.[104] It can do this by misuse of the minority legal protections described; by asserting that the directors have breached fiduciary duties, the prosecution of which is suppressed by fraud on the minority; or by arguing (as in Baileys case) that its rights are protected by implied special contracts. Thus, the implications of structural biases favouring majorities do not obviously justify more active judicial review of alterations to articles.

Allens case uses the language of bona fide good faith. Much has been written about the implications of good faith in contract law.[105] Although it has been criticised as lacking substantive content, it is best understood as an excluder of various forms of bad faith.[106] Good faiths heterogeneity is inherently relational, because it is flexible enough to examine behaviour contextually. Relational litigation involves grievances about the operation of the overall relation.[107] A test that resonates with this norm does not seek to locate a balance of convenience, given the problems noted above of identifying and applying relational norms. Therefore, the legal rule must be consistent with two key norms of relational contract law harmonising conflict within the relations internal matrix, and preserving the relation.[108] The legal rule will facilitate the exercise of majority power to resolve conflict, but will restrain discernible abuses of power by majorities.[109]

To expand on that last point, a norm of contractual behaviour is mutuality.[110] Parties must see exchange as a positive sum game. Mutuality does not require equality in dividing that positive sum, but some kind of evenness,[111] lest the relation dissolve. The test in Allens case achieves mutuality by preventing the majority from expropriating all of the exchange surplus, without seeking a finer balance. In so doing, it balances mutuality with limitations on judicial adjudication. The power to alter articles is respected as a means of resolving distributional problems within the internal matrix of the relation. The test eschews an ability to determine the balance of convenience within the relation, because of the limits on the adversarial process, and because of the inflexibility of court orders in the context of dynamic relations. However, the test reacts to the abuse of power.[112] The cases indicate that a broad contextual inquiry about the power, the relation and the effect of the change are material to determining the existence of abuse of power.[113] A maintained hypothesis is that abuse of power is easier to identify than the balance of convenience.

Hill argues that when courts interpret section 260, they should protect the reasonable expectations of minority shareholders.[114] The concepts of good faith and reasonable expectations obviously overlap;[115] but the latter has problems that the former does not share. Identifying reasonable expectations, like relational norms, is difficult. An objective determination of reasonable expectations either collapses into good faith (ie, shareholders can expect that power will not be abused), or identifies some package of minimum rights. The latter course is dangerous because rights do not exist independently of the relation. A rights focus ignores the fact that much contract breaking is expected and tolerated in relations.[116] A subjective determination is equally difficult, because it is unclear when the determination should occur. A contractarian focus would identify expectations ex ante.[117] However, expectations change in relations. However, trying to gauge these changes after the relation becomes litigious is impossible. This is Schwartzs point: such expectations do not figure in the law because courts cannot easily verify the form they are alleged to take.[118] Many of the principles that Hill found difficult to reconcile with reasonable expectations are better explained by a good faith concept. Bona fides is the express touchstone of some judgments.[119] The equation of section 260 with a no reasonable Board standard in the High Court judgment in Wayde v New South Wales Rugby League[120] reflects the limitations of court ordering of relations, but also acknowledges a refusal to countenance the abuse of power. (One wonders why the High Court changed its view of corporate relations so much in ten years.)

The test in Allens case therefore resolves conflicts within the internal matrix of the relation, rather than by judicial fiat. Unlike a classical perspective, it does not ignore the existence and effect of power. In applying this test to Baileys case, the question is whether the change to the articles was bona fide in the interests of the corporation as a whole. This article has shown why in a relation such as the Union, where indemnity is a means of distribution, the members might seek to eliminate the rights of past members. This resolves a conflict between present and past members. While this would disadvantage members who left the organisation, the test in Allens case does not strike down an alteration simply on the ground that it prejudices a member;[121] neither does it balance detriment against advantage. The fact of the resolution by a majority of members indicated that the members reached the conclusion that the alteration was in their best interests. As a company limited by guarantee, voting would be on a per capita basis, not per share, so eliminating the possibility of majority opportunism. As the change did not jeopardise any contract apart from the articles, other than the constructive one implied by the court, no ground existed to strike the change down.

