Company Law

Borland's Trustee v. Steel Brothers & Co. Ltd.

[1901] 1 Ch 279

Facts

Steel Brothers & Co. Ltd. was a private company whose articles restricted the transfer of shares.
The articles provided that if a shareholder became bankrupt, the shareholder’s shares had to be transferred to specified persons at a price calculated according to the articles.
Borland was a shareholder in the company and was later declared bankrupt.
His trustee in bankruptcy became entitled to administer his property for the benefit of creditors.
The company attempted to enforce the compulsory-transfer provision against the trustee.
The trustee argued that:
a share was ordinary personal property;
the bankruptcy provision improperly deprived him of its full value;
the restriction was repugnant to absolute ownership; and
it amounted to an invalid restraint or perpetuity.
The company argued that Borland had never owned an unrestricted piece of property.
He had acquired shares subject to the rights and obligations defined by the company’s constitution.

What is the legal nature of a share in a company?
Whether articles may require compulsory transfer upon a shareholder’s bankruptcy.
Whether such a transfer restriction is invalid as repugnant to ownership or as a restraint on property.

A share is not a proportionate piece of the company’s physical assets.
It is an interest consisting of:
contractual and statutory rights;
voting and dividend entitlements;
obligations to contribute unpaid capital; and
restrictions contained in the company’s constitution.
Shares are property, but the nature of that property is defined by the Companies Act, memorandum and articles.
A person acquiring shares accepts the constitutionally attached incidents of membership.
A bona fide transfer restriction in the articles is valid where it regulates membership and does not amount to an unlawful confiscation.

The Court rejected the trustee’s assumption that Borland first obtained an unrestricted property right which the articles later attempted to remove.
The compulsory-transfer provision existed when the shares were acquired.
It was therefore part of the property itself from the beginning.
Borland’s rights included the possibility of dividends and voting, but they were inseparable from the obligation to transfer upon bankruptcy.
His trustee could obtain no better title than Borland possessed.
Bankruptcy transferred the shareholder’s existing interest to the trustee; it did not enlarge that interest or remove its constitutional conditions.
The restriction served a legitimate private-company purpose.
It prevented outsiders or bankruptcy representatives from becoming permanent members contrary to the agreed structure of the company.
The required price was calculated according to a pre-existing valuation mechanism and was not shown to be a colourable confiscation.
The Court also rejected the perpetuity argument.
The provision did not create a remote future interest in separate property.
It regulated the present incidents of shares issued by a continuing company.
The judgment therefore described a share as an interest measured by money and made up of mutual rights and obligations under the company’s constitution.

The compulsory-transfer provision was held valid and enforceable against the trustee.
The trustee had to transfer the shares according to the articles.
The case established the classic definition of a share as a bundle of rights and obligations, rather than a direct interest in corporate assets.
Use this case for: shares are property, but the property consists of constitutionally defined rights and liabilities and may validly carry transfer restrictions.