Ashburton Oil NL v Alpha Minerals NL

[10]

To an injunction in the terms granted there are two objections; first that it affords the plaintiffs protection beyond that to which they are or could be, by law, entitled; secondly that it imposes a restriction upon the defendant's lawful freedom of action which is unjustifiably onerous. To these objections the plaintiffs made the one answer, viz. that, having become entitled by their purchase to a majority shareholding in the defendant, they were entitled to an injunction that would maintain their controlling interest. This answer is based upon what I regard as a misconception. The misconception is that a majority shareholding or a controlling interest is a right of property that ought to be preserved against any action on the part of the company in which the shares are held. A shareholder who would be affected by the exercise of a company's powers is entitled to demand and enforce that the company's power should be exercised lawfully; such a shareholder is, however, not entitled to prevent any exercise of that power. The advantage of a controlling interest in the shareholding of a company is not property that a shareholder is entitled to have preserved by the intervention of the court to prevent the allotment of any shares that would disturb it. It may often be the case, of course, that the holding of a majority of shares puts the shareholder in a position of being able to protect his majority by the exercise of his voting strength in accordance with the company's memorandum and articles of association, but to acknowledge this is merely to recognize that the rights and powers of shareholders are governed by the constitution of the company and that every shareholder holds his shares subject to that constitution. It affords no justification for conferring upon a majority shareholder rights which the constitution of the company does not give him in order to secure his position. Accordingly, a blanket prohibition against the issue or allotment of shares, or the making of an agreement to issue or allot shares, which would prevent an entirely proper issue of shares ought never to be made. To illustrate the vice of the order which was made it is only necessary to point out that it would prevent the allotment or issue of shares by the company even if the board of directors were to be completely changed. The plaintiffs are entitled to no more than an injunction against an improper issue or allotment of shares and it is my opinion that the injunction granted by Anderson J. should be varied to restrain making or agreeing to make any allotment of shares for a purpose other than for the benefit of the company and its shareholders as a whole. In the circumstances of this case an injunction in these terms should be coupled with a further order that the company should, before making or agreeing to make any further allotment of shares, notify the plaintiffs of what is proposed in sufficient time to enable them, should they see fit, to seek from the court a declaration that the allotment proposed is for a purpose other than for the benefit of the company and its shareholders and in all the circumstances should not be made, and that, in the event of such an application, the proposed allotment should not be made before the hearing of the application by the court.

[17]

The appellants, having acquired these shares, wished to exercise control of the respondent company and Mr. McEwan, who is a director of each of the appellant companies, requested that a meeting of the board of directors of the respondent should be held so that he might communicate the views of the appellants to the board. The members of the respondent's board at all material times were Messrs. Niemann (who was the chairman), Stewart, Shirrefs, O'Shannassy and Stevenson. On 14th May 1970 McEwan met two of the directors, Stewart and Shirrefs, in Melbourne. He told them that the appellants had acquired a controlling interest in the respondent and that the existing board of the respondent would be required to resign except that the chairman, Niemann, would be invited to remain on the board. He also said that Stewart, who besides being a director had a contract as mining consultant with the respondent, would be asked to resign and given a lump sum in compensation. Stewart's contract with the respondent entitled him to a fee of $2,333 per month and certain other benefits but was determinable by three months' notice. Shirrefs replied that in the absence of Niemann, who was in another State at the time, no decision could be reached on these matters, which would have to be discussed with the other directors. McEwan asked Stewart what was the present state of the negotiations between the respondent and various other parties, including Snowstone Pty. Ltd., regarding mining ventures and was told that none of these had reached a stage of finality. Shirrefs then stated that the directors of the respondent company intended not to enter into, continue with or conclude any negotiations or transactions relating to any mining venture until the shares of the appellant companies had been registered and recognized by the board of directors of the respondent. At the conclusion of the meeting it was agreed that the appellants would cause an announcement to be made to the Melbourne Stock Exchange concerning their interest in the respondent and on the same day McEwan wrote to the secretary of the Stock Exchange informing him that the three appellants, acting as a consortium, had acquired a controlling interest in the respondent. It was also agreed that a meeting between McEwan and the respondent's board would be held on 18th May 1970.

[54]

The crucial question that remains is whether the learned primary judge was entitled to draw the further inference that unless restrained the directors would be likely to make further allotments for the same unauthorized purposes. It was, of course, shown that the directors would probably make further allotments as consideration for the purchase of the mineral claims at Mt. Clifford and the mine at Steele's Creek, and Niemann admitted that it was likely that other allotments would be made as well, but the question is whether it has been established prima facie that a substantial purpose of any such allotments would be to advance the private interests of the directors. The learned judges of the Full Court said that so far from it being reasonable to infer from the incidents of 25th May that the directors would probably act improperly on a future occasion in the allotment of shares, an inference to the contrary would be the more probable. They supported this view by saying, first, that the motive for an improper allotment of shares no longer existed once the allotment of 25th May had been made, unless it be assumed that the directors expected that allotment to be set aside and, secondly, that the risks of making further improper issues in the light of the pending litigation to set aside the prior issues would be such as not to commend themselves to any reasonable body of directors. With all respect I am unable to agree with this view of the matter. It is true that if the allotments made on or about 25th May are not set aside the directors will have achieved their purpose. However, prima facie, those allotments were not made in good faith for the benefit of the company as a whole and are voidable, although if the allottees had no notice of the facts they may have an effective answer to any claim to avoid them. The issue whether they had such notice arises directly in action No. 2543, but in action No. 2718 it is only peripheral and incidental and the only evidence that bears on it is that which reveals the position of O'Shannassy as a director of all three companies. It is certainly not putting the matter too high to say that it may be inferred prima facie that after the writ was issued in action No. 2543 on 9th June the directors may have feared that their attempt to oust the appellants from control of the respondent might possibly fail unless they issued further shares. There therefore existed a motive to issue more shares in an attempt to ensure that even if the appellants won their action they would not gain control of the company, and indeed a further motive of deterring the appellants from pursuing their action by suggesting that the benefits of a victory might be illusory. Such motives do not seem to me in any way unreal nor do I think it contrary to human experience to suppose that directors who have embarked on a course designed to destroy the power of a majority of the shareholders would persist in their endeavours until they had clearly gained their end. Further it would seem to me prima facie that the risks of further litigation would not be likely to deter the directors from pursuing their course. In fact they had received the letter of 9th June from the appellants' solicitors, seeking assurances and threatened an application for an injunction if none were given, but they did not reply to the letter and went on with the transactions relating to Mt. Clifford and Steele's Creek. The allotment of a further 500,000 shares would probably be enough to deprive the appellants of their majority and an additional 200,000 would tip the scales further against them. Niemann in his affidavit has not said what tests and reports, if any, were made and received before the company took the options in respect of Mt. Clifford and Steele's Creek, and he has indeed put very little information regarding those transactions before the Court. In all the circumstances, in my opinion, the inference was open that it was proposed to allot the further shares to achieve the directors' purpose of keeping control of the company. I am, with the greatest respect, unable to agree that the finding of the learned primary judge was vitiated by error of law.

Ashburton Oil NL v Alpha Minerals NL - [1971] HCA 5 - HCA 1971 case summary — Zoe

At a glance

Court

Decision date

Before

Source

Judgment (63 paragraphs)

Parties

Cases Cited (1)