Harlowe's Nominees Pty Ltd v Woodside

Harlowe's Nominees Pty Ltd v Woodside - [1968] HCA 37 - HCA 1968 case summary — Zoe

[7]

2. Woodside is a no-liability mining company engaged in exploring areas on-shore in Gippsland and off several parts of the coast of Australia, with a view to discovering oil and natural gas. In its explorations it was working in collaboration with other companies including Burmah. The allotment in question was made by a resolution of the board of directors of Woodside on 31st August, 1966. It was an allotment of 9,000,000 shares of 50c each, paid up to 10c per share, and was made at a premium of 20c per share pursuant to an agreement under seal dated 17th August 1966, between Woodside and Burmah. The agreement provided for the payment by Burmah, upon application, of $900,000 to be applied in paying up the shares to 10c each, and this payment was duly made. The agreement also provided that the share certificate should be marked "Not negotiable until fully paid as to calls and premiums" and that immediately upon the allotment Burmah should have full voting rights. Other provisions were that the first call on the 9,000,000 shares and on the existing contributing shares in Woodside's capital should not be made before 1st December 1966 and should not be for more than 5c per share, and that thereafter calls should not be made on the 9,000,000 shares unless made at the same time and for the same amount as on any other then-existing contributing shares, provided that Burmah might at any time request Woodside to call up the amount remaining uncalled on the 9,000,000 shares only and that Woodside should forthwith make such call. The premium of 20c per share was deferred so as to be payable as to 10c per share within six months after payment of the final call on the 9,000,000 shares, and as to the remaining 10c per share within twelve months after such payment ; but the full premium was to become immediately due and payable if the 9,000,000 shares should be forfeited for non-payment of a call and not be redeemed. The agreement entitled Burmah to have a nominee appointed to the board of Woodside, and it gave Burmah certain rights with respect to future issues and certain protection against dealings by Woodside with petroleum rights. (at p491)

[11]

6. At the threshold of the argument for Harlowe on the appeal was a submission of law which was put in the form of a corollary upon the undoubted general proposition that a power vested in directors to issue new shares is a fiduciary power which the directors are not entitled to exercise otherwise than bona fide for the benefit of the company as a whole. The suggested corollary is that an exercise of the power cannot be maintained as having been bona fide in the interests of the company unless the company had at the time of the exercise an immediate need of the capital to be paid up on the new shares. In many a case this may be true as a proposition of fact ; but in our opinion it is not true as a general proposition of law. To lay down narrow lines within which the concept of a company's interests must necessarily fall would be a serious mistake. We were invited to do so by reference to a sentence in the judgment of Williams J. in Grant v. John Grant & Sons Pty. Ltd. [1950] HCA 54; (1950) 82 CLR 1, at p 32 , which was said to mean that an exercise of a power to issue shares must be invalid if the company "is not in need of further capital". This expression seems to have been taken by his Honour from the headnote to Piercy v. S. Mills & Co. Ltd. (1920) 1 Ch 77 . If the judgment of Peterson J. in that case, including his quotations from the judgment of Byrne J. in Punt v. Symons & Co. Ltd. (1903) 2 Ch 506 , be read in full it becomes apparent that Williams J. could not have meant to cast any doubt upon the correctness of the principle which is explained in the last cited case at pp. 515, 516. The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends ; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company : Richard Brady Franks Ltd. v. Price [1937] HCA 42; (1937) 58 CLR 112, at p 142 ; Mills v. Mills [1938] HCA 4; (1938) 60 CLR 150, at pp 163, 169 ; Ngurli Ltd. v. McCann [1953] HCA 39; (1953) 90 CLR 425, at pp 438-441 . Directors in whom are vested the right and the duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. Thus in the present case it is not a matter for judicial concern, if it be the fact, that the allotment to Burmah would frustrate the ambitions of someone who was buying up shares as opportunity offered with a view to obtaining increased influence in the control of the company, or even that the directors realized that the allotment would have that result and found it agreeable to their personal wishes : Mills v. Mills [1938] HCA 4; (1938) 60 CLR 150 . But if, in making the allotment, the directors had an actual purpose of thereby creating an advantage for themselves otherwise than as members of the general body of shareholders, as for instance by buttressing their directorships against an apprehended attack from such as Harlowe, the allotment would plainly be voidable as an abuse of the fiduciary power, unless Burmah had no notice of the facts. (at p494)

[13]

