Howard Smith v Ampol Petroleum Limited [1974]

Company
A and company B were majority shareholders in company M.
Company
A and company H made competing takeover bids for company M.
Directors
of company M favoured company H’s bid, but Companies A and B would not accept
the offer.
Directors
of company M then issued new shares to company H.
Contended
that their primary purpose in doing so was to raise new capital, and other
purpose was to reduce control of Companies A and B so that company H’s bid
would succeed.
Privy
Council held [Australian case] primary purpose of issue was in fact to reduce shareholding
of Companies A and B.
Was
unconstitutional for directors to use their power to allot shares for primary
purpose of destroying an existing majority or creating a new majority.
Proper
approach to take in these cases:
1.  Court must look at source of power in order
to ascertain its limits.
2.  Court must determine actual purpose for which
power exercised.
3.  Actual purpose must then be measured against
permissible purposes for which power given.

If this actual purpose is a proper one, it will not be
tainted by presence of some other improper, but insubstantial, purpose.