Overview of Shares
Cases
Imperial Hydropathic Hotel Co, Blackpool v Hampson
(1883) 23 Ch D 1 Sir George Jessel wrote
“The appeal in this case is brought against an order of Vice-Chancellor Bristowe, and it certainly raises a new question, namely, whether without express statutory authority a company can in general meeting remove its directors. That is the chief question argued. Now when we consider the nature of these companies we find that they are statutory corporations, created under the Companies Act, 1862, section 18 of which says that the subscribers to the memorandum and the other members shall on registration be a body corporate by the name contained in the memorandum of association, capable forthwith of exercising all the functions of an incorporated company. I find no other power given to them by express words as regards their proceedings, except under the 50th section, which gives them the power of altering their regulations by special resolutions. They also have the power if they think fit, but not otherwise, of adopting the rules contained in Schedule A. to the Act of Parliament. There is one section of those regulations which it is material to consider, because it has a bearing on the general terms of the Act of Parliament. It is art. 65 of Table A.: “The company in general meeting may by a special resolution remove any director before the expiration of his period of office, and may by an ordinary resolution appoint another person in his stead; the person so appointed shall hold office during such time only as the director in whose place he is appointed would have held the same if he had not been removed.” So that it is plain that the enactors of this Act of Parliament did not imagine that there was an express power to remove in the Act of Parliament itself, otherwise this would have been entirely superfluous.
The fact of the company being a corporation is not quite conclusive of the question: because it may well be that either from the nature of the corporation itself or by reason of a special provision you ought to infer this power. I will consider both points. First of all, is there any necessity? I think not. If the regulations of the company either prohibit the removal of the director or contain no provision like that in Table A. for the removal of the director, you can insert such a provision in the articles of association by special resolution under sect. 50. Therefore, whenever the occasion arises that you require to remove a director without special cause shewn, you cannot accomplish that object except under that power in the articles of association, and if you have given yourselves the power of removing the director, then you can proceed to exercise that power by an act of removal. Therefore, that appears to me to be a strong argument against the incidental power of removal. The only other question is whether the power is inherent in a corporation—it is quite plain to me it is not incidental to a corporation. As regards the corporators themselves it has been decided that in ordinary corporations there is a power of removal from the corporation for good cause. From the nature of the case one would assume that. Take the case of a municipal corporation—a corporation for the government of a town—if the head of a corporation became incapable of carrying on his functions it would be unreasonable to assume that there was no inherent power in the corporation to remove him and appoint some one else in his stead. So in the same way you might make by-laws that whenever a corporator was incapable of exercising his functions either from personal incapacity, or because he had become infamous or otherwise unfit, he might be removed from the corporation; but all that is a necessary incident for carrying out the purposes for which the corporation is created, and it stands on a totally different footing from removing a person from an office in the corporation. It appears to me there is no doctrine of the Common Law, and there is no statutory provision which enables you to vary the contract entered into between the members that the directors shall hold office for a given period, supposing there is a contract which does not contain the power of removal. That special power not being there, I think that disposes of the notion that you can remove by some inherent power not contained in the statute or the articles.
Now, as regards the other point, I think there can be no doubt whatever. The directors are to be elected in the ordinary way, to hold office for a certain period, obviously until they retire. There are provisions for the retirement in the ordinary way, and of course the meaning of the articles is that until the retirement they hold office and continue to hold office. Therefore, it comes to this, that the directors once elected hold office during the period for which they are elected without any power of removal.
The only other argument addressed to us is this:—It is said that under the special terms of these articles of association you can remove the directors; and for that purpose it is therefore necessary to see what the special terms are. The 44th clause is relied on: “The company may from time to time by a resolution passed by at least three-fourths of the votes of the shareholders present personally or by proxy at any extraordinary meeting, repeal, alter, or add to any of the regulations of the company, whether contained in the articles of association or not, provided that such resolution be confined to the object or business specified in the notice convening the meeting.” Then the 45th clause requires seven days’ notice at least, “specifying the place, the time, the hour of meeting, and the purpose for which any general meeting is to be held.” Then clause 46: “Any shareholder may, on giving not less than three days’ previous notice, submit any resolution to a meeting beyond the matters contained in the notice given of such meeting,” which is to be left under the 47th at the registered office of the company. Now, that being the position of matters, it is suggested that under clause 44 the company can by resolution remove two directors. In my opinion they cannot. They can only alter the articles of association. On the contrary, by the resolution which was passed, they left the articles alone. The articles remained, prescribing the whole term of office, three years, or whatever it might be. They have not altered them in the least, but they have passed a simple resolution that two specially named directors shall be removed from office. In my opinion that is not in the purview of clause 44 at all. If they wanted to act under clause 44 they should have had passed a clause enabling the company to remove the directors, and then when they had conferred on themselves that power they might have acted upon it. That, I think, disposes of the whole matter.
