HOWARD SMITH LTD. v. AMPOL PETROLEUM LTD. AND OTHERS
PRIVY COUNCIL
14 FEBRUARY 1974
[1974] 2 W.L.R. 689 – [1974] A.C. 821
FACTS:
There was a dispute between two companies to take over RW Millers. Both Howard Smith and Ampol held shares in this company. Ampol and Bulkships together held 55% in Millers. The directors did not want Ampol to buy the shares of RW Millers as Howard Smith created better take over terms by offering employment to the directors even in future. In response to Smith’s bid, Ampol and Bulkships issued a joint statement that they had decided act jointly in future operations of RW Millers and reject any offer for their shares from Howard Smith or from any other source. The directors of RW Millers issued $10m of new shares, which according to them was to complete the finance of two tankers. The shares were issued to Howard Smith. The effect of this issue was that Millers and much needed capital. Bulkships and Ampol’s shares were reduced by 36.6 per cent of the issued shares. This made Howard in a position to make an effective take over. Ampol challenged the validity of shares issued to Howard. Millers directors contended that the primary reason to issue shares to Howard was to obtain more capital.
ISSUES:
1) Were the directors motivated by any purpose of personal gain or advantage?
2) Whether directors had a proper purpose in issuing shares to Howard Smith?
3) Whether the directors had the power to allot or alter prior majority shareholder position in the interest of the company?
RULES:
Rule 11(a) of Stock Exchange Rules
Rule 11(b) of Stock Exchange Rules
Clause 8 of Articles of Association of R. W. Miller (Holdings) Ltd.
ANALYSIS:
Relying on dictum of Dixon J. in Mills v. Mills[1], the Chief Judge in equity, Street J., held that the primary purpose of R. W. Miller (Holdings) Ltd. (‘Millers’) was to reduce the proportionate shareholding of Ampol Petroleum Ltd. (‘Ampol’) and Bulkships allowing takeover offer by Howard Smith Ltd. (‘Howard’) to be applied. Though, the directors did not act for purpose of their personal gain or advantage or by a desire to retain the position of board but they deviated from the primary purpose of accumulating capital as required. Thereby, the judge declared it to be an improper exercise of power by the directors and ordered for setting aside the allotment of shares and the share registered to be rectified. Howard appealed before the Judicial Committee, which affirmed the judgment of the Supreme Court. Per curiam decision leads us to applying objectivity in situation where there are more than one purposes.
Howard appealed before the Privy Council on the judgment of the Supreme Court of New South Wales against Ampol on allotment and issue of shares to Howard. Howard contented that Ampol and Bulkships came together for the purpose of precluding any bids, including Howard’s in order to make everyone accept Ampol offer to which Ampol responded discarding it since no such evidence was available for the contention to stand. Howard declared Street J. reliance on Mills v. Mills [2]to be invalid stating that it does not address situation of having collateral purposes, and the future of Millers was not safe in hand of Ampol and Bulkships. While on the other hand the respondents accepted the cases’ dictum to be valid. The criticism was rejected by the Lordships as the meeting of July 6, 1972 clearly depicted the true intention of directors of allowing takeover and also the primary purpose to be only capital needs. The appellants brought before us the power difference existing in the structure of company as it described that with the allotment of shares all shareholders including Ampol and Bulksips, the majority bloc and minority bloc both were benefitted, thereby, making it “bona fide for the company as a whole”[3] but was welcomed by respondents on basis that directors are not allowed to use their fiduciary power over the shares of the company to destroy the majority bloc. Dwelling into the legal aspect, as the lordship took into account, clause 8[4], which grants the directors fiduciary power, gave way to the two-fold contention of the parties. Howard’s brought light to the fact that most of cases in which directors were held liable in relation to issue of shares were they acting in purpose of self-advantage like in Punt v. Symons & Co. Ltd. [5], supported by the lordship by relying on the Hogg v. Cramphorn Ltd. [6]. The appellants further relied on case of Tech Corporation Ltd. v. Millar[7] and argued that directors have right to defeat the majority shareholder and allow takeover if it was reasonable in interest of company to do so. Ampol’s distinguished the present case scenario from this case because in our case because there was ‘no reasonable ground to apprehend to damage the company’[8].The lordships rejected it too. Challenging the judgment of the Supreme Court, Howard contended that mere infringement of rules 11(a) and (b) did not establish the issue of shares to be invalid, in contrary to which Ampol stated it to breach of contract despising it to be bona fide in nature. The lordships described it to be showing malicious attitude of directors.
None of the parties contended on Mr. Peter Abeles, not being allowed to vote basis on his interest as director of Bulkships. Lord Wilberforce gave the judgment and described the evidence at the trial stage to be sufficient. The lordships concurred with the stating of Street J. that the directors have no personal interest at stake in issue of shares. The lordships went into accepting the trial judge’s findings and accepted the fact that as of July 6, 1972 the company had relied on loan capital and there was no pressing situation to obtain cash funds by issue of shares. The lordships rejected the contention of parties that capital needs lead to share allotment. Lord broadened the reading of issuing of shares apart from capital needs relying on Punt v. Symons & Co. Ltd. [9] . The Lordships finally upheld, the trial judges decision considering Mills v. Mills[10] case and stated that though it was within the power of directors to issue shares but it was for improper purposes and thereby would be set a side.
CONCLUSION:
It was ruled in this case with emphasis that the directors should not use their fiduciary powers over the shares of the company purely for the purpose of destroying the already existing majority or creating a new majority which previously did not exist. If a director does so, he or she is interfering with the element of company’s constitution, which is set separate from their powers. The directors cannot use their fiduciary powers for the purpose of shifting the power in order to decide whom will be the shares sold and at what price.
CASE CITED:
HOGG V CRAMPHORN LIMITED: CHD 1966
The directors will not be permitted to exercise powers, which have been delegated to them by the company in circumstances, which put the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights.[11]
PIERCY V. S MILLS & Co. Ltd. [1920] 1 Ch. 77
Directors should not be permitted to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders. That is, however, exactly what has happened in the present case.[12]
MILLS V. MILLS (1938) 60 C.L.R. 150
If the director’s resolution is to benefit the company, it does not matter if it incidentally benefits the director. [13]
TECH COPRORATION Ltd. V. MILLAR (1972) 33 D.L.R (3d) 288
It was held that directors of the company were entitled to use their powers to defeat the majority shareholders in order to fight off a takeover if they considered it reasonable in the interest of a company to do so.[14]
IMPORTANCE:
The principle of “the proper purpose” rule was laid down in this case. In accordance with principles established by that case, in determining whether a power was exercised for a proper purpose, the court should: (i) identify the power whose exercise is in question; (ii) identify the proper purpose for which the power was vested in the directors; (iii) identify the substantial purpose for which the power was in fact exercised; and (iv) decide whether that purpose was proper.[15]
The case Howard Smith Ltd. was also cited in Eclairs Group Ltd. v JKX Oil & Gas Plc[16], to understand that the court can examine beyond the bona fine duties of the directors and ascertain whether the act was within the purview of purpose for which the power was conferred.
[1] (1938) 60 C.L.R. 150
[2] (1938) 60 C.L.R. 150
[3] Howard Smith Ltd. v. Ampol Petroleum Ltd., [1974] A.C. 821
[4] Clause 8 of Articles of Association of R. W. Miller Ltd.
[5] [1903] 2 Ch. 506
[6] [1967] Ch. 254
[7] (1972) 33 D.L.R. (3d) 288
[8] Howard Smith Ltd. v. Ampol Petroleum Ltd., [1974] A.C. 821
[9] [1903] 2 Ch. 506
[10] (1938) 60 C.L.R. 150
[11] Hogg v Cramphorn Ltd [1967] Ch 254
[12] Piercy v. S Mills & Co. Ltd. [1920] 1 Ch. 77
[13]Mills v Mills (1938) 60 C.L.R 150
[14] Tech Corporation Ltd. v. Millar (1972) 33. D.L.R (3d) 288
[15]Allen Overy. “Directors’ Duties – Exercise of Powers for a Proper Purpose – Allen & Overy.” Allen Overy, July 15, 2014. https://www.allenovery.com/en-gb/global/news-and-insights/publications/directors-duties–exercise-of-powers-for-a-proper-purpose.
[16] Eclairs Group Ltd v JKX Oil & Gas Plc [2016] 3 All E.R. 641.
Written by: Anamika Tiwari and Garima Agrawal
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