Scottish Court of Session Decisions

The Glenmorangie Distillery Company, Limited, was formed and registered under the Companies Act in 1887 with a capital of £25,000 divided into 2500 shares of £10 each. As at 14th August 1895, 1200 fully paid-up shares had been issued, together with £5000 out of £6000 5 per cent. debenture stock authorised to be created.

By the company's articles of association it was, inter alia, provided that—“None of the regulations in the table marked A in the schedule to the Companies Act 1862 shall be applicable to the company except as hereinafter appears.”

Among the regulations thus excluded was art. (27) of the said Table A, which enacts that, “subject to any direction to the contrary that may be given by the meeting that sanctions the increase of capital, all new shares shall be offered to the members in proportion to the existing shares held by them.

By the articles of association it was further agreed that “The directors may at any time after the expiration of one year from the registration of the company, with the sanction of an extraordinary general meeting of the company, increase its capital by the issue of new shares, such aggregate increase to be of such amount, and to be divided into shares of such respective amounts, and of such a character, on such terms and conditions, and either with or without any preferential claim to dividend or otherwise, as the company may in general meeting direct, or, if no direction is given, as the directors think expedient. Provided always that in the event of any such issue, four thousand pounds nominal value of such shall be allotted to Mr Edward Taylor of Shawfield Street, Chelsea, in the county of Middlesex, if he so wishes.”

By article 19 it was agreed that “the directors shall be entitled to set apart and receive for their remuneration in each and every year such sum as the company in general meeting shall resolve.”

The directors of the company were Mr Duncan Cameron, Tain, the complainer in the present action, and Messrs Edward James Taylor, London, and Andrew Maitland junior, Tain, two of the respondents. Mr Maitland was managing director of the company, and received an allowance of £100 a-year, besides a commission on whisky sold, amounting in 1894–95 to £288, and his travelling expenses.

Between 1887 and 1895 the quantity of whisky sold by the company rose from about 5000 gallons to 79,000 gallons per annum, the annual profits increased from a little under £400 to £2300, a dividend at the rate of 10 per cent. was declared for 1893–94, and also for 1894–95, while the reserve fund was increased to £1000.

The proposed report by the directors to the shareholders in October 1894 contained the following paragraph:—“Directors have before them the following request from Mr Maitland upon which they desire shareholders' opinions and votes, viz:—‘That he desires an additional 200 shares in the company for which he is willing to pay £1,0s. 0d. per share premium. He feels it necessary to have his financial interest in the concern increased, so that his influence in trade circles may be still further strengthened for the benefit of the company. He has no desire to exercise any voting power upon these shares which shall disturb the existing equality of voting power at each end.”

At the annual meeting of the company, held on 27th December 1894, it was minuted as follows:—“In the course of his remarks upon the accounts Mr Andrew Maitland stated that when recently in London conferring with the leading shareholders there as to the results of last year's working of the business and the prospects for the year now current, an informal discussion had taken place as to the expediency of his (Mr A. Maitland's) position being strengthened by his having a larger stake in the capital of the company, as he (Mr A. Maitland) is the principal medium of communication between those from whom the company buys and to whom it sells. It was felt that it would greatly fortify his position with those persons if his personal stake in the company were larger than it now is. It had accordingly been suggested that other 200 shares of the company should be allotted and issued to him at £1 per share premium, and that they should be entitled to dividend as from the commencement of the financial year now current, upon the footing of interest at the rate of 5 per cent. per annum being paid by Mr Maitland upon the £11 per share until payment thereof. Mr Maitland stated that he thought it right to mention the matter now in order that the shareholders might be considering it in view of its being decided upon at a future meeting which would be called for the purpose.”

