учебный год 2023 / England-USA

may be attacked on the ground that it was not exercised for the purpose for which it was granted. It is at this point that the contentions of the parties diverge. The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: that once it is found that the directors were not motivated by self

interest-i.e. by a desire to retain their control of the company or their positions on the board-the matter is concluded in their favour and that the court will not enquire into the validity of their reasons for making the issue. . .. On the other side, the main argument is that the purpose for which the power is conferred is to enable capital to be raised for the company, and that once it is found that the issue was not made for that

purpose, invalidity follows. It is fair to say that under the pressure of argument intermediate positions were taken by both sides, but in the main the arguments followed the polarisation which has been stated. In their Lordships' opinion neither of the extreme positions can be maintained. It can be accepted, as one would only expect, that the majority of cases in which issues of shares are challenged in the courts are cases in which the vitiating element is the self interest of the directors, or at least the purpose of the directors to preserve their own control of the management .... Further it is correct to say that where the self interest of the directors is involved, they will not be

ermitted to assert that their action was bona fide thought to

be, or was, in the interest of the company; pleas to this effect have invariably been rejected .. . just as trustees Whobuy trust property are not permitted to assert that they paid a good price. But it does not follow from this, as [the appellants] assert, that the absence of any element of self interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive; and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made...."

This last sentence, to the French reader, appears decisive. Their Lordships intend to reject extreme positions and will do so. But here, nevertheless, they take sides. The question for them is whether

"a fiduciary power has been exercised for the purpose for which it was conferred." Basically, they approve, therefore, Hogg v. Cram- phorn Ltd. and reject Harlowe's Nominees Pty. Ltd. and Teck Corporation. They refuse to make the distinction between "honest" and "dishonest" improper purposes. It is true that they recite with approval part of the reasoning of the High Court of Australia:

"On the other hand, it is, in their Lordships' opinion, too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company. The discretion is not in terms limited in this way: the law should not

impose such a limitation on directors' powers. To define in

advance exact limits beyond which directors must not pass is, in their Lordships' view, impossible."

But that comes when their Lordships have already arrived at the cross-road and made their decision. It only serves them to qualify and soften, following the suggestion of some previous Canadian decisions, the doctrine they had chosen.

"In their Lordships' opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the

court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a

conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their

judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line

on which the case falls .. ."

The student who had considered that the Commonwealth decisions

were solid common sense is disappointed.35The result of the decision may suggest that their Lordships were to a certain extent prisoners of the findings of the trial judge. Perhaps also the issue was confused, because a phrase such as "bona fide in the interests of the company as a whole" applies with difficulty to a situation when the board try to serve, if one may say so, "the interest of the company with the exception of the majority." Their Lordships seem entirely dedicated

to "majority rule," refusing to consider, short of "oppression" or "fraud on the minority," the duties of a dominant shareholder-a notion widely received in the United States.36 But their Lordships quote with approval: "The question which arises is sometimes not a

question of the interests of the company at all, but a question of what is fair as between different classes of shareholders."37Was it

fair to permit the majority to offer to buy shares at $2.27 and practically prevent the other shareholders from selling them at $2.50? Perhaps, finally, their Lordships were afraid of unsettling precedents or even unsettling a doctrine based on a disputable

interpretation of a precedent?

35On the other hand, the case is criticisedfor departingfrom the English approachby

Birds, "Proper Purpose as a Head of Directors' Duties" (1974) 37 M.L.R. 580. A 1974 decision of Templeman J., Pennell and Othersv. VenidaInvestmentsLtd. and Others (unreported), even though made by applicationof Howard Smith Ltd., leans toward the

Commonwealthdoctrine: S. J. Burridge, "WrongfulRights Issues" (1981) 44 M.L.R. 40,

50. On the difficultyof ascertainingsubstantialand collateralpurposes, see id., at 52; see also K. W. Wedderburn,"Shareholders'Control of Directors'Powers: A JudicialInnova-

tion" (1967) 30 M.L.R. 77.

