Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286

Facts

• Arderne Cinemas Ltd passed a special resolution to subdivide its existing 5 shilling shares into five 1 shilling shares, maintaining proportional ownership for shareholders.
• Subsequently, a resolution permitted holders of the new 1 shilling shares to purchase an additional five shares for each share owned.
• Mr. Greenhalgh, a minority shareholder, argued his voting power was unfairly diluted and alleged the scheme aimed to shift control to Mr. Mallard, the managing director who possessed a significant shareholding.
• Mr. Greenhalgh claimed the company’s actions were prejudicial to minority shareholders and contrived to transfer control.

Issues

1. Whether the subdivision and subsequent offer of shares constituted an improper variation of share class rights or an unfair dilution of minority voting power.
2. Whether such alterations must benefit the company as a whole, rather than just the majority shareholders.
3. Whether the resolutions in question were implemented in accordance with the company's articles and for bona fide purposes.

Decision

• The Court of Appeal dismissed Mr. Greenhalgh’s appeal, finding no impropriety in the share subdivision or subsequent offer.
• It was held that changes impacting voting power are not automatically invalid if conducted honestly and for the company's benefit.
• The court found no evidence of ulterior motives or harm to the company’s general interests.
• The resolutions were deemed compliant with the company’s articles of association and properly executed.

Legal Principles

• A variation of share class rights or dilution of voting power is permissible if done honestly for the benefit of the company as a whole, not merely for the majority’s advantage.
• The "benefit of the company as a whole" test requires an objective assessment focused on the company’s broader interests, which may align but are not identical with the majority’s interests.
• Company articles of association provide the framework for adjusting class rights; adherence to these provisions is essential.
• Merely reducing minority voting rights does not, on its own, render a resolution invalid unless it breaches good faith or proper purpose requirements.

Conclusion

The Court of Appeal in Greenhalgh v Arderne Cinemas Ltd confirmed that share class variations or share issues which reduce minority voting power are valid if made honestly, for the benefit of the company as a whole, and in accordance with the articles of association, distinguishing such conduct from cases motivated by bad faith or aimed at oppressing minorities.