Scottish Court of Session Decisions

(Sequel to the case reported ante, ut supra.)

The Arizona Copper Company, Limited, was originally incorporated on 11th August 1882

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for the purpose of acquiring and working certain copper mines in Arizona, U.S.A.

By the 5th article of the memorandum of association it was provided—“(V.) The nominal capital of the company is divided into 160,000 preferred shares of £5 each, upon which a payment of £5 on each share shall be made, and 75,000 deferred shares of the nominal value of £1 each, to be issued as provided by the articles of association, but upon which no payment shall be made; with power to increase the capital as provided by the articles of association.”

By the articles of association it was provided, inter alia—“20. All or any of the rights and privileges attached to the preferred or any other particular class of share may be modified by agreement between the company and any person purporting to contract on behalf of that class, provided such agreement is confirmed by an extraordinary resolution passed and confirmed respectively at two separate general meetings of the holders of shares of that class, and all the provisions hereinafter contained as to general meetings shall, mutatis mutandis, apply to every such meeting, but so that the quorum thereof shall be for members holding or representing by proxy one-tenth of the nominal amount of the issued shares of the class. 38. The directors may at any time accept the surrender of any share or shares from any shareholder on such terms as they shall think fit, and thereafter dispose thereof for behoof of the company.”

Of the preferred shares upwards of 150,000 were taken up by the public. The deferred shares were issued to the vendors as fully paid, an agreement to that effect being duly filed in the registrar's office, and were represented by share-warrants payable to bearer. In 1883 5050 of them were sold by the vendors to the public.

In 1883 claims were made by the company against the original Scottish directors and against Mr Underwood and Mr Green, two American gentlemen, in connection with the formation and management of the company and its title to the property. These claims were compromised by two agreements executed in May and June 1884, to each of which the company was a party.

The first of these was dated May 16, 1884, and was between the company and Mr Underwood. The company in respect of certain covenants undertook to relieve Mr Underwood of liability in respect of certain claims, and Mr Underwood undertook, inter alia—“( Eleventh) That the second party hereby agrees to transfer and deliver to such person as may be named by the first party, or by Shearman and Sterling as their agents, all the deferred shares of stock which he and the said W. R. Green now own in the said first party, the same amounting to not less than forty—six thousand (46,600) shares, and agrees to procure the transfer and delivery to the person so named, not only of all those shares of deferred stock which he and the said W. R. Green now hold, but also those which either of them has sold to other parties; and that he shall and will execute or procure to be executed and delivered a formal transfer of all such shares whenever called upon to do so; or in case the second party is unable to procure such transfer and delivery of the shares sold as aforesaid to other parties, he agrees to indemnify the first party against all claims and liability thereon, and against all claims and demands for dividends thereon to the extent of three thousand (£3000) pounds sterling.” Mr Underwood was unable to reacquire all the shares which had been issued to the public.

The other agreement was dated 28th, 29th, and 31st May; and 5th June 1884. The parties to it were (1) the company; (2) four of the Scotch vendors; (3) the American vendors; and (4) a fifth Scotch vendor whose position was not quite the same as that of the others, contained, inter alia, the following provisions:—“Whereas the directors of the first party have intimated certain claims against the second, third, and fourth parties in connection with the formation and management of the said company and the title to their real estate in America, which claims are disputed and denied by the said second, third, and fourth parties; … and whereas it has been represented to the second, third, and fourth parties that it is necessary in order to aid in extricating the company from pressing embarrassments that a sum of £30,000 in cash should be forthwith made available to meet such claims; and whereas, without admitting any liability therefor, and in consideration of the transfers hereinafter referred to, and also in consideration of the discharges and others hereinafter mentioned—(1) The third party agrees to provide £7000 by abandoning the claims mentioned in article 10 hereof; and (2) the second parties agree to pay or provide £21,000; and whereas the fourth party, while also denying all liability in respect of said claims, but being desirous to give assistance in extricating said embarrassments and to enable these presents to be the more effectually carried out has consented to provide £2000 on the conditions mentioned in article 11 hereof—and with the view of compounding, compromising, and settling all disputes and avoiding litigations the parties hereto have agreed to enter into these presents: Now this agreement witnesseth, and it is hereby agreed and declared that the said claims, disputes, and threatened litigations are hereby compounded, compromised, and settled between the parties on the following terms and conditions, viz.—… ( Seventh) The second parties agree to transfer in favour of the first party or their nominees, for behoof of the preferred shareholders, all the deferred shares at present held by them in the Arizona Copper Company Limited, as follows:—Thomas Jarron Gordon, 5500 shares; James Duncan Smith, 5500 shares; William Lowson, 5500 shares; Mitchell Thomson, 4950 shares.… ( Eleventh) The said fourth party, in order to enable the said arrangement to be carried out hereby agrees to transfer to the first

