Protection of minority shareholders

The first exception is when the act which was done was illegal or wholly ultra vires the company. This was seen in the case of Smith v Croft No.3 which was about a transaction which violated the financial assistance or provisions of the capital maintenance of the Companies Act. Another leading case is the case of Taylor v National Union of Mineworkers (Derbyshire Area)which was about the support of a strike which was unlawful. In both cases, courts decided that a member or shareholder has the right to sue against a threatened lawful act and may also disregard an unlawful act by the means of a derivate action. This was given authority by the case of Simpson v Wesminster Palace Hotel Co. However, if it is merely contrary to the company’s written constitution, it may be condoned and any action against the

directors will be waived, as given by section 35(3) of the Companies Act 2006.

The second exception is regarding circumstances where the matter in contest could only be lawfully valid or sanctioned by a special majority or when a special procedure was overlooked which would be a violation of the articles of the company. The case which raised this was Edwards v Halliwell where it stated the alleged act in question could only be sanctioned not only by a simple majority but a two-thirds majority. Hence, the rule in Foss v Harbottle could not be applied because the members of the company were taking action in their own right and not in the right of the union as the wrongdone was done against the union. Hence, action was taken in order to protect their own rights in the capacity available to them. However, if the wrong was done to the union instead, then only the union would be able to bring action. This was not the case however, here, the defendants had breached the rules given by the union which were binding on them and by doing so, invaded the individual and personal rights of the minority shareholders. Another case in regards to

 this is Baille v Oriental Telephone Co. Ltd where a minority shareholder was able to restrain the company from acting on a special resolution of which insufficient notice was given. Same was seen in Dunn v Banknock Coal Co. Ltd.

The next exception is when there has been infringement of a member’s special rights such as an invasion of the plaintiff’s individual and personal rights in his role as a member of the company. This was seen in Edwards v Halliwell.

The last of the string of exceptions is when fraud has committed towards the minority shareholders by the people who control the company such as the majority or directors. There has been instances where the minority has brought action based on this exception and succeed, such as in the case of Menier v Hooper’s Telegraph Works, Estmanco (Kilner House) Ltd. V Greater London Council, Daniels v

Daniels and Pavlides v Jensen. In the Menier case, there had been misappropriation of the company’s assets and Menier who was a minority shareholder claimed that there were transactions between the company and the majority shareholders which were self-interested creating a ‘conflict of interest’. Here, courts held that Menier’s action was justified and properly brought due to the circumstances. The case of Estmanco was rather intriguing; it was not on the basis of fraud but on discrimination and abuse of power. Here, Justice Templeman stated a claim could be brought by a minority based on this exception even if there has been an absence of fraud. He further stated that any individual whether majority or minority can proceed with action if the power has been used by the people in control in a manner which would benefit them and induce losses to other members even if it was done unintentionally or negligently. Hence, the courts introduced a principle stating that it may be ‘fraud on the minority’ if there has been stultification of the purpose behind the company was formed if it was done against the wishes of the minority. The case of Daniels v Daniels is an example of negligence leading to thee gain of the wrongdoers. Here, 3 minority shareholders brought action against Mr. & Mrs. Daniels as they claimed Mr. & Mrs. Daniels had been negligent for selling a land belonging to the company for a very low price to Mrs. Daniels even though it was worth a lot of money. Here, courts held that the minority shareholders had the right to sue even though it was done negligently. Ironically, in Pavlides v Jensen, a minority shareholder claimed that the people in control of the company had been negligent in selling an asbestos mine to some other company for a very low price. The courts held the minority shareholder could not sue or take action as there had been no personal advantage or fraud to the directors hence the action has to fail. However, it important to know that even if it’s the right of the individual member to take action on behalf of the company based on the above exceptions, his/her efforts may be prevented if the wrongdoers have sufficient and substantial amount of control over company and oppose the litigation in contest. This was seen in Smith v Croft No.2. Here, the minority shareholders claimed in order to recover the sum of money given away in transactions which were both ultra vires and breaching the statutory prohibition on financial assistance. The courts held that it was a prima facie case of illegality and ultra vires. Hence, the minority shareholders had the right to bring a derivative action as long as the majority shareholders did not object the continuation of the action. Another case to illustrate this exception is Cook v Deek where a shareholder brought a majority shareholders’ action to compel the directors to account for the profit made out of the construction of a contract made on their names. In Prudential Assurance Co. Ltd v Newman Industries Ltd (No.2), Justice Vinelott extended the exception by saying it does not apply only to voting directors but also to directors whom are solely in control and have no voting powers.  

Another remedy available to minority shareholders is the winding up of the company on the grounds of ‘just and equitable’. This is given authority by statute under section 122(1)(g) of the Insolvency Act 1986 which states that a company could be wound up if the courts are in opinion that it is just and equitable to do so. A number of case law has been used in order to determine whether it is just and equitable to do so. The two most common circumstances are;

1. when there has been a wrongdone by the people in control if the company such as directors and the majority shareholders
2. where the company in question is a ‘quasi partnership’ or ‘incorporated partnership’, the courts would wound the company if the same would have been done if it was a partnership instead.

