Whitehouse v Carlton Hotel Pty Ltd

Whitehouse v Carlton Hotel Pty Ltd - [1987] HCA 11 - HCA 1987 case summary — Zoe

At the time of the purported allotment, Mr. Whitehouse and Mrs. Whitehouse, who was then living, were divorced. The four daughters of the marriage had aligned themselves with their mother; the two sons with their father. The company's capital was divided into three classes of shares, "A", "B" and "C". The "A" class shares, of which two had been issued, were held by Mr. Whitehouse. They alone carried unrestricted voting rights. The "B" class shares, of which two had been issued, were held by Mrs. Whitehouse. They carried full voting rights after the death of Mr. Whitehouse if, and for so long as, they were held by the original allottee or, if initially allotted to Mr. Whitehouse, by the transferee from him. The "C" class shares, of which 6,400 had been issued, were beneficially owned by the two sons (1,200 each) and four daughters (1,000 each). The "C" class shares alone carried rights to share in profits and surplus capital but conferred no voting rights. It would seem that, in the courts below, the case was conducted on both sides on the basis that, on that state of the share register, the "B" class shares held by Mrs. Whitehouse would, during any period during which she survived Mr. Whitehouse and continued to hold them, alone enjoy voting rights. That approach overlooked the fact that the voting rights attaching to the two "A" class shares would continue after Mr. Whitehouse's death and ignored any significance in the fact that the material in evidence indicated that one of the two "B" class shares held by Mrs. Whitehouse had been initially allotted to a Mr. Wadley who was a subscriber to the company's memorandum of association. Be that as it may however, it is common ground between the parties that Mr. Whitehouse believed that, if there were no changes in the company's issued capital, Mrs. Whitehouse would, during any such period, enjoy control over at least one-half of the voting power at any general meeting of the company and it has not been suggested by either side that any purpose would be served by investigating the correctness of that belief. The finding of the learned trial judge, affirmed by the Full Court and not challenged in this Court, was that the purported allotment by Mr. Whitehouse of "B" class shares to his sons was made to ensure that the daughters and their husbands would not gain practical control over the company on his death through the voting power which might then attach to the "B" class shares held by Mrs. Whitehouse. In other words, the purpose of the allotment was to dilute the voting power which might attach to Mrs. Whitehouse's shares by creating, for the period after Mr. Whitehouse's death, a new majority. That the company, under the continuing control of Mr. Whitehouse, is now maintaining that the purported allotment of the "B" class shares to the two sons was invalid reflects a new alignment of forces among the surviving members of the family.

[10]

It is true that the powers attached to the "B" class shares make it clear that the allotment of such shares will necessarily be, and was intended to be, concerned with the conferral of voting rights. The same can be said of the "A" class shares. Thus, it would seem plain enough that the allotment of "A" and "B" class shares was for the initial purpose of conferring voting power upon Mr. Whitehouse during his life and Mrs. Whitehouse during any period of survivorship. It is, however, one thing for those involved in the establishment of a company to exercise the power to allot shares for the purpose of creating a voting structure where otherwise there would be a vacuum filled only by the votes (if any) attaching to the subscribers' shares. It is another thing to exercise the power to allot shares for the purpose of defeating the voting power attaching to established shareholdings after such a voting structure has been established. Indeed, in the context of the wording of the provisions of Art. 56 of the articles defining the rights attaching respectively to the "A", "B" and "C" class shares and of the allotments of shares which were initially made, the inference could well be drawn in the present case that the power to allot "B" class shares was intended to be used for the initial creation of a settled and not uncommon structure of family control (voting control held by one parent during his or her life, by the other parent during any period of survival and by one or more of the children after the death of the survivor of the parents) rather than as a means of diluting the voting power of particular holders of issued shares. That is not to say that, after such a voting structure has been erected, there could be no further occasion for the legitimate allotment of "B" class shares. Such shares could, e.g., be allotted pursuant to an arrangement between all shareholders or (perhaps in association with an allotment of "C" class shares) for a genuine purpose of raising further capital. What the cases are concerned to establish as impermissible and invalid is the exercise by directors of a fiduciary power to allot shares for the purpose of manipulating voting power by favouring one shareholder or group of shareholders at the expense of another non-consenting shareholder or group. It was for that very purpose that the allotment was made in the present case and there is nothing in the articles of the company defining the rights attaching to the different classes of shares which operates to negative its prima facie invalidity.

