Scottish Court of Session Decisions

William Augustus Rixon of London, a shareholder of the Edinburgh Northern Tramways Company, raised the present action of reduction against (1) the said company; (2) the Patent Cable Corporation, Limited, and its liquidator; and (3) Messrs Dick, Kerr, & Company, tramway contractors, London and Kilmarnock, by which he sought to reduce a contract dated 15th June 1888, executed by the said parties above named, whereby, inter alia, Dick, Kerr, & Company agreed to construct a cable tramway between Stockbridge and Princes Street in Edinburgh under the statutory powers of the Edinburgh Northern Tramways Company, and also to pay the creditors of the Edinburgh Company to the amount of £3000, and whereby, on the other hand, the Edinburgh Company agreed to pay a contract price of £75,000 (of which £60,000 was to be paid in shares of £10 each, and £15,000 in mortgage debentures).

The circumstances out of which the action arose are fully narrated at an earlier stage of the case ( ante, March 1, 1889, vol. xxvi. p. 405), as well as in the opinion of Lord Adam, who delivered the judgment in this case.

The pursuer sought to have the said contract reduced upon several grounds, the more important of which were (1) that the works contracted for did not form the subject of competition, as provided by the company's Act of incorporation, and were therefore ultra vires of the company; and (2) on the ground of fraud, alleging that the majority of the shareholders who voted in favour of the contract were nominees of the contractors, and had obtained their shares gratuitously, and for the purpose of voting in their favour.

The Lord Ordinary ( Kincairney), after a proof on 25th March 1890, found, inter alia, that it had not been proved that the agreement libelled had been entered into fraudulently and collusively to the prejudice of the pursuer; and further, that it was not reducible at the pursuer's instance, in respect that it had been entered into in contravention of the Edinburgh Northern Tramways Act 1884.

“ Opinion.—[ After stating the facts] — The first argument was rested on the want of any competition for the contract, and on the clause in the agreement with the Magistrates of Edinburgh and Leith, Schedules C and E of the Act above quoted. The plea has been dealt with by Lord Kinnear. I concur in and refer to his opinion. I think the objection not one which the pursuer has any title to take, and I think that the only persons in titulo to take it are the Magistrates of Edinburgh and the Magistrates of Leith. I do not consider that the case of The Caledonian Railway Company, March 30, 1874, 1 R. (H. of L.) 8, quoted by the pursuer, supports his contention. It merely shows that such agreements have statutory force, but not that the statute converts them into agreements with the public or with individual shareholders.

I think the plea that the contract was illegal because the directors were disqualified is also bad, and that the pursuer as an individual shareholder has no title to plead it. I did not understand the pursuer's counsel to plead that the directors had no true qualification, and were disqualified because they were mere nominees of the Assets Company. If such an argument had been stated, I rather think it must have been disallowed on authority—Buckley, p. 53; Lindley, p. 391; Pulbrook v. Richmond Consolidated Mining Company, 9 Ch. Div. 610. The objection that the directors were disqualified because they were interested in the contract appears to me not well-founded, whether the directors be regarded as representing the interests of the Cable Corporation or of the Assets Company. In either case their interests, supposing they had interests, were the same as those of the Edinburgh company. There was no conflicting duty. They were not contracting with the company but for it. It was argued that this was not so if the contract of 1888 were to be regarded as what it professes to be—supplemental to and a mere modification of the prior contracts of 1884 and 1886; but although there may be subtlety in this view, there is, I think, no substance. The contract of 1888 was really a new contract. The plea pressed by the pursuer is an equitable plea, founded on the assumption of a conflict between the personal interest of a director and his duty as director, and where there is no such conflict the rule has, I think, no place. During the debate I felt a little doubt whether the directors did not fall to be regarded as the nominees of Dick, Kerr, & Company, in which case the argument of the pursuer would have had more force. But I think they cannot be so regarded, and I rather think that even if they were, the objection to the contract which would thence arise would be one which could be, and has been, waived by the majority of the company.

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The plea founded on fraud raises more difficulty, because it involves the consideration of intricate and complicated negotiations and arrangements, in which it may be that fraud may lurk. Although it may generally be the case that a contract which is a fraud on a company is not void but only voidable, and may be accepted and validated by the company, and that where that is the case the title of a single shareholder to reduce it can not be sustained, yet it does not seem doubtful that the rule admits of this exception, that where a contract amounts to a fraud by a majority of shareholders on the minority, such a contract may be reduced at the instance of any shareholder who has been so defrauded— Atwool v. Merryweather, L.R., 5 Eq. 464; Meaverv. Hooper's Telegraph Works, 1874, 9 Ch. App. 350; Mason v. Harris, 1879, 11 Ch. Div. 97. The previous decision of the Court in this case amounts to a judgment to that effect.

The present is clearly a case to which that principle is applicable. If there has been any fraud, it has been a fraud practised by the majority of the shareholders on the minority, and against which the minority could have no remedy except through the Court. If such a fraud has been proved in this case the contract ought to be reduced. Now, whether there has been such a fraud or not is just a jury question, as to which impressions and opinions may differ, but my own impression was when the proof was being led, and remains after consideration and examination of the documents, that no fraud has been proved. I think that the evidence of Mr Harold Brown is substantially true, and while it shows that he was looking keenly and acutely after the interests of his own clients, it does not show that he disregarded or acted adversely to the interests of the Edinburgh Northern Tramways Company.