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party or their nominees, for behoof of the preferred shareholders, 5500 deferred shares of the said Arizona Copper Company Limited, presently held by him. He further hereby stipulates that the first party shall procure, and the first party hereby oblige themselves to procure, without any further payment by the fourth party, the transfer from the fourth party's name of 3000 shares of the Arizona Trust and Mortgage Company, Limited, for which application had been made in name of the said fourth party, and shall free and relieve him of all calls, demands, and payments of every description for or in respect of said shares. ( Twelfth) It is hereby provided that in the event of an agreement entered into between the said Frank Livingston Underwood and Shearman and Sterling, counsellors-at-law, New York, of date on or about 16th May 1884, being found to contain a stipulation to the effect that the said Frank Livingston Underwood shall transfer or surrender to the first party or their nominee all deferred shares which were at any time allotted to or held by him and Willard Reed Green, the said provision shall be and is hereby modified to the effect of making it only obligatory on the said Frank Livingston Underwood to transfer or surrender all deferred shares held by him at the date of these presents, being not fewer than 21,500, and to transfer or surrender all deferred shares presently held by the said William Reed Green, and any deferred shares which the said William Reed Green has sold or assigned under a penalty for the non-delivery of those sold or assigned shares at the rate of £750 for every 500 of said shares, but declaring that the penalty shall in no event exceed £1500.”…

The total number of shares thus transferred was 26,950. On 5th August 1884 the new Arizona Copper Company was incorporated. By the memorandum of association it was stated—“III. The objects for which the company is established are—1. To adopt, execute, and carry out an agreement proposed to be entered into immediately after the incorporation of the company between the Arizona Copper Company, Limited (therein called the Old Company) and the liquidators thereof, of the first part, and the company (that is this company, therein called the New Company) of the second part, relating to the transference of the business, property, and undertaking of the Old Company to this company.… V. The capital of the company is £875,000 divided into 160,000 preferred shares of £5 each, and 75,000 deferred shares of £1 each.”

By the articles of association it was provided, inter alia—“8. All or any of the rights and privileges attached to the preferred or any other particular class of share may be modified by agreement between the company and any person purporting to contract on behalf of that class, provided such agreement is confirmed by an extraordinary resolution passed and confirmed respectively at two separate general meetings of the holders of shares of that class, and all the provisions hereinafter contained as to general meetings shall, mutatis mutandis, apply to every such meeting, but so that the quorum thereof shall be for members holding or representing by proxy one-tenth of the nominal amount of the issued shares of the class.”

On 6th August 1884 an agreement was entered into between the old and new companies, containing the following provisions:—“ First. The old company and the liquidators thereof shall sell, and the new company shall purchase, the business, property, and undertaking of the old company, including every asset, heritable or moveable, real or personal, of whatever nature and wheresoever situated, belonging to or vested in the old company or the liquidators thereof, or which the old company has power to acquire, or which is held in trust for the old company, or to which it has right in law or equity, and also including all calls due on shares, with the full benefit of all contracts and agreements, but subject always to all mortgages, charges, liens, and incumbrances affecting the said property and assets or any part thereof. Second. Without prejudice to the preceding article, it is hereby provided that the new company shall be entitled to the full benefit of all rights conferred on the old company by the following agreements, viz.—[the two quoted above]—Declaring that the rights of the preferred shareholders of the new company to certain of the deferred shares thereof shall be the same as the rights of the preferred shareholders of the old company are under the agreement first above mentioned to certain of the deferred shares thereof. Third. The new company shall pay and discharge all the debts, liabilities, and obligations of the old company, and shall adopt, perform, and fulfil all contracts and engagements undertaken by it, including those in the agreements mentioned in the immediately preceding article (in so far as not already fulfilled), and shall free and relieve the old company and the liquidators thereof of and from the said debts, liabilities, obligations, contracts, and engagements, and of and from all actions, proceedings, expenses, damages, claims, and demands in respect thereof. Fourth. The new company shall pay and free and relieve the old company and the liquidators and contributories thereof of and from the whole expenses of and incident to the winding-up of the old company and carrying the said sale into effect. Fifth. The shareholders of the old company shall be entitled to shares of the new company as follows, viz.—( first) each holder of preferred shares of the old company shall, except as mentioned in article seventh hereof, be entitled in respect of each such share held by him, to require the new company to allot to him, or to his nominee or nominees, one £5 preferred share of the new company, with the sum of £5 credited as having been paid thereon; and ( second) each bearer of a warrant for deferred shares of the old company shall be entitled in respect thereof to require the new company to issue to him

