Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd [1920] 2 Ch 124

Facts

  • Dafen Tinplate Company Ltd and Llanelly Steel Company (1907) Ltd had an agreement for Llanelly Steel to supply all the steel plate required by Dafen Tinplate.
  • The articles of association of Dafen Tinplate included terms giving effect to this arrangement.
  • Llanelly Steel proposed an amendment to its articles to permit the purchase of Dafen Tinplate’s business.
  • This amendment was passed by a majority of Llanelly Steel shareholders, many of whom also held shares in Dafen Tinplate.
  • Smaller shareholders in Dafen Tinplate objected, arguing that the amendment unfairly damaged their interests without justification.

Issues

  1. Whether a majority-approved amendment to a company’s articles is valid if it undermines the rights of minority shareholders.
  2. Whether the amendment was honestly made for the benefit of the company as a whole.
  3. How the risk of conflicts arising from overlapping shareholdings impacts the validity of such amendments.

Decision

  • The Court of Appeal held that amendments to company articles, even if approved by the majority, must be made bona fide for the benefit of the company as a whole.
  • The amendment allowing Llanelly Steel to purchase Dafen Tinplate’s business was found not to be honestly intended for the company's general welfare.
  • The conflict of interest due to overlapping shareholdings was significant, as it allowed majority shareholders to potentially profit at the expense of minority shareholders in Dafen Tinplate.
  • The amendment was invalid as it unfairly disadvantaged the smaller shareholders.

Legal Principles

  • Majority power to amend articles is subject to the requirement that changes be made bona fide for the benefit of the company as a whole, as previously set out in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656.
  • The presence of a conflict of interest, such as overlapping shareholdings, heightens scrutiny on the majority's motives for amending articles.
  • Article changes supported by the majority may be set aside if they are not genuinely for the company's benefit or if they unjustly harm minority interests.
  • The honest welfare rule requires a practical assessment of the purpose and effect of article changes, not merely formal compliance.

Conclusion

Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd established that majority-approved article amendments are subject to the bona fide benefit of the company as a whole, protecting minority shareholders from unfair prejudice where conflicts of interest exist. The case remains a significant authority on the limits of majority control in company law.

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