Shareholders’ Agreements : Shareholders’ Contractual Freedom in Company Law

This article examines shareholders' contractual freedom in company law by providing a considered analysis of the validity of shareholders' agreements in private companies. It explores a line of Hong Kong cases where the principles recognised by the House of Lords in Russell v Northern Bank Development Corp [1992] 1 W.L.R. 588 have been applied and considered, and contrasts with the position in England with the aim of revealing a general difference of approach which may be instructive. Russell is a classic case of private agreements trump legal rules. The Russell jurisprudence has obvious appeal in so far as it gives proper recognition to the principle of freedom of contract. But the English courts have been far from unanimous in accepting the principles recognised in Russell. Recent authorities, however, show a discernible trend of increasing liberality to shareholder private contracting. By contrast, the Hong Kong judiciary displays a measure of hostility towards shareholder contracting around corporate norms. It is argued that the Hong Kong courts had thwarted the intention behind Russell by applying it restrictively: the invalidation of shareholders' agreements was based entirely on public policy of an uncertain scope with a total disregard of the fundamental principle of freedom of contract. As such, it is suggested that the public policy justification underpinning the Hong Kong authorities as developed under the Russell jurisprudence needs to be vigorously re-examined by the courts, and that a narrow interpretation of Russell should be rejected. It is argued that in small private companies, which are in essence quasi-partnerships, shareholders should be afforded greater freedom to enter into agreements that would be permissible in the partnership context. The law should more clearly recognise that shareholders' agreements are enforceable so long as they do not affect third parties or the general public. In the absence of any decisive policy objections to shareholder contracting of this nature, this is eminently a context in which the principle of freedom of contract shall prevail