Smith (Howard) Ltd v Ampol Petroleum Ltd

JurisdictionUK Non-devolved
Judgment Date1974
Date1974
Year1974
CourtPrivy Council
[PRIVY COUNCIL] HOWARD SMITH LTD. APPELLANT AND AMPOL PETROLEUM LTD. AND OTHERS RESPONDENTS [ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES] 1973 Nov. 26, 27, 28, 29; Dec. 3; 1974 Feb. 14 Lord Wilberforce, Lord Diplock, 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 shareholding 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 4 ½ 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 shareholding 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 retain their position on the board; that M needed capital but that the primary purpose of the allotment was to reduce the proportionate shareholding 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 allotment, to alter a majority shareholding 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 shareholding, the directors had improperly exercised their powers and the allotment was invalid (post, p. 699D–H).

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 far 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 critical at the relevant time, it may have reason to doubt or discount the assertions of individuals that they acted solely in order to deal with the matter (post, p. 694E–H).

Judgment of the Supreme Court of New South Wales affirmed.

The following cases are referred to in the judgment:

Australian Metropolitan Life Assurance Co. Ltd. v. Ure (1923) 33 C.L.R. 199.

Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame [1906] 2 Ch. 34, Warrington J. and C.A.

Fraser v. Whalley (1864) 2 Hem. & M. 10.

Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483.

Hindle v. John Cotton Ltd. (1919) 56 Sc.L.R. 625, H.L.(Sc.).

Hogg v. Cramphorn Ltd. [1967] Ch. 254; [1966] 3 W.L.R. 995; [1966] 3 All E.R. 420.

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

Ngurli Ltd. v. McCann (1953) 90 C.L.R. 425.

Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77.

Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506.

Teck Corporation Ltd. v. Millar (1972) 33 D.L.R. (3d) 288.

The following additional cases were cited in argument:

Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, C.A.

Ansett v. Butler Air Transport Ltd. (No. 1) (1957) 75 W.N.(N.S.W.) 299.

Ashburton Oil N.L. v. Alpha Minerals N.L. (1971) 45 A.L.J.R. 162.

Bamford v. Bamford [1970] Ch. 212; [1968] 3 W.L.R. 317; [1968] 2 All E.R. 655; [1970] Ch. 212; [1969] 2 W.L.R. 1107; [1969] 1 All E.R. 969, C.A.

Benmax v. Austin Motor Co. Ltd. [1955] A.C. 370; [1955] 2 W.L.R. 418; [1955] 1 All E.R. 326, H.L.(E.).

Gaiman v. National Association for Mental Health [1971] Ch. 317; [1970] 3 W.L.R. 42; [1970] 2 All E.R. 362.

Grant v. John Grant and Sons Pty. Ltd. (1950) 82 C.L.R. 1.

Greenhalgh v. Arderne Cinemas Ltd. [1951] Ch. 286; [1950] 2 All E.R. 1120, C.A.

Jermyn Street Turkish Baths Ltd., In re [1971] 1 W.L.R. 1042; [1971] 3 All E.R. 184, C.A.

Orion Property Trust Ltd. v. Du Cane Court Ltd., March 15, 1963; Bar Library Transcript No. 77 of 1963, C.A.

Peters' American Delicacy Co. Ltd. v. Heath (1939) 61 C.L.R. 457.

Richard Brady Franks Ltd. v. Price (1937) 58 C.L.R. 112.

Royal British Bank v. Turquand (1855) 5 E. & B. 248; (1856) 6 E. & B. 327.

Salmon v. Quin & Axtens Ltd. [1909] 1 Ch. 311, C.A.; [1909] A.C. 442, H.L.(E.).

Savoy Corporation Ltd. v. Development Underwriting Ltd. (1961) 79 W.N. (N.S.W.) 1021.

Shuttleworth v. Cox Brothers & Co. (Maidenhead) Ltd. [1927] 2 K.B. 9, C.A.

Smith and Fawcett Ltd., In re [1942] Ch. 304; [1942] 1 All E.R. 542, C.A.

Surrey Garden Village Trust Ltd., In re [1965] 1 W.L.R. 974; [1965] 3 All E.R 962.

APPEAL (No. 9 of 1973) from a judgment and order (December 14, 1972) of the Supreme Court of New South Wales (Street J.) in proceedings brought by the respondent, Ampol Petroleum Ltd., against the appellant, Howard Smith Ltd., and others, that an allotment and issue to Howard Smith Ltd. of 4,500, 000 ordinary shares of $1 each in the capital of R W. Miller (Holdings) Ltd. was invalid and should be set aside.

The facts are stated in the judgment of their Lordships.

K. A. Aickin Q.C. and A. M. Gleeson (both of the New South Wales Bar) for the appellant, Howard Smith Ltd.

W. P. Deane Q.C., David F. Rofe (bath of the New South Wales Bar) and Bruce Coles for the respondent, Ampol Petroleum Ltd.

Cur. adv. vult.

February 14, 1974. The judgment of their Lordships was delivered by LORD WILBERFORCE. This is an appeal from a decision of Street J., Chief Judge in Equity, in the Equity Division of the Supreme Court of New South Wales. On December 14, 1972, the judge made certain declarations and orders, the effect of which was to set aside the issue to the appellant (“Howard Smith”) of 4,500,000 ordinary shares of $1 each in the capital of R. W. Miller (Holdings) Ltd. (“Millers”). The proceedings, for the setting aside of this issue, were brought by the respondent to the appeal (“Ampol”) as plaintiff against 14 defendants, which included Howard Smith, Millers, 11 directors or alternative directors of Millers, and a company which acted as registrar for Millers in New South Wales. Only Howard Smith, as appellant, and Ampol, as respondent, appeared on the present appeal to the Board.

The litigation arose out of a struggle for the takeover and control of Millers, the rival parties to which were Ampol on one side and Howard Smith on the other. Associated with Ampol was Bulkships Ltd., a substantial shareholder in Millers. Ampol had acquired, in May 1972, a large shareholding in Millers; this holding was 29.8 per cent. of Millers' issued share capital; Ampol bought it for a price of $2.27 a share. Bulkships owned 25.1 per cent. of Millers' issued share capital so that Ampol and Bulkships together had about 55 per cent., the remaining 45 per cent. being held by outside shareholders. By the allotment, made on July 6, 1972, Howard Smith obtained 4,500,000 shares at $2.30 a share. The effect of this, if valid, would be that Ampol and Bulkships would no longer be the majority shareholders in the company.

The rival takeover propositions, to which reference has been made, were as follows. On June 15, 1972, Ampol formally made an offer for all issued shares in Millers at $2.27 per share. On June 23, 1972, the directors of Millers met and considered the offer. They unanimously decided to recommend that it be rejected as too low. Before this date there had been discussions between Howard Smith and persons concerned in the management of Millers who included Mr. A. N. Taylor, the managing director; these persons have been referred to in the proceedings as “the management team.” No other Millers' director than Mr. Taylor was involved at this stage. These discussions first focused upon the possible acquisition by Howard Smith of two tankers which were under construction for Millers; the concern of Howard Smith, and to some extent of the management team of Millers, being to prevent these tankers passing under the control of Ampol. Objections were found to exist to this proposal and then there emerged an alternative, namely, that Howard Smith should make an offer to take over Millers in toto. On June 22, 1972, Howard Smith announced its intention to make a takeover offer at $2.50 cash per share (there was an alternative offer of cash and shares worth at that date $2.76). On June 27, 1972, a press statement...

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