6) Minority Shareholder Remedies Flashcards
MA 3
Directors are responsible for the day-to-day running of the company and have the authority necessary to act on the company’s behalf in this regard.
s21 CA 2006
Certain key decisions require shareholder approval.
Eg Amending the company’s articles
s188 CA 2006
Granting a director a long-term service contract
s197 CA 2006
Making a loan to a director
s168 CA 2006
Removing a director from office
Ordinary Resolution
Over 50% in favour
Special Resolution
75%
Principle of the Majority Rule
Directors and shareholders act by majority rule.
Pervades company law.
CA 2006 - minority shareholders
- Have certain limited remedies where the management of the company causes prejudice and loss
Historically minority shareholders’ only remedy
Petition the court for the company to be wound up as just and equitable to do so
Introduction of action for unfair prejudice
- Sought to provide minority shareholders with a better remedy
- Initially set out in s459 CA 1985
- Now s994 CA 2006
S994(1)
- A member of a company may applyto the court by petition for an order…on the ground:
- Company’s affairs are conducted in a manner unfairly prejudicial to interest of members generally, or some at least.
- Or that would be prejudicial
To succeed with a petition under s 994(1)
Petition must establish
unfairly prejudicial conduct arising from an act or omission of the company.
Or made on the company’s behalf.
* Must be by the company, not individuals
* Relate to affairs of company, not personal
Re Legal Costs Negotiators Ltd 1999
- 4 = shareholders, directors and employees.
- Fourth individual dismissed as employee - resigned as director.
- Petitioned under s 459 to transfer his shares to them
CoA rejected petition, as the majority could prevent any prejudice
Re Home & Office Fire Extinguisher Ltd 2012
- Overlap between the requirement that conduct relates to company affairs and not personal disputes, where disputes make it impossible for parties to continue working together.
- Brother attacked with hammer - ordered to sell his shares in company
Breach that the company would act properly and in good faith
Re City Branch Group Ltd, Gross v Rackind 2005
- Conduct of a subsidiary regarded as falling within the affairs of a company.
- Especially where the directors are the same
Petitioner must prove
That their interests in their capacity as members have been unfairly prejudiced as a result of conduct on the part of the company
Construed widely
De Bovey Hotel Ventures Ltd
Members have an interest in the value of shares
* May be able to bring a claim if can show value has been seriously jeopardies
* by action of company & is unfair
Gamelstaden Fastigheter B Baltic Partner Ltd 2007
- Member had provided a loan to the company
- Issue was whether petition should be struck out where company was insolvent and relief sought.
Interests extend to members who are a creditor - distinction artificial.
Unfair prejudice case
O’Neill v Phillips 1999
O’Neil v Philips
- Petitioner employed by company. Was awarded 25% of company and made director.
- Following decline after sole director, retired director used voting rights to appoint himself MD.
- Petitioner issued a petition for unfair prejudice based on legit expectation of receiving 50% profits.
**HoL held no unfair prejudice, 50% never formalised and relied on petitioner running business((
Hoffmann LJ - O’Neill v Phillips
Fairness for the purposes of s994 must be viewed in context of a commercial relationship - that set out in the articles.
Re Tobian Properties Ltd 2012
Arden LJ
Unfairly prejudicial = two elements
* Unfairness
* prejudice
Cannot be unbound
Following O’Neill v Phillips to establish unfair prejudice against
Petitioner must prove
* Breach of Contract (Articles; or shareholders agreement)
* Breach of some fundamental understanding
How will court address claims of unfair conduct
- Look into conduct in accordance with articles
- Consider scope for “fundamental understandings”
- Unfairness tested - looking whether the majority acting in a manner which equity would have regard as contrary to good faith
Unfairness tested
Majority had acted in a manner equity would regard as contrary to good faith
Is unlawful conduct unfairly prejudicial
- Not necessarily
Examples of unfairly prejudicial conduct
- Exclusion from management
- Mismanagement
- Breach of director’s fiduciary duties
- Excessive renumeration / refusal to pay dividends
Cases re: Exclusion from Management
- Tottenham Hotspur plc 1994
- Re Compound Photonics Group Ltd 2022
Exclusion from Management
- Director may validly be removed from office by an OR under s168 CA 2006
- Not the case that any removal = unfair prejudice
Re Tottenham Hotspur Plc, 1994
Venables CE of football club
Brought a petition claiming unfair prejudice after dismissed from office.
Held that he had no legitimate expectation of remaining in control = failed
Re Compound Photonics Group Ltd 2002
- Two minority shareholders petitioned for unfair prejudice for termination of roles as directors.