Gambotto v WCP Ltd is closer to the line as expropriation destroys an individuals participation in a relation.[122] Other authors have analysed this issue in detail.[123] I have little to add. However, the persistence of a seriously asymmetric shareholding profile in a corporation that had ceased to be exchange traded is inherently unstable in the intermediate and longer term. The law needs to be careful not to sustain unstable balances. If so, the existence of abuse of power seems to depend on the terms of the expropriation, by which the problematic balance is resolved.

6. Conclusions

Classical contract law projects a passive image of courts. Ex post judicial review of the parties contracts diminishes the ability of the parties to project exchange into the future. The review of precedent showed that courts have long been willing to review how the parties contracted, and how they exercised contractual power, frequently with sensitivity to relational concerns. However, the early 1900s was hardly the time for courts to assert a messy relational jurisdiction of contractual review. One attempt to rationalise this jurisdiction in classical terms was to proffer abstracted concepts, like the qua member test and the implied special contract. Even though the concepts made very little sense, they offered a functional means to invalidate offensive terms (or actions), and protect other rights. These fictitious concepts were difficult to explain logically, and their formalistic properties divorced them from the policy reasons underlying the cases from which these concepts were abstracted. In time, the provision creating the statutory contract was amended in a way which seemingly attempted to correct this aberration. Yet, Baileys case shows that formalistic fictions remain alive and well, and that, as in the past, these fictions conceal a species of judicial review based on unclear and disjointed norms.

Despite the difference in facts, and the greater difference in reasoning, Baileys case and Gambotto v WCP Ltd both demonstrate that the law can and will exert a powerful influence to maintain the status quo, by refusing to enforce majoritarian alterations. What is unclear, however, is whether courts exercise this jurisdiction because the justice of the case warrants it, or because courts should restrict relational changes that are not unanimously adopted. The former approach intensifies the conceptual incoherence of the law. The latter, in contrast, shifts corporate norms away from the flexibility of majority rule, towards either stasis or increased litigation. Both approaches have considerable policy implications. Is there a role for legislation?[124] The better answer is no: relations are too heterogeneous to preclude the legislative enactment of any single solution that is a priori preferable. The analysis suggests that the answer lies with the courts.[125] First, courts must be more candid, and less formalistic, in articulating their reasons. Second, courts must recognise limits on their ability to fashion orders that solve the problems of relations of which they are not part. Third, courts must do what they can, in the case of small numbers of disputants, to force the parties to resolve problems through private ordering, while striking down majority attempts to undermine mutuality. Only in these ways can courts preserve relations, and encourage the harmonisation of conflicts within the relations internal matrix. Only then can legal scholars and judges emerge from the vortex of whirling abstractions that has dominated the law of the corporate contract for over a century