The pursuer's conjecture is intelligible enough, and it cannot be said that his suspicion is altogether unreasonable. The idea seems to be that Mr Brown, in order to secure payment of the £43,314, 19s. due to the Assets Company, agreed with Dick, Kerr, & Company to secure to them through the influence of the Assets Company the contract for the Stockbridge section on too favourable terms, if they in return would pay the debt due to the Assets Company by the Cable Corporation, which must in that view be held to have exceeded the value of the Cable Corporation assets. All the witnesses concerned deny most absolutely that there was any such agreement, and there certainly was none unless these witnesses are all to be disbelieved. There is no direct proof whatever of such an agreement. There may, however, have been a fraud without any such express agreement, and indeed it was in no view to be expected that such an express agreement would be proved. The device of filling the directorate of the Edinburgh Northern Tramway Company with nominees of the Assets Company may excite suspicion and challenge inquiry, but such suspicion can not, I think, supply the proof of a direct fraud.

It might be shown that the conditions of the contract are so unfair as of themselves to prove fraud, and they would prove fraud if the pursuer's contention were established that the contract price is three times what it ought to have been, but I think there is nothing of the kind established. Parties are not much at variance as to the probable cost of making the Stockbridge section. Both sides put it at £25,000 or thereby. The question is not about that at all, but about the value at the time of the shares of the company. £60,000 to be paid in shares, having regard to the financial condition of the company, was a very different thing from £60,000 to be paid in money. Evidence has been led on both sides on this point. It would serve no good purpose to examine it, but after considering it I am not prepared to say that the contract price was excessive, or so excessive as to warrant the conclusion that it must have been agreed to in fraud of the company. There was evidence led by engineers and contractors that contractors might have been got at more reasonable terms, and it is said that the contract should have been put up for competition. Ex post facto evidence of this kind must be considered with caution, and I do not see in it sufficient reason to disbelieve the evidence of Mr Brown and the other witnesses, who are satisfied that it would have been useless to attempt to get outside contractors. It was submitted for the pursuers that the proceedings adopted by the Assets Company, the removal of the Edinburgh directors, and in particular the appointment of a judicial factor, were taken with the deliberate intent of discrediting the Edinburgh company and reducing the nominal value of the shares, so as to enable them the more readily to deter competitors and to favour Dick, Kerr, & Company. I cannot find that such a design has been proved, and I find no sufficient ground for inferring it.

The question is, not whether the directors made a bad bargain, but whether they made the bad bargain knowingly, or in disregard of the interests of the company, with the intent to sacrifice the interests of the company and the minority in order to save and protect the interests of the predominating shareholder, whose nominees they were? I am of opinion that that has not been proved, and that the reasons of reduction ought to be repelled.”

The pursuer reclaimed, and argued—That he was entitled to prevail, as the contract was extravagant in its terms, and ultra vires of the majority of the company. The directors of the company had virtually entered into a contract with themselves, and any such agreement was therefore void. Besides, the statute of incorporation precluded the directors from issuing shares except for a cash payment of at least one-third of their nominal value, and this they had not done. By these means the stock of the minority of the shareholders, who were represented by the pursuer, had been watered down, and the dividend earned by

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the company was spread over a much larger share list. Such a transaction could not have been legitimated by the consent of the whole body of shareholders, much less by a mere majority. In such circumstances any single shareholder who thought himself aggrieved was entitled to object. It being practically admitted that the true money value of the Stockbridge contract was about £22,000, what the directors did was to give this work to the contractors at three times its value. Such a transaction was just an illegal issue of stock, or the issuing of shares at a discount, and the actings of the majority being seriously to the prejudice of the minority, the minority were entitled to come to the Court for redress— Macdougall v. Gardiner, November 1875, L.R., 1 Chan. Div. 13; Meaver v. Hooper's Telegraph Works, February 1874, L.R., 9 Chan. App. 350; Mason v. Harris, January 1879, L.R., 9 Ch. Div. 97; North-West Transportation Company v. Beatty, June 1887, L.R., 12 App. Cas. 589; East Pant Company, Limited v. Merryweather, 1864, 2 Hemming & Miller, 254; Leckie's case, December 1870, L.R., 11 Eq. 100 and 107; Jones, November 1870, L.R., 6 Chan. App. 49.

Argued for respondents—The shares held by the pursuer were in the same position as those held by Dick, Kerr, & Company. If theirs were vitiated, so were his, and he had no title to sue. The pursuer was not entitled to argue that the agreement in question was ultra vires of the directors, as he had no averment or plea to that effect, but even if such an argument was well-founded, it would not in the circumstances nullify the contract. It was not fair to judge this contract in the light of the present day; it had to be looked at as at the time when it was entered into. The directors got no personal benefit by it, and in such circumstances fraud was most improbable. Suppose it admitted that the true cash value of the contract was £25,000, the question to be determined was, what was to be considered a fair price when payment was to be made only in shares? The contract was one which was concluded under great difficulties, and the shares were at the time only worth £2 each, and not the £10 of nominal value. The result of the decisions upon the question of the issuing of shares at a discount was that when money's worth and not money was given in payment of work done, the Court would not inquire into the exact value of the shares—Lindley on Companies (5th ed.), 395; Pell's case, November 1869, L.R., 5 Chan. App. 11; Oakbank Oil Company v. Crum, December 2, 1881, 9 R. 198, and L.R., 8 App. Cas. 65.

At advising—