Mills v Mills
60 CLR 150(Judgment by: Dixon J)
Mills
vMills
Judges:
Latham CJ
Rich J
Starke J
Dixon JEvatt J
Legislative References:
Companies Act 1899 (NSW) - s 7(e); s 11
Case References:
-
Judgment date: 17 February 1938
Judgment by:
Dixon J
Under the articles of association of the respondent company, at a poll of its members preference shares carry three votes each and ordinary shares one vote each. It is a family company which under the management of the respondent Neilson Mills has carried on the breeding of stud sheep with much profit to its shareholders. Neilson Mills occupies for life the position of managing director, and the board consists of him, the secretary of the company, who is not a shareholder, and the appellant Ainslie Mills, who is a nephew of Neilson Mills. Ainslie Mills is a young man who is conducting a revolt against his uncle's control of the company's affairs. As matters stood up to 28th August 1936 his uncle was able to withstand his insurgence because his uncle controlled shares carrying votes exceeding the greatest number of votes likely to be cast in favour of any proposal made by Ainslie Mills to which he might object. But a large number of votes so controlled by Neilson Mills belonged to shares held by him as a trustee under three several settlements. The beneficiaries under two of these trusts might be considered to be ranged on Ainslie Mills' side in the family division. As a result of pressure exerted by, or at the instigation of, Ainslie Mills his uncle, on 28th August 1936, consented to retire from these two trusts. If the votes attached to the shares held under the trusts in question were cast in favour of any ordinary resolution proposed by Ainslie Mills and opposed by his uncle Neilson Mills and the members who so far had supported Ainslie Mills voted for the resolution, then it would be passed notwithstanding that Neilson Mills should continue to carry with him the votes of a sister, named Winifred, who so far had voted in accordance with his views. Neilson Mills' prospective retirement from the trusteeship of the two settlements was therefore calculated to inspire his nephew with a hope that his opposition to his uncle might become more formidable. But before he actually resigned, Neilson Mills, at a meeting of directors held on 7th September 1936, proposed a resolution for the distribution among the ordinary shareholders of 86,250 fully paid ordinary shares of £1 as bonus shares paid up out of reserves of undistributed profit. Having regard to the manner in which the holdings of ordinary and of preference shares were respectively distributed among the family, the result of the allotment of 86,250 more ordinary shares among the ordinary shareholders would be to leave Neilson Mills in a position, if, but only if, his sister Winifred voted with him, to pass or defeat any ordinary resolution notwithstanding that the votes attached to the shares belonging to the two trusts should be cast against him. Ainslie Mills voted against the resolution, which, however, was passed by the votes of the other two members of the board.
On 9th September 1936 he issued the writ in the present action, suing on behalf of himself and all other shareholders in the company except his uncle and claiming a declaration that the resolution was invalid and an injunction restraining any action upon it. In fact, however, the resolution had been acted upon on the same day as the issue of the writ and the names of the shareholders had been entered in the share register in respect of the new shares and the certificates sealed and executed.
The company is incorporated in New South Wales, and, in common with all other matters affecting the membership and organization of the corporation, the validity of the allotment and issue of its share capital is governed by the law of that State. The action was, nevertheless, brought in the Supreme Court of Victoria.
The first question which naturally suggests itself is whether the Supreme Court of Victoria can and ought so to interfere in the internal management of a "foreign corporation" and to pass upon the validity of the issue or allotment of part of its share capital. It is not a question, however, in which the parties manifested any interest, and it has not been argued.
