““DIRECTORS’ DIRECTORS’ DUTY TO ACT DUTY TO ACT FOR PROPER FOR PROPER PURPOSES”PURPOSES”

DEFINITION OF FIDUCIARY DUTY:Directors and other company officers owe fiduciary duties to the company and which they hold office.

Further explanation about fiduciary duties can be found in the case:

BRISTOL & WEST BUILDING SOCIETY v MOTHEW (1998) Ch. 1Millett L.J.: “A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances give rise to a relationship of trust and confidence. A fiduciary must act in good faith, must not make a profit out of his trust, he must not place himself in a position where his duty and his interest in conflict, he may not act for his own benefit or the benefit of a third person without the informed consent of his principles.”

Section 132 (1) of the Companies Act 1965“A director of a company shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the company.”

Similarly, a director must employ the power & assets that he is entrusted with for the purpose for which they were given & not for any collateral purpose.

MILLS V MILLS (1937) 60 CLR 150Dixon J said: "Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power"

Duties that normally conferred to directors are:

To refuse to register transfer

To declare dividends

To order for forfeiture of shares

To expel a member

The duty imposed upon directors to exercise those powers solely for a proper purpose envisages that each and every power is conferred to permit the director to achieve certain limited ends.

The director nevertheless, is in breach of his duty if the transaction was outside the directors allocated powers.

Hoffmann L.J. described the duty thus:

“If the director chooses to participate in the management of a company and exercises powers on its behalf, he owes a duty to act Bona Fide in the interests of the company. He must exercise the powers solely for the purpose for which it was conferred. To exercise the powers for another purpose is a breach of his fiduciary duties.”

The most controversial duty is on the exercise of the directors of the power to allot shares.

Section 132D of the Companies Act 1965:

“ The directors shall not issue new shares without the prior approval of the member in General Meeting.”

Many attempts by directors to use this power (to allot shares) to consolidate their control or prevent arrival body from taking over the company have been held to be invalid, not withstanding the asserted believe of the directors that they were acting in the best interest of the company.

This situation is illustrated in the case:TECK CORPORATION LTD v MILLAR (1972) 33 DLR (3d) 288

HARLOWE’S NOMINEES PTY V WOODSIDE (LAKE ENTRANCE) OIL CO. (1968) 121 CLR 483

FACT:Mining Company (Afton Mine) had 2 bigger companies bidding for ‘ultimate deal’. Afton chose Millar not Teck even though Teck had made a bigger offer and was gaining control through share acquisition. To make sure Millar got the deal, Afton issued shares to Canex (Millar parent’s company), which made Teck a minority shareholder. Teck alleged that Afton’s directors were driven by improper purpose – sought to frustrate Teck’s attempt to gain control, not in best interests of company.

Jugdment:

Supreme court of British Columbia permitted an allotment to defeat such a take over even the take over was make against the wishes of the existing majority shareholder and deprived that shareholder of control of the company.

Court was satisfied that the directors had simply being concern to obtain the best possible deal for the company.

FACT:Harlowe sued Woodside and Burmah, companies engaged in oil and gas exploration, in respect of an issue of shares in Woodside to Burmah when, Harlowe alleged Woodside did not need fresh capital, but was causing the shares to be allotted to prevent Harlowe from gaining more power and in order to safeguard the position of the directors of the target comp, Woodside.

High Court of Australia permitted an allotment of shares which was made in order to secure the financial support of a large oil company although a consequence of the allotment was to block a would be take over by an existing shareholder.

The HC conducted its own enquiry into the findings of facts made by the trial judge and rejected the attack.

The HC judge said:

“Directors in whom are vested the right and the duty of deciding where the company’s interest lie and how they are to be served may be consent with a wide range of practical consideration, and their judgment if exercise in good faith and not for irrelevant purposes is not open to review in the court. 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.”

FACT:The Articles of Cramphorn Ltd. empowered the directors to “allot or otherwise dispose of the shares to such person on such terms and conditions, and at such time as the directors think fit…”.

The directors of Cramphorn Ltd. devised a scheme whereby 5707 new preferences shares where allotted to a trust newly as established for the benefit of the company’s employee.

The Board made a loan of £5707 out of their company’s fund free of interest to the trustee to enable the trustee to subscribe and pay for the shares. The vote attached to the new shares coupled with those of the directors and their friends were sufficient to constitute a majority of the General Meeting and the takeover bid was defeated.

Buckley J. held that:

“The directors had acted for an improper purpose. The power of the directors to issue shares was a fiduciary power, and if it was exercise for an improper motive the issue of shares was liable to be set aside.”

This case concerned with the issue of shares by the directors of a company (Miller). The A (Howard Smith) and the R (Ampol) were both trying to take control of Millers.

The directors of Millers considered that it would be in the best interest of the company to be taken over by Howard Smith.

However, Howard Smith's take over bid could not succeed as Ampol controlled sufficient shares in Miller’s to block the bid.

To overcome the problem, the director allotted unissued shares to Howard. The purpose of the allotment was to provide needy capital as well as relegating Ampol to the position of a minority shareholder.

HELD:

The Privy Council held that they had misused their powers, and nullified the issue of the shares. According to Lord Wilberforce, the directors' power was a fiduciary one. The exercise of such a power, though formally valid, could be attacked on the ground that it was not exercised for the purpose for which it was granted.

The power to issue shares was for the purpose of raising money for the company. It has been used to prevent a takeover bid. This was an abuse of the power even though the directors had not acted to further their self-interest.

The Privy Council further concluded that although Miller would have benefitted from the capital raised from the sale of shares to Howard, the dominant purpose behind the shares allotment had been in improper one, namely the allotment had as its primary purpose, the aim of manipulating voting control in favour of Howard.

FACT:On 20th Nov.- defendants (Henry Vincent, Richard Hawthorn and John George) and the plaintiff (Rupert Cyril) had a General Meeting to pass a resolution of an allotment of shares. In that meeting, plaintiff voted against the resolution.

On 21th Nov.- plaintiff and Anthony Paul sued defendant, Burgess Ltd and Bamford Ltd as to allotment of 500,000 ordinary shares.

HELD:

The allotment of shares was considered as improper purpose because the allotment reduce plaintiffs' position to minority shareholder.

1. The company may sue for damages or for the return of specific property

2. The company may claim any secret profit that the director made

3. The exercise of the power which in breach of directors’ duties may be declared to be invalid.

In the conclusion, as long as the directors act within the authority conferred to him, he is said to act in proper purpose for the best interest of the company.