PERCIVAL V. WRIGHT (1902) 2 CH. 421
PERCIVAL V. WRIGHT (1902) 2 CH. 421
FACTS
- This case involved challenging a sale of shares in a limited company.
- The argument was that the buyers, who were also directors, should have informed the existing shareholders about ongoing negotiations to sell the company's business.
- According to the company's official documents, it was allowed to sell its property, but selling the coal mines required a special resolution.
- When the company's shares were priced low, one director, acting on behalf of the company, arranged to sell the business at a very favourable price.
- To take advantage of this, the directors bought as many shares as possible before the sale became public, making a significant profit.
- During this period, a person named Holden was approached by the chairman and the board of the company.
- Holden wanted to buy the entire business of the company and sell it later to another company for a profit. He suggested different prices, all of which were much higher than £12.10 per share. However, Holden never made a firm offer that the board could present to the shareholders, and the negotiations didn't succeed.
- The plaintiffs, in this case, took legal action against the chairman and the two other directors who purchased the shares.
- They sought to nullify the sale, arguing that the directors should have disclosed their negotiations with Holden when buying the plaintiffs' shares because of their role as directors.
ISSUE
- Whether directors stood in fiduciary position to disclose the negotiation to the shareholders of the company?
HELD
Swinfen Eady J held the directors owed duties to the company and not shareholders individually. There is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling. The plaintiffs’ case wholly fails, and must be dismissed with costs.
- It was strenuously urged that, though incorporation affected the relations of the shareholders to the external world, the company thereby becoming a distinct entity, the position of the shareholders inter se was not affected, and was the same as that of partners or shareholders in an unincorporated company.
- The House of Lords emphasised that directors hold a fiduciary position as trustees for individual shareholders, particularly during negotiations for the sale of a company.
- However, the court acknowledged that this fiduciary duty does not prevent directors from engaging in dealings with shareholders before discussions about the sale arise.
- The court clarified that shareholders are presumed to be aware of directors' powers and have no reason to assume that negotiations for a sale are not underway.
- The House of Lords asserted that directors are not obligated to disclose unsuccessful negotiations to shareholder vendors.
- Requiring such disclosure would put directors in a difficult position, potentially harming the company's interests.
COMMENTARY
“Directors are trustees of the company and not of individual shareholders. This principle was laid down in 1902 in Percival v Wright and still holds ground as a basic proposition. In that case: Negotiations for the sale of a company's undertaking were on foot and without disclosing this the directors purchased shares from the plaintiff-shareholders. The selling shareholders had written to the company's secretary asking him if he knew anyone willing to purchase their shares. Three directors offered to buy the shares at a price assessed by an independent valuer but they did not disclose that they were in the process of negotiating the sale of the company at a price per share considerably higher than the amount offered to the shareholders. The negotiations proved to be abortive, but the plaintiffs claimed that the non-disclosure was a breach of the fiduciary duty entitling them to repudiate the sale. But the court held that there was no such fiduciary duty towards individual shareholders and, therefore, the directors were not bound to disclose negotiations which ultimately proved abortive. The court also pointed out that a premature disclosure of this kind might well be against the best interests of the company.”-