Company - Capitalization of profits - Validity of alteration of articles - Prejudice of H.C. or A. holders of parlly paid-up shares - Benefit of company - Statements in circular 1938-1939,

explaining proposed alteration - Statements at meeting - Accuracy and com- Sag

• pleteness. : Sypyey, a4 1938, The share capital of a company consisted of a large number of fully paid yoy, 11, 14, shares and a smaller number of shares paid up to one-third, The articles of 17. association contained @ provision that cash dividends should be distributed yy. Some, in proportion to the amount of capital paid up on shares and a provision that "939 "notwithstanding anything in any other article contained " under the authority 5, <A

of a general meeting profits might be distributed in the form of fully paid or partly paid shares in proportion to the number of shares held by the respective esas CS. members. At a general meeting a special resolution was passed altering the Dixon and article dealing with the capitalization of profits to the effect that when a capitalization took place the distribution of shares should be in accordance with the amount paid up on the respective shares of the members participating. This alteration formed part of a scheme for the formation of a subsidiary

operating company and a transfer of the assets to it in exchange for shares.

"i Further resolutions were passed at the meeting to give effect to this scheme.

E A circular explaining the purpose and nature of the proposed charge had

been sent to shareholders with the notice of the meeting. The circular was

capable of conveying a view of the situation arising by reason of the different VoL, LXI. 31

bases of distribution of cash profits and of profits in the form of fully paid partly paid shares which was not the correct legal result ; but the re articles were set out therein and the circular was carefully and honestly draw 'At the meeting the chairman and the company's solicitor made statement which were similarly mistaken, as to the effect of the proposed alteration 'The opponents of the scheme put their views before the meeting. plaintifis, who were contributing shareholders, sought a declaration that th resolutions were 'invalid on the grounds (i) that the resolutions were passe solely for the purpose of benefiting fully paid shareholders to the disadvant of partly paid shareholders and not in the interests of or for the benefit of th company, or the body of shareholders ; (ii) that the circular issued with th notice convening the meeting was misleading; (iii) that at the meeting th chairman and the solicitor made statements which were not complete and 1 accurate and were misleading.

Decision of the Supreme Court of New South Wales (Nicholas J.) reversed

Apprat from the Supreme Court of New South Wales. In a suit brought in the Supreme Court of New South Wale:

Co, Ltd., was a limited liability company carrying on busines that State and incorporated therein on 14th September 1920. the date of the commencement of the suit it had a total paid- capital of £397,445 15s. 4d. which was divided into 511,364 share of 14s. each fully paid up and 169,247 shares of 14s. each paid t 4s. 8d. :

The plaintiffs to the suit, Thomas Wood Heath, Lynton E Palmer and Herbert Raymond Nettheim, were the holders of

holders of partly paid-up shares in the company who at an ex ordinary general meeting held on 14th September 1937 did not in favour of the proposal to alter art. 120 of the company's a of association.

At the hearing no exception was taken to the manner in v the suit was constituted.

The plaintifis sought a declaration that the resolutions wh the shareholders purported to alter the articles were not v passed, and an injunction restraining the company and its direct

from acting upon those resolutions or making any distribution of H- ©. or A.

the assets of the company inconsistent with art. 120 as it stood at the date of the extraordinary general meeting above mentioned. The grounds upon which the declaration and the injunction were sought in the statement of claim as originally drafted were in sub- stance: (i) that the resolutions were passed solely for the purpose of benefiting fully paid shareholders to the disadvantage of partly paid shareholders and not in the interests of or for the benefit of the company, or the body of shareholders; and (ii) that '' the members of the company at all material times holding only partly paid shares were only a small minority of the shareholders and the plaintiffs charge and it is the fact that the fully paid shareholders used their majority voting power to pass the said resolutions to benefit themselves at the expense of the partly paid-up shareholders." At the hearing the plaintiffs put their case on three additional and alternative grounds as follow: (i) that a circular issued with the notice convening the meeting was misleading; (ii) that speeches made at the meeting by the chairman of directors and the company's solicitor were, even although bona fide, incomplete, inaccurate and misleading ; and (iii) that the chairman refused to put an amend- ment which was proposed at the meeting by a shareholder and which should have been put to the vote. _ Art. 120 was headed " Capitalization of Profits" and was in the following terms : - " 120. Notwithstanding anything in any other article contained the whole or any part of the undivided profits including amounts at credit of reserve or any other fund may with the sanction of the company in general meeting be converted into capital of the company by distributing the same amongst the holders of shares as a special dividend or bonus by issuing partly or fully paid-up shares in respect thereof to the holders of such shares in proportion to the shares held by them in the company. The directors may sell shares or make cash payments if necessary in order to adjust tights and a proper contract shall be filed in accordance with section 5b of the Companies Act 1899, and the directors may appoint any

person to sign such contract on behalf of the persons entitled and such appointment shall be effective."

1938-1939. we Perens' AMERICAN Deticacy Co. Lr.Hears.

H.C.orA. By the resolution of which the plaintiffs complained it ee resolved : - " That the articles of association be altered in manner Perers' following: ' Article 120 shall be cancelled and the following article ae substituted therefor - 120. Any general meeting declaring a dividend Co. Lx. may resolve that such dividend be paid wholly or in part by 1° Heats. distribution of specific assets and in particular of paid-up shi

~~ debentures or debenture stock of the company or paid-up shares, debentures or debenture stock of any other company or in any one or

more of such ways. 120a. Any general meeting may resolve that

moneys investments or other assets forming part of the undivided

profits of the company standing to the credit of the reserve fund or in the hands of the company and available for dividend (or representing premiums received on the issue of shares and standing to the credit of the share premium account) be capitalized and distributed amongst such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportions on footing that they become entitled thereto as capital and that all or an part of such capitalized fund be applied on behalf of such shareholder in paying up in full either at par or at such premium as the resolution may provide any unissued shares or debentures or debenture si of the company which shall be distributed accordingly or in or towards payment of the uncalled liability on any issued shares or debentures or debenture stock and that such distribution or paymen shall be accepted by such shareholders in full satisfaction of th ein interest in the said capitalized fund.'" Art. 120B was an article which it was proposed to substitute for the second portion of th original art. 120, and which it is not necessary to set forth in this report. At the meeting at which the resolution for the alteration of the articles was proposed and carried resolutions were also proposed for increasing the capital of the company to £1,050,000 by the creatior of 750,000 new shares of 14s. each, for the promotion of a new company to which the existing company was to sell portion of it assets, of which the most valuable was the goodwill of its busine in New South Wales, and for the formation of a special res account to which the directors should carry all or such part as they

should think fit of the moneys to be received from such sale or sele

with a view to the subsequent distribution thereof amongst the H. ©. or A.

shareholders by way of a bonus dividend to be satisfied by the issue of shares in the company as fully paid, as thereafter mentioned.

Resolution 4 of the resolutions put to the meeting was stated in the notice to be contingent on the previous resolutions having been passed. It was as follows: "That it is desirable that a sum of £397,446 which will be part of the undivided profits of the company and which will stand to the credit of the said special reserve account after the moneys shall have been received by the company from the said sale or sales be capitalized and accordingly that a special bonus dividend of 14s. per share be declared on each of the issued fully paid 14s. shares of the company and of 4s. 8d. per share on each of the shares of the company which have been partly paid namely to 4s. 8d. and that such dividend be satisfied by the company allotting to each holder of fully paid shares one new share of 14s. credited as fully paid for each one fully paid share held by him on 3rd Septem- ber 1937, and by the company allotting to each holder of partly paid shares one new share of 14s. credited as fully paid for each three partly paid shares held by him on the same date."

At the meeting the chairman refused to put an amendment which a shareholder wished to move. The amendment was in the following terms: " That art. 120 be not cancelled and that the capitalization of profits involved in the resolution before the meeting be effected by making the distribution among shareholders, treating fully paid shareholders and contributory shareholders pari passu in accordance with art. 120 of the company's existing articles of association."

Other articles material to this report were as follows : - ' 36. 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 and either at par or at a premium to all the then members or any class thereof in proportion to the amount of capital held by them or make any other provisions as to the issue and allotment of the new shares but in default of any such determination or so far as the same shall not extend the new shares may be dealt with as if they formed part of the shares in the original ordinary capital." "108. The profits of the company shall be divisible among the members in proportion to the capital paid up on the shares held by them

respectively. 110. The company in general meeting may a dividend to be paid to the members according to their rights interests in the profits and may fix the time for payment. 111. larger dividend shall be declared than is recommended by th directors, but the company in general meeting may declare a small dividend. 112. No dividend shall be payable except out of th profits of the company and no dividend shall carry interest a against the company." Sec. 20 of the Companies Act 1936 (N.S.W.) provides as follo "(1) Subject to the provisions of this Act and to the conditio contained in its memorandum, a company may by special resol alter or add to its articles. (2) Any alteration or addition so m shall be as valid as if originally contained in the articles, a subject in like manner to alteration by special resolution." A brief summary of the events preceding the general meeting 0 14th September 1937 is as follows : - The defendant company we incorporated in 1920 on the reconstruction of a company whiel had for some years previously carried on the same business wi the same name. From 1920 until 1929 all the shares in the comp were £1 shares paid up to 15s., but in 1929 the company incre its capital by the issue of one contributing share paid up to 5s. every three shares paid up to 15s. On 4th August 1931 it pass

shares of £1 each to £525,000 divided into 750,000 shares of 14 each by paying the holders of the shares issued as paid up to 15s. sum of Is. per share and by wholly extinguishing the liability o the uncalled capital thereon, and by reducing the nominal amount of each of the said shares from £1 to 14s., and by paying to the holder of the 169,247 shares that had been issued paid up to 5s. per share' sum of 4d. per share and by extinguishing the liability on shares to the extent of 6s. per share, and by reducing nominal amount of each of the said last-mentioned shares from £ to lds. For some time prior to the year 1934 the company had enj great prosperity, and for some years had paid dividends at the rate of 16 per cent per annum. Between the years 1931 and 1934 ther had been discussion between the then chairman of directors and th

present chairman, on the advisability of distributing the whole or H. C. oF A. 1938-1939,

portions of the reserves, but owing to the ill-health of the then chairman, no decision was made. In 1934 the directors were warned by the auditor that if they intended to distribute part of the reserves it was desirable that they do so before the end of 1934 so as to avoid the extra taxation which came into force at that time. Counsel was thereupon consulted, but owing to his doubt about the exact effect of the articles it was regarded as impossible to take the steps necessary for a distribution before the end of that year. Between the months of May and June 1935, discussions took place between representatives of the company and a number of senior counsel, and also between officers of the company and the chairman of directors of a company which had recently succeeded in avoiding taxation on a distribution of profits. On 5th June 1935 the board of the defendant company resolved to leave the question of distribu- tion temporarily in abeyance. No proposal to alter art. 120 had come before the board until early in 1937, although a suggestion had been made earlier that the wording of the article would create a difficulty. On 17th March 1937, the chairman submitted to the board a scheme of distribution which had been framed after lengthy consideration with the company's auditors and which was designed to secure for the shareholders immunity from taxation on the benefits to be received by them. At this meeting the chairman stated that there was another matter exercising the minds of the board and that was in regard to art. 120 of the company's constitu- tion, " such article in its present form not appearing to be equitable." The board meeting was followed by a conference at the offices of the company's solicitor, and this conference by an opinion from senior counsel received on 4th April 1937. At the conference the directors were advised by their solicitor that the company could alter art. 120. It was not suggested that by doing so the majority would inflict an injustice on the contributing shareholders, but the opinion was expressed either then or at a later conference with senior counsel that it would be inequitable for shareholders who had paid 4s. 8d

to receive the same profit as those who had paid 14s. The advis- ability of the necessity of altering art. 120 was discussed in the opinion received on 4th April. In a later opinion from a fourth

1988-1939. Ss PETERS' AMERICAN DELicacy Co. Lrp. v Hearn.

senior counsel the liability for taxation was again discussed, the company was advised that it would be open to it to distril its accumulated profits under art. 108 so that shareholders y benefit in proportion to the amounts paid up on their shares inste of under art. 120 in proportion to the number of shares held by them

Inthe conferences and the board meetings held in 1937 the director acting on the advice of their experts, agreed that it would injudicious to call up the amounts unpaid on their contributir shares and so make all the shares fully paid, and so avoid the difficult said to be created by the wording of arts. 120 and 108. The comp: it was held, had large funds available and could find no possible for any additional moneys that might be called up. It was suggeste also that the court might not give its sanction for a scheme for' reduction of capital which had been evolved in conjunction wit scheme for turning contributing into fully paid shares.

The opinions of counsel were tendered and evidence was given of conferences between solicitors and counsel, and between the dire: and their expert advisers, for the purpose of showing (a) that th directors were engaged in the preparation of a scheme for the di tion of profits in such a way as to safeguard the shareholders agains taxation, and (b) that the alteration of art. 120 was considered te be and was in fact essential to this scheme and that in placing thei proposals before the shareholders the directors acted in accord: with the opinions of their expert advisers and gave to the shareholder a reasonably full and accurate account of this advice. The la the opinions of senior counsel was received on 25th May 1937. dealt with two questions : the avoidance of taxation by a revaluation of the goodwill and a subsequent sale to a new company, and alteration of the articles, and, as already mentioned, it conclu with a suggestion that accumulated profit might be distribu under art. 108.

