Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13

Citco challenged special resolutions amending a BVI company's articles to create class B shares with 50 votes each, converted from shares held by the chairman Mr Tobias, giving him control. The Privy Council upheld the amendments, finding shareholders could reasonably believe they benefited the company seeking new finance.

Facts

Pusser’s Ltd, a British Virgin Islands company, was in serious need of working capital. At an extraordinary general meeting on 16 March 1994, the company passed special resolutions amending its articles of association to create 200,000 class B shares, each carrying 50 votes (compared to one vote per class A share). The resolution further provided that 200,000 class A shares held by the chairman, Mr Charles Tobias, be converted into class B shares, thereby giving him indisputable voting control. The resolutions were carried by 1,125,665 votes to 183,000, with Citco Banking Corporation NV (holding approximately 13% of shares) voting against.

Mr Tobias had explained at the meeting that potential investors for a private placement and the company’s bankers required him to have unquestioned control before providing finance. He also stated he would not call loans owed to him by the company if he had control.

Issues

Primary Legal Issue

Whether the special resolutions were invalid because they were passed in the interests of Mr Tobias personally, to give him control, rather than bona fide in the interests of the company as a whole.

Secondary Issues

Whether shareholders who personally benefit from an amendment should be excluded from voting on it, and what test applies to determine validity of such amendments.

Judgment

The Privy Council dismissed the appeal, upholding the Court of Appeal’s decision that the resolutions were valid.

Lord Hoffmann, delivering the judgment, reviewed the established principles from Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656:

“The power…conferred on companies…to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company memorandum of association…It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.”

Lord Hoffmann emphasised the principle from Shuttleworth v Cox Brothers [1927] 2 KB 9, where Scrutton LJ stated:

“Now when persons, honestly endeavouring to decide what will be for the benefit of the company and to act accordingly, decide upon a particular course, then, provided there are grounds on which reasonable men could come to the same decision, it does not matter whether the Court would or would not come to the same decision or a different decision. It is not the business of the Court to manage the affairs of the company.”

The Privy Council found the trial judge erred by stepping into the commercial arena and deciding himself whether the amendment was for the company’s benefit, rather than applying the correct test of whether reasonable shareholders could have considered it beneficial.

On whether Mr Tobias should have been excluded from voting, Lord Hoffmann cited Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286:

“It is…not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects…”

Their Lordships noted that even excluding Mr Tobias’s controlled shares, 78% would still have voted in favour.

Implications

This case reaffirms that courts should not substitute their own commercial judgment for that of shareholders when assessing the validity of amendments to articles of association. The test is whether reasonable shareholders could have considered the amendment to be for the benefit of the company as a whole, not whether the court itself considers it beneficial.

The case confirms that shareholders who personally benefit from an amendment are not automatically excluded from voting, provided they act bona fide in what they consider to be the company’s interests.

The Privy Council also notably criticised the nearly five-year delay by the trial judge in delivering judgment, describing it as “completely unacceptable” and a “violation of the constitutional right of the parties to a determination of their dispute within a reasonable time.”

Verdict: Appeal dismissed. The special resolutions amending the articles of association to create class B shares with enhanced voting rights and converting Mr Tobias’s shares were held to be valid.

Source: Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13