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a warrant of the new company for the same number of deferred shares of that company as is embraced in the warrant of the old company held by him, with the sum of £1 credited as having been paid on such deferred shares of the new company: Declaring that for the purposes of this clause each person to whom the old company shall have contracted to allot shares shall be reckoned a shareholder thereof in the same way as if the shares had already been issued to him; and also declaring that each shareholder of the old company who shall take the benefits by this clause offered to him shall accept the same in full satisfaction and discharge of all claims and demands in respect of his interest as a shareholder in the property and assets of the old company.”

On 12th May 1898 a scheme was proposed by the directors for reconstructing the share capital of the company. The proposals were contained in a statement of that date which was issued to the shareholders, and were submitted to a meeting of the company on 20th May 1898.

The statement contained the following proposals, inter alia:—“2 and 3 Preferred and Deferred Shares.—The directors consider that it would be advisable to get rid of the deferred share issue. While they are of opinion that these deferred shares possess little or no value, they consider that it would be advantageous to make such arrangements with the shareholders thereof as would merge these shares, at par value, with the preferred share issue, which, after providing for the outstanding deferred shares, may be taken at £640,000. The company controls 69,950 of the deferred shares, and the directors have already arranged with the holders of 3505 of the 5050 deferred shares in the hands of the public to fall in with the above proposal, so that 73,455 out of the 75,000 shares may be taken as assenting.”

On 19th and 20th July 1898 an agreement was entered into between the company and three persons purporting to contract on behalf of three classes of shareholders, viz., the holders of A preference shares, of preferred shares, and of deferred shares. The agreement contained the following terms:—. … “And whereas it being now intended that the rights and privileges of the various classes of shares should be modified as hereinafter set forth, this agreement is entered into in order to set out these modifications, with a view to the same being confirmed in manner before recited. Therefore the parties have agreed, and do hereby agree, as follows:—( First) The company and the second, third, and fourth parties contracting as aforesaid agree that the rights and privileges attached to the ‘A’ preference shares, the preferred shares, and the deferred shares of the company shall be modified to the effect and intent involved in the following resolutions, which are to be submitted in order to the same being passed and confirmed by the company in general meeting as special resolutions—(1) That each preferred share of the company of £4 shall be divided into four shares of £1 each. That two of these shares shall be called preference shares, and be entitled to the rights and privileges hereinafter declared to appertain to preference shares, and that the remaining two of these shares shall be called ordinary shares, and shall be entitled to the rights and privileges hereinafter declared to appertain to ordinary shares. (2) That each of the 75,000 deferred shares of the company of £1 shall be divided into two shares of 10s. each. That one of these shares shall be called a deferred preference share, and that the other of these shares shall be called a deferred ordinary share. (3) That the 75,000 deferred preference shares of 10s. each arising from the sub-division of deferred shares, shall be consolidated and divided into 37,500 shares of £1 each, and that the shares so arising shall be called preference shares, and be entitled to the rights and privileges hereinafter declared to appertain to preference shares; and that the 75,000 deferred ordinary shares of 10s. each, arising from the sub-division of deferred shares, shall be consolidated and divided into 37,500 shares of £1 each, and that the shares so arising shall be called ordinary shares, and be entitled to the rights and privileges hereinafter declared to appertain to ordinary shares.. … (7) That upon the sub-division of shares provided for in the first and second, and the consolidation and division provided for in the third of the foregoing resolutions taking effect, the holders of preferred shares and deferred shares shall cease to have any rights as such, other than the rights which they will have as the holders of the shares arising therefrom, and that without prejudice to such general provision, they shall have no right to or any interest in or in respect of any deferred shares previously held by the company or any other party whatsoever either for behoof of the company or of the preferred shareholders thereof, or in respect of any shares or stock arising therefrom in accordance with the preceding resolutions, and the board are hereby authorised and empowered to do all such deeds and execute all such documents as may be necessary to effectually surrender, extinguish, and cancel the said deferred shares held as aforesaid, or the shares or stock arising therefrom as aforesaid.”…

This agreement was afterwards confirmed by resolutions passed at separate meetings of each class of the shareholders, and at extraordinary general meetings of the company.