On the two following days conferences were held with other counsel at which this opinion was discussed. Subsequently th directors resolved that a general meeting of shareholders be hel and the resolutions to be proposed at this meeting, together with circular explanatory of these resolutions, were settled by counsel.

The meeting was addressed by the chairman of directors and by H: ©. or

one of its solicitors. Speeches in opposition to the proposed amend- ment were made by two shareholders, one of whom stated his inten-

_ tion of moving an amendment, but he was prevented from doing so by the chairman.

There were 257 shareholders present. Of these 45 held no con- tributing shares, 35 more than one-third contributing and 14 more contributing shares than fully paid. The resolution for the altera- tion of art. 120 was carried with 19 dissentients, a poll was not called for, and for this reason proxies were not used, although a great number had been sent in.

The following extracts from the circular show the portions which were attacked : - " It will be seen that the said notice refers to two resolutions to be passed as special resolutions and two resolutions to be passed as ordinary resolutions at the said meeting. The passing of the said resolutions by the necessary majorities is required in order to give effect to proposals by which the issued capital of the company can be increased by the issue to shareholders of bonus shares fully paid. . . . In order to make such bonus shares fully paid it will be necessary to declare a dividend which can be set off against the amounts payable on the said shares. . . . As previously stated it is necessary to declare a dividend payable by the company to the shareholders which can be set off against the amount payable by the shareholder to the company in order to make the bonus shares fully paid. Art. 108 (swpra) provides that the profits of the company shall be divisible among the members in proportion to the capital paid up on their shares while on the other hand art. 120 provides that when bonus shares are distributed amongst the shareholders they must be distributed according to the nominal amount of capital held by shareholders in the company irrespective of the amount paid up thereon. The two articles

_ would only be consistent when, as was originally the case, all the issued shares of the company had been paid up to the same amount and would become inconsistent with one another when the issued shares are, as at present, paid up to two different amounts. In order therefore that the bonus dividend which the directors propose to declare should be available to make all the new bonus shares to be

issued fully paid, it is proposed that art. 120 should be dele the new article referred to in the said notice substituted.

for such new bonus shares. In the event of the special altering the articles being defeated the directors may have to

the carrying of the special resolution. The directors have advised by counsel that the company would legally be entit declare a bonus and at the same time make available for issue si new shares for the shareholders to take up and apply the said to make the said shares fully paid so long as shareholders wl not desire to take up the said shares were paid their divi cash so that in this way the provisions of art. 120 would be avoit This course would however be subject to many objections."

The following are extracts from the speech of the chairman "Your directors are of the opinion that the resolutions before J to-day are the only means whereby a bonus issue of shares can properly made. In order to clear any doubt that you may h on the subject the company's solicitor is in attendance and coun: opinions are available here. To-day it is not a debate on Ww alternatives any of you might imagine to be possible. Your bo with its advisers has gone into all the pros and cons long ag the matter before you is: Are you prepared to alter the arti we suggest and thereby create the machinery which will enable # company to make the bonus issue of shares ?"' and from the spe of the solicitor : - " The difficulty arises, of course, out of the im sistency between at least two of the articles of association of company. Art. 108 provides that dividends shall be paid in pro tion to the amount paid up on the shares, Art. 120, which ist article providing for the capitalization of profits, indicates th that proceeding is availed of, then the amount paid up is no criterion upon which the distribution is to be made, but the n of shares held. That inconsistency is what has given rise to so mt talk and consultation on the part of your board." The speaker t

set out the steps which, he said, were implied in a distribution of H. ©. or A.

shares and said: "It is illogical and the difficulty has arisen owing to the inconsistency between these two articles."

No charge of personal bad faith was made against any of the directors. It was, however, claimed that they took into considera- tion and put before the shareholders matters which should not have been considered and statements based on a misapprehension of the effect of the articles, that the circular accompanying the notice was misleading in a material respect, and that the action of the majority was such as to " oppress a minority " of their fellow shareholders.

Nicholas J. held that the shareholders voted under a misappre- hension of the true relationship of art. 120 to the other articles, and therefore of the purpose of the resolution, and that it could not be said that the object of the resolution was the benefit of the company, or that the action of the shareholders was capable of being considered for the benefit of the company, or that the shareholders with the best motive had not considered matters which they ought not to have considered. He was of opinion that if the shareholders did not vote with a view of depriving the minority of its rights,

they voted to remove an obstacle which did not exist. He made the declarations and granted the injunction sought by the plaintiff.

From that decision the defendant appealed to the High Court.

Dudley Williams K.C. (with him Street), for the appellant. The word "dividend " should be given the same meaning wherever it occurs in the articles, that is, a dividend declared on the paid-up value of the shares, so that the word " dividend " in art. 120 means a dividend declared in accordance with the rights of members as conferred upon them by art. 108. The words " notwithstanding anything in any other article contained " in art. 120 were inserted for the purpose of meeting the decision in Wood v. Odessa Waterworks Co. (1), and allow the appellant to apply a dividend to pay for bonus shares instead of paying the dividend in cash to the shareholders. The emphasis in art. 120 is upon the words " notwithstanding anything in any other article contained profits may be converted into capital." The word " profits" as there used means profits in

1938-1939. WY PrrErs' AMERICAN Deticacy Co. Lrp. v. Hearn.

1938-1939. a Prrers' AMERICAN Deicacy Co. Lrp. w Heat.

the same sense as in other articles, that is, profits which u art. 108 are divisible in proportion to paid-up capital. Art. 1

that instead of paying a dividend in cash that dividend should converted into shares. To make art. 120 read sensibly the wo "to be satisfied " should be inserted after the word " bonus." Uj the appellant's construction of art. 120 the only way the neces: dividend could be declared to pay for the bonus shares in ul up to the same amount if the bonus shares are to be distribu proportion to the shares held in the company, would be whe the issued shares were paid in full or to the same amount. | only way bonus shares can be issued paid up in full or to a cert amount is to declare a dividend under art. 108 and then to appl the dividend so declared in payment of the shares in full or t certain amount (Inland Revenue Commissioners v. Wright (1); I v. Permanent Trustee Co. of New South Wales (2); Inland Re Commissioners v. Fisher's Executors (3); Inland Revenue Co sioners v. Blott (4); Bouch v. Sproule (5); Commissioner of (Vict.) v. Nicholas (6); Commissioner of Taaation (N.S.W Stevenson (7); James v. Federal Commissioner of Tacation ( Palmer's Company Precedents, 15th ed. (1938), vol. 1, p. 967). [Laraam C.J. referred to Swan Brewery Co. Ltd. v. The King (8 All that Blott's Case (10) really decides is that if in the ultim result, if the requisite steps have been taken, the shareholder what is a capital asset, then for the purposes of income ti England that is not income but capital. Alternatively art. open to the construction that in the allotment of bonus shares shat holders who hold fully paid-up shares would receive fully ps bonus shares, and shareholders who only had partly paid-up 8 would receive partly paid-up bonus shares. In that way would be reconciled with arts. 108 and 110. The reasonin;

(1) (1927) 1 K.B. 333, at pp. 342, 348. (6) (1933) 59 C.L.R. 230, at pp. 242.

(2) (1930) A.C at p. 731. 2. f (3) (1926 (7) (1937) 59 C.L.R. 80, at p. 98. (4) (1921 , at pp. 178, 183, (8) (1924) 34 C.L.R. 404. 187, 204. (9) (1914) A.C. 231. (5) (1887) 12 App. Cas. 385, at pp. (10) (1921) 2 A.C. 171. 402-404,

House of Lords in Hole v. Garnsey (1) and Biddulph and District H. C. oF A.

Agricultural Society Lid. v. Agricultural Wholesale Society Ltd. (2) may be very apposite with the right of the company to offer partly paid-up shares to its members. A mistake or ambiguity in an article may be removed only by the machinery provided by and under the Companies Act for the alteration of articles ; such a matter does not come within the court's jurisdiction to rectify documents on the ground of mutual mistake (Hvans v. Chapman (3) ). It is not sug- gested that art. 120, on any construction, is in any way ultra vires the Companies Act. In every case it is a question of fact: Did the shareholders vote to benefit the company or did they vote for the purpose of oppressing the minority of the shareholders ? [Dixon J. referred to Miles v. Sydney Meat Preserving Co. (Ltd.) (4) and Dutton v. Gorton (5).] The scheme put forward by the appellant is not a scheme which causes an expropriation of rights because: (i) art. 120 can only operate by resolution of a general meeting and it is obvious the shareholders in general meeting would not agree to an issue of bonus shares on the basis that one fully paid-up bonus share should be issued for each existing fully paid-up and partly paid-up share ; (ii) it is within the power of the company by ordinary resolution in general meeting to provide that what would be equivalent to bonus _ shares should be allotted on the basis of art. 108 ; (iii) the only case in which the company would be likely to pass a resolution in general meeting under art. 120 - if " dividend " in that article means dividend

• on nominal capital - would be when (a) all the issued shares were : paid up to the same amount; (b) the holders of partly paid-up shares could outvote the holders of fully paid-up shares ; and (iv) if the holders of partly paid-up shares are entitled to an injunction _ in the present case, then, if these holders could outvote the holders 7 of fully paid-up shares and passed such a resolution under art. 120, _ the holders of fully paid-up shares might be entitled to an injunction _ to prevent a distribution of profits otherwise than in accordance _ with art. 108. The basic position is that the company in general

(1) (1930) A.C. 472, (4) (1913) 16 C.L.R. 50, at p. 90; 17 (2) (1927) A.C. 76. C.L.R. 639.

] } k k (3) (1902) 18 TLR. 506; 86 LT. (5) (1917) 23 C.L.R. 362, at pp. 394, F 381. 395,

meeting has complete control as to whether a dividend s a paid in cash, or in shares, or at all. The advantages of the attacked are: (a) the alteration of art. 120 can only be effe special resolution ; (b) it brings arts. 108 and 120 into conf and should prevent in the future any disputes between shareh¢ and (c) the proposed bonus distribution would clearly be capita the case of settled estates. The matter of the alteration of arti is dealt with in Palmer's Company Precedents, 15th ed. (19 586-590, where the relevant cases are discussed: See particuli Pepe v. City and Suburban Permanent Building Society (1); Al v. Gold Reefs of West Africa Ltd. (2); Batu Pahat Bank Ltd. vy. Assignee (3); see also In re T. N. Farrer Lid. (4). The posit here is similar to the position in In re Imperial Chemical Ind Ltd. (5). That decision was affirmed by the Privy Council v. Imperial Chemical Industries Ltd. (6) ). Cases in wh injunction has been granted are extremely rare. One such Brown v. British Abrasive Wheel Co. Ltd. (7), where the d was simply on a question of fact.

(Drxon J. referred to Dafen Tinplate Co. Ltd. v. Llanelly Co. (1907) Ltd. (8).

The dictum in that case was disapproved by the Court of in Shuttleworth v. Cox Brothers & Co. (Maidenhead) Lid. (9 the suit succeeded the holders of partly paid-up shares would obtain any real benefit. They would only prevent the ado application of the present scheme. They would not be have any profits capitalized. The proposed distribution will the proportionate amount of the total dividend payable existing shareholders unchanged whatever the future rate of divide may be. The court will only interfere to prevent a company its articles when, as stated in Shuttleworth v. Cox Brothers d (Maidenhead) Ltd. (9), the alteration of the articles is of sue character that no reasonable man could consider it to be for benefit of the company. That is the true test. In this ¢

(1) (1893) 2 Ch. 311. (6) (1937) A.C, 707. (2) (1900) 1 Ch. 656. (7) (1919) 1-Ch. 290. (3) (1933) A.C. 691, at p. 697. (8) (1920) 2 Ch, 124. (4) (1937) Ch. 353, at p. 356. (9) (1927) 2 K.B. 9

(5) (1936) Ch. 587; see particularly pp. 609, 610, 615-619.

reasonable shareholder acting bona fide could consider the proposed H- ©. or A.

alteration of art. 120 to be for the benefit of the company. The test is not whether the proposed alteration is for the benefit of the company as a trading concern. If it were so, Brown v. British Abrasive Wheel Co. Ltd. (1) would have been differently decided. The decision in Geary v. Melrose Co-operative Dairy Co. Ltd. (2) was based on a statement which appeared in Palmer's Company Precedents but which has been eliminated from the 14th and 15th editions of that work. An alteration may be made in good faith even thought it may prejudice some shareholders. The question in each case is one of fact (Sidebottom v. Kershaw, Leese & Co. Lid. (3) ). 'The scheme proposed is not unconscionable and is a proper exercise of the power to alter the articles ; it is not animated by an improper purpose (Mills v. Mills (4) ). The evidence strongly supports the finding of fact that throughout the directors acted in perfect good faith. The circular was an accurate circular and was not misleading. Its purpose was to explain the proposed resolutions set forth in the notice. Assuming, though not admitting, that the legal views expressed in the circular were erroneous, the notice and circular nevertheless accurately set forth sufficient facts to substantially put the shareholders in a position to know what they were being asked to vote about (Carruth v. Imperial Chemical Industries Ltd. (5) ). The inaccurate statements in, and the omissions from the circular, if any, were not in respect of material matters and were completely different in character from those under discussion in Kaye v. Croydon Tramways Co. (6), Tiessen v. Henderson (7) and Baillie v. Oriental Telephone and Electric Co. Ltd. (8), nor were there any intentional _and deliberate non-disclosures (Bulfin v. Bebarfald's Ltd. (9) ). No shareholder possessing ordinary intelligence could have been misled by the notice, the circular, or the speeches at the meeting as to any matter before the meeting. The evidence shows that the matters before the meeting were freely and fully debated. The directors

(1) (1919) 1 Ch. 290. (5) (1937) A.C., at pp. 760, 761. (2) (1930) N.Z.L.R. 768, (6) (1898) 1 Ch. 358. (8) (1920) 1 Ch., at pp. 167, 171, 173, (7) (1899) 1 Ch. 861. 174. (8) (1915) 1 Ch. 503. (4) (1938) 60 C.L.R. 150, at pp. 165- (9) (1938) 38 S.R. (N.S.W.) 423, at ; 167, 179, 185, p. 430.

