"Proper Purpose"
Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper.
The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision of Howard Smith Ltd v Ampol Ltd AC 821. The case concerned the power of the directors to issue new shares. It was alleged that the directors had issued a large number of new shares purely to deprive a particular shareholder of his voting majority. An argument that the power to issue shares could only be properly exercised to raise new capital was rejected as too narrow, and it was held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company, or as part of an agreement to exploit mineral rights owned by the company. If so, the mere fact that an incidental result (even if it was a desired consequence) was that a shareholder lost his majority, or a takeover bid was defeated, this would not itself make the share issue improper. But if the sole purpose was to destroy a voting majority, or block a takeover bid, that would be an improper purpose.
Not all jurisdictions recognised the "proper purpose" duty as separate from the "good faith" duty however.
Read more about this topic: Board Of Directors, Corporations, Duties
Famous quotes containing the words proper and/or purpose:
“People are less self-conscious in the intimacy of family life and during the anxiety of a great sorrow. The dazzling varnish of an extreme politeness is then less in evidence, and the true qualities of the heart regain their proper proportions.”
—Stendhal [Marie Henri Beyle] (1783–1842)
“Culture is the tacit agreement to let the means of subsistence disappear behind the purpose of existence. Civilization is the subordination of the latter to the former.”
—Karl Kraus (1874–1936)