Minority Shareholder Remedies

Question 1

Rights of minority shareholders

Answer 1

• CA 2006 allows minority shareholders certain limited remedies where the management of the company causes them prejudice or loss.
• The claims are costly to bring and uncertain in outcome, as the court has wide discretion as to remedies
• Shareholders are advised to instead enter into Shareholders Agreements

Question 2

Unfair prejudice - s 994-996 CA 2006

Answer 2

Section 994(1): ‘A member of a company may apply to the court by petition for an order…on the ground:

(a) that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or
(b) that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.’

Question 3

Conduct of the company’s affairs

Answer 3

• To succeed with a petition under s 994(1), a petitioner must establish unfairly prejudicial conduct arising from an act or omission of the company, or made on the company’s behalf.
• The conduct complained of must be an act or acts done by the company (e.g. directors), not the conduct of an individual shareholder
• The complaint must relate to how the affairs of the company have been managed (personal disputes between the shareholders are outside the scope of s 994)

Question 4

Cases on unfairly prejudicial conduct

Answer 4

Re Legal Costs Negotiators Ltd: simply remaining as a shareholder was not conduct relating to the company’s affairs.

Re Home & Office Fire Extinguishers Ltd: illustrates there may be an overlap between the requirement that the conduct relates to the company’s affairs and personal disputes where such disputes make it impossible for the parties to continue working together. The court ordered S to sell his shares to G, holding that S’s conduct related to the affairs of the company because it was a breach of the implied understanding that S and G would act properly and in good faith towards each other.

Re City Branch Group Ltd: the conduct of a subsidiary could be regarded as falling within the affairs of a holding company, especially in the situation where the directors of the holding company and subsidiary are the same or substantially the same.

Question 5

Interests of the members

Answer 5

• The petitioner must also prove that his interests in his capacity as a member have been unfairly prejudiced as a result of conduct on the part of the company.
• This requirement is construed widely. Members have an interest in the value of their shares and will therefore be able to bring a claim if they can show that ‘the value of their shareholding has been seriously jeopardised by reason of a course of conduct on the part of those persons who have had de facto control of the company, which has been unfair to the member concerned’ (Re Bovey Hotel Ventures)
• “interests” may extend to cover those of a member who is also a creditor as in this case where, in the circumstances, the distinction becomes artificial (Gamblestaden Fastigheter v Baltic Partner)

Question 6

Unfair prejudice

Answer 6

O’Neill v Phillips: In order to establish unfair prejudice, a petitioner must prove:

(a) Breach of contract (the articles or a shareholders’ agreement)
(b) Breach of some fundamental understanding
- The court will begin by looking at whether the conduct complained about is in accordance with the articles.
- The court will next consider the scope of any fundamental understandings between the parties
- Unfairness must be tested by looking at whether the majority had acted or was proposing to act in a manner which equity would regard as contrary to good faith
- Unlawful conduct would not necessarily be unfairly prejudicial, and trivial or technical infringements of the articles may not give rise to an s 994 petition

Question 7

Examples of unfairly prejudicial conduct

Answer 7

(1) Exclusion from management
(2) Mismanagement
(3) Breach of directors’ fiduciary duties
(4) Excessive remuneration and refusal to pay dividends

Question 8

Exclusion from management

Answer 8

• most common ground for unfair prejudice petitions
• in a small quasi-partnership private company, a member may expect to continue to participate in the management of the company on the basis of a fundamental understanding between the parties, despite the fact that any director may be validly removed from office by an ordinary resolution under s 168
• this will not be the case in larger companies with outside investors. It is also not the case in every small quasi-partnership company
• there needs to be some conduct which is ‘unfairly prejudicial’ regarding the removal.

Question 9

Exclusion from management - example

Answer 9

Re Tottenham Hotspur plc: Terry Venables, chief executive of Tottenham Hotspur, brought a petition for unfair prejudice after he was dismissed from office. It was held that he had no legitimate expectation of remaining in control of the company, so the action failed.

