Casenotes Statutory minority protection PDF

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Casenotes by Professor Bryan Clark...

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Statutory minority protection cases – s 994, CA 06 Re Bovey Hotel Ventures Ltd (1982) Unreported It was said that to establish unfairly prejudicial conduct, the petitioner did not have to show that the persons controlling the company knew they were acting unfairly, or that they acted in bad faith. The test was whether a reasonable bystander, observing the consequences of the conduct, would regard it as having unfairly prejudiced the petitioner's interests. In this case, a company was owned in equal shares by a husband and wife. On the breakdown of the marriage the wife was excluded from management and the company incurred a large VAT bill. She applied for an order for the purchase of either her own or her husband's shares. It was held that the exclusion from management and loss of profit by payment of the unpaid VAT diminished the value of the wife's shares and this was unfairly prejudicial conduct. Re London School of Electronics [1986] Ch 211 The school was 25% owned by the petitioner and 75% owned by another company, CTC, which was mainly owned by two people. The petitioner was employed as a teacher by CTC until the relationship between the parties broke down, when there was a resolution to remove the petitioner as a director of LSE. CTC then transferred most of LSE's students to its own school. The petitioner left CTC and LSE and set up a rival institution, taking 12 former LSE students with him. He petitioned under s.459 (now 994) and it was claimed by CTC that he was not entitled to a remedy because he had himself behaved prejudicially toward the company by taking 12 students away. Held: "Clean hands" were not an overriding requirement, though it might affect the relief the court was prepared to grant. Re a Company (No 00477 of 1986) [1986] BCLC 376 The petitioners held all the shares in a company (A Ltd) which they later sold to O plc in return for an issue of shares in O plc. The understanding was that the relationship between them and the controlling shareholders in O plc would be a "partnership". The petition was brought against the controlling shareholders of O plc on the ground that the dismissal of S, one of the petitioners, in breach of his service contract with O plc, was contrary to their agreement and unfairly prejudicial. Held: A member's interest in a company in which he has invested his capital may include a legitimate expectation that he will continue to be employed as a director and exclusion from management may be unfairly prejudicial. Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126

The petitioner had joined three other men who were all to be equal partners in a joint venture in which they would each invest £25,000. All were to take part in the management but the petitioner thought the others were not pulling their weight financially or managerially and he quarrelled with them after which he was excluded from management. The others refused to purchase his shares. Held: His legitimate expectation to be involved in the management had been breached. The others must therefore buy his shares under s 461 (now 996).

Re Sam Weller & Sons Ltd [1990] Ch 682 The petitioners owned 42% of the shares in a family company. Their uncle was the majority shareholder and his conduct had caused the company to fail to increase its dividends in 37 years despite having been prosperous in recent years. At the same time, the directors of the company were receiving substantial salaries. This was held to be unfairly prejudicial conduct, even though the low dividends applied equally to all the members. Re D R Chemicals Ltd (1989) 5 BCC 39 The majority had 60% and the minority 40% of the shares. The majority could thus pass ordinary resolutions but required the support of the minority for special resolutions. The majority shareholder issued shares directly to himself and increased his shareholding to 96%, diluting the minority to 4%, so that the minority had lost any control over the company. This was held to be unfairly prejudicial conduct.

Re Elgindata Ltd [1991] BCLC 959 The petitioners made various complaints against the controlling directors, including exclusion from management, late payment of dividends, mismanagement and extravagance. The petition was eventually granted on the basis that the directors had used assets of the company for their personal benefit. On the issue of mismanagement, the court felt that serious mismanagement could amount to unfair prejudice, but the circumstances where this could be so would be rare. Anderson v Hogg 2002 SLT 354 A brought a reclaiming motion following the dismissal (2000 S.L.T. 634) of his petition against H under the Companies Act 1985 s. 459 (now s 994). Following an agreement by members to cease trading and to sell off the assets of an informally run company, H made an unauthorised

