SU12B Company Disputes & Remedies 2 - Workbook v2 PDF

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Company Law inContextMembership Disputes & Remedies 2 - WorkbookContentsWORKSHOP HANDOUT..........................................................................................................................Study Unit Objectives................................................................

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Company Law in Context Membership Disputes & Remedies 2 - Workbook

Contents WORKSHOP HANDOUT..........................................................................................................................3 Study Unit Objectives............................................................................................................................3

TUTORIAL QUESTIONS.........................................................................................................................16 Self-test questions …………………………………………………………………………………………………………………………. 20

How to use this Workbook Before the Workshop: 

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Read or re-read the following article: James Mendelsohn, “Majority Rule” (August 2010) TLEJ 44 (a copy is available in the Study Unit folder). This will (hopefully!) enable you to get a bird’s eye view of the topic. Review your materials from SU12A (Company Disputes & Remedies 1) Print off the Workbook Read the Workshop Handout Attempt Workshop Activities 1 and 2 Read through the rest of the handout to gain familiarity with the subject; you do not need to fill in the gaps as this will be done in the “live lecture” part of the Workshop

During the workshop:    

There will be group discussion of Workshop Activities 1 and 2 at the start You will complete the handout with the aid of the live lecture There will be in-class discussion of Workshop Activities 3, 4, 5 and 6 You will have time to start preparing for the Tutorial, with the tutors “in the background”

After the Workshop:  

Review the handout Continue to prepare for the tutorial

During the Tutorial: 

There will be discussion of the Tutorial Activities

After the Tutorial:  

Review your notes and make sure you understand what has been covered Complete the self-test questions at the end

WORKSHOP HANDOUT

What we have covered so far on the module… • • • • • • • • • • • • • •

SU1: Business Organisations SU2: Corporate Personality SU3: Registration – Key Actors & Process SU4: Articles of Association SU5: Corporate Decision-Making SU6: Corporate Capital SU7: Loan Capital SU8: Capital Maintenance SU9A: Directors’ Duties – The Statutory Framework SU9B: Directors’ Duties – Breaches, Liability and Consequences SU10: Corporate Liability SU11: Corporate Governance SU12A: Membership Disputes & Remedies 1 SU12B: Membership Disputes & Remedies 2

The Objectives of this Study Unit are to be able to: • • • • •

Summarise the problems historically faced by minority shareholders Outline the three mechanisms the law has developed to protect minority shareholders Explain and illustrate the operation of ss. 994 – 996 CA 2006 Explain and illustrate how a company can be wound up under the “just and equitable” grounds Apply the above to realistic practical scenarios

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OVERVIEW 1. 2. 3. 4. 5. 6. 7.

Background: problems facing minority shareholders Background to the current “unfair prejudice” remedy S. 994-996 CA 2006 – constituent parts & key cases Further examples Quasi-partnerships What relief may be given? Winding-up on just and equitable ground

1. BACKGROUND: THE PROBLEMS F FACI ACI ACING NG MINORIT MINORITY Y SHAREHOLDERS WORKSHOP ACTIVIT ACTIVITY Y1 Summarise concisely the challenges faced by minority shareholders.

[Write your answers here]

WORKSHOP ACTIVIT ACTIVITY Y2 Summarise concisely the three mechanisms the law has developed to protect minority shareholders.

[Write your answers here]

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2. BACKGROUND T TO O THE CURRENT “UNF “UNFAIR AIR PREJUDICE” REMED REMEDY Y S. 210 Companie Companiess Act 1948: “Oppression”       

In 1945, the Cohen Committee was convened to look at the challenges facing minority shareholders. This led to the enactment of s. 210 CA 1948 This section allowed minority shareholders to petition the court for relief from ………………………………………….. Any remedy was awarded to the ………………………………………………………………. ……………………………………………………………………………………………………………… HOWEVER – the section was poorly drafted and therefore difficult to prove There were only two successful cases in 32 years! “Oppression” was not even made out in the case of Ebrahimi!