But it was suggested that three days’ notice given of a resolution by a shareholder would do instead of the notice specified in clause 45. In my opinion it would not. The notice given by clause 45 is to be given to every shareholder. The notice given by clause 46 is only to be left at the registered office of the company, the one notice is seven days’ notice, and the other is three days’ notice. It is plain to me that the notice to be given under clause 46 is something ancillary or subsidiary, which could be properly brought forward under the terms of the notice convening the meeting, and therefore the resolution passed at the first meeting was passed on a bad notice. As regards the second meeting it is not necessary to decide whether the second meeting had power to remove directors. The result, therefore, will be that this appeal will be dismissed with costs.”
Cotton LJ wrote
“in my opinion it is an entire fallacy to say that because there is power to alter the regulations, you can by a resolution which might alter the regulations, do that which is contrary to the regulations as they stand in a particular and individual case. It is in no way altering the regulations. The alteration of the regulations would be by introducing a provision, not that some particular director be discharged from being a director, but that directors be capable of being removed by the vote of a general meeting. It is a very different thing to pass a general rule applicable to every one who comes within it, and to pass a resolution against a particular individual, which would be a privilegium and not a law. Now here there was no attempt to pass any resolution at this meeting which would affect any director, except those who are aimed at by the resolution, no alteration of the regulations was to bind the company to those regulations as altered…”
Bowen LJ wrote
“It is neither a question of removal of an officer nor of an agent of a common law corporation. We are discussing the rights of directors of a statutory corporation created by the Act of 1862, and in such a case we must consider what are the rights of the directors and shareholders, for the articles of association, by sect. 16, are to bind all the company and all the shareholders as much as if they had all put their seals to them. Therefore you must look, when you are considering the question of dismissal of a director, to see whether the articles of association have been complied with. When we look at the articles of association it seems quite clear that they are not complied with. It seems to me that as regards the first meeting the Appellants are out of Court, and as regards the second meeting the vice of their position is this, that they are treating what has been done at this meeting as if it amounted to an alteration of the regulations, whereas it is only a displacement of individuals. I do not think it is possible to find language that would more happily express my view than that of Lord Justice Cotton. It is a mistake to suppose that a law and a privilegium are the same, or that you are really altering the regulations when you are attempting to deprive an individual of the benefit of them.”
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame
[1906] 2 Ch 34
Lord Collins MR held that the vote of a bare majority of shareholders was not enough to circumvent a requirement in the constitution that the directors may be required by the shareholders to act only a 75%% resolution
“It has been suggested that this is a mere question of principal and agent, and that it would be an absurd thing if a principal in appointing an agent should in effect appoint a dictator who is to manage him instead of his managing the agent. I think that that analogy does not strictly apply to this case. No doubt for some purposes directors are agents. For whom are the agents? You have, no doubt, in theory and law one entity, the company, which might be a principal, but you have to go behind that when you look to the particular position of directors. It is by the consensus of all the individuals in the company that these directors become agents and hold their rights as agents… There are provisions by which the minority may be overborne, but that can only be done by special machinery in the shape of special resolutions.”
Cozens Hardy LJ wrote
“going back to the root principle which governs these cases under the Companies Act 1862… [it] seems to me that the shareholders have by their express contract mutually stipulated that their common affairs should be managed by certain directors to be appointed by the shareholders in the manner described by other articles, such directors being liable to be removed only by special resolution.”
