''Howard Smith Ltd v Ampol Petroleum Ltd'' is a leading
company law case, concerning the duty of directors to act only for "proper purposes". This duty has been codified into the
Companies Act 2006
The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law.
The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
section 171, and arises particularly in cases involving takeover bids.
Facts
RW Miller
R. W. Miller was an Australian company that had interests in coal mining, pubs and shipping. The company was named after its founder Robert William Miller (1879-1958).
History
R. W. Miller was founded in 1923 as a colliery proprietor and coal de ...
was embroiled in a
hostile takeover
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...
bid, by a large petrol company called
Ampol
Ampol Limited is an Australian petroleum company headquartered in Sydney, New South Wales. Ampol is the largest transport energy distributor and retailer in Australia, with more than 1,900 Ampol-branded stations across the country . It also ope ...
. Ampol already controlled (with an associated company) 55% of the shares. The directors did not want Ampol to buy the shares of RW Miller as
Howard Smith had bettered terms for take over by offering employment to the directors even in the future. So the directors of RW Miller issued $10m of new shares. They said it was to finance the completion of two tankers. The shares were given to Howard Smith Ltd who were going to take over RW Miller, and that blocked Ampol’s rival bid. Without the issue, Howard Smith Ltd had no hope of succeeding in taking over the company. But with the new issue, Ampol could not complete its acquisition. Ampol commenced proceedings in the
Supreme Court of NSW
The Supreme Court of New South Wales is the highest state court of the Australian State of New South Wales. It has unlimited jurisdiction within the state in civil matters, and hears the most serious criminal matters. Whilst the Supreme Court i ...
.
Street
A street is a public thoroughfare in a built environment. It is a public parcel of land adjoining buildings in an urban context, on which people may freely assemble, interact, and move about. A street can be as simple as a level patch of dirt, ...
said that the argument of the directors that the tanker purchase was the dominant purpose was ‘unreal and unconvincing’.
The issue of shares to Howard Smith was held to be invalid. Howard Smith sought and obtained conditional leave to appeal to the Privy Council.
[''Howard Smith Ltd v Ampol Petroleum Ltd'' ]972
Year 972 ( CMLXXII) was a leap year starting on Monday (link will display the full calendar) of the Julian calendar.
Events
By place
Byzantine Empire
* Spring – Emperor John I Tzimiskes divides the Bulgarian territories, recent ...
nbsp;2 NSWLR 850 (14 December 1972), Supreme Court
A supreme court is the highest court within the hierarchy of courts in most legal jurisdictions. Other descriptions for such courts include court of last resort, apex court, and high (or final) court of appeal. Broadly speaking, the decisions of ...
(NSW, Australia). 1
Judgment
The Privy Council dismissed the appeal.
Lord Wilberforce
Richard Orme Wilberforce, Baron Wilberforce, (11 March 1907 – 15 February 2003) was a British judge. He was a Lord of Appeal in Ordinary from 1964 to 1982.
Early life and career
Born in Jalandhar, India, Richard Wilberforce was the son of S ...
held that the issue of shares was within power but that it was exercised for an improper purpose. ‘To define in advance
hat that means isimpossible.’ It must be adjudged ‘in the light of modern conditions’, and referred back to ''
Hogg v Cramphorn Ltd
''Hogg v Cramphorn Ltd'' 967Ch 254 is a famous UK company law case on director liability. The Court held that corporate directors who dilute the value of the stock in order to prevent a hostile takeover (the poison pill) are breaching their fi ...
''. His judgment continued.
The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: that once it is found that the directors were not motivated by self-interest—i.e. by a desire to retain their control of the company or their positions on the board—the matter is concluded in their favour and that the court will not inquire into the validity of their reasons for making the issue...
It can be accepted, as one would only expect, that the majority of cases in which issues of shares are challenged in the courts are cases in which the vitiating element is the self-interest of the directors, or at least the purpose of the directors to preserve their own control of the management.
Further it is correct to say that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected... just as trustees who buy trust property are not permitted to assert that they paid a good price.
But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made...
It would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management’s decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.[at p. 834]
See also
*''
Eclairs Group Ltd v JKX Oil & Gas plc
was a decision of the United Kingdom Supreme Court relating to the exercise of directors' powers for a proper purpose under English company law.
The Supreme Court's decision was slightly unusual in that a minority (Lord Sumption and Lord Hod ...
''
References
{{reflist, 30em
United Kingdom company case law
Judicial Committee of the Privy Council cases on appeal from Australia
1974 in case law
1974 in Australian law
Lord Wilberforce cases