Mr Gill, S.S.C., a holder of preferred shares and of 400 deferred shares, and Mr Miln, a holder of 70 deferred shares, protested against the proposed scheme, and thereafter raised an action against the company and against the directors. The summons contained a conclusion ( First) for the reduction of the agreement of 19th and 20th July 1898, of the resolutions following thereon, and the following, inter alia, conclusions:—“( Third) it ought and should be found and declared, by decree foresaid, that it is illegal and ultra vires of the company

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and of any meeting of deferred shareholders to modify the rights and privileges attached to the deferred shares as proposed in the foresaid agreement, or to do anything having the effect of extinguishing or abrogating the deferred shares of the said company, and merging or commuting them into preferred shares or into other shares arising from the sub-division of preferred shares, with only the rights and privileges attached to preferred shares or the shares arising therefrom as aforesaid, without the consent of each holder of a deferred share; and ( Fourth) the defenders ought and should be interdicted, prohibited, and discharged, by decree foresaid, from so extinguishing, abrogating, merging, or commuting the deferred shares of the said company without the consent of each holder of a deferred share, and of each person having right to be a holder of a deferred share; and ( Fifth) it ought and should be found and declared, by decree foresaid, that the 26,950 deferred shares fully paid of the Arizona Copper Company, Limited, incorporated on 11th August 1882, which formerly belonged to the second and fourth parties to the agreement immediately hereinafter mentioned, and were transferred by them to that company for behoof of the preferred shareholders of the said company, in implement so far and in terms of an agreement between and among the said last-mentioned company and William Lowson of Balthayock and others, dated 28th, 29th, and 31st May and 5th June, in the year 1884, were held by the said last-mentioned company in trust for behoof of the preferred shareholders thereof, and now belong beneficially to the holders of the preferred shares of the present Arizona Copper Company, Limited.”…

The case so far as regards the remaining conclusions is reported ante ut supra.

The pursuers pleaded—“(1) The foresaid agreement of 19th and 20th July 1898 and relative resolutions being ultra vires of the company, as above set forth, should be set aside in terms of the reductive conclusions of the summons. (4) The foresaid scheme as embodied in the foresaid agreement and resolutions being illegal and improper, and the directors having by concealment and misrepresentation procured the adoption of it, all as above set forth, the directors ought to bear personally the whole expenses caused to the company in connection with the said scheme, and the pursuers are entitled to decree in terms of the second conclusion. (5) It being illegal and ultra vires of the company to extinguish, abrogate, merge, and commute the deferred shares, the pursuers are entitled to declarator and interdict, in terms of the third and fourth conclusions of the summons. (6) The 26,950 fully paid deferred shares transferred to the old company for behoof of the preferred shareholders having been held in trust by the old company for behoof of the preferred shareholders, and the preferred shareholders of the present company being beneficially entitled thereto, the pursuers are entitled to decree in terms of the fifth conclusion.”

The defenders, the company, pleaded—“(4) The proceedings complained of having been orderly carried out in terms of the Companies Acts and the constitution of the company, and having been intra vires of the company, the defenders should be assoilzied. (6) In respect that the 26,950 deferred shares are and can only be held for behoof of the company, and not merely of the preferred shareholders thereof, the pursuers are not entitled to decree in terms of the fifth conclusion of the summons.”

The Lord Ordinary ( Pearson) on 19th January 1900 pronounced the following interlocutor—“Finds and declares, under the fifth conclusion of the summons, that the 26,950 deferred shares, fully paid, of the Arizona Copper Company, Limited, incorporated on 11th August 1882, which formerly belonged to the second and fourth parties to the agreement of 28th, 29th, and 31st May and 5th June 1884, and were transferred by them to that company for behoof of the preferred shareholders thereof, were held by the said company in trust for behoof of the preferred shareholders thereof, and now belong beneficially to the holders of the preferred shares of the present Arizona Copper Company, Limited: Finds that the seventh article of the agreement and relative resolutions sought to be reduced is contrary to the rights of the preferred shareholders as above declared, and is ultra vires and not warranted by the terms of the eighth article of the articles of association of the company: Reduces, decerns, and declares in terms of the reductive conclusions of the summons: Quoad ultra dismisses the action so far as the conclusions are not previously disposed of, and decerns: Finds the defenders entitled to expenses from the date of closing the record to the date of the reclaiming-note of 6th April 1899: Quoad ultra finds the pursuers entitled to expenses so far as not already disposed of,” &c.

Opinion.—“For the circumstances in which this action was brought I may be allowed to refer to the first seven paragraphs of my previous opinion.

Three of the conclusions of the summons have now been disposed of, namely, the second and sixth, which sought to impose liability upon the directors, and the seventh, which raised the question how far the dividend on the preference shares was a cumulative dividend.