Question 10

Mismanagement

Answer 10

• In general, poor management of a company will not give rise to a claim for unfair prejudice.
• The courts will not interfere with a bona fide business decision made by a company’s board or its majority shareholders except where there is a clear conflict of interests (Re Elgindata)
• Where directors have abused their powers or exercised them for some ulterior purpose, an allegation of mismanagement may amount to unfair prejudice.

Question 11

Mismanagement - example

Answer 11

Re Macro (Ipswich) Ltd: an allegation of mismanagement over 40 years resulting in economic loss to the company was found to amount to unfairly prejudicial conduct. The sole director had neglected his management responsibilities allowing dishonest employees to steal from the company. The petitioners successfully argued that substantial financial losses were suffered by the companies as a result, which caused unfair prejudice to them.

Question 12

Breach of directors fiduciary duties

Answer 12

A common ground for petitions of unfair prejudice.

• Re London School of Electronics: those in control of the company had misappropriated its assets by diverting them to another business owned by them.
• Re Little Olympian Each-Ways Ltd: The directors sold the company’s business at a substantial undervalue to another company as part of a wider transaction in which the directors received a significant personal benefit.

Question 13

Excessive remuneration and refusal to pay dividends

Answer 13

• The court will not tend to interfere with the business judgement of the board provided it has honestly determined the level of remuneration.
• There is ample scope for abuse of power, and in these cases the courts will be prepared to hold that failure to pay dividends and/or directors awarding themselves excessive remuneration will be unfairly prejudicial conduct.

Question 14

Excessive remuneration and refusal to pay dividends - example

Answer 14

Re a Company: if remuneration and dividend levels cannot be justified by “objective commercial criteria” then it would follow that the affairs of the company have been managed in a way which is unfairly prejudicial to the interests of the shareholders who are not directors.

Question 15

Who can bring a claim for unfair prejudice?

Answer 15

• s 994(1): petition for unfair prejudice may be brought by a “member” of the company
• Section 112 defines a “member” as a subscriber to the company’s memorandum and “every person who agrees to become a member of the company and whose name is entered into the register of members.”
• However, case law indicates that the court will be prepared to interpret this broadly.

Question 16

Broad interpretation of ‘member’

Answer 16

Harris v Jones: a person to whom shares had been transferred but had not been registered as a member had the right to bring a s 994 petition

Blunt v Jackson: Judge noted that the court had the power to retrospectively amend the register of members, and so allowed a person who had agreed to become a 50% shareholder and had worked for the company on low wages in the belief he was a shareholder, but was not registered as such, to succeed in a petition for unfair prejudice

Question 17

Remedies - s 996

Answer 17

Section 996(1): the court may “make such order as it thinks fit for giving relief in respect of the matters complained of.”
Section 996(2) lists possible orders the court may make, although this list is not determinative. It states the court’s order may:
(a) regulate the conduct of the company’s affairs in the future;
(b) require the company (i) to refrain from doing or continuing an act complained of, or (ii) do an act which the petitioner has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;
(d) require the company not to make any, or specified, alterations in its articles without leave of the court;
(e) provide for the purchase of the shares by any members of the company by other members of the company or by the company itself…’

Question 18

Remedies - Share purchase order

Answer 18

• There is a presumption that the court will grant an order for the purchase of the petitioner’s shares by the company or another shareholder under s 996(2)(e) (Grace v Bigoli)
• This is the most common remedy and is usually sought by shareholders in small private companies who have limited options to sell their shares (not allowed to offer them to the public under s 755)
• The court must then determine the valuation of the petitioner’s shares. Key issue is to determine a price that is fair in all the circumstances.
• Re Bird Precision Bellows Ltd: for quasi-partnership companies at least, it would normally be unfair to impose a discount on the shares to represent the limited voting power and control of a minority shareholder, since for these companies generally the minority shareholder is being forced to sell their shares as a result of the unfairly prejudicial conduct

Question 19

Valuation of the shares

Answer 19

• A critical issue is the date on which the shares should be valued
• Abbington Hotel Ltd: the starting point for the date of valuation of shares for a buy-out order under s 996 is the date of the judgment, but the court is free to choose a date that is most appropriate in the circumstances, “that which best remedies the unfair prejudice held to be established.”
• O’Neill v Phillips: if the respondent has made a reasonable offer to buy out the petitioner, the respondent may be entitled to have the petition for unfair prejudice struck out.

