Share Issues to Thwart Takeovers: Legal Risks

Introduction Recent press reports have described a public company’s board issuing a substantial block of new equity to a friendly vehicle in order to defeat an activist shareholder’s bid for control. The board described the allotment as necessary to safeguard long-term strategy and preserve value for stakeholders. This development raises immediate and classic corporate law questions about directors’ powers, the proper purpose doctrine, shareholder pre-emption rights, and available remedies. The issue is legally important because it tests the boundary between legitimate defensive measures and fiduciary abuse, implicating statutory duties in the Companies Act 2006 (UK), well-known common law controls on purpose, and remedies for unfair prejudice or improper allotment.

Legal Background Under the Companies Act 2006 (UK) directors must act within their powers and for proper purposes and exercise independent judgment and reasonable care (notably ss.171–177). The allotment or issue of shares is an exercise of the board’s substantive power that, while often within board discretion, can be subject to legal limits set by statute, the company’s articles and equitable principles. English and Commonwealth authorities have long applied the ‘‘proper purpose’’ doctrine where power to allot or issue shares has been used to alter the control of a company. Notable authorities include Hogg v Cramphorn [1967] 1 Ch 254 (directors invalidly issued shares to frustrate a takeover), Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (House of Lords: issue of shares for the purpose of diluting a bidder was improper), and Gambotto v WPC Ltd (1995) 182 CLR 432 (Australian High Court: procedural/legislative limits on share allotment used to oppress minority shareholders). More recent UK Supreme Court authority on proper purpose and directors’ powers, such as Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, reiterates that courts will examine motive and context when assessing the exercise of discretion.

Critical Analysis Applying these principles to the reported facts, the central legal question is motive: was the allotment genuinely aimed at protecting the company’s long-term business, or was it motivated primarily to prevent a change in control? The courts approach this by asking whether the power was exercised for a purpose within the scope of the power conferred by the articles and law. In Hogg v Cramphorn Buckley J set aside share allotments where directors used their power to issue shares for the improper purpose of repelling a takeover — despite an asserted protective motive. Howard Smith emphasises that the court will look at the substance over the label: even if directors claim commercial reasons, if the dominant purpose is to alter control the allotment risks invalidation.

The conduct described in the reports gives rise to several possible legal challenges. First, affected shareholders may apply to the court for an order setting aside the allotment as ultra vires or for an order rectifying the register if the issue was void. Hogg suggests that courts will set aside an allotment obtained for an improper purpose. Second, minority shareholders could bring an unfair prejudice petition (under s.994 CA 2006) arguing that the allotment constitutes unfairly prejudicial conduct because it defeats legitimate expectations and dilutes voting power. Third, there is scope for a derivative claim where the company has suffered loss from directors’ breaches of duty (ss.260 et seq. CA 2006). Remedies could include rescission of the allotment, declaration of nullity, damages, or injunction.

Several factual points will be decisive but are not resolved in the news reports: whether pre-emption rights in the articles or statute were observed; whether independent non‑executive directors were involved and whether they received full information; and whether there was an immediate threat to company assets that justified emergency action. If board minutes and contemporaneous advice demonstrate a considered assessment of commercial threats and independent advice, courts may be more reluctant to intervene. Conversely, a rapid allotment timed to frustrate a known bid, coupled with lack of shareholder consultation or shadowy preferential terms, will fit the Hogg/Howard Smith paradigm and make successful challenges likely.

Opinion & Outlook On balance, precedent strongly disfavors directors using share issues primarily to influence control contests. The established jurisprudence gives courts clear tools to police motive and to protect shareholder rights. Practically, boards facing a hostile approach should prefer transparent governance: convening shareholder meetings, invoking clearly drafted articles, relying on special shareholder resolutions where necessary, and documenting objective commercial reasons supported by independent advice. Regulators and policymakers could strengthen protections by clarifying statutory pre-emption regimes and by enhancing disclosure and timing rules for intraday allotments tied to control disputes.

From a market perspective, attempts to entrench incumbents through opaque equity issues risk reputational harm and litigation costs. English and Commonwealth courts have shown willingness to set aside such defensive devices, and the risk of an unfair prejudice petition or derivative claim should counsel restraint. Boards can lawfully defend company strategy, but must ensure any defensive issuance is demonstrably proportionate, for a proper purpose, and — where possible — ratified by shareholders.

Conclusion The reported board allotment highlights a perennial tension between managerial autonomy and shareholder democracy. Rooted in authorities such as Hogg v Cramphorn and Howard Smith, the law requires directors to exercise share‑issue powers for proper purposes and within statutory and contractual limits. Absent clear, commercial, and documented justification, a defensive share issue risks being set aside and attracting unfair‑prejudice or derivative remedies. The lesson for directors is simple: preserve legitimacy through transparency, independent scrutiny, and adherence to procedural safeguards.