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.

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