[12]

It is arguable that special circumstances may arise in which the dilution of the voting power of an existing shareholder or group of shareholders or the creation of new voting power may constitute a legitimate purpose to be pursued by directors in the exercise of a fiduciary power to allot shares. Circumstances in which statutory provisions make a particular spread of voting power compulsory or commercially essential are a possible example of the kind of case where that may be so. It is unnecessary to pursue that question here however since it is plain that no such special circumstances existed to legitimize Mr. Whitehouse's purpose in allotting the "B" class shares to his sons. In that regard, it is unavailing that Mr. Whitehouse was not motivated by purely selfish considerations in that he believed that the manipulation of voting power in favour of his sons at the expense of his former wife was in the interests of the company in that it would ensure that the management of the company after his death was in the hands of those whom he favoured. Indeed, in the ordinary case of a purported allotment of shares for such an impermissible purpose, it is likely that the directors will genuinely believe that what they are doing to manipulate voting power is in the overall interests of the particular company: see, e.g., Piercy v. S. M. Mills and Co. [9] ; Hogg v. Cramphorn Ltd. [10] . In this as in other areas involving the exercise of fiduciary power, the exercise of a power for an ulterior or impermissible purpose is bad notwithstanding that the motives of the donee of the power in so exercising it are substantially altruistic. Thus, e.g., the "noblemen and gentlemen" in Fraser v. Whalley [11] were acting in what they saw as the interests of the company of which they were directors when they allotted shares for the purpose of diluting the voting power of the "contractor", Savin, whom they believed to have conflicting interests in other companies and who had, by what they saw as "an unfortunate accident", acquired a majority of the ordinary shares. Their belief that they were so acting could not, however, serve to overcome the invalidity of the allotment. As the Vice Chancellor (Sir William Page Wood, as Lord Hatherley then was) commented [12] :

[14]

It should be mentioned that one finds in some statements of the vitiating effect of a purpose of diluting the voting power of one or more existing shareholders a qualification to the effect that the allotment will be invalid if it is "merely" or "purely" or "solely" for that purpose: see, e.g., Piercy v. S. M. Mills and Co. [13] ; Grant v. John Grant & Sons Pty. Ltd. [14] ; Howard Smith v. Ampol [15] . The introduction of such a qualification is intended to put to one side cases in which there are present both permissible and impermissible purposes. In such cases of competing purposes, practical considerations have prevented the law from treating the mere existence of the impermissible purpose as sufficient to render voidable the exercise of the fiduciary power to allot shares: seeMills v. Mills [16] and note, as to Dixon J.'s apparently inadvertent use of the word "void", Richard Brady Franks Ltd. v. Price [17] . In this Court, the preponderant view has tended to be that the allotment will be invalidated only if the impermissible purpose or a combination of impermissible purposes can be seen to have been dominant - "the substantial object" (per Williams A.C.J., Fullagar and Kitto JJ., Ngurli Ltd. v. McCann [18] quoting Dixon J. in Mills v. Mills [19] and see Harlowe's Nominees [20] ); "the moving cause": per Latham C.J., Mills v. Mills [21] . The cases in which that view has been indicated have not, however, required a determination of the question whether the impermissible purpose must be " the " substantial object or moving cause or whether it may suffice to invalidate the allotment that it be one of a number of such objects or causes. As a matter of logic and principle, the preferable view would seem to be that, regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, "the power would not have been exercised": per Dixon J., Mills v. Mills [19] . It is, however, unnecessary to express a concluded view on the question of precise formulation of the relevant test in such cases since the present case does not raise any problem of competing permissible and impermissible purposes. The only substantial or moving purpose of the allotment in the present case was the manipulation of voting power. As has been said, it is simply not to the point that Mr. Whitehouse believed that it was in the overall interests of the company that the voting power attaching to the shares held by his former wife be diluted so as to ensure that the control of the company in the period after his death would be in the hands of those whom he favoured. That belief was an explanation of, or reason for the allotment for the impermissible purpose. It did not constitute a competing permissible purpose.