Ebrahi Ebrahimi mi v W Westbourne estbourne Galleries Ltd [1973] AC 360         

Ebrahimi & Nazar run a business as a partnership for a decade In 1958, they formed a company to take over the business Initially, they were the sole directors and equal shareholders Nazar’s son joins as both a director and shareholder Ebrahimi therefore became a minority ………………………………….. ………………….……………………………………………………………………… Nazar and his son dismissed him as director by passing an ………………………….……………………………………………………………… Thereafter, E was no longer consulted on the running of the business He received ……………………………………………………………………. – these were all distributed as directors’ fees and …………………….. ………………………………. were paid E petitioned the court for a winding-up order under what is now s.122 IA 1986; alternatively, for relief from “oppression” under s.210 CA 1948

Held: - there was ………………………………. and therefore the company should be ………………………………………………………………….

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Jenkins Committee (1 (1962) 962)   



Concluded that s. 210 was restrictive Made recommendations which were enacted in s. 75 CA 1980, later consolidated in ……………………………., now ……………………………….. Minority shareholders could now petition the court for relief from “………………………... ……………………………….” – less restrictive than “oppression” i.e. “a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely” (para 204 of the Jenkins Committee’s Report)

3. S. 9 994 94 CA 2006 CONSTI CONSTITUE TUE TUENT NT P PAR AR ARTS TS & KEY CAS CASES ES S. 994(1) CA 200 2006: 6: A member may petition the Court for relief on the grounds that:

  

(a)

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 some part of the members (including at least himself) or

(b)

that any actual or proposed act or omission of the company (including any act or omission on its behalf) is or would be so prejudicial.

Company’ Company’ss affairs Interests of member(s) Unfairl Unfairly y prejudicial

(a) “the company’ company’ss affairs are bei being ng or hav have e been conducted” i.e. what is being complained of, must relate to the conduct of the company’s affairs

Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171) – • • • •

Company had 4 directors 3 of them dismissed the 4th from employment He resigned as a director but retained his quarter of the shares Other 3 petitioned for an order he sell his shares to them – claimed his continued membership was unfairly prejudicial to them • Held: his retention of the shares did not amount to “conduct of the company’s affairs” therefore ………………………………………………………………………….. (b) “interests of its members gen gene eral rallly or some part of the members (incl (inclu uding at least himself himself)” )” 6

i.e. the petitioner must be affected in his capacity ……………………………………………………….

• •

• •

Re A Company (1983) – petitioners hold shares as executors for two minors – petition dismissied Re Cade (JE) & Son Ltd [1992] BCLC 213 – petitioner pursuing his interests as a landlord – petition dismissed BUT ……………………… ………………………………………….…………………. has been found to fall under s. 459/ 994! (look at some cases later) And, in Gamlestaden v Baltic Partners Ltd (PC) [2007] Bus LR 1521 – petition allowed even though benefitted petitioner only as ……………………………….. not as ……………………………………………………

(c) “Unfai “Unfairrly prejudici prejudicia al conduct” • • •

•

No statutory definition Following s. 994(1) – it may be conduct that is past, present or future (i.e. proposed) ………………………………… test – no need to show …………………………………………. ( Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273) 2 key cases: Re Saul D Harrison plc (1995, CA) & O’Neill v Phillips (1999, HL)

BCLC C 14 (CA) Re Saul D Harrison and Son Sonss plc [1995] 1 BCL   

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Petitioner was minority shareholder in family company She held non-voting shares with a right to a dividend She alleged that the directors had allowed the company to trade at a loss to pay themselves excessive remuneration instead of closing it down and distributing assets to shareholders Petition eventually dismissed by CA In his judgment, Hoffman LJ outlined what was meant by “unfairly prejudicial conduct”

Per Hoffman LLJ: J:     

Starting point: was the conduct complained of in accordance with ………………………………………? In this case, ………………………….. Sometimes, the articles do not reflect the entire understanding between the shareholders. This may lead to conduct which is in accordance with the articles but is nevertheless ………………………… Shareholders might have ………………………………………………………………………….. not set out in the 7

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•

•

• • •

articles, e.g. to share in ……………………………………………………. …………………………………………………………. If these “legitimate expectations” are not met – the conduct might be ……………. ……………………………………………………… - even if the company is being run in accordance with the articles On the facts: the relationship between the members was as set out in the articles – nothing more – i.e. there were no ………………………………………………… …………………………………………………. beyond what was in the articles. Directors had not abused fiduciary powers (e.g. only drew modest salaries) or conducted company’s affairs in breach of articles: petition therefore dismissed. Quoted wording from Jenkins committee (see above) Trivial or technical infringements of articles insufficient Similar comments about “……………………………………………………..” made by Neill LJ