- Breached SA: good faith; majority shareholders not to determine commercial strategy.
- CoA rejected the petition - Good Faith clause not so wide.
Absence of express provision to entrench directors = lack of intention
Mismanagement
- Risk of poor management inherent to share ownership
- Courts will not interfere in business decision making except when CoI.
- When directors have abused their powers may amount to mismangement
Re Elgindata Ltd 1991
Courts will interfere when there is a clear conflict of interest
Mismanagement Cases
- Re Macro (Ipswich) Ltd 1994
Re Macro (Ipswich) Ltd 1994
- Allegation of mismanagement over 40 years resulting in economic loss
- Sole director neglected responsibilities - allowed theft from company by employees.
Successfully argued substantial loss sufferred = unfair prejudice
Breach of directors’ fiduciary duties - cases
- Re London School of Economics 1986
- Re Little Olympian Each Ways ltd (No3) 1995
- Re A Company (No 005287 or 1985) 1986
Re London School of Economics 1986
- Petition for UF succeeded
- Those in control had misappropriated assets by diverting them to another business owned by them
Re Little Olympian Each-Ways No3, 1995
- Directors sold business at substantial undervalue
- Part of a wider transaction; directors received personal benefit.
= UF
Re A Company (No 005287 and 1985) 1986
Petition for UF succeeded as directors made secret profits
Excessive remuneration and refusal to pay dividentds
- Articles provide Directors renumeration should be determined by the GM
- Practice delegated to the board
- Court won’t interfere if honest
Excessive remuneration and refusal to pay dividends
Case
Re a Company No 004415 of 1996
Re a Company No 004415 of 1996
Court held renumeration and dividend
* not justified by “objective commercial criteria”
* UF to shareholders who are not directors
Who may bring a claim for UF?
Unfair prejudice claim can be brought by a “member” of the company
s994(1)
s994(1)
Unfair prejudice claim can be brought by a “member” of the company
S112
Defines a “member” as subscirber to the company’s memorandum; name is entered onto register of members.
- Can be broadly interpreted in some circumstances
Who may bring a claim for unfair prejudice - cases
- Harris v Jones 2011
- Blunt v Jackson 2013
Harris v Jones 2011
- Court held a person whom shares had been transferred
- But had not been registered as a member
- Had the right to bring an s994 petition
Blunt v Jackson 2013
- Judge noted court had power to retrospectively amend register of members.
- Allowed a person agreed to become a 50% shareholder and had worked for low wages - although not registered
- to succeed based on exclusion from management
Where do remedies for UF come from.
s996 (2)
Remedies - s996(1)
Courts make such order has thinks fit for giving relief in respect of matters complained of.
s 996(2)
Remedies list:
* Regulate conduct of company’s affairs in future
* Require company to refrain or do an act
* Authorise civil proceedings
* Require a company not to alter articles
* Provide for purchase of shares by any member of the company
Grace v Bigiolu 2005
Presumption that a court will grant and order for the purchase of the petitioners shares by the company or another shareholder
s99623
Most common remedy for small private companies
Share purchase order
Small private companies have limited options to sell shares.
Court to determine a price that is fair in all circumstances
s755 CA 2006
Private companies are prohibited from offering shares to the public
Re Bird Precision Bellows Ltd 1984
- Unfair to impose a discount on the shares to represent limited voting power since mainly being forced to sell
Why is the valuation of shares difficult
- Value of shares may have changed considerably between when petition to court was made and the date of judgment
- See Abbington Hotel Ltd 2011
Abbington Hotel Ltd 2011
- Starting point for date of valuation of shares is the date of the judgment
- Court is free to choose a date that is most appropriate **Date should be that which best remedies the unfair prejudice held*
O’ Neill v Phillips 1999 - valuation
- If offer is made on expert valuation
- Respondent may be entitled to have petition for UF struck out
McCallum-Toppin 2019
Estate of deceased director succeeded with a UF claim.
Majority
* Deprived dividends; paid large salaries
* Used as personal piggy bank - borrowed in excess of £1 mill.
Majority ordered to buy out at a fair, undiscounted value
Re Sprintroom, 2019
- Breach of duty by a director who incorrectly claimed the IP was vested to him personally rather than company.
- Did not preclude remedy as 40% shareholder for exclusion by management, and undervalued share offer.
Balancing payment ordered
Historically just and equitable winding up….
Was the only remedy available to an aggrieved minority shareholder
s122(1)9g) Insolvency Act 1986
A company may be wound up by the court if the court is of the opinion that it is just and equitable that it be wound up
Remedy of winding up a company comes from….