A dogmatic assertion has long stood in Westlake that the English court will not interfere in the internal disputes of foreign corporations (Westlake, Private International Law, 7th ed (1925), s 302). So far as English authority goes, the statement is based upon the not very solid foundation of Lord Romilly's decision in Sudlow v Dutch Rhenish Railway Co [25] .. In the United States, however, there is a body of authority which works out a principle. The principle is stated as follows by Professor J H Beale in his Conflict of Laws [1935], s 192, I., p 885, Vol 2: -- "In dealing with the internal affairs of a foreign corporation the courts may have complete jurisdiction over the parties; both the corporation itself and its officers may be subject to the jurisdiction of the courts: the lack of jurisdiction which may be claimed, therefore, is of the somewhat vague thing called jurisdiction of the subject matter. This phrase in this connection indicates that a court which has entire power to issue orders refrains from doing so for some reason connected with the nature of the contention. A court may decline to act from a lack of power to enforce its decrees, or because the court of some other jurisdiction is better entitled to settle the dispute. In the case of a foreign corporation, both these reasons exist' to prevent a regulation of its internal affairs by a foreign court. But these considerations, it will be noticed, apply only in the case of an exercise of discretionary jurisdiction; the granting of an equitable remedy or of a prerogative writ." This means, I think, that where, owing to its authority over the persons concerned, a court of equity may be able by remedies in personam to control the corporators and perhaps the corporation, it will not assume jurisdiction to deal with the constitution or internal management of a foreign corporation except on special grounds which in the particular case exclude the application of the principle of forum non conveniens. But a somewhat wider statement of the doctrine of the American cases has been made in the Supreme Court of the United States in Rogers v Guaranty Trust Co of New York [26] ., where Butler J collects and states the effect of the decided cases. Omitting the citations, what he says is as follows: -- "It has long been settled doctrine that a court -- State or Federal -- sitting in one State will as a general rule decline to interfere with or control by injunction or otherwise the management of the internal affairs of a corporation organized under the laws of another State but will leave controversies as to such matters to the courts of the State of the domicil ... . While the district court" (ie, in the instant case) "had jurisdiction to adjudge the rights of the parties, it does not follow that it was bound to exert that power ... . It was free in the exercise of a sound discretion to decline to pass upon the merits of the controversy and to relegate plaintiff to an appropriate forum ... . Obviously no definite rule of general application can be formulated by which it may be determined under what circumstances a court will assume jurisdiction of stockholders' suits relating to the conduct of internal affairs of foreign corporations. But it safely may be said that jurisdiction will be declined whenever considerations of convenience, efficiency and justice point to the courts of the State of the domicil as appropriate tribunals for the determination of the particular case" [27] ..
I should have thought that there was a good deal to be said against the Supreme Court of Victoria exerting an authority to declare invalid the steps taken by the directors of the New South Wales company now in question to issue further capital and to capitalize profits to answer the liability on the shares. But, as the matter was not argued and as the conclusion at which I have arrived upon the validity of the resolution makes it unnecessary to deal with it, I shall not pursue the question whether it was not the proper course for the Supreme Court to decline to determine the matter.
The first ground upon which the validity of the resolution for the issue of bonus shares was attacked is that, upon the proper interpretation of the articles of association of the company, they did not empower the directors to make the necessary increase of capital and to issue the shares. The contention is that the authority of a general meeting is necessary to enable the directors to do what they have resolved upon.
Power to increase capital is taken pursuant to s 11 of the New South Wales Companies Act 1899. This is done by Art 25, which says that the company may from time to time increase its capital by the creation of new shares. The article is silent upon the question whether the power so taken by the company is to be exercised on its behalf by the members or the directors, but the question is expressly dealt with by Arts 26 and 72. Article 72, which vests the general management and control of the business and affairs of the company in the directors and enables them to exercise all powers and do all such things as are within the scope of the memorandum, expressly authorizes the directors to increase the capital of the company. Article 26 gives the directors the power of determining the amount of the new shares, the terms and conditions upon which they shall be issued and the rights and privileges which shall be annexed thereto. The directors are given complete control of reserves of profit and of the declaration of dividend (Arts 74, 77 and 78). Then Art 80 empowers them to direct payment of a dividend by the distribution of shares of the company.