There remain the first, third, fourth, and fifth conclusions. Of these the three former conclude for reduction of the reconstruction scheme of July and August 1898 on general grounds, and for a relative declarator and interdict on a narrower and more special ground. The fifth conclusion seeks for declarator that a parcel of deferred shares of the original company, 26,950 in number, were held by that company in trust for behoof of the preferred shareholders thereof, and that they now belong beneficially to the holders of the preferred shares of the present company, and fall to be distributed among the preferred shareholders rateably, or as nearly as may be in proportion to their respective holdings of

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preferred shares. In the view I take of the case it will be convenient to consider in the first instance the circumstances which give rise to this fifth conclusion.

The original company, which was incorporated in 1882, had a nominal capital of £875,000, divided into 160,000 preferred shares of £5 each, and £75,000 deferred shares of £1 each. The latter were vendor's shares. They were issued to the vendors as fully paid, the contract being duly filed in the Registrar's office, and they stand and have all along stood upon share warrants ‘to bearer.’ It is averred, and not disputed, that in 1883 the vendors had sold 5050 of these deferred shares to the public. Of the preferred shares upwards of 150,000 were taken up.

In this state of matters claims of large amount were made by the company against its original Scottish directors, and also against two American gentlemen, Mr Underwood and Mr Green, in connection with the formation and management of the company and its title to the property. These claims, which had to some extent issued in litigation, were compromised in May and June 1884 by two agreements, to each of which the company was a party.

The first in date is an agreement between the company and Mr Underwood, which was executed in New York on 16th May. It contains a large number of covenants of a most onerous character. Inter alia, Mr Underwood agreed by article 11 to transfer and deliver to such person as might be named by the company or their agents all the deferred shares which he and Green then owned in the company amounting to not less than 46,000 shares, and also to procure the transfer and delivery to the person so named of all deferred shares which either of them had sold to other parties; and in case he should he unable to procure such transfer and delivery of the shares which had been sold, he agreed to indemnify the company against all claims and liability thereon, and against all claims and demands for dividends thereon, to the extent of £3000. This was to some extent modified by the 12th article of the next agreement. But it seemed to be agreed at the discussion before me that this resulted in 43,000 deferred or vendors' shares being given up to the company on the part of Underwood and Green; and it is common ground that these shares are not now in issue and are not affected by any trust.

The second agreement deals (among a great number of other things) with the 26,950 deferred or vendors' shares which are the subject of the fifth conclusion of the summons. It is dated in May and June 1884; and the parties to it are—(1) the company; (2) four of the Scottish vendors; (3) the American vendors Underwood and Green; (4) a fifth Scottish vendor whose position was not quite the same as that of the others. It narrates that it had been represented to the second, third, and fourth parties as necessary that a sum of £30,000 in cash should be forthwith made available ‘in order to aid in extricating the company from pressing embarrassments’; that those parties had agreed to provide this sum, the Scottish vendors providing £23,000 of it; and that the claims, disputes, and threatened litigations between the parties were thereby compounded, compromised, and settled. The stipulations of the agreement are very various, and range over a wide field. But among them there occurs this stipulation in articles 7 and 11, viz., that the second and fourth parties agree to transfer ‘in favour of the first party ( i.e. the company) or their nominees, for behoof of the preferred shareholders,’ all the deferred shares then held by them in the company, amounting in all to 26,950 deferred shares.

As I have said, these vendors' shares have never been represented by certificates entering the register of members. They stood then, as they have all along stood, upon share-warrants to bearer. And as the result of this stipulation the warrants representing these 26,950 shares were simply handed over by the second and fourth parties to the company, in whose custody they have remained ever since. They have indeed remained dormant in this sense, that as the position of the company has not permitted of any dividend being paid on the deferred shares, nobody seems to have paid much attention to them until recently. But as a period of prosperity has now opened, it becomes important to determine their legal position.

Now, as I understand it, one of the pursuers (Mr Gill) was at the date of the agreement of 1884, and is still, a holder of preferred shares in the company; and his contention is that the expression ‘for behoof of the preferred shareholders’ must be read in its plain and natural meaning, and imports that the 26,950 deferred shares were put in trust for the preferred shareholders, himself among the number. It is true that since then the original company has come to an end, and a new one—the existing company, incorporated in 1884—has taken its place. But an agreement of date of 6th August 1884 was entered into between the old and the new company by which it was provided (article 2)—(1) that the new company should be entitled to the full benefits of all rights conferred on the old company by the two agreements I have narrated, and (2) ‘that the rights of the preferred shareholders of the new company to certain of the deferred shares thereof shall be the same as the rights of the preferred shareholders of the old company are under the agreement of May and June 1884 to certain of the deferred shares thereof.’ I take it therefore—and I do not think it is for the defenders to dispute it—that the rights of the original preferred shareholders to these deferred shares, whatever they were, were carried over into the existing company.

