Professional Documents
Culture Documents
Promoters
A promoter negotiated the sale of a business from the seller to the company which
he was intending
to form. The seller agreed to pay a share of the profit he received from the sale to
the promoter.
It was held that the promoter was accountable to the company for that profit.
In an attempt to define the term "promoter", Bowen J said:
"The term promoter is a term not of law, but of business, usefully summing up in a
single word a
number of business operations familiar to the commercial world by which a
company is generally
brought into existence.
A syndicate headed by Erlanger acquired the lease of an island in the Caribbean for
£55,000. The
leaseholder was a nominee of the syndicate. The syndicate later incorporated the
New Sombrero
Phosphate Co. At a meeting of the directors (some of whom were members of the
syndicate) it was
agreed that the company would buy the lease from the nominee. The company
issued a prospectus
which did not mention that anyone other than the nominee had any interest in the
lease. Held: As
there had been no disclosure by the promoters of the profit they were making, the
company could
rescind the contract and recover the price from Erlanger and the other members of
the syndicate.
F Co contracted to purchase two music halls for £24,000 and had the property
conveyed to a nominee, R,
intending to sell it to the Leeds and Hanley when the company was formed. F Co
then promoted the
formation of Leeds and Hanley and agreed to sell it the music halls for £75,000. The
board of directors of
Leeds and Hanley was not an independent board. A prospectus for issuing shares to
the public gave R as
the seller of the property and did not disclose the interest of F Co or the profit it was
making. For breach
of fiduciary duty to those invited to take shares the promoters were liable in
damages to the company; the
measure of damages being the promoters' profit.
Pre-incorporation Contracts
6. Newborne v Sensolid (GB) Ltd [1954] 1 QB 45
Tinned ham was sold to Sensolid under a contract headed "Leopold Newborne
(London) Ltd" and ending
"Yours faithfully, Leopold Newborne (London) Ltd" and signed by Leopold
Newborne. Sensolid refused
to take delivery of the ham. Held: Neither the then unincorporated company nor Mr
Newborne personally
could sue on the contract.
Lord Goddard said:
"This contract purports to be a contract by the company; it does not purport to be a
contract by Mr
Newborne. He does not purport to be selling his goods but to be selling the
company's goods. The only
person to have any contract here was the company, and Mr Newborne's signature
merely confirmed the
company's signature...In my opinion, unfortunate though it may be, as the company
was not in existence
when the contract was signed there never was a contract, and Mr Newborne cannot
come forward and
say: "Well, it was my contract."
A rock group intended to perform under the name "Cheap Mean and Nasty" and to
form a company for the
purpose to be called "Fragile Management Ltd". Mr Lane accepted a cheque from
Phonogram for £6,000,
signing his name "for and on behalf of Fragile Management Ltd". The money was
to be used to finance
production of an album and was repayable if this was not achieved. When the
album was not produced,
Phonogram sought to recover the money from Lane, the company having not been
in existence at the time
the contract was made. Lane argued that his signature "for and on behalf of" the
company amounted to an
agreement that he was not to be personally liable on it - an "agreement to the
contrary" in terms of s.36C.
(Then s.9(2) of the European Communities Act 1972). Held: This was not sufficient
to exclude the operation
of the section, which would be given full effect unless there was a clear and express
exclusion of personal liability.
Lane was thus liable to repay the money.
Refusal to Register
9. R v Registrar of Joint Stock Companies, ex p More [1931] 2 KB 197
The Registrar refused to register a company because its main object was to sell in
great Britain tickets
to a Republic of Ireland lottery known as the Irish Sweep. The company's
promoters applied for judicial
review of the refusal to register. The court found that selling the tickets would have
been an offence under
legislation then in force, and the Registrar was right to refuse to register a company
which was not formed
"for a lawful purpose".
The company was charged with a driving offence. It was held that a company could
not be guilty of an offence which required for its commission the physical act of
driving a lorry.
15. Tesco Supermarkets v Nattrass [1972] AC 153 (HL)
An assistant at a branch of Tesco had stocked shelves with washing powder showing
the normal price when posters in the store were advertising a lower price. The store
manager failed to notice the error and the company was charged with misstating the
price under the Trade Descriptions Act 1968. s.24(1) of the TDA 1968 allowed a
defence where the offence had been committed owing to the fault or default of
another person and the accused had exercised all due diligence to avoid committing
an offence. The prosecution argued that the defence did not apply as the manager
had not done all he could to avoid the offence. Held: The store manager was not the
directing mind and will of the company - the company had done all it could to avoid
committing an offence and the offence was the fault of another person (an
employee). The company was acquitted.
