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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Ramsbotham v. The Scottish American Investment Co., Ltd [1891] ScotLR 28_419 (25 February 1891)
URL: http://www.bailii.org/scot/cases/ScotCS/1891/28SLR0419.html
Cite as: [1891] ScotLR 28_419, [1891] SLR 28_419
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SCOTTISH_SLR_Court_of_Session
Page: 419↓
Court of Session Inner House First Division.
v.
Facts:
The memorandum of a registered company provided—“The nominal capital of the company is £1,000,000, divided into 100,000 shares of £10 each.”
The articles of association provided—“28. The original capital shall be one million pounds sterling, divided into one hundred thousand shares of ten pounds each; but the company, with the sanction of a general meeting of the members to be specially convened for that purpose, may from time to time increase such capital to any amount that may be determined by such meeting. 29. Such general meeting, or any subsequent general meeting, may determine the conditions on which such increase shall be made, the number and amount of the shares into which such increased capital shall be divided, and the time, mode, and terms at and according to which such last-mentioned shares shall be issued, and how the premium, if any, on such shares shall be applied, and all new shares so created shall be offered to the existing members in proportion to the existing shares held by them, or as near as may be.” The capital was subsequently increased to £2,000,000.
The company passed this special resolution—“1. That the capital of the company be increased to £2,400,000 by the creation of 200,000 shares of £2 each, entitled to a fixed cumulative preferential dividend of 4
per cent. per annum, but to no further or other participation in the profits of the company.” 1 2 Held, on an objection by a shareholder, that as the memorandum and articles of association contemplated equality of interest among the shareholders, the increase of the capital by the creation of preference shares was ultra vires of the company, and the resolutions to that effect were invalid.
The Scottish American Investment Company, Limited, was incorporated under the Companies Acts, and was registered on 29th March 1873. Its registered office was in Edinburgh. The leading object of the company was the investment of money in the United States of America or Dominion of Canada, or any of the British Dependencies in North America, upon security as set forth in the memorandum of association. The fifth head of the said memorandum provided that “The nominal capital of the company was £1,000,000, divided into 100,000 shares of £10 each.” The articles of association registered along with the said memorandum contained under the title “Capital and increase thereof,” the following provisions:—“28. The original capital shall be one million pounds sterling, divided into one hundred thousand shares of ten pounds each; but the company, with the sanction of a general meeting of the members to be specially convened for that purpose, may from time to time increase such capital to any amount that may be determined by such meeting. 29. Such general meeting, or any subsequent general meeting, may determine the conditions on which such increase shall be made, the number and amount of the shares into which such increased capital shall be divided, and the time, mode, and terms at and according to which such last-mentioned shares shall be issued, and how the premium, if any, on such shares shall be applied, and all new shares so created shall be offered to the existing members in proportion to the existing shares held by them, or as near as may be.”
At an extraordinary general meeting on 2nd March, and confirmed on 23rd March 1875, the capital of the company was increased to £2,000,000.
At an extraordinary general meeting of the company held on 11th December, confirmed at another meeting held on 30th December 1890, the following special resolutions were passed, inter alia—“I. That the capital of the company be increased to £2,400,000 by the creation of 200,000 shares of £2 each, entitled to a fixed cumulative preferential dividend of 4
per cent. per annum, but to no further or other participation in the profits of the company. 1 2 II. That the following changes be made in the memorandum and articles of association, viz.—(a) That article V. of the memorandum of association as altered by special resolution be deleted, and the following substituted in place thereof:—The nominal capital of the company is £2,400,000, divided into 200,000 preference shares of £2 each, entitled to a fixed cumulative preferential dividend of 4
per cent. per annum, and into 200,000 ordinary shares of £10 each. Any shares when fully paid may be converted into stock by resolution of the shareholders in general meeting. That article 28 of the articles of association as altered by special resolution be deleted, and the following substituted in place thereof:—The capital of the company shall be £2,400,000 sterling, divided into 200,000 preference shares of £2 each, and into 200,000 ordinary shares of £10 each. The preference shares shall be entitled to a fixed preferential cumulative dividend at the rate of 4 1 2 per cent. per annum, before any dividend is paid on the ordinary shares, and to priority in repayment of capital, but shall in no case be entitled to participate in surplus assets; and the company may (if it see fit) convert its shares, or any portion or class thereof, when fully paid, into stock: The company may further from time to time increase its capital to any amount that may be determined by the shareholders in general meeting.” 1 2 Page: 420↓
Effect was given to this resolution by an alteration in the memorandum of association.
Samuel Henry Ramsbotham, M. D., Leeds, a shareholder in the company, objected to the creation and issue of preference shares as ultra vires of the company and the directors.
The directors followed up the resolution above referred to by resolving to offer £170,000 of the said preference £2 shares to the shareholders of the company in proportion to their present holdings, and Dr Ramsbotham threatened to interdict the issue of the said preference shares.
