10 - Members' remedies Flashcards
What are the 3 principal statutory member remedies?
- Derivative claim
- Unfair prejudice petition
- Winding up petition
Who can typically sue a wrongdoer when wrongdoer causes loss to company and its members?
Both the company and its members
Exception to general rule that both company and its members can sue wrongdoers
‘Reflective loss’ principle
What is ‘reflective loss’ principle?
Prevents members from suing the wrongdoer if the members loss is viewed as being merely the reflective loss of the company, which the company can recover itself
Two mechanisms allowing for collective action of multiple members
- Representative action
- Group litigation order
Representative actions explained
A member who has suffered a loss can, on his own or with other affected members, bring a claim along with or on behalf of the affected members.
Any judgement or order made by the court binds all the parties.
Group Litigation Orders explained
Similar to representative action, but allows for some members to obtain different remedies from others.
Effectively allows for multiple cases arising from common or related issues to be managed at the same time, avoiding multiple hearings.
What is a derivative action claim?
A claim brought by a member of a company in respect of a cause of action vested in the company, which seeks relief on behalf of the company
What must a claimant member do before derivative action claim can continue?
Apply to court for permission
What is the aim of ‘stage 1’ in determining whether derivative action claim may continue? - establishing ‘prima facie’ case
To filter out frivolous or unmeritorious claims
What do courts consider in determining whether to grant permission to a derivative action claim, if discretion is required (none of ‘three circumstances’ apply)? - ‘stage 2’ (6)
- The views of other ‘independent’ shareholders
- Whether the member is acting in good faith
- The importance a director promoting company success would attach to the claim
- Whether the conduct would likely be authorised/ratified
- Whether the company has decided not to pursue the claim
- Whether the applicant should pursue a remedy in their own right rather than on behalf of the company
2 stages following application to make derivative action claim
- Stage 1 - establishing a prima facie case
- Stage 2 - determining whether to grant permission
What is the ‘proper claimant’ principle? & significance
The principle that the party that suffered the loss is the party entitled to sue to obtain redress.
Members usually cannot sue on behalf of company.
Principle rationale behind proper claimant principle
Prevent excessive claims being brought - majority of members must agree to bring litigation, one litigation-loving minority member cannot do so alone
What is the irregularity principle?
A member cannot bring a claim in relation to an irregularity that could be remedied or ratified by a simple majority of the members
Key reason why possibility for derivative action is important
In instances where directors are wrongdoers, and they are also majority shareholders
Act constitutes a ‘fraud on the minority’
Which actions provide grounds for a derivative claim?
An actual or proposed act or omission involving negligence, default, breach of duty or breach of trust
‘Three circumstances’ which prevent derivate action from continuing if they apply?
1 - Person acting in accordance with S.172 would not make claim
2 - Act or omission yet to occur has been authorised or ratified by the company
3 - Act or omission has occurred and has been authorised or ratified by the company
What must be demonstrated for a successful claim of unfair prejudice?
The conduct of the company was unfair, and the conduct caused or is causing prejudice or harm to the interest or rights of some or all members
When is conduct considered unfair?
There need not be any bad faith or intention. Courts consider unfair if hypothetical reasonable bystander would consider it so
When are members rights considered prejudiced - conduct is considered prejudicial?
Must be shown that conduct has done the members harm, usually in a commercial (generally financial) sense
Where in CA.2006 can remedies available for successful claims of unfair prejudice be found?
S.996
Who may pursue unfair prejudice remedy?
- Members
- Non-member if shares have been transferred or transmitted to them by operation of law
- Sec of State in certain circumstances
3 examples of conduct that have been held to amount to unfairly prejudicial conduct
- Breach of directors’ duties
- Breach of company’s constitution or statutory rights
- Abuse of controlling position such as paying themselves excessive remuneration
If a share purchase order is made by court, when will price of shares be discounted?
If the shares don’t grant any control of the company
When will court grant order for members’ winding up?
If it is ‘of the opinion that it is just and equitable that the company should be wound up’
Understanding of ‘just and equitable’ in court decision to grant members’ winding up
Jurisdiction of court is not limited, each case depends upon its own circumstances - ie. broad definition and up to courts to decide
It is well accepted that in what circumstance, a members’ winding up of a quasi-partnership will be justified?
If one member is excluded from management
Relationship of remedy that is members’ winding up with other remedies explained
As winding up is a drastic measure, it will not be ordered unless some other remedy is available
Can a winding up petition be brought with an unfair prejudice petition in relation to the same conduct?
Yes - but as it places significant pressure on the company, it is usually not allowed
3 characteristics of quasi-partnership
- association formed or continued based on personal relationship/mutual confidence, often found following conversion from pre-existing partnership to company
- agreement or understanding that shareholders shall participate in conduct of the business
- restriction upon transfer of members’ interest in the company (members stake cannot be taken out if excluded from management)