In July 1895 the directors, in response to a requisition signed by certain members of the company, called an extraordinary general meeting to consider, inter alia, the following resolution:—“ Resolution No. 1.—1200 shares of £10 each of the capital of the company having been already issued to the members, whereby the issued capital now stands at £12,000: Resolved that sanction be given to the directors increasing said capital to the sum of £14,000, and that by the issue to Mr Andrew Maitland,

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architect, Tain, of 200 shares of £10 each upon the following terms and conditions, viz.—(1) Payment ( a) of the sum of £10 in respect of each of said shares; ( b) of a premium of £1 in respect of each of said shares; and (c) of interest at the rate of 5 per centum per annum upon the cumulo sum of £11 thus payable in respect of each of said shares from 9th October 1894 until payment; and (2) that said issue be entitled to a dividend equally with the already issued shares as and from 9th October 1894.”

At an extraordinary general meeting of the company held on 14th August 1895 this resolution was carried by a large majority in spite of the opposition of Mr Cameron.

Mr Cameron thereupon presented a note of suspension and interdict against the company, Messrs Taylor and Maitland, his co-directors, and the secretary of the company, to have the respondents interdicted from in any way carrying out or acting upon the resolution for increasing the capital of the company to £14,000 passed at the extraordinary general meeting held on 14th August, and in particular to have the respondents Taylor and Maitland interdicted from allotting to Maitland 200 shares of the company in terms of the said resolution.

The complainer averred—“(Cond. 4) The resolution referred to is illegal and ultra vires of the shareholders. If it were given effect to the respondent Andrew Maitland, one of the directors, would receive a large present out of capital, to the serious loss and prejudice of the other shareholders, including the complainer and the company. The proposed transactions are not reasonably incidental to or within the reasonable or ordinary scope of carrying on the business of the company, but are prejudicial to and will cause loss to the company, and all this was well known to all the parties at the time. The effect of the issue of the said shares at the said price would be that the value of the other shares would be greatly depreciated, as the liabilities of the company would be increased without a corresponding increase in the assets. The proposed new capital is not required by the company, and is merely being created to be presented to Mr Maitland, while what is really accrued dividend on the capital already existing is to be made over in part to this favoured director by the last clause of the resolution for an altogether inadequate consideration.… If additional capital were required, the £1000 of unissued debenture stock is available and would be at once taken up. The proposal that the respondent Mr Maitland should acquire the new stock in preference to all others, and at the inadequate price mentioned, is grossly unfair and unjust. The proposed price does not represent anything like the true value of the shares, and if they were offered to the public or brought their fair value in any way, a much larger sum could be got for them.”

The respondents denied that the resolution in question was illegal or ultra vires of the shareholders, and averred that Mr Mait land had been the main cause of the company's success. “He has devoted a very large portion of his time to the business of the company, and has been from the first the real medium of communication between the company on the one hand, and those from whom it bought and to whom it sold on the other hand. His services have been of the greatest value to the company, and the shareholders have long recognised this fact.… The resolution complained of was infra vires of the shareholders, and they were the best judges of the expediency of passing it. It is believed that they passed it not only in recognition of the valuable and gratuitous services which Mr Maitland had rendered to the company, but also in the belief that it would be for the benefit of the company in the future that he should have a larger stake in it, and have a greater inducement for rendering further services to it. Further, apart from the resolution, the directors had and have right to allot unallotted shares either to Mr Maitland or to any other person. They do not intend to allot the shares for anything short of their full face value, and they intend to demand in addition a premium which was fairly fixed as regards Mr Maitland's proposed allotment at £1 per share.”

The complainer pleaded—“(1) The transactions referred to not being reasonably incidental to or within the reasonable scope of the carrying on of the business of the company, but being in the knowledge of the parties at the time prejudicial and injurious to the company as condescended on, are irregular and illegal, and the complainer is entitled to interdict as craved. (2) The said resolution being ultra vires of the shareholders and directors, is invalid and inept. (3) The resolution referred to being illegal and ultra vires of the shareholders, the complainer is entitled to interdict as craved.”

The respondents pleaded—“(2) The note should be refused, in respect (1st) the resolution complained of was lawful, and was authorised by the memorandum and articles of association, and intra vires in all respects of the shareholders; (2d) the directors had power to allot the shares in virtue of their common law and statutory powers.”