The present special case was accordingly presented by (1) Dr Ramsbotham, and (2) the company, in which the question submitted for the determination of the Court was as follows—“Whether the increase of the capital of the Scottish American Investment Company, Limited, by the creation of 200,000 shares of £2 each, entitled to a fixed preferential cumulative dividend at the rate of 4
per cent. per annum before any dividend is paid on the ordinary shares, and to priority in repayment of capital, but with no right to participate in surplus assets, is within the powers of the company, and whether the special resolutions of December 1890, so far as they purport to increase the capital by the creation of such shares, are valid?” 1 2 Argued for the second party—The memorandum and articles of association contemplated the increase of the capital of the company, and intending shareholders got due notice that this might be done by the language of article 29, which provided that a general meeting was to determine the “conditions” upon which this increase was to be made. What the company had here done was quite within the powers conferred on them by their memorandum and articles of association and the Companies Act 1862, sec. 12— Harrison v. Mexican Railway Company, L.R., 19 Eq. 358; South Durham Brewery Company, L.R., 31 Ch. Div. 261; Hutton v. Scarborough Cliff Hotel Company, 2 Drury & Smail, 514 and 521; Ashbury v. Watson, L.R., 30 Ch. Div. 376; Companies Act 1862 (25 and 26 Vict. cap. 89), sec. 12.
Argued for the first party—There was nothing in the memorandum or articles of association which entitled the company to create preference shares, or to destroy that equality of interest which existed among all the shareholders. The essence of the contract was equality, and it was that which the resolution complained of proposed to take away. The resolution was ultra vires and illegal. Authorities supra.
At advising—
The 28th article provides that “The company, with the sanction of a general meeting of the members to be specially convened for that purpose, may from time to time increase such capital to any amount that may be determined by such meeting.” Such a provision is precisely within the memorandum of association, and imports nothing like a variation of that equality of interest among the shareholders to which I have just referred. But the next article No. 29, is in these terms—“Such general meeting, or any subsequent general meeting, may determine the conditions on which such increase shall be made, the number and amount of the shares into which such increased capital shall be divided, and the time, mode, and terms at and according to which such last-mentioned shares shall be issued, and how the premium, if any, on such shares shall be applied, and all new shares so created shall be offered to the existing members in proportion to the existing shares held by them, or as near as may be.” Now, it is said that the import of this article is, that a general meeting called in terms thereof can fix the conditions upon which an increase of the capital of the company can be made; and that such a meeting can also determine that the new stock so created shall in the matter of dividends be entitled to a preference over the old.
I do not so read this article, and I do not think that this is the meaning which is to be attached to the word “conditions” which we find in it. This word suggests the limitation of a right, and indicates something of the nature of a stipulation under which the right is to be granted. Nor can I see anything in this 29th article to suggest that the word “conditions” which occurs in it is used in any other than its ordinary meaning. The company at this specially convened general meeting are empowered to determine the time, the mode, and the terms upon which the newly created shares are to be issued and to be paid for; but to import into the word “conditions” anything of the nature of a privilege, or to suggest that the newly created shares are to be entitled to any priority over the other shares in the matter of dividends, is a reading of this 29th article which I am not prepared to adopt.
From what I have already observed, it is clear I think that neither the memorandum nor articles of association of this company entitle them to create preference shares. But what is it that this company has done? At a general meeting held upon 11th December 1890 certain resolutions were passed, which were confirmed at another meeting held upon the 30th December following, and among them was one to the following effect—“That the capital of the company be increased to £2,400,000 by the creation of 200,000 shares of £2 each entitled to a fixed cumulative preferential dividend of 4
Page: 421↓
Now, I consider such a resolution entirely ultra vires of the company and illegal, and I am therefore for answering the question in the negative.
Had the question which we are here asked to determine occurred for the first time in the present case I should have entertained the greatest doubts as to the competency of the application, but looking to the decisions in the English authorities to which we were referred, there can be no doubt that the memorandum and articles of association are to be read together, and that they limit and define the powers of the company.
In the present case the 5th head of the memorandum of association provides, on a reasonable construction of the language, for an equality of interest among the shareholders both as regards their shares and their dividends, and this necessary implication is not easily to be displaced.
If we turn to the articles of association, and especially to article 29, to which we have been specially referred, we can find nothing which can in any way affect this equality of interest. I have, therefore, come to the same conclusion as your Lordship that the resolution of December 1890 with reference to the creation of preference shares was ultra vires of the company, and therefore illegal.
The Court answered the question in the negative.
Counsel for the First Party— Dundas. Agents— Crombie, Bell, & Bannerman, W.S.
Counsel for the Second Party— Lorimer. Agents— Menzies, Black, & Menzies, W.S.