BVI Analysis Of A Share Allotment In Breach Of Fiduciary Duty

• Published date: 26 March 2021
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Ogier
• Author: Mr Nicholas Burkill and Sulman Iqbal

The allotment of shares by directors affects the constitutional balance of a company. The exercise of this sensitive power is therefore subject fiduciary duties.

The duty to exercise powers for a proper purpose; and the duty to act honestly and in good faith in the best interests of the company were both recently considered by the BVI Commercial Court in IsZo Capital LP v Nam Tai Property Inc & Ors (3 March 2021)¹.

In Nam Tai, the Court considered the exercise by directors of their power under the Articles of Association to allot shares that resulted in the board allotting shares to one shareholder effectively preventing the other shareholders proceeding with a requisitioned meeting to consider changing the board.

Introduction: the power to allot shares

The power to allot shares is subject to fiduciary duties² and has long been recognised as a particularly sensitive power: see for example Ampol Petroleum Ltd v R.W. Miller (Holdings) Ltd³ per Street CJ:

"It is always a delicate exercise for directors to issue shares. Particularly is this so where an issue is made otherwise than on a basis of equality to existing shareholders. Even more particularly is this so where the issue is made otherwise than to existing shareholders, and in a situation in which it is foreseeable that there can be real prejudice to existing shareholders or an identifiable group of existing shareholders."

This proposition was reinforced by the Privy Council dismissing an appeal from the decision of Street CJ:

"Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office (Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame [1906] 2 Ch. 34), so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers."⁴

The Eastern Caribbean Court of Appeal has consistently taken the same position. In Independent Asset Management Company Ltd v Swiss Forfaiting Company Ltd⁵, Webster JA held at [25]:

"The foundation of the proper purpose rule lies in the fact that a company is divided into two basic organs: the board of directors and the shareholders. Directors are responsible for managing the business and affairs of the company and have the power to issue the shares as a part of that responsibility. In doing so, they must ensure that a proper balance is maintained between the two organs of the company...

In the situation described by Lord Sumption [in Eclairs Group Ltd v JKX Oil & Gas plc and others], where there is a power...