[*] BCom (Hons), LLB (Hons), MFM (Qld) Faculty of Law, Griffith University.
[1] Macneil, I R, The Many Futures of Contracts (1974) 47 Southern California LR 691 at 729, n113 (hereinafter Macneil, Many Futures).
[2] [1995] HCA 12; (1995) 182 CLR 432.
[3] Bailey (as executrix of the estate of the late Dr Harry R Bailey) v New South Wales Medical Defence Union Ltd; New South Wales Medical Defence Union Ltd v Crawford (1995) 18 ACSR 521.
[4] A bibliography of analyses of the High Court judgments includes: Whincop, M J, Gambotto v WCP Ltd: An Economic Analysis of Alterations to Articles and Expropriation Articles (1995) 23 ABLR 276; Ramsay, I M (ed), Gambotto v WCP Ltd: Its Implications for Corporate Regulation (1996); Kevans, S, Oppression of Majority Shareholders by a Minority? Gambotto v WCP Ltd [1996] SydLawRw 6; (1996) 18 Syd LR 110.
[5] Macneil, I R, Contracts: Adjustments of Long-Term Economic Relations Under Classical, Neoclassical and Relational Contract Law (1978) 72 Northwestern U LR 854 at 862-4.
[6] The concept of projecting exchange into the future implies that parties make conscious choices that involve or affect a future exchange. Thus, bilateral promise involves a present reciprocal commitment by parties to undertake some future action: Macneil, above n1 at 712-20.
[7] Macneil, above n5 at 862.
[8] Macneil, I R, Restatement (Second) of Contracts and Presentiation (1974) 60 Virginia LR 589 at 589. Emphasis in original.
[9] Eisenberg, M A, Relational Contracts in Beatson, J and Friedmann, D, Good Faith and Fault in Contract Law (1995), 291 at 296.
[10] Sealy, L, The Enforcement of Partnership Agreements, Articles of Association and Shareholder Agreements in Finn, P D (ed), Equity and Commercial Relationships (1987), 89 at 90.
[11] Macneil, above n5 at 888-9.
[12] Id at 883-4.
[13] Id at 862 n24, and at 895.
[14] Maitland, F W, Equity: A Course of Lectures (Brunyate rev edn, 2nd edn, 1936) at 28-9.
[15] Langbein, J H, The Contractarian Basis of the Law of Trusts (1995) 105 Yale LJ 625.
[16] Id at 653-4.
[17] Coase, R H The Nature of the Firm (1937) 4 Economica 386; Macneil, above n1 at 759-67.
[18] Sealy, above n10 at 95.
[19] Joint Stock Companies Act 1856 ss7, 10. This approach survives in Corporations Law, s180.
[20] Contract eventually became the centre of a major corporate theory economic contractarianism. See generally Easterbrook, F H and Fischel, D R, The Economic Structure of Corporate Law (1991). Most contractarian research relies on the classical idea that contract permits a sharply differentiated ex ante allocation of risk between shareholders and other constituencies, which allocation is priced in exchanges between these parties: Macneil, I R, Economic Analysis of Contractual Relations: Its Shortfalls and the Need for a Rich Classificatory Apparatus (1981) 75 Northwestern U LR 1018. By contrast, this article adopts a relational view of contract, where ongoing issues of relational change and power dominate the importance of initial allocations.
[21] Macneil, above n1 at 760.
[22] Macneil, above n5 at 893.
[23] Id at 894.
[24] (1995) 18 ACSR 521 at 542.
[25] Id at 527.
[26] Id at 530. The problem, however, is that this intention of the parties changed when insurance contracts were renewed after the alteration. The majoritys analysis is consistent with these contracts enabling the Union unilaterally to refuse indemnity. This inconsistency makes one doubt that the contract at the date of the treatment should be determinative.
[27] Id at 539.
[28] Id at 546-7.
[29] [1843] EngR 478; (1843) 2 Hare 461.
[30] Above n3 at 547.
[31] Id at 547-8. These cases are discussed in more detail in text accompanying nn55-71 below.
[32] Id at 539.
[33] Id at 542. Cf Brennan CJ, Deane and Dawson JJ at 529-30.
[34] Macneil, I R, The New Social Contract: An Inquiry into Modern Contractual Relations (1980) at 8 and 40-1. See also Eisenberg, above n9 at 296.
[35] Macneil states that the use of promise to project exchange is always accompanied by nonpromissory means: id at 8.
[36] Macneil, above n1 at 750-3.
[37] Macneil, id at 800-4.
[38] (1995) 18 ACSR 521 at 530.
[39] This reasoning is consistent with the permissive approach to the amendment of an investment unit trust deed found in Gra-Ham Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65
[40] Macneil, above n5 at 891.
[41] Macneil, id at 891-2. Cf Perpetual Trustees of WA Ltd v Corporate West Management Ltd (1988) 13 ACLR 568 at 585.
[42] (1883) 12 QBD 176.
[43] Id at 192.
