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Issues Involved
1. Contractual Obligation to Employees 2. Contractual Obligation to Associated Newspapers 3. Ultra Vires and Gratuitous Payments 4. Justification of Compensation Payments Detailed Analysis 1. Contractual Obligation to Employees The defendants argued that on October 17, 1960, the defendant company became contractually bound to its employees to make the payments in question. They claimed that promises were given to the employees' representatives in consideration of their continued work and facilitation of the takeover, which the employees accepted by continuing to work. The court rejected this plea, noting that the defendants had always intended any payment beyond legal entitlement to be ex gratia. The court found no evidence that any employee did anything beyond their contractual obligations based on any promise from the defendant company. Thus, the plea was dismissed. 2. Contractual Obligation to Associated Newspapers The defendants also claimed a contractual obligation to Associated Newspapers to make the payment. The court noted that before October 6, 1960, there was no contract between the defendant company and Associated Newspapers, as all negotiations were subject to the approval of Associated Newspapers' board. The court found that clause 6 of the agreement did not incorporate the letters into the contract to create a binding obligation. The court also rejected the alternative submission that the inclusion of the formula in Mr. Cadbury's letter induced Associated Newspapers to enter into the agreement, as there was no proof of inducement, and the terms of the letters did not indicate an intention to create a contractual obligation. 3. Ultra Vires and Gratuitous Payments The plaintiff argued that the proposed payment of compensation was gratuitous and ultra vires the defendant company. The court referred to several authorities, including Hutton v. West Cork Railway Co. and In re Lee, Behrens & Co. Ltd., to establish that a company's funds cannot be applied in making ex gratia payments as such. The court concluded that gratuitous payments are only valid if they meet the tests of being reasonably incidental to the carrying on of the company's business, bona fide, and for the benefit of the company. The court found that the proposal to pay compensation was motivated by generosity towards employees and a desire to avoid criticism, rather than the interests of the shareholders. Therefore, the payment was deemed ultra vires. 4. Justification of Compensation Payments The defendants attempted to justify the payments by arguing that they were linked with the sale of the company's assets and were in the company's interest. They cited Kaye v. Croydon Tramways Co. to support their argument. However, the court found that the linkage alone could not justify the payments. The court noted that the onus was on the defendants to justify the payments on the principles stated in the Lee Behrens case, which they failed to do. The court concluded that the decision to distribute the funds was not taken in the interests of the company but was motivated by a desire to treat employees generously. Consequently, the proposal to pay compensation was one that a majority of shareholders could not ratify, following the precedent set in the Hutton case. Conclusion The court concluded that the defendants' proposals to pay compensation were ultra vires and could not be justified under the principles established in relevant case law. The payments were motivated by considerations that the law does not recognize as sufficient justification, and therefore, the majority of shareholders were not entitled to ratify the proposal.
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