1938-1939, Ww Prrers' AMERICAN Deticacy Co. Lrp. v. Heatu.

1938-1939. Ww Perers' AMERICAN Deicacy Co. Lrp. v. Hearn.

sought to bring about a result which was both necessary and d in the company's interests. [Ricu J. referred to Topham v. Duke of Portland (1).] The amendment referred to by a shareholder was properly reje

by the chairman. It was not clearly indicated and was not the scope of the notice convening the meeting (Henderson v. Ba Australasia (2); Halsbury's Laws of England, 2nd ed., vol. 5, p

368; Palmer's Company Precedents, 15th ed. (1938), p. 647).

Mason KC. (with him Wickham), for the respondents. not any inconsistency as between art. 108 and art. 120. Th articles deal with separate matters; they are entirely independ: of one another, and as the shareholders accepted their shares wit notice of those articles no question of " fair and equitable " or " fair" and " more equitable" can arise (Oakbank Oil Co. v. Or (3) ). Under art. 108 the profits of the conipany must be distri by way of cash dividends (Wood v. Odessa Waterworks Co. Art. 120 is concerned only with the capitalization of profits. the direct method provided for that purpose; therefore i methods are not permissible. Upon a scheme for the capitaliz

108. Regard must be had to the substance of the transaction : question whether it is intended to declare a dividend, or to capital the profits (Bouch v. Sproule (5); Inland Revenue Commis v. Blott (6)). Whether or not art. 120 may be altered depend upon the special circumstances of the case. The

stances proved in this case do not show that the proposals u consideration were for the benefit of the company (Shutilewor Cox Brothers & Co. (Maidenhead) Ltd. (7); Sugden vy. Urban Fi Insurance Co. Ltd. (8) ). The effect of those proposals is to tal from the contributing shareholders something conferred upon by the articles as existing and to give that something to the ho

(1) (1863) 1 De GJ. & S. 517, at p. 570; 46 E.R. 205, at pp. 226,

(4) (1889) 42 Ch. D. 636. (5) (ase7) 12 App. Cas., at pp. 39

(6) (ise 2 AC, at p. 198. (7) (1927) 2 K.B. 9. (8) (1931) 75 Sol. Jo. 60.

of fully paid-up shares, that is, those proposals are designed to H. ©. or A.

bring about an alteration of rights in favour of the majority at the expense of the minority. The nature and effect of that alteration was not accurately and fully explained by those in charge of the company's affairs. Some of the information contained in the circular, particularly as regards an alleged inconsistency between art. 108 and art. 120, and the necessity to alter art. 120, was inaccurate, which together with some important and material omissions there- from tended to cause, and, doubtless, did cause, some shareholders to be misled ; consequently the resolutions were vitiated (Bulfin v. Bebarfald's Ltd. (1) ). Profits capitalized under art. 120 are changed in character and thereafter can reach shareholders only upon a winding up. It follows from In re Driffield Gas Light Co. (2), that if the company were wound up after a capitalization the distribution would go eventually on the basis provided for by art. 120. That article is a fair compromise of the rights that should attach as between paid-up and contributing shareholders. Inland Revenue Commis- sioners v. Blott (3), Inland Revenue Commissioners v. Fisher's Executors (4), Commissioner of Taxation (N.S.W.) v. Stevenson (5) and Commissioner of Taxes (Vict.) v. Nicholas (6) are " income tax " cases in which the respective decisions depended upon the terms of the particular statute involved, and thus are not applicable to this case. The meaning of the expression "distribute in proportion " was considered in Oakbank Oil Co. v. Crum (7) and Birch v. Cropper ; In re Bridgewater Navigation Co. Ltd. (8). Upon an alteration of articles the test is: Is there any reasonable prospect of advantage to the company as a whole? (Buckley on The Companies Act, 10th ed. (1924), pp. 25, 26). An attempt to reconcile the two lines of cases was made in British America Nickel Corporation Lid. v. M. J. O'Brien Ltd. (9). When exercising his vote a shareholder should have greater regard for the benefit of the company as a whole than for his personal enrichment. Directors, as fiduciary agents, are under a special obligation in this regard (Mills v. Mills (10) ). The

(1) (1938) 38 S.R. (N.S.W.) 423. (6) (1938) 59 C.L.R. 230,

(3) (1921) 2 A.C. 171. (8) (1889) 14 App. Cas. 525.

(5) (1937) 59 C.LR. 80. (10) (1938) 60 C.L.R., at pp. 185, 186.

1938-1939,Perers' AMERICAN Denicacy Co. Lrp. v Hears.

effect of the evidence is that persons did buy contributing sha because of the special benefits that attached to them under art. 13 The only purpose served by the proposed art. 120A is to div money which under art. 120 would go into another channel; it j not possible to conclude that this was for the benefit of the comp There is abundant evidence to justify the finding of fact by th judge of first instance that the proposals were not for the ben of the company. The test of what is for the benefit of the company is dealt with in Halsbury's Laws of England, 2nd ed., vol. 5, p 295, 410, and the cases there cited: See also Miles v. Sydney Preserving Co. (Ltd.) (1) and Dutton v. Gorton (2). The s

of the circular refrained from attending the meeting in person we prejudiced thereby (In re Quebrada Railway, Land and Copper 0 (4); Carruth v. Imperial Chemical Industries Ltd. (5) ).

[Ric J. referred to In re Union Plate Glass Co. (6).J

Upon any proposal to alter a person's rights it is essential that. full and fair explanation free from ambiguity be made (In re Zmper Chemical Industries Ltd. (7); Clarkson vy. Davies (8); Baillie Oriental Telephone and Electric Co. Ltd. (9); Bulfin v. Bebarfal Ltd. (10); Kaye v. Croydon Tramways Co. (11) ). Owing to no disclosures and misstatements the shareholders were not only m but were officially misled. The amendment, the nature of ¥ as found as a fact by the judge of first instance, had been indicat should have been accepted by the chairman and submitted to meeting. Notice of the amendment was not necessary ; but tl amendment itself was necessary in order fully to ascertain th opinions of the shareholders. It was not a direct negative to th proposals before the meeting (Henderson v. Bank of Australasia (12),

(1) (1912) 16 C.LR., at p. 90. (7) (1936) 1 Ch. 587.

(2) (1917) 23 C.LR., at pp. 394, 395. (8) (1923) A.C. 100, at p. 108.

(3) (1938) 38 S. S.W.) 423. (9) (1915) 1 Ch., at pp. 514, 515, 518. (4) (1888) 40 Ch, D. 363, at p. 367. (10) (1938) 38 S.R. (N.S.W.), at (5) (1937) A.C., at p. 746. 430 et seq.

(6) (1889) 42 Ch. D. 513. (11) (1898) 1 Ch. 358. (12) (1890) 45 Ch, D., at pp. 343, 349.

Dudley Williams K.C., in reply. There was not any amendment actually proposed at the meeting. The amendment intended to be moved was a direct negative of the matter before the meeting and was very different in its terms from the amendment under considera- tion in Henderson v. Bank of Australasia (1). The intended amend- ment was not within the scope of the business before the meeting (Betts & Co. Ltd. vy. Macnaghten (2) ). The cases where amendments of special resolutions have been allowed have been very special cases (Torbock v. Westbury (Lord) (3) ). In re Quebrada Railway, Land and Copper Co. (4) was a reduction case in which the court has a discretion : it differs from the present case. The circular was not misleading in the sense of being a "tricky " circular, or mis- leading in the sense that the shareholders were not placed in a position to know substantially what they were voting about; it is not a ground for an injunction against the company acting on the resolu- tion. The shareholding of the company is such that there is not any reasonable probability of a resolution ever being carried under art. 120 as it now stands; therefore it would be for the benefit of the company that art. 120 should be altered in the manner suggested. A shareholder may, in the absence of unfairness and oppression, vote in accordance with his individual interests (Goodfellow v. Nelson Line (Liverpool) Ltd. (5); British America Nickel Corporation Lid. yv. M. J. O'Brien Ltd. (6) ). The special resolution was validly passed by the bona fide exercise of the power of the company in general meeting.

Laruam C.J. This is an appeal from a decree of the Supreme Court of New South Wales in its equitable jurisdiction whereby it was declared that certain resolutions of the shareholders in the appellant company were not validly passed as special resolutions and that the articles of the company were not validly altered by such resolutions. The court also granted an injunction restraining

(1) (1890) 45 Ch. D. 330. (4) (1888) 40 Ch, D. 363. (2) (1910) 1 Ch, 430. (5) (1912) 2 Ch, 324, at p. 333. (8) (1902) 2 Ch. 871. (6) (1927) A.C., at p. 374,

the company, its directors, servants and agents from acting upon the resolutions or making any distribution of the assets of th company thereunder.

The action was brought by three shareholders on behalf of then selves and other shareholders in the company holding partly pai shares. By amendment the title of the statement of claim wa altered so as to bring about the result that the plaintifis were su on behalf of themselves and other shareholders in the company holding only partly paid shares who did not vote at an extraord general meeting held on 14th September 1937 in favour of cancellation or amendment of art. 120 of the articles of associat of the company. The special resolutions provided for the alteratior of the articles and for a capitalization of profits by a distribution bonus shares in proportion to the amount paid up on their share by the respective shareholders. The nominal capital of the comy was £525,000, divided into 750,000 shares of 14s. each. The comp had issued 511,364 shares each all fully paid, and 169,247 sh each paid to 4s. 8d. Thus the partly paid shareholders had pai one-third of their capital liability.

The difficulties which have led to this litigation arose from the form of the articles of association of the company. Arts. 108, 1 and 111 were as follows : - " 108. The profits of the company sha be divisible among the members in proportion to the capital paid up on the shares held by them respectively. 110. The company it general meeting may declare a dividend to be paid to memb according to their rights and interests in the profits and may fi the time for payment. 111. No larger dividend shall be de than is recommended by the directors but the company in ge meeting may declare a smaller dividend."

These articles provided for dividends to be paid in proportion to the amount of capital paid up on shares, and they also provided th the company could not declare a dividend larger than that ree mended by the directors.

Art. 120 was as follows : - ' 120. Notwithstanding anythin any other article contained the whole or any part of the undiv profits including amounts at credit of reserve or any other fund with the sanction of the company in general meeting be conve

into capital of the company by distributing the same amongst the holders of shares as a special dividend or bonus by issuing partly or fully paid-up shares in respect thereof to the holders of such shares in proportion to the shares held by them in the company. The directors may sell shares or make cash payments if necessary in order to adjust rights and a proper contract shall be filed in accord- ance with section 55 of the Companies Act 1899 and the directors may appoint any person to sign such contract on behalf of the persons entitled and such appointment shall be effective." (Sec. 55 of the Companies Act 1899 (N.S.W.) is now sec. 145 of the Companies Act 1936 (N.S.W.).)

Tf action were taken under art. 120 by distributing what is described as a special dividend or bonus in the form of shares, the article required that the distribution should be in proportion to the number of shares held by the shareholders in the company and not in proportion to the amount paid up on the shares.

