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[1969] 1 ALL ER 969

31 JANUARY 1969

3PLR/1969/30 (CA)










Company – Ultra vires – Allotment of ordinary shares by directors to counter take-over bid – Directors empowered by articles to issue unissued shares – Directors’ action approved by company in general meeting – Whether, assuming directors’ action was not in best interests of company and in excess of their powers, the allotment could be ratified by the company in general meeting – Inherent residual power of company over unissued shares.




This appeal from Plowman J, is concerned with a popular modern subject—the subject of take-overs. The company in question, Bamfords is a public company, making agricultural implements somewhere in the Midlands, incorporated in 1916, having under its present articles (dating from 1958, so in quite a modern form) a capital of £1,000,000, all now in shares of similar rights with a nominal value of 4s, and 500,000 of them remaining unissued. From 1966 onwards, another member of the Bamford family (this being largely a family company) kept on making proposals to amalgamate his business (which was that of making earth-moving machinery and whom I shall call “Excavators”) with that of Bamfords. He did not receive a very hearty welcome. In 1967 he started to make bids for taking over his cousins’ company. The division roughly was that three directors, the defendants Vincent, Richard and John, were of one school of thought: another one, the plaintiff Rupert, was I think on the other side of the line; and the other party one needs to mention is the defendant Frederick H Burgess who were a private company who acted I think as distributors of Bamfords’ agricultural machinery on a large scale and who the defendants’ side thought it would be a good thing to engage in the Bamford business in order to promote its sales and so forth and, incidentally, to make a take-over by Excavators more difficult. The proposal on one side was for Excavators to buy everybody out—anyway enough to obtain control—and the three Bamford defendants proposed instead to get Burgesses into the company by issuing the unissued shares to that company or to Mr Burgess, its managing director, and thus obtain his sympathy and help.

The ball opens with a resolution of the board of Bamfords, made on 20 November 1967, to allot the 500,000 unallotted shares to Burgesses at par. On the next day a writ was issued to prevent that being done, that being issued on behalf of Rupert and another Bamford—Anthony. Just before that allotment, the defendant directors had issued a circular to the shareholders, of whom there were a good many in number outside the family on both sides of the dispute. The first writ was issued on 21 November and its purpose was to have it declared that the allotment was bad because it was made for an improper motive, namely, as a move in the take-over war and not in the best interests of Bamfords. As a counter to that the defendant directors gave notice of a general meeting for 15 December 1967, at which they proposed to ask the general meeting to approve of what they had done, and they sent out a circular about that. There was another writ, on 1 December, attempting to stop that meeting and to have it declared that anyhow any resolution passed at it was a nullity. The meeting nevertheless was held on 15 December and there a resolution was passed. The resolution which was passed was in these terms:

“That this general meeting of [Bamfords] hereby ratifies and approves the allotment to [Burgesses] on 20th November, 1967, of 500,000 shares of 4s. 0d. each in the capital of the company at a price of 4s. 0d. per share paid in full on allotment.”

That having been passed, the action proceeded with interlocutory motions on each side and various moves and counter-moves; and it was eventually suggested, on the part of the defendants, that this was a suitable case for a preliminary point to be taken. The point was that, the general meeting of 15 December having passed the resolution ratifying what the directors had done, it did not matter if the allotment when it was made was an allotment made for a purpose beyond the powers of the directors because it was not made within the trust purposes of their power. It was eventually decided to set the matter down and an order was made; and the preliminary point of law was argued on 4 April 1968.
The preliminary point was in these terms:

“On the assumption (which is made solely for the purposes of the hearing of this preliminary point of law) that the allotment by the board of [Bamfords] of 500,000 shares at par to [Burgesses] on 20th November, 1967, was not made bona fide in the interests of [Bamfords], because it was a tactical move in a battle for control of [Bamfords], having as its primary purpose to make it more difficult for [Excavators] to obtain such control.

“Whether as a matter of law and on the true construction of the Memorandum and Articles of Association of [Bamfords] such allotment was capable of being effectively ratified and/or approved by an ordinary resolution of a general meeting of [Bamfords].”

The learned judge decided that point of law in this way:

“Declare that as a matter of law and on the true construction of the memorandum and articles of association of [Bamfords] such allotment was capable of being effectively ratified and approved or approved by an ordinary resolution of a general meeting of [Bamfords].”

If that is right, that is an end of the action, as has been recognised by the fact that the order goes on to order both actions to be consolidated and to stand dismissed. Now there is an appeal to this court.

The notice of appeal gives as its grounds these:

“(i)     That on the true construction of the articles of association of [Bamfords] the power to allot the shares purported to be allotted to [Burgesses] on 20th November, 1967, was vested in the directors of [Bamfords] and in them alone and that the company in general meeting had no residual power to make or ratify or approve an allotment of the said shares.