O’Neill v Phillips [1999] 1 WLR 1092 (HL) • • • • • •

• • •

• • •

This was the first case to consider s. 459 CA 1985 in the House of Lords. O’Neill (Petitioner) was employee, minority shareholder and director Phillips = majority shareholder O’Neill was left to run the company as Managing Director His benefits included 50% of profits P and O had discussions about O buying 50% shares, conditional upon targets being met (growth in value of company) – but …………………….. ……………………………. …………………………………………………………………….. Recession hit company. P resumed his role as MD O’s entitlement to 50% profits withdrawn, extra shares never issued (NB he remained a director and continued to earn a salary as manager of the business in Germany.) O brought claim under s. 459. CA held that he had a ………………………………………………………………….. that he would receive equal share of profits and additional shares. P appealed to HL.

Held in HL: • •

Usually, “unfairness” requires a breach of the terms upon which it had been agreed the company’s business should be conducted Sometimes, equitable considerations might make it unfair for those conducting the company’s affairs to rely upon ………………………………………………………………………… (as set out in the articles or the Act) 8

•

• • • •

E.g. if shareholders have an understanding that each will participate in management – if a majority vote to exclude a member from management [in accordance with s. 168 CA 2006] without giving him opportunity to remove his capital – this would breach his ……………………………………………………………………… – even if in accordance with statute and the articles Breakdown of trust and confidence alone …………………………………………………………. Here, as P had made ………………………………………………………………………………….…., there was ……………………………………………………………………………………………………... Unfairness to a member ordinarily required some breach of the terms on which he had agreed that the company's affairs should be conducted Since P had not agreed unconditionally to give O more shares or to share the profits equally, he had not acted unfairly in changing his stance

Lord Hoffm Hoffman: an: “Where, as here, parties enter into negotiations with a view to a transfer of shares on professional advice and subject to a condition that they are not to be bound until a formal document has been executed, I do not think it is possible to say that an obligation has arisen in fairness or equity at an earlier stage… [Phillips] had made no promise to share the profits equally in such circumstances and it was therefore not inequitable or unfair for him to refuse to carry on doing so.”

The principles from O’Neill v Phillips: 1. A member will not ordinarily be entitled to claim unless there has been some ……………………………………………………………………………………………………………… ……………………………………………………………………………………………………………… 2. Has the company been run in accordance with …………………………………………… ………………………………………………………………..? 3. If it has been run in accordance with the articles (or CA 2006), has there nevertheless been a breach of members’ …………………………………………………… ………………………………………………………. about how the company should be run, particularly in a ………………………………………………….? •

If so, the member may be entitled to relief under (what is now) ss. 994 – 996 CA 2006.

•

In O’Neill itself, the court found there had been no such breach.

4. FUR FURTHER THER EXAMPLES Majority depriving mi minority nority of financial benefits 9

Re London School of Electro Electroni ni nics cs Ltd [1985] 3 WLR 474        

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London School of Electronics Ltd ran courses in electronics Lytton owned 25% of the shares and was a director Remaining shares in LSE Ltd were owned by City Tutorial College Ltd – which also ran a separate tutorial college CTC Ltd itself was mainly owned by Athanasiou and George Lytton was removed as director of LSE Ltd A & G also transfer most of LSE’s students to courses run by CTC Lytton was therefore deprived of any interest in the profits attributable to those students Lytton claimed he had suffered “unfair prejudice” and petitioned the court for an order for CTC Ltd to purchase his shares in LSE Held: CTC’s appropriation of LSE’s students was …………………. ………………………………………….. – deprived Lytton of his 25% interest in the profits attributable to those students Remedy: CTC ordered to buy Lytton’s shares, which should be valued as if ………………………………………………………………………. ………………………………………………………………………………………..

WORKSHOP ACTIVIT ACTIVITY Y3 Of which older case does Re London School of Electronics Ltd remind you? How does the outcome/remedy differ?

[Write your answers here]

Management Exclusion

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

Being excluded from the management or future management of a company may be unfair prejudice even though the value of shares is not affected: why is this surprising?