16. R v P & O Ferries (Dover) Ltd (1990) 93 Cr App R 72
P & O, along with five of its managers was indicted for manslaughter after the
cross-Channel ferry "Herald of Free Enterprise" capsized in 1987 with the loss of
192 lives. The judge held that the indictment was valid, saying:
"..where a corporation, through the controlling mind of one of its agents, does an act
which fulfils the prerequisites of the crime of manslaughter, it is properly indictable
for the crime of manslaughter."
(In October 1990 the judge directed the jury to find all of the defendants not guilty,
as there was insufficient evidence that any of the managers had the necessary mens
rea - mens rea could not therefore be attributed to the company.)
The NUJ was involved in a trade dispute with T Bailey Forman Ltd. NUJ members
had also been picketing a company called TBF (Printers) Ltd and the question arose
as to whether this amounted to unlawful secondary picketing. The NUJ argued that
it did not, as both companies were wholly owned subsidiaries of the same holding
company, and were therefore both employers who were party to the dispute, within
the meaning of s.17(3) of the Employment Act 1980.Held: Both companies were
separate entities and the picketing was therefore unlawful. Lord Diplock said: "The
corporate veil in the case of companes incorporated under the Companies Acts is
drawn by statute and it can be pierced by some other statute if such other statute so
provides; but, in view of its raison d'etre and its consistent recognition by the courts
since Salomon v A Salomon & Co Ltd, one would expect that any Parliamentary
intention to pierce the corporate veil would be expressed in clear and unequivocal
language."
21. Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd 1968 2 All ER 987
Durham Fancy Goods drew a bill of exchange on the defendants which was accepted
on behalf of the company by M Jackson, who was a director and a company
secretary. The bill and the form of acceptance, both of which were drawn up by the
plaintiffs, referred to "M Jackson (Fancy Goods) Ltd", whereas the proper name of
the company was "Michael Jackson (Fancy Goods) Ltd". The bill was dishonoured
and the plaintiffs brought an action against M Jackson personally, arguing that by
signing a document which did not correctly state the company's name, he had made
himself personally liable on the bill.
Held: There was sufficient misdescription to impose personal liability under what is
now s.349 CA 1985. (Mr Jackson in fact escaped liability because it was the
plaintiffs who had prepared the bill with the incorrectly stated name - they were
therefore personally barred from going back on their implied representation that it
was acceptable to them.)
Lord Hanworth said: "I am quite satisfied that this company was formed as a
device, a strategem, in order to mask the effective carrying on of a business by Mr E
B Horne.
(2) The single economic unit argument - that Cape and its subsidiaries
were really one economic unit, and
All of the arguments failed. The court stated that: "Save in cases
which turn on the wording of particular statutes or contracts, the
court is not free to disregard the principle of Salomon v A Salomon &
Co merely because it considers that justice so requires.
28. DHN Food Distributors v Tower Hamlets London Borough Council [1976] 1WLR 852.
DHN was a holding company which ran its business through two wholly owned
subsidiaries: Bronze Investments Ltd and DHN Food Transport Ltd. Bronze owned
the premises from which the business was conducted and Transport ran the
business. The Council compulsarily purchased the land. Compensation could be
paid under two heads: (a) the value of the land, and (b) disturbance of business. The
Council was prepared to pay for the value of the land but refused to pay for
disturbance of business because neither DHN or DHN Food Transport had any
rights of ownership in the land. Lord Denning pierced the veil of incorporation to
treat DHN as the owners of the land, which entitled them to payment of
compensation. He felt that the group of companies was a single economic entity.
29. Woolfson v Strathclyde Regional Council 1978 SC (HL) 90
W ran a shop in Glasgow, which in 1966 was compulsarily purchased by the
Council. Part of the shop premises was owened by W himself, the rest being owned
by a company called Solfred Holdings Ltd, whose shares were owned by W and his
wife. W and Solfred received compensation for the value of the land, but the
Council refused to pay compensation for disturbance of the business, because the
business was operated by M & L Campbell Ltd, another company owned by W and
his wife. Campbell Ltd occupied the premises, but had no interest in the land. W
tried to persuade the court that he and his two companies were, in reality, a single
entity which both owned and occupied the land. The court did not accept this. It was
held that W's case was distinguishable from the DHN case. Whereas, in that case,
DHN had owned and totally controlled both its subsidiaries, W himself held only
two-thirds of the shares in Solfred, and Solfred owned no shares in Campbell Ltd.
The three were distinct entities.
30. Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd [1916] AC 307
After war broke out with Germany, the tyre company, which was registered in
England and had its registered office there, sued Daimler for the cost of goods
supplied before war broke out. Daimler claimed that, as the members and officers of
the company were German, paying the debt would amount to trading with the
enemy, therefore the matter should not be permitted to go to trial. Held: The action
should not go to trial. Though the domicile and nationality of a company is normally
determined by its place of registration and the situation of its registered office, the
court was prepared to lift the corporate veil to determine who was in control of the
company. If the company was controlled by enemy aliens, the company could also
be regarded as an enemy alien.
31. Re a Company [1985] BCLC 333 (CA)
The case involved a complicated network of companies and trusts. The court
allowed the veil to be lifted to establish exactly what the defendant owned and where
it was located. The network of companies had been set up in an attempt to confuse
and conceal. It was said that: "The court will use its powers to pierce the corporate
veil if it is necessary to achieve justice."
32. Creasey v Breachwood Motors Ltd [1993] BCLC 480
C was dismissed from his employment with a company called Welwyn Motors Ltd.
W Ltd carried on business from premises owned by Breachwood Motors Ltd. The
two people who were the sole directors and shareholders of B Ltd were also the only
directors and shareholders of W Ltd. C sued his employers for wrongful dismissal
and was awarded over £60,000. Unknown to C, the directors of W Ltd had already
transferred all its assets to B Ltd, and W Ltd had been struck off the register of
companies. B Ltd paid all of W Ltd's trade creditors, so as to maintain
creditworthiness, but it did not pay C's claim. B Ltd then carried on W Ltd's former
business from the same premises as before. B Ltd claimed it was not liable to pay
the compensation to C because W Ltd and B Ltd were separate legal entities. The
court lifted the corporate veil and determined that W Ltd was part of B Ltd, thus B
Ltd was prima facie responsible for payment of the compensation. The court felt
that lifting the veil was necessary in the interests of justice.
33. Ord v Belhaven Pubs Ltd [1998] BCLC 447
The claimants bought the lease of a pub from the defendant company, and brought
an action for damages for misrepresentation and breach of warranty. The defendant
company was part of a group, which was restructured in a way that transferred the
hotels that the defendant company
had owned into the name of the parent company, leaving the defendant without
assets, apart from the pub leased to the claimants. The claimants sought leave to
substitute the parent company and another subsidiary as the defendants in the case.
This was allowed at first
instance, but reversed on appeal. The Court of Appeal held that in the absence of
evidence that the transfer was a sham or a fraud, the veil of incorporation should be
upheld and the decision in Creasey v Breachwood Motors Ltd was disapproved.
34. Yukong Line Ltd v Rendsburg Investments Corp [1998] 2 BCLC 485
The claimant (Y) was a ship-owning company, which agreed to charter a ship to
Rendsburg (R) The charterparty to hire the ship was signed for R by Yamvrias as
director of the brokers of R. Before the ship was delivered, Yamvrias gave notice to
Y that R would be unable to carry out
the contract to hire the ship. On the same day Yamvrias transferred large sums of
money out of R’s bank account to that of an associated company, in order to make
the money unavailable in the event of litigation by Y against R. Litigation was
commenced, and later amended to
include Yamvrias and the associated company as defendants, as R was insolvent.
The court refused to lift the veil of incorporation: Yamvrias was held to be a shadow
director of R, but although he was in breach of fiduciary duty to R, that would be
actionable by R but not by Y.
However, if R were to be put into liquidation, the liquidator would be able to bring
proceedings seeking compensation from Yamvrias for breach of fiduciary duty. As
the company was not put into liquidation in this case, there was no remedy to Y.
Passing Off
Ewing ran a dairy products business called the Buttercup Dairy Company, which
sold margarine in 150 shops. The shops were only in Scotland and the North of
England, but Ewing had plans to expand his business to the South of England. The
defendant company was registered in 1916 to carry on the business of supplying
margarine wholesale. Ewing brought an action for an injunction to prevent the
company trading under its registered name. The defendants suggested that, as
Ewing was a retailer and they were wholesalers, there would e no confusion. In
addition, as the company would only operate around London, there would be no
confusion between it and a trader who only operated in the North. Held: The
injunction would be granted. Although the defendants were wholesalers, the objects
clause of the memorandum did give power to retail which the company might
exercise in future. In addition, the plaintiff intended to expand his business into the
South of England. Confusion was a real possibility.
36. Dunlop Pneumatic Tyre Co Ltd v Dunlop Motor Co Ltd 1907 SC (HL) 15
The pursuers were in the business of manufacturing tyres, the defenders carried on
business as a retail motor trader and car repairer. There was no evidence of any
fraudulent intention on the part of the defenders. Interdict was refused, on the basis
that confusion was unlikely to result.
