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Company’s Payments for Favourable Votes was Lawful

In a decision of importance to company lawyers, the Court of Appeal has ruled that there is no objection in principle to a company paying investors to vote in favour of a resolution whilst withholding such payments from those who do not – so long as everything is ‘open and above board’.

A company had issued $100 million in guaranteed loan notes with a fixed maturity date. However, as part of a re-structuring exercise, the company had proposed that a payment of interest due under the notes be postponed. The company stated that cash payments would be made to those who voted in favour of the resolution but denied to those who voted against it or abstained.

The resolution was passed by an overwhelming majority; however two individuals (the claimants) who had invested $1.2 million in the notes argued that the payments made to positive voters were ‘in the nature of a bribe’. Seeking the return of their investment, the claimants argued that the payments were inherently unlawful under English company law, having been made in breach of the fundamental ‘pari passu’ principle that all members of a class should be treated equally.

The claimants’ arguments failed at first instance and, in upholding that decision, the Court of Appeal ruled that it was ‘inappropriate to speak of bribery’ in circumstances where the arrangements were fully disclosed to all investors. It was not a case of investors having ‘sold’ their votes and there was nothing wrong in principle with such arrangements so long as full transparency was maintained.