Pro. of Minority shareholder PDF

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The general rule is that the proper claimant in wrongs committed against a company, whether by directors or by third parties, is the company itself: Foss V Harbottle. The ability to decide whether to sue or not is generally vested in the board of directors. A court will not intervene in the internal...

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The general rule is that the proper claimant in wrongs committed against a company, whether by directors or by third parties, is the company itself: Foss V Harbottle. The ability to decide whether to sue or not is generally vested in the board of directors. A court will not intervene in the internal management of a company acting within its powers. However, where certain specified types of wrong are committed by company directors, the court has discretion in appropriate circumstances to permit members to bring a claim in their own name on behalf of the company. Such a claim is known as a derivative claim. Previously, derivative action at common law mainly arises where fraud has been perpetrated on the minority and the wrongdoers were in control. Fraud was defined in Burland V Earle; as when the majority is endeavoring directly or indirectly to appropriate to themselves money, property or advantages which belong to the company or in which the other shareholders are entitled to participate. The meaning of control also attracted criticism. There has been judicial debate over whether actual control is required or de facto control is sufficient. In Prudential Assurance Co Ltd V Newman Industries Co Ltd (No-2); the court of Appeal followed a restrictive approach and in Smith V Croft (No-2); it is stated that if a majority of the independent minority shareholders decide not to support the action, the individual shareholder will not be able to initiate proceedings. Davies concludes that this antipathy shown towards individual shareholders suggests that the derivative action is now seen as ‘a weapon of last resort’. The reform of the law on protection of minority shareholders was brought about by Companies Act 2006 following recommendations by Law Commission Report No.245. Thus, in s.260 (1), a derivative claim is defined as one that is brought by a member in respect of a cause of action vested in the company and that seeks relief on behalf of the company. A key provision of CA 2006 is s.260 (3) which gives shareholders for the first time a statutory right to sue directors in a derivative action on behalf of the company for negligence, default, breach of duty or breach of trust, subject to the court allowing the action to proceed. This covers a broader range of conduct than exists under the present common law. For example, shareholders will be able to bring a derivative action against directors for negligence, even if the directors concerned have not benefited from their negligence. This is a significant change from the present law (Pavlides V Jensen). However safeguards have been introduced to protect directors from ill-founded claims, the main one being that shareholders will need to obtain the court’s consent to continue a claim by showing that they have a prima facie case. S.261 CA 2006 requires a formal leave requirement – a minority shareholder must apply to the court for leave to bring a derivative

claim. Whether or not a shareholder gets leave is governed by the provisions of s.263. Under this provision, leave must be refused where the cause of action arises from an act or omission that has not yet taken place and the act or omission has been authorized by the company. Finally, leave will be refused where the act or omission was authorized in advance by the company or where it was ratified by the company afterwards. The CA 2006 does not give a definitive right to shareholders to claim against the directors nor does it compel the court to allow or disallow derivative claims under defined circumstances. But it is expected that the more defined criteria for derivative and simplified procedure would help minority shareholders to pursue their claims. Although many of the archaic rules have been swept away, the new provisions may still prove to be a formidable obstacle to any shareholder seeking to bring a claim. In both Mission Capital Plc V Sinclair and Franbar Holdings Ltd V Patel; permission to continue the derivative claim was refused. The approach in Airey V Cordell still appears to represent the law; the court only has to ‘be satisfied that a reasonable board of directors could take the decision’. But it remains a tough question whether the court will be able to know whether reasonable directors would make such a decision. S.168 of CA 2006 Resolution to remove director: (1) A company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him. (2) Special notice is required of a resolution to remove a director under this section or to appoint somebody instead of a director so removed at the meeting at which he is removed. (3) A vacancy created by the removal of a director under this section, if not filled at the meeting at which he is removed, may be filled as a casual vacancy. (4) A person appointed director in place of a person removed under this section is treated, for the purpose of determining the time at which he or any other director is to retire, as if he had become director on the day on which the person in whose place he is appointed was last appointed a director. (5) This section is not to be taken— (a) as depriving a person removed under it of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director, or (b) as derogating from any power to remove a director that may exist apart from this section.

Derivative action can be brought under s.994 CA 2006 “A member of a company may apply to the court by petition for an order…. On the ground (a) 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)...” With the availability of a wide range of remedies under s.996 CA 2006 in a wide variety of situations s.994 offered majority or minority adequate protection for unfairly prejudicial conduct. In O’Neill Vs Phillips, guidance was given on what constitutes ‘unfair prejudice’. Lord Hoffman seems to suggest that there are only two ways in which unfair prejudice may be established: First, there has to be some breach of the terms in which (the petitioner) agreed that the affairs of the company should be conducted”, or secondly “cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal rights”. Typical examples of unfairly prejudicial conduct include such common shareholder complainants as exclusion from management, misappropriation of assets, and failure to pay dividends. But in other cases where the courts seem to have paid less regard to what the shareholders themselves agreed, and to be more driven by the judges own opinions of what behavior is acceptable in a quasi-partnership. Compared to s.122 (1) (g) of the Insolvency Act 1986 which provides that 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 a wide range of remedies are available for unfairly prejudicial affairs of company. S.996 (1) CA 2006 provides that the court may make such order as it thinks fit for giving relief in respect of the matters complained of under s.996 (2) (e) court may order for the purchase of the shares of any members of the company by other members or by the company itself and in the case of a purchase by the company itself, the reduction of the company’s capital accordingly. In Re Bird Precision Bellows Ltd, affirmed by the court of Appeal, the court reviewed the approach to be adopted towards valuing shares. It was stressed that the overriding objective was to achieve a fair price and that normally no discount would be applied given that the petitioner is an unwilling vendor of what is, in effect, a partnership share (i.e.; the shares will be valued on a pro rata basis according to the value of all the issued share capital). The right to petition under s.994 is however not inalienable. So, in the Fulham Vs Richards case the CA upheld a decision that a claim based on an unfair prejudice petition under s.994 of the CA 2006 was capable of being referred to arbitration. S.994 gave a shareholder an optional right to invoke the assistance of the court. There was nothing in the provisions making the underlying dispute unsuitable for determination by arbitration on public policy grounds.

Lord Hoffman’s judgment in O’Neil, cautions judges against using the concept of legitimate expectations to override parties’ own understandings. The concept of unfair prejudice comprised not only ‘unlawful conduct’ but also ‘lawful but inequitable conduct’. According to Sealy, unfair prejudice may be used as a means of oppression by minority shareholders because of their board scope and easy access. One effect of unfair prejudice action is under s.996 (2) CA 2006 to authorize civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct. Although the procedural obstacles for derivative action under s.260 are absent, if unfair prejudice remedies are to be used for pursuing corporate relief, safeguards should exist against such abuse. That is the reason why judges are conferred with extensive discretionary powers. However, balancing discretionary powers remains the main challenge for the courts in order to promote fairness in the conduct of a company’s affairs, protect aggrieved shareholders from unfairly prejudicial conduct, and prevent malicious and vexatious lawsuits....