37. Aerators Ltd v Tollitt [1902] 2 Ch 319
The plaintiff company was formed to work a patent for the instantaneous aeration
of liquids. The defendants were in the process of forming a new company to be
called Automatic Aerator Patents Ltd. The plaintiffs requested an injunction the
restrain the defendants from registering that name on the basis that it would deceive
the public, the work "aerator" being associated with the plaintiff company. The
plaintiff's patent was a portable aerator for use in siphons, while the defendants'
company was concerned with large installations. Held: No evidence had been
brought to show there was any likelihood of confusion and the injunction would not
be granted. The action was an attempt to monopolise a word in ordinary use and
must be dismissed.
38. Exxon Corporation v Exxon Insurance Consultants International Ltd [1982] Ch 199
The plaintiffs were internationally known producers of petroleum products. The
defendants were motor insurance brokers. The plaintiffs successfully sought an
injunction to restrain the defendants fom their use of the word "Exxon" even
though the two businesses were unrelated to each other. The plaintiffs had an
international reputation and "Exxon" was a distinctive invented word. There was a
possibility of confusion.
Ultra vires
A company had ordinary and preference shares. The memoradum provided that the
holders of the preference shares should have a preferential right in the distribution
of the company's assets in the event of a winding up. The articles provided that in a
winding up the surplus assets should be divided between all the members in
proportion to the capital paid up on their shares, ordinary or preference. Held: The
rights conferred by the memorandum on the preference shareholders were
exhaustive. The articles could not be referred to to extend the rights in the
memorandum.
Limitations on Power to Alter Articles
41. St Johnstone Football Club Ltd v Scottish Football Association Ltd [1965] SLT 171
One of the company's articles prohibited any member from taking legal proceedings
of any kind against the company. It was held that this was contrary to public policy
and therefore void.
42. Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)
The articles gave the company a lien for debts owed by members to the company on
all partly paid shares held by such members. Zuccani was the only holder of fully
paid shares although he also held shares which were not fully paid. The company
altered its articles to extend the lien to fully paid shares, an alteration which would
only affect Zuccani. Zuccani's executors challenged the alteration. Held: The
alteration was bona fide for the benefit of the company as a whole, and the lien
applied to all shareholders equally. It made no difference that Z was the only person
practically affected at the time. The alteration was valid.
43. Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA)
Under the articles, existing members had a right ot pre-emption if any member
wanted to sell his shares. M, who owned a controlling interest in the company,
wanted to sell his shares to S, who was not a member. To achieve this, he procured a
resolution to alter the articles so as to enable any member with the sanction of an
ordinary resolution to transfer his shares to any outsider named in the resolution.
The plaintiff sought a declaration that the alteration was invalid. Held: The
alteration was valid, even though the minority not only lost their right of pre-
emption, but possibly also the right to sell to an outsider, since they would require
the concurrance of the majority to pass the necessary resolution. It was considered
to be for the benefit of the company as a whole.
44. Brown v British Abrasive Wheel [1919] 1 Ch 290
The company required further capital. The majority, who represented 98% of the
shareholders were willing to provide the capital but only if they were able to acquire
the remaining 2% of the shares. The articles were altered to allow holders of 90% of
the shares to compulsarily purchase the shares of the remaining shareholders. The
alteration was held to be invalid - it was not for the benefit of the company as
presently constituted, though it would have been valid if it had been contained in the
original articles.
45. Dafen Tinplate Co Ltd v Llanelly Steel Co [1920] 2 Ch 124
The principal shareholders of the defendant company were other steel companies,
and it was hoped that the member companies would buy their steel bars from the
defendants, though there was no contract to this effect. The member companies did
mostly buy their steel from the defendants, but in 1912 the plaintiff company began
to buy steel elsewhere. The defendants then altered the articles in order to expel the
plaintiffs. The alteration provided that the defendant company could, by means of
an ordinary resolution, require any member to sell his shares to the other members.
Held: The alteration was void. The power taken by the articles was a bare power of
expulsion and could be used to expel a member who was not acting to the detriment
of the defendant company.
Legal Effect of Memorandum and Articles
Hickman was a member of the association but it proposed to expel him. He brought
an action for an injunction to prevent the expulsion, but the articles provided for
disputes between the association and its members to be referred to arbitration. The
court stayed the action so that the matter could be referred to arbitration - the
article was binding between the company and its members.
47. Wood v Odessa Waterworks Co (1889) 42 Ch D 636
A company declared a dividend and passed a resolution to pay it by giving to the
shareholders debenture bonds bearing interest and redeemable over 30 years. The
articles empowered the directors to declare a dividend "to be paid" to the
shareholders. Held: The words "to be paid" meant paid in cash. A shareholder
could restrain the company form acting on the resolution on the ground that it
contravened the articles.
