286 Greenhalgh v Arderne Cinemas, LD.

and
Others.
Court of Appeal

10 November 1950

[1948 G. 1287]
[1951] Ch. 286
Evershed, M.R., Asquith and Jenkins, L.JJ.

1950 Nov. 8, 9, 10.

Company law—Private company—Articles restricting transfer of shares to members—Majority

The authorities establish that a special resolution can be impeached if it is not passed "bona fide
for the benefit of the company as a whole". That phrase means that a shareholder must proceed
upon what in his honest opinion is for the benefit of the company as a whole. "The company as a
whole" does not, however ordinarily mean the company as a commercial entity as distinct from
its corporators. It means the corporators as a general body.

A special resolution may be impeached if its effect is to discriminate between the majority
shareholders and the minority shareholders so as to give to the former an advantage of which the
latter are deprived. The persons voting for a special resolution are not required to dissociate
themselves from their own prospects and consider what is for the benefit of the company as a
going concern. If an outside person offers to buy all the shares, prima facie, if the corporators
think it is a fair offer and vote in favour of a resolution accepting the offer, it is no ground for
impeaching the resolution that in passing it they considered their own individual positions.

The first defendants were a private company with a nominal capital of 31,000l. divided into
21,000 preference shares of 10s. each and 205,000 ordinary shares of 2s. each. All the ordinary
shares had been issued, 155,000 shares being fully paid up and 50,000 shares being paid up to
the extent of twenty per cent. The plaintiff was the holder of 4,213 ordinary shares. The second
defendant and his family and friends were the holders of 85,815 shares. The 50,000 partly paid
up ordinary shares were held by the last two defendants as nominees of another company.

The articles of association provided by cl. 10 (a): "No shares in the company shall be transferred
to a person not a member of the company so long as a member of the company may be willing to
purchase such shares at a fair value to be ascertained in accordance with sub-clause (b) hereof".
By an agreement dated June 4, 1948, made between the second defendant and the third defendant
(hereinafter called "the purchaser") which recited that the second defendant owned or controlled
85,815 ordinary shares and 50,000 partly paid ordinary shares, the second defendant agreed to
sell the ordinary shares to the purchaser at 6s. a share. On June 7, a notice was sent out calling an
extraordinary meeting of the company for the purpose of passing the following resolution: "That
the articles of association of the company be altered by adding at the end of art. 10 the *287
following additional clause: 'Notwithstanding the foregoing provisions of this article any
member may with the sanction of an ordinary resolution passed at any general meeting of the
company transfer his shares or any of them to any person named in such resolution as the
proposed transferee, and the directors shall be bound to register any transfer which has been so
sanctioned'".

On the footing that that resolution had been passed, it was proposed to pass an ordinary
resolution sanctioning the transfer of 500 shares to the purchaser. These resolutions were duly
passed by the requisite majorities at a meeting of the company held on June 30, 1948. Thereupon
the plaintiff issued the writ in this action claiming, inter alia, that the two resolutions passed on
June 30, 1948, were void and to restrain, in effect, transfers of shares to the defendants who were
nominees of the purchaser.

The plaintiff contended that the resolutions of June 30, 1948, were invalid on the ground that the
interests of the minority of the shareholders had been sacrificed to those of the majority.

Held, that, the special resolution having been bona fide passed, it was not an objection to it that,
by lifting the ban in the original articles on sales to persons who were not members of the
company, the right on a sale to tender for the majority holding of shares would be lost to
minority shareholders, and that accordingly the special resolution could not be impeached.

Sidebottom v. Kershaw, Leese & Co. Ld. [1920] 1 Ch. 154; Dafen Tinplate Co. Ld. v. Llanelly
Steel Co. (1907), Ld. [1920] 2 Ch. 124, and Shuttleworth v. Cox Brothers & Co. (Maidenhead)
Ld. [1927] 2 K. B. 9 considered.

APPEAL from Roxburgh, J.

The first defendants, Arderne Cinemas, Ld. were a private company. Their issued capital
consisted of preference shares (with which the action was not concerned) and 205,000 ordinary
shares of 2s. each. Of the ordinary shares 155,000 shares had been issued and were fully paid up,
the remaining 50,000 shares having been issued but were only partly paid up. Article 10 of the
articles of association of the company provided:

"(a) No shares in the company shall be transferred to a person not a member of the company so
long as any member of the company may be willing to purchase such shares at a fair value to be
ascertained in accordance with sub-cl. (b) hereof.

