Brown v British Abrasive Wheel Co [1919]
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Brown v British Abrasive Wheel Co [1919] 1 Ch 290 is a significant UK company law case that deals with the validity of an alteration to a company's constitution, specifically one that adversely affects the interests of a minority shareholder.
The British Abrasive Wheel Co needed additional capital, and the majority shareholders, constituting 98% of the company, were willing to provide this capital on the condition that they could acquire the shares held by the 2% minority shareholders. When attempts to reach an agreement to buy out the minority shareholders failed, the majority proposed to amend the company's articles of association to grant them the power to compulsorily purchase the shares of the minority. The proposed article outlined the terms for the compulsory purchase, and the majority was willing to include a provision specifying that the minority would receive a price deemed fair by the court.
Astbury J held that the proposed alteration was not for the benefit of the company as a whole and, therefore, could not be made. One key reason for this decision was the lack of a direct link between the provision of extra capital and the proposed alteration of the articles. Although the overall scheme was to provide capital after removing the dissenting shareholders, the court noted that it would have been possible to remove the shareholders first and then refuse to provide the capital.
The judge considered the connection between the alteration and the benefit to the company, emphasising that alterations should be bona fide for the advantage of the company as a whole. In this case, Astbury J found that the primary purpose of the alteration was to eliminate the minority shareholders rather than to genuinely benefit the company. The insertion of a provision regarding a fair price did not remedy the fundamental flaw in the proposal.
This case underscores the principle that alterations to a company's constitution should be made in good faith and for the benefit of the entire company. It also highlights the court's scrutiny of the true purpose behind such alterations, especially when they may adversely affect the interests of minority shareholders.
The British Abrasive Wheel Co needed additional capital, and the majority shareholders, constituting 98% of the company, were willing to provide this capital on the condition that they could acquire the shares held by the 2% minority shareholders. When attempts to reach an agreement to buy out the minority shareholders failed, the majority proposed to amend the company's articles of association to grant them the power to compulsorily purchase the shares of the minority. The proposed article outlined the terms for the compulsory purchase, and the majority was willing to include a provision specifying that the minority would receive a price deemed fair by the court.
Astbury J held that the proposed alteration was not for the benefit of the company as a whole and, therefore, could not be made. One key reason for this decision was the lack of a direct link between the provision of extra capital and the proposed alteration of the articles. Although the overall scheme was to provide capital after removing the dissenting shareholders, the court noted that it would have been possible to remove the shareholders first and then refuse to provide the capital.
The judge considered the connection between the alteration and the benefit to the company, emphasising that alterations should be bona fide for the advantage of the company as a whole. In this case, Astbury J found that the primary purpose of the alteration was to eliminate the minority shareholders rather than to genuinely benefit the company. The insertion of a provision regarding a fair price did not remedy the fundamental flaw in the proposal.
This case underscores the principle that alterations to a company's constitution should be made in good faith and for the benefit of the entire company. It also highlights the court's scrutiny of the true purpose behind such alterations, especially when they may adversely affect the interests of minority shareholders.