Quin & Axtens Ltd v Salmon
[1909] AC 442 Lord Loreburn LC in the House of Lords wrote
“The bargain made between the shareholders is contained in articles 75 and 80 of the articles of association, and it amounts for the purpose in hand to this, that the directors should manage the business; and the company, therefore, are not to manage the business unless there is provision to that effect. Further the directors cannot manage it in a particular way–that is to say, they cannot do certain things if Mr. Salmon or Mr. Axtens objects. Now I cannot agree with Mr. Upjohn in his contention that the failure of the directors upon the objection of Mr. Salmon to grant these leases of itself remitted the matter to the discretion of the company in general meeting. They could still manage the business, but not altogether in the way they desired.
Next, in regard to the second point I think it is really too clear for argument that the business in question was business within the meaning of the 75th article. The only question of substance to my mind is the third contention of Mr. Upjohn, when he said that the word “regulations” as employed in the 75th article includes at all events, if it is not equivalent to, directions whether general or particular as to the transaction of the business of the company. Now it may be a question for argument, but for my own part I should require a great deal of argument to satisfy me that the word “regulations” in this article does not mean the same thing as articles, having regard to the language of the first of these articles of association. But, whether that be so or not, it seems to me that the regulations or resolutions which have been passed are of themselves inconsistent with the provisions of these articles, and therefore this appeal fails, and I move your Lordships that the appeal be dismissed with costs.”
John Shaw & Sons (Salford) Ltd v Shaw
[1935] 2 KB 113 Greer LJ wrote
“I am therefore of opinion that the learned judge was right in refusing to dismiss the action on the plea that it was commenced without the authority of the plaintiff company. I think the judge was also right in refusing to give effect to the resolution of the meeting of the shareholders requiring the chairman to instruct the company’s solicitors not to proceed further with the action. A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders. The law on this subject is, I think, accurately stated in Buckley on Companies as the effect of the decisions there mentioned: see 11th ed., p. 723.
For these reasons I am of opinion that the Court ought not to dismiss the action on the ground that it was instituted and carried on without the authority of the plaintiff company.”
Barron v Potter
[1914] 1 Ch 895 it was alleged that the following constituted valid meeting of the shareholders
“Accordingly on February 23 he met the train at Paddington by which he expected Canon Barron to arrive, and seeing him alight from it walked by his side along the platform and said to him, “I want to see you, please.” Canon Barron replied, “I have nothing to say to you.” Mr. Potter then said, “I formally propose that we add the Reverend Charles Herbert, Mr. William George Walter Barnard, and Mr. John Tolehurst Musgrave as additional directors to the board of the British Seagumite Company Limited. Do you agree or object?” Canon Barron replied, “I object and I object to say anything to you at all.” Mr. Potter then said, “In my capacity as chairman I give my casting vote in their favour and declare them duly elected.” He continued to walk with Canon Barron a few steps and then said, “That is all I want to say; thank you. Good day.” ”
A general meeting followed at which new directors were again said to be appointed to which Mr Barron’s objected. Mr Barron sought a declaration that the appointment of the directors were invalid, arguing that the meeting on the train station was not a valid general meeting and that the board was the only body that could appoint more directors.
Warrington J. wrote
“The question then arises, Was the resolution passed at the general meeting of the company a valid appointment? The argument against the validity of the appointment is that the articles of association of the company gave to the board of directors the power of appointing additional directors, that the company has accordingly surrendered the power, and that the directors alone can exercise it. It is true that the general point was so decided by Eve J in Blair Open Hearth Furnace Co v Reigart, and I am not concerned to say that in ordinary cases where there is a board ready and willing to act it would be competent for the company to override the power conferred on the directors by the articles except by way of special resolution for the purpose of altering the articles. But the case which I have to deal with is a different one. For practical purposes there is no board of directors at all. The only directors are two persons, one of whom refuses to act with the other, and the question is, What is to be done under these circumstances? On this point I think that I can usefully refer to the judgment of the Court of Appeal in Isle of Wight Ry Co v Tahourdin,not for the sake of the decision, which depended on the fact that it was a case under the Companies Clauses Consolidation Act, 1845 , but for the sake of the observations of Cotton and Fry LJJ upon the effect of a deadlock such as arose in the present case. Cotton LJ says:
“Then it is said that there is no power in the meeting of shareholders to elect new directors, for that under the 89th section the power would be in the remaining directors. The remaining directors would no doubt have that power if there was a quorum left. But suppose the meeting were to remove so many directors that a quorum was not left, what then follows? It has been argued that in that case, there being no board which could act, there would be no power of filling up the board so as to enable it to work. In my opinion that is utterly wrong. A power is given by the 89th section to the remaining directors ‘if they think proper so to do’ to elect persons to fill up the vacancies. I do not see how it is possible for a non-existent body to think proper to fill up vacancies. In such a case a general meeting duly summoned for the purpose must have power to elect a new board so as not to let the business of the company be at a deadlock.”
