(Canada) The Corporation had issued mortgage bonds secured by a trust deed giving power to a majority of the bondholders to bind the minority. The company proposed a restructuring scheme involving the replacement of these bonds by bonds of a different issue, on different terms. This proposal was passed by the necessary three-quarters majority. It would not have been so passed without the support of the holder of a large number of bonds. That support was procured by promising a large block of ordinary stock of the company, not then of great value but potentially valuable if the price of nickel recovered. The promise was made well before the resolution was put to the bondholders, but it was not mentioned in the documents which gave notice of the resolution.
Viscount Haldane gave the opinion of the Privy Council. He observed in general about powers for a majority to bind a minority of debenture holders, and said: ‘To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice. The business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to a majority bears some analogy to such a power as that conferred by section 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted.’ He continued: ‘It has been suggested that the decision in these two cases on the last point is difficult to reconcile with the restriction already referred to, where the power is conferred, not on shareholders generally, but on a special class, say, of debenture holders, where a majority, in exercising a power to modify the rights of a minority, must exercise that power in the interests of the class as a whole. This is a principle which goes beyond that applied in Menier v. Hooper’s Telegraph Works, inasmuch as it does not depend on misappropriation or fraud being proved. But their Lordships do not think that there is any real difficulty in combining the principle that while usually a holder of shares or debentures may vote as his interest directs, he is subject to the further principle that where his vote is conferred on him as a member of a class he must conform to the interest of the class itself when seeking to exercise the power conferred on him in his capacity of being a member. The second principle is a negative one, one which puts a restriction on the completeness of freedom under the first, without excluding such freedom wholly.
The distinction, which may prove a fine one, is well illustrated in the carefully worded judgment of Parker J. in Goodfellow v Nelson Line. It was there held that while the power conferred by a trust deed on a majority of debenture holders to bind a minority must be exercised bona fide, and while the Court has power to prevent some sorts at least of unfairness or oppression, a debenture holder may, subject to this vote in accordance with his individual interests, though these may be peculiar to himself and not shared by the other members of the class. It was true that a secret bargain to secure his vote by special treatment might be treated as bribery, but where the scheme to be voted upon itself provides, as it did in that case, openly for special treatment of a debenture holder with a special interest, he may vote, inasmuch as the other members of the class had themselves known from the first of the scheme. Their Lordships think that Parker J. accurately applied in his judgment the law on this point.’
Judges:
Viscount Haldane
Citations:
[1927] AC 369
Jurisdiction:
Canada
Cited by:
Cited – Redwood Master Fund Ltd and Others v TD Bank Europe Ltd and Others ChD 11-Dec-2002
The claimants were a minority of a lending syndicate. A change to the terms of the syndication agreement had been proposed which they considered would prejudice them. Risks of the loan arrangement would be transferred to them.
Held: The change . .
Lists of cited by and citing cases may be incomplete.
Company
Updated: 12 April 2022; Ref: scu.180548
