Part F Management, administration and regulation of companies 18: Company directors 283
If the irregular use of directors' powers is in the allotment of shares the votes attached to the new shares
may not be used in reaching a decision in general meeting to sanction it.
Howard Smith Ltd v Ampol Petroleum Ltd 1974
The facts: Shareholders who held 55% of the issued shares intended to reject a takeover bid for the
company. The directors honestly believed that it was in the company's interest that the bid should
succeed. The directors allotted new shares to a prospective bidder so that the shareholders opposed to the
bid would then have less than 50% of the enlarged capital and the bid would succeed.
Decision: The allotment was invalid. 'It must be unconstitutional for directors to use their fiduciary powers
over the shares in the company purely for the purpose of destroying an existing majority or creating a new
majority which did not previously exist'.
Any shareholder may apply to the court to declare that a transaction in breach of s171 should be set
aside. However the practice of the courts is generally to remit the issue to the members in general
meeting to see if the members wish to confirm the transaction. If the majority approve what has been
done (or have authorised it in advance) that decision is treated as a proper case of majority control to
which the minority must normally submit.
Hogg v Cramphorn 1966
The facts: The directors of a company issued shares to trustees of a pension fund for employees to prevent a
takeover bid which they honestly thought would be bad for the company. The shares were paid for with
money belonging to the company provided from an employees' benevolent and pension fund account. The
shares carried ten votes each and as a result the trustees and directors together had control of the company.
The directors had power to issue shares but not to attach more than one vote to each. A minority shareholder
brought the action on behalf of all the other shareholders.
Decision: If the directors act honestly in the best interests of the company, the company in general
meeting can ratify the use of their powers for an improper purpose, so the allotment of the shares would
be valid. But only one vote could be attached to each of the shares because that is what the articles
provided.
Bamford v Bamford 1969
The facts: The directors of Bamford Ltd allotted 500,000 unissued shares to a third party to thwart a
takeover bid. A month after the allotment a general meeting was called and an ordinary resolution was
passed ratifying the allotment. The holders of the newly-issued shares did not vote. The claimants
(minority shareholders) alleged that the allotment was not made for a proper purpose.
Decision: The ratification was valid and the allotment was good. There had been a breach of fiduciary duty
but the act had been validated by an ordinary resolution passed in general meeting.
These cases can be distinguished from the Howard Smith case (where the allotment was invalid) in that in
the Howard Smith case the original majority would not have sanctioned the use of directors' powers. In the
Bamford case the decision could have been sanctioned by a vote which excluded the new shareholders.
Ratification is not effective when it attempts to validate a transaction when
It constitutes fraud on a minority.
It involves misappropriation of assets.
The transaction prejudices creditors' interests at a time when the company is insolvent.
Under the Companies Act, any resolution which proposes to ratify the acts of a director which are
negligent, in default or in breach of duty or trust regarding the company must exclude the director or any
members connected with them from the vote.
Much of the case law in this area concerns the duty of directors to exercise their power to allot shares.