36See infra., p.164 and note 45. Compare in English law Re Halt Garage [1982] 3 All E.R. 1016, noted by K. W. Wedderbur, "Ultra Vires in Modern CompanyLaw" (1983)

46 M.L.R. 204, 209.

37Mills v. Mills (1938) 60 C.L.R. at p.168, per LathamC.J.

Do American courts, through more freedom toward precedents, reach a more satisfactory result? A surprise at once awaits the French student: the issue is never discussed as such in the United

States. To borrow a commentator's formulation,38proper purpose is not a head of directors' duties. Classical case-books may devote 150

pages or more to the duty of loyalty: there is no trace of the

problem.39The words "proper purpose" or "improper purpose" are used, but never in the framework of a special aspect of the fiduciary duties. How is it that the matter is a "non-problem" in the United States.40

There is a host of cases dealing with issuance of shares or repurchase of its own shares by a corporation to prevent or to obtain a shift in control. The student is invited to approach the question through a classic decision made by the Supreme Court of Delaware in 1965: Cheff v. Mathes.41This was a case of repurchase of shares as a defence to a threatened take-over. The facts are complicated and need be recorded here. Plaintiffs had filed a derivative suit, complaining that the directors had purchased company's stock for

the purpose of insuring the perpetuation of their control; they had requested rescission of the purchase and damages to the corporation.

The general statement of the law applicable to the case, made by the Supreme Court, confirms that the problem which the English courts confronted is completely ignored in Delaware:

"Under the provisions of 8 Del.C. ?160, a corporation is granted statutory power to purchase and sell shares of its own stock.

Such a right, as embodied in the statute, has long been recognized in this State. . . The charge here is not one of violation

of statute, but the allegation is that the true motives behind such purchases were improperly centred upon perpetuation of control. In an analogous field, courts have sustained the use of proxy funds to inform stockholders of management's views upon the policy questions inherent in an election to a board of directors, but have not sanctioned the use of corporate funds to advance the selfish desires of directors to perpetuate themselves in office. . . Similarly, if the actions of the board were motivated by a sincere belief that the buying out of the dissident stockholder was necessary to maintain what the board believed to be proper business practices, the board will not be held liable

for such decision, even though hindsight indicates the decision was not the wisest course. ... On the other hand, if the board

has acted solely or primarily because of the desire to perpetuate

38J. R. Birds, op. cit., note 35.

39e.g., W. L. Cary and M. A. Eisenberg, Casesand Materialson Corporations(5th ed., 1980), pp.563-712; R. W. Jenningsand R. M. Buxbaum,Corporations,Casesand Materials

(5th ed., 1979), pp.441-617.

40A possible explanation might be that, in most of the English cases discussing the 'proper purpose"question, the courts had to interpretthe articlesof association, while in the United States directorsnormallyderive powers from statutes. One may however doubt

its validity. One can hardlyconceive Americanjudges reasoningas did the Englishones on that issue, even if the directors'powers were derived from the company'sby-laws.

45 199 A. 2d 548.

The student is invited to study some other cases in the same vein, if not always of the same quality. In one of them43he can read:

"Management has the responsibility to oppose offers which, in its best judgment, are detrimental to the company or its stock-

holders. In arriving at such a judgment, management should be

scrupulously fair in considering the merits of any proposal submitted to its stockholders. The officers' and directors'

informed opinion should result from that strict impartiality which is required by their fiduciary duties. After taking these

steps, the company may then take any step not forbidden by law to counter the attempted capture."

It is difficult to take issue with this approach or to see on what grounds it might be attacked. Does it not lead to satisfactory results? The technicalities of English law on this matter are completely ignored; the law on one point has been reversed in complete disregard of the authority of precedent. Does that authorise the student to maintain that "American law is a second-rate form of

common law"44?

III.SOME TENTATIVE CONCLUSIONS

It would be pointless to continue the comparison of English company law and American corporation law on other topics, such as the use of a corporate opportunity or the duties of a dominant shareholder toward the others.45 Most of the time, the conclusion is the same:

one reads English cases with admiration for the high intellect of their authors; then the American cases with perhaps greater admiration for the practical results reached, sometimes also through a refined technical reasoning, but a reasoning free from any slavish obedience to the authority of precedent. The judge is not Machiavelli in one country and dullard in the other.46 But one may feel that what was said by A. L. Goodhart more than 50 years ago is still valid; "when

43 NorthwestIndustries,Inc. v. The B. F. Goodrich Co., 301 F.Supp. 706 (N.D. 111.

1969).

