Hogg v. Cramphorn Ltd.

"Hogg v. Cramphorn Ltd." [1967] Ch. 254 is a famous English case on the director liability. The Court held that corporate directors who dilute the value of the stock in order to prevent a hostile takeover (the poison pill) are breaching their fiduciary duty to the company.

Background

Hogg approached the board of directors of Cramphorn Ltd. to make a takeover offer for the company. The directors believed that the takeover would be bad for the company and so they issued new shares to a trust so that they could outvote Hogg's bid for majority control.

Opinion of the Court

Buckley J, writing for the Court, held that the new shares issued by the directors are invalid. The directors violated their duties as directors by issuing shares for the purpose of preventing the takeover. The power to issue shares creates a fiduciary duty and must only be exercised in order to raise capital and not for any other purposes such as to prevent a takeover. The act could not be justified on the basis that the directors honestly believed that it would be in the best interest of the company. The improper issuance of shares can only be made valid if the decision is ratified by the shareholders at a general meeting.

Citations

The case was followed by the Privy Council in "Howard Smith Ltd v Ampol Ltd" [1974] AC 832.