There was unanimous agreement among all concerned that it was desirable to make a distribution of profits in the form of bonus shares. The company had been prosperous and for some years had been paying dividends of 16 per cent. There were obvious reasons of a business character, if it appeared probable that the same amount of money would be available in the future for the payment of dividends, for an adjustment of the rate of dividends to the moneys of the shareholders which were actually used in the enterprise. There were accumulated profits and the value of the goodwill had increased. It was therefore proposed to double the capital so as to halve, not the amount of the dividend, but the rate of dividend. Tn order to achieve this result a special resolution was proposed for the alteration of the articles under which art. 120 would be cancelled and other articles substituted under which it would be possible to make a distribution of new shares proportionately to the amount of capital paid up on the shares. Another special resolution provided for increasing the capital of the company to £1,050,000 by the creation of 750,000 shares of 14s. each. By an ordinary resolution it was proposed that (if the special resolutions were carried) the directors should be authorized to promote a com- pany to take over the goodwill and certain property of the appellant

1938-1939. a PrrErs' AMERICAN Deticacy Co, Lrp. ® Heat.

company to be paid for partly by shares in the new company, further ordinary resolution was also to be proposed in the e only of the special resolutions being duly passed. Under this re tion a sum of £397,446 would be capitalized and a special bi dividend of 14s. per share declared on the fully paid shares and ds, 8d per share on the partly paid shares, such dividend to be satisfied by allotting to each holder of fully paid shares one new share for ead fully paid share already held by him, and by allotting to each pa paid shareholder one new fully paid share for each three contributin shares held by him. f In the case of any particular shareholder the effect of these change

would be advantageous to him if he held fully paid shares and number of contributing shares less than one-third of the numb of fully paid shares held by him. Without going into details, it sufficient to state that the evidence shows that there were 94 sh holders to whom the proposals were disadvantageous when proposals were compared with a distribution under art. 120 in it original form. At the meeting at which the resolutions were pa 257 shareholders were present. Only 19 voted against the resolu tions. The plaintifis allege that the resolutions were invalid upon th grounds: (i) That a circular issued by the directors and distribut od to the shareholders before the meeting was not fair and frank and that it was misleading; (ii) that in the speeches at the mee the chairman of directors and the solicitors for the company mad statements which were not complete and not accurate but ¥ misleading ; (iii) that those who voted for the resolutions did solely for the purpose of benefiting fully paid shareholders to the disadvantage of partly paid shareholders and not in the interests 0 or for the benefit of the company or the whole body of shareholder A further objection was taken that the chairman acted wronglj in refusing to accept an amendment. I do not propose to deal with this objection in detail because the amendment, as to part, was direct negative of the motion before the chair, and as to another part was relevant only to the last resolution to be proposed and the

proposal of that resolution was contingent upon the passing of the Hi. C. ov A.

other resolutions. The proposed amendment would have been inconsistent with the articles as altered by the special resolutions and as an amendment to the last resolution would have been out of order upon that ground.

The effect of the judgment of the learned judge (Nicholas J.) may be stated in the following extract from his reasons for judgment :

• *T hold that the shareholders voted under a misapprehension of the true relationship of art. 120 to the other articles, and therefore of the purpose of the resolution, and that it could not be said that the object of the resolution was the benefit of the company, or that the action of the shareholders was capable of being considered for the benefit of the company, or that the shareholders with the best motive have not considered matters which they ought not to have considered : See Shuttleworth v. Cox Brothers & Co. (Maidenhead) Itd. (1). If the shareholders did not vote with a view to depriving the minority of its rights in the interests of the majority, they voted to remove an obstacle which in my judgment did not exist."

His Honour accordingly made the order the terms of which have already been stated.

I propose first to state some relevant principles of law.

(1) The Companies Act 1936 (N.S.W.), sec. 20, provides: " Subject to the provisions of this Act and to the conditions contained in its memorandum, a company may by special resolution alter or add to its articles." A company cannot deprive itself of this statutory power either by agreement or by a provision contained in the articles (Malleson v. National Insurance and Guarantee Corporation (2) ; Allen v. Gold Reefs of West Africa Ltd. (3) ). It is not possible, by articles of association, to make an unalterable article. If it is desired to place the rights of particular shareholders beyond the risk of being affected by an alteration of articles it is possible to include a provision in the memorandum of association which will have that effect. Sec. 20 empowers a company to alter its articles only subject to the conditions contained in the memorandum of association. There are no conditions contained in the memorandum of association

(1) (1927) 2 K.B,, at pp. 18, 23. (2) (1894) 1 Ch. 200, (3) (1900) 1 Ch., at pp. 671, 676.

of the appellant company which limit the right to alter the a

(2) It follows that the contract between members of the com and between the company and its members which is constituted the articles must be regarded as containing among its terms a p vision that articles may be altered in the manner provided by Act, that is, by special resolution. An alteration in a pa case may constitute a breach of contract with a shareholder, | such a breach of contract does not invalidate the resolution to alt the articles (Allen's Case (1) ).

(3) It follows that where the rights of members of the con depend only upon the articles it is possible to alter the members or of some only of the members by altering the a1 The fact that an alteration prejudices or diminishes some rights of the shareholders is not in itself a ground for attackin validity of an alteration: See Sidebottom v. Kershaw, Leese Tid. (2) (expelling a shareholder) ; Shuttleworth v. Cox Brot Co. (Maidenhead) Ltd. (3) (disqualifying a director); Allen's 0 (4) (creating a lien upon shares). Any other view would, in make unalterable and permanent any articles of association whi conferred rights upon a class of shareholders, or possibly upon: shareholder, if they or he desired that those rights should contin to exist unchanged. It is plainly not the law that the fact that alteration of articles alters the rights or prejudices the rights « some shareholders is sufficient to prevent the alteration from bi validly made.

(4) The power to alter articles must be exercised bona fide. generally said that the power must be exercised bona fide for t benefit of the company as a whole, and all the recent authorities ref to the statement by Lindley M.R. in Allen's Case (5) : - " The pow thus conferred on companies to alter the regulations contained their articles is limited only by the provisions contained it statute and the conditions contained in the company's memo u of association. Wide, however, as the language of sec. 50" (int

(1) (1900) 1 Ch., at p. 672. (3) (1927) 2 K.B. 9. (2) (1920) 1 Ch. 154, (4) (1900) 1 Ch. 656, (5) (1900) 1 Ch., at p. 671.

_ it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It ~ must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed." In Allen's Case (1) an article was altered in such a way as to prejudice quite seriously a single person who was the only holder of fully paid-up shares. The alteration had the effect of creating a lien for unpaid calls upon those shares. The articles before the alteration provided that such a lien existed upon "all shares not being fully paid." Thus the alteration was definitely directed against the interests of one member ; but it was for the benefit of

the company to recover moneys due to it, and, as the alteration was found to have been made bona fide for that purpose, it was upheld. (5) It is not for the court to impose upon a company the ideas of the court as to what is for the benefit of the company. It is for the shareholders to determine whether an alteration of the articles is or is not for the benefit of the company, subject to the proviso that the decision is not such as no reasonable man could have reached (Shultleworth v. Cox Brothers & Co. (Maidenhead) Ltd. (2) ). This is not an absolute rule, but it is the prima-facie general rule (Carruth v. Imperial Chemical Industries Ltd. (3) ). (6) The benefit of the company as a corporation cannot be adopted _ as a criterion which is capable of solving all the problems in this branch of the law. An alteration which is made bona fide and for the benefit of the company, if otherwise within the power, will be good, but it is not the case that it is necessary that shareholders should always have only the benefit of the company in view. In eases where the question which arises is simply a question as to the telative rights of different classes of shareholders the problem cannot be solved by regarding merely the benefit of the corporation. I refer to Pender vy. Lushington (4) and Mills v. Mills (5), a case of the exercise of powers of directors in relation to the " interests of the company." See North-West Transportation Co. Lid. v. Beatty (6),

(1) (1900) 1 Ch. 656. (4) (1877) 6 Ch. D. 70, at pp. 75, 76. (2) (1927) 2 K.B. 9. (5) (1938) 60 C.LLR., at p. 164, (8) (1937) A.C. 707. (6) (1887) 12 App. Cas. 589.

1938-1939. we Perens' AMERICAN Darrcacy Co. Lr. v. Hearn.

where it was held that a shareholder may vote as he pleases ey when his interests are different from or opposed to those of th company. Shareholders are not trustees for the company or { one another and the relations between them cannot be identifi with the relations between partners (Phillips v. Manufactu Securities Ltd. (1) ). But though a shareholder may vote in hi own interests the power of shareholders to alter articles is ite by the rule that the power must not be exercised fraudulently 0 for the purpose of oppressing a minority: See Cook v. Deeks (2) Menier v. Hooper's Telegraph Works (3) ; Shuttleworth v. Cox Brothe & Co. (Maidenhead) Ltd. (4); Carruth v. Imperial Chemical Indust Lad. (5).

(7) When the validity of a resolution of shareholders is challeng the onus of showing that the power has not been properly exercise is on the party complaining. The court will not presume fraud oppression or other abuse of power. See the cases as to vali of acts of directors when exercising a fiduciary power - whe higher standard would be required than in the case of shareholder who do not, in voting at a meeting, exercise any power of a fiduciary character (In re Gresham Life Assurance Society; Ex parte (6) ; In re Coalport China Co. (7); In re Hannan's King (Brow Gold Mining Co. (Ltd.) (8) ). It cannot be the law that a resolution of shareholders is to be presumed to be invalid until the defendants in an action positively establish that it is valid.

The result of applying these principles is that the special resolutior altering the articles cannot be declared to be invalid merely upo the ground that the original articles conferred special rights upot the holders of partly paid shares of which the alteration dept ed them, or upon the ground that the voting holders of fully paid shares were interested in making the alteration adversely to the holders of partly paid shares. If, however, the resolution wai passed fraudulently or oppressively or was so extravagant that r reasonable person could believe that it was for the benefit of the pany, it should be held to be invalid.

(1) (1917) 116 L.T. 290. (5) (1936) Ch. 587; (1937) A.C. 707. (2) (1916) 1 A.C. 554, at p. 564. (6) (1872) 8 Ch. App. 446.

(4) (1927) 2 K.B., at p. 27. (8) (1898) 14 T-L.R. 314,

Before considering the specific objections raised in the present case it is necessary to understand the problem which presented itself to the directors after it had been agreed that it was desirable to increase the capital of the company, to make a distribution of bonus shares, and to reduce the dividend rate. The question which arose was whether this objective should be achieved under art. 120 or by some other means. If it were accomplished under art. 120 some holders of partly paid shares would gain at the expense of some holders of fully paid shares. It is obvious that there is room for difference of opinion as to the fairness of distribution upon the basis of shareholdings as opposed to the basis of amounts of capital paid up. On the one hand it can be said that the partly paid share- holders bought their shares on the faith of the existing articles and that, although they had not paid as much towards the capital of the company as fully paid shareholders, they had been subject at all times to the risk of having calls made. On the other hand, as already stated, the contract between the partly paid shareholders and the company must be regarded as a contract which was subject to the statutory provision that its terms could be altered, in effect, by an alteration of the articles. Further, it is quite possible for any person to hold a bona fide opinion that such an article as art. 120 is in itself not equitable.

Apart from these considerations, difficulties arose by reason of the concurrent existence of arts. 108 and 120. Art. 108 provided for the payment of dividends in proportion to capital paid up. But art. 120 provided that the company might capitalize profits by distributing shares as a special dividend in proportion to the number of shares held by shareholders. If the procedure of capitalization involves the real or notional declaration of a dividend to be applied in satisfaction of the liability upon bonus shares, then there is a difficulty in applying art. 120 in face of art. 108. Art. 108 would tequire the declaration of a dividend upon one basis, and art. 120 would permit (even if in the case of capitalization it did not require) the declaration of what is called in that article a "' special dividend or bonus" upon another basis. The decision in Blott's Case (1) was doubtless intended to place beyond controversy the rule that

1938-1939, we Perens' AMERICAN Deticacy Co. Lap. v. Hearn.

profits could be capitalized by "a direct and simple process' per Viscount Finlay in Blott's Case (1) ) without any declar real or notional, of a dividend. But the dissenting judg

be regarded as paid up, have not been without their effect, ¢ though they were dissenting judgments. The case of Swan B Co. Lid. v. The King (2), where the dissenting view is clearly shortly expressed, has been distinguished on more than one occ (See Commissioner of Income Tax, Bengal v. Mercantile India Ltd. (3)), but the decision in the Swan Brewery Case | not been declared to be wrong: See per Scrutton LJ. in Revenue Commissioners v. Wright (4). In the present case it be urged that the reference in art. 120 to the distribution of s as "a special dividend " helps to make applicable the reasoning Lord Swnner in his dissenting judgment in Blolt's Case (5) the Swan Brewery Case (2). 3

On the other hand it is urged that the introductory words withstanding anything contained in any other article" place | 120 in what has been called a dominant position, so that the visions of art. 108 may be regarded as irrelevant when a capita is made under art. 120. As against this contention it is argt that the only object of these words is to meet the decision in I vy. Odessa Waterworks Co. (6) and to make it possible to pay a divid otherwise than in money. 4

A further question which arises upon the construction of 1 articles is whether art. 120 is intended to be the only mei capitalizing profits. The article certainly confers a power of capit izing profits, but only in language which is permissive. Unde 34 the company may increase its capital by the creation of shares. Under art. 35 the new shares may be issued with prefe or qualified rights or other special rights and privileges. Under 36 the company in general meeting may, before the issue of any! shares, determine that they shall be offered to all the then of any class of the shareholders in proportion to the amou

(1) (1921) 2 A.C., at p. 193. (4) (1927) 1 K.B., at pp. 346, 347, (2) (1914) A.C, 231, (5) (1921) 2 A.C., at pp. 206 et 809 (3) (1936) A.C. 478. (6) (1889) 42 Ch. D, 636.

capital held by them or " make any other provisions " as to the issue and allotment of the new shares. It is contended that under these articles the company could increase its capital by creating new shares, and could then distribute the shares among the shareholders in proportion to the amount paid up on their shares and not in propor- tion to the number of shares held by them.

Various questions of difficulty thus arose upon the construction of the articles, and it was not easy for the directors to be completely satisfied as to the course which it was best, or possibly most proper, to pursue. It is important to remember that in the statement of claim no charge of bad faith is made against the directors or against any other person.