4 Above, p.156.

45 A decision such as Greenhaighv. ArderneCinemas,Ltd. [195012 All E.R. 1120, 1126 (majorityshareholderswho procuredthe passingof a specialresolutionin effect negativing the pre-emptive rightsof the minorityheld free from any fiduciaryduty; the resolution is considered passed bona fide and in the interests of the company as a whole) must be contrasted with Perlman v. Feldmann, 219 F. 2d 173, 176 (2d Cir. 1955) (fiduciary responsibilityof directorand majorityshareholderincludes "dedicationof his uncorrupted business judgment for the sole benefit of the corporation")and Brown v. Halbert, 271

Cal.App. 2d 252, 272, 76 Cal.Rptr. 781, 793 (1969) (director who was also a major shareholderbreached fiduciaryduty to minorityshareholdersby selling his shares without

acting "affirmativelyand openly" to provide them a similaropportunity).A decision such as Jones vH. . F. Ahmanson and Co. (1 Cal. 3d 93, 460 P. 2d 464, 81 Cal.Rptr.592, 1969),

holding that majorityshareholders, placing their own shares in a profitablearrangement, owe fiduciaryduties to the other shareholdersand should allow them to participatein the' arrangement,is unthinkablein either Frenchor English law.

Again, tribute must be paid to the House of Lords and Lord Wilberforcefor Ebrahimi v. WestbourneGalleriesLtd. [1972]2 All E.R. 492. This decisionands.75 of the Companies Act 1980might open a new era in shareholders'relationships(see howeverRe A Company

[1983]2 W.L.R. 381, noted (1983) 46 M.L.R. 643). 46See A. L. Goodhart, op. cit., note 1, 268.

example the directors' fiduciaryposition. In England, a definite numberof consequenceshavebeen drawnfromit. Thereare"heads" of fiduciaryduties,53and a probablysterile and unfortunatediscus- sion has arisen as to whether "properpurpose"was or was not a separatehead of these duties. From indisputableheads, odd decisions may result.54Outside the classical"heads,"a concept which

shouldbe basicrarelyinspiresa decision-or, at least, rarelyinspired a decision before Lord Wilberforce'sspeech in Ebrahimiv. WestbourneGalleriesLtd.55remindedthe legal professionthat "The'just

and equitable' provision ... does, as equity always does enable the court to subject the exercise of legal rightsto-equitableconsidera- tions."56One could apply and adapt to fiduciaryduties what Lord

the "just and equitable"provision:"therehas been a tendency to create categoriesof headingsunderwhichcases must be broughtif

generalwordsshouldremaingeneralandnot be reducedto the sum of particularinstances."

In American law, by contrast, the concept of fiduciaryduty permeates everything-as indeed it should do. The courts fully respect the directors'businessjudgment57"The businessjudgment

point, it even appeared that this last rule might bring under the federal Rule 10b-5 any kind of alleged corporatemisbehaviour.In 1977, however, in the famous Santa Fe decision,59the Supreme Court of the United States resisted this situation. It reversed a

decision the result of which would have been "to bringwithin the Rule a wide varietyof corporateconducttraditionallyleft to state

American views: A. Tate Jr, "The 'New' Judicial Solution: Occasions for and Limits to

JudicialCreativity"(1980) 54 Tul.L.Rev. 877; and, of course, B. N. Cardozo, The Nature of the Judicial Process (1921), see especially p.150: "I think that when a rule, after it has been duly tested by experience, has been found to be inconsistentwith the sense of justice or with the social welfare, there should be less hesitation in frank avowal and full

abandonment."

No attempt is made in this research to describe in itself the authorityof precedent in England and in the United States, nor to make a general assessment of its merits and drawbacksas it works in both countries. The researchconcentrateson the adjustmentof the law to contemporaryconditions and expectationsand that only in the field of company law. The present writer is however more broadly convinced that a more liberal attitude

towardprecedents would also permit the Englishjudge, in disregardingor restrictingsome precedents, to "put the house in order," i.e. to streamlinethe law, thus giving it greater

clarityand certainty. This is Lord Diplock's opinion: supra, at pp.282-284. 53 Comparesupra, p.160 and note 35.

