Re Smith and Fawcett, Limited

Lord Greene M.R.

The principles to be applied in cases where the articles of a company confer a discretion on directors with regard to the acceptance of transfers of shares are, for the present purposes, free from doubt. They must exercise their discretion bona fide in what they consider — not what a court may consider — is in the interests of the company, and not for any collateral purpose. They must have regard to those considerations, and those considerations only, which the articles on their true construction permit them to take into consideration, and in construing the relevant provisions in the articles it is to be borne in mind that one of the normal rights of a shareholder is the right to deal freely with his property and to transfer it to whomsoever he pleases. When it is said, as it has been said more than once, that regard must be had to this last consideration, it means, I apprehend, nothing more than that the shareholder has such a prima facie right, and that right is not to be cut down by uncertain language or doubtful implications. The right, if it is to be cut down, must be cut down with satisfactory clarity. It certainly does not mean that articles, if appropriately framed, cannot be allowed to cut down the right of transfer to any extent which the articles on their true construction permit. Another consideration which must be borne in mind is that this type of article is one which is for the most part confined to private companies. Private companies are in law separate entities just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that in the articles of such a company the control of the directors over the membership may be very strict indeed. There are, or may be, very good business reasons why those who bring such companies into existence should give them a constitution which confers on the directors powers of the widest description. The language of the article in the present case does not point out any particular matter as being the only matter to which the directors are to pay attention in deciding whether or not they will allow the transfer to be registered. The article does not, for instance, say, as is to be found in some articles, that they may refuse to register any transfer of shares to a person not already a member of the company or to a transferee of whom they do not approve. Where articles are framed with some such limitation on the discretionary power of refusal as I have mentioned in those two examples, it follows on plain principle that if the directors go outside the matters which the articles say are to be the matters and the only matters to which they are to have regard, the directors will have exceeded their powers. Mr. Spens, in his argument for the plaintiff, maintained that whatever language was used in the articles, the power of the directors to refuse to register a transfer must always be limited to matters personal to the transferee and that there can be no personal objection to the plaintiff becoming a member of the company because the directors are prepared to accept him as the holder of 2000 of the shares which have come to him as legal personal representative of his father. Mr. Spens relies for his proposition on observations in several authorities, but on examination of those cases it becomes clear that the form of article then before the court by its express language confined the directors to the consideration of the desirability of admitting the proposed transferee to membership on grounds personal to him. I cannot put the point which I am endeavouring to make with greater clearness than in the words used by Warrington L.J. in In re Bede Steam Shipping Co., Ld. (1). There the articles empowered the directors “in their discretion and without assigning any “reason therefore to refuse to register the transfer of any “share (not being a fully paid-up share) to any person of whom “they do not approve as transferee, and may decline to “register the transfer of any fully paid-up share or shares “on certifying that in their opinion it is contrary to the “interests of the company that the proposed transferee “should be a member thereof.’”’ Warrington L.J. said (1): “The article gives them one ground, and one ground only, “for refusing to register the transfer of a fully-paid share, “namely, that in their opinion it is contrary to the interests “of the company that the proposed transferee should be a “member.” It is perfectly clear from that observation that the court was not laying down a general rule to be applied to all forms of article, but was coming to a decision on the particular article before it, the nature of which was such as to confine the directors to the consideration of one particular matter.

There is nothing, in my opinion, in principle or in authority to make it impossible to draft such a wide and comprehensive power to directors to refuse to transfer as to enable them to take into account any matter which they conceive to be in the interests of the company, and thereby to admit or not to admit a particular person and to allow or not to allow a particular transfer for reasons not personal to the transferee but bearing on the general interests of the company as a whole — such matters, for instance, as whether by their passing a particular transfer the transferee would obtain too great a weight in the councils of the company or might even perhaps obtain control. The question, therefore, simply is whether on the true construction of the particular article the directors are limited by anything except their bona fide view as to the interests of the company. In the present case the article is drafted in the widest possible terms, and I decline to write into that clear language any limitation other than a limitation, which is implicit by law, that a fiduciary power of this kind must be exercised bona fide in the interests of the company. Subject to that qualification, an article in this form appears to me to give the directors what it says, namely, an absolute and uncontrolled discretion. That being my view on the question of law in this case, it only remains to consider the issue of fact which has been raised.

It is said that on the evidence before us we ought to infer that the directors here were purporting to exercise their power to refuse a transfer not bona fide in the interests of the company but for some collateral purpose, namely, the desire of the leading director to acquire part of the shares for himself at an under-value. Speaking for myself, I strongly dislike being asked on affidavit evidence alone to draw inferences as to the bona fides or mala fides of the actors. If it is desired to charge a deponent with having given an account of his motives and his reasons which is not the true account, then the person on whom the burden of proof lies should take the ordinary and obvious course of requiring the deponent to submit himself to cross-examination. That does not mean that it is illegitimate in a proper case to draw inferences as to bona fides or mala fides in cases where there is on the face of the affidavit sufficient justification for doing so, but where the oath of the deponent is before the court, as it is here, and the only grounds on which the court is asked to disbelieve it are matters of inference, many of them of a doubtful character, I decline to give to those suggestions the weight which is desired. In the present case the principal director has sworn an affidavit which, if accepted, makes it clear that, whether rightly or wrongly, the directors have bona fide considered the interests of the company and come to the conclusion that it would be undesirable to register the transfer of the totality of these shares. Accordingly, on the evidence I am satisfied, as the learned judge was satisfied, that there is no ground shown here for saying that the directors’ refusal has been due to anything but a bona fide consideration of the interests of the company as the directors see them. That being so, and that being, on the true construction of the article, the only matter to which the directors have to pay regard, I am of opinion that the learned judge was right in the conclusion to which he came and that this appeal fails.