Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28

Facts

  • The dispute arose from a joint venture agreement between Criterion Properties plc and Stratford UK Properties LLC.
  • A disagreement developed regarding the terms of the joint venture.
  • Directors of Criterion issued new shares, claiming this would strengthen the company's negotiating position.
  • Stratford argued that the real purpose of the share issue was to reduce Stratford's influence in the venture, rather than to benefit Criterion.

Issues

  1. Whether Criterion's directors exercised their powers to issue shares for an improper or undisclosed purpose.
  2. Whether actions taken by directors are valid if influenced by motives unrelated to the interests for which their powers were conferred.
  3. How courts should determine the dominant or true purpose behind directors' decisions.

Decision

  • The House of Lords held that the directors' main motive in issuing shares was to undermine Stratford’s rights under the joint venture.
  • The "but for" test was adopted: if directors would not have exercised their power but for the improper or undisclosed purpose, their action is invalid.
  • Even if other legitimate reasons are present, the existence of an undisclosed improper objective may render the action void.

Legal Principles

  • Directors owe fiduciary duties to act in good faith for the interests of the company.
  • The proper purpose doctrine requires that directors exercise their powers only for the reasons for which those powers were granted.
  • The "but for" test assesses whether the improper motive was decisive; if the directors would not have acted without it, the exercise of power is invalid.
  • Courts focus on objective facts rather than the directors' subjective beliefs when assessing the legitimacy of director conduct.
  • Precedent, such as Hogg v Cramphorn Ltd [1967] Ch 254 and Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, support the assessment of director purpose.

Conclusion

Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28 is a leading authority on the proper purpose doctrine in company law, confirming that directors must exercise their powers solely for permitted purposes and establishing the "but for" test as the standard for evaluating the validity of director motives.

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