54 e.g. Regal (Hastings) Ltd. v. Gulliver[1942] 1 All E.R. 378, [1967] 2 A.C. 134 n. 55[1973] A.C. 360, [1972] 2 All E.R. 492.

56 Italics ours. To what extent, however, is it legitimate to underline these words and

give them some autonomous value? See on this question S. J. Burridge,op. cit., note 35, 59-60.

57 See, e.g. Bayer v. Beran, 49 N.Y.S. 2d 2 (S.Sup.Co. 1944), comparable in some respects to Re A Company[1983] 2 W.L.R. 381, commented upon (1983) 46 M.L.R. 643; Shlenskyv. Wrigley,95 Ill.App. 2d 173, 237 N.E. 2d 776 (1968).

58 Justice Shientag in Bayer v. Beran, above. See, e.g., Gimbelv. the Signal Companies, Inc., 316 A. 2d (Del.Ch., 1974); Millerv. American Telephoneand TelegraphCo., 507 F.

2d (3rd Cir. 1974).

59Sante Fe Industriesv. Green, 430 U.S. 462 (1977).

regulation."It felt that "In additionto facinga dangerof vexatious litigationwhichcouldresultfroma widelyexpandedclassof plaintiffs under Rule lOb-5 . . ., this extension of the federal securities laws

wouldoverlapand quitepossiblyinterferewithstatecorporatelaw." The Courtwas sensitiveto the dangerof Rule lOb-5 covering"the corporateuniverse."60The broodingpresenceof the fiduciarycon- cept, however, was not reduced. The SupremeCourtof Delaware was quickto seize the opportunityin Singerv. MagnavoxCo.61The problemwas the same as the one dealt within the SantaFe decision:

decidedby the latter.62The majoritystockholderhad eliminatedthe

minorityfor cash, allegedlyfor no propercorporatepurposeandfor inadequateconsideration,througha "shortformmerger"not requir- ing a vote of the stockholders.The Court'sdecisionis favourableto

the plaintiffs63on the recurringtheme that, by reason of the defendants' fiduciaryduty, "even complete compliance with the mandateof a statute does not, in every case, make the actionvalid in law." This is close to Lord Wilberforce'sstatementpreviously reproducedwhich is the basis on which TemplemanJ. in Pennell and Othersv. VenidaInvestmentsLtd. and Others6andFosterJ. in

Clemensv. ClemensBros. Ltd.65were able to overcomethe weight

of Greenhalghv. Arderne Cinema Ltd.66 It is no insult to the foresightof Lord Wilberforce,however, to note that his statement

Delawarewas able to relyon a long line of precedents.The strength

is given.6

60The expression was borrowedby the Courtfrom W. Cary, "Federalismand Corporate Law: Reflections Upon Delaware" (1974) 83 Yale L.J. 663, 670.

61380 A. 2d 969 (1977).

62Now regulatedby Rule 13e-3 taken by the S.E.C. in 1979.Among other requirements, the issuer or affiliate has to state whether he "reasonablybelieves that the ... transaction is fair or unfair to unaffiliated security holders" and "discuss in reasonable detail the materialfactorsupon whichthe belief ... is basedand to the extent practicable,the weight assigned to each such factor."

63As to the solution (but not the reasoning)compareRe Hellenicand GeneralTrustLtd. [1976] 1 W.L.R. 123, [1975] 3 All E.R. 382.

64 Noted S. J. Burridge, op. cit., note 35.

6511976]2 All E.R. 268. For a reserved view of this case, see Victor Joffe, "Majority Rule Undermined?" (1977) 40 M.L.R. 71; for a more critical view, see L. S. Sealy,

"Equitableand Other Fetters on the Shareholder'sFreedom to Vote," in N. E. Eastham and B. Krivy(eds.), The CambridgeLectures1981 (1982), p.80, at p.85. Comparecriticism

of the intrusioninto the law of vague "equity"concepts, W., "DerivativeActions and Foss v. Harbottle"(1981) 44 M.L.R. 202, 205-211.