The directors took the advice of three leading counsel and the objectors took the advice of leading counsel also. The company was advised that possibly the object in view could be attained by the application of art. 36, but that it might be thought that the use of art. 86 would be a back-door method of achieving the desired result, and that therefore, on the whole, it was wiser to propose the deletion of art. 120 and the substitution of a new article so that the transac- tion should be direct and straightforward. In the opinions given to the company attention was directed to the various questions of interpretation to which I have referred. The objectors on the other hand were advised that art. 120 provided the only means of bringing about a capitalization of profits, and, in substance, that the company in general meeting could not alter those rights. As I have already said, I do not agree that the law is that such rights are unalterable by an amendment of the articles of association.

It should be observed that, if the directors had made calls upon the partly paid shares so as to require them to be fully paid up, there would then have been no difficulty in applying both arts. 108 and 120, because a distribution on the basis of share for share would, in those circumstances, have satisfied both articles. But it was agreed by all concerned that the company did not require any new capital, and it was feared that the making of the call might be challenged as not bona fide in the interests of the company and as being only an indirect method of evading art. 120.

1938-1939. ee, PETERS' AMERICAN DELICACY Co. Lrp. v. Hearn.

In all these circumstances the directors determined to p the cancellation of art. 120 and the substitution of a new which would enable them to carry out what was proposed. 1 contention of the plaintiffs is that the alteration was nece unfair to the partly paid shareholders who were deprived of rights under art. 120 and that the shareholders were misled by circular which was distributed by the directors and by the state made by the directors at the meeting of shareholders.

In my opinion it cannot properly be held by a court that é art. 120 or the new article substituted for it is necessarily un As I have already said, it is a controversial question whether pri are most fairly distributed in proportion to shareholdings or in p

tisk) by the shareholder. Quite reasonable men may hold differi opinions upon such a question.

Further, for reasons which I have already stated, it cannot | said that any alteration of an article of association which diminis the rights of any class of shareholders is necessarily and as of cow outside the powers conferred by the statute to alter articles.

The circular is attacked on the ground of inaccuracies and

only method of giving effect to any proposal to increase the capil and to distribute bonus shares was the method proposed by directors, involving the cancellation of art. 120. In my op this objection is not sustained. The proposals to which the cire referred were the particular proposals of the directors. proposals did involve the cancellation of art. 120. Tt was made in the circular that the directors were not prepared to recom any distribution of bonus shares unless the articles were altere as to place beyond doubt the power to make such a distributio proportion to capital paid up. They were entitled to adopt 1 attitude. The circular stated : - " In the event of the special

tion altering the articles being defeated, the directors may ha reconsider the whole position and for that reason the propos

the fourth resolution referred to in the notice has been made contin- gent upon the carrying of the special resolutions." The fourth resolution was the resolution providing for the issue of new shares in proportion to capital paid up. This proposal did involve the cancellation of art. 120. But the circular did state that the same tesult could, legally, be reached under the existing articles. The directors explicitly stated in the circular that they had been advised that the company " would legally be entitled to declare a bonus dividend upon the amount paid on the shares that had been issued and at the same time make available for issue sufficient new shares for the shareholders to take up and apply the said dividend to make the said shares fully paid so long as shareholders who did not desire to take up the shares were paid their dividend in cash and that in this way the provisions of art. 120 would be avoided. This course, however, would be subject to many objections." Some reference was then made to these objections. Accordingly I do not think that it can fairly be said that the directors represented that the only possible method of making any distribution of bonus shares was a method involving the cancellation of art. 120.

But it is further objected that the directors misrepresented the position by stating that arts. 108 and 120 were inconsistent and that for this reason it was necessary to alter art. 120 in order to bring about any distribution of bonus shares. The circular stated that it was necessary to declare a dividend in order to make the new shares fully paid. Art. 120 in terms authorizes the conversion of profits into capital "' by distributing the same among holders of shares as a special dividend or bonus." As I have already said, these words may, notwithstanding the decision in Blott's Case (1), introduce the principle insisted upon in Swan Brewery Co. Lid. v. The King (2). But, whether they do so or not, the question is an arguable one. The directors were putting their views forward for the consideration of the shareholders. Even if their views were wrong, there was no

• dishonesty or trickery. The shareholders could get their own advice and use their own minds. The circular was almost necessarily argumentative. That this was in fact the case was obvious upon the face of the document. An expression of an honest opinion

1938-1939, Ee Perers' AMERICAN Deticacy Co. Lrp. v. Heats.

upon such a matter does not amount to misrepresentation or ever to inaccuracy if the opinion, even if wrong, is accurately stated as an opinion. In so far as the circular stated that it was neces to declare a dividend in order to bring about a capitalization, stated what was, I think, plainly a matter of legal opinion. Thes observation applies to the statement that arts. 108 and 120 w only be consistent when all the issued shares of the company wer paid up to the same amount. The substance of the matter | that profits could be distributed in one way under art. 108 and it another way under art. 120. The two articles did deal with the same subject matter - so far as that subject matter was the dis tion of profits - in two different ways. In this sense the a were inconsistent. But I agree with Nicholas J. that in a str legal sense they were not inconsistent. In the first place botl articles could, upon any construction of them, be obeyed if all th shares were paid up to the same amount. The fact that the director did not wish to call up further capital did not make the arti inconsistent. But further, the introductory words of art. " Notwithstanding anything in any other article contained," my opinion, exclude the application of art. 108 when a capital is effected under art. 120 even if that capitalization involves a or a notional declaration of a dividend. I agree with what Nic/ J. says upon this matter. But, in my opinion, the circular sho in this respect, be regarded as expressing the views of the dir and not as laying down in absolute terms propositions of law guar teed as correct. Even if those views were wrong, the action of th shareholders in passing the resolutions is not invalidated. As W be pointed out later, the shareholders heard the other sid the case, and made their decision after hearing both sides. was reasonable ground upon which it could be believed that | obstacle to any capitalization of profits did exist. Even if a co should ultimately decide that such an obstacle did not exist, th fact would not deprive the shareholders of the right of so alte the articles as to express a meaning which they deliberately d them to bear.

It was also objected that the directors did not give full, frank fair information to the shareholders because the directors did 1

tell the shareholders that there had been advice that art. 120 was H.C. or A.

an overriding article, that it conferred rights upon the fully paid shareholders, and that a capitalization could be carried out without altering the articles. The directors had been advised that art. 120 could be regarded as an overriding article, but that the matter was open to question. So also they had been advised that the partly

1938-1939. Ses} Pxrrers' AMERICAN Deuicacy Co. Lrp. v Hazara.

paid shareholders had rights under art. 120 as it then existed, but Tatham 0.5.

they had also been advised that the company could (notwithstanding those rights) possibly bring about in a legal manner the desired distribution by using art. 36 without altering art. 120. The opinions disclosing the advice actually given to the directors were available to the shareholders.

The objections to the circular are objections which put the case against the proposals of the directors. They all raise fair matters for argument. The opinions of counsel obtained by the directors were not only available to the shareholders; they were actually inspected by the solicitor for the objecting shareholders on the day before the meeting was held. The opinions given by counsel were taken to the meeting and the chairman stated that, if the shareholders so desired, he would have them read. In my opinion the objections to the circular cannot be supported.

It is next objected that the statements made by the chairman and the solicitor for the company in the speeches which they made at the meeting were misleading. The objections to the speeches cover much the same ground as the objections to the circular. Complaint is made that the chairman and the solicitor to the company represented that the only way of carrying out the proposed capitaliza- tion was by adopting the proposals of the directors. In one sense that was true, for the reason that the directors were not prepared to recommend capitalization upon any other basis and probably art. 111 prevented the company from declaring any dividend not recommended by the directors. But the weight of the objection is that the speeches stated that it was legally impossible to bring about the desired capitalization by reason of inconsistency between arts. 108 and 120. Statements to this effect (more definite than those in the circular) were made in speeches by the chairman and by the

company's solicitor. The company had in fact been so advised, VOL. LXI. 33

but in my opinion the answer to these objections (as also to tl

discussed and debated at the meeting. The directors put. views through the chairman and the company's solicitor. A and another speaker for the objectors contested the statemer the chairman and of the company's solicitor, contended proposed alteration would be unfair to the partly paid sha for reasons which have already been stated, stated (as was the that counsel other than those consulted by the company had adyis that arts. 108 and 120 were consistent and that the proposed alte tion was, as one of the speakers put it, " unconstitutional unbusinesslike," and that they had been advised that the iss the new shares could only be made in accordance with the company' existing art. 120. They also said that the court would prevent tl alteration desired, and went so far as to assert that art. 120 cor not be altered except 'with the consent of every individual tributing shareholder." Thus it appears to me that the ¥ matter was put before the shareholders. They were given qui full information. Any further information which they desired wi available to them, including the opinions of counsel. No ch fraud or of bad faith is made, or, if made, could on the evidence b supported. There is no evidence that the alteration was made with the object of oppressing a minority or to deprive a minority of it tights. 4

Whatever may be the true view of the relation between art. and art. 120, there is no doubt that as it was not desired by an those concerned to call up the uncalled capital the co-exi: the two articles was embarrassing to and created difficulties in management of the company. Even if it should be held that so m of the statements made in speeches at the meeting were ina it would, in my opinion, be a dangerous thing for a court to declat that such a circumstance invalidated a resolution passed at a meetin of the shareholders of the company. Whenever a controversy as to what is the wisest course to pursue, and particularly when | matter in issue involves the alteration of existing rights (re supposed), statements will probably be made on each side which t other side regards as unfair or inaccurate and which may in

unfair or inaccurate. There is, in my opinion, no authority to support the proposition that the fact that statements which are not true in fact were made at a shareholders' meeting has the effect of invalidating a decision reached at the meeting. If this were the law, then, as two inconsistent statements can never both be true, it would only be necessary for any dissentient shareholder to make a statement or series of statements which were plainly inconsistent with other statements made at the meeting in order to procure the invalidation of any resolution passed.

Evidence was given by a witness for the plaintiff who read the circular that he understood from the circular that arts. 108 and 120 were inconsistent and that "only by the passing of the" (special) "resolution could the action of the directors be made legal." I have already dealt with the question whether, in all the circumstances, it was proper to read the circular as stating such a proposition either at all or otherwise than as a matter of opinion which was submitted for discussion. With respect to this evidence, I desire to add that, in my opinion, an actual misapprehension of facts by one shareholder or by a number of shareholders, not induced by some relevant fraud or trickery, is not sufficient to invalidate a resolution of shareholders. Jn any meeting attended by a considerable number of people there will be some who misunderstand proposals submitted to the meeting and who vote upon an inaccurate view (or sometimes upon no view) of the facts that are really relevant. Such errors of understanding, of judgment, or of knowledge, not induced by improper means by persons who are subject to a duty in relation to the shareholders (as distinct from " outsiders"), do not afford grounds for setting aside resolutions passed by the meeting. A contrary view would place all proceedings at shareholders' meetings at the mercy of those present who possessed relatively low qualities of intelligence, business ability, and care.

In the present case there is admittedly no fraud or trickery. As there is no evidence of oppression, and as the alteration cannot be described as extravagant, so that reasonable men could not regard it as a fair alteration to be made, the case of the plaintiff fails. I therefore think that the appeal should be allowed and that judgment should be entered for the defendant.

1938-1939.

Prrers' AMERICAN Dexicacy Co. Lrp. v Heatu.

H.C.orA. Rich J. This suit was brought by and on behalf of holder aan partly paid shares in the appellant company, which has met wi Perens' great success in its business operations, to restrain the con aed from acting upon certain special resolutions for the alteration of Co. Lt? articles, and for a declaration that the special resolutions are Heats. The point at issue is whether upon a capitalization of profits a distribution of bonus shares shall be made according to the ai of capital paid up upon the shares or, if made at all, in prop:

to the number of shares regardless of the amount paid up on t respective shares.

