The recent High Court decision Rogers & Anor v Advanced Creative Technologies Limited & Ors  NZHC 577 provides guidance on the exercise of a board's discretion to delay registration of a share transfer and other powers in relation to a company.
Advanced Creative Technologies Limited was established in the late 1990s to develop and commercialise a data storage technology known as "codex". By 2010, the company had raised capital from a number of investors but its founder Mr Brown retained a significant interest. Mr Brown was considered to be the brains behind the codex technology and therefore critical to its development. However, the Court heard evidence which cast doubt on his business acumen and financial management abilities. In the later part of 2010 the plaintiffs (the Rodgers), made a series of payments to Mr Brown in exchange for the transfer of around 360,000 shares in the company. A share transfer form documenting this transaction was executed and presented to the board in January 2011. The board, aware of other similar arrangements between Mr Brown and third parties, resolved to delay the transfer under section 84(4) of the Companies Act on the basis that to register the transfer at the time was not in the best interests of the company. It transpired that Mr Brown had pledged some of his shares to the third defendant in the proceedings (the Fishers). In April the Fishers exercised their right to be transferred around 100,000 of Mr Brown's shares. In contrast to its approach to the Rodgers transfer, the board decided to register the Fisher transfer.
Rodgers claimed, among other things, that the board had no right to delay registration of his transfer indefinitely.
The Court observed that it was "trite law" that the board must exercise its powers in good faith, in the best interests of the company and only for a proper purpose. The issue was what the board, having invoked a power to delay a transfer, was required to do next and in what timeframe. The Court held that the resolution to delay the transfers did not permit the directors to "sit on their hands and do nothing". While evidence was presented of some attempts to canvas other parties who alleged claims over Mr Brown's shares, the Court ultimately concluded that the board could only delay for a period sufficient to investigate those competing claims. The Court found that the directors had essentially let the matter ride without any real attempt to resolve it and, as a result, had failed in the proper exercise of their duties. The Court considered evidence of the competing claims and observed that none were sufficient to justify a refusal to register the transfer. The Court rectified the company's share register to reflect the transfer of the 286,229 shares that remained in Mr Brown's name. However, having found that the Fishers did not have notice of the Rodgers' competing claim, the Court did not disturb their shareholding. The issue of compensation for the shortfall in the shares received by the Rodgers (around 76,000 shares) is yet to be dealt with.