Fry LJ says this:
“Then with regard to the objection that a general meeting cannot elect directors to fill up vacancies, it appears to me that a general meeting would at any rate have that power in the event of all the directors being removed. In my judgment it is quite impossible to read the 89th section as the only section relating to the filling up of vacancies in the office of directors. That applies only where there are remaining directors, and those remaining directors think proper to exercise their power. That does not, in my judgment, deprive the general meeting of the power to elect directors, where there are no directors, or where the directors do not think fit to exercise their powers.”
Those observations express a principle which seems to me to be as applicable to the case of a limited company incorporated under the Companies (Consolidation) Act 1908, as to a case falling under the Companies Clauses Consolidation Act 1845, and moreover to be a principle founded on plain common sense. If directors having certain powers are unable or unwilling to exercise them—are in fact a non-existent body for the purpose—there must be some power in the company to do itself that which under other circumstances would be otherwise done. The directors in the present case being unwilling to appoint additional directors under the power conferred on them by the articles, in my opinion, the company in general meeting has power to make the appointment. The company has passed a resolution for that purpose, and though a poll has been demanded no date or place has yet been fixed for taking it. The result therefore is that I must grant an injunction on the motion in Canon Barron’s action and refuse the motion in Mr. Potter’s action.”
Allen v Gold Reefs of West Africa Ltd
[1900] 1 Ch 656
Lord Lindley MR wrote that the power to change the articles is,
“like all other powers [to] be exercised 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…
How shares shall be transferred, and whether the company shall have any lien on them, are clearly matters of regulation properly prescribed by a company’s articles of association…
It is easy to imagine cases in which even a member of a company may acquire by contract or otherwise special rights against the company, which exclude him from the operation of a subsequently altered article…
The altered articles applied to all holders of fully paid shares, and made no distinction between them. The directors cannot be charged with bad faith.”
Greenhalgh v Arderne Cinemas Ltd (No 2)
[1946] 1 All ER 512;
Lord Evershed MR wrote
“When a man comes into a company, he is not entitled to assume that the articles will always remain in a particular form, and so long as the proposed alteration does not unfairly discriminate, I do not think it is an objection, provided the resolution is bona fide passed, that the right to tender for the majority holding of shares would be lost by the lifting of the restriction [to transfer shares to individuals outside the company”
It was incorrect to say, “that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground. It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern. If, as commonly happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the resolution that they are considering their own position as individuals.”
Citco Banking Corporation N.V. v. Pusser’s Ltd & Anor
[2007] UKPC 13 Lord Hoffman wrote
Section 89 of the Act contains no qualification of the power of a 75% majority to amend the articles of association. But the courts have always treated the power as subject to implied limitations. The problem has been to say where the line should be drawn. In Hutton v Scarborough Cliff Hotel Co. (1865) 2 Dr & Sm 521 Kindersley V-C said that, in the absence of contrary provision in the memorandum of association, it was a fundamental condition of a company’s constitution that shareholders should be treated equally. The power to amend the articles could therefore not be used to create shares with special privileges. But in Andrews v Gas Meter Company [1897] 1 Ch 361, in which there was a challenge to an amendment to allow the issue of preference shares, this decision was overruled, Lindley LJ saying that it was “desirable, from all points of view, to remove from companies a fetter which ought never to have been imposed upon them”.
The limits of the power of amendment were considered again by the Court of Appeal in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656. Mr Zuccani, a shareholder who held partly paid shares and was also the only holder of fully paid shares (which had been issued to him in consideration of a property he had sold to the company) had died and the directors envisaged some difficulty in recovering arrears of calls. The articles gave the company a lien over the partly paid shares but none over the fully paid shares. By special resolution the company amended the articles to extend its lien to fully paid shares. Despite the fact that the amendment disadvantaged only Mr Zuccani’s estate, the Court of Appeal held the amendment valid. In a well-known passage (at pp. 671-672), Lindley MR said:
“The power.. . conferred on companies [by the equivalent of section 89 of the BVI Companies Act] to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company memorandum of association. Wide, however, as the language of s. [89] is, the power conferred by 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. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it.”
