CH12 Statutory Minority Protection PDF

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STATUTORYMINORITYPROTECTION❖ Minority shareholdersin anowned-managedprivate company➢ frequently workfor the companyand➢ participates inits management● Two main claims forminority shareholders:○ Just andequitablewinding up○ Unfair prejudice➥ Dominant way for aminority to seekredressADVICE FOR PROBLEM...

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ADVICE FOR PROBLEM QUESTIONS

STATUTORY MINORITY PROTECTION ❖ Minority shareholders in an owned-managed private company ➢ frequently work for the company and ➢ participates in its management

❖ It is important, when applying both s.994 Companies Act 2006 and s.122(1)(g) Insolvency Act 1986, ➢ to decide whether a company is a ‘quasi-partnership’. ❖ If it is, the court is more likely to take account of ‘equitable considerations’ between the members, which often means that ➢ the court will give effect to informal agreements and understandings which the members have reached amongst themselves

Held: the court found that a company that had initially been a quasi-partnership might cease to be such as the relationship between its members changed. The case shows that categorising a company as a quasi-partnership is a dynamic, and not a static, exercise. ➽The court must take account of changes in the shareholders’ relationships.

Sudicka v Morgan (2019)

This case addresses a point about whether shareholders can exclude, or limit, the unfair prejudice regime, under s.994 Companies Act 2006, by the terms of their own contracts. ➥ One way shareholders might try to do that would be by stating, in say a shareholders’ agreement, that their company was not a quasi-partnership. Such an agreement, if binding on the court, would not exclude the unfair prejudice regime but it would limit the court’s ability to take into account ‘equitable considerations’ between the members. However, in this case, the court held that a shareholders’ agreement, which expressly provided that there was no partnership between the shareholders, did not prevent.

Waldron v Waldron (2019)

● Two main claims for minority shareholders: ○ Just and equitable winding up ○ Unfair prejudice ➥ Dominant way for a minority to seek redress

Re AMT Coffee Ltd (2019)

A company might sometimes be a quasi-partnership only insofar as some members of the company are concerned. Or, to put it slightly differently, the relationship between some members of a company may be a quasi-partnership relationship, whilst the relationship with other members is not. ➽ In such a case, equitable considerations might then apply between the quasi-partners but would not apply to the other members of the company.

WINDING UP ON THE ‘JUST AND EQUITABLE’ GROUND

Ebrahimi v Westbourn e Galleries Ltd (1973)

➔ This type of claim derives from partnership law where the Court had equitable jurisdiction to dissolve a partnership ◆ This was used where the relationship had broken down and the only alternative was to dissolve the partnership ●

s.122(1)(g) Insolvency Act 1986 ○ ‘a company may be wound up by the Court if the Court is of the opinion that it is just and equitable that the company should be wound up .’

Re German Date

1. The company was incorporated to take over the Oriental rug business which N and the petitioner, E, had been running as a partnership for some 10 years. 2. Initially N and E were equal shareholders and the only directors. 3. When N’s son joined the company as director and shareholder, E became a minority both within the board and at the general meeting, where he could be outvoted by the combined shareholding of N and his son. 4. Relations between E on the one hand, and N and his son on the other, broke down and E was voted off the board using the power conferred by s.303 CA 1985 (now s.168 CA 2006).

Held: It was held that even though E had been removed from the board in accordance with the Companies Act and the articles of association, the just and equitable ground conferred on the court the jurisdiction to subject the exercise of legal rights to equitable considerations.

1. The memorandum of association of a company stated that it was formed for working a German

Held: the substratum of the company had failed, and it was impossible to carry out the objects for which it was formed ; and

Since E had agreed to the formation of the company on the basis that the essence of their business relationship would remain the same as with their prior partnership, his exclusion from the company’s management was clearly in breach of that understanding. It was therefore just and equitable to wind up the company

Coffee Co (1882) ❖ Lord Wilberforce listed the typical elements in petitions brought under just & equitable grounds: ➢ The basis of the business association was a personal relationship and mutual confidence ■ Generally where a partnership has converted into a limited company ➢ An understanding that all or certain shareholders will participate in management ■ Excluding ‘sleeping partners’ ➢ There was a restriction on the transfer of members’ interest preventing petitioner leaving

❖ Lord Wilberforce stressed that the court was entitled to superimpose equitable constraints upon the exercise of rights set out in the articles of association or the Companies Act. ➢ To him, ‘just and equitable’ means: ■ ‘…a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure…’ ●

S.122(1)(g) IA 1986 ○ petitioners should come to court with ‘clean hands’. ○ If a petitioner’s own misconduct led to the breakdown in relations relief

Virdi v Abbey Leisure Ltd (1990)

Re Perfectair Holdings Ltd (1990)

patent, and also for obtaining other patents for improvements and extensions of the said inventions or any modifications thereof or incident thereto; and to acquire or purchase any other inventions for similar purposes; and to acquire or lease buildings, either in connection with the above mentioned purposes, or otherwise for the purposes of the company. 2. The intended German patent was never granted, but the company purchased a Swedish patent, and also established works at Hamburg, where they made and sold coffee made from dates without a patent. 3. Many of the shareholders withdrew from the company on ascertaining that the German patent could not be obtained; but the large majority of those who remained desired to continue the company, which was in solvent circumstances. 4. A petition having been presented by two shareholders:

therefore it was just and equitable that the company should be wound up, although the petition was presented within a year from its incorporation.