48. Eley v Positive Government Life Assurance Co Ltd (1876) 1 Ex D 88
The articles provided that Eley was to be appointed as the company's solicitor, and
that he should not be removed from office except for misconduct. Eley was
employed as solicitor and he became a member of the company some time after its
incorporation. When the directors ceased to employ him and used another solicitor,
he sued for breach of contract. Held: The articles did not create any contract
between the company and Eley in his capacity as solicitor.
49. Beattie v E & F Beattie Ltd [1938] Ch 708
The company's articles provided for any dispute between the company and one of
its members to be settled by arbitration. A director who was also a member sought a
stay in legal proceedings brought against him concerning his conduct as a director,
on the grounds that the matter should be referred to arbitration. Held: There was
no contractual agreement to submit to arbitration a dispute between the company
and a member in his capacity as director. The articles are enforceable as a contract
only with regard to membership matters.
50. Re New British Iron Co, ex parte Beckwith [1898] 1 Ch 324
Beckwith was employed as a director, relying for his remuneration on a provision in
the articles which said he should be paid £1000 per year. He brought an action
against the company for payment of his fees. It was held that the articles did not
form a contract between the company and Beckwith in his capacity as director, but
he had taken office and worked on the basis of the articles, so the provisions had
thus become an implied term of his contract of employment and the company was
liable to pay him on this basis.
51. Salmon v Quinn & Axtens Ltd [1909] 1 Ch 311
Shares in the company were mostly held by Axtens and Salmon, who were both
appointed directors along with one other person. The articles permitted either
Axtens or Salmon to veto any board decision. Salmon tried to veto a decision, but
the other directors went ahead and got approval for the decision by ordinary
resolution at a general meeting. Salmon tried to restrain the company from carrying
out the decision and the court issued an injunction. The company was trying to
bypass its own rules regarding decision making without following the procedure for
altering the company's constitution. Salmon as a member had the right to enforce
the provisions of the articles and to prevent the company acting unconstitutionally -
he sued as a member, not as a director.
52. Rayfield v Hands [1960] Ch 1
The articles provided that if a member of the company who intended to transfer his
shares informed the directors of this, the directors were bound to buy them. It was
held this bound the director to take the shares. The action was concerned with the
relationship between the plaintiff as a member and the directors in their capacity as
members. It was not necessary for the company to be party to the action.
Meetings - Court Orders
Wyman and Mitchell held shares in a restaurant. Disputes arose and Mitchell
brought a s.459 petition on the basis that the conduct of the company was unfairly
prejudicing his interest. It was then agreed that Wyman would buy Mitchell's
shares. Mitchell refused to attend any meetings, but the quorum set by the articles
was two, so the company could not carry out any formal business. Wyman applied
to the court for an order calling a general meeting at which he could appoint two
additional directors. The court granted the order, subject to certain conditions.
Meetings - Notice
The company was a mining company in Cornwall, with offices in London. Notice of
a general meeting was properly given but, on the day, the meeting was only attended
by the secretary, Sharp, and one shareholder. They conducted the meeting and
agreed, among other things, to make a call on shares. Dawes refused to pay the call
and was sued by Sharp on behalf of the company. Dawes' defence was that calls
could only be made at a meeting and there had been no meeting, as no quorum was
present. Held: The call on shares was invalid. A meeting could not be constituted by
one member.
Meetings - Voting
59. Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 2 All ER 625
The judgement in this case illustrates that, although directors voting at a board
meeting owe a fiduciary obligation to the company, when voting as shareholders in
general meetings they can vote in their own interests.
Walton J said: "..a director is an agent, who casts his vote to decide in what manner
his principal shall act through the collective agency of the board of directors; a
shareholder who casts his vote in general meeting is not casting it as an agent of the
company in any shape or form. His act, therefore, in voting as he pleases cannot in
any way be regarded as an act of the company."
Directors - Appointment
A bankrupt applied to the court for permission to take part in the management of a
company. There was no evidence to suggest that the applicant had been dishonest in
any way, but the application was refused. The court emphasised that the prohibition
on bankrupts acting as company directors was not intended as punishment for the
bankrupt individual but to protect the community. The applicant had a long history
of failed businesses in the building industry and this demonstrated an incompetence
from which the public deserved to be protected.
61. R v Brockley [1994] 1 BCLC 606
Brockley was convicted of taking part in the management of a company while he
was an undischarged bankrupt. His defence was that he honestly believed the
bankruptcy had been discharged automatically through lapse of time. Held: The
honestly held belief of the accused that he was no longer bankrupt made no
difference to the conviction. The prohibition was absolute and the offence was one of
strict liability.