In Allen’s case it was for the benefit of the company as a corporate entity that it should be able to recover the debt owed by the deceased shareholder. As Romer LJ put it (at p. 682):
“It appears to me the shareholders were acting in the truest and best interests of the company in exercising the legal right to alter the articles so that the company might as one result obtain payment of the debt due from Mr. Zuccani. The shareholders were only bound to look to the interests of the company. They were not bound to consult or consider Mr. Zuccani’s separate or private interests.”
The test of whether the amendment was “bona fide for the benefit of the company as a whole” was applied somewhat literally in Dafen Tinplate Company Ltd v Lianelly Steel Company (1907) Ltd [1920] 2 Ch 124, which concerned an amendment giving the board power to require a member to transfer his shares to a nominated person at a fair value. Peterson J said that the question was not whether the shareholders bona fide or honestly believed that the alteration was for the benefit of the company. It was whether “in fact the alteration is genuinely for the benefit of the company.” In the judge’s opinion, the new article was not and he held it invalid. But in Shuttleworth v Cox Brothers and Co (Maidenhead) Ltd [1927] 2 KB 9 (an amendment to give the Board power to remove a permanent director) the Court of Appeal said emphatically that this approach was wrong. Scrutton LJ said (at p. 23):
“Now when persons, honestly endeavouring to decide what will be for the benefit of the company and to act accordingly, decide upon a particular course, then, provided there are grounds on which reasonable men could come to the same decision, it does not matter whether the Court would or would not come to the same decision or a different decision. It is not the business of the Court to manage the affairs of the company. That is for the shareholders and directors. The absence of any reasonable ground for deciding that a certain course of action is conducive to the benefit of the company may be a ground for finding lack of good faith or for finding that the shareholders, with the best motives, have not considered the matters which they ought to have considered. On either of these findings their decision might be set aside. But I should be sorry to see the Court go beyond this and take upon itself the management of concerns which others may understand far better than the Court does.”
Bankes LJ expressed a similar view when he said (at p. 18):
“[T]he test is whether the alteration of the articles was in the opinion of the shareholders for the benefit of the company. By what criterion is the Court to ascertain the opinion of the shareholders upon this question? The alteration may be so oppressive as to cast suspicion on the honesty of the persons responsible for it, or so extravagant that no reasonable men could really consider it for the benefit of the company. In such cases the Court is, I think, entitled to treat the conduct of shareholders as it does the verdict of a jury, and to say that the alteration of a company’s articles shall not stand if it is such that no reasonable men could consider it for the benefit of the company.”
These were cases in which the amendment operated to the particular disadvantage of a minority of shareholders: Mr Zuccani’s estate in Allen’s case and the director whose removal was proposed in Shuttleworth’s case. But the same principle must apply when an amendment which the shareholders bona fide consider to be for the benefit of the company as a whole also operates to the particular advantage of some shareholders. This is illustrated by Rights & Issues Investment Trust Ltd v Stylo Shoes Ltd [1965] Ch 250, in which, together with a substantial increase in the issued ordinary share capital, the articles were amended to double the number of votes attached to special management shares in order to maintain the control of the existing management. 92% of the ordinary shareholders voted in favour. Pennycuick J said,at pp 255-256:
“What has happened is that the members of this company, other than the holders of the management shares, have come to the conclusion that it is for the benefit of this company that the present basis of control through the management shares should continue to subsist notwithstanding that the management shares will henceforward represent a smaller proportion of the issued capital than heretofore. That, it seems to me, is a decision on a matter of business policy to which they could properly come and it does not seem to me a matter in which the court can interfere. So far as I am aware there is no principle under which the members of a company acting in accordance with the Companies Act and the constitution of the particular company and subject to any necessary consent on the part of a class affected, cannot, if they are so minded, alter the relative voting powers attached to various classes of shares. Of course, any resolution for the alteration of voting rights must be passed in good faith for the benefit of the company as a whole, but, where it is so, I know of no ground on which such an alteration would be objectionable and no authority has been cited to that effect. So here this alteration in voting powers has been resolved upon by a great majority of those members of the company who have themselves nothing to gain by it so far as their personal interest is concerned and who, so far as one knows, are actuated only by consideration of what is for the benefit of the company as a whole.”
