Co, Lrp. v Ure.

Co, Lrp. v Ure. - [1923] HCA 29 - HCA 1923 case summary — Zoe

[35]

Howard Russell, James Curwen Penny and Mary Bligh O'Connell, respectively. The total number of shares covered by these transfers is 1,720; and the transferees are nominees of the respondent Frances Stephanie Ure, who is the beneficial owner of the shares. The articles of association of the appellant provide (art. 21) that the directors may refuse to register any transfer whatsoever of any shares without assigning any reason therefor, and the directors of the appellant have abstained from assigning any reason for their refusal to register the transfers now in question. The law with regard to the right of a proposed transferee to challenge in a Court of law the action of directors, under an article such as this, in refusing consent to a transfer without assigning any reasons, has recently been discussed in two cases in the House of Lords. In McLllistrim vy. Ballymacelligott Co-operative Agricultural and Dairy Society (1) Lord Atkinson says : - '' For all practical purposes this rule places the shareholder absolutely at the mercy of the committee, and at their option binds him to the society for life. Even if they were prima facie compellable to consent to a transfer, they are not com- pellable to do so if they bona fide refuse to consent to it in what they believe to be the interest of the society, and if they refuse to state their reasons it is to be assumed that they refused bona fide for reasons they deemed sufficient." And Lord Shaw said (2) : - "His release is at the option of a committee for whose conduct no reason need be assigned, and against whose conduct no challenge can be made except that it was moved by bad faith. And the onus of establishing this grave charge would rest upon the appellant." In Weinberger v. Inglis (3) Lord Atkinson, speaking of the authorities on this question, said : - '' What are the principles established by these last-mentioned authorities? They are, it appears to me, the following : - First, that directors refusing to consent to the transfer are not bound to state their reasons for so refusing. Second, that if they do not state their reasons it must, in the absence of all evidence to the contrary, be assumed that they have acted bona fide and honestly for the furtherance, in their belief, of the interests they were bound to protect ; and, thirdly, that in order to vitiate

[70]

resolution for the issue of new shares of which notice was given on 17th November 1922, the suggestion being that by exercising their powers under that resolution they would secure control of the Com- pany notwithstanding any transfers which might subsequently be registered. In order to understand this contention, it is necessary to refer to some events in the history of the Company. 4 The Company was originally incorporated in the year 1895 with a capital of £10,000 divided into 5,000 shares of £2 each. In 1897 the capital was increased by special resolution to £12,000 by the creation of 1,000 new shares of £2 each. On 20th April 1905 a special resolution authorizing a further increase of capital was duly passed and confirmed. The resolution is as follows : - '' That the capital of the Company be increased to £100,000 by the creation of 44,000 shares of £2 each, such shares not to be issued until the Company in general meeting shall hereafter by special resolution so authorize such issue, : provided such shares shall be first offered pro rata to the members in proportion to their existing holdings." Pursuant to this authority _ 4,000 new shares were issued, making the capital £20,000 divided into 10,000 of £2 each. By special resolution passed and confirmed in November 1908, the memorandum and articles of association were altered. In the amended memorandum the capital was stated to be £100,000 divided into 50,000 shares of £2 each. Clauses 44, 45 and 46 of the amended articles were in the following words : - _ "44, The Company may from time to time by ordinary resolution increase the capital by the creation of new shares. Such shares shall be of such amount and shall be issued on such terms and condi- tions as the Company in general meeting may direct or in default of any such direction on such terms and conditions as the directors may think expedient. 45. The Company in general meeting may before the issue of any new shares determine that the same or any of < them shall be offered in the first instance to the members in propor- tion to the existing shares held by them or make any other arrange- ment as to the issue and allotment of the new shares. Such offer if made shall be by notice specifying the number of shares to which - the member is entitled and limiting the time within which the offer 2 if not accepted will be deemed to be declined and after the expiration of such time or on receipt of an intimation in writing from the member

[119]

Macrossan. He urged that directors had no right to refuse a transfer _ to prevent a majority from carrying its way. That is true, but not 4 completely true. The accuracy of the statement has its limits. A majority has not the right to destroy or injure the common property or otherwise deprive the minority of their rights (see Dominion Cotton Mills Co. v. Amyot (1) ). If directors, possessing by the regulations _ the power of protecting and guiding the company's affairs that the _ regulations of this Company provide, honestly come to the conclusion - that general destruction or injury will ensue by reason of a proposed transfer of shares, it cannot be said that, because the transfer if effected by registration would enable a majority to effect its will, they are bound to register. Directors may be regularly displaced, _ or the articles may be regularly altered. But until that is done, the position is not doubtful. Directors obtain their powers from - the consensus of all the shareholders as expressed in the articles because the primary maxim of corporate action is wbi major pars 4 ibi totum, that is, the whole corporation (Grant on Corporations, p. - 68). The duty of directors is consequently primarily to the company - itself (Allen v. Hyatt (2), per Viscount Haldane L.C. for the Privy - Council). The consensus of the shareholders is therefore not as _ individuals, and even if the whole of them were unanimously to - attempt to withdraw the powers of the directors, it would be : ineffectual unless done in the way prescribed by law. So long as the articles stand (and see particularly art. 109) the directors, and not the Company by its general body of shareholders, have the power to manage the corporate affairs unless some provision to the contrary is found (Automatic &c. Co. v. Cuninghame (3) ; Gramophone he. Lid. - v. Stanley (4); Salmon v. Quin & Axtens Ltd. (5) ). Tt follows that if the directors honestly acted upon the business consideration - mentioned, it was within their power, even though a transient majority thought differently or desired differently. It is possible, of course, that the directors were not really moved by that legitimate consideration, but acted upon some extraneous reason, perhaps some unworthy reason. If they did, then their power is gone, and

[129]

course be scrupulously careful in the wielding of the serious power committed to them to have regard to the true interests of the company ; itself." Lord Wrenbury agreed. It is provided by art. 21 that the directors need not assign any - reason for their refusal to register. They have preserved silence in _ this case. The authorities just cited establish that their silence is : not a sufficient circumstance in itself on which to base an inference of impropriety. Indeed, it is part of the basic contract that no reason need be assigned. (See per Lord Wrenbury in Weinberger v. Inglis (1). ) But an applicant is not helpless; nor is the Court deprived of its power to do justice in a proper case. The Court will - judge of circumstances, and form its conclusions on reasonable probabilities. It is for the applicant to place, if he can, such cireum- stances before the Court as will reasonably lead to the conclusion - that in some way an improper use has been made of the power, so that the discretion committed to the directors has not been exercised. The case of Weinberger v. Inglis is decisive on this point, once the ambit of the power is ascertained (see the observations of Lord Birkenhead L.C. (2), of Lord Buckmaster (3), of Lord Atkinson (4), of Lord Wrenbury (5)). In the House of Lords case, Hindle v. John Cotton Ltd. (6), Viscount Finlay said : - '* Where the question - is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason. That is a subject which must be inquired into, and unless all the - authorities which lay down that directors must exercise their powers honestly and for the purposes for which those powers were given are wrong, an inquiry where relevant circumstances are alleged must : take place." It is not out of place to add some further observations -

At a glance

Court

Decision date

Before

Source

Judgment (179 paragraphs)

H.C. oF A. the exercise of their powers it must be shown by evidence that their f 1923. action was arbitrary and capricious." And Lord Wrenbury said

Parties

Cited By (2)