Re Smith & Fawcett Ltd [1942] Ch 304

Court: Court of Appeal

Facts: The company's constitution (Article 10) allowed directors to refuse to register share transfers. After Mr. Fawcett, one of the two directors and shareholders, passed away, Mr. Smith co-opted another director and refused to register a share transfer to Mr. Fawcett's executors. Shares were bought by some parties, and the remainder were offered to the executors.

Issue: Did the directors act within their powers under the constitution when refusing to register the share transfers?

Held: The Court of Appeal held that the directors did not breach their duties and were entitled to refuse the share transfers.

Key Judicial Statement: Lord Greene MR stated, “the principles to be applied in cases where the articles of a company confer a discretion on directors are... they must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose.”

💡 Leveluplaw: Directors must act bona fide in what they consider to be in the interests of the company and not for any extraneous purpose. The scope of their discretion is determined by the true construction of the company's constitution, as long as they act within these limits.