Hogg v Cramphorn Ltd [1967] Ch 254

Facts

• Cramphorn Ltd received a takeover offer from Mr. Baxter.
• The board of directors, believing the takeover would harm the company, allotted shares to a trust for employees.
• This share allotment reduced Mr. Baxter's shareholding and prevented his takeover bid.
• Mr. Hogg, a shareholder, challenged the validity of the share allotment.

Issues

1. Whether the directors’ allotment of shares to an employee trust to prevent a takeover was a valid exercise of their powers.
2. Whether exercising powers for the principal purpose of blocking a takeover constitutes a proper purpose under directors’ duties.
3. Whether directors’ good faith belief that they are acting for the company’s benefit can justify such an allotment.

Decision

• The Court of Appeal held that the allotment of shares by the directors was invalid.
• The court found that the main purpose behind the allotment was to block the takeover rather than to raise capital or advance the company’s lawful interests.
• The directors, while acting in what they believed to be the company’s best interests, had used their powers for an improper purpose.
• The Court of Appeal affirmed the lower court’s decision and set aside the contested share allotment.

Legal Principles

• Directors must exercise their powers for proper purposes, consistent with the authority given to them.
• Allotment of shares with the primary purpose of defeating a takeover, regardless of directors' good faith, is an improper use of power.
• Directors’ duties entail acting honestly and focusing on the company's overall interests, rather than protecting the company from takeovers for personal or subjective reasons.
• The case clarifies that the subjective belief of directors is not sufficient if the dominant objective does not align with proper purposes under company law.

Conclusion

Hogg v Cramphorn Ltd [1967] Ch 254 established that directors' powers to allot shares are subject to the proper purpose rule; using those powers chiefly to frustrate a takeover, even if well-intentioned, renders the allotment invalid and reinforces the requirement that directors act lawfully in the interests of the company.