1. M, a minority shareholder, brought a winding up petition on the just and equitable ground, alleging that the company had been formed to undertake a single project and, that project having been completed, the company should be wound up. 2. The other directors and shareholders wished to launch the company on a new venture which M said was unfairly prejudicial to his interests. 3. The other shareholders made an open offer to buy his shares in accordance with the articles of association which provided for the determination by an accountant of a fair value of the shares. 4. M rejected that offer.

Held: under the Insolvency Act 1986, s 125 a shareholder was entitled to have the company wound up on the grounds that it was just and equitable to do so unless the court believed that some other remedy was available and that the shareholder was acting unreasonably in not pursuing that other remedy.

1. The directors of a company agreed to liquidate the company once the business and premises had been sold. 2. The agreement was designed to compromise an unfair prejudice petition. Subsequently the petition was amended to seek winding-up on the just and equitable ground. 3. The respondents argued that the prosecution of an action relating to the performance of the agreement to liquidate was itself a sufficient reason for continuing the company's existence.

Held: winding up the company, that the action was not incidental to any part of the company's business but only to the process of liquidation. In the circumstances the liquidation would better be carried on by an independent liquidator than the directors of the company. The court wound up a company on the just and equitable ground where the sole reason for its continued existence would have been to prosecute an action relevant to the liquidation.

will be denied

➢ Example of the grounds which will support a s.122(1)(g) petition: ○ The company’s substratum has failed ■ Need for the petitioner to establish that the commercial object for which the company was formed has failed or has been fulfilled ○

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Deadlock ■ If the relationship has broken down with no hope of reconciliation, the court may order a dissolution

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Justifiable loss of confidence in the company’s management ■ Provided the company is in essence a quasi-partnership, winding up may be ordered where there is a lack of confidence in the competence or probity of its management.

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Fraud ■ Remedies will enable shareholders to recover their investment when the company has been formed to perpetrate a fraud.

Re Thomas Edward Brinsmead & Sons (1887)

Re Yenidje Tobacco Co Ltd (1916)

Loch v John Blackwood Ltd (1924)

Exclusion from participation in a small private company where there was a relationship based on mutual confidence Hardings v Edwards (2014)

Winding up is a measure of last resort ○ If a petitioner brings a claim for just & reasonable winding up he must consider other remedies first ○ A petitioner may only bring a claim for winding up if the other remedies are inappropriate or unavailable;

1. A company fraudulent in its inception, carrying on a small business at a loss, having no capital of its own, all the subscribed capital having found its way into the hands of the real, though not the ostensible, promoters and hopelessly embarrassed by numerous actions brought by shareholders on the ground of fraud.

Held: the Court of Appeal ordered that it was just and equitable that the Company should be wound up because it was the most effective means for recovering for the shareholders the money dishonestly retained by the real promoters (Fraud).

1. Yenidje Tobacco Company Limited had two shareholders with equal shares and each were directors. 2. They could not agree how the company could be managed. 3. There was no provision for breaking the deadlock.

Held: The Court of Appeal held the company could be wound up as just and equitable under the now Insolvency Act 1986, section 122(1)(g) as the only way to break the deadlock.

1. Man set up a company; after his death, company was run by trustee for benefit of his estate (which included trustee’s wife). 2. Trustee began to run business as if it were his own, and allotted shares so as to give himself and his wife voting control, as well as paying himself a large salary.

Held: Other members of company could have no confidence in manner in which trustee ran company.The Court granted the winding-up order.

1. B was a family business involving the running of a large farm. 2. H were two sisters. The first respondent (E) was their older sister. 3. All three had been appointed as directors of B by their mother following the death of their father in 2001. 4. H's case was that the sisters could not agree on the management of B; their dealings with each

Held: The Court decided that the company should be wound up, because of the depth of the shareholders’ disagreement and their inability to agree a method for valuing the minority’s shares.

Lord Cozens-Hardy MR said the following: ‘Certainly, having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company call be carried on, I think the company should not be allowed to continue. I have treated it as a partnership, and under the Partnership Act of course the application for a dissolution would take the form of an action; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form or the guise of a private company?’

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otherwise he would be acting unreasonably and the petition would be struck out

UNFAIR PREJUDICE - S. 994 CA 2006

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s. 994 Companies Act 2006 (replaces s.459 CA 1985) ○ ‘A member of a company may apply to the court by petition for an order… on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself), or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.’

➔ Petitioners generally seek an order requiring the respondent (usually the majority shareholders) to purchase their shares ◆ Although s.996 provides for a wide range of remedies

❖ The ‘company’s affairs’ ➢ A flexible approach is taken by the Court regarding what constitutes the

other over recent years had been marked by accusations and counter-accusations of misconduct descending into bitter acrimony; they could not seem to pull themselves out of the mess into which B's affairs had fallen or agree any matters relating to its future governance; the only way forward was for B to be wound up and the business sold. 5. E's case was that H had shown little interest in helping to run B's affairs; B was profitable and successful, and she was able and willing to continue to run it for the benefit of all if H would leave her alone to do so.

