There is no overarching objective test of this but

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There is no overarching objective test of this but use the following examples to draw a similar factual scenario C.1 Examples of Proper Purposes Raising capital: o Generally raising capital is a proper purpose o HOWEVER NOTE: Although the courts give credit to the bona fide opinion of directors and respect their judgment with respect to management decisions, the court may have reason to doubt this assertion when, objectively viewed at the relevant time, the company was not in a real, critical or urgent need of finance” {Howard Smith} Financial Stability o A desire to give financial stability to the company is a proper purpose (ie. Frustrating the aims of a hostile bidder) {Darvall} o Also issuing shares to prevent a party who would have a destabilising interest from taking control MAY be a proper purpose {Darvall} o This includes where the party seeking control is a business competitor who aims to run the business down {Cayne} In determining what are proper purposes it will generally be a consideration of raising capital and simply thing if it was necessary C.2 Examples of Improper Purposes Issuing shares to deprive existing majority shareholder of control o This will be an improper purpose {Howard Smith; Darvall} To dilute voting power of a shareholder to below 50% to defeat a hostile takeover bid and favour a preferred shareholder who would retain management is improper {Howard Smith} 3
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Frustration of takeover offers by means other than issuing shares is improper {Darvall} I ssuing shares to confer a benefit on directors is a improper purpose C.3 Summary of Purposes for Issuing Shares D. What Actual Purposes was the power exercised for? After determining what are proper and improper purposes by which the power can be exercised for, the next question is a factual question of what purposes the director was actually exercising the power for. Ascertaining the actual purpose for the exercise of a power requires an investigation into the state of mind of the directors and the motive on which they acted {Howard Smith} The main issue surrounding this question is where there are many purposes for which the director was acting for D.1 ‘Substantial Purpose’ Test Where there are several purposes, a breach occurs if the substantial or dominant purpose of the directors’ exercise power is improper Therefore after working out the real reason why the directors exercised a power, then make sure that this is the substantial purpose for which the power was exercised Proper Purposes Improper Purpose To raise capital To dilute the value of shares held by existing shareholders, where there is no demonstrable benefit to the company: { Kokotovich} As consideration for the purchase of an asset To consolidate the voting power of certain shareholders: { Whitehouse} To provide employees with shares under an employee share scheme Diluting voting power: To facilitate a friendly takeover bid by weakening majority shareholder voting power: { Howard Smith} and {
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