These principles, together with the proposition that the burden of proof is upon the person who challenges the validity of the amendment (see Peters’ American Delicacy Company Ltd v Heath (1939) 61 CLR 457, per Latham CJ at p. 482) appear to their Lordships to be clearly settled and sufficient for the purpose of deciding this case. It must however be acknowledged that the test of “bona fide for the benefit of the company as a whole” will not enable one to decide all cases in which amendments of the articles operate to the disadvantage of some shareholder or group of shareholders. Such amendments are sometimes only for the purpose of regulating the rights of shareholders in matters in which the company as a corporate entity has no interest, such as the distribution of dividends or capital or the power to dispose of shares. In the Australian case of Peters’ American Delicacy Company, to which reference has been made, the amendment provided that shareholders should thenceforth receive dividends rateably according to the amounts paid up on their shares rather than, as previously, according to the number of shares (fully or partly paid) which they held. It was, as Dixon J pointed out (at p. 512), “inappropriate, if not meaningless” to ask whether the shareholders had considered the amendment to be in the interests of the company as a whole. Some other test of validity is required. In Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, where the amendment was to remove a pre-emption clause to facilitate a sale of control to a third party, Sir Raymond Evershed MR tried to preserve the application of the traditional test by saying that in such cases “the company as a whole” did not mean the company as a corporate entity but “the corporators as a general body” and that it was necessary to ask whether the amendment was, in the honest opinion of those who voted in favour, for the benefit of a hypothetical member. Some commentators have not found this approach entirely illuminating but for the purposes of this appeal it is not necessary to discuss such cases any further. In this case, as in the Stylo Shoes case, it would have been perfectly rational to ask whether the vesting of voting control in Mr Tobias was in the interests of the company as a whole.
Their Lordships also note that in Gambotto v WCP Limited (1995) 182 CLR 432 the High Court of Australia created a new rule for amendments which they characterised as conferring powers of “expropriation” of the shares of a minority. Such an amendment could be justified only if it was reasonably apprehended that the continued shareholding of the minority was detrimental to the company, its undertaking or the conduct of its affairs and expropriation was a reasonable means of eliminating or mitigating that detriment. It was not enough in such a case that the amendment was considered by the majority shareholders to be in the interests of the company as a corporate entity or even that it actually was for the company’s benefit. In a joint judgment, Mason CJ, Brennan, Deane and Dawson JJ said at p 446:
“Notwithstanding that a shareholder’s membership of a company is subject to alterations of the articles which may affect the rights attaching to the shareholder’s shares and the value of those shares, we do not consider that, in the case of an alteration to the articles authorizing the expropriation of shares, it is a sufficient justification of an expropriation that the expropriation, being fair, will advance the interests of the company as a legal and commercial entity or those of the majority, albeit the great majority, of corporators. This approach does not attach sufficient weight to the proprietary nature of a share and, to the extent that English authority might appear to support such an approach, we do not agree with it.”
The Gambotto rule appears to have come as something of a surprise to the profession in Australia (see the full discussion in Heydon v NRMA Ltd (2000) 51 NSWLR 1) but their Lordships need not consider it further because this was clearly not a case of expropriation which would have attracted its application. It is sufficient to say that, as the High Court observed, it has no support in English authority.
Their Lordships therefore return to the present appeal. Benjamin J heard evidence and argument over 5 days towards the end of June 1998 and reserved his judgment, saying that he would give it before the end of July. In fact he gave it on 7 April 2003, nearly 5 years later. The judgment as delivered offers the parties no explanation for the delay and their Lordships understand that the judge is no longer serving in the British Virgin Islands. But their Lordships feel bound to observe that such delays are completely unacceptable. Besides being a violation of the constitutional right of the parties to a determination of their dispute within a reasonable time, they are likely to be detrimental to the interests of the British Virgin Islands as a financial centre which can offer investors efficient and impartial justice.
