Introduction
The judgment in Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28 provides key points on evaluating director conduct, especially the legality of their intentions. This House of Lords decision outlines clear standards for determining when a director’s exercise of authority, even if formally permitted, might be deemed invalid due to undisclosed objectives. The case emphasizes that directors must act to support the company, not for unrelated purposes. The central issue is distinguishing between exercising powers for valid reasons and doing so for undisclosed objectives, irrespective of whether directors privately thought their actions aided the company.
Director Duties and the Proper Purpose Doctrine
Company law obligates directors to uphold fiduciary duties, requiring them to act in good faith for the company’s interests. The proper purpose doctrine is a fundamental aspect of these duties. It holds that directors must employ their powers solely for the purposes for which those powers were granted, not for personal advantage or unrelated objectives. Criterion Properties builds on prior cases, such as Hogg v Cramphorn Ltd [1967] Ch 254, to clarify how courts detect improper director intentions.
The Facts of Criterion Properties plc v Stratford UK Properties LLC
The dispute in Criterion Properties originated from a joint venture agreement between Criterion Properties plc and Stratford UK Properties LLC. A disagreement emerged over terms of this agreement. Criterion’s directors issued new shares, asserting this would strengthen the company’s negotiating position. Stratford contended the true objective was to diminish Stratford’s role in the venture, not to assist Criterion.
The House of Lords' Decision and the "But For" Test
The House of Lords concluded the directors’ primary motive for issuing shares was to undermine Stratford’s rights under the joint venture. Lord Scott of Foscote, in the leading opinion, outlined the "but for" test to determine if a purpose is improper. This test examines whether directors would have exercised their power "but for" the undisclosed objective. If the power would not have been used without this hidden aim, the action is invalid, even if other legitimate reasons were present.
Importance of the "But For" Test
The "but for" test from Criterion Properties provides a straightforward method to assess director intentions. It acknowledges that directors may have multiple motives, some valid and others not. The test isolates the dominant motive. This prevents directors from concealing improper conduct behind permissible goals. The decision emphasizes evaluating director conduct based on objective facts, not solely their subjective beliefs.
Practical Effects for Directors
Criterion Properties highlights boundaries on director authority. Directors must confirm their actions serve the company and use powers only for lawful purposes. The case demonstrates the importance of maintaining clear documentation and justifications for decisions. When exercising powers that impact shareholder rights or business partnerships, directors should assess risks of improper purpose allegations and seek legal advice if necessary. Understanding how the "but for" test applies assists directors in complying with their obligations.
Applying the Criterion Properties Principles: Examples
If directors issue shares to secure capital for expansion, this is lawful. However, if they issue shares primarily to dilute a shareholder’s voting power due to disputes, and would not have issued shares without this motive, the action becomes improper—even if raising capital was a valid reason.
Another example: a director enters a contract that aids the company but also personally enriches them. Applying the "but for" test, if the director would not have proceeded without the personal gain, the action is improper.
Conclusion
Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28 is a significant case in company law, particularly concerning lawful exercise of director powers. The House of Lords’ decision and the "but for" test define how to evaluate director motives and determine action validity. This judgment reaffirms that directors must use powers for the company’s interests, not undisclosed objectives. Cases like Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 further detail director obligations and illustrate why Criterion Properties remains relevant. The decision continues to play a key role in ensuring directors act lawfully and uphold company law standards.