66[1951] Ch. 286, [1950] 2 All E.R. 1120.

67This may be an importantqualification:see supra, note 56.

68E.g. Perlmanv. Feldmann,219 F. 2d 173 (2nd Cir. 1955), repeating"the often-quoted words of Judge Cardozo: 'Many forms of conduct permissible in a workadayworld for

those acting at arm's length, are forbidden to those bound by fiduciaryties. A trustee is held to something stricterthan the moralsof the marketplace. Not honesty alone; but the

punctilioof an honor the most sensitive, is then the standardof behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromisingrigidityhas

been the attitude of courts of equity when petitioned to underminethe rule of undivided

168 THE MODERN LAW REVIEW [Vol. 47

By reason of the omnipresence and the imperium of the fiduciary dutyin the United States, it seems clearthat, even quite apartfrom the legislation,there is no countryin the worldwherethe individual shareholderreceives comparableprotection and where fairness is soughtafterso eagerlyby the courts.The reverseside of the matter, of course, is that, if the Englishshareholderfindsgreat difficultyin obtaininga remedyfrom the court, the Americandirectormay feel

permanentlythreatened by derivative actions. Little is done to restrictthe shareholder'saccessto the courtand every misdeedis a

ground for an action. On this soil has grown a bar specialisedin "strikesuits."This facet of the problemshouldnot be ignored.The evil however is in process of being cured by the idea that an independentcommitteemightbe appointedby the boardto decide whether the derivativesuit is or is not in the best interest of the

corporationand that a negativeconclusionwould, by applicationof the business judgment rule, justify a dismissalof the suit by the court. The matteris still fluid. The SupremeCourtof Delaware,in

Zapata Corp. v. Maldonado,70 has decided that the committee's

.conclusion should not be binding upon the court: even though it requires"a balance of many factors-ethical, commercial,promo-

tional, public relations,employee relations,fiscalas well as legal," such factors "are not beyond the judicial reach of the Court of

Chancery which regularly and competently deals with fiduciary

."

AssumingAmericanlaw is as innovative,advanced,sophisticated as suggested in this research-with, as counterpart,the excessive refinementscurrentlyimplied in the adjective "sophisticated"71-it remainsto try to explainthe reasonsfor them. Some are obvious.

A nation with 50 states and a federal government is a unique

relationship to the corporation and to the minoritystockholdersas beneficiariesthereof, and places a dominant stockholder in the same relationshipas a director, a progressive Englishtextbook still has to teach (subject to criticismof the present state of the law) that the directors' "fiduciaryduties are owed to the company and to the company alone" and extends the fiduciaryduties to "any officialsof the companywho are authorisedto act on

its behalf and in particularto those actingin a managerialcapacity,"but is silent as regards dominant shareholders: Gower, op. cit. note 11, 573, 574. See, however, Clemens v.

ClemensBros. Ltd. (supra, note 57); but, with respect, FosterJ.'s reasoningdoes not seem a very tight one and the style of the decision may appearmore "American"than "English" (unless humouris deemed a Britishmonopoly, since it may take a good deal of humourto quote Greenhalghas a basis for the decision). For a criticismof this equity trend, see W., op. cit. note 65, especially at pp.205-206 and notes 45-49; L. S.

especially at p.81, note 9.

70 430 A. 2d 779. The case has already given rise to a large literature.The last article known by the writer is: D. J. Block, H. A. Prussin, B. K. Wachtel, "BusinessJudgment Rule: Zapata One Year Later"(1983) 38 Bus.Law. The backgroundof the decision is very

clearly presented in L. D. Solomon, R. B. Stevenson, Jr., D. E. Schwartz,Corporations Law and Policies. Materialsand Problems (1982), pp.670-671, 681-686. For researchon

the independence of the "independent"directors,see Victor Brudney, "The Independent Director-Heavenly City or Potemkin Village?"(1982) 95 Harv.L.Rev. 597.

71 Compare A. Tunc, op. cit., note 3, at pp.758-759.