Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 is a leading UK company law case, concerning the duty of directors to act only for "proper purposes". This duty has been codified into the Companies Act 2006

Companies Act 2006

The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...

 section 171, and arises particularly in cases involving takeover bids.

Facts

RW Millers was embroiled in a hostile takeover bid, by a large petrol company called Ampol

Ampol

Ampol, the Australian Motorists Petrol Company, was incorporated by Sir William Gaston Walkley in 1936 in New South Wales. This was in response to Australians' concerns about perceived inequitable petrol pricing, and allegations of transfer pricing by foreign oil companies to limit their tax...

. The directors did not want Ampol to buy the shares of RW Millers. So the directors of RW Millers issued $10m of new shares. They said it was to finance the completion of two tankers. The shares were given to Howard Smith Ltd who were going to take over RW Millers, and that blocked Ampol’s rival bid. Ampol already controlled (with an associated company) 55% of the shares, and without the issue, Howard Smith Ltd had no hope of succeeding in taking over the company. But with the new issue, Ampol could not complete its acquisition.

Street J said that the argument of the directors that the tanker purchase was the dominant purpose was ‘unreal and unconvincing’.

Judgment

Lord Wilberforce held that the issue was intra vires but that it was exercised for an improper purpose. ‘To define in advance [what that means is] impossible.’ It must be adjudged ‘in the light of modern conditions’, and referred back to Hogg v Cramphorn Ltd. His judgment continued.