Faulkner & Anor v Bennett & Ors

Where shareholders alter articles so that shares are transferred or forfeited for the benefit of a particular shareholder group, the equitable principle against fraud on the minority may apply even if that group holds less than half the issued shares, where it is in substance the voting majority.

The question is whether reasonable shareholders acting in good faith could regard the alteration as benefiting the company as a whole, assessed in light of the company’s objects. The court must not substitute its own commercial judgment for that of the shareholders. An alteration may validly protect control of a club company from outsiders and secure the company’s continuing purpose, even though it disadvantages former members or their personal representatives.

The claimants, acting for members of the dissolved Warrington Club, sought declarations concerning 810 shares in The Warrington Club (1906) Limited and directions for distribution of the resulting sale proceeds.

In 1997 the company adopted a resolution providing that shares could only be held by club members and that shares of persons ceasing to be members, including shares held by personal representatives, would be returned at par value or forfeit to the club trustees. The claimants contended that the resolution was valid. Mrs Sowerbutts, representing affected estates, challenged it as an improper expropriation and alleged fraud on the minority.

The central issue was whether the resolution was invalid under the equitable principle stated in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656.

1. Construction. The 1997 resolution had an overarching purpose: shares were to be held only by members of the club. Its forfeiture provision therefore applied both prospectively to persons subsequently ceasing membership and, within the resolution’s commercial purpose, to shares already held by personal representatives of deceased former members.
2. Application of the equitable principle. The principle in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 was engaged. Although the club trustees held only 380 of 810 issued shares, they were effectively the majority for this purpose because personal representatives who were not registered members could not vote. The relevant test was whether reasonable persons acting in good faith could conclude that the discriminatory alteration benefited the company as a whole. This reflected Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154 and Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9.
3. The company was established to promote the Warrington Club and its members. The shareholders could reasonably regard restricting ownership to club members as protecting the premises and the club’s control from outsiders. The court was not entitled to substitute its own view of the preferable commercial decision. The equitable principle was therefore not infringed.
4. The evidence did not establish an actual custom requiring personal representatives to transfer shares to the trustees, although the persons supporting the resolution genuinely believed that such a practice existed. That genuine belief was relevant to the good-faith assessment.
5. The claimants’ application succeeded. Declarations and directions were granted, subject to distribution being confined to members fully paid-up for at least five years before dissolution.

First-instance decision. No prior appellate decision is stated in the judgment.