The judge was invited to draw the inference that the 86% majority who voted in favour of the special resolutions accepted the reasons advanced by Mr Tobias as to why it would be in the interests of the company as a whole for his control to be entrenched. The judge, however, (at paragraph 35) accepted Citco’s submission that —
“[I]t was not in the company’s interests to have control relinquished to a single shareholder permanently for the duration of his life, such shareholder not being removable should the remainder of the shareholders no longer have confidence in his management. It was said that it hardly be legitimately expected by Pusser’s bankers and prospective investors that excessive voting power be placed in the hands of Mr Tobias. I do accept this reasoning especially in the absence of satisfactory proof that there was such a requirement.”
The judge concluded (at paragraph 46):
“I find it impossible to say that what was effected by the resolution is for the benefit of Citco and the remaining shareholders. The reasons proffered at the meeting were all largely subjective to Mr Tobias. While it is understandable that it may be desirable that superior voting power be conferred to preserve confidence in management in my view the measure went too far to the extent of being extravagant. It is not within my purview to speculate upon what formula would fall short of oppression suffice it to say that the resolution fails to pass the test of being bona fide for the benefit of the company as a whole.”
The Court of Appeal, reversing the judge, said (at paragraph 16) that where he went wrong in principle was “when he attempted to step into the commercial arena”. Their Lordships take this to mean that the judge fell into the same error as Peterson J in Dafen Tinplate Company Ltd v Lianelly Steel Company (1907) Ltd [1920] 2 Ch 124, namely that he took it upon himself to decide whether the amendment was for the benefit of the company. The Court of Appeal said that he should instead have applied the test laid down in Shuttleworth’s case, namely, whether reasonable shareholders could have considered that the amendment was for the benefit of the company. The Court of Appeal considered that it would have been reasonable for shareholders to have accepted in good faith the arguments put forward by Mr Tobias as to why the amendment would be in the interests of the company. The only shareholder who gave evidence at the trial was Mr de Vos, who said that he had thought the amendments were in the best interests of the company as a whole. It was not necessary for Mr Tobias and the company to prove to the judge that the arguments were justified by the facts.
Their Lordships consider that this reasoning is correct. Mr Todd QC, who appeared for Citco, said that in a case in which one shareholder gained a personal advantage by the amendment, as Mr Tobias did in this case, it was necessary to show that even without his votes, the amendment would have been passed. In Rights & Issues Investment Trust Ltd v Stylo Shoes Ltd [1965] Ch 250, Pennycuick J laid some stress upon the fact that the resolution had been passed at a separate meeting of ordinary shareholders at which the holders of management shares did not vote. In this case there was, prior to the amendment, only one class of shares, but Mr Todd said that it was necessary to show that the resolution would have passed even without the votes controlled by Mr Tobias.
Their Lordships do not think that the Stylo Shoes case decided that in a case like this, shareholders who particularly stand to gain from the amendment should not vote. As Evershed MR said in Greenhaigh v Arderne Cinemas Ltd [1951] Ch 286,291:
“It is…not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects…”
If Mr Tobias bona fide considered that the amendment was in the interests of the company as a whole, and there has been no attack on his bona fides, their Lordships do not see why he should not vote. This is only one aspect of the general principle that shareholders are free to exercise their votes in their own interests. As Lord Davey said in Burland v Earle [1902] AC 83, 94:
“Unless otherwise provided by the regulations of the company, a shareholder is not debarred from voting or using his voting power to carry a resolution by the circumstance of his having a particular interest in the subject-matter of the vote.”
In any case, it appears to their Lordships that even the test proposed by Mr Todd was satisfied. The only evidence as to the number of shares controlled by Mr Tobias was that of Mr de Vos, who said that it amounted to 28% of the issued share capital. He was cross-examined on this point, with counsel for Citco seeking to establish that Mr Tobias actually controlled very few shares, but stuck to 28%. He did also say that Mr Tobias was indirectly able to exercise the votes of 51% of the share capital, but this was consistent with the additional votes being simply those of supporters who had decided to entrust Mr Tobias with their proxies. Of the 28%, Mr Tobias did not vote the 62,439 shares registered in his own name. If he had not voted the 460,245 shares registered in the names of his wife and Piccadilly Properties Ltd, which made up the rest of the 28%, the votes cast in favour of the resolution would have been 665,420 out of a total of 848,420. This would still have been 78%.
Their Lordships will therefore humbly advise Her Majesty that the appeal should be dismissed with costs.