[44] These were examined in text accompanying nn29-31 above.
[45] It is difficult to see how Foss v Harbottle applies to enforcement by a member of a right conferred by the articles on a member.
[46] See text accompanying nn86-89 below.
[47] (1995) 18 ACSR 521 at 549.
[48] Accord, Kirby Ps judgment in Baileys case in the Court of Appeal, rejecting the existence of a special contract: (1993) 11 ACLC 1114 at 1117-8.
[49] This conclusion is doubly strange, given authority suggesting that agreements outside the articles that restrict the power to alter the articles are ultra vires: Russell v Northern Bank Corporation Ltd [1992] 3 All ER 161; Shapira, G, Voting Agreements and Corporate Statutory Powers (1993) 109 LQR 210.
[50] (1995) 18 ACSR 521 at 529.
[51] Id at 542.
[52] See, eg, Baily v British Equitable Assurance Co [1904] 1 Ch 374 (CA).
[53] Ultimately, no text can provide entirely for its own interpretation: see generally Davidson, D, Belief and the Basis of Meaning (1974) 27 Synthese 309.
[54] See generally Finn, P D, Shareholder Agreements (1978) 6 ABLR 97; Goldwasser, V R, Shareholder Agreements Potent Protection for Minorities in Closely Held Corporations (1994) 22 ABLR 265.
[55] Sealy, above n10 at 98.
[56] The Lion Mutual Marine Insurance Association Ltd v Tucker (1883) 12 QBD 176 (see text accompanying nn42-43 above); Peninsular Co Ltd v Fleming (1872) 27 LT 93; Re The Maria Anna and Steinbank Coal and Coke Company (Ltd); McKewans case (1877) 37 LT 201.
[57] McKewans case id at 203. Emphasis added. James and Baggallay LJJ agreed.
[58] [1915] 1 Ch 881.
[59] Id at 897-8.
[60] Cf Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 6 ACLC 320 and Andy Kala Pty Ltd v EJ Doherty (Northcote) Pty Ltd (1995) 13 ACLC 1630. In the latter case, Vincent J affirmed the qua member test in connection with an article prescribing a mechanism for resolution of member disputes. Note that both cases involved disputes between members, not between the company and a member.
[61] Heron v Port Huon Fruitgrowers Co-operative Association Ltd [1922] HCA 20; (1922) 30 CLR 315; Pakenham Upper Fruit Company Ltd v Crosby [1924] HCA 55; (1924) 35 CLR 386.
[62] Heron id at 323; Crosby id at 400.
[63] Heron id at 339-42; Crosby id at 393.
[64] [1924] NZLR 561.
[65] Cf The Lion at nn56-57, above. It is notable that these cases have been explained as involving special contracts: Biddulph and District Agricultural Society v Agricultural Wholesale Society [1925] 1 Ch 769 at 792-3. However, the rhetoric of special contracts never appears in these judgments.
[66] [1971] NZLR 552.
[67] [1930] NZGazLawRp 183; [1931] NZLR 216.
[68] Id at 246-7.
[69] Id at 247.
[70] Id at 246-7.
[71] Accord, Kirby P in Baileys case in the Court of Appeal: (1993) 11 ACLC 1114 at 1118.
[72] [1900] 1 Ch 656 at 673.
[73] Ibid.
[74] [1906] AC 35 sub nom Baily v British Equitable Assurance Co [1904] 1 Ch 374.
[75] [1906] AC 35 at 38.
[76] Ibid.
[77] Id at 42.
[78] See, eg, Biddulph above at n65; Hickman above at n58.
[79] See s78 Companies Act 1981 (Cth), prior to its amendment by Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth).
[80] However, references are sometimes made to extrinsic material indicating to the contrary: See Australian Corporation Law: Principles & Practice (1996), Butterworths looseleaf service, 2.4.0150.
[81] See nn28-31 above.
[82] [1900] 1 Ch 656 at 671.
[83] Above n2 at 445-7.
[84] Above n82: see also, British Equitable Assurance Co v Baily [1905] AC 35.
[85] Whincop, above n4 at 279-84.
[86] Macneil, above n5 at 895.
[87] Ibid.
[88] Neoclassical economic theory sought to demonstrate that fiat was irrelevant to corporate contracts, and the contracting advantages of the corporation: Alchian, A A, and Demsetz, H, Production, Information Costs and Economic Organization (1972) 62 Amer Econ R 777. This approach strips contracts of their relational quality. It has been trenchantly criticised: Williamson, O E, The Mechanisms of Governance (1996) at 98-100; Macneil, above n5 at 865.
[89] Macneil, above n5 at 895-6.
[90] Miller, M and Modigliani, F, Dividend Policy, Growth, and the Valuation of Shares (1961) 34 J Bus 411.
[91] OKelley, C R, Filling Gaps in the Close Corporation Contract: A Transaction Cost Analysis (1992) 87 Northwestern U LR 216. It is unsurprising to find that a number of cases on members rights provisions (eg, Corporations Law, s260) involve allegations of distributional unfairness: eg, Re City Meat Co Pty Ltd (1983) 2 ACLC 149; Re G Jeffery (Mens Store) Pty Ltd (1984) 2 ACLC 421; Morgan v 45 Flers Avenue Pty Ltd (1987) 5 ACLC 222; Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394.