(ii)     That an allotment not made bona fide in the interests of [Bamfords] is void and thus incapable of ratification or approval.”

Now to me from the very start that sounded odd, and I shall be forgiven if, after all the eloquence which we have had in this case, I am expressing the view which I have held throughout—that this is a tolerably plain case. It is trite law, I had thought, that if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because sometimes there are no directors properly appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been, so to speak, wrongly done because it was not done by a proper board, such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins; and provided the acts are not ultra vires the company as a whole everything will go on as if it had been done all right from the beginning. I cannot believe that is not a commonplace of company law. It is done every day. Of course, if the majority of the general meeting will not forgive and approve, then the directors must pay for it.
It will be remembered that in the well-known case, Regal (Hastings), Ltd v Gulliver, decided in the House of Lords. Lord Russell Of Killowen in the course of his speech made a very significant observation about this. In that case certain directors had acquired some shares by reason of the fact that they were directors of a certain company. They afterwards sold those shares at a profit. It was held that they must account for the profit because it had been obtained as a result of their directorships and therefore was in the nature of trust property of the company. Lord Russell said this ([1942] 1 All ER at p 389.):

“The suggestion that the directors were applying simply as members of the public is a travesty of the facts. They could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting. In default of such approval, the liability to account must remain.”

So that Lord Russell considers it obvious that they could, either by getting a previous approval or a subsequent ratification, retain the profit, which otherwise they must disgorge.

So it seems to me here that these directors, on the assumptions which we have to make, made this allotment in breach of their duty—mala fide, as it is said. They made it with an eye primarily on the exigencies of the take-over war and not with a single eye to the benefit of the company, and therefore it is a bad allotment; but it is an allotment. There is no doubt that the directors had power to allot these shares. There is no doubt that they did allot them. There is no doubt that the allottees are on the register and are for all purposes members of the company. The only question is whether the allotment, having been made, as one must assume, in bad faith, is voidable and can be avoided at the instance of the company—at their instance only and of no one else, because the wrong, if wrong it be, is a wrong done to the company. If that be right, the company, which had the right to recall the allotment, has also the right to approve of it and forgive it; and I see no difficulty at all in supposing that the ratification by the decision of 15 December in the general meeting of the company was a perfectly good “whitewash” of that which up to that time was a voidable transaction; and that is the end of the matter. Unfortunately, so it seems to me, the matter has been bedevilled by the course that the case has taken. The learned judge delivered a very long and elaborate judgment in which he went through the whole line of cases to show that the general meeting of the company by ordinary resolution cannot override or usurp the authority of the directors where the conduct of the business is entrusted to them. I see no quarrel with any of those cases and I do not see that anybody can say there is any question about it. I will only mention one of them because it has an observation or so which may be useful. It is North-West Transportation Co, Ltd v Beatty , a Privy Council case. The decision of the Board was delivered by Sir Richard Baggallay. The point, as stated in the headnote, was that a voidable contract, fair in its terms and within the powers of the company, had been entered into by its directors with one of their number as sole vendor. It was, therefore, of course, voidable; but it was said, and said quite properly, that the general meeting could set that right. Sir Richard Baggallay said this ((1887), 12 App Cas at pp 593, 594.):

“The general principles applicable to cases of this kind are well established. Unless some provision to the contrary is to be found in the charter or other instrument by which the company is incorporated, the resolution of a majority of the shareholders, duly convened, upon any question with which the company is legally competent to deal, is binding upon the minority, and consequently upon the company, and every shareholder has a perfect right to vote upon any such question, although he may have a personal interest in the subject-matter opposed to, or different from, the general or particular interests of the company. On the other hand, a director of a company is precluded from dealing, on behalf of the company, with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound by fiduciary duty to protect; and this rule is as applicable to the case of one of several directors as to a managing or sole director. Any such dealing or engagement may, however, be affirmed or adopted by the company, provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it.”

So that Sir Richard Baggallay had no doubt that a voidable transaction of that sort could be set right by the company in general meeting if the matter was properly explained to the shareholders.

The learned judge, having gone through these cases at great length, came to the conclusion that though it was true that the general meeting could not override the directors it could affirm that which they had done; but he arrived at this result by what to my mind is a curiously unapt process. He said that the right to allot shares if not delegated to anybody else is in the company in general meeting: in this case by art 12 that power has been delegated to the directors: but in the present instance the directors, having regard to their equivocal position, cannot exercise the power: it therefore remains to the company and the company can do what it has done, and it has what is termed in the notice of appeal a “residual” power. That might be all very well if the company in general meeting had ever made an allotment. It never did anything of the sort. It merely ratified that which the directors had already done and prevented its being undone. Therefore it seems to me that to talk of “residual” power is entirely beside the mark, with all respect to those who think otherwise.

