Howard Smith

Topics: Stock, Shareholder, Corporations law Pages: 29 (9812 words) Published: April 19, 2014
ICLR: Appeal Cases/1974/HOWARD SMITH LTD. APPELLANT AND AMPOL PETROLEUM LTD. AND OTHERS RESPONDENTS [ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES] - [1974] A.C. 821

[1974] A.C. 821

[PRIVY COUNCIL]

HOWARD SMITH LTD. APPELLANT AND AMPOL PETROLEUM LTD. AND OTH-ERS RESPONDENTS [ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES]

1973 Nov. 26, 27, 28, 29; Dec. 3;

Lord Wilberforce, Lord Diplock,

1974 Feb. 14

Lord Simon of Glaisdale, Lord Cross of Chelsea and Lord Kilbrandon

Company - Director - Fiduciary duty - Allotment of shares - Australian company in need of capital - Primary object of directors to alter majority share holding of issued shares - No personal advantage to directors - Whether power to allot shares validly exercised by directors

Two companies, A and B, held 55 per cent. of the issued shares of company M, which required more capital. A made an offer for all the issued shares of M, and another company, H, announced an intention to make a higher offer for those shares. M's directors considered A's offer too low and decided to recommend that the offer be rejected. A and B then stated that they intended to act jointly in the future operations of M and would reject any offer for their shares. H then applied to M for an allotment of 4½ million ordinary shares; M's directors decided by a majority to make the allotment and immediately issued the shares. The effect of that issue was that M had much needed capital; A and B's share holding was reduced to 36.6 per cent. of the issued shares and H was in a position to make an effective takeover offer. A challenged the validity of the issue of the shares to H and sought an order in the Supreme Court for the rectification of the share register by the removal of H as a member of M in respect of the allotted shares. M's directors contended that the primary reason for the issue of the shares to H was to obtain more capital.

Street J. found that M's directors had not been motivated by any purpose of personal gain or advantage or by a desire to [1974] A.C. 821 Page 822

retain their position on the board, that M needed capital, but that the primary purpose of the allotment was to reduce the proportionate share holding of A and B so that H could proceed with its takeover offer. The judge held that in those circumstances the directors had improperly exercised their powers and he ordered that the allotment of shares be set aside and the share register rectified.

On appeal by H to the Judicial Committee:-

Held, dismissing the appeal, that, although the directors had acted honestly and had power to make the al-lotment, to alter a majority share holding was to interfere with that element of the company's constitution which was separate from and set against the directors' powers and, accordingly, it was unconstitutional for the directors to use their fiduciary powers over the shares in the company for the purpose of destroying an existing majority or creating a new majority; and that, since the directors' primary object for the allotment of shares was to alter the majority share holding, the directors had improperly exercised their powers and the allotment was invalid (post, pp. 837F - 838C).

Mills v. Mills (1938) 60 C.L.R. 150 considered.

Per curiam. A matter such as the raising of finance is one of management, within the responsibility of the directors. It would be wrong for a court to question the correctness of the management's decision if bona fide arrived at. But, when a dispute arises whether the directors of a company made a particular decision for one purpose or for another, or whether there being more than one purpose, one or another purpose was the substantial or primary purpose, the court is entitled to look at the situation objectively in order to estimate how critical or pressing or substantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent or...
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