Question 20

Unfair prejudice vs just and equitable winding up

Answer 20

• The courts are opposed to petitions for just and equitable winding up being added to claims under s 994 as a matter of course.
• Civil Procedure Rules Practice Discretion 49B: winding up orders should not be sought unless that is the preferred relief or it is thought that it is the only available relief.
• Fulham Football Club v Richards: the court held that s 994 will usually provide a satisfactory remedy in cases of shareholder disputes, and that winding up under s 122(1)(g) Insolvency Act 1986 is a last resort and an exceptional remedy.

Question 21

Reform of the law relating to unfair prejudice

Answer 21

• In 1996, the Law Commission proposed to reform statutory shareholder remedies, particularly unfair prejudice. The Law Commission’s Consultation Paper No 142 noted a concern relating to the length and cost of unfair prejudice proceedings and the destructive effect of these actions on small private companies.
• Re Engindata Ltd: the trial lasted 43 days and cost around £320,000

Question 22

Law Commission’s proposals

Answer 22

• found that the majority of petitions for unfair prejudice were brought by minority shareholders in small private companies seeking to have their shares purchased on the basis of exclusion from management. They set out three proposals:
  (1) There should be rebuttable presumptions of unfair prejudice in small private companies where the petitioner has been excluded from management
  (2) Winding up should be added to the potential remedies under s 996
  (3) The MA should be modified to include an exit provision in the event of a shareholder dispute
• None of these proposals were ultimately adopted.

Question 23

Just and equitable winding up

Answer 23

‘A company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up.’ - s 122(1)(g) Insolvency Act 1986
- A company may apply to the court for the company to be wound up and assets distributed.

Question 24

Is just and equitable winding up often used?

Answer 24

• A draconian remedy of last resort
• The courts will try and find alternative remedies where possible
• The CA 1980 introduced the remedy of unfair prejudice and this is now used far more commonly

Question 25

Consequences of just and equitable winding up

Answer 25

Section 127 IA 1986: ‘any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up, is unless the court otherwise orders, void.’
- Banks will freeze company bank accounts as soon as they receive notice of such a petition, so the company is in effect paralysed until the outcome of the petition.

Question 26

Grounds for a just and equitable winding up petition

Answer 26

Ebrahimi v Westbourne Galleries:

• court has a wide discretionary jurisdiction.
• usually result from where the relationship between the directors and/or shareholders has broken down to the extent that it is not possible for the company to be run effectively
• examples include deadlock, justifiable loss of confidence in the company’s management and exclusion from management
• it will only be ordered on compelling grounds.

Question 27

(1) Substratum has failed

Answer 27

• where the petitioner establishes that the commercial object for which the company was formed has failed or been fulfilled
• of much less importance now s 31(1) CA 2006 establishes that a company’s objects will be generally unrestricted
• Re German Date Coffee Co: company was registered with the object of acquiring a German patent. The court made an order for the company to be wound up on the basis that the whole substratum was gone.

Question 28

(2) Fraud

Answer 28

• where a company has been formed to perpetuate a fraud and winding up represents the best way for its shareholders to recover the money they invested
  (Re Thomas Edward Brinsmead & Sons)

Question 29

(3) Deadlock

Answer 29

• rare but where deadlock does occur, the court can order for the company to be wound up.
• Re Yenidje Tobacco Ltd: the two shareholders who were also the only two directors refused to speak to each other.

Question 30

(4) Justifiable loss of confidence in the company’s management

Answer 30

• where a company is in effect a quasi-partnership, the court may order it to be wound up where there is a lack of confidence in the management.
• there needs to be a lack of probity in the way the company is being run by the majority, effectively driving the minority out so that it is unjust and inequitable to require the minority to remain shareholders
• Lock v John Blackwood Ltd: the majority shareholder dominated the board of directors, refused to declare dividends, call GMs or publish accounts. The Privy Council ordered the company to be wound up.

Question 31

(5) Exclusion from participation in a small private where there was a relationship based on mutual confidence

Answer 31

• the situation in Ebrahimi v Westbourne Galleries.
• Lord Wilberforce listed the typical elements:
• (i) the basis of the business association was a personal relationship and mutual confidence
  (ii) an understanding that all shareholders will participate in management
  (iii) a restriction on the transfer of members’ interests preventing the petitioner from leaving
• concluded that just and equitable winding up would be appropriate where the petitioner ‘can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved.’

Question 32

Who can bring a petition for just and equitable winding up

Answer 32

Section 124(1) IA 1986: may be made by a “contributory”

• Contributory means any person liable to contribute to the assets of a company in the event of it being wound up, which includes any past and present member
• for a fully paid up shareholder to bring a petition, they must show a “tangible interest in the company.” This has been held to mean that the shareholder must prove (on the balance of probabilities) that there will be a surplus among the shareholders after payment of the company’s debts, liabilities and the expenses of liquidation (Re Rica Gold Washing Co)
• If the shareholder cannot prove surplus assets, they may also establish a tangible interest by showing that they would achieve some advantage or avoid or minimise some disadvantage if the company was wound up (Re Chesterfield Catering Co)
• The petitioner’s own conduct is relevant, as this is an equitable remedy.

Question 33

Derivative claims - Internal disputes

Answer 33

• Where a company has suffered loss, due to the doctrine of separate legal personality (Salomon), it is the company that is the proper claimant.
• However, companies are inanimate and can only act through their directors.
• Where the loss has been caused by the action of an internal stakeholder e.g. a director, or the majority of the members, vested interest may prevent a company from bringing an action.
• The courts have long been reluctant to interfere in the internal management of companies (Carlen v Drury - “This Court is not required on every Occasion to take the management of every Playhouse and Brewhouse in the Kingdom.”)

Question 34

Types of shareholder actions relating to internal disputes

Answer 34

(1) Claims brought by members to vindicate a wrong done to the company (Derivative claims)
(2) Claims brought by members in relation to wrongs done to them personally (Personal claims)

Question 35

Derivative claims

Answer 35

• Originally dealt with by the courts in accordance with the rule in Foss v Harbottle
• Since CA 2006, there is now a statutory procedure for a shareholder to bring a derivative claim on behalf of the company.

Question 36

Personal claims

Answer 36

• not affected by the rule in Foss v Harbottle or the statutory procedure in CA 2006
• the member may bring a personal or representative action, or one of the statutory remedies (unfair prejudice under s 994 CA 2006 or just and equitable winding up under s 122 Insolvency Act 1986)
• Shareholders may also bring a personal claim to enforce their rights as shareholders in the articles under s 33 CA 2006

Question 37

Historical development of the law on derivative claims

Answer 37

• Historically, the rule in Foss v Harbottle guided the approach of the courts to derivative claims.
• The rule provided that the “proper claimant” was the company and made it very difficult for an individual member to bring a claim.
• CA 2006 introduced a new statutory procedure under ss 260-263.
• The statutory rules only affect claims for wrongs done to the company, and even then, only claims for wrongs done by directors (s 260(5)) so the old common law rules are still relevant in certain situations.

Question 38

Rule in Foss v Harbottle summarised in Edwards v Halliwell

Answer 38

(i) The proper claimant in an action in respect of a wrong done to a company is prima facie the company itself (the “proper claimant principle”)
(ii) Where the alleged wrong is a transaction which might be made binding on the company and all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action (the “internal management principle”)
(iii) if the matter relates to an irregularity that the company is able to ratify or condone by its own internal procedure, then no individual member may bring an action (the “irregularity principle”)

Question 39

The proper claimant principle

Answer 39

Burland v Earle: ‘it is clear law that, in order to redress a wrong done to the company or to recover damages alleged to be due to the company, the action should prima facie be brought by the company itself.’

Question 40

The internal management principle

Answer 40

MacDougall v Gardiner: The chairman of a company adjourned a meeting without allowing the members to vote on the question of adjournment as requested by a shareholder, M. M brought an action seeking a declaration that the chairman’s conduct was improper and an injunction. The Court of Appeal refused on the grounds that the issue was one of internal management for the majority members to decide, and the conduct complained of was capable of ratification.

Mellish LJ: ‘if what is complained of is simply that something which the majority are entitled to do has been done or undone irregularly, then I think it is quite right that nobody should have a right to set aside…except the company itself.’

Question 41

Exceptions to the rule in Foss v Harbottle

Answer 41

(1) Where the act complained of is ultra vires or illegal;
(2) Where the matter is one which could validly be done or sanctioned only by some special majority of members, or there has been non-compliance with a special procedure;
(3) Where the personal and individual rights of the member have been infringed; or
(4) Where what has been done amounts to a “fraud on the minority” and the wrongdoers are in control of the company.
- The generally accepted view is that (4) is the true exception to the rule as the others can be explained on the basis of a member being able to sue for breach of their personal rights.

Question 42

(1) Where the act complained of is ultra vires or illegal

Answer 42

Prudential Assurance Co Ltd v Newman Industries: where the wrongful act in issue is ultra vires the company, the rule in Foss v Harbottle does not operate because a majority of members cannot ratify the transaction. Therefore an individual member can bring a claim.

Smith v Croft: act was giving of financial assistance to facilitate the acquisition of shares in the company, which was illegal under the Companies Act 1981

Question 43

(2) Where the matter is one which could validly be done or sanctioned only by some special majority of members, or there has been non-compliance with a special procedure

Answer 43

Edwards v Halliwell: a resolution increasing member’s subscriptions was declared invalid because the required two-thirds majority for such a resolution had not been obtained.

Quin & Axtens Ltd v Salmon: the articles required the consent of both managing directors to acquire certain premises. One of the MDs (also a major shareholder) objected to such an acquisition. The matter was put to a shareholder GM which tried to authorise it without consnet. House of Lords found that this was an attempt to alter the articles by ordinary rather than special resolution.

Question 44

(3) Where the member’s personal rights have been infringed

Answer 44

Depends on whether the breach of a provision in the articles is an “internal irregularity” capable of being sanctioned or whether it is a constitutional infringement for which a member may sue.

Pender v Lushington: claimant allows to sue in his own name and in the name of the company to enforce his right to have his vote counted.

Question 45

(4) Where what has been done amounts to a “fraud on the minority” and the wrongdoers are themselves in control of the company

Answer 45

• The one true exception to the rule in Foss v Harbottle
• No precise definition of ‘fraud’ although courts have acknowledged it is wider than the meaning of fraud at common law.
• Covers conduct which is an abuse or misuse of power, in circumstances where the directors themselves are to benefit
• It also must be established that the wrongdoers had control over the company and were able to prevent proceedings being brought in the name of the company, through their shareholding or their influence (Prudential Assurance v Newman Industries)
• If the “innocent majority” oppose the proceedings, the claim cannot proceed (Smith v Croft)

Question 46

Derivative actions under CA 2006 Part 11

Answer 46

• Disadvantage = relief granted is only awarded to the company
• Advantage = allows individual members to “right a wrong” on behalf of the company in circumstances where the company itself does not bring a claim.

Question 47

Rules under the statutory procedure for derivative actions (CA 2006 Part 11)

Answer 47

• A claim may be brought by any member (s 260(1))
• A claim may be brought against any director and/or another person, including former directors (s 260(3)/(5))
• The grounds for bringing a claim: any act or omission, actual or proposed, involving negligence, breach, breach of duty or breach of trust by a director or another person e.g. auditors (s 260(3))
• It is immaterial whether the cause of action arose before or after the claimant became a shareholder (s 260(4))

Question 48

Application for permission to continue a derivative claim

Answer 48

• Sections 261-263 require a member bringing a derivative claim under s 260 to apply to the court for permission to continue the claim
• This is a two step process involving two hearings:
  (1) The court will consider whether the applicant has a prima facie case for permission to continue the derivative claim
  (2) If the applicant shows a prima facie case for permission under stage 1, then it proceeds to a second stage under s 263, which is the full permission hearing. The court may order the company, as well as the applicant, to provide evidence.

Question 49

Bypassing the first stage

Answer 49

• The purpose of the first stage is to allow the court to quickly dismiss cases that stand little to no chance of success
• In practice, the parties may be able to bypass this stage where the defendant company concedes that there is a prima facie case (Franbar Holdings Ltd v Patel) or where the court may be prepared to hear the first and second stages at the same time (Stimpson v Southern Landlords)

Question 50

Bars to a derivative claim

Answer 50

For the second stage, the full permission hearing, s 263 sets out absolute and discretionary bars to granting permission to a member to continue a derivative claim.

Question 51

Absolute bars

Answer 51

Section 263(2): permission must be refused if the court is satisfied -

(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or
(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or
(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission -
(i) was authorised by the company before it occurred
(ii) has been ratified by the company since it occurred.

Question 52

Discretionary bars

Answer 52

Section 263(3) factors which the court must take into account when exercising its discretion to grant permission:

(a) whether the member is acting in good faith in seeking to continue the claim;
(b) the importance that a person acting in accordance with section 172 (promote the success of the company) would attach to continuing it;
(c) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be -
(i) authorised by the company before it occurs, or
(ii) ratified by the company after it occurs;
(d) where the cause of action arises from an act or omission that has already occurred, whether that…could be…ratified by the company;
(e) whether the company has decided not to pursue the claim;
(f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company.’

Question 53

Other considerations to be taken into account when the court is considering whether to grant permission to continue the claim

Answer 53

Section 263(4): the court must have particular regard to any evidence before it as to the views of members of the company who have no personal interest in the matter (Smith v Croft (No2))

Question 54

Approach of the courts

Answer 54

• The court will presume to dismiss a derivative claim unless one of the exceptions applies.
• Successful claims remain rare.
• There are substantial disincentives to bringing a claim since members themselves do not recover the damages and the costs are substantial.

Question 55

Case law under s 260

Answer 55

Mission Capital v Sinclair: court refused to give permission to continue the derivative claim under the discretionary grounds, as a notional director acting in accordance with the duty under s 172 to promote the success of the company would give little weight to continuing the claim, and the claimants could alternatively bring an unfair prejudice claim under s 994.

The opposite was found in Cullen Investments v Brown.

Bridge v Daley: refused permission as an overwhelming majority of shareholders and independent board members did not support the claim.

Question 56

Costs of derivative claims

Answer 56

• Rule 19.9E of the Civil Procedure Rules allows the court to order the company to indemnify the claimant; this is called a pre-emptive costs order.
• Wallersteiner v Moir: first awarded in this case where Buckley LJ concluded that a member who brings a derivative claim may be entitled to be indemnified by the company at the end for his costs provided he acted reasonably in bringing the action.

