Lecture 7 - Majority Rule and Minority Protection Flashcards
Explain the voting shareholders and the rights they have
The voting shareholders control a company. An individual shareholder with more than 50% of the shares can pass an ordinary resolution and could therefore elect and remove the directors of the company.
A shareholder with at least 75% of the shares can pass a special resolution
Similarly, shareholders who between them can muster over 50% or over 75% can exercise different types of control
Situation where two shareholders have 50% each is sometimes known as negative control!
Explain negative control
Negative control arises when minority shareholders or stakeholders have sufficient rights or powers to block certain actions of the majority, even if they lack the ability to unilaterally impose their will. This is a form of minority protection and serves as a check against majority tyranny.
If the minority objects to the majority’s actions, the basic rule is that it has no recourse because the company itself is the proper claimant
This is the principle behind the rule in Foss v Harbottle
However, the minority is given the right to object in certain circumstances – this is generally where the majority has acted in an unfairly prejudicial manner or there has been a breach of duty or negligence by the directors
Case Overview: Foss v Harbottle (1843)
Facts: Two shareholders of a company (Foss and Turton) brought a lawsuit against the directors, alleging that they had misused company funds and property, causing harm to the company. The shareholders wanted the court to intervene and hold the directors accountable.
Ruling: The court dismissed the case, stating that the proper plaintiff in such situations was the company itself, not individual shareholders.
The Proper Plaintiff Rule:
The company, as a separate legal entity, is the proper plaintiff in any legal action for wrongs done to it.
If directors or third parties harm the company, the legal right to sue lies with the company, not its shareholders.
This rule is based on the concept of separate legal personality, as established in Salomon v Salomon (1897), which treats the company as a distinct legal “person” capable of owning property, entering contracts, and suing or being sued.
The Majority Rule Principle:
Decisions regarding the company’s affairs are governed by the majority of shareholders.
If the alleged wrongdoing can be ratified by a majority of shareholders, the court will not interfere.
This reflects the principle of majority rule, which is essential for efficient corporate governance, as it prevents the courts from being overwhelmed with disputes and encourages internal resolution of conflicts.
what’s an advantage of the proper plaintiff/ majority rule
The main practical advantage of this rule is that it prevents multiple actions against the company.
If every shareholder in every company was able to sue for every perceived wrong, there would be an enormous number of potential court cases.
However, it can be seen as in Foss v Harbottle that this rule can lead to minority shareholders being disadvantaged and treated unfairly or prejudicially
What are the Statutory Rights of Minorities
Any individual member can prevent the registration of a limited company as unlimited
Any member or creditor can apply to the court to prevent payment out of capital by a private company for the redemption or purchase of its shares
Company meetings can be requisitioned by holders of 5% of the company’s paid-up capital with voting rights
Equally notice of members resolutions must be given by the company on requisition of members holding 5% of the voting rights
Holders of 15% of a class of shares can apply to the court for the cancellation of a variation of their class rights.
Explain Unfairly prejudicial conduct
A shareholder who thinks that the company is being run in a way which is unfairly prejudicial to some of the shareholders (they may even be the majority) may make an application to the Court to correct that behaviour.
For example, failing to pay declared dividends, undertaking activities which are not permitted under the company’s Articles or doing something which might result in the company’s insolvency are all things which might justify an application.
It is important to act quickly because the court will reject an application where the shareholder has allowed things to run on, as the court will regard this as acquiescence in the action taken by the Director/s.
If an application is made, the petitioning shareholder may be required to sell his/her shares to the remaining shareholders by the court as a way of resolving the matter if this is practical
the reason for the application, the complaint must be based on prejudice to the member as a member and not as an employee, nor as an unpaid creditor see O’Neill v Phillips
Explain the Shareholders Agreements
- A shareholders’ agreement is a contract between Company Shareholders who are a party to it and often the company itself. The purpose of these agreements includes:
To give (often minority) shareholders rights and protections that they would not otherwise enjoy
To place the Company itself under a duty to recognise and uphold the rights of specified shareholders.
To reflect and maintain as confidential certain agreements achieved between shareholders (unlike the company articles which are open to public inspection)
Remember that a limited company is a legal entity and should be a party to the agreement to ensure its enforceability.
Different shareholders may have conflicting interests and should take independent advice on any draft agreement - A shareholders’ agreement may seek to regulate several issues between shareholders including:-
Binding shareholders to vote in a specific way on matters.
To nominate agreed bankers, auditors and professional advisers
To provide a policy as to declaring dividends.
To restrict or govern dealings in shares – or to, for example, impose option agreements permitting shareholders an option to purchase shares being sold by another shareholder – instead of a sale to an outsider
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