Personal claims and specific statutory minority rights Flashcards
Personal claims
Where an individual’s rights as a shareholder are infringed and it is the shareholder and not the company that has suffered loss, the rule in Foss v Harbottle is not relevant and the shareholder may bring a personal claim for the loss suffered. The statutory procedure in CA 2006 does not affect personal claims.
Lee v Sheard CA: Where a dividend was declared but not paid, a shareholder was able to succeed in a claim for payment by way of legal debt. Here only the shareholder and not the company had suffered loss.
Personal claims for reflective loss
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 (eg the shareholder’s shares have decreased in value due to the wrong suffered by the company), the courts will not allow the shareholder to bring a personal claim. This is a result of the rule in Foss v Harbottle.
Prudential Assurance Co Ltd v Newman Industries Ltd
Personal claims where the shareholder has suffered reflective loss but also further personal loss
Where the shareholder can establish that the defendant’s conduct constituted a breach of a legal duty owed to them personally (eg in contract or tort) and that the breach of duty caused them personal loss, separate and distinct from the loss caused to the company, they will be permitted to bring a personal action.
(Johnson v Gore Wood)
Giles v Rhind
In this case the company was insolvent due to a former director’s breach of directors’ duties not to compete or misuse confidential information. These duties were also express terms in a shareholders’ agreement to which the defendant and claimant were parties. The company had initiated an action against the former director, but the administrative receivers discontinued it when the defendant director applied for a security of costs order. In effect, the defendant had, by his breach of duty, rendered the company incapable of seeking legal redress against him. The claimant sought to recover losses to the value of his shareholding, loss of remuneration and loss of the value of loan stock. The Court of Appeal held that the claimant could pursue his claim for breach of the shareholders’ agreement including his losses in respect of the value of his shareholding. The claims for loss of remuneration and losses of capital and interest in respect of loans made by him to the company did not, in any case, fall within reflective losses. A substantial sum was awarded by way of damages. The court placed
emphasis on the fact that the defendant’s own wrongdoing had, in effect, disabled the company from suing him for damages.
Johnson v Gore Wood
Lord Bingham summarised the authorities as supporting three propositions:
“(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs has declined or failed to make good that loss…
(2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding…
(3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.”
Representative actions (group litigation)
A representative action is 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 (eg all members of a class of shareholders or all shareholders). These types of actions are governed by Civil Procedure Rule 19.6(1), which avoids multiplicity of 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 of the persons who have the same interest as representatives of any other persons who have that interest.
CPR 19.6(4) goes on to add that unless the court otherwise directs, any judgment or order given in a claim in which a party is acting as a representative under this rule is binding on all persons represented in the claim; but may only be enforced by or against a person who is not a party to the claim with the permission of the court.
There are a number of provisions in CA 2006 which give rights to minority shareholders in respect of particular decisions taken by the company.
- Protection against alteration to the company’s constitution (s 21)
- The right to requisition a general meeting (s 303 – 305)
- The right to demand a poll vote (s 321)
- The right to enforce the articles (s 33)
- Protection against alteration to the company’s constitution (s 21)
Under s 21, minority shareholders are protected to an extent against alterations to the company’s articles, as a special resolution (75% majority) is required to make changes to the articles.
You will recall that where shareholders are voting on a decision to amend the articles, 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 of West Africa Ltd [1900] 1 Ch 656) 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 providing that a higher majority is required to alter these provisions (s 22(1)).
In addition, it is possible for the shareholders in a shareholders’ agreement to agree how they will exercise their voting rights on a resolution to alter the articles, and this agreement is enforceable (Russell v Northern Bank Development Corpn Ltd [1992]).
- The right to requisition a general meeting (s 303 – 305)
As you know, s 303 gives the right to the shareholders to request that the directors call a general meeting of the company.
This requisition can be brought by shareholders holding not less than 5% of the voting paid-up capital of the company.
If the directors fail to convene a general meeting within 21 days of the requisition, or to hold the general meeting within 28 days after calling it (s 304), the shareholders may call the general meeting themselves (s 305).
- The right to demand a poll vote (s 321)
In general meetings, voting takes place on a show of hands unless a poll vote is demanded. On a show of hands, each member has one vote irrespective of how many shares that person holds.
On a poll vote, each member has one vote per share held.
Section 321 provides that a poll vote may be demanded by:
- Not less than 5 members having a right to vote at the meeting;
- Members holding not less than 10% of all voting rights that could be cast at the meeting;
- Members holding shares conferring a right to vote at the meeting on which the aggregate paid up sum equals not less than 10% of the total sum paid up on such shares.