If these articles stood alone and were not qualified or abridged by any other provision, it is almost needless to say that there could be no doubt whatever of their sufficiency to authorize the creation by the directors of new capital and its distribution by them as bonus shares paid up out of the reserves of profit. Every step is specifically authorized by the articles in express terms: increase of capital, distribution of the reserves as dividends, distribution of shares as payment of dividend. The resolution of the directors, the text of which it has been thought unnecessary to set out, follows these steps. The difficulty arises entirely, as it seems to me, from a general article which occurs in the early part of the articles of association. It is Art 6, which provides that all shares shall (subject to an immaterial exception) be under the control of the company and shall be issued, allotted, placed under option, or otherwise disposed of, on such terms and conditions and at such times as the company by extraordinary resolution shall direct. If this means that the terms, conditions and times upon and at which the shares shall be issued, allotted, & c, shall be determined by the authority of an extraordinary resolution and by no other authority, then the article is directly contradictory of Art 26 in relation to new capital. Upon ordinary principles the special provision relating to new capital would prevail over the general and the apparent contradiction would be so removed. But, in any case, I do not think that Art 6 prevents full effect being given to the articles I have already quoted. It must be remembered that we are dealing with a document containing a collection of powers, authorities and directions for the governance and guidance of shareholders and directors in all the contingencies which the future may produce. The preparation of articles often consists in the adoption of one well-known provision or type of provision after another in. order to supply a source of power or authority in case it should be required. The intention of the framers is not carried out by seeking to reconcile apparent inconsistencies, redundancies, repetitions and repugnancies and obtaining coherence and symmetry by qualifying or restricting an intention expressed in one article by an intention implied by another. As a rule, power is sought and is taken by articles intended to be cumulative or alternative one upon or with another. Where an express power is given in clear words it is. more probably intended to take effect according to its tenor, although at the expense of an intention of a restrictive nature implied or even expressed by another article.
In the present case, I think Art 6 can only be completely reconciled with the articles I have mentioned by treating it as meaning that, if an extraordinary resolution is passed, then it shall control the terms, & c, of issue, & c, of shares and shall prevail over the powers otherwise residing in the directors. It is susceptible of this interpretation, which, perhaps, should be adopted. But, however this may be, I do not see how the very clearly expressed special powers of the directors to increase capital, to determine the conditions of its issue and to distribute shares as dividends can be overridden by the general provision contained in Art 6. For this reason, I think that such a resolution as that passed fell within the powers conferred on the directors by the articles of the company.
The appellants, however, deny that the resolution amounted to a valid exercise of these powers. They maintain that it was proposed and adopted for no purpose which fell within the scope of the powers in question, but in order to achieve a collateral and extraneous object. The object which the appellants ascribe to the directors who proposed and supported the resolution is that of maintaining the voting strength which otherwise the resignation of Neilson Mills from the two trusts would impair.
Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power. It is only one application of the general doctrine expressed by Lord Northington in Aleyn v Belchier [28] .: "No point is better established than that, a person having a power, must execute it bona fide for the end designed, otherwise it is corrupt and void."
Upon the facts of the present case, or at all events upon the expressions used by Lowe J in stating his findings, it may be thought that a question arises whether there must be an entire exclusion of all reasons, motives or aims on the part of the directors, and all of them, which are not relevant to the purpose of a particular power. When the law makes the object, view or purpose of a man, or of a body of men, the test of the validity of their acts, it necessarily opens up the possibility of an almost infinite analysis of the fears and desires, proximate and remote, which, in truth, form the compound motives usually animating human conduct. But logically possible as such an analysis may seem, it would be impracticable to adopt it as a means of determining the validity of the resolutions arrived at by a body of directors, resolutions which otherwise are ostensibly within their powers. The application of the general equitable principle to the acts of directors managing the affairs of a company cannot be as nice as it is in the case of a trustee exercising a special power of appointment. It must, as it seems to me, take the substantial object the accomplishment of which formed the real ground of the board's action. If this is within the scope of the power, then the power has been validly exercised. But if, except for some ulterior and illegitimate object, the power would not have been exercised, that which has been attempted as an ostensible exercise of the power will be void, notwithstanding that the directors may incidentally bring about a result which is within the purpose of the power and which they consider desirable.