- Law of partnership
- Courts of equity had jurisdicition to dissolve partnership where relationship between members had broken down
Just and equitable winding up is a….. remedy
- Draconian
- Remedy of last resort
- Where possible will find alternative remedies
The Companies Act 1980 introduced the remedy of unfair prejudice
Now Unfair prejudice is used more commonly in resolution of shareholder disputes than just equitable winding up.
Consequences of equitable winding up petition
Any disposition of shares, alteration of status of the company… made after commencement of winding up is void.
section 127 IA 1986
Section 127 IA 1986
Disposition of the company’s property and transfer of shares, alteration of status of members after winding up commences will be VOID
On notice of just and equitable winding up….
- Banks freeze accounts
- Payments may be set aside by the liquidator when wound up
Ground for petition for “just and equitable winding up” - Case
Ebrahimi v Westbourne Galleries 1973
Ebrahimi v Westbourne Galleries 1973
- Court have wide discretionary jurisdiction - consider cases individually
- Usually where relationships have broken down
Three examples of where relationships between directors and shareholders has broken down….
- Deadlock (Where parties are not able to reach a decision)
- Justifiable loss of confidence in management
- Exclusion from management
Ebrahimi v Westbourne Galleries Ltd
A rug business run as a partnership for 10 years.
* Company est to take over the business.
* Another person joined shareholder - E became minority.
* E was voted off board, retained shares - no dividend paid - all paid to directors.
* Found it was just and equitable to wind up, as the company was a quasi partnerhsip
Grounds for petition
- Substratum failed
- Fraud
- Deadlock
- Justifiable loss of confidence in management
- Exclusion from participation in small company - when relationship based on mutual confidence
Grounds for petition: Substratum has failed
- Commercial object of the company has failed or been fulfilled (less important now following 31(1) CA 2006 where objectives are unrestricted.
Re German Date Coffee Co 1882
Re German Date Coffee Co 1882
The company was registered with the object of a German patent for date coffee.
* Not granted, but swedish one was.
* Wound up on the basis the substratum of the company was gone**
Grounds for Petition: Fraud
- Where a company has been formed to perpetrate fraud and winding up represents best way for shareholders to recoup investment
** Re Thomas Edward Brinsmead & Sons 1897**
Re Thomas Edward Brinsmead & Sons 1897
- Three men employees of renowned piano manufacturing company
- Made company to pass off piano as made by John Brinsmead * Sons.
Fraudulent therefore just and equitable
Grounds for petition: Deadlock
- Rare for a total deadlock.
- Chairman generally has casting vote.
- When deadlock does occur, court may order winding up
Re Yenidje Tobacco Ltd 1916
Re Yenidje Tobacco Ltd 1916
- Two tobacco manufacturers merged
- Equal shareholders - two directors
- Refused to communicate - only communicate via CoSec.
Profitable but wound up
Grounds for petition: Loss of confidence in management
- When a quasi-partnership, may order to be wound up when lack of confidence.
- Lack of probity in way company is run by the majority.
- Driving minority out.
Loch v John Blackwood Ltd 1924
Loch v John Blackwood Ltd 1924
Majority shareholder in this company dominated board of directors
* Refused to declare dividends
* Call GM
* Publish accounts.
Aim was to induce minority to sell at undervalue = wound up
Grounds for petition: Exclusion, when based on mutual confidence
Wilberforce L
* Basis of association was personal and mutual confidence.
* Understanding that all shareholders participate in management
* Restriction of transfer of interests preventing leaving
Ebrahimi v Westbourne Galleries
Who can bring a petition
A “contributory”
Section 124(1) IA 1986
Define a contributory
Any person liable to contribute to the assets of a company in the event of it being wound up
* Past or present nmember
For a fully paid-up shareholder to bring a petition
Must show “tangible interest in the company
* On balance of probabilities
* Prove there will be surplus among shareholders after payment
Re Rica Gold Washing Co 1879
Re Rica Gold Washing Co 1879
Must prove on a balance of probabilities that will be surplus post winding up.
If cannot prove surplus assets (Re Rico Gold Washing Co)…. must….
Establish a tangible interest by showing they would achieve advantage or avoid/minimise disadvantage if wound up Re Chesterfield Catering Co 1977
Re Chesterfield Catering Co 1977
Establish a tangible interest by showing they would achieve advantage or avoid/minimise disadvantage if wound up
If petitioner’s own conduct was reason for breakdown….
this will be a relevant factor in deciding what order to make
Can an individual member bring a claim when the board refuse to do s0?
- Courts reluctant to interfere in internal management
- Best left to directors
- Elected, assumed to have greater commercial awareness.
