COMPANY AFFAIRS

Evening Post, Volume CXXI, Issue 104, 4 May 1936, Page 11

COMPANY AFFAIRS

DEALINGS ATTACKED

ASSOCIATED MOTORISTS

DLRECTOBS' ELECTION

Certain acts on the part of directors of the Associated Motorists Petrol Company, Ltd., of Wellington, were attacked in the Supreme Court today before the Acting Chief Justice (his Honour Mr. Justice Reed), when an injunction to restrain an important meeting set down for jtomorrow was sought by Gerald Henry Patterson Fitzgerald, company manager, of Eltham, whose nomination for election as a director representing preference shareholders was disapproved by the directors. The purpose of the meeting tomorrow was to elect two directors representing preference shareholders. The validity of the directors' disapproval was challenged, and various aspects of the company's dealings were discussed.

Mr. E. P. Hay appeared for Mr. Fitzgerald, and Mr. F. C. Spratt, with him Mr. Lloyd Wilson, for the Associated Motorists Petrol Company.

In his affidavit Mr. Fitzgerald said he was the holder of ten preference shares in the company, allotted on February G, 1932.

On March 30 of this year he was nominated as a director representing preference shareholders, and the nomination was posted to the company on April 3. On April *10 the secretary of the company notified him that his nomination had been disapproved. That letter bore the date of Good Friday, a Post Office holiday, and the first knowledge he had of its contents was on April 20, when he received a telegram from his solicitors, and also the original letter sent by the company, he having been absent from Eltham for some days prior to April 20.

The plaintiff said he was general manager and director of the New Zealand Co-operative Rennet Co., Ltd., and had been a vice-president of the Automobile Association (South Taranaki) (for the past two years. He had been ! actively asosciated with the Automobile Association (South Taranaki) for the past eight years, and had been a member of the association's committee for the past five years. He had been a member of the Eltham Borough Council on two occasions, and was a member of the executive of the South Taranaki Returned Soldiers' Association. As a member of the Automobile Association he supported the formation of the company, believing it to be in the interest* of motorists throughout New Zealar/i. He was not directly or indirectly interested or connected in any company engaged in the petrol business, aparffrom his interest as a preference shareholder in the company; and he had no business or financial interests which in any way conflicted with the interests of the company. Under the articles of association the only rights conferred upon preference shareholders relative to the management of the' company were to elect jtwo directors and appoint an auditor; the entire management and control of the company were vested in the ordinary shareholders and the directors elected by them.

Until January 30, 1936, the authorised capital of the company was £135,000, divided into 130,000 8 per cent, noncumulative preference shares of £1 each, and 5000 ordinary shares of £1 each, and he believed- that all the shares were' allotted, with the exception of 1568 preference shares. On January. 30 the company, by extraordinary resolution, increased its capital by £20,000 by the issue of 20,000 ordinary shares of £1 each —ranking pari passu with the existing ordinary shares—which were allotted on March 17 pro rata to the holders of the original ordinary shares, on the basis of their par value.

The persons originally appointed to act as preference shareholders' directors were Frederick William Johnston and William Arthur O'Callaghan, who, at that time, held the respective offices of president of the South Island Motor Union and president -of the North Island Motor Union. Their .term of office had expired and the directors of the company had called a meeting of preference shareholders for the purpose of electing two directors, the meeting to be. held on May 5.

Messrs. Johnston and O'Callaghan were the largest holders of ordinary shares in the capital of the company, apart from Todd Investments, Ltd. In view of the constitution of the company and its history, the plaintiff said he considered it desirable, in the interests of the preference shareholders, that they should be represented on the directorate of the company by men who had no interest an the company as ordinary shareholders.

There were between 7300 and 7500 preference shareholders in the company, and they were scattered throughout New Zealand. The articles of association provided for a postal ballot at the option of the directors, who decided to carry it out at a meeting. As the meeting called by the company was to be held in Wellington, the majority of those shareholders must be represented by proxy if they were to exercise their voting at the meeting.