(b) If any member desires to sell or transfer his shares or any of them, he shall notify his desire to
the directors by sending them a notice in writing (hereinafter called a 'transfer notice') to the
effect that he desires to sell or transfer such shares. The receipt by the directors of the transfer
notice shall constitute an authority to them to offer the shares for sale at a fair value ascertained
as follows, viz., the sum so estimated *288 by the selling member shall, if approved by the
directors, be the fair value, but in the absence of such approval in order to prevent disputes
arising, the fair value shall be the auditor's valuation of the current worth of the company's shares
to be made by him in writing at the request of the directors. ...

"(c) When the fair value of the said shares has been fixed under the provisions of sub-cl. (b)
hereof, the directors shall cause a notice to be sent to the selling member informing him of the
current value of his shares, and shall also cause a notice to be sent to every other member of the
company stating the number of shares for sale and the fair value of such shares and shall therein
invite each of such members to give notice in writing within fourteen days whether he is willing
to purchase any and if so what maximum number of such shares. At the expiration of such
fourteen days the directors shall apportion such shares amongst those members (if any, if more
than one) who shall have given notice to purchase the same, and as far as may be pro rata
according to the number of shares already held by them respectively; provided that no member
shall be obliged to take more than the maximum number of such shares which he has expressed
his willingness to take in his answer to the said notice. ...

"(d) If the directors shall be unable within one month after receipt of the transfer notice to find a
purchaser for all or any of the shares among the members of the company, the selling member
may sell such shares as remain unsold to any person though not a member of the company at any
price but subject to the right of the directors (without assigning any reason) to refuse registration
of the transfer when the proposed transferee is a person of whom they do not approve, or where
the shares comprised in the transfer are shares on which the company has a lien."

The ordinary shares of the Arderne company were held as follows: the second defendant, J. T. L.
Mallard, who was the managing director of the company, held with his relatives and friends
85,815 of the fully paid up ordinary shares. The 50,000 partly paid up shares were held partly by
the tenth defendants Tegarn Cinemas, Ld. and partly by the eleventh and twelfth defendants to
the action who were nominees of the Tegarn company. The plaintiff held 4,213 fully paid
ordinary shares. The holders of the remaining shares did not figure in this dispute.

There had been a series of actions in relation to the affairs of the Arderne company which had
left the plaintiff with a strong sense of grievance. In April, 1948, the defendant Mallard opened
negotiations with the third defendant Sol Sheckman (hereinafter called "the purchaser") for the
sale of a controlling interest in the company to the purchaser. By agreements of *289 June 4,
1948, the defendant Mallard agreed to sell or procure the sale to the purchaser of 85,815 fully
paid ordinary shares at 6s. a share in the Arderne company. At the same time the purchaser
obtained the control of the Tegarn company.

In order to give effect to these agreements an extraordinary meeting of the Arderne company was
held on June 30, 1948. At that meeting the following special resolution was passed: "That the
articles of association of the company be altered by adding at the end of art. 10 the following
additional clause: 'Notwithstanding the foregoing provisions of this article any member may with
the sanction of an ordinary resolution passed at any general meeting of the company transfer his
shares or any of them to any person named in such resolution as the proposed transferee, and the
directors shall be bound to register any transfer which has been so sanctioned'." That resolution
was followed by an ordinary resolution sanctioning the transfer by the defendant Mallard of 500
shares to the purchaser. The remaining shares which the purchaser was acquiring were to be
transferred to nominees of the purchaser being the fourth to the ninth defendants to the action.

Immediately after these resolutions had been passed, the plaintiff issued the writ in this action in
which he claimed a declaration that the resolutions passed at the meeting of June 30, 1948, were
void and of no effect, and a declaration that the transfers under the resolutions should be set aside
and certain ancillary relief. The action was heard by Roxburgh, J. The plaintiff made various
allegations against the defendant Mallard which involved certain questions of fact. The judge
held that the defendant Mallard had not been guilty of deliberate dishonesty, and dismissed the
action. The plaintiff appealed. On the appeal the various transactions which led up to the
resolutions of June 30, 1948, were considered at length, but they do not call for report.

Jennings, K.C., and Lindner for the plaintiff. The question is whether there has been a fraud on
the minority of the shareholders by the majority's taking first steps towards appropriating the
assets of the company. Unless the resolution of the majority was passed bona fide for the benefit
of the company, it would be an invalid resolution.

[JENKINS, L.J. Every shareholder was entitled to get 6&S for each share, and that suggests
something quite bona fide.]

It is contended that the particular interests were not casting votes for the benefit of the company
and, moreover, that all acted mala fide and in the interest of the defendant Mallard.