The share capital of the company, which is divided into shares «

14s. each, consists of a large number of fully paid shares and a sn

number of shares paid up to 4s. 8d. The existing articles of assoc

tion contained a provision that cash dividends should be distribut

in proportion to the amount of capital paid up on shares a

provision that under the authority of a general meeting prot

might be distributed in the form of fully paid or partly paid s

in proportion to the number of shares held by the respective membe

The introduction into the same set of articles of these two oppos

ratios of distribution was probably due to thoughtlessness and no

design. There is at least a want of symmetry about articles whieh

require a distribution of ordinary dividends according to one propot

of the special resolutions was to alter art. 120, the article with capitalization, so that when a capitalization of profits took plat the distribution of shares should be in accordance with the

paid up on the respective shares of the members participating. alteration proposed formed the first step in a plan for the form of a subsidiary operating company and the transfer of the a

it in exchange for shares. Other resolutions directed to the cam out of this plan formed part of the business of the same mee but it is unnecessary to describe the general scheme submitte

the shareholders' consideration. It would be only human for t holders of fully paid-up shares to object to a scheme of capitalizat which would result in a diversion of some of the profits which hold of fully paid shares would receive on a cash distribution - a dive from holders of fully paid shares to holders of partly paid

who, under the existing articles, would receive the paid-up shares H- ©. or A.

representing them as the result of a capitalization. It is, therefore, problematical whether a scheme involving capitalization would be sanctioned if it was necessary to carry it out under the existing art. 120. On the other hand the holders of partly paid shares proved no less human. When the proposal was carried for an alteration of art. 120 depriving them of the chance of obtaining a larger proportion on a capitalization than they would on a cash distribution, they brought the suit out of which this appeal arises, asserting that the alteration had been resolved upon mala fide in order to deprive them of that to which they were entitled and to hand it over to the majority. The directors, who feared the Commis- sioner of Taxation more than they did any internecine conflict, had at an early stage invoked the aid of their legal and financial advisers Their legal advisers saw the complication created by what they called the inconsistency of the articles, and this caused a pause in the proposal for capitalization when it was first mooted. In the hope of finding wisdom the directors summoned a multitude of counsellors, who, with less variation of opinion than might have been expected, tecommended a change in the articles. A circular explaining to the shareholders the purpose and nature of the proposed change was drawn up. It was drawn with much care and bears the evident marks of an attempt to give to an exposition of a complicated matter the not altogether compatible qualities of brevity, completeness, legalism and commercial intelligibility. Unfortunately, the prevail- ing thought among those who composed it was that the two articles were inconsistent because they prescribed different bases of distribu- tion. For this reason it seems to have been considered that the co-existence of the articles made it impracticable to carry out the desires of the directors. The predominant argument of the circular presents some such view. I have not gone into the exact details of phraseology in which art. 120 is expressed, but it is sufficiently clumsy to admit of an argument that to capitalize under art. 120 would involve a violation of the article relating to dividends, art. 108. But notwithstanding this possible argument it is clear enough that the articles allowed the company to capitalize the profits according to one proportion and to distribute them according to

1938-1939. Ww Prrers' AMERICAN Dewicacy Co. Lrp. v. Heats.

another. As they constituted two courses between which company could choose, it could not be correctly said that the a were inconsistent one with another so as to produce an im Where you are provided with a choice between two procedures cannot take both, and, as it is only by combining them that th impossibility of them standing together is made manifest, it i logical to say that the alternatives are inconsistent. Accordingly the minority represented by the plaintiffs say that the circular w misleading. Their case is founded on the contention that eith majority was misled into voting for the amendment in order to the company out of an impasse or else they voted for their ow aggrandisement. In aid of the first limb of this alternative argu the minority points to the proceedings at the meeting, which inclu strong statements by the solicitor of the company of the impossibility of carrying out the plan under the existing articles.

All this appears to me to be an artificial edifice of contentio1 which would make impossible the ordinary administration of affairs of a company, so far as they depend upon ill-considered and unsuitable articles of association. The plain fact was that company had begun its life with an article of association relating ' capitalization which ought not to have been found with an arti requiring a distribution of profits according to the amount paid wy on shares. Such articles ought not to have been found tog because they are based on different conceptions of what is the proportion for distributing gains and because they introduce a opposition of interest between the classes of shareholders wh question of capitalization of profits or distribution in cash is presented to them. The object of the proposals in the present case was to get over this want of harmony in the policy of the articles and resultin conflict of interests. Different ways of describing the situatio would be adopted by different people. Many epithets or commen might fairly be used or made by directors or others in circulars ' at meetings. Company law confers a power of alteration on a gen meeting of shareholders requiring for any positive alteration a thre fourths majority. There is no other body to whom the questi can be submitted. No rights given by articles of association can

t exercised bona fide with a view to the advancement of the company

• considered as a whole and not with a view to the advancement of the interests of a majority of voters or of a section of the company only (Richard Brady Franks Ltd. v. Price (1); Mills v. Mills (2)). But in deciding what is for the interest of the company and _ what is bona fide, the constitution of the company, the condition and effect of the various articles of association and the extent to _ which rights are conferred upon different classes of shareholders are relevant and important. This seems to be the effect of Allen v. Gold Reefs of West Africa Ltd. (3), British Murac Syndicate Ltd. v.
• Alperton Rubber Co. Ltd. (4), Sidebottom v. Kershaw, Leese & Co.
• td. (5) and Shuttleworth v. Cox Brothers & Co. (Maidenhead) Ltd. _ (6). Where the very problem which arises contains as inherent in _ itself all the elements of a conflict of interests between classes of
• shareholders these authorities do not mean that the power of altera- _ tion is paralysed, they mean only that the purpose of bringing _ forward the resolution must not be simply the enrichment of the majority at the expense of the minority. The resolution in the present case was brought forward to solve a difficulty and make possible a capitalization. It can hardly be supposed that the only solution of such a difficulty which can be lawfully adopted is that which gives the minority an advantage at the expense of the majority. In my opinion the case presents nothing but an ordinary example of an honest attempt on the part of the directors to clear up a difficulty by securing an alteration of the articles not unjust to any class of shareholders, but at the same time conserving the interests of the shareholders who form the great majority of the company. The facts that some of the arguments advanced were open to criticism does not make the case any less typical of the common course of company meetings.

I agree with the view taken by the learned primary judge that the rejection by the chairman of the meeting of the amendment which is alleged to have been proposed did not invalidate the pro- ceedings.

(1) (1937) 58 C.L.R, 112, at p. 138, (4) (1915) 2 Ch. 186, (2) (1938) 60 C.L.R., at pp. 169, 170. (5) (1920) 1 Ch. 154. (3) (1900) 1 Ch. 656. (6) (1927) 2 K.B. 9.

all are subject to it. It is true that the power of alteration must be 4. ©. or A.

Drxon J. The decree from which this appeal is brought de validity to certain special resolutions for the alteration of thea t of association of the appellant company. The special resoluti were carried at a meeting held on l4th September 1937. decree declares that they were not validly passed and articles were not validly altered. The decree then restrains t appellant company from acting upon the resolutions. The a tions which it was intended to make in the articles relate to t capitalization of undistributed profits.

The articles, as they existed, contained clauses providing tl the profits of the company should be divisible among the sharehold in proportion to the capital paid up on the shares held by respectively ; that a general meeting might declare a divide be paid to the members according to their rights and intere the profits; that a general meeting might increase the capita the creation of new shares ; and that such a meeting might de that the new shares should be offered to the members in proporti to the capital held by them or make any other provision as to #l issue and allotment of such shares (arts. 108, 110, 111, 34 and

The articles contained no provision as to the division of a s in a winding up. But they contained a clause (art. 120) sp dealing with capitalization, and the purpose of the alterations to overcome the effects which this clause produced. The me of the clause has been disputed, but I think that it clearly that with the sanction of a general meeting undistributed profit might be capitalized by making a ratable distribution among th members of shares paid up in full or in part out of such pr The article means that the ratable distribution shall be in propor with the shares held by the members, not with the capital paid u thereon, and that the amount paid up on the bonus shares be uniform and should not vary with the amount paid up 0 existing shares of the respective members.

The issued capital of the company was in fact divided into ful paid and contributing shares. About three-fourths of the sh were paid up in full, and about one-fourth were paid up to onettl only of their amount. Large reserves of undistributed profits existe

'As the articles stood, the course taken by the company would deter- H.C. or A.

mine the destination of these profits, or, rather, the proportions in

which they or a title to them would be distributed to the share- holders. If they were distributed as a cash dividend, they would be divided in proportion with the amount of capital paid up by the respective members. If they were distributed in the form of paid- up shares under the authority of the specific clause in the articles, the division would be proportionate with the number of shares held, without regard to the amount paid thereon. If the company reconstructed by forming a new company to which it transferred the assets in consideration of shares and then wound up so that its members received the shares in the new company from the liqui- dator as contributories, the distribution would be upon still another basis. It would be necessary first to repay the capital paid up on the respective classes of shares, shares fully paid and shares partly paid, or in some other way to equalize the amount paid up and then to make a ratable distribution according to the number of shares held. A fourth possibility lies in the adoption of the indirect procedure

• for capitalization formerly in general use. By that procedure a cash dividend is declared and at that same time an intimation is made to every member that shares of a face value equal to the amount payable to him by way of dividend will be allotted to him on his signing some suitable authority under which the directors of the company will apply the dividend in satisfaction of the liability on the shares. This method of capitalization theoretically allows of the shareholder's taking the dividend in cash and declining the allotment of shares, but practically the contingency of his doing so is made negligible by taking care that only shares will be issued which have a market value well above par.

There appears to have been some doubt or difference of opinion among the company's advisers as to the competence of this method of capitalization. It was felt that perhaps the fact that one of the company's articles of association expressly authorized the direct method of capitalization of profits and directed that the distribution of shares should be according to capital subscribed as opposed to capital paid might be considered enough impliedly to exclude the indirect method. In my opinion it would not. The purpose of the

1938-1939, Ww Prrers' AMERICAN DELIcacy Co. Lrp. v. HeEata.

make a distribution of shares paid up or partly paid up wit allowing the shareholders the choice of taking cash and thus { empower the company to make an effective distribution o' shares even though the market value might not be so far above | as to ensure that the shares would be taken instead of a cash divi

under the older method. I agree in the view that the presen such an express power supplies no sufficient reason for denyii the company in general meeting the right to exercise simultaneous the power of declaring a cash dividend and of offering a new is of capital to the members in proportions corresponding the amount of the cash dividend payable to them respectively, It is true that under the articles prima facie a new issue of s

I think, subject to the direction of a general meeting (art. 36). 1 fact that under the article authorizing the direct method of capil ing profits the ratio prescribed is proportionate with subscribed and not paid-up, capital does not, in my opinion, give a foundation for the inference that other methods of capitalization must fo the same proportion. Doubtless the difference in the propor fixed for that purpose and for the purpose of a cash dividend truth an accident such as often results from bringing tog articles drawn from different precedents. But, however that be, it can mean no more than that where shares are to be forced 01 the members without the option of a cash dividend the distrib is to be proportionate with subscribed capital.

It follows, therefore, that, as the articles stood, accumulations | profit, if distributed as a cash dividend or under the older indirect procedure for capitalization, would be distributed according to on proportion, viz., according to capital paid up ; if distributed din i as shares, according to another proportion, viz., according to capit subscribed ; and if distributed as upon a reconstruction throug liquidator, according to still a third method, viz., by first equ paid-up capital and then distributing according to shares held.

For some years the directors had had the capitalization of profits H.C. or A.

under their consideration. They were alive, of course, to the danger that a capitalization might mean a distribution liable to income tax. Tn the course of seeking advice upon the subject their attention was drawn to the anomaly that under the articles a cash dividend was payable in proportion with the paid-up capital of the respective shareholders, while a distribution of bonus shares directly made under the specific authority of art. 120 must be in proportion with the shares held. The plan which the directors favoured involved the formation of a new company to carry on the business so far conducted by the appellant company, the transfer to that company of the assets of the business, including goodwill, and the holding by the appellant company of the shares in the new or operating company. Under the plan the value at which the goodwill would be transferred to the new company would produce a large profit which could be capitalized without danger of the distribution being taxable. But the fact that a capitalization of profits and a distribution of shares formed part of the plan brought the directors face to face with the question what should be the basis of the distribution among share- holders, that is, whether according to capital subscribed or capital paid up. After taking much advice the directors determined to deal with the question by proposing alterations of the articles which would enable a direct distribution of shares according to the amount of capital paid up by the respective shareholders upon their shares. The alterations designed to effect this result were proposed as special resolutions at an extraordinary general meeting of the company on 14th September 1937. The notice summoning the meeting stated that resolutions would be proposed for the necessary increase of capital and for authorizing the directors to carry out the proposed transaction and, also, if the resolutions altering the articles increasing the capital and approving of the transaction were passed, for the capitalization under the new articles of the profits arising from the sale of the goodwill. At the meeting the special resolutions were passed by the requisite majority. No poll wasdemanded. The Temaining resolutions were then also carried.

If the capitalization of the profits arising from the sale of the goodwill had been carried out under the former article authorizing

1938-1939, ee. PETERS' AMERICAN Deticacy Co. Lrp. v Hears.

H.C. or A. direct capitalization, those members of the company who co contributing shares but hold no, or comparatively few, paid-up sl

Perers' would have received a much larger number of new shares than anor the altered article. The respondents, who are plaintiffs in Co. Lt». represent the holders of partly paid shares. The decree decl

v. HzarH. the attempted alteration of the articles to be invalid was mad

Dixon J. their instance. They say that the object of the alteration deprive holders of partly paid-up shares of the right conferred the existing articles to participate in a capitalization of pro the same footing as holders of fully paid shares, i.e., accordin, the number of shares held, and that it amounted to an atte the part of the majority to appropriate what belonged to the minori They also say that in a circular sent to shareholders with the n of the meeting the directors misstated the situation unde existing articles and that at the meeting itself misstatements | made and an amendment moved in the interests of the min was wrongly rejected.

The allegations that the circular and the statements at the mee were misleading is not altogether independent of the attack upon' propriety of the purpose actuating the special resolutions for t alteration of the articles. For on behalf of the holders of ps paid shares the contention is put, by way of dilemma, that eitl the purpose of the resolutions was to deprive them of that to wl the existing articles entitled them or else the purpose was s p by the misleading statements contained in the circulars and m to the meeting. The judgment of Nicholas J., who made the d under appeal, applies this form of reasoning to the facts.