Nicholas v Soundcraft Electronics Ltd (1993)

Re City Branch Group Ltd (2004)

1. S held 75 per cent. of the shares in the company; the remainder of the shares were held by N and another. 2. The company was to be a 75 per cent. subsidiary of S and S was to support the company financially. 3. No financial support was provided between 1980 and 1981 and between 1984 and 1985 when S was in financial difficulties. 4. N applied for relief under the Companies Act 1985, s.459. 5. The judge held that the withholding of financial support was not action in the conduct of the affairs of the company but the conduct of S's own affairs and dismissed the petition. 6. N appealed.

Held: the Court of Appeal held that the failure of a parent company (Soundcraft Electronics) to pay debts due to its subsidiary (in which the petitioner was a minority shareholder) constituted acts done in the conduct of the affairs of the company.

1. R and G each held 50 per cent of the shares in a company, C. 2. C had three wholly owned subsidiaries. All the business of C, which involved investment property portfolios, was carried out through its subsidiaries. 3. C's business was effectively a quasi partnership between R and G, which broke down following differences between them. 4. R had applied for C to be wound up, and G had sought an order under s.459 on the ground that C's affairs had been conducted in a manner unfairly prejudicial to the interests of C, citing breaches of fiduciary duty and misappropriation of funds by R in respect of two of C's subsidiaries.

Held: the Court of Appeal held that an order under s.994 could be made against a holding company where the affairs of a wholly-owned subsidiary have been conducted in an unfairly prejudicial manner and the directors of the holding company are also the directors of the subsidiary.

This reflects the Court’s flexible approach when it comes to what constitutes the ‘company’s affair’.

According to Re Charterhouse Capital Ltd, matters passed by a company’s resolution amounts to the company’s affairs.

‘company’s affairs’ ■ However, it will not constitute the conduct of the company’s affairs if it only concerns the rights of shareholders themselves.

5. On appeal, R argued that his alleged conduct related solely to C's subsidiaries and not to C itself, and therefore the petition could not succeed in relation to C.

Graham v Every (2014) ❖ The ‘interests’ ➢ The petitioner must establish that his or her interest as a member have been unfairly prejudiced ■ Although the petitioner must be a shareholder, the prejudice must not necessarily affect the petitioner in his quality of shareholder

Re Phoneer Ltd (2002)

➢ The use of the term ‘interest’ is expansive ■ This word is used rather than ‘right’ to avoid imposing a narrow scope to the provision ➢ According to Lord Wilberforce: ■ shareholders’ interests can be found as an exhaustive statement of a member’s right under the Articles of Association or the Companies Act ■ also there are situations in which equitable considerations could be ‘superimposed’: ● Where there is a personal relationship between shareholders which involves mutual confidence ● Where there is an agreement that some or all should participate in the management ● Where there are restrictions on the

1. The parties were the present or former shareholders in a company. 2. Originally some of the parties were directors of the company, but the claimant was removed as a director in 2009. 3. Following his removal, the claimant presented a petition for relief from unfair prejudice, under s 994 of the Companies Act 2006.

Held: the court held that an alleged breach of a pre-emption provision in the company’s articles did not constitute the conduct of the company’s affairs, as it concerned only the rights of the shareholders themselves.

1. The company was originally incorporated in 1996 with the petitioner as the sole director and shareholder. 2. In 1999, the respondent agreed to lend the company £500,000, interest-free, in return for a 70% shareholding in the company. 3. The company prospered, primarily as a result of the petitioner’s efforts, and by March 2000 the loan capital had been repaid to the respondent. 4. In September 1999, the petitioner re-negotiated his shareholding in the company and further shares were issued, giving him a 50% shareholding in the company. 5. By February 2001, the petitioner sought to renegotiate the director’s salary structure so as to make it primarily commission-based. 6. The respondent rejected that proposal and relations subsequently broke down between the parties. 7. The company ceased trading on 12 March 2001 and it was accepted that there was a total deadlock in the management of the company’s affairs.

Held: The agreement of September 1999 was an agreement relating to the conduct of the affairs of the company as well as an agreement as to the conduct of affairs between the parties. The petitioner’s attempt to renegotiate the agreement in February 2001 represented a departure from the agreement sufficient, on the basis of existing authority, to bring the matter within s 459 of the 1985 Act. The respondent’s case that s 459 applied was therefore made out and a winding up order would be made pursuant to that section, on the basis of a 50:50 split of the company’s assets. The petitioner sought a winding up order on the just and equitable ground and the respondent cross-petitioned for winding up under s.994. Roger Kaye QC, granting a winding up order since both parties obviously desired it, noted that ‘section 996 enables, but does not compel, the court to make an order under that section’. Although the respondent held 70 per cent of the shares, the judge felt that on the facts of the case ‘justice is served by ordering the winding up of the company… on the basis of a 50/50 split’ ⇒ The Court can fashion a remedy to the wrong done, as in Re A Comp...