In the present case the circumstances attending the resolution to issue bonus shares in satisfaction of a dividend upon the ordinary shares suggest at first sight that the real object was to give to ordinary shareholders such an increase in their voting power that Neilson Mills with the help of his sister Winifred might retain the means of defeating or of passing any ordinary resolution proposed at a shareholders' meeting. But Neilson Mills swore in the witness box that the reason why he proposed the resolution was that he considered that accumulations of profit ought not upon a winding up to be distributed ratably among holders of preference and of ordinary shares, but ought to be divided among ordinary shareholders only, and that he feared that a winding up might be a consequence of the attempts of Ainslie Mills to displace his control of the company. He gave a more or less circumstantial account of the genesis and cause of the proposal to distribute the company's reserves or accumulations of profit, and in all he said he was substantially supported by the evidence of his fellow director who with him formed the majority in favour of the resolution. What I hope has been a complete examination of the evidence has led me to the conclusion that there is nothing inherently incredible or improbable about his story, and it is at least clear that Lowe J, who heard his evidence and that of his fellow director, did not disbelieve either of them. The picture presented is in some respects incomplete, because by common consent some very important negotiations which resulted in Neilson Mills' agreeing to retire from the two trusts were treated as inadmissible in evidence because they were conducted without prejudice. Further, evidence was not given of some conversations which Neilson Mills appears to have had, particularly with his lawyers, because it was regarded as inadmissible on one ground or another. The picture too was blurred by a great quantity of evidence extracted in the cross-examination of Neilson Mills which, however important to the parties in view of other litigation, had but a remote bearing on the issues raised in the present proceedings. But, although these are matters tending to make the account of the transaction given by Neilson Mills less coherent and satisfactory than perhaps it otherwise might have proved, they ought not to be allowed to weigh against its acceptance. Indeed, it may be said in his favour that without a full understanding of the entire course of events it would be both improper and unsafe to find that he had not acted bona fide for the purpose which he claimed. As I read the judgment of Lowe J, he found that Neilson Mills and the director supporting him had some time before decided provisionally that the reserves of profit or a large part of them should be distributed by way of dividend in cash, which meant that they would be divided amongst the ordinary shareholders, but that, because of difficulties in selling a portion of the land to raise the money or of some other difficulty, they did not carry out their intention. His Honour then found, I think, that, because his resignation as a trustee might mean the impairment of the completeness of his control of the company, Neilson Mills before actually resigning adopted the course of capitalizing the profits and thus appropriating them to the holders of ordinary shares. I understand his Honour to mean this when he says that the particular form which the resolution finally assumed and the time at which it was adopted were due to the resignation of Neilson Mills as a trustee of the two trusts. It is not unnatural that Neilson Mills should decide that before handing over his shares he would take the steps necessary to ensure that the ordinary shareholders would get the greater part of the accumulated profits, and, as at that time the only form in which it could be done was capitalization, the time and form of the resolution might well be said to be due to the resignation. But his Honour definitely held that the two directors thought the resolution to be in the best interests of the company and that was their main reason for passing it. Although "the best interests of the company" is an indefinite phrase, its meaning admits of little doubt. There were two rival explanations of the resolution. On the one hand, it was said to have been adopted for the purpose of maintaining voting strength and, on the other, for the purpose of protecting ordinary shareholders. As no third purpose has ever been suggested, the finding must mean that the main reason of the directors was the desire to secure the benefit to ordinary shareholders of the greater part of the reserves of profits in the event of liquidation. When his Honour goes on to say that the two directors were not unconscious of the effect of the resolution in altering voting power and that Neilson Mills probably hoped that it would make a majority easier, he is far from finding that an actuating motive for the resolution was the desire to maintain voting strength. The statement does no more than to ascribe an appreciation of one incidental consequence and a hope that it might occur. But, whether I have correctly interpreted the meaning of Lowe J or not, it remains true that the appellant failed to obtain from the learned judge any finding which would make the resolution invalid on the ground that it was not adopted bona fide for a purpose within the power. Upon the materials before us we could not arrive at such a finding for ourselves, and I can see no ground for a rehearing of the action.
The appeal, accordingly, could not succeed. In my opinion it should be dismissed with costs.