payment to himself in respect of redundancy or the termination of his employment. A had not tried to persuade the company itself to take action to recover the payment. The Lord Ordinary dismissed the petition on the basis that A had failed to show that the payment to H was unfair as well as being unlawful, and further held that it was inappropriate to proceed by way of a petition under s. 459 in circumstances where a remedy was available in an ordinary, derivative action brought on behalf of the company by the minority shareholder under the common law. Summary: The Inner House Held, allowing the reclaiming motion (Lord Prosser dissenting), that the existence of circumstances which justified the commencement of a derivative action to recover monies from a company director and shareholder a petition did not necessarily act as a bar to proceedings brought under s. 459. In general it was possible for a petitioner to succeed if he could show that an action, or proposed action, of the company satisfied the test of unfairness in s. 459, notwithstanding that the action might be lawful in that the company had acted or was acting within its powers. The test of unfairness to be applied was not a subjective test but was based upon equitable principles of good faith, O'Neill v Phillips [1999] 1 W.L.R. 1092 and Guidezone Ltd, Re [2001] B.C.C. 692 applied. In the instant case, H had maintained that the redundancy payment, although unlawful, was not unfair. However the refusal of a s. 459 petition on that basis could not be justified because such a refusal, of necessity, required the court to apply a subjective test of fairness and to consider whether the actions of a shareholder were reasonable.

Case List – Just and Equitable Winding Up Legitimate Expectations in private ‘quasi-partnership’ companies Ebrahimi v Westbourne Galleries [1973] AC 360 E and N had run a successful partnership business selling carpets and tapestries. They decided to incorporate the business as a ltd company. The business flourished and later N sought entry of his son, G into the business and E agreed. Some shares were transferred from N and E to G. A dispute then ensued and N and G excluded E from the management of the company and removed him as director. Furthermore, the considerable profits of the business were paid out as directors’ salaries rather than as dividends which kept E away from the profits. He sought a winding up order on the just and equitable ground and the House of Lords granted this on the basis that he had a legitimate expectation to be involved in and share in the profits of the business which rendered it just and equitable that the company be wound up. Exclusion from management Re A and BC Chewing Gum [1975] 1 All ER 1017

The petitioner had put up 1/3 of the capital and had been promised an active role in the management of the company. When he was excluded, the court granted a petition to have the company wound up. Fraudulent promotion Re London and County Coal Co (1866) LR 3 Eq 355 The company was promoted fraudulently and its purported future business plans were found to be false. The company was set up merely to take money from subscribers of shares without any intention of carrying on any substantial business. A winding-up order on the just and equitable ground was granted. Destruction of the substratum of the company Re German Date Coffee Co (1882) 20 Ch D 169 The company had been formed to obtain a German patent to manufacture coffee from dates. A request for the patent was refused. It was held that a winding-up petition would be granted. Re Kitson & Co [1946] 1 All ER 435 Before a winding up order is granted, it must be that all of the company’s main activities become impossible. In this case the company’s engineering business had ceased when it was sold. The company had other activities, however, which remained capable of achievement. A petition to wind the company up was therefore not successful.

Deadlock Re Yentide Tobacco [1916] 2 Ch 426 The company had two directors, each with an equal number of shares. They could not agree as to how the company should be managed. As there was no provision for breaking the deadlock, a petition was granted to wind up the company on the just and equitable ground. Note that there is no deadlock as such if there is any procedure under the company’s articles or the general law by which one side could get decisions made (e.g. by appointing additional directors, using casting votes, going to arbitration, dismissing directors or petitioning the court under s 371 to hold a meeting and setting the quorum at one) Lack of probity of directors Re Bleriot Manufacturing (1916) TLR 523 The court held that where directors had misappropriated company property, this would sufficient grounds for winding the company up. Re Lundie Bros [1965] 2 All ER 692 The court granted a winding-up petition in a situation where the directors ran the company as if it was their own business without taking any account of the interests of the shareholders. In addition, the petitioner had been excluded from management. Breakdown of trust and confidence where there is ‘no fault’? Re RA Noble (Clothing) Ltd [1983] BCLC 273 In this case, the court viewed that where the respondent acts in such a way as to undermine the trust and confidence of the petitioner (even if such conduct is not in itself underhand, then that in itself may give grounds to the winding-up of the company on the just and equitable ground. The court also sanctioned a kind of ‘no-fault divorce’ and viewed that whenever the parties in a quasi-partnership company suffered an irretrievable breakdown of trust and confidence, either party may bring an action to have the company wound up in a similar fashion as is the case in partnership law Loch v John Blackwood[1924] AC 783 Directors failed to provide corporate information to shareholders and to hold company meetings and in general ran the company as if it was their own property – there was a breakdown of trust and confidence. A windingup order was granted. But see Re Guidezone [2000] where the court viewed that the grounds for an action under s 122 could be no wider than an action under s 459 and hence the winding-up of the company on the just and equitable ground could not be ordered in ‘no fault’ scenarios....