Howard Smith Ltd v Ampol Petroleum Ltd
Directors must exercise their powers for the purposes for which they were conferred, so an issue of shares to destroy an existing majority is invalid, even if the directors believe it to be in the company's interests.
Facts
Ampol and another company together held 55 per cent of the shares in RW Miller, an Australian company, and wanted to take it over. Howard Smith made a rival takeover bid, which the directors of Miller preferred. The directors allotted new shares to Howard Smith, which reduced the holding of Ampol and its ally to below 50 per cent, so that Howard Smith's bid could succeed. The directors said that they had issued the shares because the company needed capital. Ampol challenged the share issue.
Legal principle
The Privy Council held that the share issue was invalid. Lord Wilberforce said that the court must consider the nature of the power and the limits within which it may be exercised, and then examine the substantial purpose for which it was exercised. The power to issue shares is not limited to raising capital, but it is 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. The primary purpose of the issue was to destroy the majority, so it was invalid, even though the directors acted honestly. The duty is now in section 171 of the Companies Act 2006.
Related cases on directors' duties: powers, judgment and care
- Bamford v Bamford [1970] Ch 212
- Re Barings plc (No 5) [1999] 1 BCLC 433
- BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2024] AC 211
- Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
- Re D'Jan of London Ltd [1994] 1 BCLC 561
- Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498
- Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71
- Hogg v Cramphorn Ltd [1967] Ch 254
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This summary is for study and revision and is not legal advice. Although our case summaries are checked for accuracy, we do not guarantee that they are free from errors or omissions. Always read the full judgment for the court's reasoning.
