Minority Protection Essay PDF

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Are the minority shareholders adequately protected? When there is wrong done to the company which undermines interest of minority shareholders there are options available to them to pursue a derivative claim against the wrongdoer or petition to seek unfair prejudicial or winding up. Therefore the qu...

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Are the minority shareholders adequately protected? __________________________________________________________________________ When there is wrong done to the company which undermines interest of minority shareholders there are options available to them to pursue a derivative claim against the wrongdoer or petition to seek unfair prejudicial or winding up. Therefore the question concerns a discussion on the efficacy of unfair prejudicial petition in safeguarding interest of minority shareholders. A comparison will be made as to all remedies available for minority shareholders with case laws and whether any reforms propounded if it is ineffective. Derivative Claim The common law position on derivative claim is illustrated in Foss v Harbottle the courts held that company is the proper plaintiff to sue as directors owes a fiduciary duty to the company. Edwards v Halliwell supported this stance where shareholders have no standing to sue and the impropriety may be ratified except when it directly infringed member’s rights or fraud on members. However, interest of minority shareholders will still be undermined if the majority shareholder is associated with the culprits since there will be insufficient votes for a simple majority. Hence the law today provides that members may seek to bring actions in the name of the company in virtue of Part 11 CA 2006 including impropriety of negligence, breach of duty and trust. Section 260(3) CA 2006 provided that a derivative claim can be brought on the grounds of director’s wrongdoing. The discretion to allow such claim is conferred on courts taking into consideration factors determining whether permission to sue should be granted is expressed in section 263(3)(a)-(f) CA 2006 such as whether the member was in good faith, fostering favourable outcome for a company, ratification of impropriety was possible, and whether alternative avenue is available. It is crucial that when the wrongdoing was permitted or possibly have been approved and director in compliance with his fiduciary duty to foster company success would not have pursued a claim, courts must reject the approval to claim. The case of Mission v Capital plc v Sinclair illustrated that courts refused to grant permission for derivative claim as the court is satisfied that a director acting in line with section 172 CA 2006 would not pursue the claim and alternative remedy were available to them. Recently in Saatchi v Gajjar & Anor concerning the director made company transactions to obtained loans and purchased vehicle without consent from shareholders, the court is satisfied that a director complying with section 172 CA 2006 would pursue the claim as the wrongs cannot be ratified and shareholder acted on good faith to claim on behalf of the company referring to section 263(3)(a) CA 2006 thus approval is granted. Noting that the wrongdoer holding majority share could have ratified the act and the minority shareholder may not be well acquainted with what is in the best interest of company hence

there will be little incentives to bring a derivative claim owing to lack of financial advantage. Edwin Mujih in ‘The new statutory derivative claim: a paradox of minority shareholder protection’ (2012) propounded that section 263 CA 2006 attempts to discourage trivial claims considering the widened scope in Part 11 CA 2006 but has also made it burdensome for members to overcome hence leaving no better position than in common law. Unfair Prejudice Petition Optionally, members can seek a petition for reliefs when they had been oppressed personally in line with Section 994 CA 2006 enunciated that a member may petition for an order on the basis that company affairs conducted had unfairly prejudiced the member’s interest or the suggested act of company would be so prejudicial. Accordingly, the statute required that claimant’s interest being undermined in the capacity of a member owing to the unfairly prejudicial conduct, in contrast with derivative claim where the impropriety must not be done directly to the member. In Re Westbourne Galleries, the courts found that expulsion of a director who is also minority shareholder was not harsh on him as he was undermined in the position of a director. Nevertheless, the qua member requirement has been interpreted broadly to include that member’s stake can be affected by his removal from management. In the case of Re Ghyllbeck Driving Range, courts held that a member was unfairly prejudiced due to his eviction from management as a director contradicted the partnership agreement. In Gamlestaden Fastigheter v Baltic Partners, the member was able to claim against the directors who wrongly withdrawn company funds even though he is affected as a creditor. Next, the complained act must also be unfairly prejudicial to pursue a claim, in Re A Company, the courts found that director’s deceptive advice to hinder members from getting best bid for their shares was treated as an unfair prejudice act. Whilst in Re Sam Weller & Sons Ltd courts held that low dividend distribution, inflated capital expenditure and excessive director’s salary amounts to unfair prejudice act. Similarly, in Croly v Good, director taking excessive remuneration disregarding the profit sharing agreement constitutes an unfairly detrimental to member. In Re Elggindata Ltd, it was held that wrongdoing must be serious mismanagement concerning defalcation of the company’s assets for personal gain to be construed as unfairly detrimental to member. Moreover, section 994 also safeguard member’s legitimate expectation of involvement in management but was not included in the constitution, Lord Wilberforce in Re Westbourne Galleries acknowledged the notion of protecting member’s expectation. In contrast, O’Neill v Philips concerning the claimant alleged unfair prejudiced as he was promised of entitled to 50% profits but later retracted when company fell into financial hardships, courts held that legitimate expectation must be grounded on a contractual basis thus his claim failed. Conversely, a director’s expectation of participation in management of a quasi partnership usually derived from an informal agreement hence it is likely to be legitimate expectation. In the