Carlen v Drury 1812
Court is not required in every Occassion to take the management of every Playhouse and Brewhouse in the kingdo
Two types of shareholder actions relating to internal disputes
- Personal claims
- Derivative Claims
Personal claims - define
Claims brought by members in relation to wrongs done to them person
Derivative claims - define
Claims brought by members to vindicate a wrong done to the company
Personal claim - Process
- Personal or representative action
- Statutory remedies (UP or JEW)
- May also bring personal claim to enforce rights as shareholders
s994 CA 2006
Unfair Prejudice
s122 Insolvency Act 1986
JEW
s33 CA 2006
Shareholders may bring a personal claim to enforce their rights as shareholders in the articles.
Personal claims are not affected by..
- Rule in Foss v Harbottle
- Statutory procedure in CA 2006
Derivative claims were orginally dealt with by courts…
In accordance with Foss v Harbottle
Now there is a statutory procedure.
Derivative Claim
A derivative claim is a claim brought by a member in respect of a cause of action vested in the company seeking relief on behalf of the company
Exceptions to Foss v Harbottle
- Act complained of is Ultra vires or illegal
- Matter could be validly done by special majority
- Or non compliance with special procedure.
- Personal and individual rights have been infringed
- Fraud on the minority - wrongdoers are in control
Academic debate as to exceptions to Foss v Harbottle
- True exceptions, or separate rights of action?
- View is only “fraud on the minority” is a true exception
- Others = sue for breach of personal rights
Edwards v Haliwall 1950
- Proper claimant = company itself
- Internal management principle - wrong might be binding
Statutory rules only affect claims for wrongs done….
- To the company
- By directors
s260(3)
Disadvantage of derivative claims
Relief gained is only awarded to the company, not the individual bringing proceedings
Advantage of derivative claim
- Allow individual members to “right a wrong” on behalf of the company
- When company itself does not
Under statutory procedure, a derivative claim may be brought….
- By any member - s260(1)
- Brought against any director /person, including former - s 260(3) (5)
- Grounds for bringing claim - act or omission, actual or proposed, neg, defailt breach - 260 (3)
s260(1) CA 2006
A claim may be brought by any member
s260(3) C3A 2006
The grounds for bringing claim:
act or omission, actual or proposed, involving negligence, default, breach of duty or trust by a director.
s260(4) CA 2006
Immaterial whether the cause of action arose before or after the claimant became a shareholder
Application process ofr derivative claim
1) Applicant has case for permission to continue derivative claim?
2) Full permission hearing - may order company & applicant to provide evidence.
s261-263
Stage 1
- Dismiss cases that stand no chance
- Can bypass stage if company concedes
- Or where court prepared to hear both stages.
Franbar Holdings Ltd v Patel 2008
Parties can bypass stage where the defendant concedes there is a case,
Stimpson v Southern Landlords Association 2009
Court may be prepared to hear first and second stages for permission together
Re Severn Holdings 2011
Combining both stages, criticised for bypassing filter mechanism.
Stage 2
Full permission hearing
* S263
* Sets out absolute and discretionary bars to granting permission to continue a derivative claim
Absolute bars to continue the claim
- s 263(2) permission refused:**
- Person acting in accordance with s172
- action authorized by company
- Ratified by company.
Discretionary bars when granting permission to continue derivative claim
Section 263(3) consider
* Acting in good faith?
* Promoting success of company
* Authorised by company
* Ratified by company
* Company decided not to pursue claim
* Rise to personal action
Other considerations when court looking to grant permission to continue claim
- s263(4)
- Particular regard to any evidence as to views of members who have no personal interest in the matter
Smith v Craft No2
Approach of the courts
- Presume to dismiss derivative unless exception applies.
- Concern for floodgates
- Courts case manage stage 1
Substantial disincentives of derivative claim
- Members do not recover damages
- Paid to company if successful
- Courts cliams aresubstantial
Mission Capital v Sinclair 2008
- 2 directors = shareholder
- Dismissed and service contracts terminated.
- Company brought a claim against them
- They brough counter claim seeking reinstatement * DC
- Court refused as notional director acting with their duty wouldn’t continue claim
- Claimants could bring UF claim
s172 CA 2006
Directors’ duty to promote success of the company
Franbar Holdings v Patel 2008
- Disag about way company was managed and Shareholders Agreement.
- Shareholder brought claim of breach of SA
- Notional director would not attach importance
- Unfair prejudcie claim
Iesini v Westrip Holdings Ltd 2009
- Directors did not breach duties - no derivative claim
- S1: evidence filed by applicant
- S2: Need something moreS
Stainer v Lee 2010
- Court granted limited permission to continue DA to end of disclosures
- Subject to various conditions eg costs.
