Scottish Court of Session Decisions

Lord President (Clyde).—This is an application with reference to a proposed issue of new shares to be subsequently converted into preference and ordinary stock, 60 per cent of the former and 40 per cent of the latter. The application is presented under section 120 of the Companies (Consolidation) Act, 1908, and asks our sanction of a scheme of arrangement between the company and its existing preference stockholders giving effect to the conditions of the proposed new issue, provided the scheme is approved at the necessary meetings. The scheme appears to be a perfectly fair one.

The question which has been raised by the reporter is whether, in view of the terms of the company's memorandum and articles of association, the sanction of the Court is required or not. If it is not, the company would be free to act without resort to the Court, and the application would fall to be dismissed as unnecessary. If it is, the sanction which we are asked to give is a condition precedent to the creation of the new shares.

The point arises on the terms of a clause in the memorandum and on a reference at the end of that clause to the terms of the company's articles. By the clause in question the share capital of the company is defined as consisting of £500,000 divided into shares of £10 each, convertible into stock in the proportion of 60 per cent of preference to 40 per cent of ordinary. It is further provided that holders of the preference stock are to be “entitled to a fixed cumulative preferential dividend at the rate of 5 per cent per annum, and shall rank as to dividend and capital in priority to the said ordinary stock and all other stock and shares in the capital for the time being of the company.” The clause concludes with the following words:—“And the said preference stock shall be subject to the other provisions with regard to the same contained in the articles of association.” The italics are, of course, mine.

So far as the leading part of that clause is concerned, it leaves no doubt whatever that the original preference stock (being part of the total original capital of £500,000) had permanently attached to it a priority over all stock and shares in the capital of the company, whether such stock and shares were part of the original capital or part of a subsequent increase of capital. The question, however, is whether the concluding words of the clause (quoted above) are sufficient to overcome or qualify the clear words used in the leading part of the clause. In Article 45 of the articles of association there is power to create new shares “with such preference or priority as regards dividends, or in the distribution of assets, or as to voting or otherwise over other shares, whether then already issued or not” (provided that meetings of the holders of the class of shares or stock thereby affected shall approve); and the suggestion is that this power is one of the other provisions with regard to the original preference stock referred to in the concluding words of Clause V. of the memorandum.

The construction of Clause V. of the memorandum which is implied in that suggestion is not an impossible one, but I do not think it is the natural or sound construction. The words used at the end of Clause V. are by their own terms limited to provisions in the articles of association dealing with the original preference stock, and Article 45 deals, primarily and directly at least, not with that stock, but with the rights which may be attached to new shares forming part, not of the original capital of the company, but of any increased capital. I fully agree that the reference in Article 45 to “shares already issued” and to “shares or stock already issued or created” is not in terms confined to shares or stock forming part of increased capital; on the contrary, it is habile, so far as the words go, to cover the preference shares or stock which formed part of the original capital of the company, and whose rights and priorities are defined in Clause V. of the memorandum. But it is difficult to suppose that the concluding words of that clause were intended to defeat the clear and unambiguous terms of its main provisions by reference to an apparent inconsistency in one of the articles of association dealing with increased capital. In these circumstances I do not think the construction of Clause V. implied in the reporter's suggestion is one which it would be safe to adopt in dealing with the present application. If that be so, the proper course is to entertain it, and, the necessary majorities having been obtained, to grant the sanction which is sought.

Lord Sands.—I should have had great difficulty in forming a confident opinion as to the proper construction of Clause V. if it had not been for the fact that a general principle of construction could be applied. The memorandum of association is regarded as a peculiarly sacred document in the constitution of a company, and the clause in question concerns the interests of preference shareholders, and gives them a clear—and it may be a very valuable—priority; and I think that in dubio an ambiguous provision of this kind must be construed strictly against the idea of freedom or laxity of any kind. I accordingly concur in the conclusion at which your Lordship has arrived.

Lord Blackburn.—I concur in thinking that the construction of the words at the end of Clause V. of the memorandum of association, although they admit of the argument that leave is unnecessary, do not admit of that construction in their ordinary interpretation.