The learned judge supported his view about “residual” power with two cases. I will only mention one of them and that is Grant v United Kingdom Switchback Rys Co. I cite that because of certain observations both of Cotton and Lindley LJJ. There, there was a limitation on the powers of the directors to borrow; they overstepped those powers and were affirmed by a general meeting. It was said that could not be done because there was an article which gave a special resolution as necessary to a future authority to exceed the borrowing power. Cotton LJ, said ((1888), 40 ChD at pp 139–140.):

“A majority of a meeting called with due notice of the object for which it was called could make this a contract of this company, and it would be wrong for the Court to interfere with the proceedings of a general meeting as to an act within the powers of the company. It is clear that a contract of this nature [that is to say borrowing money] was within the objects of the company, and the appeal, in my opinion, fails.”

Lindley LJ, said ((1888), 40 ChD at pp 139–140.):

“The Appellant contends that the company could not ratify this contract except by special resolution. In my opinion that contention is unfounded. There is a broad distinction between altering the articles and merely saying ‘this act was not authorised by the articles, but we will ratify it’. The shareholders can ratify any contract which comes within the powers of the company, and this contract clearly does, for the articles expressly authorise selling any part of the undertaking of the company.”

It was said by counsel for the plaintiffs that the company in general meeting could not ratify this transaction for it was not a power within the power of the general meeting and therefore it could not ratify it. I think that is a fallacy. The power to allot shares is clearly something within the powers of the company and it is therefore an intra vires power and one which the company can ratify.

Lastly there has been a very recent case, Hogg v Cramphorn, before Buckley J, which is very like the present and which the learned judge purported to follow though he did not exactly do so. That also was a question of a take-over. Buckley J, came to the conclusion that certain shares were not properly issued by the directors because they were issued as part of the take-over war and not with a single eye to the company’s benefit: he therefore said the issue was bad: but it could be ratified by a general meeting. He said ([1966] 3 All ER at p 429; [1967] Ch at p 269.):

“Counsel for the plaintiff says, no doubt rightly, that the company in general meeting could not by ordinary resolution control the directors in the exercise of the powers under art. 10. He goes on to say, I think, with less justification, that what they could not ordain a majority could not ratify. There is, however, a great difference between controlling the directors’ exercise of a power vested in them and approving a proposed exercise by the directors of such a power, especially where the proposed exercise of the power is of a kind which might be assailed if it had not the manifest approval of the majority. Had the majority of the company in general meeting approved the issue of the … shares before it was made … I do not think any member could have complained of the issue being made; for in these circumstances, the criticism that the directors were, by the issue of the shares, attempting to deprive the majority of their constitutional rights would have ceased to have any force. It follows … that a majority in a general meeting of the company at which no votes were cast in respect of the … shares could ratify the issue of those shares”

and he proposed, therefore, as he said, to stand that action over until it was seen whether a general meeting would ratify the transaction—which it did, as the report shows ([1966] 3 All ER at p 430, footnote) and therefore the complaint fell to the ground.

The present case is very much on a parallel with that, apart from the timing. Here, the approving resolution had been passed before the preliminary point came before the judge and, that having been done, the act, wrong as it was in its inception, was ratified and approved, and validly ratified and approved. That in my opinion was the end of the matter, and the learned judge , though not for reasons with which I altogether sympathise, came to the right conclusion. I would dismiss this appeal.
RUSSELL LJ. This case depends solely on the mooted point of law and the assumptions on which it is based. It is to be artificially assumed that the board, to whose decision by the articles the disposal of unissued shares was confided, allotted to Burgesses these 500,000 shares as a tactical more in a battle for control of the company, having as its primary purpose to make it more difficult for Excavators to obtain such control. It is further to be assumed that the effect of such assumption is that the allotment was not made by the board bona fide in the interests of the company. No other facts or assumptions are relevant to our consideration of this appeal; and whether the assumptions are correct is not, of course, for present decision. The question of law is whether the allotment in those circumstances was capable of being effectively ratified and/or approved by an ordinary resolution of the company in general meeting.

There is no doubt that the allotment (on the given assumptions) would be voidable as against the allottee without such a resolution, at least if the allottee was aware of the improper purpose, and that the directors could be sued in appropriate proceedings for misfeasance; but unless the allotment is avoided in proceedings it is effective. The question basically is whether the company in general meeting can waive the voidability by an ordinary resolution or whether a special resolution would be required.

