Case Summary
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Full Case Details
The directors of a company are not trustees for individual shareholders, and may
purchase their shares without disclosing pending negotiations for the sale of the company’s
undertaking.
This was an action to set aside a sale of shares in a limited company, on the ground that
the purchasers, being directors, ought to have informed their vendor shareholders of certain
pending negotiations for the sale of the company’s undertaking.
In and on prior to October 1900, the plaintiffs were the joint registered owners of 253
shares of 10l. each (with 9l. 8s. paid up) in a colliery company called Nixon’s Navigation
Company, Limited.
The objects of the company, as defined by the memorandum of association, included the
disposal by sale of all or any of the property of the company. The board of directors was
empowered to exercise all powers not declared to be exercisable by general meetings; but no
sale of the company’s collieries could be made without the sanction of a special resolution.
The shares of the company, which were in few hands and were transferable only with the
approval of the board of directors, had no market price and were not quoted on the Stock
Exchange. On October 8, 1900, the plaintiffs’ solicitors wrote to the secretary of the company
asking if he knew of any one disposed to purchase shares. On October 15, 1900, in answer to
the secretary’s inquiry as to what price they were prepared to accept, the plaintiffs’ solicitors
wrote stating that the plaintiffs would be disposed to entertain offers of 12l. 5s. per share. This
price was based on a valuation which the plaintiffs had obtained from independent valuers
some months previously. On October 17, 1900, the chairman of the company wrote to the
plaintiffs’ solicitors stating that their letter of October 15 had been handed to him, and that he
would take the shares at 12l. 5s. On October 20, 1900, the plaintiffs’ solicitors having taken a
fresh valuation, replied that the plaintiffs were prepared to accept 12l. 10s. per share. On
October 22, 1900, the chairman wrote accepting that offer, and stating that the shares would
be divided into three lots. On October 24, 1900, the chairman wrote stating that eighty-five
shares were to be transferred to himself and eighty-four shares apiece to two other named
directors. The transfers having been approved by the board, the transaction was completed.
The plaintiffs subsequently discovered that, prior to and during their own negotiations for
sale, the chairman and the board were being approached by one Holden with a view to the
purchase of the entire undertaking of the company, which Holden wished to resell at a profit
to a new company. Various prices were successively suggested by Holden, all of which
represented considerably over 12l. 10s. per share; but no firm offer was ever made which the
board could lay before the shareholders, and the negotiations ultimately proved abortive. The
Court was not in fact satisfied on the evidence that the board ever intended to sell.
The plaintiffs brought this action against the chairman and the two other purchasing
directors, asking to have the sale set aside on the ground that the defendants as directors ought
to have disclosed the negotiations with Holden when treating for the purchase of the
plaintiffs’ shares.
For the plaintiffs. There is no suggestion of unfair dealing or purchase at an undervalue;
but the defendants as directors were in a fiduciary position towards the plaintiffs, and ought to
have disclosed the negotiations for sale of the undertaking, in which case the plaintiffs would
have retained their shares, on the chance of that sale going through.
The prima facie obligation of directors purchasing shares to disclose all information as to
the shares is, no doubt, tacitly released as to information acquired in the ordinary course of
management. The defendants, for instance, would not have been bound to disclose a large
casual profit, the discovery of a new vein, or the prospect of a good dividend. But that release
did not relive them from disclosing the special information acquired during their negotiations
for the sale of the entire undertaking. At the commencement of those negotiations they
became trustees for sale for the benefit of the company and the shareholders, and could not
purchase the interest of an ultimate beneficiary without disclosing those negotiations. They
are trustees both for the company and for the shareholders who are the real beneficiaries. No
question of privity can arise in the case of trusts.
Now, “a share in a company, like a share in a partnership, is a definite proportion of the
joint estate, after if has been turned into money, and applied as far as may be necessary in
payment of the joint debts”: Lindley on Companies, 5th ed. p.449.
The undertaking of the company is, therefore, merely the sum of the shares. No doubt at law
it belongs to the company, but in enquiry it belongs to the shareholders and the directors as
trustees for sale of the undertaking cannot purchase the interest of a beneficiary without
giving him full information. In this respect the shareholders inter se are in the same position
as partners, or shareholders in an unincorporated company. If managing partners employ an
agent to sell their business, he cannot purchase the share of a sleeping partner without
disclosing the fact of his employment. Incorporation cannot affect this broad equitable
principle. It does not alter the rights of the shareholders inter se, though it affects their
relations to the external world.
