In its November ruling, the BVI Court of Appeal carefully considered whether a fresh issuance of shares by directors was done for a proper purpose or specifically to alter the balance of voting power between the shareholders.

The rationale behind the proper purpose ‘rule’ is that directors should not issue shares that could create new majorities or disturb the balance of power between groups of shareholders in the company. However, this is exactly what happened in this case: the directors created a new majority by the July Issuance, and it was immaterial whether the new majority had a proprietary interest in the Fund.

The basic rule is that the directors’ purpose, however noble, should not be used to affect the balance of power in the company. If it is used in this way, it is an improper use of the power and is liable to be set aside. However altruistic those motives and reasons may have been “[t]hat is not, in itself, enough.”

Particularly where there is a power struggle between different groups of shareholders, the directors should not issue additional shares to affect the balance of power in the company to influence the outcome of shareholders’ resolutions, even if this results in additional capital or other benefits for the company.

This restriction is not written into the company’s articles and it is for this reason that the law (equity) imposes on the directors the additional requirement that the shares must be issued for a proper purpose or the issue is liable to be set aside.

This ruling has implications for all corporate and funds clients including directors and appointed officers. Click HERE for the full ruling.