A great deal of discussion below and here has centred on the question whether the company has some residual power to allot shares. I do not myself see the problem in that light at all. The company by such a resolution would not be allotting shares at all. They have already been allotted. The question is whether such a resolution can prevent the shares being recalled. It is argued that this can only be done by special resolution because the resolution would alter or contradict the articles. I cannot see that it would, nor that any authority cited leads to that conclusion. The board had the power to allot, and allotted, albeit for an improper motive, and albeit that they were thereby guilty of a misfeasance; but I see no provision of the articles that is altered or contradicted or disobeyed by the resolution envisaged. In Salmon v Quin & Axtens the express term of the articles giving the plaintiff a veto on the proposed transaction could not be overriden either by the directors or by ordinary resolution of the company: but that was quite different from a case in which a power given to the board was undoubtedly exercised but with an improper motive.

It is argued that under the articles allotment can only be: (a) by the board (which is true); and (b) by the board acting in good faith, and that a resolution by the company waiving the defect in a mala fide and therefore voidable allotment infringes the articles and must be a special resolution.

I do not accept this argument, which seems to me to run counter to the general situation that impropriety by directors in the exercise of their undoubted powers is a proper matter for waiver or disapproval by ordinary resolution. Basically the argument treats an allotment by directors otherwise than bona fide in the interests of the company as a nullity, which it is not. In truth the allotment of shares by directory not bona fide in the interests of the company is not an act outside the articles: it is an act within the articles but in breach of the general duty laid on them by their office as directors to act in all matters committed to them bona fide in the interests of the company.
The point before us is not an objection to the proceedings on Foss v Harbottle grounds; but it seems to march in step with the principles that underlie the rule in that case. None of the factors that admit exceptions to that rule appear to exist here. The harm done by the assumed improperly-motivated allotment is a harm done to the company of which only the company can complain. It would be for the company by ordinary resolution to decide whether or not to proceed against the directors for compensation for misfeasance. Equally, assuming that the allottee could not rely on Royal British Bank v Turquand, it would be for the company to decide whether to institute proceedings to avoid the voidable allotment: and again this decision would be one for the company in general meeting to decide by ordinary resolution. To litigate or not to litigate, apart from very special circumstances, is for decision by such a resolution. If, as I consider, the company could validly decide by ordinary resolution not to institute proceedings to avoid the voidable allotment—a resolution which could not possibly be said to contradict or alter the articles—it seems to me to support entirely the view that an ordinary resolution in the terms posed in the point of law would be effective, having as it would in substance the same purpose and effect as a resolution not to bring proceedings to avoid the allotment.

In the end, however, the contention of the plaintiffs that the suggested resolution would be a resolution to allot shares, or a resolution to alter or contradict any provision of the articles, is in my judgment quite unfounded; and I also would dismiss the appeal.

KARMINSKI LJ. I agree, and have nothing to add.

Appeal dismissed. Leave to appeal to the House of Lords refused.

Solicitors: Allen & Overy, agents for Wilkins & Thompson, Uttoxeter (for the plaintiffs); Theodore Goddard & Co (for the first, second, third and sixth defendants and for Bamfords, the fifth defendants); Ward, Bowie & Co agents for Lane, Clutterbuck & Co, Birmingham (for Burgesses, the fourth defendants).
Henry Summerfield Esq Barrister.


Cases referred to in judgment

Foss v Harbottle (1843), 2 Hare, 461, 67 ER 189, 9 Digest (Repl) 506, 3333.
Grant v United Kingdom Switchback Rys Co (1888), 40 ChD 135, 58 LJCh 211, 60 LT 525, 9 Digest (Repl) 507, 3337.

Hogg v Cramphorn (1963), [1966] 3 All ER 420, [1967] Ch 254, [1966] 3 WLR 995, Digest (Cont Vol B) 98, 1903a.

North-West Transportation Co, Ltd v Beatty (1887), 12 App Cas 589, 56 LJPC 102, 57 LT 426, 9 Digest (Repl) 506, 3336.

Regal (Hastings), Ltd v Gulliver, [1942] 1 All ER 378, 9 Digest (Repl) 523, 3447.
Royal British Bank v Turquand (1856), 6 E & B 327, [1843–60] All ER Rep 435, 25 LJQB 317, 119 ER 886, 9 Digest (Repl) 660, 4374.

Salmon v Quin & Axtens [1909] 1 Ch 311, 78 LJCh 367, 100 LT 161, affd, HL sub nom Quin & Axtens, Ltd v Salmon [1909] A C 442, 78 LJCh 506, 100 LT 820, 9 Digest (Repl) 498, 3283.


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