8. It is right to keep in mind, as counsel for Harlowe has urged us to do, that at the time of the agreement with Burmah there was an active market for Woodside shares, and that the ruling prices were well above par - indeed the margin above par was greater than the premium Burmah agreed to pay. Additional capital might thus have been obtained by offering the new shares either proportionately to existing shareholders or to the public. Either way Harlowe would have had at least an opportunity of participating in the new issue. The placement with Burmah therefore represented a deliberate choice by the directors, and the suggestion is that the choice must have been made for the sake of denying to Harlowe (at that time an unidentified "mystery buyer") the chance of acquiring any of the 9,000,000 new shares and so for the sake of enhancing the likelihood of the directors retaining their positions on the board. All this leaves out of account, however, that even though an issue of shares might have been successfully offered to existing members or to the public, and even though a higher premium might have been obtained, it was by no means certain that so large a number as 9,000,000 shares would have been taken up on terms forbidding alienation while the shares were not fully paid, and it was still less certain that an issue of that magnitude would have commanded so large a premium. One point which is emphasized on behalf of Harlowe is that even if Woodside had a need of additional share capital the peculiar number of 9,000,000 shares was not shown to have been reached by any process of precise estimate of the actual needs of Woodside ; and a note which Burmah's chairman of directors made on 23rd May 1966 is pointed to as tending to support the view that the number was selected specifically by reference to the effect the new issue would have upon the position of the "mystery buyer". This note, Ex. V, refers to the "Woodside counter proposal", and shows that the result of issuing 9,000,000 shares with full voting rights would be to range interests holding 37.92 per cent of an issued capital of 29,000,000 shares against "opposing interests" which might have 10.3 to 17.2 per cent of that capital but were "still buying". On the other hand, according to Donaldson the directors had agreed, even before Withers first went to London to negotiate with Burmah, that the placement should be of "substantially a third" of the pre-existing capital, and 9,000,000 was not far from that mark. This was supported by the evidence of Hughes-Jones and Humphris. (at p495)

[16]

11. His Honour's finding on this matter is strongly attacked. It is pointed out that at the time of the Burmah placement Woodside had available funds in the vicinity of $1,000,000 and had $4,000,000 of uncalled share capital which, in view of the active interest in Woodside shares on the stock exchanges, might be called up with confidence. Moreover, no proved estimate of immediately foreseeable expenditure suggested a need for so large a placement of shares as was made to Burmah - though indeed Withers made an estimate (Ex. 12W) (in May 1966, he said) and produced it, according to Donaldson, to all directors in that month, which showed expected expenditure at $5,440,000 and funds available from cash and calls on uncalled capital at $5,024,000. It must be conceded that there is force in the comment that Withers, in his own interests, would have been far less likely to deceive Burmah as to the reality of a danger of an imminent take-over - a matter as to which he would almost certainly be found out sooner or later if it were false - than he would have been to lie to the court as to what his purpose was in inducing Burmah to accept the allotment. And it must be added that there is strong evidence that Withers was in fact apprehensive of an impending take-over by some outside interests, that he had a strong personal preference for Burmah, and that the only alternative potential allottee whom he ever considered was another "partner" of Woodside, namely Shell. These considerations are undoubtedly weighty, but they are not irreconcilable with a conclusion that the purpose, even of Withers, in the making of the placement was the purpose of putting Woodside in a position of vastly greater freedom to plan for increasing participation with its "partner", Burmah, in the activities for which hopes in many quarters were running high. Withers was crossexamined at great length, and the judge, fully alive though he was to the general unreliability of the man as a witness, accepted his sworn testimony on the vital point. A court of appeal is simply not in a position to say that in doing so his Honour was wrong. (at p496)

[23]

18. The attack that has been made on behalf of Harlowe upon the conclusion that (leaving Tarrant aside) the directors other than Withers agreed to the Burmah allotment because they thought it was in the best interests of Woodside, took in the main the shape of a submission that these directors were merely compliant with any recommendation made by Withers, and failed in their duty by not applying their minds to the needs of Woodside sufficiently to form any positive opinion that the allotment on the terms of the agreement was in the interests of that company. It would indeed be enough for Harlowe's purposes in the case to show that the evidence established the negative proposition that whatever induced the board's decision in favour of the agreement it was not a purpose of thereby serving the interests of the company as a whole, and accordingly during the argument on behalf of Harlowe a good deal of time was taken up with submissions based upon an assertion that the evidence showed an absence of attention on the part of the directors other than Withers to any question about the allotment except the question of the premium. It will suffice to say by way of answer that numerous passages in the evidence would have to be ignored before that view could be adopted. And a point worth remarking upon is that although the Burmah agreement was made pursuant to a "letter of intent" and the full terms of that document were presented to the board at a meeting on 20th June 1966 (Ex. AC) at which Hughes-Jones and Humphris were present, and was then and there unanimously approved, neither Hughes-Jones nor Humphris was asked in the course of lengthy cross-examinations any question at all about the consideration they gave or failed to give to the proposal at that crucial meeting. The decisive fact now, however, is that the judge's findings were against the negative proposition which Harlowe set itself to establish, and it seems to us impossible in all the circumstances of the case for a court of appeal to hold that the proposition was made out. The findings to which we refer are reflected in several passages in his Honour's reasons, but one quotation will suffice. Speaking of Donaldson, Hughes-Jones and Humphris, his Honour said:

At a glance

Court

Decision date

Before

Source

Judgment (26 paragraphs)

Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483 (21 June 1968)

Parties

Cases Cited (5)