A proof having been allowed, the following evidence, inter alia, was led for the complainer J. S. Gowans, C.A.… “From my examination of the books, I did not see the slightest indication that the company during the last four years was in need of capital. [Witness then cited instances of distillery companies paying 10 or 12 per cent., the shares of which stood at a premium of from 80 to 160 per cent.] … The effect of Mr Maitland paying £10, 11s. per share, and getting 200 shares, is to reduce the value of each shareholder's holding. Taking the footing of the company's own balance-sheet as at October 1895, the value of the shares was £13, 12s. 3d., and the effect of the introduction of 200 new shares would be to reduce the value of each share to £13, 6s. 5d. If the shares were taken at what I think is their true value, over £17, on that basis Mr Maitland

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would get a present of about £1400.”

John Sullivan, secretary of the Edinburgh Stock Exchange—… “I have noted the steady progress of the company and the dividends that they made on the profit earned from year to year. Assuming these details to be correct, I should say the £10 share would be worth £15. I arrive at that in this way; at £15 the price of £100 of stock would be £150, and that would give a yield of £6, 13s. 4d. to an investor, which I think a very high yield for stock.”

For the respondents, Maitland the respondent deponed—“With regard to the proposal which is objected to in this action, in carrying on negotiations with a firm of prospective agents, when I came to a final conclusion with them, they wanted to know whether they could introduce me as one having a substantial stake in the company, and whether in dealing with me there would be a prospect of continuity in the transactions, because it is very inconvenient to take different parties into trade relations. I said, without going into particulars, that they might take it that that was the position generally, and when I went to London in my journey immediately after, I laid this view before the shareholders, and said I thought it was only fair and reasonable even in other respects that I should have a more substantial stake, owing to the increasing time the work was taking, and the responsibility it was laying upon me. What they looked at was the advantages the additional holding would give me with the trade. It may be said that one does not carry round on a card what one's holding is, but it becomes well known in the trade whether one is an ordinary shareholder or holds a very substantial stake in the company, and in the latter case it is a help, I maintain, to one in calling upon customers.”

The respondent Edward James Taylor, examined on commission, deponed—“Now, in your opinion from your knowledge of the business, to whom do you ascribe the success of the company?—(A) Mr Maitland, undoubtedly—the sales of the company, undoubtedly. (Q) You voted in favour of this resolution?—(A) Yes. (Q) What were the circumstances in your mind which induced you to vote in favour of this resolution?—(A) Considering the services that Mr Maitland had rendered to the company for a very considerable period, and that at not any very great remuneration to himself, I thought it was just and fair that he should have these shares allotted to him. That was one reason. (Q) That was from the point of view of Mr Maitland himself. Then from the point of view of the company how did you regard it?—(A) I considered that it was due from us shareholders to remunerate Mr Maitland for the work that he had done; that the proposal as made was to the best interests of the company, that a larger holding would be a the on Mr Maitland to the company, and that he would of necessity be forced to give his best powers to it because his commissions would fall off if his sales fell off, and so would the profits of the business decrease, and then he would not get so much in dividend. That appeared to me on those grounds the best thing that could possibly be done as regards the company, and so far from being prejudicial to it, we—I speaking for myself and the shareholders—thought it was a very good arrangement for ourselves. (Q) As a practical business man consulting upon the interests and those interests which were identical with the interests of the company?—(A) Yes, and that a larger holding would give Mr Maitland a larger influence in dealing with principals in the trade. (Q) As to that last point, do you know, as a practical man in the trade, that a principal has far more influence than a mere traveller?—(A) Certainly.”…

On 22nd February 1896 the Lord Ordinary ( Kyllachy) pronounced an interlocutor refusing the prayer of the note.

Opinion—… “It is, I think, quite clear that the transaction was not ultra vires. I do not know that it would have been intra vires of the directors. But it was certainly intra vires of the company. It is within a company's power to allot, as the shareholders here did, unpaid shares forming part of the authorised capital. It is also within its power to fix the premium, if any, at which such shares shall be issued. It is also within its power to select the allottees; and I know of no disability which attaches to a company making allotments, if it so resolve, to existing shareholders, or to its own directors or other officials. There is of course here no question of issuing shares at a discount, or without full payment in cash. In other words, there is no suggestion that the transaction in any way diminished the capital of the company. Neither is there any room for challenge on the ground that the act of the company was intra vires, but irregular. There is no dispute that the meetings were duly called and duly held, and that everything done was done formally and regularly.