The reply made by the defenders on this head is, that the expression ‘for behoof of the preferred shareholders’ is open to construction, and that in the circumstances it must be read as meaning the company as a whole. Their contention is that the parties intended these 26,950 vendors' shares

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to be given up or surrendered to the company just as the 43,000 American vendors' shares were surrendered and are agreed not to be now in issue; and that in fact the scheme was to wipe out the deferred shares and to leave the company with only the preferred shareholding. It is pointed out that even as regards the 5050 vendors' shares which had found their way into the hands of the public, the New York agreement stipulated that Mr Underwood should procure these to be also transferred or delivered to the company, and failing his doing so he undertook to guarantee the company against claims in respect of these shares or their dividends to the amount of £3000.

One can figure circumstances in which the stipulation in favour of the preferred shareholders would have been open to construction, and might have been construed as equivalent to a stipulation in favour of the company. I thought that such circumstances might possibly exist in the present case, and that these being proved or admitted might compel the inference that the contracting parties so intended; but reading the expression in the light of the documents and of the admitted facts I do not feel at liberty to draw any such inference. In the first place, the contrast in the language used as to the 43,000 and the 26,950 shares is most marked. The one prima facie imports a trust; the other does not. Nor is this a mere chance variance in language between a New York agreement and an Edinburgh agreement. For the latter contains within itself, in the very next article to the words now under construction, a reference to and a modification of the former agreement, which shows that the distinction must have been present to the minds of the contracting parties.

Then it is said that on the pursuers' construction the transaction was ultra vires, and that the defenders' contention should be adopted on the principle ‘ ut res magis valeat quam pereat.’ A company cannot hold its own shares so as to become a member of itself, and cannot traffic in its shares, and further, it cannot so use its funds as to procure a benefit for one class of its shareholders as against the remainder. All these objections, it is said, attach to the construction contended for by the pursuers. In my opinion this is not so. I think the fallacy underlying the defenders' position is this, that they assume that the words, ‘for behoof of the preferred shareholders,’ express something stipulated for by the company. Now, they occur in an agreement of great complexity, entered into by parties whose precise position towards one another in all the matters dealt with by the agreement has not been cleared up. In such a case one can only say that all the stipulations are part of a mutual contract, and enter into the consideration. Some of the stipulations are plainly on the one side, some as plainly on the other. Thus the discharge of the company's pecuniary claims against the other contracting parties is clearly a stipulation by those parties and against the company. So it may be said that the agreement to transfer or deliver the deferred shares to the company or their nominees is a stipulation against the parties who undertake to do it. But I see no warrant for saying that the qualifying words ‘for behoof of the preferred shareholders’ are part of the company's stipulation, as against the other parties to the contract. Prima facie, they seem to me more likely, and at all events just as likely, to have been stipulated for by the other contracting parties in order to qualify what might otherwise have been read as an absolute transfer. The words being apt to create a trust, one expects the qualification to be imposed by the truster and not by the trustee. It might have been different if the defenders had been able to show that the other contracting parties had no interest at all in the destination of those shares, or were not in a position to stipulate about it. But although (oddly enough) the particulars as to the amount of preferred shares then held by those parties have not been cleared up, it was admitted that they or some of them held some preferred shares, and the agreement itself shows in its fifth article that two of the contracting parties were to obtain ten thousand more of them as fully paid.

It appears to me that a similar fallacy underlies the defenders' other objections on this head. It will not do to isolate articles 4 and 7 of this complex agreement, and to say that because the claims which were being discharged by the fourth article were due to the company, therefore the deferred shares which were to be delivered under article 7 were practically paid for out of the assets of the company, and that these could not be lawfully devoted to purchasing a benefit for a particular class of shareholders. The whole agreement was a compromise, as it bears to be. The company were stipulating for the best terms they could get from parties who were not admitting but were disputing their claim. And these parties, being interested as they undoubtedly were to some extent in the preferred shares, may quite naturally and lawfully have stipulated with the company that they would only hand over the vendors' shares on certain conditions as to the persons who were to have an interest in them.

No doubt such a trust as the pursuer contends for might be difficult, and may be difficult to work out, but it is not unworkable, and the fact that the vendors' shares are represented by share warrants to bearer relieves it of some of the difficulties which might otherwise have attended it.

