This Supreme Court of Canada decision has raised questions as to the nature and extent to which directors owe a duty to non-shareholders.
Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper.
The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision of Howard Smith Ltd v. Ampol Ltd.[9] The case concerned the power of the directors to issue new shares.
[10] It was alleged that the directors had issued a large number of new shares purely to deprive a particular shareholder of his voting majority.
[7] If so, an incidental result (even desirable) that a shareholder lost his majority, or a takeover bid was defeated would not itself make the share issue improper.
The test is a subjective one—the directors must act in "good faith in what they consider—not what the court may consider—is in the interests of the company..." per Lord Greene MR.[12] However, the directors may still be held to have failed in this duty where they fail to direct their minds to the question of whether in fact a transaction was in the best interests of the company.
However, the more pragmatic approach illustrated in the Australian case of Mills v. Mills normally prevails: "[directors are] not required by the law to live in an unreal region of detached altruism and to act in the vague mood of ideal abstraction from obvious facts which [sic] must be present to the mind of any honest and intelligent man when he exercises his powers as a director.
Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational… It is for the directors to judge, provided it is a matter which is reasonably incidental to the carrying on of the business of the company… The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.
"Directors cannot, without the consent of the company, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings.
However, a more modern approach has since developed, and in Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498 the court held that the rule in Equitable Fire related only to skill, and not to diligence.
With respect to diligence, what was required was: This was a dual subjective and objective test, and one deliberately pitched at a higher level.
More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively and subjectively; in the United Kingdom the statutory provisions relating to directors' duties in the new Companies Act 2006 have been codified on this basis.
In many countries there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure.