Minority Shareholder Protection

Question 1

What are the possible actions for minority shareholders who feel aggrieved?

Answer 1

1. Just and equitable winding-up (s122(1)(g) IA 1986);
2. Petition for unfair prejudice (s994 CA 2006);
3. Derivative action on behalf of the company (s260 CA 2006);
4. Personal action under s33 contract

Question 2

What are the suggested grounds for just and equitable winding-up?

Answer 2

1. Substratum has failed (Re German Date Coffee);
2. Fraud (Re Thomas Edwards Brimsmeads & Sons)
3. Deadlock (Re Yenidjie Tobacco Co Ltd)
4. Loss of confidence in management (Loch v John Blackwood Ltd)
5. Exclusion from management in a quasi-partnership where there was mutual agreement the aggrieved party would be included in management (Ebrahimi v Westbourne Galleries).

Question 3

What three elements must be proven to successfully argue that the company must be wound-up because the shareholder has been excluded from management?

Answer 3

1. There was a personal relationship and mutual confidence;
2. An undertaking that all or certain shareholders would participate in management;
3. Restriction on transfer of members’ interests preventing the petitioner leaving.

Question 4

Who has the right to petition for just and equitable winding-up?

Answer 4

Any shareholder who has held shares for at least six months (s124(2) IA 1986) past or present (ss 74 and 79).

Question 5

Would just and equitable winding-up be permitted by the court if there was another remedy?

Answer 5

Just and equitable winding-up is a remedy of last resort and will not be granted if there is another remedy and the petitioner is being unreasonable (s125(2) IA 1986). Petitions are likely to be struck out if there is a remedy under s994 (Re Woven Rugs) or there is an offer to buy him out (Fuller v Cyracuse) unless valuation by an accountant will result in discount in the value of the shares (Virdi v Abbey Leissure).

Question 6

What must be the status regarding assets in order to petition for just and equitable winding-up?

Answer 6

There must be some assets available to distribute which represent the disadvantage/loss the shareholder has suffered (Re Rica Gold Washing Co (1879) and Re Chesterfield Catering (1976).

Question 7

What are the elements of unfair prejudice under s994 CA 2006?

Answer 7

1. Unfair prejudice must arise from the conduct of the company;
2. The petitioner must prove his interests qua member have been unfairly prejudiced;
3. There must have been some unfair prejudice.

Question 8

Must the conduct of the company which gave rise to unfair prejudice and the petitioner have been a shareholder at the same time?

Answer 8

No, the petitioner may petition against unfairly prejudicial conduct before he was a member (Lloyd v Casey).

Question 9

In Re Legal Costs Negotiators was the conduct complained of viewed as that of the company?

Answer 9

No, a former director refused to sell his shares and remained a minority shareholder.

Question 10

May actions of parent companies constitute unfair prejudice in relation to their subsidiaries and vice versa?

Answer 10

Yes, parents’ conduct can form the basis of a petition against a subsidiary (Nicholas v Soundcraft Electronics) and vice versa (Gross v Rackind and Re Citybranch Group Ltd).

Question 11

Can a majority shareholder apply for unfair prejudice?

Answer 11

In theory but unlikely (Re Legal Costs Negotiators).

Question 12

Have the courts viewed ‘interests’ for the purposes of s994 widely or narrowly?

Answer 12

Widely. Hoffmann J in Re a Company (No 00477 of 1986) stated ‘interests’ encompassed more that ‘rights’ under the constitution (confirmed by Peter Gibson J in Re Sam Weller & Sons Ltd).

Question 13

How was members’ interests interpreted in Re Bovey Hotel Ventures?

Answer 13

Members have an interest in the value of their shares.

Question 14

Can legitimate expectation form the basis of an interest to petition for unfair prejudice?

Answer 14

Yes, but only to an extent. Lord Hoffmann preferred the wording ‘equitable considerations’ (Re Saul D Harrison). The court will seek to strike a balance between the constitution on one hand and the extraneous expectation on the other (Re a Company No 4377 of 1986). It is said to be near impossible to argue when petitioning a public company (Re Blue Arrow and Re Saul D Harrison).

Question 15

In which case was it decided that interests qua members includes interests qua creditors?

Answer 15

Gamblestaden Fastigher AB v Baltic Partners Ltd.

Question 16

Will a claim be successful if the conduct complained of is in the constitution?

Answer 16

No (Re Saul D Harrison).

Question 17

In which case was it decided that interests qua members includes interests qua directors?

Answer 17

O’Neill v Phillips.

Question 18

What interests were not held to be interests qua member in Re JE Cade and Sons Ltd?

Answer 18

Interests in land ie petitioner was freeholder of a farm which the company refused to sell.

Question 19

How will the court determine whether conduct has been unfairly prejudicial?

Answer 19

The court will look to see if there has been some breach of agreed terms or failing that some use of the rules contrary to good faith (per Lord Hoffmann in O’Neill v Phillips).

Question 20

What are some examples of conduct that has been held as unfairly prejudicial?