[27]

The trial judge accepted evidence to the effect that in the latter part of 1973, following the divorce proceedings and the commencement of the litigation to which I have referred, Charles had a number of discussions both with Alexander and with Mr. Jones concerning steps that might be taken to ensure the continued existence and successful operation of the respondent and the other companies in the event of his resignation or death. He made known to Mr. Jones his concern as to the capacity of the daughters and their husbands, should they gain control of the companies through their mother's "B" class shares, to conduct the business successfully. Early in January 1974 Alexander visited Mr. Jones, taking with him a document written by Charles which proposed that the articles of association should be altered so as to ensure that in the event of his resignation or death full power should pass to Alexander and Wilson. Mr. Jones advised Alexander against an alteration of the articles and proposed an alternative method of achieving the desired result. He said that provided the directors acted honestly for proper reasons it would be in order to use the existing framework of the articles to allot shares to accommodate Charles' wishes. He made particular reference to the "B" class shares as a means of ensuring that control would pass to Alexander and Wilson on the death or resignation of Charles. On the same occasion as he advised Alexander to this effect, Mr. Jones telephoned Charles and repeated the advice. Although the evidence was somewhat meagre the trial judge was satisfied that Charles, exercising the wide powers conferred on him by Art. 127, entered into an agreement with the appellants for the allotment of shares and did in fact allot two "B" class shares each to Alexander and Wilson. No meeting of directors as provided for in the articles was held but the trial judge held that the powers conferred on Charles by Art. 127 could be exercised without regard to the requirements of the articles with respect to meetings of directors. The annual returns filed with the Commissioner for Corporate Affairs by the respondent in 1974, 1975, 1977 and 1978 recorded the allotment of four "B" class shares in addition to those held by Mary Olivia. It is unnecessary to examine in detail the evidence upon which the trial judge based his finding because the actual making of the allotment for valuable consideration by Charles in the manner described was not challenged in the Full Court or in this Court. It suffices to say that his Honour accepted the evidence of Alexander and Mr. Jones in preference to that of Charles. The failure to record the allotments in the register of the respondent is explained by evidence that the register was not available to the company secretary because of legal action proceeding between 1973 and 1980. In 1980 Charles underwent a change of mind about the allotment because of differences that had arisen between him and his sons and he initiated action within the company which purported to reverse the decision.

[31]

Subject to any direction to the contrary given by the company in general meeting all new shares of whatever kind 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 in the class of shares to be issued . It is argued for the respondent that the effect of this article is such as to require that the "B" class shares allotted to Alexander and Wilson must first have been offered to Mary Olivia, the only then existing holder of shares in that class. On the other hand the appellants contend that the reference to "new shares" is a reference to shares newly created by an increase in the capital of the company. The respondent's submission finds support in the decision of Nevile J. in Lewis v. Riverton Public Golf Course Pty. Ltd. [23] . However, a contrary view of a similar provision was expressed by Russell J. in Musselwhite v. C.H. Musselwhite & Son Ltd. [24] : see also, K.E. Lindgren, The Fiduciary Nature of a Company Board's Power to Issue Shares, Western Australian Law Review, vol. 10 (1972), 364, at pp. 365-366 . I find the question to be one of considerable difficulty. In the end, I find the reasons advanced by Nevile J. to be insufficiently persuasive when considered in the context of the article here in question. Article 59 appears in a section headed "Alteration of Capital" and Arts. 57, 58 and 61 each use the term "new shares" in a manner which supports the contention of the appellants. The heading may be regarded in order to resolve an ambiguity in the wording of an article; at least, that is the intention that I draw from the obscure reference to headings in the interpretation article, Art. 4, which is as follows: The head notes hereto shall not affect the construction hereof and in these presents unless there is something in the subject or context inconsistent therewith. In my opinion, Art. 59 has no application to an allotment of shares which form part of the unissued capital of the company. 1. [1971] W.A.R. 75, at pp. 82-83. 2. [1962] Ch. 964, at p. 979.