The particular mode of working it out proposed in the fifth conclusion is that these deferred shares fall to be distributed among the preferred shareholders rateably, or as nearly as may be in proportion to their respective holdings of preferred shares. Now, it may turn out that this proposal as stated is impossible, for it may on the statement of it lead to the splitting of shares into fractions, and the pursuer has not shown that it would not. The conclusion

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contains no alternative, as that the shares should be realised and the price divided, or that they should be held by the company, or (if there should be any difficulty in that) by the company's nominee. Accordingly, I think this latter part of the fifth conclusion must be dismissed.

I have been considering the fifth conclusion apart from the others. It remains to consider the reductive conclusion, and the effect upon it of the view I have expressed as to the fifth conclusion.

Now, if that view is right, I do not see how the seventh article of the agreement and relative resolutions can be supported. That article distinctly provides (among other things) that the preferred shareholders ‘shall have no right to or any interest in or in respect of any deferred shares previously held by the company or any other party whatsoever’ for behoof of the preferred shareholders thereof. And it proceeds to empower the board to do all such deeds and execute all such documents as may be necessary to effectually surrender, extinguish, and cancel the said deferred shares held as aforesaid or the shares or stock arising therefrom. It is true that this latter clause does not operate of itself to cancel the shares, and that the meaning may be, and I think is, to empower the board to take all necessary steps to procure this to be done. But the preceding words which I have quoted amount to a stipulation contrary to the rights of parties, and the question is, whether it can be justified under article 8 of the articles of association, upon which the agreement bears to proceed. That article provides that ‘all or any of the rights and privileges attached to the preferred or any other particular class of share may be modified’ by such an agreement. In my opinion this does not warrant such an extinction of beneficial rights as is attempted in article 7 of the agreement. The interest of the preferred shareholders in the 26,950 deferred shares does not seem to me to be a ‘right or privilege attached to a particular class of shares,’ and I think that even if it were, the proposal goes far beyond a ‘modification of it.’

I should be disposed to support, if I could, a rearrangement which had the assent of so large a majority of the shareholders, and if it should prove defective in part to support the rest of it. But I do not see how that can be done. I cannot reform the scheme. And as in my view it fails in a material part, I think the whole scheme must go. I therefore pronounce decree of reduction.

As to the third conclusion I have had some difficulty. I cannot affirm it, nor either alternative of it, as it stands, and when that is the case with a declaratory conclusion, it affords a reason rather for dismissing it than for altering it. I therefore propose to include this and the relative conclusion for interdict in the decree of dismissal, and the more readily because I do not think this will in any way hamper the pursuer in working out his remedy. But he is entitled, in my opinion, to a finding as to the scope of article 8 of the articles of association.”

The defenders the Arizona Copper Company reclaimed.

The pursuer Mr Miln at this stage withdrew from the case.

Argued for reclaimers—1. The effect of the transfer of deferred shares under sections 7 and 11 of the Edinburgh agreement of May and June 1884 was practically a surrender of them to the company. The company was entitled to accept such a surrender, because the transaction was equivalent to a payment of money by the company by giving up its claims in return for these shares. The respondents' contention that they were to be held in trust by the company “for behoof of a limited class of shareholders,” was untenable, because such a transaction was illegal, the company not being able to hold shares for such a class, and in return surrender assets belonging to the company as a whole. That was clearly an onerous stipulation in the agreement, which must be for the benefit of the whole company. Accordingly, these shares were transferred to the company by the only legal method provided by its articles of association—that was to say, by surrender, and the effect was that the shares were in the position of unissued shares. The effect of the respondents' contention would be to create an illegal trust, for it was not competent for a company to purchase its own shares and hold them in its own name, and it made no difference to say they were held for behoof of another— Trevor v. Whitworth, 1887, L.R., 12 App. Cas. 409, at p. 424; British and American Trustee and Finance Corporation v. Couper [1894], App. Cas. 399, at p. 414; in re Sovereign Life Assurance Company [1892], 3 Ch. 279, at p. 288. There was no power in the memorandum of association for the company to hold shares in trust, and the trust was one that could not possibly be worked out. Accordingly, when these shares were found in the hands of the company they must necessarily be held as the property of the company. 2. But assuming this was a well-constituted trust, had there been any violation of the trust by the reconstruction scheme? If the right to these deferred shares passed with these preference shares, which was the only method in which such a right could pass to the new preference shareholders, for they could have no personal right apart from their shares, then it could only be a right appropriate to and “attached to” such shares in the sense of article 8 of the articles of association of the new company. That being so, it was a right which in terms of that article the company had power to modify, and this was what had been done. It was said that there was no power to alter the conditions in the memorandum of association, and that it was a special condition that one of the “objects” of the new company was to carry out an agreement by which the new preference shareholders were to have the same rights as the old preference shareholders. That might be so, though the case of Ash bury v. Watson, 1884, L.R., 28 Ch. Div. 56, on which the respondent