Answer 20

1. Exclusion from management (Brownlow v Marshall);
2. Mismanagement (Re Macro (Ipswich) Ltd c/f Re Elgindata);
3. Breach of directors’ fiduciary duties (Almack v Burnham);
4. Excessive remuneration and failure to pay dividends (Re Metropolis Motorcycles c/f Grace v Baglioli, Quinlan v Essex Hinge, Irvine v Irvine);
5. Misappropriation (Re Olympian Each-Ways);
6. Improper allotment of shares (Re Coloursource);
7. Breach of articles/statute.

Question 21

How will the court find unfairly prejudicial conduct under Lord Hoffman’s second limb in O’Neill v Phillips ie abuse of rules contrary to good faith?

Answer 21

Patten J in Grace v Baglioli said ‘the exercise of power or rights in question would involve a breach of an agreement or understanding between the parties which it would be unfair to allow a member to ignore.’

Question 22

Where do we find the remedies for petitions for unfair prejudice? What are they?

Answer 22

Under s996(1) ‘the court may make such order as it thinks fit’. Examples have included regulatory orders, restraining actions, authorise derivative actions (Re Cyplon Developments), amend or prevent amendments to Articles, order a share purchase (Grace v Biagioli), award damages for reflective loss (Re Brightview Ltd).

Question 23

The most common remedy following s994 petitions is a buy-out. What are the issues inherent in this remedy?

Answer 23

Undervaluing the minority shares. In Irvine v Irvine 49.96% shareholding was not given a premium despite the buyer effectively gaining control of the entire share capital.

Question 24

What are the two ways the courts will value a minority shareholder’s shares?

Answer 24

1. Discount basis ie taking into account lack of voting power and control.
2. Pro rata basis ie disregarding power and control and taking into account fairness.

Question 25

Are courts more likely to impose a pro rata valuation of shares?

Answer 25

Yes (Strahan v Wilcock) but especially where the company is a quasi-partnership and/or the petitioner is unwilling to sell (per Nourse J in Bird v Precision Bellows Ltd).

Question 26

When are courts more likely to impose discount valuations of minority shares?

Answer 26

When the shareholder bought them at a discount or has not participated in management (Re DR Chemicals) or when the petitioner does not have clean hands (Richardson v Blackman).

Question 27

What date will the court use for valuing the shares in a buy-out?

Answer 27

The starting point is the date of the judgment but the court is free to choose what is most appropriate to apply a fair remedy (Abbington Hotel Ltd).

Question 28

If a fair offer is made to buy out a minority shareholder what will happen to the petition under s994?

Answer 28

It will be struck out (O’Neill v Phillips).

Question 29

Is the court order to buy out a shareholder negotiable?

Answer 29

No

Question 30

From when did the new rules on derivative actions come into force?

Answer 30

1 October 2007.

Question 31

Who can claim for a derivative action?

Answer 31

Any shareholder (s260(3)).

Question 32

Can you claim for incidents before you were a member under derivative action?

Answer 32

Yes (s260(4)).

Question 33

Who can you claim against in a derivative action?

Answer 33

A director, former director or third party who dishonestly assists a director to breach his duty (s260(3) and (5)).

Question 34

On what basis can you claim in a derivative action?

Answer 34

You may claim for any act or omission, actual or proposed, involving negligence, breach of duty or trust by a director (s260(3)) including any breach under s174 ie ‘mere negligence’ (which differed fro old case law requiring ‘self-serving’ negligence).

Question 35

What is the procedure for bringing a derivative action?

Answer 35

The two stage process (s261) includes:

1. Claimant must ask permission to continue of the court and prove a prima facie case;
2. Full permission hearing where evidence from the company may be required.

Question 36

What are the absolute bars to a derivative action?

Answer 36

1. No prima facie case (s262(3)) and the court may decide to adjourn for ratification or authorisation (s261(4)).
   2 (a) A director in accordance with s172 would not pursue the claim (including the costs the company would have to bear (per Lewison J in Kiani v Cooper) or (b)/(c) the act or omission has been authorised or ratified.

Question 37

What are the discretionary bars to a derivative action?

Answer 37

Section 263(3) states:

(a) lack of good faith or clean hands (Barrett v Duckett);
(b) importance a director acting in good faith would attach to the claim (Stainer v Lee and Iestini v Westrip Holdings Ltd);
(c) likely authorisation or ratification;
(d) majority of directors have not pursued;
(e) members could pursue a claim in their own right (Frambar Holdings Ltd v Pate);
(f) views of disinterested shareholders (263(4) taking up Smith v Croft (No2)).

Question 38

If the member’s only loss is the same suffered by the company who is allowed to sue?

Answer 38

This is known as reflective loss and only the company can sue (Prudential Assurance v Newman (No 2) and Johnson v Gore Wood & Co).

Question 39

Who must pay for a derivative action?

Answer 39

The claimant may seek a refund (Wallersteiner v Moir (no 2) and the defendant director may also be funded but must repay if he loses (s205(1) and (2))

Question 40

Out of all the remedies which should be pursued first?

Answer 40

Unfair prejudice

Question 41

What are the advantages of unfair prejudice?

Answer 41

1. It is easier to proceed
2. No absolute bars
3. Remedy is for claimant not company
4. Wide discretion of remedies

Question 42

What are the advantages of derivative action?

Answer 42

1. Reimbursement for costs (Wallersteiner order);

2. Avoid being bought out

Question 43

What are the disadvantages of derivative action?

Answer 43

You could end up devaluing your shares.