Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)

Facts

  • Ampol Petroleum and Bulkships Ltd held a majority of shares in R.W. Miller (Holdings) Ltd.
  • Howard Smith Ltd sought to acquire Miller by making a takeover bid.
  • To thwart the takeover, Miller’s directors issued shares to interests aligned with Howard Smith, reducing the holdings of Ampol and Bulkships and blocking their bid.
  • The directors claimed the share issue was to raise necessary funds, but this rationale was doubted by the Privy Council.

Issues

  1. Whether the directors' main motive for issuing shares was to raise capital or to influence control of the company.
  2. Whether the use of directors’ power to issue shares was for a proper purpose as required by company law.
  3. Whether the transaction remained valid if the main motive was found to be improper, even if directors believed it was in the company’s best interests.

Decision

  • The Privy Council found the primary motive for the share issue was to affect the outcome of the Howard Smith takeover bid by altering voting control, not to raise funds.
  • It held that although directors can issue shares, the power must be used for legitimate purposes defined by the company’s constitution, such as capital raising, and not to manipulate voting rights or takeover outcomes.
  • The transaction was declared invalid because it failed the two-part test: the real motive was not permitted, and the action was outside the scope of the power.

Legal Principles

  • Directors’ powers must be used for the proper purposes stated in the company’s constitution and not for extraneous motives, even if directors believe they are acting in the company’s interests.
  • The two-part test: (1) ascertain the directors’ real, dominant motive for exercising their power; (2) determine if that motive aligns with purposes for which the power is conferred.
  • Even honest directors’ actions are void if taken for an improper primary purpose.
  • These principles guide later authorities in scrutinizing directors’ actions, especially in the context of takeovers.

Conclusion

Howard Smith Ltd v Ampol Petroleum Ltd remains a leading authority in company law, establishing that directors’ powers must only be exercised for proper purposes, with the genuine motive aligned with lawful company objectives, regardless of the directors’ good faith belief in benefiting the company.

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