The circular set out fully the two articles said to cause the dif art. 108, which provided that profits should be divisible in pro to the capital paid up, and art. 120, which provided that the pro tion should be according to the shares held, when a direct capita tion of profits took place by a distribution of bonus shares. | circular stated that the articles were inconsistent. It is s to quote one passage: " The two articles would only be consis when, as originally was the case, all the issued shares of the had been paid up to the same amount, and would become inconsl with one another when the issued shares are, as at present, pai

to two different amounts ." setting off against the amount payable by a shareholder in respect of share capital issued to him an amount payable to him as a dividend in order to make such bonus shares fully paid.

It is, of course, indisputable that the liability upon shares issued by way of bonus distribution must be answered by some application of profits to the purpose. And it is difficult to deny that the word "inconsistent " might properly be used to describe the opposition between the principle or policy manifested in the article requiring cash dividends to be distributed according to capital paid up and that manifested in the article requiring a bonus-share distribution to be made according to the capital subscribed by members. But, when the requirement that in some way the liability upon the shares distributed shall be answered out of profits is described as a necessity that a dividend shall be declared in order to provide a set-off and this statement is brought into juxtaposition with the statement that the articles are inconsistent, it is apparent that an impression might readily be produced that under the existing articles a distribu- tion of fully paid bonus shares was made quite impossible. Such an impression would have been incorrect. For, in my opinion, under art. 120 it would clearly have been lawful to distribute among members according to the number of shares respectively held by them bonus shares fully paid up out of profits.

How far the circular would actually produce such an impression it is not easy to say. A lawyer or accountant well acquainted with the principles upon which the capitalization of profits depends would not, I think, obtain it. A reader who was not informed upon Such matters but who read the whole circular quite carefully and considered its total effect would probably understand it as meaning that the difference in the basis of distribution directed by the respec- tive articles caused a difficulty, but not necessarily an impossibility, in carrying out the plan finding favour with the directors and that, if the alterations were not resolved upon by the shareholders, the plan would require reconsideration with a view of carrying it out by some other means. At the meeting, however, the company's 'Solicitor clearly put a view which amounted to saying that it was impossible to act under art. 120 without contravening art. 108 and

The document emphasizes the need of H.C. or A. 939,

1938-1939, Ww Prrers' AMERICAN Deticacy Co. Lap. v. Haru.

that on the existing articles a capitalization of profits could no carried through unless by the indirect way of declaring a divid and simultaneously offering shares of like amount to the memb

Another statement at the meeting upon which the respond place some reliance was made by the chairman. He held a nun of partly paid shares and, it is said, stated that he would for t reason be much better off financially if the proposals he recommend to the meeting were defeated. The statement is said to have he erroneous because he overlooked the effect, on the other side, p duced by his holding certain fully paid shares.

In my opinion neither upon the ground that the resolutions we not carried bona fide for the ends allowed by the statutory power upon the ground that the passing of the resolutions was procured affected by misleading statements nor upon a combination of dilemma between such grounds ought the alteration of the artic association be held invalid.

The power of altering the articles of the company is now deriv from sec. 20 of the Companies Act 1936 (N.S.W.), which is a g statutory provision. The section in terms empowers a company bh special resolution to alter or add to its articles. No limitati restrictions on the power are expressed, except that it is made subj to the provisions of the Act and the conditions contained in' memorandum of association. The section goes on to enact that: alteration or addition should be as valid as if originally con in the articles.

The conditions expressed by the section itself make it clear tl no alteration of the articles can validly operate to destroy or pre rights which the statute confers upon members of a comp which are lawfully fixed under provisions of the memorandum But the power of altering articles of association now confe statute had its analogue, if not its source, in clauses found in dé of settlement by which a specified majority of the membe companies constituted or regulated by such instruments empowered to alter or add to their provisions. The mala-fide 1 or abuse of such powers would naturally fall under the jurisdicti of courts of equity, and from the time of the Act of 1856 (19 &2 Vict. c. 47, secs. 33, 34 and 35), which included the statutory au

to alter articles of association, it has never been conceded that the H.C. or A.

power is unrestrained. It is one thing, however, to say that such a power is not unlimited or uncontrolled and another to define the grounds upon which an ostensible exercise of the power should be considered invalid. At first an attempt was made to distinguish between matters which went to the foundation of a company's structure and matters which related only to the conduct and manage- ment of its afiairs. Thus, in the course of his now overruled judgment in Hutton v. Scarborough Cliff Hotel Co. (Ltd.) (1) Kindersley V.C. said ; " The question is whether the power given to a general meeting, by special resolution, to modify the regulations of the company is unlimited: clearly there must be some limit to the power; other- wise they might alter not only such as relate to the management of the company, but they might alter the very constitution and nature of the company." But the distinction was found untenable. It is the province of the memorandum of association to fix the constitution and nature of the company, and the power of altering the articles is subject to whatever restrictions it may contain. But no article as such could be made unalterable. It may be altered notwithstanding that it is expressed to be fundamental or part of the constitution of the company or unalterable, and a company cannot contract itself out of the power. In spite of what is said in British Murac Syndicate Ltd. v. Alperton Rubber Co. Lid. (2), the better opinion still appears to be that the fact that to alter an article involves a breach of con- tract can be no more than an evidentiary consideration and does not in itself make the alteration invalid: See Buckley on The Companies Adds, 10th ed. (1924), pp. 24, 25; 11th ed. (1930) pp. 18, 19; Law Quarterly Review, vol. 31, p. 359. After the abandonment of the distinction between, on the one hand, matters of administration and management admittedly subject to the power of alteration and, on the other, matters going to the constitution of the company and said

• therefore to be outside the power, the courts sought for a limitation in the more general doctrine that a power must be exercised bona fide for the end for which the power is designed. Primarily a share _ in a company is a piece of property conferring rights in relation to

(1) (1865) 2 Drew. & Sm. 521, at pp. 524, 525 ; 62 E.R. 717, at p. 719. (2) (1915) 2 Ch. 186,

1938-1939. Ww Perers' AMERICAN DEwicacy Co. Lap. ® Hears.

distributions of income and of capital. In many respects the } prietary rights are defined by the articles of association, and easy to see that a power of alteration might be used for the aggrar

ment of a majority at the expense of a minority. For example there were no check upon the use of the power, it is cone that a three-fourths majority might adopt an article by whi shares which they alone held would participate, to the excl other shares, in the surplus assets in winding up or even in tions of profit by way of dividend. Again, authority

ible that alterations of such a nature could be made by the exe of the power. But reliance upon the general doctrine that poy shall be exercised bona fide and for no bye or sinister purpose b its own difficulties. The power of alteration is not fiduciary. shareholders are not trustees for one another, and, unlike dire they occupy no fiduciary position and are under no fiduciary du They vote in respect of their shares, which are property, and thi to vote is attached to the share itself as an incident of property

those of a majority without any reasonable prospect of advan to the company as a whole: Compare the expression in Kenned De Trafford (1).

Apart altogether from altering articles of association, the strength of a majority of shareholders may be used in matters ' management and administration to obtain for themselves adv which otherwise would enure for the benefit of all the membi :

the company, and in some circumstances such an attempt on the H.C. or A.

part of the majority to secure advantages to the prejudice of the minority conflicts with ordinary notions of fair dealing and honesty. Often when this is done the thing attempted will be found by its nature to fall outside the power of the members in general meeting

and even outside the corporate powers of the company. But this

• is not necessarily the case, and a thing not of its own nature ultra
• vires may be invalidated by the effect which it produces or is intended to produce in benefiting some shareholders at the expense of others or individuals at the expense of the company. The ground upon _ which the invalidity is placed is fraud, but what amounts to fraud has not been made the subject of definition; possibly under the influence of the tradition that "the court has never ventured to lay down, as a general proposition, what shall constitute fraud" (per Lord Eldon, Mortlock v. Buller (1) ).

An example of a misuse of power on the part of shareholders

constituting a majority in the administration of a company's affairs is the unjustifiable refusal to allow an action to be maintained in the name of the company to redress a wrong done to it by one of themselves. "The cases in which the minority can maintain such an action are," says Lord Davey in Burland vy. Earle (2), " confined to those in which the acts complained of are of a fraudulent character

or beyond the powers of the company. A similar example is where the majority are endeavouring directly or indirectly to appropriate _ to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to partici- pate." In Dominion Cotton Mills Co. Ltd. v. Amyot (3) Lord Macnaghten reduces the rule to a brief statement of general applica- _tion: - "The principles applicable to cases where a dissentient _ minority of shareholders in a company seek redress against the action of the majority of their associates are well settled. . . . Inorder _ to succeed it is incumbent on the minority either to show that the action of the majority is ultra vires or to prove that the majority have abused their powers and are depriving the minority of their rights." 'In Cook v. Deeks (4) resolutions were in question which disclaimed

(1) (1804) 10 Ves. 292, at p. 306; (2) (1902) A.C. 83, at p. 93. 32 E.R. 857, at p. 862. (3) (1912) A.C, 546, af pp. 551, 552. (4) (1916) 1 A.C. 554, ; VOL. LxI. 34

on behalf of a company any interest in a contract made by p who were directors of the company and who formed the majo shareholders passing the resolutions. They were in fact const1 trustees of the benefit of the contract for the company, becaus had made the contract in breach of their fiduciary duty as di Lord Buckmaster in giving the reasons of the Privy Council

• ' If, as their Lordships find on the facts, the contract in ques was entered into under such circumstances that the directors ¢ not retain the benefit of it for themselves, then it belonged in eq to the company and ought to have been dealt with as an as the company. Even supposing it be not ultra vires of a com to make a present to its directors, it appears quite cet directors holding a majority of votes would not be permitted

to oppress the minority. . . . In the same way, if direc have acquired for themselves property or rights which they be regarded as holding on behalf of the company, a resolutior the rights of the company should be disregarded in the mat would amount to forfeiting the interest and property of the minor of shareholders in favour of the majority, and that by the vot those who are interested in securing the property for thems Such use of voting power has never been sanctioned by courts" (1). A

In these formulations of general principle there is an assum that vested in the company or in the minority of shareho the case may be, is an independent title to property, to rights remedies, and the ground of the court's intervention is that by course adopted by the majority, the company or the minority be deprived of the enjoyment of that to which they are so en The conduct of the majority is then given some dyslogistic deseri such as " fraudulent," "abuse of powers" or " oppression. chief purpose of articles of association is to regulate the rig shareholders inter se, and their relations to the profits and su assets of the company are governed by the provisions of the ar A power to alter articles of association is necessarily a power to the rights of shareholders inter se, including their mutual

some difficulty must arise in applying to resolutions for the alteration of articles a statement of principle which assumes the independent existence of rights which should not be impaired or destroyed, Prima facie rights altogether dependent upon articles of association not enduring and indefeasible but are liable to modification or destruction ; that is, if and when it is resolved by a three-fourths jority that the articles should be altered. To attempt to distin- guish between alterations which deserve the epithet fraudulent or oppressive or unjust and those deserving no moral censure without explaining the considerations upon which the distinction depends, is to leave the whole question to general notions of fairness and pro- _ priety. In Sidebottom v. Kershaw, Leese & Co. Lid. (1), after express- ing the opinion that a regularly passed resolution for the alteration of articles could be held bad only on the ground of mala fides, Eve J. referred to the question what is meant by mala fides in this connection _ and said : - " Speaking for myself, I do not think the solution of that _ question is assisted by the use of such phrases as 'the ordinary

principles of justice,' 'just and equitable' or 'oppressive.' To base the application of these descriptions to a particular resolution _ upon the fact that it involves a modification or defeasance of rights of a valuable or important nature, is in eflect to go back to the

• discarded distinction between articles affecting the constitution and those affecting the administration of the company or to a distinction very like it. To base the application of the epithets upon the circumstance that the majority obtain a benefit by the change seems to involve some departure from the principle that the vote attached to a share is an incident of property which may be used _ as the shareholder's interests may dictate. The considerations which I have mentioned all arise in attempting _to discover and fasten upon some element the presence of which will _ always vitiate a resolution for the alteration of articles of association. But, whatever may constitute bad faith, it is evident that, if a resolu- _ tion is regularly passed with the single aim of advancing the interests of a company considered as a corporate whole, it must fall within the Scope of the statutory power to alter the articles and could never be

pect of profits and surplus assets. It is therefore evident that H.C. or A.

1938-1939. Ww Perens' AMERICAN Dewicacy Co. Lap. v. Hearn.

1938-1939.

PETERS' AMERICAN Deticacy Co. Lrp. v Heata.

condemned as mala fides. A positive test was therefore ay conformity with which necessarily spelt validity. When the reject of the doctrine of Hutton v. Scarborough Cliff Hotel Co. (Ltd.) (1) made final by Andrews v. Gas Meter Co. (2), compliance with positive test was declared to be all that was demanded, that besides consistency with the provisions of the statute and of tl memorandum of association.