[92] Corporations Law, ss176, 253.
[93] Macneil, above n5 at 859-61. It might be said that the shareholders contracted on terms that the articles were subject to alteration by special resolution; thus, they have agreed to be bound by such changes: WCP Ltd v Gambotto (1993) 11 ACLC 457 at 459. Such an approach is highly suspect from a classical paradigm. It amounts to an agreement to agree.
[94] Above n3 at 530. See n26 above.
[95] [1965] NSWR 240 at 244. See generally Sealy, L, Bona Fides and Proper Purposes in Corporate Decisions [1989] MonashULawRw 16; (1989) 15 Monash U LR 265 at 266. Contra, Fischer v Easthaven Ltd [1964] NSWR 261. Analysing alterations to shareholders rights by reference to the old judicial review method of analysing the existence of fraud on the minority.
[96] Schwartz, A, Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies (1992) 21 J Leg Stud 271.
[97] Above, n74.
[98] Macneil, above n20 at 1049-62.
[99] See, eg, Sidebottom v Kershaw Leese & Company [1920] 2 Ch 124 at 136; Shuttleworth v Cox Brothers & Company (Maidenhead) [1927] 2 KB 9 at 22, 26.
[100] Above n74 at 42; see n77 above.
[101] Drury, R R, The Relative Nature of a Shareholders Right to Enforce the Company Contract [1986] 5(2) Camb LJ 219.
[102] See generally Sunstein, C, The Partial Constitution (1993) at 134.
[103] See generally Hill, J, Protecting Minority Shareholders and Reasonable Expectations (1992) 10(2) Companies and Securities LJ 86.
[104] Johnston, JS, Opting In and Opting Out: Bargaining for Fiduciary Duties in Cooperative Ventures (1992) 70 Washington ULQ 291; OKelley, above n91; Kevans, above n4.
[105] See, eg, Farnsworth, E A, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations (1987) 87 Columbia LR 217; Finn, P D The Fiduciary Principle in Youdan, T (ed), Equity, Fiduciaries and Trusts (1989) at 1; Brownsword, R, Two Concepts of Good Faith (1994) 7 JCL 197; Waddams, S M, Good Faith, Unconscionability and Reasonable Expectations (1995) 9 JCL 55.
[106] Summers, R, Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code (1968) 54 Virginia LR 195 at 201. Cf Brownsword, above n105. In the USA, good faith is the substantive test of contractual modifications: Uniform Commercial Code, 2- 209.
[107] Macneil, above n5 at 892.
[108] Id at 895.
[109] OKelley characterises American law in a similar way: [C]orporate law does not give majority shareholders absolute discretion. Nonetheless, corporate law is tilted in favour of the majority. (Above n91 at 240). This permits the corporation to be more adaptable than other organisational forms.
[110] Macneil, Social Contract, above n34 at 44-7.
[111] Id at 44.
[112] Macneil argues that restraint of power is a norm common to any contract law system: id at 56-7.
[113] Peters American Delicacy Company Ltd v Heath [1939] HCA 2; (1939) 61 CLR 457 at 513.
[114] Above n103.
[115] Contra, Waddams, above n105 at 59.
[116] Macneil, above n34 at 9. Macneil adds desired to this list.
[117] See n20 above.
[118] See text accompanying n96 above.
[119] Re G Jeffery (Mens Store) Pty Ltd; Re G Jeffery Pty Ltd (1984) 2 ACLC 421 at 426. The reference in Thomas v HW Thomas Ltd (1984) 2 ACLC 610 at 618 to visible departure[s] from the standards of fair dealing elevates the importance of observable abuses of power over the protection of reasonable expectations, consistently with Schwartzs theory.
[120] [1985] HCA 68; (1985) 61 ALR 225.
[121] Accord, Gra-Ham Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65 at 81 per Malcolm CJ. (The fact that the alteration diminished, prejudiced or altered the rights of unitholders was not sufficient to prevent the alteration from being validly made.)
[122] Macneil, above n5 at 899-900.
[123] See references in n4 above.
[124] A proposal has been outlined to deal with issues raised by Gambotto v WCP Ltd: Legal Committee of the Companies and Securities Advisory Committee, Compulsory Acquisitions Report (1996) Companies and Securities Advisory Committee, Sydney. However, consistently with the theme of this article, Baileys case shows these issues extend to relational change generally, and are larger than issues of compulsory acquisition.
[125] Ayres, I, Making a Difference: The Contractual Contributions of Easterbrook and Fischel (1992) 59 Chicago U LR 1391.

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