4.4.5.4.2 Increase of issued share capital or improper allotment of shares

According to the Law Commission's analysis, when answering the question whether an increase of issued share capital is deemed as unfairly prejudicial, a distinction should be made between two situations, i.e., the increase is selfinterested behaviour or the increase is merely a minor breach of statutory requirements.1 It is clear that an increase of shares is a legal action when the power conferred by the articles is exercised, but in a quasi company, putting one's own interests before those of one's fellow shareholders may amount to unfairly prejudicial conduct.

A unilateral power to allot shares with the improper motive to decrease other shareholders' holdings is an act of unfair prejudice, and it is a blatant case of unfair prejudice if the party exercising the power increases his own share-holding at the same time.2 As in the Re DR Chemicals case, the petitioner's shareholding was decreased from 40 per cent to 4 per cent by a unilateral allotment carried out by the majority shareholder.3 The conduct substantially changed the voting power within the company and constituted unfairly prejudicial conduct. In Clemens v. Clemens Bros. ltd., the plaintiff had a 45 per cent shareholding which gave her enough power to block any special resolutions. Later on, however, resolutions were approved in the general meeting to increase the issued share capital, allot the shares, and set up a trust for employees, which actually watered down the plaintiff's shareholding to 25 per cent and had the effect of preventing her from blocking any special resolution.4 It was held that in this quasi partnership, the plaintiff was entitled to expect her veto power to remain throughout the life of the company. Such an expectation which relied on the relationship of trust and confidence, as analyzed in Ebrahimi, did not dissolve in the corporate structure, and by denying the expectation, the majority was behaving unfairly prejudicially to the minority's interests.

In Dalby, the court ruled that the respondent's secretive allotment of shares to himself was a breach of duty in that it was "plainly and fragrantly putting his own interests before those of his fellow shareholders," and the court went on to say 'in no sense could his action be justified as being in the interests of the company as a whole.'5 This gives the impression that it is possible for the respondents to use the interests of company as a defence. And in this case, the respondent did try to defend himself by invoking the interests of the company, but the judge considered his contention wholly inadequate to justify his action. Without proof that the increase was made bona fide in the interests of the company, an allotment of shares with the effect of diluting other shareholders' holdings is considered as having an improper purpose and unfairly prejudicial. The question nevertheless remains in which cases a defence involving the best interests of the company is capable of being ample justification. It is understandable that a defence in this situation would be extremely difficult and justified only in exceptional situations.