[38]

It is a condition of this Memorandum of Association that the Articles of Association of the Company shall not be amended without the permission of Charles MacDonald Whitehouse while he remains a Director of the Company. The only shares to carry full voting rights were the "A" class shares and Charles was the only shareholder in this class. "B" class shares were to carry voting rights only after the death of Charles and then only for so long as the shares were held by the original holder. "C" class shares carried no voting rights but on the other hand this was the only class of ordinary shares to participate in the profits of the company by way of dividend and generally to participate in distributions of capital and profits. The consequence of all this was that so long as Charles remained the only "A" class shareholder then he held the total voting power of the company in general meeting. This does not rob other provisions of the articles relating to the general meetings of the company of all materiality because it no doubt remained desirable and appropriate for such meetings to be held in order to give members of the company an opportunity to express views on matters touching the company notwithstanding that they had no power to vote. But it does emphasize, when taken in conjunction with the unlimited extent of the powers, authorities and discretions vested in Charles as the permanent governing director of the company by Art. 127, that Charles bore the responsibility for the total control and direction of every aspect of the respondent's operations. It is against this background that the critically important finding of the trial judge must be considered. His Honour was satisfied that at the time when the allotments were made Charles had the interests of the respondent at heart. It is implicit in the finding that Charles acted bona fide and reasonably, with a view to preserving the efficient and profitable operation of the respondent. Charles reasoned, as revealed in his communication to Mr. Jones early in January 1974, that on his death his two "A" class shares with their voting rights - and assuming that he did not bequeath them to Mary Olivia - would be neutralized by her "B" class shares. In the light of his daughters' support of Mary Olivia and their attempts to have the company wound up, coupled with their lack of experience of the company's operations, Charles could reasonably conclude that the future profitability of the company would be enhanced if Alexander and Wilson were in a position to exercise control over the company after his death. They had the experience and expertise that were not to be found elsewhere within the membership of the company. There is no question of Charles' decision being infected by self-interest. It is clear that he had nothing personally to gain from the decision for its effect was not to be felt until after his death. True it is that if Mary Olivia survived Charles then the effect of the decision would be to diminish her capacity to influence the conduct of the company's business. But even if it be said that the allotments interfered with her contingent voting rights, the question remains whether they were made purely for that purpose. Counsel for the respondent argued that they were, attributing them to acrimony within the family. But the trial judge's finding is otherwise. This is an area where an appellate court must have strong grounds for departing from a conclusion of a trial judge where that conclusion depends on findings of credibility as between witnesses who were the actual participants in the impugned transaction and whose evidence was in conflict. As I have said, the trial judge accepted the evidence of Alexander and Mr. Jones in preference to that of Charles and it was their evidence that enabled his Honour to determine the purpose that activated Charles in making the allotments. In my opinion, the words of Latham C.J. in Mills [32] apply to this case: Where the interests of individuals are divergent and conflicting, where personal feeling is acute, and where the parties immediately concerned give oral evidence, the trial judge is in a position which enables him to estimate the weight and value of evidence much more effectively than any court of appeal can possibly do. Where so much depends upon the character, personal motives and interests of individual persons, the finding of a trial judge should not be disturbed unless there are strong and compelling reasons for taking a different view. In this case the learned trial judge has made scrupulously careful and precise findings of fact. There is plainly evidence to support them. In my opinion, they should be accepted by this court without hesitation. Their Honours who formed the majority in the Full Court concluded that the substantial purpose for which the power was exercised was to alter the balance of voting power and thereby to give the ultimate control of the company to the appellants. Furthermore, their Honours were forced to the conclusion that in the exercise of the power Charles had acted in a clandestine fashion with the consequence that the power was not used bona fide. With all respect to their Honours, two things may be said about a resolution of the problem in these terms. First, the conclusion as to improper purpose fails to give sufficient weight to the finding of the trial judge to which I have referred. Secondly, Charles himself proposed that his objective be achieved by an alteration of the articles, a procedure which would have been entirely above board and the outcome of which, having regard to his monopoly of voting power, would have been entirely predictable. The fact that he then accepted legal advice that there was an alternative lawful way of achieving the same end does not in my view suggest that in taking that advice he was acting other than bona fide. In my opinion, there is no reason to withhold relief on equitable grounds. 1. (1938) 60 C.L.R., at p. 161.