The complainer therefore requires to make out a case of what I have called abuse of power; and I do not doubt that such cases may occur, and that when they do the Court may interfere. It is always, however, a delicate matter to interfere as between a majority and minority of shareholders of a going company, with respect to matters connected with the conduct of the company's business, and as to which the shareholders have come to a resolution. Prima facie, the shareholders are the best judges of their own affairs, and it is only where it appears that some sinister motive has operated, or that interests other than the interest of the company have plainly prevailed, that the Court will entertain a complaint. The test always is.—Is the thing complained of a thing done in the interest of the company?—or, to put it perhaps more accurately, is the action of the majority irreconcilable with their having proceeded upon any reasonable view of the company's interest?

Now, in this point of view, it requires only a glance at the evidence to see that

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the complainer's case fails. The allotment to Mr Maitland of 200 additional shares was, I see no reason to doubt, a proceeding which was in the interests of the company. I do not doubt that the increase of capital—of which a good deal was said—was a secondary consideration. I have no doubt, also, that the shares were worth a premium a good deal larger than £1 per share. It seemed to me, also, that the suggestion of greater weight being desired for canvassing customers was a little fanciful. But Mr Maitland had made the company a success, and what is more important, he was in the course of making it a greater success;—and I cannot imagine anything more natural and reasonable in such circumstances than that the shareholders, having regard to their own interests, should desire to conciliate him—to attach him to the concern—and to do so by giving him an additional interest, and therefore an additional motive for active exertion. In any case, the shareholders (the complainer alone dissenting) were of that opinion, and I find no trace in the evidence of any motive which could have influenced them other than their own interest. The case may involve an element of gratuity—perhaps it does. But the gratuity was, I think, largely inspired by a sense of favours to come. In that respect the case differs widely from that of Clouston v. Edinburgh & Glasgow Railway Company, 4 Macph. 207, and other cases of that description. Where a company is being wound up, gratuities to servants and officials may very well be illegal. But a going concern is in a different position.

On the whole, I see no reason for holding that the shareholders exceeded their powers, or that the majority abused those powers in this transaction. I shall therefore refuse the note of suspension.”

The complainer reclaimed, and argued—The resolution was ultra vires of the shareholders; for these reasons—(1) The new capital was not required, and there was not a word in the minute about its being a remuneration to Mr Maitland. (2) If new capital was to be issued, the general rule was that it must be issued to each shareholder in proportion to his existing interest in the business— Reis, Freeman's American Reports, vol. 72, p. 726, Hudson, 16 Bevan 485; Hoole v. Great Western Railway Company, 3 Oh. 362; Griffith v. Paget, 5 Ch D 894. (3) It was very doubtful if share holders were entitled to remunerate their servants or officers for past services— Clouston v. Edinburgh & Glasgow Railway Company, Dec. 14, 1865, 4 Macph. 207; but they certainly were not entitled to remunerate them by a present of new shares issued at a price far below their real value. (4) At all events the shareholders had no power to give Maitland a dividend as from October 1894.

Argued for the respondents—There was no suggestion of corruption here. Accordingly if what was done was intra vires in law, the Court would not review it, for it would really resolve itself into a matter of discretion, and of internal management. There was no authority for the complainer's proposition as to the allotment of new shares and there was nothing to countenance it in the memorandum of association. The company had not created new capital; it had merely issued part of the capital already authorised. What was to prevent the company selling its new shares in the market at a premium, and making a present of the proceeds to its servants? As regards the power to remunerate, Clouston, ut sup., had no bearing on the present case. But that right was fully established in the case of Henderson v. Bank of Australasia, 40 Ch. D. 170; see also Newman [1895], 1 Ch. 674. As regards the dividend on the new shares, that too was essentially a matter for the company to decide.

At advising—