In Teck Corp v. Millar Justice Berger set aside the Hogg decision, which held that directors may not allot shares to frustrate an attempt to obtain control of the company, even if they believe that it is in the best interests of the company to do so. In Justice Berger’s opinion, Hogg was wrongly decided because it was inconsistent with the general rule that the directors’ discretionary power as properly conferred by the articles of a company, in the absence of mala fides, shall not be disturbed.
That general rule was established by an earlier English case: Re Smith & Fawcett. The court found that the directors’ decision on share transfers was proper because their exercise of discretion, which is conferred by the articles of a company, is “free from doubt.” As a general requirement directors must exercise their discretion bona fide in what they consider to be in the best interests of the company. The court is not there to second-guess their judgment.
At least two more reasons could possibly explain Teck Corp’s departure from Hogg. First, the power to issue shares cannot be segregated from the power that the directors have as a whole. In another words, the directors’ power to issue shares should receive the same treatment as the other powers that directors could have. Whether the decision to issue shares would adversely affect shareholders is irrelevant to the degree of deference the court is willing to show to the directors’ business judgment. Another minor concern expressed by Justice Berger was: If the court is going to make exceptions for the issuance of shares, is it prepared to make exceptions for other circumstances?
Second, the issue in these cases should be hinged on the purpose of the directors instead of the consequences of their decision. The proper question to ask is, “Are the directors acting bona fide in exercising their discretionary power?” That question goes to the propriety of the directors’ purpose. In the absence of a finding of fraud or intention to deceive, the directors are presumably acting bona fide and thus acting with a proper purpose.
In Teck Corp, the court found that the primary purpose of the directors was to make the best contract they could for Afton while they still had the power to do so. Unlike the findings in Hogg, that purpose does not derive from an attempt to obtain control of the company. The same purpose stands despite the fact that Teck became a majority shareholder later on. As Justice Berger correctly stated, “The defendant directors were elected to exercise their best judgment. They were not agents bound to accede to the directions of the majority of the shareholders.”
Hogg seems to be focusing more on the fact that the directors’ exercise of power interfered with the majority shareholder’s right to obtain control of the company. It also relies on the finding that the directors’ actual purpose was to obtain control of the company by defeating the takeover. However, it does not give fair weight to another important fact that Millar thought the takeover would hurt the company. In general, I think Teck Corp does a better job in articulating the general principle and applying the established law to the case at bar.
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