- Court considered strength would be clearer after disclosures.
Cullen Investments Ltd v Brown 2015
- Granted permission to continue claim to trial
- Director exploited corp opportunity for own benefit
- Shareholder assumed financial risks of litigation
- Rejected that a director in accordance with duty would have supported claim.
Bridge v Daley 2015
- Refused permission for DC
- Claimant acting in good faith
- Allegations unsubstantiated
- Majority of shareholders and independent board did not support
Better under s994
Cost of derivative claims
- Cost = disincentive.
- Rule 19.19 Civil Procedure Rules; allows company to indemnify claimant against liability
Rule 19.19 Civil Procedure Rules
- Pre-emptive costs order
- Indemnify claimant against liability
Wallersteiner v Moir No2 1975
Wallersteiner v Moir No2, 1975
Pre emptive costs first awarded
* Indemnified provided acted reasonably.
Derivative claims - overlap with s994
Courts will be reluctant to grant permission to continue with derivative claim
Not an absolute bar.
Mission Capital Plc v Sinclair
Franbar Holdings v Patel
Phillips v Fryer 2011
- Appropriate cases discretion may be exercised the other way
- Court may hear proceedings under s994 and 260 together
Advantages - claim of under s994 rather than DC
- Unfair prejudice
- Easier to proceed
- No permission requirement
- Remedy for member not company.
Derivative Action may be preferable to Unfair Prejudice
- Where aim of claimant is not bought out, but for the company to benefit
Clark v Cutland 2004
s996(2)(c)
Gives the court power to direct claimants for Unfair Prejudice to bring a derivative claim.
Very rare
Claims often brought on more than one ground
Paramount Powders (Baydal v Baydal) 2019
Paramount Powders (Baydal v Baydal) 2019
- 3 claims failed
- Unfair prejudice
- Just and Equitable winding up
- Derivative claim
Paramount Powders (Baydal v Baydal) 2019
Unfair Prejudice
- Director directly competing against company through son’s company
- No unfair prejudice remedy
s172 and 175 CA 2006
Paramount Powders (Baydal v Baydal) 2019
JEW
- Failure of mutual trust and confidence
- Did not come to equity to clean hands
- Also would “leave field clear” for competitor
Paramount Powders (Baydal v Baydal) 2019
DC
- Claimed brother breached duty as director
- Failed as had consented
Shareholder contract or tort loss
- Could also have claim for UF and JEW
Alleged loss results in loss to company and shareholder
- Only loss alleged to have been suffered by shareholder is
- = reflection of the loss sustained by company.
Courts will not allow shareholders to bring personal claims
- Reflection of Foss v Harbottle
- Can only claim for reflected loss sustained by the company.
Prudential v Assurance Co Ltd v Newman Industries Ltd (No 2)
Shareholder cannot recover damages because the company he is interested to suffered damage.
* Loss is through the company, diminution of net assets of company.
PERSONAL CLAIM
* Reflective Loss
* Further personal loss
- Conduct = breach of legal duty owed personally (contract & tort)
- Personal loss = separate and distinct
Johnson v Gore Wood
Policy reason underlying the bar on personal claims for reflective loss is the need to protect creditors
Rare case where shareholder was able to show additional loss on which to claim
Giles v Rhind
Rights for Statutory Minority shareholders
- Protection against alteration of constitution
- Right to requisition a GM
- Demand a poll vote
- Enforce articles
s21 CA 2006
Protection against alteration to the company’s constitution
ss303-305 CA 2006
Right to requisition a GM
s 321 CA 2006
Right to demand a poll vote
s33 CA 2006
Right to enforce articles
Protection against alteration to the company’s constitution
- Protected against article alterations
- SR =75% majority needed.
Allen v Gold Reefs of West Africa Ltd 1900
Shareholders must vote to amend articles in good faith
Not undermine substantive rights of minority.
Russell v Northern Bank Development Corpn 1992
Shareholders can agree via SA how to exercise voting rights on a resolution to alter articles
= enforceable
Right to requisition a GM
- Requisition can be brought by shareholders holding not less than 5% of the voting paid-up capital
s305
Shareholders may call GM meeting themselves if fail to convene a meeting
s304
Directors fail to convene GM within 21 days
Hold GM within 28 days
Right to demand a poll vote
1 vote per hand
Section 321 provides that a poll vote may be demanded
- Not less than 5 members having a right to vote
- Members > 10% of all voting rights
- Members > 10% paidup shares