[62]

In the ordinary case, an issue of shares not for the purpose of raising needed capital but for the purpose of destroying the voting power of a particular shareholder cannot be upheld. But the power to allot "B" class shares is not a power conferred for the purpose of enabling the company to raise needed capital. A "B" class share gives no right to any financial return on the capital subscribed except the return of the nominal value of the share, and no voting power unless the original allottee continues to hold the shares and survives Charles. A "B" class share is not an attractive investment. The allotment of "B" class shares is not an appropriate means of enabling the company to raise capital. The allotment of "B" class shares determines who, in addition to the holders of "A" class shares, should have voting power after Charles' death. The allottees of "B" class shares cannot transfer that voting power to others. The purpose for which the power to allot "B" class shares was designed appears with tolerable clarity to be the nomination of those who should control the company after Charles' death. As Art. 127 reposed the power to control the allotment of all classes of shares solely in Charles, he was able to determine who should control the company during his life and, by testamentarily disposing of his "A" class shares and controlling the allotment of the "B" class shares, he was able to determine who should control the company after his death. If the purpose for which the power to allot "B" class shares was conferred was not the raising of capital but the nomination of persons to control the company after Charles' death, the purpose of the power to allot "B" class shares is radically different from the purpose of the power to allot shares of the kind considered in the cases referred to. Therefore the results of those cases throw no light on the question whether the purpose for which Charles allotted "B" class shares to Alexander and Wilson was within the power conferred on him.

[74]

The power to order rectification of the register must clearly, I think, be in all cases discretionary. The person claiming rectification must show that he has some equity which the court will protect. If he is a shareholder, then prima facie he shows such an equity if he establishes that a name is wrongly included in or omitted from the register of his company. Some definite reason must be shown, I would think, for refusing rectification before rectification will be refused. It is immaterial whether the jurisdiction invoked by an applicant is equitable or statutory, for the statutory provision is merely procedural: Kathleen Investments (Aust.) Ltd. v. Australian Atomic Energy Commission [56] . What reason is there for refusing rectification in the present case? The application is made by allottees of shares whose shares have been paid for but who are not on the register. It may be assumed that the omission of their names from the register was not at first due to any deliberate decision and latterly the omission was not continued with their consent or acquiescence. There has been no occasion for them to exercise the voting power attached to the "B" class shares and there will be no occasion for them to do so during Charles' lifetime. The conduct to which the company points as a reason for refusing rectification is the secrecy and purpose of the agreement made between Alexander and Wilson on the one hand and Charles on the other. Making the agreement and keeping it from Mary Olivia's knowledge was less than frank but the parties to the agreement deprived her of no right, power or privilege to which she was entitled. She retained her "B" class shares until her death but, having regard to the provisions of the articles as I have construed them, the deferred voting power which they originally gave her was always subject to defeasance by Charles' allotment of further "B" class shares to others. For the reasons stated, she was not entitled to notice before Charles allotted the shares and Alexander and Wilson were under no legal or equitable obligation to notify her of their applications for shares or of Charles' intention to allot them. Alexander and Wilson are thus unregistered shareholders who neither consented to nor contributed to the omission of their names from the register nor failed in any legal or equitable duty to Mary Olivia or to the company. They are entitled to the decree of rectification first pronounced in their favour. 1. (1950) 82 C.L.R., at p. 51. 2. (1977) 139 C.L.R. 117, at p. 151.

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Before

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Judgment (75 paragraphs)

Parties