As ordinary shareholders and business interests controlled by ordinary shareholders resident in Wellington owned more than 2000 preference shares, a candidate for election at the meeting, to have any chance of success, must have a reasonable opportunity of communicating with preference shareholders throughout New Zealand, and obtaining proxies for use at the meeting. On March 25 he was advised by the secretary of the company that the election would be carried out at a meeting on May 5.

Because of the intervention of the Easter holidays, the plaintiff's mail had not been sent to him, and( without knowledge of the resolution disapproving of his nomination h« proceeded with the preparation and dispatch of a circular to all preference shareholders in support of his candidature, and was committed to the expense of approximately £100 before becoming aware of the directors' decision. The circular was accompanied by a proxy form and he had already received a substantial number of completed proxy forms.

All the directors of the company were holders of ordinary shares, and had been parties to the following acts which, it was claimed, had been to the detriment of preference shareholders:—

The payment to the ordinary shareholders of a dividend of 350 per cent, for the financial year ended March 31, 1935.

The voting to themselves of £2000 as directors' fees for the financial year ended March 31, 1934, for which year the company !paid to preference shareholders a dividend of only 5 per cent.

The i writing back as an asset of the company at the annual meeting on June 11, 1935, of the sum of £3773 6s Gd brokerage charges to enable the balance available for dividends to be increased from £27,724 12s 3d to £31,497, 18s 9d.

The issue and allotment to themselves of 20,000 ordinary shares of £1 each at par, when sucli shares would have brought on the open market a premium of a considerable amount which would have been available to the company as an asset. In accordance with the company's articles of association, the preference shareholders had no preference as regards return 'of capital on a winding up" of the company.

The failure to act in accordance with the principles of sound business practice by placing to general reserve a substantial portion of the net -profits of the company for the financial year ended March 31, 1935. AVith a net profit of £31,497 18s 9d available, £17,500 was paid to the holders of 5000 ordinary shares,. and £12,626 17s 9d was paid as dividend on the £.126,208 17s paid-up capital on preference shares, and only £1371 Is was placed to general reserve.

In November, 1933, continued the plaintiff, the company, in conjunction with the South Island Motor Union and the New Zealand Farmers' Union, petitioned the House of Representatives for legislation fixing the price of petrol, so as to protect the company from the effects of a petrol war alleged by the company to have been waged against it by! opposition petrol companies carrying on business in New Zealand. As a result of the petition the Motor Spirits Regulation of Prices Act, 1934, was passed and in its first year of business after the passing of the Act the company disclosed the available balance of net profit amounting to £31,497 18s 9d.

The plaintiff said he knew of no valid reason which would have justified the directors of the company on a fair consideration of his nomination in expressing disapproval of himself as a person suitable for the office of director representing the preference shareholders of the company. His nomination was made and supported by persons of repute and responsibility and he was fully competent to discharge the duties of a director of the company and to represent the preference shareholders impartially.

Mr. Fitzgerald contended that the resolution of disapproval passed by the directors of the company was not a decision arrived at after a bona fide exercise of the discretion conferred upon them by the articles of association, but was dictated by considerations which were wholly invalid. He made that statement on the grounds that it had been known to the directors for some time past that he had been instrumental in bringing up for discussion before meetings of the committee of 'the Automobile Association (South Taranaki) the affairs of the company, and that in particular a resolution was passed by that committee on February 28 last, on a notice of motion given by the plaintiff, to the effect that alterations should be brought about in the constitution of the company, so as to ensure that each automobile association in New Zealand be given the opportunity of acquiring at par twenty-five ordinary shares in the company and that 10 per cent, a year on the paid-up capital be the maximum limit of dividend that might be paid on any share in the company.

According to his own knowledge there was grave dissatisfaction on the part of a large number of preference shareholders (most of whom were the holders of small parcels of shares) arising out of the administration of the affairs of the company.

"Having identified myself with the criticism of the company—which criticism, it is contended, has been made bona fide and with an appreciation of the service performed by the company in reducing the cost of petrol to motor-

ists—there must necessarily tie a strong incentive on the part of the directors to prevent my election to the directorate of the company, especially in view of the fact that such criticism on my part directly affects their personal interests as ordinary shareholders, and, further, such circumstances render impossible an impartial consideration of my nomination on their part. . . . There is no ground upon which the directors could have arrived at a bona fide decision that I was not a suitable person for the office of director representing preference shareholders."