recent case of Re Dinglis Properties Ltd, the courts dismissed unfair prejudicial petition due to lack of evidence of an agreement to indicate legitimate expectations. Seemingly, the courts may have inclined towards precluding expectation protection under section 994 petition. Section 996(2) CA 2006 clarified a list of reliefs available if the unfair prejudicial petition is justified, courts have wide discretion power grant an order to require a company to do an act or refrain from doing it, to managing the company’s affairs, buy out of shares or permitting proceedings to be brought on behalf of the company. It can be observed that unjustly prejudicial conduct was not defined in statues and section 994 is drafted widely which includes impropriety done to company such as inflated directors pay. Noting that Shenara Perera in ‘Reconceptualising shareholder remedies to mitigate the problems caused by the overlap between section 994 and Part 11 Companies Act 2006’ (2019) observed that in Clark v Cutland the court allowed members seeking corporate relief under section 994 petition which enabled an aggrieved shareholder to obliquely enforce company’s rights and diminishing the rule in Foss v Harbottle. Shenara (2019) recognised the overlap in section 996(2)(c) and section 260(2)(b) of CA 2006 confers discretionary power on courts to allow derivative action as a remedy of the petition hence circumventing the threshold in section 263 CA 2006. Similarly John Armour in ‘Derivative actions: a framework for decisions’ (2019) enunciated that the Law Commission acknowledged that the relief available under section 994 renders the cases under derivative claim weaker. Although the determination of proper avenue for the member is whether he was directly or indirectly affected by the impropriety done, the line between these two avenues is blurred. Winding up Alternatively, shareholders may seek petition for winding up as the last option pursuant to section 122(1)(g) Insolvency Act 1986, courts may grant such order on the grounds of fairness and equitable. In Fulham Football Club v Richards, Patten LJ held that winding up order must be used as exceptional remedy provided that company is solvent and has surplus to wind up. Therefore, the courts must be satisfied that there is a proof of assets and parties acting reasonably to pursue the order as there is no other possible remedy according to section 152(2) IA 1986. Possible grounds to justify dissolution is illustrated in Re Yenidge Tobacco Ltd where members relationship are irreconcilable resulting in management deadlock; in Loch v John Blackwood where faith and honesty no longer exist among shareholders; the company created was for intention to fraud as shown in Re Walter Jacob Ltd; or when it becomes impossible to reach company’s objective as per Re German Date Coffee Co Ltd. Lord Wilberforce in Re Westbourne Galleries expressed that quasi partnership was created based on mutual confidence, if the expectation to be involved in management is breached, it will be equitable to wind up. However, Lord Hoffman in O Neil v Philips doubted whether

dissolution should be approved when there is possibility for a partnership to carry on business based on constitution which requires the remaining partner to purchase shares at fair value when trust is broken. Note that the recent case of Badyal v Badyal concerning director was validly expelled from the company as he engaged in the trident business and transferred immoderate funds, courts dismissed the petition for dissolution and unfair prejudice on the grounds that not all lost in mutual confidence in a quasi partnership lead to winding up if the person pursuing relief caused the breakdown and the director was not unfairly prejudiced since his impropriety was substantiated. Brenda Hannigan in Drawing Boundaries between derivative claims and unfairly prejudicial petitions (2009) opined that overlapping rules were not resolved in CA 2006 and suggested that aggrieved shareholder should only be allowed to claim personal relief regarding an unfairly prejudicial act, but not a corporate relief claim as the appropriate avenue is derivative action, though petition may be granted if the misconduct could merit a derivative claim. Conclusion, Courts adopting a liberal attitude may result in floodgates of litigation thus the court had to strike a balance between a need to discourage trivial claims against directors and the need to strengthen protection for minority shareholders....