WRONGFUL RIGHTS ISSUES
| Published date | 01 January 1981 |
| Date | 01 January 1981 |
| Author | Susan J. Burridge |
| DOI | http://doi.org/10.1111/j.1468-2230.1981.tb01623.x |
WRONGFUL RIGHTS ISSUES
DURING
the last
15
years or
so,
the threatened or actual creation,
issue and allotment of new shares have provided the factual back-
ground for many of the leading cases in certain areas of company
law-cases such as
Hogs
v.
Cranzphorn Ltd.,l Bamford
v.
Barnford,=
Howard Smith Ltd.
v.
Ampol
Petroleum Ltd.3
and
Clemens
v.
Clemens
Bros.
Ltd4
Sanguine opinions have been expressed that,
by virtue
of
legislation such as that now found on the statute-book in
the form
of
section
14
and sections
17
to
19
of
the Companies Act
1980,6
many of the more knotty problems concerning new share issues
will be solved. However, that litigation raising similar issues
as
those
hitherto encountered by the courts might still arise is clearly
illustrated by the case of
Pennell,
Sutton
and Moraybell Securities
Ltd.
v.
Venida Investments Ltd.. Berry, Farr, McLelland, Macphail
and Nationwide Homes
Ltd.,
a decision of Templeman
J.
(through-
out this article
I
have frequently referred to Sir Sydney Templeman
as Templeman J. because the proceedings in
Pennell’s
case took
place long before Sir Sydney Templeman was appointed a Lord
Justice of Appeal) in July
1974,
which is regrettably
so
far
unreported.* In
so
far as the case involved both a proposed resolution
to increase the amount of the company’s nominal share capital and
also a proposed rights issue? it is hoped that a summary
of
the judg-
ment might be valuable in indicating the type of abuse and problem
which may still confront legal advisers and the courts despite the
enactment of section
14
and sections
17
to
19
of the Companies Act
1980.’O
In addition, it is hoped that an account of
Pennell’s
case may like-
wise provide assistance to those advising minority shareholders.
1
[1967]
Ch.
254.
2
[1970]
Ch.
212.
3
[1974]
A.C.
821.
4
[1976]
2
All E.R.
268.
5
See e.g. paras.
119-121
of
the Report
of
the Company Law Committee Cmnd.
1749 (1962)
and the report
of
the proceedings
of
Standing Committee
F
(H.C.)
(session
1978-1979),
cols.
277-283.
6
See further the
EEC’s
Second Directive
on
Company Law
of
December
13, 1976
(77/91/EEC,
O.J.
1977, L26/1).
See also the Report
of
the Company Law Committee
Cmnd.
1749 (1962)
(hereinafter referred to as “the Jenkins Report”) at paras.
119-121
and the recommendations at para.
122
(h)-(n).
The Stock Exchange Rules
in
any event require quoted companies to offer new share issues first to
the
existing
members of the company
on
a pro rata basis.
7
July
25, 1974.
8 The present summary
of
the case
is
based
on
my contemporaneous note
(I
was
present throughout the hearing) together with copies
of
various documents.
9
For a discussion
of
the similarity between a rights issue and an issue
of
shares
in accordance with pre-emption rights
of
the type specified
in
ss.
17-19,
Companies
Act
1980,
see H.C.Deb., Vol.
980
(the report stage
of
what was then the Companies
Bill
1979)
cols.
1501, 1502
(February
27, 1980).
10
The extent to which
ss.
17-19
of
the Companies Act
1980
will take effect, will
of
course depend upon whether or
not
the various subs.
of
s.
17.
such as subss.
3,
9
and
12
apply and whether or not the disapplication provisions
in
ss.
18
and
19
of
the Companies Act
1980
are applicable.
40
Jan.
19811
WRONGFUL RIGHTS
ISSUES
41
Pennell’s
case has strengthened the position of the minority share-
holder by virtue of the fact that Templeman
J.
applied statements
from the House of Lords’ speeches in
Ebrahiini
v.
Westbourne
Galleries Ltd.”
to a situation where
no
petition had been presented
for winding up the company under section
222
(f)
Companies Act
1948. He did
so
almost a year and a half before Foster J. did in
Clemens
v.
Clemens Bros. Ltd.12
Although with the enactment
of
section 75 of the Companies Act 1980, the position of the aggrieved
shareholder has been greatly improved, it is submitted that there
are still many situations when a minority shareholder will have to
resort to the common law in order to seek redress. Some of these
situations will be referred to later
in
this arti~1e.l~
On
such occasions
a minority shareholder may welcome the opportunity to avail him-
self of the reasoning in
Pennell’s
case.
The proceedings in
Pennell and Others
V.
Venida Investments Ltd.
and Others
took the form of a motion for interlocutory injunctions
to restrain the passing of resolutions for an increase of capital and
an ensuing rights issue. The hearing of the motion was ultimately
treated as the trial of the action and consequently all evidence in
the case was given
on
affidavit with (regrettably)
no
oral cross-
examination of the deponents.
THE
FACTS
The sequence of events leading up to the proposed rights issue
commenced in September 1970 with the incorporation of a company
called Nationwide Homes Ltd.
(“
Nationwide
”)
by
two
property
developers, Archibald John Pennell (the first plaintiff in the action)
and Philip John Sutton (the second plaintiff in the action). The
company was incorporated with the objects of a property and
development company. The articles of association were substantially
in the form of Parts
I
and
I1
of Table A Companies Act 1948.14
In
particular, regulation
44
of Table A Companies Act 1948 applied.
There was a special article giving the directors complete control over
the issue and allotment of new shares, although subject in relation to
any share capital, other than that with which the company was
originally incorporated, to any directions contained in the resolution
of the company creating the same and to regulation
2
of Part
I1
of
Table A Companies Act 1948. There was also
an
article giving
11
[1973] A.C. 360.
l2
119761 2 All
E.R.
268, 282;
cf.
Prentice (1976) 92
L.Q.R.
502. By a curious
quirk
of
fate
Pennell
v.
Venida Investments Ltd.
was originally due
to
be heard
in front
of
Foster
J.
The action was assigned
to
Group B
of
the Chancery Division
and the Group B motions judge for that term was Foster
J.
However,
on
the motions
day when
Pennell
v.
Venida Investments Ltd.
was going to be “effective,” there
were several other “effective” motions to be heard ahead
of
it by Foster
J.
It was
unlikely that Foster
J.
would have had time to hear the present motion. Consequently,
the motion was transferred to the court of Templeman
J.
whose list happened to
be clear
on
that day owing
to
the unexpected early termination
of
=me other case.
l3
See also Boyle (1980)
1
Co.Law 3, 7 and
8.
l4
See now
s.
88
(4),
Companies Act 1980.
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