[JENKINS, L.J. The fraud must be one of the majority on the minority.] *290

It is submitted that the test is whether what has been done is for the benefit of the company.
There need be no evidence of fraud. The defendants appreciated this and set up the defence that
their action was for the benefit of the company. There are cases of resolutions altering the
articles of particular companies, and the test is whether the articles were altered for the benefit of
the company. Sidebottom v. Kershaw, Leese & Co. Ld. 1 clearly establishes that the question is
whether what has been done was for the benefit of the company.

The next authorities are Dafen Tinplate Co. Ld. v. Llanelly Steel Co. (1907), Ld.2 and
Shuttleworth v. Cox Brothers & Co. (Maidenhead), Ld. 3. The court has to consider whether
what has been done is for the benefit of all the shareholders and therefore of the company as a
whole: see Buckley's Law of Companies (12th ed.), pp. 35, 37 and 38, where it is laid down that
the majority of the shareholders are not at liberty to affect the minority injuriously. The power
"must be exercised bona fide for the benefit of the company as a whole".

The evidence is only consistent with the view that the defendant Mallard and the shareholders
whose votes he controlled passed the special resolution not with a view to the benefit of the
company as a whole. If this is correct, the authorities establish that the special resolution cannot
be valid. It unfairly discriminates between the majority and the minority shareholders, in that the
majority shareholders will be able to get more for their shares for they will have an open market
for them since they need not offer them to the other shareholders, whereas the minority
shareholders will be only able to sell to the other shareholders. The special resolution was wider
than was required: it should have been limited to authorising the sale to the purchaser and not
have made a permanent alteration in the articles. The plaintiff is prejudiced by the special
resolution, since it deprives him of his prospect of acquiring the shares of the majority
shareholders should they in the future desire to sell. The passing of the special resolution was, in
the circumstances of the case, a fraud on the minority shareholders.

Lindner followed.

Christie, K.C., and Hector Hillaby for the defendants other than the defendant Mallard were not
called on to argue.

Pennycuick, K.C., and Blanshard Stamp for the defendant Mallard were not called on to argue.

EVERSHED, M.R.

[after stating the facts]. The burden of that the resolution was not passed bona fide and *291 in
the interests of the company as a whole, and there are, as Mr. Jennings has urged, two distinct
approaches.

The first line of attack is this, and it is one to which, he complains, Roxburgh, J., paid no regard:
this is a special resolution, and, on authority, Mr. Jennings says, the validity of a special
resolution depends upon the fact that those who passed it did so in good faith and for the benefit
of the company as a whole. The cases to which Mr. Jennings referred are Sidebottom v.
Kershaw, Leese & Co. Ld. 4, Peterson, J.'s decision in Dafen Tinplate Co. Ld. v. Llanelly Steel
Co. (1907), Ld. 5, and, finally, Shuttleworth v. Cox Brothels & Co. (Maidenhead), Ld. 6. Certain
principles, I think, carl be safely stated as emerging from those authorities. In the first place, I
think it is now plain that "bona fide for the benefit of the company as a whole" means not two
things but one thing. It means that the shareholder must proceed upon what, in his honest
opinion, is for the benefit of the company as a whole. The second thing is that the phrase, "the
company as a whole", does not (at any rate in such a case as the present) mean the company as a
commercial entity, distinct from the corporators: it means the corporators as a general body. That
is to say, the case may be taken of an individual hypothetical member and it may be asked
whether what is proposed is, in the honest opinion of those who voted in its favour, for that
person's benefit.

I think that the matter can, in practice, be more accurately and precisely stated by looking at the
converse and by saying that a special resolution of this kind would be liable to be impeached if
the effect of it were to discriminate between the majority shareholders and the minority
shareholders, so as to give to the former an advantage of which the latter were deprived. When
the cases are examined in which the resolution has been successfully attacked, it is on that
ground. It is therefore not necessary to require that persons voting for a special resolution should,
so to speak, dissociate themselves altogether from their own prospects and consider whether
what is thought to be for the benefit of the company as a going concern. If, as commonly
happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators
think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the
resolution that they are considering their own position as individuals.

Accepting that, as I think he did, Mr. Jennings said, in effect, that there are still grounds for
impeaching this resolution: first, because it goes further than was necessary to give effect to the
particular sale of the shares; and, secondly, because it prejudiced *292 the plaintiff and minority
shareholders in that it deprived them of the right which, under the subsisting articles, they would
have of buying the shares of the majority if the latter desired to dispose of them.