Directors - Disqualification Orders
Application was invited for 106,000 shares, and the directors resolved not to allot
until 14,000 shares were applied for. A subsequent meeting was held at which only
two directors (a quorum) were present, when a resolution was passed to allot the
shares already applied for, about 3,000. The meeting was held at a few hours notice
at 2 o'clock. This was much shorter notice than had ever been given before. One
director did not receive his notice until the following day, and another gave notice
that he could not attend until 3 o'clock. Held: The allotment was void owing to the
inadequacy of the notice.
66. Browne v La Trinidad (1887) 37 Ch D 1
A meeting of directors decided that an EGM should be convened to remove Browne
as a director. The resolution to remove him was subsequently passed at the EGM.
Browne tried to claim that his removal was not valid as he had not received
adequate notice of the board meeting. Held: The notice he had received of the
directors' meeting was inadequate, but he should have complained straight away,
and by failing to do so he had waived his right to challenge the resolution taken at
the EGM. Further, the inadequate notice made no difference to the subsequent vote
at the EGM (the members were unanimous). The court refused to interfere, as this
would mean the whole procedure would pointlessly have to be gone through again.
67. Bentley-Stevens v Jones [1974] 1 WLR 638
It was held that a letter sent on Sunday convening a board meeting for Monday
morning was not adequate notice, but the court refused to declare that a motion
passed at the meeting was invalid, as the director's presence would not have
influenced the vote.
68. Shaw v Tati Concessions Ltd [1913] 1 Ch 292
The chairman of a meeting at which a poll was demanded directed that the poll be
held 6 weeks later. Because he had proxies for about 58,000 shares, Shaw would win
the poll unless his opponents were able to use proxies they held for over 99,000
shares. On the day before the poll was to be taken, the court ruled that the
documents appointing proxies for the 99,000 shares had not been delivered within
the time limit set by the company's articles. They must therefore be disallowed.
Though only a procedural matter, failure to observe it to the letter would make a
real difference to the outcome.
69. Re North Eastern Insurance Co Ltd [1919] 1 Ch 198
Y and D, two directors of a company, had made advances to the company in
consideration of receiving debentures. The company had four directors, three of
whom were required for a quorum. A resolution was passed granting a debenture to
Y. Y did not vote on this resolution. Another resolution was then passed granting a
debenture to D, on which D did not vote. The two debentures ranked equally among
themselves. Held: The issue of the two debentures formed one transaction in which
Y and D were equally interested. One transaction could not be split into two so as to
qualify directors to vote and both the resolutions were invalid for want of a quorum.
Powers of Directors
Ampol Petroleum and Bulkships Ltd together owned 55% of the issued share
capital of R W Miller (Holdings) Ltd. Ampol and Howard Smith Ltd were making
competing takeover bids for Miller. The directors of Miller favoured Howard
Smith's bid, which was higher, but there was no prospect of this bid succeeding
because Ampol and Bulkships would not have accepted Howard Smith's offer. The
evidence showed that Miller was in need of further capital. The directors of Miller
resolved to allot new shares to Howard Smith for two purposes; first, to raise the
capital needed, and secondly to reduce the holding of Ampol and Bulkships to
enable Howard Smith's bid to succeed. Ampol challenged the validity of the
allotment. Held: The allotment was not valid. Its dominant purpose was to alter the
balance of power, and this was not the purpose for which the director's power to
allot shares had been given.
Percival wished to sell his shares in the company and wrote to the company
secretary asking if he knew of anyone willing to buy. After negotiations, the
chairman of the board of directors arranged the purchase of 253 shares, 85 for
himself and 84 for each of his fellow directors at a price based on Percival's
valuation of the shares. The transfers were approved by the board and the
transactions completed. Soon afterwards, Percival discovered that prior to and
during the negotiations for the sale of his shares, another person was negotiating
with the board for the purchase of the whole company and was offering various
prices for shares, all of which exceeded the price paid to Percival. Percival then
brought an action against the directors asking for the sale of his shares to be set
aside for non-disclosure. Held: The directors are not trustees for the individual
shareholders and may purchase their shares without disclosing that they are
negotiating for the sale of the entire company.
74. Allen v Hyatt (1914) 30 TLR 444
The directors of a company induced the shareholders to give them options for the
purchase of their shares so that the directors could negotiate for the sale of the
shares to another company. Instead of selling the shares directly to the other
company, the directors used the options to purchase the shares themselves and then
resold them to the other company. Held: The directors had made themselves agents
for the shareholders in the sale of the shares and must therefore account to them for
the profit they had made on the sale.
