(New South Wales) The court considered the use by directors of their fiduciary power of allotment of shares for a different purpose than that for which it was granted, and so as to dilute the voting power of the majority shareholding of issued shares. Lord Wilberforce: ‘Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls’.
Lord Wilberforce said: ‘it is correct to say that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company’ pleas to this effect have invariably been rejected just as trustees who buy trust property are not permitted to assert that they paid a good price.
No more, in their Lordships’ view, can this be done by the use of a phrase – such as ‘bona fide in the interest of the company as a whole’ or ‘for some corporate purpose’. Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acing sectionally, or partially: ie improperly favouring one section of the shareholders against another. Of such cases it has said:
The question which arises is sometimes not a question of the interest of the company at all, but a question of what is fair as between different classes of shareholders.’
Judges: Lord Wilberforce
References:  AC 821,  UKPC 3
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