What Mr. Jennings objects to in the resolution is that if a resolution is passed altering the articles
merely for the purpose of giving effect to a particular transaction, then it is quite sufficient (and it
is usually done) to limit it to that transaction. But this resolution provides that anybody who
wants at any time to sell his shares can now go direct to an outsider, provided that there is an
ordinary resolution of the company approving the proposed transferee. Accordingly, if it is one
of the majority who is selling, he will get the necessary resolution. This change in the articles, so
to speak, franks the shares for holders of majority interests but makes it, more difficult for a
minority shareholder, because the majority will probably look with disfavour upon his choice.
But, after all, this is merely a relaxation of the very stringent restrictions on transfer in the
existing article, and it is to be borne in mind that the directors, as the articles stood, could always
refuse to register a transfer. A minority shareholder, therefore, who produced an outsider was
always liable to be met by the directors (who presumably act according to the majority view)
saying, "We are sorry, but we will not have this man in".

Although I follow the point, and it might perhaps have been possible to do it the other way, I
think that this case is very far removed from the type of case in which what is proposed, as in the
Dafen case7, is to give a majority the right to expropriate a minority shareholder, whether he
wanted to sell or not, merely on the ground that the majority shareholders wanted the minority
man's shares.

As to the second point, I felt at one time sympathy for the plaintiff's argument, because, after all,
as the articles stood he could have said: "Before you go selling to the purchaser you have to offer
your shares to the existing shareholders, and that will enable me, if I feel so disposed, to buy, in
effect, the whole of the shareholding of the Arderne company". I think that the answer is that
when a man comes into a company, he is not entitled to assume that the articles will always
remain in a particular form; and that, so long as the proposed alteration does not unfairly
discriminate in the way which I have indicated, it is not an objection, provided that the resolution
is passed bona fide, that the right to tender for the majority holding of shares would be lost by the
lifting of the restriction. I do not think that it can be said that that is such a discrimination as falls
within the scope of the principle which I have stated.

*293

Mr. Jennings further says that, if that is wrong, he falls back on his other point, that the defendant
Mallard acted in bad faith. He concealed, it is said, various matters; he confessed to feelings of
envy and hatred against the plaintiff; he desired to do something to spite him, even if he cut off
his own nose in the process. Following the judge's line of reasoning, it is said that the defendant
Mallard did control all these other submissive persons who supported him, so that they are
equally tainted with the defendant Mallard's bad faith. I agree with Mr. Jennings that, if an
ordinary shareholder chooses to give what Mr. Jennings called "carte blanche" to the promoter of
a scheme and that promoter is then found to have been acting in bad faith, the persons who gave
him carte blanche cannot then say that they exercised any independent judgment, and they would
likewise be tainted with the evil of their leader.

Mr. Jennings had, early in his argument, formulated his grounds for bad faith against the
defendant Mallard at greater length, and I need not, I think, go through the several heads.

[His lordship considered certain specific criticisms of the defendant Mallard's conduct, and
continued:] Mr. Jennings says that all these various matters cast such doubt upon the transaction
that the defendant Mallard must be taken to have been acting in bad faith. I think that he acted
with grave indiscretion in some respects; but the judge has said that he was in no way guilty of
deliberate dishonesty; and I cannot see where and how it can be suggested that he was grinding
some particular axe of his own. He was getting 6s. a share; but he was getting no more and no
less than anyone else would get who wished to sell; and I am unable and unwilling to put upon
the actions of the defendant Mallard, because of his unfortunate secrecy and other conduct, so
bad a complexion as to impute bad faith in the true sense of the term, of which, indeed,
Roxburgh, J., acquitted him.

In my opinion, in spite of all these complexities, this was, in substance, an offer by an outside
man to buy the shares of this company at 6s. a share from anybody who was willing to sell them.
As commonly happens, the defendant Mallard, as the managing director of the company,
negotiated and had to proceed on the footing that he had with him sufficient support to make the
negotiation a reality. That was the substance of what was suggested. It discriminated between no
types of shareholder. Any who wanted to get out at that price could get out, and any who
preferred to stay in could stay in.

That being the substance of the thing, and the evidence, to my mind, clearly suggesting that 6s. a
share (allowing for the privilege of control) was a fair price, I can see no ground for *294 saying
that this resolution can be impeached, and I would dismiss the appeal.

ASQUITH, L.J.

I entirely agree.

JENKINS, L.J.

I also agree and do not desire to add anything.

Representation

Solicitors: S. A. Bailey & Co.; Billinghurst, Wood & Pope, for Keenlyside & Forster, Newcastle;
Pritchard, Englefield & Co.
Appeal dismissed. (B. A. B. )

1. [1920] 1 Ch. 154.

2. [1920] 2 Ch. 124.

3. [1927] 2 K. B. 9.

4. [1920] 1 Ch. 154.

5. [1920] 2 Ch. 124.

6. [1927] 2 K. B. 9.

7. [1920] 2 Ch. 124.