Mr. Hay said the articles of association laid it down that shareholders had to within fourteen days of a meeting in which to make a nomination, and the directors had the" discretion of disapproving a nomination within six days of its being received. As a matter of practical requirements a man was entitled to assume that if he received no overt suggestion from the directors within six days he was entitled to go ahead on the assumption that his nomination had been approved. It was true that the nomination was put in on a day that allowed up to and including Good Friday for the expression of disapproval by the directors; but on the other hand it would have been easy for the directors to meet before that date.

Mr. Hay cited the following principles:—

1. Power must be exercised subject to the following conditions: (a) The directors must act in good faith, they must not act arbitrarily, capriciously, or unjustly; (b) they must exercise the power for the benefit of the company; (c) the power must not be exercised for any purposes other than those for which it has been conferred; and (d) a question arising after the expression of power must be fairly considered at a board meeting.

(2) That.the power is a fiduciary one, and must be exercised with due regard to the shareholder's right, which is, or may be, affected by exercise of the power.

3. In the case of absolute discretion —such as the present—the directors are not bound to disclose their reasons for the exercise of the power, and in the absence of evidence to the contrary the Court will take for granted that they have acted reasonably and bona fide, and it is for those who allege they have not done so to give evidence to that effect.

4. That the ambit of the purpose of the power varies with the circumstances of each particular case. The nature of the company, its constitution, and the sch&me of its regulations as a whole must lie taken into account in determining whether a given factor comes within its range.

5. That although it is for the applicant to satisfy the Court that there was not sufficient reason for the decision of the directors, the Court may, in the absence of contrary eviden.ce on that point, draw inferences of fact from the circumstances surrounding the decision, and if the reasons inferred are improper or insufficient, may overrule the decision of the directors.

6. That silence on the part of the directors as to their reasons is not a sufficient circumstance in itself on which to base an inference of impropriety, but silence preserved once a prima facie case of impropriety is presented may be entirely different.

Mr. Hay submitted that the action of the directors in paying a dividend of 350 per cent, on ordinary shares was indefensible. In the interests of the shareholders some of the profits should have been put aside into the reserve fund, to guard against the risks attendant upon such a commodity as petrol. Instead, they issued money to pay themselves back their capital three and a half times over. He also thought it was indefensible to rewrite back £3773 brokerage charges as a normal asset of the company. Surely, he said, the duty was to have that illusory asset on the balance-sheet wiped out and replaced by actual assets. The directors had been guilty of a breach of duty to preference shareholders.

Mr. Spratt said that there was no ground on which the Court could infer that there had been an act of dis^ approval that was not bona fide. If the plaintiff had not received notification that his nomination had been approved, then the reasonable inference was that it had been disapproved. The directors individually expressed their disapproval in writing before the required lapse of time, and those expressions of disapproval amounted to a resolution of the directors on April 9, and were treated as such by the directors.

Mr. Spratt said much of the plaintiff's affidavit was irrelevant, and he would have objected to it had it been given in evidence.

(Proceeding.)

Messrs. C. H. Hewlett (Christchurch), C. F. Gardner (Auckland), C. H. Hattie (Nelson), F. Sholl (Melbourne), G. Anderson (Wairoa), R. E. H. Beamish (Hastings), R. Thomas (Blenheim), J. Yarborough (Hokianga), L. Donnelly (Rawene), and H. R. Creswick (Sydney), are staying at the Midland Hotel.

Messrs. H. N. Webster, Guy C. Malcolm, J. Harrison, J. Blakeley, and S. Anderson (Auckland), J. Murray (New Plymouth), F. Murray (Wanganui), A. E. Smith (Wairoa, Hawke's Bay), Leonard Hill (Dunedin), G. H. Fisher and E. R. McDermott (Nelson), J. Hunt and J. Kirkcaldie (Murchison) are staying at the Empire Hotel.