In the present case the plaintiffs knew that the directors were managing the business, but
not that they were negotiating a sale of the undertaking, and the non-disclosure of the latter
fact entitles them to set aside the sale of their shares.
For the defendants. Even if the directors were trustees for sale of the undertaking, they
were not trustees for sale of the plaintiffs; shares. They suggested equity has never been
applied between a director and a shareholder, although a director purchasing shares must
always purchase from a shareholder. The company is a legal entity quite distinct from the
shareholders, so that a sale by a mortgagee to a company in which he is a shareholder is
neither in form or substance a sale to himself and a sale by a company to a shareholder cannot
be impeached on the ground that the resolution authorizing that sale was carried by the votes
of that shareholder. The principle underlying these decisions is quite inconsistent with the
plaintiffs’ contention.
SWINFEN EADY J. – The position of the directors of a company has often been considered
and explained by many eminent equity judges. In Great Eastern Ry. Co. v. Turner [(1872)
L.R. 8 Ch. 149, 152] Lord Selborne L.C. points out the twofold position which directors fill.
He says: “The directors are the mere trustees or agents of the company – trustees of the
company’s money and property –agents in the transactions which they enter into on behalf of
the company.” In In re Forest of Dean Coal Mining Co. [(1878) 10 ChD 450, 453] Jessel
M.R. says: “Again, directors are called trustees. They are no doubt trustees of assets which
have come into their hands, or which are under their control, but they are not trustees of a debt
due to the company. The company is the creditor, and, as I said before, they are only the
managing partners.” Again, in In re Lands Allotment Co. [(1894) 1 Ch. 616, 631], Lindley
L.J. says: “Although directors are not properly speaking trustees, yet they have always been
considered and treated as trustees of money which comes to their hands or which is actually
under their control; and ever since joint stock companies were invented directors have been
held liable to make good moneys which they have misapplied upon the same footing as if
they were trustees, and it has always been held that they are not entitled to the benefit of the
old Statute of Limitations because they have committed breaches of trust, and are in respect of
such moneys to be treated as trustees.”
It was from this point of view that York and North Midland Ry. Co. v. Hudson [16 Beav.
485, 491, 496] and Parker v. McKenna [(1874) L.R. 10 Ch. 96] were decided. Directors must
dispose of their company’s shares on the best terms obtainable, and must not allot them to
themselves or their friends at a lower price in order to obtain a personal benefit. They must act
bona fide for the interests of the company.
The plaintiffs’ contention in the present case goes far beyond this. It is urgued that the
directors hold a fiduciary position as trustees for the individual shareholders, and that, where
negotiations for sale of the undertaking are on foot, they are in the position of trustees for
sale. The plaintiffs admitted that this fiduciary position did not stand in the way of any
dealing between a director and a shareholder before the question of sale of the undertaking
had arisen, but contended that as soon as that question arose the position was altered. No
authority was cited for that proposition, and I am unable to adopt the view that any line
should be drawn at that point. It is contended that a shareholder knows that the directors are
managing the business of the company in the ordinary course of management, and impliedly
releases them from any obligation to disclose any information so acquired. That is to say, a
director purchasing shares need not disclose a large casual profit, the discovery of a new vein,
or the prospect of a good dividend in the immediate future, and similarly a director selling
shares need not disclose losses, these being merely incidents in the ordinary course of
management. But it is urged that, as soon as negotiations for the sale of the undertaking are
on foot, the position is altered. Why? The true rule is that a shareholder is fixed with
knowledge of all the directors’ powers, and has no more reason to assume that they are not
negotiating a sale of the undertaking that to assume that they are not exercising any other
power. It was strenuously urged that, though incorporation affected the relations of the
shareholders to the external world, the company thereby becoming a distinct entity, the
position of the shareholders inter se was not affected, and was the same as that of partners or
shareholders in an unincorporated company. I am unable to adopt that view. I am therefore of
opinion that the purchasing directors were under no obligation to disclose to their vendor
shareholders the negotiations which ultimately proved abortive. The contrary view would
place directors in a most invidious position, as they could not buy or sell shares without
disclosing negotiations, a premature disclosure of which might well be against the best
interests of the company. I am of opinion that directors are not in that position.
There is no question of unfair dealing in this case. The directors did not approach the
shareholders with the view of obtaining their shares. The shareholders approached the
directors, and named the price at which they were desirous of selling. The plaintiffs’ case
wholly fails, and must be dismissed with costs.
