NOTES OF CASES
| Published date | 01 January 1967 |
| Date | 01 January 1967 |
| DOI | http://doi.org/10.1111/j.1468-2230.1967.tb01140.x |
| Author | K. W. Wedderburn |
NOTES
OF
CASES
SHAREHOLDERS’
CONTROL
OF
DIRECTORS’
POWERS
:
A
JUDICIAL
INNOVATION
?
AT
last, the judgment of Buckley
J.
in
Hogg
V.
Cramphorn
Ltd.,
delivered in
1963,
has been fully rep0rted.l The decision is of
primary importance for the law relating to the questions: (a)
HOW
far can directors use their powers to maintain control of the com-
pany in friendly hands? (b) When can a minority member
challenge their actions as an abuse of fiduciary powers used for a
collateral purpose, and what is the effect of such a challenge
if
successful
?
The plaintiff,
Mr.
Hogg, held fifty ordinary shares in the
company, of which the authorised capital comprised
40,000
ordinary
shares and
96,000
preference shares
(of
which
5,707
were unissued).*
The enterprise was an old family concern, of which Colonel Cramp-
horn was chairman and managing director
;
and the directors, their
relations and friends controlled about
37,000
shares. Shares, of
both types, carried one vote each.
In
1963,
Colonel Cramphorn
was approached by a
Mr.
Baxter who wished to buy the entire
issued capital at twenty-five shillings a share. The Colonel took
the view that
if
Mr.
Baxter gained control, the nature of the
company’s trading would be substantially altered, and the staff
would be
‘‘
unsettled.” Fearful that
Mr.
Baxter might acquire
sufficient shares to gain control, the Colonel and the board
of
directors,
on
legal advice, devised a defensive scheme against his
takeover.
In
the event, Baxter’s bid lapsed; but the plaintiff (one
of his associates), in a representative action
on
behalf of the share-
holders (other than defendants) and himself, pursued
his
claim to
have the scheme declared void.
The essence of the defensive scheme was the creation of a trust
deed, establishing a trust for the company’s employees. The
trustees were the Colonel and two The trustees applied for
the unissued
5,707
preference shares at par, asking that ten votes
per share
on
a poll be attached to them. The board allotted the
shares
on
those terms.
To
hance the transaction, the board made
a loan
of
25,707
to the trust, interest-free, out of the company’s
reserve funds.‘ With
57,070
extra votes, the Colonel and his party
1
[1966]
3 All
E.R.
420. Previously reported in
The
Times,
October
19,
1963.
2
The company was
a
public company but its shares were not quoted
on
any
stock exchange.
3
A partner
in
the
firm
which acted as the company’s auditors; and an employee.
4
From
a
reserve fund shown
as
“
employees’ benevolent
and
pension
fund
”;
but nothing turned
on
this accounting nomenclature.
The
scheme avoided
invalidity under
8.
54
of the Companies Act
1948,
of
course, by reason of
Of
the ordinary shares,
4,112
were unissued.
77
78
TEE
MODERN
LAW
REVIEW
VOL.
80
might well feel secure against
Mr.
Baxter. But they went one step
further. The board resolved
to
lend the balance of the reserve fund,
over
€28,000,
to the trustees to enable them to purchase more
preference shares at twenty-five shillings
per
share
(Le.,
to
counter
any bids which Baxter might be making). The board circularised
the shareholders explaining the position. The evidence left
no
room
for doubt that the board’s steps were taken honestly and bona fide
in what the directors thought were the interests of their company;
but were clearly
‘(
intended not
only
to
ensure that,
if
Mr.
Baxter succeeded in
obtaining a shareholding which, as matters
stood,
would have
been a controlling shareholding, he should not secure control
of the company, but, also, and perhaps primarily,
to
discourage
Mr.
Baxter
from
proceeding with his bid at all.”
it
In
those circumstances, Buckley
J.
accepted the minority
shareholders’ complaint that the directors had
in
law misused their
powers, a decision of great moment for the many boards which
regularly
try
to ensure that control does not pass
to
unfriendly
quarters. But, as we shall see, what he gave with one hand,
his
Lordship took away from the minority plaintiff with the other.
Four main points emerged in his judgment
:
(i)
The Ten Votes.
First, he found that the articles gave
no
power
to
the directors
to
attach ten votes
to
any share. Even
so,
he thought, this did
not,
by itself, entitle the plaintiff, even
in
a
representative action, to have the allotment set aside. The trustees
might waive the
‘(
ten votes
y’
condition and retain the shares
on
a
one-vote basis. The plaints was
‘(
not competent
yy
to
procure
the cancellation of the allotment because the
‘(
matter rests
. .
.
between the trustees and the company.”
His
Lordship’s discus-
sion from this point
on,
therefore, largely ignores the
“
ten-vote
”
point.
It
may be thought, however, that had the trustees insisted
upon exercising their ten votes, the plaintiff would surely have been
a competent complainant, despite the rule in
Foss
V.
Harbottle,
because of the invasion of his personal right not
to
have such
articles flo~ted.~
Putting aside the
“
ten-vote
”
problem, the question arose whether the allotment
of
subs.
(I)
(a).
Once
a5:in
the
“3-d
is
underlined
to
secure the independence
from the directors of trustees
of
employees’ shareholding schemes; the
Jenkins Report (Cmnd.
1749)
does not make this point: paras.
170-187.
(ii)
The
((
Collateral Purpose
”
Principle.
6
19661
3
All
E.R.
420
at
p.
426.
0
fbid.
at p.
41.
7
The view that such
‘‘
personal rights
”
have a wide ambit
(see
the arguments
reviewed in
(1965)
28
M.L.R.
347)
has received fresh support in
Kraus
V.
Lloyd Property Ltd.
[1966]
V.R.
232.
There, when a director had refused
to
retire
in
accordance with the articles .and invalidly continued
in
office,
4p”
plaintiff shareholder was
allowed
to
bring her action
on
the ground that
the individual rights of the plaintiff as
a
member of the company have
been
invaded
’’
(Hudson
J.
at p.
236).
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