In Allen v. Gold Reefs of West Africa Ltd. (3) a majority of tl Court of Appeal upheld as valid an amendment of a company articles which had the effect of extending to the paid-up shi members a lien which under the previous article was confin partly paid shares. The lien secured all debts, obligations ar liabilities of a member to the company and as a result of other visions contained in the articles was enforceable by forfeiture shares. The occasion for adopting the amendment was the failure the executors of a member who died holding a large number of vendor's fully paid shares and a smaller number of partly paid either to register themselves as shareholders or to pay the calls, assets being insufficient. Lindley M.R. said that, wide as thes tory power of alteration was, it must, like all other powers, be ext subject to those general principles of law and equity which ar applicable to all powers conferred on majorities and enabling themt bind minorities. "' It must be exercised not only in the manner required by law, but also bona fide for the benefit of the company as a wi y and it must not be exceeded" (4). For the decision it was en to say that an alteration which was made " bona fide for the

power. But, as in literal terms it was expressed as a positive r' ment which must be fulfilled and not merely negatived as a test pliance with which was enough, Lord Lindley's statement was takt in some subsequent cases as formulating the issue on which validi or invalidity depended absolutely, viz., whether " the power had exercised bona fide for the benefit of the company as a whole

(1) (1865) 2 Drew. & Sm. 521; 62 (2) (1897) 1 Ch. 361. ER. 717. (3) (1900) 1 Ch. 656. (4) (1900) 1 Ch., at p, 671.

the resolution was not passed in good faith, being really passed merely to defeat the existing rights of an individual shareholder " (1). He took good faith as the test and added that an alteration involving oppression of the shareholder would not be made in good faith. But the opening words of his judgment (2) show that he regarded these standards as the same as those formulated by Lindley M.R. Nevertheless, not only have the latter's words been sometimes received as embodying an exclusive and conclusive test, but through repetition

• they tended to become almost a formula. Their meaning was some- times questioned but more often assumed. In Brown v. British Abrasive Wheel Co. Ltd. (3) Astbury J. appears to have read the words as distinguishing into separate matters the good faith of the alteration and its tendency to benefit the company as a whole. The company in that case was faced with liquidation unless it could obtain further capital, which a majority holding ninety-eight per cent of the shares was ready to supply, provided the remaining two per cent of the share capital was placed under the same control. An alteration of the articles was proposed by which a transfer of the shares might be compelled at a value fixed by a method prescribed by the existing articles for the case of compulsory sale. Astbury J., after quoting the statement of Lindley M.R., said: "' The question therefore is

whether the enforcement of the proposed alteration on the minority is within the ordinary principles of justice and whether it is for the benefit of the company as a whole" (4). Stating the issue in this way, he concluded that to expropriate a minority was unjust and for the benefit not of the company but of the majority. But shortly afterwards, in Sidebottom v. Kershaw, Leese & Co. Ltd. (5), an altera- tion was upheld as valid by the Court of Appeal though it provided for the expropriation at a value of the shares of any member carrying on business in direct competition with that of the company or being a director of another company so doing. Lord Sterndale M.R. (6) and Warrington L.J. (7), as he then was, both made it clear that in their opinion Astbury J. in Brown v. British Abrasive Wheel Co. Lid. (3) had been wrong in treating bona fides and benefit of the company

(1) (1900) 1 Ch., at p. 67. (4) (1919) 1 Ch., at p. 295. (2) (1900) 1 Ch., at pp. 676, 677. (5) (1920) 1 Ch. 154. (3) (1919) 1 Ch.' 290. (6) (1920) 1 Ch., at p. 167.

Vaughan-Williams L.J., who dissented, did so on the ground " that H- ©. or A.

1938-1939. Ww Perers' AMERICAN Deticacy Co, Lrp. v. Hearn.

as separate conceptions, and the justification, if any, for his dee

the same passage from the judgment of Lindley M.R., which B (1) restated in the form of a question : " Was the resolution adopte or was the resolution made for the benefit of the company or for th benefit of some section of the company, without reference to t benefit of the company asa whole?" Yet within a few months oft decision of the Court of Appeal Peterson J. decided the validity of alteration of articles as upon an issue whether in fact it could " prop be said to be for the benefit of the company" (Dafen Tinplate Co. Lt Llanelly Steel Co. (1907) Ltd. (2) ). The article adopted, though appat ently not directed against any shareholder in particular, conferre an arbitrary power to compel the transfer of shares exercisable wit cause and upon grounds unspecified and not expressly limited,

whatever may be said as to the validity of such a provision, it could not depend on the opinion of the court that as an alteration it or it did not operate for the benefit of the company considered a whole. The view taken by Peterson J. was corrected by the Cot of Appeal in Shutileworth v. Cox Brothers & Co. (Maidenhead) (3), where the validity of an alteration was upheld which prov that any one of a board of directors appointed for life should office if his fellow-directors requested in writing that he should The alteration was directed at a particular director whose had not been satisfactory. The words of Lindley M.R.," e bona fide for the benefit of the company " (Allen v. Gold Reefs of Africa Lid. (4) ), were again interpreted as stating one condition only, condition which Seruiton L.J. understood "as meaning that the holders must act honestly having regard to and endeavouring t

criterion is the court to ascertain the opinion of the shareholders Wy , this question? The alteration may be so oppressive as to ¢ suspicion on the honesty of the persons responsible for it, or

(1) (1920) 1 Ch,, at p. 173. (3) (1927) 2 K.B. 9. (2) (1920) 2 Ch., at p. 141. (4) (1900) 1 Ch, at p. 671, (5) (1927) 2 K.B., at p. 23, : Fs

extravagant that no reasonable men could really consider it for the H. C. or A.

benefit of the company " (1). Atkin L.J. (as he then was) made a

significant but very natural remark : - '" But neither this court nor

any other court should consider itself fettered by the form of words, _as if ib were a phrase in an Act of Parliament which must be accepted

and construed as it stands. We must study what its real meaning is by the light of the principles which were being laid down by the "Master of the Rolls when he used the phrase" (2). In British | Bquitable Assurance Co. Ltd. v. Baily (3) Lord Lindley said: " Of course, the powers of altering by-laws, like other powers, must be exercised bona fide, and having regard to the purposes for which ; they are created, and to the rights of persons affected by them." I imagine that in Allen v. Gold Reefs of West Africa Ltd. (4) Lord Lindley meant no more.

Tf no restraint were laid upon the power of altering articles of association, it would be possible for a shareholder controlling the necessary voting power so to mould the regulations of a company

that its operations would be conducted or its property used so that he would profit either in some other capacity than that of member of the company or, if as member, in a special and peculiar way inconsis- tent with conceptions of honesty so widely held or professed that departure from them is described, without further analysis, as fraud. For example, it would be possible to adopt articles requiring that the company should supply him with goods below cost or pay him ninety-nine per cent of its profits for some real or imaginary services or submit to his own determination the question whether he was liable

to account to the company for secret profits as a director.

'The chief reason for denying an unlimited effect to widely expressed powers such as that of altering a company's articles is the fear or knowledge that an apparently regular exercise of the power may in truth be but a means of securing some personal or particular gain, whether pecuniary or otherwise, which does not fairly arise out of the subjects dealt with by the power and is outside and even incon- sistent with the contemplated objects of the power. It is to exclude the purpose of securing such ulterior special and particular advantages

(1) (1927) 2 K.B., at p. 18. (3) (1906) A.C. 35, at p. 42. (2) (1927) 2 K.B., at p. 26, (4) (1900) 1 Ch., at p. 671.

1938-1939. Ww PETERS' AmERIOAN Deutcacy Co. Lrp. v Hears.

that Lord Lindley used the phrase " bona fide for the benefit of company as a whole." The reference to " benefit as a whole" a very general expression negativing purposes foreign to the pany's operations, affairs and organizations. But unfortuna appears from the foregoing discussion, the use of the phrase has to cause misapprehension. If the challenged alteration relates t article which does or may affect an individual, as, for director appointed for life or a shareholder whom it is d expropriate, or to an article affecting the mutual rights and liabili inter se of shareholders or different classes or descriptions of sh holders, the very subject matter involves a conflict of inter s advantages. To say that the shareholders forming the majority m consider the advantage of the company as a whole in relation tos a question seems inappropriate, if not meaningless, and at all eve starts an impossible inquiry. The "company as a whole" i corporate entity consisting of all the shareholders. If the pro put forward is for a revision of any of the articles regulating the: 'inter se of shareholders or classes of shareholders, the primary questi must be how conflicting interests are to be adjusted, and thi ment is left by law to the determination of those whose in

conflict, subject, however, to the condition that the existing i can be altered only by a three-fourths majority. Whether the be voting rights, the basis of distributing profits, the basis of surplus assets on a winding up, preferential rights in relation to or to surplus assets, or any other question affecting mutual int it is apparent that though the subject matter is among the m conspicuous of those governed by articles and therefore of thost which the statutory power is directed, yet it involves little if ar thing more than the redetermination of the rights and interests those to whom the power is committed. No-one supposes voting each shareholder is to assume an inhuman alt consider only the intangible notion of the benefit of the abstraction called by Lord Robertson in Baily's Case (1) q company as an institution." An investigation of the thought motives of each shareholder voting with the majority would impossible proceeding. When the purpose of a resolution is s

implicit in the resolution in virtue of the circumstances or of some : larger transaction of which it formed a part or step. It is not far ; removed from what Lord Sumner called "one of those so-called ; intentions which the law imputes . . . the legal construction put on something done in fact" (Inland Revenue Commissioners v. Blott (1)). But, when the very question to be determined is a conflict of interests, unless the subject matter is held outside the power, the purpose of the resolution, as distinguished from the motives of the individuals, often must be to resolve the conflict in favour of one and against the other interest. In my opinion it was within the scope and purpose of the power _ of alteration for a three-fourths majority to decide the basis of distributing shares issued for the purpose of capitalizing accumulated profits or profits arising from the sale of goodwill, and in voting for the resolution shareholders were not bound to disregard their own interests. I am far from saying that the resolution for the alteration of the articles would have been bad if the existing articles had been uniform and clear in requiring that, however the " capitalization " was effected, the basis of distribution should be the number of shares : respectively subscribed for by members. But the facts of the case were that by one method, the older indirect method, a capitalization might have been effected which would mean a distribution according to capital paid up. Doubts were felt about the propriety of adopting this course, and doubts were agitated as to the meaning of the article

providing for the direct method. If there were no capitalization, the

• accumulated profits would not be distributed in proportion with

capital subscribed. In these circumstances the holders of partly paid

shares had no " right " to receive the profits in proportion with capital _ paid-up. As the articles stood they were entitled only to receive shares in that proportion if and when issued by way of direct capitalization. That event would never be likely to occur ; for the holders of fully paid shares were perfectly entitled to prevent it and would no doubt do so. In these circumstances it appears to me _ that the resolution involved no oppression, no appropriation of an unjust or reprehensible nature and did not imply any purpose outside the scope of the power.

of, a phrase is used which refers rather to some characteristic H. ©. or A.

1938-1939, we Perens' AMERICAN Dsticacy Co. Lrv. v.

The statements contained in the circular and made at the meet do not, in my opinion, invalidate the resolutions nor affect the clusion I have just stated. It is true that the circular is capabl conveying a view of the situation arising under the articles wl was not the correct legal result. The articles were, however, fi set out in the notice and in the circular. It can hardly be deni that they created a complicated if not confused position and a diflie situation. I agree that the circular was not likely to make the op tion of the existing articles appear less difficult. But the fact tl a description honestly made of the exact legal result arising from existing articles is thought by the court to be capable of com an incorrect impression is no sufficient ground for treating as special resolutions duly notified, proposed and passed.

The argument of the solicitor at the meeting was clearer in i error, but a bad argument to a shareholders' meeting has not t same effect upon their resolutions as a misdirection upon a jury verdict. This observation is sufficient to dispose of the cont founded on the chairman's mistaken statement as to where his ow pecuniary interest lay. ; 4

The view taken by Nicholas J. of the facts was in eflect the circular determined the action of the shareholders, they vi

stated thus : - First, the shareholders voted under a misapprel (i) of the true relationship of the respective articles, and, th also (ii) of the purpose of the resolution. Secondly, none of i following propositions could be maintained, viz., (i) that the obje

matters which they ought not to have considered. It is evide from his Honour's reasons that his view of the facts, worked out

operation of the circular and the true effect of the articles. legal basis is found in Lord Lindley's reference to the benefit

the company as a whole and the repetitions and discussions of tha expression in the later decisions. It is for that reason that I h

It so fully with the somewhat vague and unsatisfactory test to H.C. or A. e applied when what is in question is the validity of an alteration alae an article dealing with such a subject as that in the present case. Prrers'

'imately my reason for upholding the resolution is that I find no eres

ting element present. His Honour, on the other hand, approach- © 1#?- the matter somewhat differently, I think, sought and did not Hats. find any sufficient ground for the positive conclusion that the Dixon J. solution fell within the standard of validity which he regarded as down by authority.

There remains the question whether the resolution was invalidated.

by the chairman's refusal of an amendment. I shall not restate the s affecting this question, which is of no general importance. It enough to say that I think that the amendment, which was not formally proposed, consisted of two parts, one of which directly negatived the motion and the other of which fell outside the scope of the notice, which made the proposal of the only resolution to which the amendment was relevant contingent on the passage of hat which the amendment negatived. I therefore think that a jection by the chairman of the intended amendment would not have been irregular.

Jn my opinion the appeal should be allowed. The decree of the 'Supreme Court should be discharged. The suit should be dismissed with costs, including the costs of the amendments mentioned in the

ee. The respondents should pay the costs of the appeal.

McTirrvan J. In my opinion the appeal should be allowed. agree with the judgment of the Chief Justice.

5 Solicitors for the appellant, McDonell & Moffitt.

• Solicitors for the respondents, Thompson, Bradfield & Fincham.