An employment agreement contravening section 151 of the 1985 Act is unenforceable. The obvious mischief to which section 151 is directed is the case of a bidder financing his bid from the funds of the company acquired. The larger purpose had to be something other than the acquisition of shares, however beneficial the acquisition was felt to be in the interests of the company. Lord Oliver said: ‘the purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired.’
Lord Oliver of Aylmerton said that the word ‘reason’ is not the same as ‘purpose’. The former word provides an explanation why an act is done. The word ‘purpose’ describes what transaction is designed to achieve.
Lord Oliver said: ‘The matter can perhaps, most easily be tested by reference to section 153(1)(a) where the same formula is used. Here the words are ‘or the giving of the assistance for that purpose’ (i.e. the acquisition of shares) ‘is but an incidental part of some larger purpose of the company’. The words ‘larger purpose’ must here have the same meaning as the same words in subsection (2)(a). In applying subsection (1)(a) one has, therefore, to look for some larger purpose in the giving of financial assistance than the mere purpose of the acquisition of the shares and to ask whether the giving of assistance is a mere incident of that purpose. My Lords, ‘purpose’ is, in some contexts, a word of wide content but in construing it in the context of the fasciculus of sections regulating the provision of finance by a company in connection with the purchase of its own shares there has always to be borne in mind the mischief against which section 151 is aimed. In particular, if the section is not, effectively, to be deprived of any useful application, it is important to distinguish between a purpose and the reason why a purpose is formed. The ultimate reason for forming the purpose of financing an acquisition may, and in most cases probably will, be more important to those making the decision than the immediate transaction itself. But ‘larger’ is not the same thing as ‘more important’ nor is ‘reason’ the same as ‘purpose’. If one postulates the case of a bidder for control of a public company financing his bid from the company’s own funds – the obvious mischief at which the section is aimed – the immediate purpose which it is sought to achieve is that of completing the purchase and vesting control of the company in the bidder. The reasons why that course is considered desirable may be many and varied. The company may have fallen on hard times so that a change of management is considered necessary to avert disaster. It may merely be thought, and no doubt would be thought by the purchaser and the directors whom he nominates once he has control, that the business of the company will be more profitable under his management than it was heretofore. These may be excellent reasons but they cannot, in my judgment, constitute a ‘larger purpose’ of which the provision of assistance is merely an incident. The purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired and the financial or commercial advantages flowing from the acquisition, whilst they may form the reason for forming the purpose of providing assistance, are a by-product of it rather than an independent purpose of which the assistance can properly be considered to be an incident.’
Judges:
Lord Oliver of Aylmerton
Citations:
[1989] AC 755, [1988] 2 WLR 1308, [1988] BCLC 20, (1988) 3 BCC 535, [1988] 2 All ER 617
Statutes:
Jurisdiction:
England and Wales
Cited by:
Cited – Cox v Cox and Skan Dansk Design Limited ChD 27-Apr-2006
Mrs Cox sought to declarations as to the effect of arrangements made on her divorce in an attempt to avoid contentious proceedings. The couple held equal shares in the family business, but the company registers were missing or had never existed. The . .
Cited – Grays Timber Products Ltd v Revenue and Customs SC 3-Feb-2010
An assessment to income tax had been raised after the employee resold shares in the company issued through the employees’ share scheme at a price which the Revenue said was above the share value. The company appealed against a finding that tax was . .
Lists of cited by and citing cases may be incomplete.
Company
Updated: 04 May 2022; Ref: scu.242134