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relied, was doubtful law. But it was not a case of varying the conditions, for here the company was carrying out the agreement in its fullest sense, and was merely modifying it to a certain extent. The proposals embodied in the seventh article of the agreement of 1898 did not amount, as the Lord Ordinary had held, to an extinction of the right of the preference shareholders, but only to a modification. The result of them was, that instead of receiving the benefit in the form of shares issued to them, they received it in the form of increased dividend and the greater value of the capital. It was said that the conditions of article 8 of the articles of association had not been fulfilled, because the class entitled to these deferred shares had not been represented at the meetings. But if the company truly were the holders of the shares in trust, and did not choose to attend the meetings in the capacity of trustees, how would that invalidate the resolutions? and, on the other hand, could the company as such attend its own meetings? (3) Even if the seventh resolution in the reconstruction scheme were held bad, the remainder of the scheme would still hold good, being quite distinct and separable from that one part— Cleve v. Financial Corporation, 1873, L.R. 16 Eq. 363.

Argued for respondent—(1.) The meaning of the words of transference was perfectly clear, and they admitted of no other interpretation than that put upon them by the respondent—that was to say that in receiving the share warrants in terms of the agreement the company became a trustee and held these shares for behoof of the preferred shareholders. The reclaimers' argument amounted to this, that if the words were construed according to this, their only natural meaning, then the company made an unlawful bargain, and accordingly all the shares accrued to it. That would be a very anomalous result, and it was not justified by the principles of law and decisions to which the reclaimers appealed. All that was shown by these decisions was that a company could not acquire and hold shares for its own beneficial interest. It had never been decided that a company could not hold shares in trust for somebody else— Cree v. Somervail, 1879, L.R. 4 App. Ca. 648; Buckley on Companies Acts, p. 46 (note on section 22 of Act of 1862). On the contrary, the reclaimers' contention that the transference was merely a surrender to the company was an illegal one— Hope v. International Financial Society 1876, L.R. 4 Ch. Div. 327; General Property Investment Company v. Craig, January 15, 1891, 18 R. 389. Moreover, the reclaimers' method of taking one part of the agreement and construing it separately was not the right one. It must be read as a whole, and so reading it the respondents' interpretation was obviously correct. Even if it were illegal for the company to hold the shares as trustees, the right course to follow was not that the company should appropriate the shares, but that it should hand them over to a third person who could legally hold them. (2) The next question was, how had the rights of the preferred shareholders to these deferred shares been treated by subsequent transactions, and the answer was that by article 7 of the agreement of 1898 they had been extinguished. It was clear from the statement of the directors preceding this agreement that they intended to “get rid of” these deferred shares, and that was precisely what in point of fact had been done, and it was ultra vires of the company to do so. By the agreement of 1884 between the old and the new companies it was expressly stipulated that the preferred shareholders in the new company should have the same rights in the deferred shares as they had in the old company, that was to say, they had a right to 26,500 deferred shares held in trust for them by the company. Then by the memorandum of association of the new company one of the objects of the company was declared to be to carry out this agreement. The only power to which the reclaimers could point as authorising them to deal with these shares as they had was that contained in article 8 of the articles of association. But the right of the preferred shareholders was not one conferred on them by the articles of association, which admittedly might be modified, but by the agreement which the memorandum stated it was one of the objects of the new company to carry out. That object being a condition of the memorandum was by law not susceptible of alteration by the company— Ashbury v. Watson, 1884, L.R. 28 Ch. Div. 56, 1885, L.R. 30 Ch. Div. 376; Buckley on section 12 of Companies Act 1862. But in any view could this be held to be a “modification” of the rights attached to the preferred shareholders in the sense of article 8? Clearly it was not a modification, but an extinction of the right, and it was therefore not authorised by that article— Mercantile Investment, and General Trust Company v. International Company of Mexico [1893], 1 Ch. 484 (note). Nor had the so-called modification been carried out in the manner prescribed by article 8, since the class of shareholders having a right to these shares had not been represented. So in any case this irregularity would vitiate the proceeding. If the respondent was right in his contention with respect to these deferred shares, then the whole of the agreement of 1898 must go. It was all part of one scheme for the readjustment of capital, and one part being bad the whole of it must fall. In re Imperial Bank of China, India, and Japan 1866, L.R., 1 Ch. 339.

At advising—