75. Re W & M Roith Ltd [1967] 1 All ER 427
The controlling director of a company had given many years service without having
a service contract. He was then given a service agreement providing for payment of
a pension to his widow if he died while still a director. He was already in poor health
at this time and he died two months later. The pension was paid for several years
and then the company went into liquidation. The director's executors put in a claim
in the liquidation for the capitalised value of the pension. The liquidator rejected the
claim. Held: The claim could not be supported. The pension was not for the benefit
of the company, nor incidental to the carrying on of the company's business.
76. Aberdeen Railway Co v Blaikie Bros [1843-60] All ER 249
The railway company agreed to buy chairs from a partnership, Blaikie Bros.
Blaikie, a member of the partnership was also a director of the company. When the
partners tried to enforce the contract the company successfully claimed that the
contract was voidable owing to the director's conflict of interest.
Lord Cranworth said: "His duty to the company imposed on him the obligation of
obtaining these iron chairs at the lowest possible price. His personal interest would
lead him in an entirely opposite direction - would induce him to fix the price as high
as possible. This is the very evil against which the rule is directed."
Held: Ward was not entitled to the payment for his services as he was in a conflict of
interest position. He was supposed to advise the company whether to go ahead with
the bid and on what terms, but he would only receive commission if the bid was
successful and the more that Guinness paid for Distillers, the larger his commission
would be. Further, disclosure of an interest as required by s.317 of the Companies
Act 1985 had to be made to the whole board, it was not sufficient that the committee
knew of it.
(a) A director need not exhibit in the performance of his duties a greater degree of
skill than may reasonably be expected from someone of his knowledge and
experience.
(b) A director is not bound to give continuous attention to the affairs of the
company.
(c) Where duties may properly be left to some other official, a director is justified, in
the absence of grounds for suspicion, in trusting that official to perform his duties
honestly.
Three directors each held 100 shares in a company with an issued share capital of
300 shares. A provision in the articles stated that, in the event of a resolution being
proposed for the removal of a director, that director's shares would carry three
votes per share. Two of the directors attempted to remove the third but could not
obtain the necessary majority because of the weighted voting rights. A declaration
was sought from the court that the resolution had been validly passed. Held: s.303
did not prevent companies attaching special voting rights to shares. The resolution
was not valid.
Majority Rule
89. Foss v Harbottle (1843) 2 Hare 461
It was said that to establish unfairly prejudicial conduct, the petitioner did not have
to show that the persons controlling the company knew they were acting unfairly, or
that they acted in bad faith. The test was whether a reasonable bystander, observing
the consequences of the conduct, would regard it as having unfairly prejudiced the
petitioner's interests. In this case, a company was owned in equal shares by a
husband and wife. On the breakdown of the marriage the wife was excluded from
management and the company incurred a large VAT bill. She applied for an order
for the purchase of either her own or her husband's shares. It was held that the
exclusion from management and loss of profit by payment of the unpaid VAT
diminished the value of the wife's shares and this was unfairly prejudicial conduct.
97. Re Saul Harrison & Sons plc [1995] 1 BCLC 14
"The words 'unfairly prejudicial' are general words and they should be applied
flexibly to meet the circumstances of the particular case...The conduct must be both
prejudicial (in the sense of causing prejudice or harm to the relevant interests) and
also unfairly so: conduct may be unfair without being prejudicial or prejudicial
without being unfair, and it is not sufficient if the conduct satisfies only one of these
tests." (per Neill LJ).
98. Re London School of Electronics [1986] Ch 211
The school was 25% owned by the petitioner and 75% owned by another company,
CTC, which was mainly owned by two people. The petitioner was employed as a
teacher by CTC until the relationship between the parties broke down, when there
was a resolution to remove the petitioner as a director of LSE. CTC then
transferred most of LSE's students to its own school. The petitioner left CTC and
LSE and set up a rival institution, taking 12 former LSE students with him. He
petitioned under s.459 and it was claimed by CTC that he was not entitled to a
remedy because he had himself behaved prejudicially toward the company by
taking 12 students away. Held: "Clean hands" were not an overriding requirement,
though it might affect the relief the court was prepared to grant.
99. Re a Company (No 00477 of 1986) [1986] BCLC 376
The petitioners held all the shares in a company (A Ltd) which they later sold to O
plc in return for an issue of shares in O plc. The understanding was that the
relationship between them and the controlling shareholders in O plc would be a
"partnership". The petition was brought against the controlling shareholders of O
plc on the ground that the dismissal of S, one of the petitioners, in breach of his
service contract with O plc, was contrary to their agreement and unfairly
prejudicial. Held: A member's interest in a company in which he has invested his
capital may include a legitimate expectation that he will continue to be employed as
a director and exclusion from management may be unfairly prejudicial.
100. Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126
The petitioner had joined three other men who were all to be equal partners in a
joint venture in which they would each invest £25,000. All were to take part in the
management but the petitioner thought the others were not pulling their weight
financially or managerially and he quarrelled with them after which he was
excluded from management. The others refused to purchase his shares. Held: The
others must buy his shares at a quarter of the going-concern value of the company.
101. Re Sam Weller & Sons Ltd [1990] Ch 682
The petitioners owned 42% of the shares in a family company. Their uncle was the
majority shareholder and his conduct had caused the company to fail to increase its
dividends in 37 years despite having been prosperous in recent years. At the same
time, the directors of the company were receiving substantial salaries. This was held
to be unfairly prejudicial conduct, even though the low dividends applied equally to
all the members.
102. Re D R Chemicals Ltd (1989) 5 BCC 39
The majority had 60% and the minority 40% of the shares. The majority could thus
pass ordinary resolutions but required the support of the minority for special
resolutions. The majority shareholder issued shares directly to himself and
increased his shareholding to 96%, diluting the minority to 4%, so that the minority
had lost any control over the company. This was held to be unfairly prejudicial
conduct.
103. Re Elgindata Ltd [1991] BCLC 959
The petitioners made various complaints against the controlling directors, including
exclusion from management, late payment of dividends, mismanagement and
extravagance. The petition was eventually granted on the basis that the directors
had used assets of the company for their personal benefit. On the issue of
mismanagement, the court felt that serious mismanagement could amount to unfair
prejudice, but the circumstances where this could be so would be rare.
104. Re Astec BSR plc [1998] 2 BCLC 556
A company E acquired a 51% holding in A plc, a listed company, but confirmed that it
would not alter the composition of the board of directors, and that the increase in its
holding would not affect the company generally. Unusually, E was not required to make a
takeover bid for the rest of the shares, because A plc although a UK company, was resident
in Hong Kong.
E sought to acquire more shares, but this was rejected by the board. E issued a press
release, giving a cautious view of A plc’s trading position, urging acceptance of its offer for
share purchase, and urging that the company cease making dividend payments. Despite
what E had said, it did replace some of the independent directors with its nominee
directors, and a board meeting reduced the proposed dividend payment.
The minority shareholders petitioned for relief on the ground of unfairly prejudicial
conduct: the ground was either on the basis of the facts given above, or alternatively that
E’s purchase of a 51% holding gave rise to a legitimate expectation that they would have
their shares purchased.
The court refused the petition, and held that legitimate expectations had no place in public
listed companies, as the need for credibility in the share market meant that the share
purchasers had to be entitled to rely on the public documentation of the company’s
constitution.
Two men were the sole shareholders and directors of a company, with equal rights
of management and voting power. After some time they became very hostile to each
other and disagreed about appointment of staff and other matters. All
communications between them were made through the secretary. Despite this, the
company made substantial profits. Held: Mutual confidence had been lost and the
company should be wound up.
107. Ebrahimi v Westbourne Galleries [1973] 2 WLR 1289
Ebrahimi and Nazar had carried on business for several years in partnership. They
then formed a limited company carrying on the same business and were appointed
its first directors. Shortly afterwards, Nazar's son was made a third director, and
both existing directors transferred some shares to him. Nazar and his son then had
the majority at general meetings. The company made good profits. Ebrahimi was
then removed as director by the other two and he petitioned that they should
purchase his shares or, alternatively, that the company be wound up. Held: The
winding up order should be granted. This was a quasi partnership and the basis of
the relationship had broken down.
108. Loch v John Blackwood [1924] AC 783
The directors representing the majority had refused to call meetings, submit
accounts or recommend a dividend. The minority had lost confidence in the
management and suspected that the majority were trying to force them to sell their
shares at undervalue. Petition was granted.
109. Jesner v Jarrad Properties Ltd 1994 SLT 83
In this Scottish case, two companies – Jesner & Sons Ltd (Jesner) and Jarrad
Properties Ltd (Jarrad) were run informally as one unit for the benefit of members
of the Jesner family. Jesner was a trading company and Jarrad a property
company. Two shareholders of Jarrad petitioned
under S459 for the purchase of their shares by Jarrad, Jesner, and four members of
Jarrad who were also directors. They also petitioned for the company to be wound
up on the just and equitable ground. The alleged unfair prejudice lay in the
granting of security by Jarrad in
breach of its memorandum and articles of association and the grant of interest-free
loans to prop up Jesner. A special resolution authorising the grant of security by
Jarrad had been granted without a meeting taking place. The sheriff resulted to
grant an order under S459 or to wind the company up on the grounds that
managing the companies in this way had been done in good faith for the benefit of
the family. On appeal, the Inner House of the Court of Session again refused the
S459 petition, but did grant the winding up order, on the grounds that Jarrad had
been run in a manner that destroyed confidence.