Question 57

Overlap with s 994 (unfair prejudice)

Answer 57

• If the facts giving rise to a derivative action under s 260 also give rise to a claim for unfair prejudice under s 994, the court will be reluctant to grant permission to continue the derivative claim (Mission Capital plc v Sinclair)
• This is not an absolute bar. In appropriate circumstances the court may hear proceedings for s 994 and s 260 together

Question 58

Derivative claims vs s 994

Answer 58

Advantages of claim for unfair prejudice under s 994: a claim is easier to proceed (no permission requirement) and the remedy obtained is for the member.

Advantages of derivative action: may be preferable where the aim of the claimant is not to be bought out but for the company to benefit (Clark v Cutland).

Where a shareholder brings a claim for unfair prejudice under s 994, s 996(2)(c) gives the court power to direct the claimant to bring a derivative claim, however it seems it would be a very rare circumstance that this would be used.

Question 59

Personal claims

Answer 59

Where the personal right of a shareholder has been infringed by the majority, the board or an outsider, the individual shareholder may be able to bring a claim to recover loss.

Shareholders’ rights may derive from a contract or in tort. These claims often arise as a result of breaches of the company’s constitution or a shareholders agreement.

Lee v Sheard: where a dividend was declared but not paid, a shareholder was able to succeed in a claim for payment by way of legal debt. Only the shareholder and not the company had suffered a loss.

Question 60

Personal claims for reflective loss

Answer 60

Where the alleged wrong results in a loss to the company as well as the shareholder and the only loss alleged to have been suffered by the shareholder is in fact a reflection of the loss sustained by the company, the courts will not allow the shareholder to bring a personal claim.

Prudential Assurance Co v Newman Industries: ‘what a shareholder cannot do is recover damages merely because the company in which he is interested has suffered damage.’

Question 61

Personal claims where the shareholder has suffered reflective loss but also further personal loss

Answer 61

• Where the shareholder can establish that the defendant’s conduct constituted a breach of a legal duty owed to him personally and that the breach of duty caused him a personal loss separate and distinct from the loss caused to the company, he will be permitted to bring a personal action.
• Johnson v Gore Wood: the policy reason underlying the bar on personal claims for reflective loss is the need to protect creditors. It is therefore rare that the shareholder is able to show additional loss on which to claim.
• However, in Giles v Rhind, the shareholder was able to show this. The defendant had rendered the company incapable of seeking legal redress against him.

Question 62

Representative actions (group litigation)

Answer 62

• An action brought by one claimant on behalf of a group of claimants.
• Where an individual member has suffered loss which has also been suffered by other members, that member may bring representative action on behalf of themselves and other members with the same rights
• Governed by Civil Procedure Rule 19.6(1) which avoids multiplicity claims by providing that where more than one person has the same interest in a claim: (a) the claim may be begun; or (b) the court may order that the claim be continued, by or against one or more persons who have the same interest as representatives of any other persons who have that interest.’
• any judgment given in such a claim is binding on all persons represented in the claim.

Question 63

Statutory minority shareholder rights

Answer 63

• Unfair prejudice (s 994 CA 2006)
• Just and equitable winding up (s 122 IA 1986)
• Protecting against alteration to the company’s constitution (s 21)
• The right to requisition a GM (s 303-305)
• The right to demand a poll vote (s 321)
• The right to enforce the articles (s 33)

Question 64

Protection against alteration to the company’s constitution (s 21)

Answer 64

• Under s 21, minority shareholders are protected to an extent against alterations to the company’s articles, as a special resolution is required to make changes
• The court will look at whether reasonable shareholders could have considered that the amendment was for the benefit of the company. Shareholders must vote to amend the articles in good faith (Allen v Gold Reefs) and not to undermine substantive rights of minority shareholders. If not, the court may hold the amendment invalid.
• It is also possible to ‘entrench’ certain provisions in the articles by requiring a higher majority (s 22(1))
• It is possible for the shareholders in a shareholder’s agreement to agree how they will exercise their voting rights on a resolution to alter the articles, and this is enforceable (Russell v Northern Bank)