“the requirement that prejudice must be suffered as a member must not be too narrowly or technically construed” (Lord Hoffmann in O’Neill v Phillips)

Richards v Lundy [2000] 1 BCL BCLC C 376 • • • • •

R held 10% of the shares in the company and was also a director. The other directors were Mr and Mrs L who held the remainder of the shares. Prior to that R and L had carried on business together. R dismissed from employment and removed as director Held: – exclusion from management was …………………………………………..

Fai ailure lure to pay dividends/ excessive remuner remuneration ation

Re Sam W Weller eller & Sons Ltd [1990] Ch 682 • • • •

Company performed well Directors drew remuneration Dividend yield unchanged for ………………………………………… Held to be unfairly prejudicial conduct

Anderson v Hogg [2002] SC 190 • •

Director paid himself unauthorised and excessive sum Held to be unfairly prejudicial

BCLC C 622 Re McCarthy Su Surrfacing Ltd [2009] BCL • • • • •

Directors set up contracts between themselves and the company The prices they charged the company were not investigated Shareholders and company therefore gained no benefit No consideration of whether …………………………………………………………………. Held to be unfairly prejudicial

to

One shareholder hitti hitting ng another with a hammer •

Held to be unfairly prejudicial in Rodliffe v Rodliffe [2012] EWHC 917 (Ch)

S. 459/994 cases in involving volving breach of directors’ duti duties es 11

• •

Directors exercising powers to issue shares for an improper purpose - Re Cumana Ltd [1986] BCLC 430 Directors making secret profits and diverting a corporate opportunity – Gerrard v Koby [2004] EWHC 1763 (Ch)

WORKSHOP ACTIVIT ACTIVITY Y4 Does it surprise you that s. 459/994 actions have been brought in cases which involve a breach of directors’ duties? Why/why not?

[Write your answers here]

5. QUASI QUASI-P -P -PAR AR ARTNERSHIPS TNERSHIPS • •

•

NB many s. 459/994 cases involve “quasi-partnerships” i.e. ………………………………………………………………………………… …………………….……………………………………………………. E.g. ………………………………………………………………………… ………………………………………………………………………………..

WORKSHOP ACTIVIT ACTIVITY Y5 Why do you think many s. 459/994 actions have been brought in cases involving “quasipartnerships”? In which kind of company do you think it would be harder to bring a successful action

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under what is now s. 994 CA 2006?

[Write your answers here]

6. WHA WHAT T RELIEF MA MAY Y BE GIVEN? S. 996 P Powers owers of the court under this P Part art (1)

If the court is satisfied that a petition under this Part is well founded, it may make such order a ass it thinks fit for giving relief in respect of the matters complained of.

(2)

Without prejudice to the generality of subsection (1), the court's order may— (a) regulate the conduct of the company's affairs in the future; (b) require the company— (i)to refrain from doing or continuing an act complained of, or (ii)to do an act that the petitioner has complained it has omitted to do; (c) authorise 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; (d) require the company not to make any, or any specified, alterations in its articles without the leave of the court; (e) provide 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. 13

•

•

The most common order is the one outlined in s. 996(2)(e), i.e. for the shares of the petitioner to be ………………………………………………………………………………. ……………………………………………………………………………………………………………… This means that the petitioner gets his capital back; he and the company/other members can then go their separate ways.

• How does the court determine what is a “fair vvalue”? alue”? • Generally ………………………………… with no discount for minority shareholding • Shares generally valued as at ……………………………………………………………………. • May be valued at an earlier date e.g. ………………………………………………………… ……………………………………………………….. - Profinance Trust SA v Gladstone [2001] EWCA Civ 1031

7. WINDING-UP ON JUST AND EQUIT EQUITABLE ABLE GROUND The last of the three means of protection open to minority shareholders. S. 122, 124 & 125 IInsolvency nsolvency Act 1986 • • •

•

S. 122(1)(g) - A company may be wound up by the court if… the court is of the opinion that it is …………………………………………………………………………….. S. 124 empowers members to petition the court to do this S. 125(2) the court will not make such an order if it is of the opinion that there is ……………………………………………………………………….. available to the petitioners and that they are acting ……………………………………………………… in seeking a windin...