Section 459 of the Companies Act 1985 also provided an ‘alternative remedy’ to minority shareholders based on the ground of unfairly prejudicial conduct. This was firstly seen under Section 210 of the Companies Act 1948. In the 1985 act, it stated that any individual member of a company may choose to seek the assistance of the court by petition for an order relying on grounds that the affairs of the company are or has been run in a manner which would be prejudicially unfair to the rights of the members in general or at least the plaintiff itself or the act or proposed act would be deemed as prejudicial.  If so, section 461(1) of the Companies Act 1985 provides that the court has the right to make such order if it deems fit to do so for giving relief in regards of the matter which was complained about.

The provisions and remedies above provide great to the court in the regulation of the conduct of the company’s affairs. The courts have the ability to order a company to do something and even refrain it from acting in a certain manner. For example, it could order a reinstatement of directors or order for a change in the company’s articles. In practice, the order which is very common is that minority shareholders should be bought out either by the company or the other shareholders.

The enactment of the Companies Act 2006 has made improvement to the protection of minority shareholders and at the same time, provided for clarity. Before evaluating the significance of this statute to minority shareholders, it’s vital to understand the remedies available under this act.

In regards to the common law rules attached to the principle given by Foss v Harbottle in its application to derivative claims, further reform has been made by the Companies Act 2006 under section 260-269 which would replace the common law rules immediately. Section 260 of provides a definition for a derivative claim as proceedings in regards to a cause of action in interest of the company by a member of the company whether minority or majority on the behalf of the company. Section 260(3) provides an exclusive list of grounds which states where a cause of action has arised from an actual or proposed act or even an omission which involves negligence or a breach of trust or duty by a director in the company in question, can a claim of derivative action be made and it is irrelevant whether the member which brought the claim was a member before or after the cause of action arose. It is vital to take note that negligence is specifically mentioned as a ground to raise action and bring proceedings for statutory derivative claims and the claim will be allowed only if it was brought in regards to wrongdone by the directors of the company. Section 261 states that there is a requirement to apply to the courts for permission in order to bring a derivative claim.

After the application for a derivative claim has been made, then the courts would decide whether to allow, dismiss or adjourn it and provide the necessary directions. Under section 262, it states when a company has made a claim and wished for it as a derivative claim, a member of the company must still make an application to the courts seeking permission to do so on the grounds that;

1. the methodology used by the company in proceeding with the claim is abuse of the court process
2. the claim has not been diligently prosecuted by the company
3. and it is more logical and practical to proceed with the claim as a derivative claim.

The courts have the same option again once an application has been forwarded. Section 263 sets out a range of factors that the courts must contemplate while determining whether to allow the pursue of claims as a derivative claim under section 261 and section 262. Similarly, section 264 is a provision which allows an application made to the court to proceed with the derivative claim which was brought by a member of a company on the grounds similar to if it was brought by a company, as stated in the paragraph above.

In regards to the matter of indemnity for the minority shareholder that brought the derivative action, common law laid down by Wallersteiner v Moir No.2 states that a minority shareholder who brought a derivative claim may be entitled to indemnity in regards to the cost suffered when bringing the action against the company only if the shareholder had proceeded with action out of good faith. This case overruled an earlier case which was Jaybird Group Ltd v Greenwood. Wallersteiner case also stated that legal aid would not be available if a shareholder brought a derivative claim as given by the Legal Aid Act 1988 and seen in R v Chester and North Wales Legal Aid Area Office, ex parte Floods of Queenferry. The indemnity claim must be made and seen along with the application to proceed a claim as a derivative claim. However, in Smith v Croft, it stated when an indemnity order application is made, there must be substantial prove that the amount claimed as indemnity is needed and to add to this, it will be weighed against the amount left for the plaintiff. Hence, as it can be seen, a minority shareholder might be entitled to indemnity under common law. However, when a minority shareholder has made a claim for a remedy under the common law rules against a company, the Companies Act 2006 would be applicable. The reason is because section 260 to section 264 does not state any provisions in regards to rights to indemnity in a derivative claim. Here, a shareholder may take action with the use of a representative form. Other options are to proceed with a claim on his name but seek an injunction or seek an action for a declaration.  

Hence, the law needs to strike a balance between both. Neither can it fully support the concept of the majority rule as then the minority would be neglected nor allow too much of circumstances in which the minority could take action as it would then raise a floodgate of cases as the minority would argue on almost every action. As it can be seen from the various case law and the exceptions in the Foss v Harbottle case, minority shareholders are protected to quite a significant extent and various remedies have been provided to cater for cases where the power of the majority has been abused. Ergo, it can be said that the minority are well protected especially after the introduction of the Companies Act 2006.

        

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